ILLUSTRATION: KATMANDU JOURNAL
HIGH IN the Himalayas, a new kind of expedition is underway. Instead of climbers, it is financiers who are now attempting an ascent. In Kathmandu’s crowded cafes, talk is of deal flow, exit strategies and internal rates of return. Last year private equity and venture capital investments in Nepal hit a record $64m, nearly two-fifths of all such money deployed since the industry’s infancy in 2012. The numbers are still tiny by global standards but the trajectory is dizzying. A country long defined by remittances and aid is experimenting with a new economic engine. The question is whether this is the start of a sustainable climb or a speculative bubble waiting to burst in the thin air.
The boom is real, and in many ways, rational. Nepal is a nation of 30m people with a growing young population and a desperate need for modern infrastructure and services. The traditional economy, reliant on farming and tourism, cannot provide enough jobs. For a decade, a handful of plucky fund managers have been scouring the country for opportunities, often backed by development banks and impact investors. Their early bets were cautious, focused on small hydropower projects and basic consumer goods. Now the map has expanded. Digital fintech firms, hospital chains and climate-tech startups are attracting checks. A regulatory change in 2019 created a formal structure for “Specialized Investment Funds” (SIFs), giving the industry a rulebook. Seven such funds now account for nearly three-quarters of recent investment.
Also read: Nepal’s private-equity boom has an exit problem
Look closer, however, and the path gets rockier. The euphoria is concentrated in Kathmandu, which sucks in 85% of the capital. Most deals are small, averaging $1.6m. Exits—the moment when investors realise their profits—are few and fraught. Only 19 have been recorded since 2012. Nepal’s stockmarket is shallow and volatile. Selling a successful company to a larger rival is hard because there are few domestic giants with the appetite or cash. Foreign buyers face currency controls and regulatory fog. The fallout is a curious mismatch: money is pouring in, but no one is quite sure how it will get out. This is the classic emerging-market private-equity trap. Everyone is betting that someone else will arrive later, willing to pay an even higher price.
The consequences of this bottleneck are by now visible. It distorts investment decisions, favouring sectors that promise fast operational profits over those needing patience. Renewable energy, particularly small hydropower, has attracted over a third of all capital partly because its revenues (from power sales) are predictable, offering dividends while investors wait for an exit. Meanwhile, more innovative but longer-term bets in agriculture or education are starved. It also creates a precarious dependency on a narrow set of backers. Nearly half of last year’s money came from domestic banks and insurers, institutions with their own liabilities and regulatory constraints. If sentiment sours this tap could close abruptly.
Who wins in this early-stage gold rush? A small cohort of educated entrepreneurs with plausible pitch decks, and the fund managers who back them. The professional services ecosystem—lawyers, accountants, consultants—is enjoying a welcome boom. The state benefits from a flicker of modernisation and job creation in formal sectors. The losers, for now, are those on the wrong side of Nepal’s ugly divides: rural businesses far from the capital, firms without English-speaking founders and any venture deemed too risky or unproven for a spreadsheet model. Private equity, by its nature, is not a tool for equitable development.
Two plausible futures now present themselves. The first is a virtuous cycle. The current wave of capital builds a critical mass of successful, well-run companies. Their example attracts more sophisticated international investors and lures Nepal’s vast diaspora wealth home. Pressed by the industry, regulators simplify exit rules, perhaps creating a niche market for trading private shares. Pension funds allocate more to alternatives. The recent case of Hydro Solutions Nepal, which delivered a tidy return for its impact investors, becomes the norm rather than the exception. Private capital evolves from a curious sideshow into a real pillar of finance.
The second future is a bust. The exit drought continues, testing the patience of institutional investors. A couple of high-profile failures or governance scandals shatter confidence. Political instability—a perennial risk in Nepal—returns, freezing decision-making. The flood of money recedes as fast as it arrived, leaving behind stranded assets and embittered entrepreneurs. Nepal becomes another cautionary tale of “tourist capital”: hot money that visits but does not stay.
The choice between these paths rests largely with the government. Its role is not to pick winners or shower subsidies. It is to fix the basics. First, it must deepen the country’s capital markets, making initial public offerings a realistic exit route. Second, it should clarify and stabilise the rules for foreign investors, particularly around repatriating profits. Third, it could use its own spending power to catalyse sectors where social and financial returns align, such as climate adaptation or rural health-tech, perhaps through blended finance structures.
The bigger truth shown by the country’s private-equity experiment is one of global relevance. In an era of low growth in rich countries, capital is scouring the world for yield, washing up in ever-more remote corners. This can be a force for transformation. But finance without a functioning exit is like a mountain road without a destination: a thrilling ride that ends at a cliff edge. Nepal’s fledgling financiers have shown admirable daring. Now they need the ground under them to firm up. The path to a sustainable boom is harder. It needs regulators to build and politicians to resist meddling, as well as investors to keep their nerve. The alternative—a bubble that pops, leaving cynicism in its wake—is the path of least resistance. That is the path to ruin. ■
