In 2011, capital market regulators amended the listing rules in a bid to regulate the private equity. These were primarily targeted at companies that launch Initial Public Offerings (IPOs) within a few months of placing shares privately at a discount to the IPO price.
Under the rules, private equity investors are locked-in for nine-months after an IPO; and where the placement has been done within 12 months prior to the IPO, the lock-in would be extended up to one-year.
The new rules prevent private equity investors profiting at the expense of new investors on the Colombo Stock Exchange (CSE) when it comes to pre-IPO placements.
“We strongly believe that while regulations are neededto protect investors and the integrity of the market, over regulations is also harmful,” Israel Paulraj, Chairman of Guardian Capital Partners PLC told shareholders.
The rule change also penalises genuine private equity investor that provide growth capital to companies, from exiting their positions once the company goes public, lamented Paulraj.
A typical private investment is spread between three to five-years, to allow a company from the time of capital infusion, to achieve the targeted growth.
Paulraj said if investors are to be locked-in for a further year, it makes the private equity industry unattractive for firms keen to take part in building the risk capital market.
He said in emerging markets, there is a one-year lock-in periods for private equity investors, which is similar to what Sri Lanka adopted before.
Sri Lanka Private Equity Market
The Sri Lankan private equity market slowed down sharply in 2011/12, with capital raised dropping to 9.5 billion rupees, from1 3.1 billion rupees recorded a year earlier, according to Guardian Capital Partners figures.
Eight companies, up from six a year earlier, raised capital during the year, which resulted in the average deal size shrinking to 1.2 billion rupees from 2.2 billion rupees in 2010/11 period.
Most of the private equity deals in the latter part of the FY 2011and FY 2012 were pre-IPO placements. Poor performance from the Colombo bourse, hurt these deals, which saw a drop in capital raising in the second quarter of FY 2012.
Guardian Capital Partners PLC, the private equity investment arm of Ceylon Guardian Fund Management Limited, made a post-tax loss of 21.5 million rupees for the financial year ended March 31, 2012, over revenues of 13.8 million rupees.
The company made a loss of 9.0 million rupees during the 2010/11 financial year.
Its earnings per shares were a negative 83-cents during the 2011/12 financial year, despite a 360 percent revenue growth that was driven by capital gains realised and dividends received.
The firm said revenues came from capital gain of 90,000 rupees from a sale of Expolanka shares, a further capital gain of 3.7 million rupees from write-back and sale of Softlogic Capital PLC, which was written off previously as part of the business re-organisation.
Dividends paid out by Expolanka Holdings PLC and Textured Jersey Lanka PLC generated 5.3 million rupees in dividend income.
In 2011/12 financial year, Guardian investment 240.3 million rupees in two companies taking the total portfolio value up to 522.2 million rupees from 287.4 million rupees recorded a year earlier.
New investments were 40.0 million rupees for an eight-percent stake in hSenid Business Solutions Private Limited and 214.0 million for a 41 percent stock in Access Engineering PLC.
Its previous investments included 251.0 million for a 48 percent stake in Expolanka Holdings PLC and 17.0 million rupees for a three-percent stake in Textured Jersey Lanka PLC.
The company did not exit any of its investments during the year.