How now, Tau?
KAZAKHSTAN OFFERS RICH opportunities for private equity. Whether it’s investing in a small-scale fish farm in the south, hotel chains in the north, cement plants in the east or a wannabe oil and gas in the west, there are a plethora of opportunities in all shapes and sizes in the booming central Asian republic. What’s more, potential investors are equally heterodox, spanning big global private sector firms and regional public sector minnows. Whatever the differences in scale and investment approach, all participants concur that private equity as an asset class in Kazakhstan is at last coming of age and that it has an important role to play if the country is to avoid Dutch disease-type reliance on oil and gas and to achieve the kind of well-diversified economy that will enable the nation to avoid the dreaded resource curse that has stricken other emerging market countries. Nobody is labouring under the illusion that the country will be able in the short term to wean itself off its dependence on the extraction and sale of commodities, whether hydrocarbons or metals, but there is widespread confidence among private equity market practitioners that Kazakhstan has the requisite business climate and regulatory environment to make a decent fist of establishing non-resource-related industries and create the conditions for sustainable economic development.
A key advantage is that the Kazakh authorities have applied market and institutional reforms that have created a politico-socio-economic environment where innovation and entrepreneurship have a good chance to not just survive but positively thrive. Initiatives include the prudent oversight of the National Bank of Kazakhstan, the visionary thinking behind the Regional Finance Centre Almaty, Kasnya Sustainable Development Fund and National Innovation Fund projects, and the progressive thrust behind a range of educational sponsorship programmes. As a result the country not only has an extensive pool of ambitious entrepreneurs and managers but also an institutional and retail investor base to turn pipe dreams into financial reality. For example, pension fund reforms implemented in the mid-1990s have created a $7 billion-plus domestic fund industry with inflows of more than $100 million a month. And anyone walking along the streets in downtown Almaty will be struck by the number of posters advertising the attraction of mutual funds. These developments have contributed to a surge in liquidity on the Kazakhstan Stock Exchange, whose market capitalization soared from $2.8 billion in 2005 to $5.3 billion in 2006.
Transformation
It’s no surprise then that a broad range of investment firms are looking at private equity investments in Kazakhstan. At one end of the private equity spectrum are public sector regional specialists such as the Central Asian Small Enterprise Fund, which operates at the small and medium-sized enterprise level, with typical investments of less than $1 million.
As regional director Donald Nicholson admits: "By Kazakh private equity standards we’re small fry." Quite literally so in the case of one of its investments, which is in a fish farm in the south of Kazakhstan that employs the latest Israeli aquaculture technology.
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"We believe the long-term value of our investment in Bank Caspian will be very rewarding. Banks can be a very good source of information for future private equity transactions"
Michael Lomtadze, Bank Caspian |
At the other end of the private equity spectrum in Kazakhstan, Citi Venture Capital International (CVCI), which has more than $7.5 billion under management in the emerging markets, indicates that the big global players in the industry are taking note of Kazakh investment opportunities. CVCI recently invested $20 million in KazInvestBank, it’s first investment in Kazakhstan. Sunil Nair, managing director and CVCI’s head of central and eastern Europe, the Middle East and Africa, says: "This investment is demonstrative of CVCI’s deep interest in private equity opportunities in the region." CVCI invested alongside another big private equity player in the region, the European Bank for Reconstruction and Development, which also invested $20 million to help support the bank’s regional expansion in Kazakhstan and the further development of its lending activities, especially in the retail and SME sectors. Founded in 2004 by Lancaster Holding, a Kazakh business group, KazInvestBank has its headquarters in Almaty and plans to establish branches in all the big regional commercial centres. Adnan Ally Agha, chief executive of KazInvestBank, says that the demanding due-diligence process that the bank had to go through in order to attract private equity investments from CVCI and the EBRD was worth the effort. "It reinforces the corporate governance and business strategy policies of the bank, and customers know we have credible shareholders driving us forward." Agha says that the participation of the EBRD in particular brings more tangible benefits as well as increased credibility – the bank has already provided a $30 million trade finance line, with a syndicated loan in the offing as well.
Regional players
Spanning the gap between Casef and CVCI are regional players such as Moscow-headquartered Baring Vostok Capital Partners and Stockholm-based East Capital, both of which have focused strongly on Kazakhstan in the past year. East Capital, for example, led a group of Scandinavian investors that filled the breach left by Raiffeisen International when it exited its minority stake in Kazakhstan’s number two financial services provider, Bank TuranAlem (BTA), in 2006. Having bought a 8% holding in BTA in 2001, Raiffeisen International had hoped to secure a majority holding in the bank but failed to come to an agreement over price with the bank’s owners and subsequently offloaded its participation to an East Capital-led group of Scandinavian asset managers looking for an attractive play in Kazakhstan’s highly regarded banking sector. "Banking is clearly one of the key investment themes in Kazakhstan," says Jacob Grapengiesser, a fund manager at East Capital in Stockholm.
Baring Vostok Capital Partners has acquired a 97% stake in Bank Caspian, one of the most profitable retail-focused banks in the country and with one of the biggest networks. Michael Lomtadze, chairman of Bank Caspian and a BVCP partner, says: "Bank Caspian is very important for BVCP in Kazakhstan in terms of the size of the investment." He says the plan is to expand Bank Caspian’s branch network by at least 50% in the next three years to help sustain asset growth of 30% to 40%. "We believe the long-term value of our investment in Bank Caspian will be very rewarding," says Lomtadze, adding: "Banks can be a very good source of information for future private equity transactions."