The objective of this study was to develop and characterize a nanoparticulate-based sustained release formulation of a water soluble dipeptide prodrug of dexamethasone, valine-valine-dexamethasone (VVD). Being hydrophilic in nature, it readily leaches out in the external aqueous medium and hence partitions poorly into the polymeric matrix resulting in minimal entrapment in nanoparticles. Hence, hydrophobic ion pairing (HIP) complexation of the prodrug was employed with dextran sulphate as a complexing polymer. A novel, solid in oil in water emulsion method was employed to encapsulate the prodrug in HIP complex form in poly(lactic-co-glycolic acid) matrix. Nanoparticles were characterized with respect to size, zeta potential, crystallinity of entrapped drug and surface morphology. A significant enhancement in the entrapment of the prodrug in nanoparticles was achieved. Finally, a simple yet novel method was developed which can also be applicable to encapsulate other charged hydrophilic molecules, such as peptides and proteins.