Sri Lanka Is Cinderella Story of Asia

By Shasha Dai, 29th June 2009, WSJ Blogs

Private equity investors wax poetic about Asia, but for the most part, by Asia, they mean established economies like Japan, or up-and-comers like China or India. Sri Lanka tends to be an area that gets a lot less focus, but one firm, Singapore-based Calamander Capital Ltd., hopes to change that. Calamander, headed by Chairman Roman Scott, is looking to raise $150 million to invest in the South Asian island nation. We caught up with Scott to ask him why.

How do you get comfortable with political risk in the country after a three-decade war?

Outsiders, especially Westerners, don’t understand that over the last six years, Sri Lanka has grown faster than all ASEAN (Association of Southeast Asian Nations) countries except Vietnam. Now imagine what you can achieve without the war. The war thing has always been a perception issue. Unlike the situations in Iraq, Afghanistan or Israel, what happened in Sri Lanka over the last two years is that the Tamil Tiger rebels have been largely removed. The political risk is not the resurgence of the Tigers movement, because there are no Tigers to resurge. The risk instead is fighting the economic war, and putting in place the right economic policy.

What kind of investors are you marketing the fund to?
We’d like to have an investor base as mixed as possible and hope to have no more than one-third of investors coming from the U.S. and Europe. But for the majority, our focus is on Asia, particularly Indian institutions and high-net worth individuals, and to a lesser extent, ASEAN and the rest of Asia. That’s because they understand the Sri Lanka story. It’s the Cinderella story of Asia. Like all Cinderellas, Sri Lanka is the prettiest girl although she works in the kitchen infested with rats – and Indians understand that. It’s closely tied to the Indian economy, almost like another province of India.

Why does the fund plan to invest in commodities?
The demand for soft commodities in Sri Lanka is dependent on Asian demand. For example, demand for rubber is tied to Asian growth and future global growth, and is less tied to Wal-Mart. Demand for tea, for example, is more fundamental. If you have a cup of tea in the morning, the demand is resistant to recession and consumption doesn’t change much. Demand for building and construction products remains strong in Asia, especially as much of the Asian governments’ economic stimulus packages goes into construction projects.

How do you plan to create value?
Virtually every company in Sri Lanka is not adequately capitalized and is not efficient. For instance, some tea factories in the country are using machinery that’s 90 to 100 years old, and some are still powered by steam engines. The country has the biggest concentration of low-hanging fruit on the planet. It has been in a war for 25 years, which means no investment for 25 years. We are taking something out of the 19th century and into the 20th century. Accordingly, we will use very limited leverage, no more than one-third of the transaction value. And the leverage will be primarily for working capital needs.

What is your exit strategy?
Exits will rely on trade sales to larger companies from the Asian region that are looking for a foothold in the country or a supply of goods. For example, the Indonesians and the Chinese are interested in rubber assets, and the Singaporeans and the Malaysians are interested in building materials.