The Ceylon Assets Management Company (CAMC), on the back of launching a fund for investment in Initial Public Offerings (Ceylon IPO fund), is gearing to launch two more such funds within the next three months, officials said.
“Within the next three months we will introduce two more funds and one will be targeted at foreigners,” Dulindra Fernando, Managing Director CAMC told the Business Times on the sidelines of the launch recently.
He said that some promising IPOs are coming up this year, and the list will probably increase over the next year, not decrease as more companies seek financing to expand. “It will help increase market cap of the relatively small Colombo Stock Exchange (CSE). However, the Ceylon IPO fund will not invest in every single IPO but will select the IPOs we expect to trade on the market at a premium,” he stressed.
He added that CAMC will look beyond the fundamentals of the company, such as valuation of the IPO issue price and growth opportunities of the sector, etc. He further explained that ideally, for an IPO share to be successful, it must be offered at a Price Earnings Ratio of under 10, ideally 6 to 8 times, i.e. a 25% discount to market, leaving at least a 25% upside for the investor.
Asked to comment on some of the opinions expressed at a high-level two day capital market development workshop last weekend about the market being overvalued, Mr. Fernando said that he doesn’t share that view. “Sri Lanka offers high GDP growth and steep growth in profits and there is the case of some hotels and banks reporting profits growth in excess of 60%,” he said, adding that this trend will continue for a couple of years at least, and observing that few other markets offer comparable growth.
However, he added that the problem with the CSE is its poor liquidity that deters large investors. It forces paying a premium upon entry and a discount when selling. “If we had better liquidity, shares will find proper valuations naturally. The SEC could help this process by encouraging larger free floats, lower brokerage fees and introducing new instruments, which will facilitate better price discovery.” He added that the IPO Fund avoids this issue as it invests only in selected IPOs and fixed income instruments. “We hope to take advantage of the IPOs that come to the market at a built in discount and exploit the 10% IPO allocation reserved for Unit Trusts,” he said.
He said that the IPO fund will offer a unit at Rs 10 each and will accept a minimum investment of Rs 1,000 along with a maximum of Rs 10 million, the maximum investment allocation for retail investors. Investors will be charged a one percent management fee.
Mr. Fernando said that Deutsche Bank will be the trustee and custodians of the new IPO fund which is set to open for subscription on June 21, 2011.