ANALYSIS: Private equity funds finally arriving in Kazakhstan

analysis

ANALYSIS: Private equity funds finally arriving in Kazakhstan

By SRI ⋅ March 24, 2009 ⋅

(SRI) - Private equity funds, long conspicuously absent from Kazakhstan’s financial landscape, seem to have finally arrived, as the financial crisis forces local businesses to look for alternative sources of capital.

During the economic boom in the earlier part of the decade, activities of private equity funds in Kazakhstan were mainly symbolic. Several local and international funds established their presence early , ready to take advantage of the opportunities of Central Asia’s fastest growing economy, but the availability of cheap bank credit and the unwillingness of local entrepreneurs to part with equity stakes in their companies prevented the funds from gaining foothold in Kazakhstan.

The current economic crisis has changed the rules of the game, however. Cheap credit is no longer available, and businesses struggle to cope with deteriorating economic conditions. In this environment, private equity funds are suddenly in a position of strength, and local entrepreneurs are finding themselves much more receptive to the idea of private equity investments.

“The changing conditions have made local entrepreneurs more agreeable towards private equity, and they no longer consider selling a part of their business as a too expensive price to pay to raise capital,” Dauren Alipbayev, managing director of Central Private Equity Fund, told the business weekly Vox Populi.

“Many business owners have become more flexible in their requirements - both in terms of valuations, and also in their willingness to sell to investors more substantial stakes in their companies - even exceeding 50 percent,” Marina Shcherbakova, the Kazakhstan representative of SigmaBleyzer, a CIS-focused private equity group, told Vox Populi. SigmaBleyzer recently acquired a controlling stake in Kazakh drinks producer Asem-Ai , reportedly paying USD70 million in the deal.

Not surprisingly, sectors which have suffered most from the economic downturn are especially quick to embrace the arriving private equity funds. Construction companies and real estate developers, particularly hurt by the slowdown, have been among the first. Retail companies and local manufacturers like Asem-Ai, affected by the growing uncertainty and declining consumer demand across the country, have also begun to take advantage of this new source of financing.

But not just the small and medium businesses, long relying almost exclusively on now unavailable bank debt as a source of funds, have shed their reluctance to approach private equity groups. “Even public companies in the oil and gas sector are now considering the so-called private placement and are approaching us with collaboration proposals,” Takgat Kukenov, managing director of Aureos Central Asia Fund, said in an interview with Vox Populi.

According to Kukenov, the valuations of Kazakh companies are becoming increasingly attractive, as they are coming down from the heights of the pre-2007 boom. During the heady mid-2000s, the availability of cheap money and continuing economic growth have led to valuations that rivaled those of world leaders listed on stock exchanges in London or New York. “The financial crisis put everyone back in their place, and the valuations became more realistic,” Kukenov said.

Business as usual

While the improving conditions have been turning the tables for private equity funds in Kazakhstan, the participants claim that they are not planning to change their approach.

“The crisis has not brought any radical changes to our investment plans,” Aureos’s Kukenov said. “We have just become even more conservative in assessing potential investments. The one important change to point out, however, is that we increasingly look at public companies and consider the so-called PIPE - private investment in public equity.”

Aureos Central Asia Fund, managed by the emerging markets specialist Aureos Capital Limited, concentrates on companies active in telecommunications, food processing, services, logistic and pharmaceuticals. “The main reason why we concentrate on those sectors is that investments in them tend to pay for themselves quite quickly. Under the right management, companies in those segments show the highest profitability, and it is much easier and faster to develop and sell them,” Kukenov explained.

“Our ideal target is a private company, operating in a promising, fast-growing segment of the market, with good management and transparent accounting,” Kukenov said. Besides that, private equity funds look for a clear ownership structure and good exit opportunities, meaning the possibility to sell the company to a strategic investor or lead it to an IPO. “According to our investment guidelines, our fund [with USD67 million in committed capital] will invest up to USD10 million into one company,” Kukenov specified. “The most important provisions for our investments are participation in the management of the company, control over its cash flow, and the prospect to sell the company (or a controlling stake in it) within the next three to four years.”

Like Aureos, Central Private Equity Fund limits its participation to USD10 million per investment. According to Alipbayev, the fund’s managing director, the important factors when considering an investment are a good business model, room for growth, and competitive advantage. He stressed that, given the long-term nature of private equity investments, an important factor to ensure a successful investment outcome is good relationship between the principal owners and their private equity partners.

Centras Private Equity Fund focuses on investments in consumer goods and retail but also in financial services (excluding banking and property finance) in which the fund, given the backing of its parent firm, Central Securities, has the most experience. “The retail sector is interesting because of the lack of investment in the services sector, like for example in medical services. Also, we pay attention to local manufacturers, since we expect an increase in activity of local entrepreneurs,” Alipbayev said.