A report by the Global Impact Investment Network (GIIN), a world leading body promoting impact investments, has found that even though an equally high number of private equity (PE) and developmental funds are operating in Sri Lanka with respect to India, the amount invested is small due to the size of the country and lack of state support.
“Given the small size of the market, the deal sizes for both funds and DFIs (development finance institutes) tend to be smaller in Sri Lanka than in other countries in the region… (and) several have engaged only through syndicated loans with other DFIs; therefore, the number of deals made overall is relatively small,” it said.
It noted that while the small size will also force domestic investors to seek opportunities abroad, it also lets investors identify potential entrepreneurs locally.
Further, it added that government spending on infrastructure, limited action over alleged human rights violations, corruption, and inconsistent investment policy applications have weakened investor confidence.
However, it also praised Sri Lanka for having a much friendlier business climate than its neighbours in South Asia. The report noted that while a government encouraged venture capital programme was undertaken by banks in the 1990s and early 2000s after realizing the need for risk capital, almost none of them are in existence after investing US$ 8 million, due to inexperienced fund managers making extremely risky investments with low returns.
“The negative perceptions created by these unsuccessful efforts have left a sour taste for many domestic investors who remain wary of deploying risk capital,” it added.
An expert in private equity, while agreeing, said that the failure was also partly due to having the funds available under banks or non-bank financial institutions, which fail to understand the incubation, patience and advising required in operating private equity successfully.
However, the report noted that DFIs continue to utilize these methods, and the funds have generally been diverted to mature businesses as debt, which banks are more familiar with.