To Catch a Calamander

By Echelon.

Published on March 21, 2013 with No Comments

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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.

MFaz grConsumption 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.”

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