Private equity investment in Sri Lanka is kind of like the Yeti (or sex in high school, for that matter): Lots of people have seen evidence of it, someone knows someone else who knows someone who knows about it – but when you get down to it, only a few people really get it, and even fewer people are actually doing it. Mafaz Ishaq of Calamander Capital – along with the firm’s head, Singapore-based Roman Scott – belongs to the latter group. While small, the firm put itself on the map by acquiring Sri Lanka’s Coffee Bean franchise. Calamander also owns the Unawatuna Beach Resort near Galle, a land bank that it intends to eventually turn into hotels, and a few intriguing early-stage investments.
Colombo to Austin, Texas… and back
While Mafaz is clearly well suited to what he’s doing, he’s taken a roundabout way to get here. He left Sri Lanka when he was just four years old, in favor of the U.S. – where his father was studying – and then Saudi Arabia. He went to boarding school in the United Kingdom, and then studied mechanical engineering at King Fahd University of Petroleum and Minerals in Saudi Arabia. A bit later, he returned to the U.S. to get a graduate degree in aerospace engineering at the University of Texas in Austin.
Texas, I ask? The stereotype – which is a common perception for a reason – of Texas usually involves rodeos, fried food, xenophobia towards other Americans (to say nothing of towards actual foreigners), and pimped-up pickup trucks as a symbol of virility. Soft-spoken, cultured, and erudite – a few of the words that come to mind after spending three minutes in the company of Mafaz – and Texas aren’t an obvious fit.
As it happens, my own Texas prejudices and ignorance trip me up – that, and the fact that apparently Austin isn’t really in Texas, whatever the map might say. Mafaz explains, “[Austin] is a beautiful place, and… very special. It’s got a very young, alive culture to it and there’s a very liberal attitude towards those things. It’s situated in the hills… you’ve got lakes… it’s a very nice place to live.” For a moment it sounds like Nuwara Eliya, only without the tea and with lots of steakhouses offering 2 kilo steaks.
One abandoned doctoral program later, Mafaz returned to Sri Lanka, in 1993. “I came here actually in sort of a search for me. As a third country kid, I had grown up everywhere but my own country, and I was searching for a country that was my own, a place to identify with.” After stints working for John Keells, the United Nations and the Sri Lanka Ports Authority, Mafaz went to the London School of Economics to round off his business education. Drawing upon his background in information systems Mafaz returned to Sri Lanka to head up offshore development for industrial tire manufacturer Solideal, and then joined the firm that later became Holcim, the global cement maker. He went to Puttalam, the site of the only integrated cement plan in the country, about 120 km north of Colombo, and spent nine months turning around the company’s cement plant there. For his troubles, he was sent to Bangkok, and later to Zurich, where he was head of IT audit, still with Holcim. A few years later, back home in Colombo, Mafaz’s old friend Roman Scott launched Calamander in Singapore, and Mafaz joined him in early 2007.
A first niche: Singaporean shop houses
Calamander didn’t waste any time in uncovering a unique niche in the Singaporean real estate market, which was an early focus of the firm. In the heady days prior to the global financial crisis, real estate was booming, and Scott figured out a business centered on renovating traditional shop houses in downtown Singapore, where sleek high-rises were popping up like mushrooms on steroids. Calamander Group bought former shop houses for half of what new, Grade A office space was selling for just across the street. After renovating the property, Calamander would rent or sell the former shop houses to small law firms, hedge fund managers, accountants and other small businesses that were service providers to the occupants of the high-rises – but which weren’t themselves large enough to get their own space in the glassy tall buildings. “It is incredibly successful… thanks to a very granular level understanding of the economics of what is happening on the ground,” Mafaz says.
Three themes: Money, selling stuff abroad, and people buying things
In the meantime, Mafaz, who is the point person for Calamander’s deals in Sri Lanka, had been trying to figure out how to best approach the local market. The firm developed three investment themes, with an eye on unlocking hidden value and generating a 20-25% internal rate of return. That’s like making back one-fifth or one-quarter of your initial investment every year: Not easy at all. Drawing on Scott’s background in bank restructuring, Mafaz first looked for opportunities in the financial services sector – banks and other financial organizations – as a long-term way to play underlying economic growth.
Financial companies have the most direct exposure to economic growth – as deposits rise, companies and individuals borrow more money, and the pool of banking products broadens and deepens, resulting in solid growth and expanding margins.
Second, Calamander focused on export industries – tea, rubber, coconut, ceramics and IT in particular – where Sri Lanka has a competitive advantage and a clear and well-defined market. Mafaz’s background in getting his hands dirty on a factory level fit well here, as Calamander figured that it was well positioned to add value by improving and making more efficient the operations of poorly managed plants. It’s not easy work, but – like figuring out exactly which shop houses on which blocks of downtown Singapore were ripe for gentrification – sometimes distinctly unglamorous labor pays extremely well, in part because a lot of investors aren’t willing to get their hands dirty.
Third, Calamander decided to focus on some of the prime beneficiaries of macroeconomic growth and booming exports: Sri Lanka’s small but growing middle class consumer. This has been an enduring investment theme throughout Asia and much of the rest of the emerging markets: Economics meets the aspirations of people with more disposable income. The trick was finding the right way to play the idea in Sri Lanka.
Calamander’s final theme, hospitality, had already been a focus for Scott before the founding of the firm. He had been targeting hotels in Sri Lanka for more than a decade, and Mafaz took over the challenge of finding deals.
Coffee Bean and Corolla Man
Themes are one thing, though, and closed transactions are another. Demanding valuations, and regulations that prohibit a single investor from owning more than 15% of a bank, pushed the financial sector focus to consumer finance companies. But Calamander’s requirements proved too demanding. “I’ve found more than eight little finance deals,” says Mafaz. “[but] none… passed our litmus test for investing.”
The export industry idea hasn’t completely gotten off the ground either. “We went knocking on a number of doors looking for factories,” he says. Tea factories were a key focus, and Mafaz says he visited around 30 facilities in his search for a good opportunity. But asset prices were high, and rising labor cost loomed as a challenge.
“We came very close, but as time passed, the space became very busy… we won’t overpay, and are not afraid to walk away,” Mafaz says.
Consumption proved an easier nut to crack under Calamander’s emerging middle class theme, with a focus on consumer brands. Mafaz built a deal pipeline, leading to the acquisition of the franchise for Coffee Bean, a seemingly ubiquitous coffee shop that speckles the Colombo landscape.
“I think there is a new coffee culture that’s emerging in the country… it’s a nice simple business. You sell coffees, sell cakes and goodies to go along with it,” Mafaz says, before going on to segment the Coffee Bean demographic with an impressively high degree of specificity.
“The customer profile changes over the day… there are expats that come in early, the embassy crowd. Then you get the up and coming young urban professionals who I call Corolla Man.”
Corolla Man? I ask. It sounds like some kind of name of a stage of prehistory dreamed up by a marketing intern that I missed out on.
“That’s my term for a certain level of income level … the [Toyota] Corolla is not like the American $20,000 car; here, it’s a $50,000 car, so these people have a [reasonable] level of income. They may go out for a coffee once a month maybe twice a month with a bunch of friends.” Moving past Corolla Man, Mafaz expounds further, segmenting the demographic with an astonishing level of detail. .
What’s next? “We’re planning to expand Coffee Bean very aggressively,” Mafaz says. Supporting this growth will be the gradual emergence of a more mall-centered consumerist culture, he says.
“[Unlike other similar cities], we still don’t have [a] retail culture here… in the next five years, if you believe all plans that are coming through, that culture is going to change as well.
We are going to get lot of mall-centered commerce, and that’s going to be great for guys like us, since Coffee Beans go [so well] in these types of places,” he says. Meanwhile, Mafaz says he’s still looking for other consumer brand opportunities.
Like an angel
One of Mafaz’s big focuses is on early-stage investments. Calamander is an active member of the Lankan Angel Network, a group that evolved out of Venture Engine 2012, a business plan competition. The best plans received investment – and, along with that, guidance and advice from their new investors. “It’s been a great eye-opener into the challenges that entrepreneurs face in this country,” Mafaz says.
Calamander made small early-stage investments in two innovative fashion design firms, including Nithiya Yarn and House of Lonali. The firm has also invested in travel companies. One, Lanka Wild Trails, plays into the emerging middle class theme, as it targets local tourists. “[The proposition] is that local tourism is no longer affordable for Sri Lankans… so the firm is trying to offer a value proposition [through] tented camps around most of the wild parks in the country,” Mafaz says. Another investment, Trekurious, arranges experiential travel – for example, a tour of Geoffrey Bawa buildings, led by a highly knowledgeable guide, or a tour of Pettah led by someone with deep knowledge of the history of the area.
Mafaz has also emphasized technology. Calamander came close to completing a couple of big deals in IT, and Mafaz says the firm will do a “significant deal” at some point.
To help explain the potential of the sector, Mafaz points to the large number of graduates in the field in Sri Lanka – and the small number of IT (and BPO, or business process outsourcing) firms operating in the space in the country. “What are the constraints to entrepreneurship? This is something that I’m trying to understand,” he says. Mafaz bolsters his sense of the next generation of Sri Lankan entrepreneurship by teaching supply chain management, information management and structured finance to MBA students at the Post Graduate Institute of Management.
Show me the money?
Calamander has raised funds from investors for its efforts in Singapore – but hasn’t yet launched a fund focused on investment in Sri Lanka.
Back in 2009, after Sri Lanka’s civil war ended, the mood in investment circles bordered on the euphoric. Poised and ready to go, Calamander started to test the market and made some splashy announcements about raising capital. “We found everyone hugely interested in the country given the end of a civil war,” Mafaz says.
But the global macroeconomic environment got in the way. “Nobody wanted to open their purse for new investment because they were afraid for their own jobs [because of the global economic crisis], and making a decision to enter a new market at that time was tough,” he explains. Rather than try to raise a fund, Calamander instead decided to build up a track record through investing the funds of the firm’s owners and those of existing investors. Now that global investor risk appetite has improved, Mafaz says the firm is considering opening the door to new capital.
Will the fact that many global investors have difficulty finding Sri Lanka on a map be a problem? Maybe not as much as you’d think. “I always thought that Sri Lanka was a niche product,” Mafaz says, “but it’s not. The world is growing and people are searching for [good returns] and they are looking for genuine stories that can take off… they are also very cautious that they are not investing into things that seem too good to be true.”
Mafaz says that Calamander remains a conservative institution. “We prepare the ground carefully first [to] ensure success,” he says.
What’s standing in the way?
Mafaz delineates two key challenges for the investment environment: One global, and one local.
Mafaz sees the global macroeconomic environment – which seems on the verge of being in eternal recession – as a self-fulfilling prophecy in some ways. “The most amazing thing about recession… is the way that it changes the state of mind of consumption. You [as an individual] may not be affected at all – but just the perception that the economy slowed down means that your thinking changes. You say, hang on a second. Shall I go out to eat today? Maybe we should eat at home. Maybe I won’t buy that pair of trousers, even though it’s on sale. You start looking for deals. But it’s all perception, and may not even be related to your underlying personal reality.” And the result is that recession happens when a lot of people think there’s a recession happening – even if there wasn’t really a recession happening in the first place.
Meanwhile, investing in Sri Lanka has its own set of risks. “There’s increasing political risk attached to this country. It hasn’t gone away, and it seems to be rearing its head in different forms consistently… from policy to the legal framework to the exchange rate being politically manipulated.” These factors are beyond the control of the investor: And a shift in the wrong direction in any of them can blow up even the most promising investment premise in a rice-and-curry second.
And: Board shorts
Mafaz waxes maybe the most enthusiastic when he’s talking about a private, non-Calamander investment in a local company that makes board shorts. Board shorts? I ask, sensing that I’m scratching through my already-razor-thin veneer of cool with such a query. Indeed: Board shorts, Mafaz patiently explains, are surfing shorts – as in, what you wear when you’re on a surfboard.
It started with a guy named Dunstan, who Mafaz had known for 15 years. “Dunstan claims to be Sri Lanka’s oldest surfer… he turned 50 last year,” Mafaz says. “He learned to surf from all these Australians and Americans coming in the ‘60s and ‘70s to Hikkaduwa, where his father had a house… and he started a shop called Dunstan’s Surf Design, selling shorts and boards. After a while he said, maybe I could make these shorts myself, and he started making these really cool customized board shorts, with amazing designs. I have the first pair I bought, in 1998, and they’re still in one piece.”
So a number of years later, Mafaz gave a pair of Dunstan’s board shorts to a visiting friend, who was an instant convert. That was the spark and before long, Mafaz, his friend, and a few others went into business with Dunstan. The fledgling company’s web site, www.dunstansurfwear.com, is an experience and an education in itself. “We put some money into it, and now you can make your own pair of shorts” – you can choose the fabric, the design, everything. The shorts are produced in a small facility in Hikkaduwa, and delivered anywhere in the world.