Raj Rajaratnam, the founder of Galleon Group

(Bloomberg) -- Raj Rajaratnam, the founder of Galleon Group, planned to gauge interest in a $200 million Sri Lanka fund with a trip to London before he was arrested, said two people with knowledge of the matter.

The Sri Lankan-born billionaire had planned to raise money for the fund by listing it on London’s Alternative Investment Market, one of the people said, asking not to be identified because the information is private. Dan Gagnier, a New York- based spokesman for Galleon, declined to comment.

The hedge-fund manager, who was also planning to put his own money into the fund, had arranged to meet bankers from Collins Stewart PLC and Rothschild on Oct. 19 to discuss the plan, the person said. Nick Miles, spokesman for Collins Stewart, and Louisa Leslie, spokeswoman for Rothschild in London, couldn’t immediately comment.

Authorities expedited plans to arrest Rajaratnam after learning he had bought a plane ticket to travel to London on Oct. 16, a person familiar with the matter said. Rajaratnam was one of six people arrested in New York that day for alleged insider trading, charges which he denies.

Rajaratnam had planned to start a fund that would invest in bonds, stocks, private equity and companies that were seeking initial public offerings in Sri Lanka, said the person familiar with the matter.

The New York-based hedge-fund manager in June bought a 20 percent stake in broking firm Lanka Orix Securities Pvt., now known as Capital Trust Securities Pvt.

Investor Inflow

Overseas investors are venturing into Sri Lanka as the government seeks to rebuild the economy after a 26-year civil war. The Sri Lankan army’s victory over the Liberation Tigers of Tamil Eelam in May prompted economists to boost growth forecasts and spurred a rally in stocks, making the island’s Colombo All- Share Index the best performer in Asia this year.

The benchmark gauge has gained 103 percent so far in 2009, heading for its best annual advance since 1991. The Sri Lankan currency has dropped 1.6 percent to 114.81 rupees a dollar, while bond yields have fallen about 800 basis points this year.

Leopard Capital LP, which manages a fund in Cambodia, plans to raise $100 million to invest in Sri Lanka, said Douglas Clayton, the firm’s Phnom Penh-based founder. Calamander Capital is seeking to pour $50 million to $75 million mainly into the country’s banks, rubber, coconut and tea businesses, said Roman Scott, managing director at the Singapore-based investment firm.

‘Low-Hanging Fruit’

“This is a war-distorted economy that is set to be rationalized,” Clayton said. “That leaves some low-hanging fruit for private equity to come in and build those missing sectors.”

Rajaratnam is one of Sri Lanka’s biggest investors, holding the second-largest stake in John Keells Holdings Plc, the nation’s biggest listed company. His funds also hold stakes in People’s Merchant Bank Plc, DFCC Bank Ltd. and Commercial Bank of Ceylon Plc, data compiled by Bloomberg show.

Rajaratnam is free on a $100 million bail.

He had also planned to watch a screening of a film that he had invested in called “Today’s Special,” which is being screened at the London Film Festival before going to Geneva to meet investors in Galleon’s funds, according to another person familiar with the matter.

“I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing investors’ capital,” Rajaratnam said in a letter to investors and employees this week. Galleon is exploring alternatives for the business, he said in the Oct. 21 letter. He will liquidate his hedge funds.