August 14, 2014 / 2:36 PM / 3 years ago

UPDATE 2-TPG in biggest Sri Lanka buyout with $113 mln Union Bank deal

* Private equity fund to take up to 75 percent stake

* TPG sees opportunity to lend as SMEs seek capital

* Sri Lanka economy expected to grow 7.8 pct this year (Adds quotes, context of economic expansion and lending opportunity)

By Shihar Aneez and Stephen Aldred

COLOMBO/HONG KONG, Aug 14 (Reuters) - TPG Capital Management LP has agreed to purchase a majority stake in Sri Lanka's Union Bank of Colombo Plc for $113 million in the country's biggest buyout deal.

TPG, via its affiliate Culture Financial Holdings Ltd, will take a stake of up to 75 percent in Union Bank through a combination of primary and secondary shares and warrants, the bank and the fund said on Thursday. The exercise of the warrants would take the value of the deal to $117 million.

Sri Lanka's government is keen to develop the banking sector to support growth in an economy emerging from the trauma of a protracted civil war. The economy is expected to grow by 7.8 percent this year, faster than last year's 7.2 percent.

Puneet Bhatia, a partner and TPG's India country head, told Reuters the private equity fund hopes to turn Union Bank into one of Sri Lanka's top five banks.

Union Bank is the eighth-largest of Sri Lanka's 12 listed banks and has a market capitalisation of around $67 million, according to Thomson Reuters data.

TPG sees opportunities to lend in an underdeveloped banking market as consumption rises and Sri Lanka looks to boost tourism, infrastructure, manufacturing, agriculture and exports.

"The government's programmes are clearly mushrooming SMEs (small and medium-sized enterprises), but first-generation entrepreneurs find it hard to get capital and our experience with banks in Asia shows that a small, community-based lender can create a very strong financial institution," Bhatia said.

The buyout will boost Union Bank's Tier 1 capital, a measure of financial strength, to enable it to meet the central bank's minimum capital requirement of 10 billion rupees ($76.8 million) before a Jan. 1, 2016 deadline.

TPG's experience in developing emerging-market banks was a key part of winning government approval for the deal, Bhatia said.

The returns made from relatively small investments in banks in emerging markets can be substantial for private equity funds.

Last year, TPG sold part of its stake in Indonesia's Bank Tabungan Pensiunan Nasional Tbk PT to Japan's Sumitomo Mitsui Banking Corp, putting it on course to earn more than 10 times its initial investment made in 2008.

$1 = 130.1800 Sri Lankan rupees Reporting by Shihar Aneez in COLOMBO and Stephen Aldred in HONG KONG; Editing by Denny Thomas, Matt Driskill and Dale Hudson

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