Unprecedented opportunities for Investment Banking in Sri Lanka - Frontier Capital Partners CEO Nishan Sumandeera

[GMNet]

http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=39947
Courtesy - The Island

Frontier Capital Partners Ltd, under two years from its inception, has reached the forefront of the investment banking industry in Sri Lanka, surpassing many renowned and leading investment Banks. During this period, it facilitated many mega deals, including many investments made by listed and unlisted companies. In 2009, it facilitated the C.W. Mackie sale to Lankem worth over Rs.1.4 billion, the Confifi Hotel Group sale to LOLC and Browns group worth Rs. 2.5 billion last year and this year,  the Softlogic Holdings’ acquisition of Asian Alliance Insurance worth over Rs.3.3 billion, surpassing all big numbers of major acquisitions this year.

Here, the company’s Managing Partner/ CEO Nishan Sumanadeera is in conversation with The Island Financial Review.

Q:What is your core business?

A: Ours is a boutique investment advisory firm doing fee and fund based activities both in Sri Lanka and abroad.  Our core team, with their diverse expertise and experience in different disciplines have leveraged their professional experience and personal relationships with the extensive networks throughout the world to bring the best solutions to business needs of our clients.

We provide cutting edge and tailor-made investment strategies and solutions to our clients throughout the entire spectrum investment cycle from the point of entry to the exit. These solutions range from the initial formation of businesses, financial feasibilities, business modelling and appraisals, to promotion of investment, facilitation, arrangement of equity and other types of funding into new and existing projects. Mid term strategic solutions include capital market activities, business expansions and diversification, corporate finance services such as takeover and merger advice, deal facilitation and execution, mezzanine finance arrangements and equity placements.

We also provide advise and assistance relating to restructuring, recapitalization and end term solution such as disposals, divestments and liquidations of businesses in order for our clients to realize capital gains and exit from a particular investment.

Apart from the core business activities of investment banking, we have refocused on some of the activities traditionally considered as cost drivers by many organizations. We have revolutionized and created a platform to monetize these cost centres/activities to be core strength of our business. These services include Legal & Company Secretarial Services, Equity Research, Media and Information Technology.

Apart from our fee-based activities, we have already made few strategic investments in Sri Lanka. We continue to identify new opportunities and make further investment in niche growth sectors. Currently we are in the process of raising US$ 10m from strategic foreign investor who had already pledged to be our long-term technical and financial collaborator. We are targeting a listing on the Colombo Stock Exchange by 2015.

Q:What made you venture into these specialized businesses?

A: Being involved in Investment Banking and Legal services for over 15 years in many investment banks including that of Asia Capital PLC as the Head of the Investment Banking and Legal Divisions, it was very easy to understand the synergies of providing complete legal and financial solutions under one roof. However, integrating information technology and media into the core business was novel and revolutionary. Regardless of these synergies, we always maintain Chinese walls between each activity to ensure confidentiality and independence of advise.

Q:What are your perceptions of the recent legislation for acquisition of under- performing Assets and the decision to depreciate the Sri Rupee against major currencies?

A: Any legislation or initiative to improve the efficiency and the performance of any enterprise or underperforming asset should be welcomed. As businessmen and entrepreneurs we constantly compare Earnings per Share (EPS), Return on investment and assets (ROI). There are other performance measurement yardsticks of competing businesses to determine the efficiency and performance. When performances of our companies and its subsidiaries are below benchmark, we as stakeholders often take decisions to divest, capitalize or liquidate businesses. As a responsible government it is important to maintain a steady pace of growth by ensuring efficient performance of assets and businesses that have greater impact to the country and its people. Therefore government decision should be welcomed for greater interest of the country provided that such acquisitions are handled transparently in an accountable manner.

Devaluation is imperative against major currencies in the backdrop of the global debt crisis. Although I am great believer of free movement of currencies, in which demand and supply determine the equilibrium of the exchange rate, I believe current exceptional global crisis requires timely and more radical action to redirect our economy. Overnight depreciation of the currency though radical, I believe is the only way to prevent market speculation, which would have resulted in greater risk to the economy. Sri Lanka being an import- driven economy this move is likely to have greater short term pressure on inflation and interest rates.

Q:What are the future opportunities for Investment Banking?

A: They are unprecedented. As an investment banker, you live in your own imagination, the essence of success. It is hard to find textbook investment banking solutions to complex real life opportunities. Every investment banking solution needs to be tailor-made and requires out- of- the- box thinking. Imagination has no boundaries. It is only when the last tree has died and the last river has dried and the last fish been caught that the investment banker will run out of solutions. Sri Lanka is not for sale but businesses will change hands at least one more time during the next decade paving way for many opportunities.

Decades ago, investment banking solutions revolved around resurrecting sick companies via restructuring, but today Mergers and Acquisitions (M&A) activities have become order of the day. I would see many opportunities in this area. Further, Sri Lanka needs capital to rebuild and grow in this post-conflict period. The capital available in Sri Lanka’s corporate sector is limited and it is here that Investment Bankers can play a major and catalytic role in promoting foreign direct and portfolio investment. Sri Lanka’s corporates must engage Investment Bankers with international reach in order to access foreign capital. For example, John Keells Holdings would not have been able to build South Asia Gateway Terminals if it did not access international capital markets via investment bankers in 1994. SAGT now contributes nearly 40% of JKH’s earnings. Therefore, the role that Investment Bankers can play in developing Sri Lanka is immense.

Q:How did the local investment banking industry evolve in the last two decades?

A: Investment banking has evolved from being just an impressive word spoken in corporate boardrooms into real life, everyday solutions practiced and adopted by investment bankers and investors collectively to add shareholder value via capital market activities. 

With the introduction of the Companies Act in 2007, legislation in Sri Lanka added more flexibility and diversity, which has undoubtedly helped investment bankers to innovate new solutions within the existing legal framework of the country. This was a welcome change, and I must say was the turning point of the industry.

With these changes together with capital market boom, current day Investment Bankers have the opportunity to provide a variety of services, which was far-fledged and unimaginable two decades ago.

Q:What are the growth ingredients for Sri Lanka?

A: As an analyst it is very difficult to determine ingredient or conditions for growth. We can characterize the successful economies of the postwar period, but we cannot name with certainty the factors that sealed their success, or the factors they could have succeeded without. It would be preferable if it were otherwise.

Many countries have grown, for a time, on the back of a much shorter set of policies and reforms. But we suspect that over the course of 10 or 20 years of fast growth, all of these ingredients will matter. Low inflation, for example, will not compensate for poor education or backward infrastructure. To sustain growth over a long period, a set of things needs to come together. Doing some basic things may produce beneficial results. But the items the policy maker neglects will eventually haunt the economy’s progress.

Q:What are the inherent risks in investing in Sri Lanka?

A: Emerging Sri Lanka vouches for economic, regulatory and political stability, the hallmark of any good investment destination. No place on earth is risk-free, likewise no investment. Each country has its inherent risks factors, currently geopolitics affecting Sri Lanka should be an important factor in your watch list.

Private investment and Investment Banking needs policy consistency, coherence and transparency in order to flourish. Therefore the government should look to build on these areas, which will in turn help build confidence in Sri Lanka’s capital markets.

Q:After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the market euphoria is now gradually receding with the index falling below its lowest ever during the last two years. What do you think of the direction of the Stock Market?

A: The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns. Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

The market is in the stage of correction and consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviors which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. Valuations of the stocks are likely to get attractive in the backdrop of higher quarterly earnings and market correction, which had resulted in nearly 25 percent decline from its peak.

Q:What are the best investment sectors in the CSE?

A: In an emerging market, as Jim Rogers said, you need to own a bank, a brewery and a newspaper!! The Banking sector will always remain, as a proxy to any emerging economy whilst beverages and media would have more than proportionate growth.

Sri Lanka is historically known to be a travel destination; hence the leisure and travel sector would always remain in the top drawer. There will be new lines of tourism; many people will come to Sri Lanka for their medical and higher education needs paving way for new opportunities. These new opportunities coupled with ageing Sri Lankan population will help health and education sectors to have a phenomenal growth. The infrastructure development, which is considered as the most, promising opportunity by emerging market investors, also should remain in your shopping list. 

Q:How do you cope with market fluctuations?

A: It is generally easy to deal with matured investors because they understand the risk involved in capital market activities. It is retail investors that require frequent advise. As a seasoned investor you generally invest funds in different asset classes with varying risk return combination. Market investment is an art not a science.

Q:What factors are considered by "matured" companies when buying assets in certain sectors?

A: There are many factors considered by investors prior to engaging in a M&A deal. Some of these opportunities can be considered once in a lifetime, a dynamic businessman would not want to miss. It is their vision, dynamism, business acumen that drives them towards these opportunities. Mature companies and investors do not place too much significance on past financial performance, more weightage would be given for business synergies. Historical financial information cannot be considered a yardstick of the future growth potential as it has been proved wrong many times. Most of these mergers and acquisitions have happen depending on investment objective, appetite and style of the respective investor.

Q:What measures do you propose to arrest the declining stock market which seems to be sinking faster than the Titanic?!!

A: Any artificial measures taken by regulators against the free market movement is likely to result in prolonging the eventuality. Hence we should allow free market forces to determine the bottom. In the past we have seen many ad-hoc remedies resulting in failed attempts to rejuvenate the stock market.

Q:Can you spell out as to how much more it will fall?

A: Stock markets are subject downward and upward movement due to varying factors. These factors and its future implication usually result in negative or positive by sentiments of the investors. The global debt crisis and some of the international factors have resulted in negative sentiments of the investors’ community. These factors have resulted in lower demand for equity investments as against the other asset classes. 

The Market is currently is in the phase of correction and consolidation.   It is likely to result in a downward trend until valuations become more realistic and reasonable. It is surprising to see some companies without any real business or assets of any value trade at very high multiple to its earnings or at a substantial premium to assets value. These valuations have to get corrected and total market capitalization should be close to value of businesses.

Likewise there are many companies with future earnings potential, which still trade at cheaper forward multiples. Share Prices will have to eventually reflect the corporate earning. Hence I consider this down trend to be an opportunity. 

Q:Investors, who have pumped in US$ 2 billion into Treasury Bonds are  aghast at getting less Dollars with the depreciation when they exit. Some say that they want to exit what ever the losses were. Your comments?

A: Foreign Exchange Rate usually affects returns of the inbound investments. Sri Lanka used to have a steady Rupee depreciation of approximately 2% per annum during last 20 years. Comparatively our bond rates still far more attractive to foreign investors especially inconsideration of the investment risk and current global factors. 

The Government is also keen to commence  local industries  in consonance  with the theme : Apema ratak, Apema Deyak. How do you see the private sector sentiments in that regard?  Granted that earnings is the core business  of business. But, don’t you think that this is more noble than  blue chips investing in hotels abroad ?!!

A: All business decisions of the private sector will have to make commercial sense regardless of whether these investments are inbound or outbound. Private sector would be more than willing to invest in local businesses in consonance with special themes, provided that theses investments which are commercially and financially viable.

Q:Sri Lanka is spending US$ 400 million in subsidizing the New Zealand milk farmer and another US$ 300 million  in sugar imports. What is stopping blue chip corporates looking at both these sectors not only  in terms of growth  in corporate earnings, but also in the national interest as well given that the trade deficit is projected at US $ 11 billion this year?

A: Sri Lanka is considering the benefits of import savings similarly to the export earnings. Corporate would certainly look at new investments in the area of import substitutes such as local Milk Powder and Sugar if necessary incentives are provided to the investors.  

Q:There is a lot of hype on  public sector- private sector  partnerships. Given that  each IPO is  oversubscribed so many fold running into billions, why can’t the government  and the private sector team up  for, say, major  infrastructure projects  where the funds are raised here, without running to the World Bank, the International Monetary Fund  and  the EXIM bank of China where the latter’s interest rates are even higher than the donor concerns?

A: Oversubscription of IPOs does not necessarily means there is an abundance of excess cash. Some oversubscriptions were due to large sums of monies being given to investor by way of margin lending by banks. Agree that there should be fund raising with regard to infrastructure project, which could be funded jointly by government, Private Sector Companies and private investors.

Q: Don’t you think that there should be more companies obtaining listings, especially in the apparel sector?

A: Among factors which discourage companies from obtaining listings are stringent disclosure policies and regulation. Regulators should make listing simpler and straight forward. Regulators should provide more incentives for listed companies. There are more than 30,000 registered businesses but only 300 listed companies. This ratio should be at least 30%. Central Bank’s directives to make Finance and Insurance companies listed can be considered as a step taken in the right direction.