Sri Lanka Emerald PE fund aims for 20-pct returns

(EconomyNext) – The new Emerald Sri Lanka Fund, managed by NDB Capital Holdings and Zephyr Management, is looking for over 20 percent returns on its investments and will ‘hand-hold’ companies, bringing management expertise and technology to help them grow.

The 50 million US dollar fund, managed by NDB Zephyr Partners, will invest in fast-growing small and medium businesses focused on value-added exports and those set to gain from rising domestic consumption.

"The main difference between our fund and others is that we’re going to be very much engaged with the companies we invest in," explained Senaka Kakiriwaragodage, a joint Managing Director of NDB Zephyr Partners, the fund manager jointly owned by NDB Capital Holdings, a Sri Lankan investment bank, and Zephyr Management LP, a global emerging markets investment firm.

"We will ‘hand-hold’ them to achieve their growth aspirations. We will identify what we want to be in 3-5 years, our exit horizon, like say, market share, and have plans and milestones.

"To execute them we will develop robust management information systems and key performance indicators to track progress and see early what corrective action is needed."

The Emerald Sri Lanka Fund will invest 2-6 million US dollars each (250 – 800 million rupees) for significant minority stakes in fast-growing SMEs seeking expansion capital.

Target firms will be in export-oriented sectors like agricultural products, information technology and high-value textiles as well as those in the domestic market like FMCG (fast moving consumer goods), education, and healthcare.

Asked what returns they expect, Kakiriwaragodage told EconomyNext: "We’re looking for returns north of 20 percent."

The fund does not expect regular payments or dividends but will aim for high returns through collaboration with the investee firms and expanding their business.

In the export sector, it will invest in firms like agricultural exporters with a competitive advantage such as in value-added tea and spices, and logistics firms that can benefit from the island’s geographical location.

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In the domestic market investee firms will be in the FMCG, healthcare, financial services, and education sectors.

Kakiriwaragodage said Emerald is a 10-year life fund with investment period of five years and exit of five years.

He rejected criticism that PE only looks for quick returns on their investments and have time horizons too short to really benefit the firms they put money into, saying: "I prefer to refer to PE as ‘patient capital’."

SMEs will benefit from the management expertise and international network of equity partners in the fund.

"They can tap our international network if Sri Lankan firms want to expand in India or Africa," Kakiriwaragodage said. "We can help them introduce new technology and get into new markets. Our network is a great asset."

The fund’s investors include experienced emerging markets investors like IFC, the private sector lending arm of the World Bank Group, DEG – Deutsche Investitions-und Entwicklungsgesellschaft mbH and FMO (the Netherlands Development Finance Company).

Zephyr will invest 700,000 dollars in the Emerald Fund , NDB 12 million dollars and IFC, DEG and FMO 10 million dollars each.

The fund will start with 42.5 million dollars and grow to 50 million dollars.

It will invest in 10-12 firms in the next four years, said Zephyr Management’s Karthik Bhat, the other joint Managing Director of NDB Zephyr Partners.

Bhat said they look for capital efficient business with an advantage derived from proprietary process like in information technology and proven business models with revenue and customer traction that are already profitable or on a clear path to profits.

"We look for companies that have business expertise which can be leveraged overseas or to achieve scale locally and are led by competent management teams, not perfect but with a good executive track record, the highest level of integrity and open to external advice," Bhat said.
 

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