By Eric Ellis
|Colombo: under construction|
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Like millions of his fellow Sri Lankans, investment banker Hiran Embuldeniya was gripped by the remarkable scenes he saw unfolding back home in May 2009.
The brutal civil war between Tamil separatists in the island’s north and the Sinhalese-led state in Colombo, which had dragged on for 26 years, was finally coming to an end.
These were events Embuldeniya, now in his late 30s, thought he’d never see. Schooled at Oxford and Harvard but compelled by the conflict to pursue a career abroad – in his case post-graduate stints at Goldman Sachs and McKinsey – he realized this was an opportunity to return home and help build a new Sri Lanka.
Embuldeniya created Ironwood Capital Partners and its closely associated boutique investment bank and advisory outfit York Street Partners and says he raised $30 million from some of the island’s wealthiest people to invest in post-war Sri Lanka.
He leads a team of young Sri Lankans, who are keen to create a modern private equity and investment banking scene in Sri Lanka and hope to shake up a fusty financial sector as they go.
“I always thought private equity was something that had to happen in Sri Lanka,” Embuldeniya tells Asiamoney. “You can’t have an $80 billion economy and no private equity. Locally, there is no institutional equity beyond a few big corporate houses, and they’ll probably want to take you over, so there’s a lot of scepticism around that. So, this is the need, this is the gap in the market.”
The notoriously secretive world of private equity, where details of investments and financials are seldom disclosed, can be prone to exaggeration. Sri Lanka’s embryonic private equity sector presents a far from crowded field, with room for many more players. Singapore-based Sri Lankan investor Roman Scott set up Calamander Capital to identify post-war opportunities. Embuldeniya’s Ironwood and NDB Zephyr, a joint venture between local bank NDB and New York-based Zephyr Management, both launched funds in 2014.
Other private equity interest is coming from family offices, as well as from big names like TPG Capital, Actis, BlackRock, and Blackstone, according to Senaka Kakiriwaragodage, managing director of NDB Zephyr Partners Lanka.
Hiran Embuldeniya, Ironwood
“There’s $70 million to $80 million for private equity here, which is still massively under penetrated,” says Embuldeniya. “Once we grow a bit larger, maybe we’ll hit the radar, but right now we are below it.”
The deals so far have been pretty small beer. Kakiriwaragodage says NDB Zephyr’s Emerald Fund raised $42.5 million from investors such as the IFC, Zephyr and some US-based family offices in December 2014, and that so far a total of about $7 million has been invested in JAT Holdings and Cleanline Linen Management.
Ironwood has made three investments so far. In June last year, the Colombo-listed Abans Finance, part of one of the country’s biggest retail conglomerates, announced it had placed almost 20% of its stock with Ironwood in a SLRs277 million ($1.82 million) deal.
Embuldeniya says Ironwood bought a 50% share in private Colombo company Jewelex Ltd, which owns Sri Lanka’s Barista café chain franchise. And Embuldeniya says he’s also bought 70% of a Colombo industrial cleaning business called The Laundromat, which is used by the island’s tourist hotels, currently enjoying a post-war boom. He says Ironwood is also looking at information technology, hotels and the education sector, in a country overdue for overhaul.
“The response has been interesting,” Embuldeniya says. “There’s lot of companies who want to talk, but we’ve been filtering through them, targeting those that are experiencing hyper-growth and need capital.”
The arrival of new firms into private equity is bringing fresh faces into Colombo’s stuffy financial establishment. Ironwood’s office is nowhere near Colombo’s traditional business locales in downtown Pettah and Fort, near Sri Lanka’s central bank. Instead they are based in Colombo’s leafy suburbs, operating from a converted house where the Italian embassy once processed entry visa applications.
With its smoothed concrete grey floors, the workspace is open plan and democratic, the atmosphere replicating something akin to a Silicon Valley tech start-up. The average age of Embuldeniya’s 20-strong room is probably late 20s, the youngest staffer a 21-year-old associate, the oldest a 45-year-old partner.
With their flash CVs bearing prominent international financial brandnames and their experience offshore in mature financial centres, Colombo’s young returnee professionals say they want to bring new ideas and skills to the market.
Moreover, unlike many of the legacy players here, hidebound by years of hierarchical traditions, these new firms operate as colour-, gender- and ethnically blind, a revelation on an island that has pivoted, too often violently, on exclusion.
In a bubble
Embuldeniya says his CV hasn’t much helped in Colombo. “If you come here with a sense of entitlement and say: ‘Hey I’ve got a great CV’, you are going to fall on your face very quickly.”
He cites a meeting he had soon after returning to the island with the chairman of a big state-owned bank and other local companies. “They kind of vaguely knew what Goldman and McKinsey were…they’ve kind of lived in a bubble.
“What has changed in the last five years, or since 2009, is that there’s a whole new array of companies now,” he says.
“If you look at the number of companies listed on the exchange, say 10 to 15 years ago, that had a market cap of more than $100 million, there’d maybe be five companies,” he says. “Now there’s more than 50, and that’s just in the public domain. There are so many big private companies now too, which is nice. If we are going to double our economy in the next five to 10 years, we have to have these guys coming up, and people backing them.”
Embuldeniya had always planned to return to Sri Lanka. A tentative ceasefire between Colombo and the Tigers in the early 2000s had ushered in some economic reform, and the resultant boom prompted a partial return of the Sri Lankan diaspora, particularly its prosperous Tamil community. But by the mid-2000s, peace had collapsed, the war restarted with renewed brutality and Embuldeniya changed his plans and joined McKinsey.
As the war reached its horrific end game in 2009, Embuldeniya was based at McKinsey’s office in Dubai. Consulting at Middle Eastern banks, Embuldeniya had a clear career path at McKinsey. “I could quite easily have continued on my career path abroad,” he says. “London and Dubai were happy places to be, but I wanted to help create a new Sri Lanka.”
He was still drawn to his homeland, denied by the civil war of the developmental boom that had transformed much of post-colonial Asia. He’d have the occasional trip home when McKinsey had a commission on the island, but for most of the 2000s, Sri Lanka was a corporate no-go zone, too risky for long-term commitment.
And then the war ended. After the Sri Lankan military paraded the grisly remains of feared Tamil Tiger leader Prabhakaran on state TV, Embuldeniya flew back to Colombo to see his family and gauge the national mood.
He says he encountered Sri Lankans who coveted what they saw as his glamorous career abroad and cautioned him against returning. But others who had seen how Malaysia, Indonesia and India had left Sri Lanka behind were more optimistic and dared to believe what could be possible on the island.
“It was shrouded by a heavy dose of disbelief when the first announcements (that the war was over) were made, so I don’t recall exactly the moment when it finally sunk in,” says Embuldeniya. “Only when you see the boundary walls coming down, the checkpoints being removed, do you start to believe. It started to finally sink in when I saw the reactions of people on the ground. I finally got round to really digesting that we had actually reached a turning point.”
Embuldeniya wasn’t alone. In Singapore and the US, three other young Sri Lankan finance professionals, one a friend from Harvard, one from Goldman and another from high school, were similarly transfixed by the stunning events back home, and fired up. “Independent conversations led to a collective conversation,” Embuldeniya recalls, “and so we eventually said why don’t we come back and set something up.”
Thus York Street and Ironwood were born. Today, Ironwood has four partners and four associates, while York Street boasts four partners and six associates. And they are starting to make an impression on people like Jim McCabe, Standard Chartered’s country head, who tells Asiamoney he has been talking them up as emblematic of a much-need modernization of the financial sector.
McCabe cites a recent deal York Street did to introduce Chicago-based ethical investor Creation Investments, which Embuldeniya’s team had known from post-college stints working in the US, to one of Sri Lanka’s leading finance houses, Commercial Credit and Finance.
That ended up being a $13 million transaction for Creation, which took 25% of CCF in February 2014, a stake that by December 2016 was worth around $70 million when Thai digital finance company Group Lease bought into CCF. “That was a sweet deal,” says McCabe.
Ironwood wants to focus on local companies with turnover of between $5 million and $10 million and between 50 and 200 employees, a medium-sized business in Sri Lanka.
“Our sweet spot is a deal around $4 million to $5 million,” Embuldeniya says, which is below the usual threshold of foreign private equity dealmaking of around $10 million on the island. “And when you are Commercial Bank of Ceylon [Sri Lanka’s biggest bank], doing a billion-rupee loan [or about $10 million] isn’t a big number.”
Embuldeniya says deals less than that are harder for international private equity funds to bother with. “Sri Lanka has never been a darling of international investor interest, because we are surrounded by giants who have been.”