It should be noted that this question has been vital for a long time in the Kazakh community of entrepreneurs, financiers, investors. Some of them have a product that could potentially bring a big profit if making investment in development. Others have significant amounts of liquidity and instruments for investing in order to obtain even greater profit. At the same time, there is the Kazakhstan Stock Exchange (KASE) with required infrastructure. But why all the parties cannot come to a common denominator for the common benefit? Representatives of business, broker companies, managers of private equity tried to answer this question.
So, small and medium-sized businesses in Kazakhstan do not have access to private equity. At the same time, they are experiencing an acute need for liquidity, choking on lack of credit from banks. In turn, private equity funds with huge liquidity, though while giving a look at the SME sector, but for a number of reasons do not demonstrate activity for cooperation. It includes the issues of quality and reliability of a project and a product and some legislative restrictions in activities of limited liability partnerships (LLPs), level of transparency and readiness of SMEs to meet requirements of investors as well as profitability and problem of entering and exit from a company and much more.
And nevertheless the issue of establishing a trading platform for SMEs with participation of private equity funds has become acute for the financial sector with the help Kazyna Capital Management JSC, which is a participant of 13 private equity funds, has over $ 1 billion of investment liquidity that could be invested in capital of Kazakh companies. For the record, Kazyna Capital Management already has circa 60 portfolios of companies most of which are located in Kazakhstan.
- As far you know, the task of a fund is to find and invest in a growing company and exit with profit usually within 3-7 years. Despite the large number of growing SMEs and the potential demand for investment on their part, the exit therefrom is very difficult due to the limited number of potential buyers. It creates barriers for profitable and timely exit for private equity funds. And these are hundreds of millions of dollars of long-term investment. Today Kazakhstan has such exit vehicles as sale of a stake in business to a partners or a strategic investor. Therefore, the funds during the search for projects are forced to pay special attention to financial condition of a partner and attractiveness of a strategic investor.
Having studied the international experience we came to conclusion that, indeed, the private equity market depends on the development of financial markets, both at the stage of investment and at the stage of exit from a project.
In order to provide the SME market with additional investment and the funds with interest in projects of this sector we offer a number of options that may be either alternative or complementary.
We are convinced that it is a time to establish such trading platform, - such position was announced by Askar Dostiyarov, Chairman of the Management Board of Kazyna Capital Management JSC, opening the round table meeting.
So, according to Dauren Onayev, Director of CITIC Kazyna Investment Fund I (private equity fund owned by Kazyna Capital Management), KCM’s staff suggest to consider the following three options.
The first and core option is a separate trading platform on the basis of Kazakhstan Stock Exchange KASE
According to Kazyna Capital Management, KASE has a good operating infrastructure> It has strong interaction between market participants, broker companies and companies in different sectors. KASE both normatively and from the point of view of competencies has a great chance to establish such special platform.
Moreover, the trading platform based on KASE would fully meet the requirements in terms of transparency of transactions, fixation of all settlements, requirements of both stake sellers and buyers. The largest exchanges in the world in London, Canada, Hong Kong, Singapore have similar trading platforms. If we talk about difficulties, then of course it will require adoption of appropriate regulatory documents. It is important to take into account the existing legislative restrictions related to exit from an LLP, consent of participants and there are no vehicles for implementation of such procedures.
The second option is OTC (Over The Counter) or off-exchange transaction that implies an idea of direct trading between two parties
In order a seller and a buyer could find each other, a special online platform will be established. Therefore, investors may independently obtain information about SME projects, and individual transaction conditions and flexible criteria may potentially expand the investment market. Professional financial consultants will be invited for implementing a transaction.
An electronic bulletin board of the US OTC market is a striking example of such platform.
Here it is necessary to clarify that we speak about the type of OTC that implies certain requirements when placing. Here the companies must be prepared to disclose information, conduct an audit and adjust their internal procedures according to investors' expectations.
During settlement of transaction KASE may be involved to ensure transparency.
The third option includes the mutual investment funds (MIF)
Core advantages include a chance to diversify the portfolio, since according to requirements of the law no more than 15% of MIFs must be placed in one instrument and a MIF may acquire no more than 15% stake in an LLP. As a plus - a professional team of a manager involved in in-depth analysis of potential projects. The same manager cooperates with private equity funds.
According to analysts of Kazyna Capital Management, despite obtaining tax preferences during listing of a MIF on KASE, this option is the most difficult for implementation due to legislative restrictions.
According to Alina Aldambergen, Chairman of the Management Board of Kazakhstan Stock Exchange (KASE) - “KASE and development institutions should work for business, create conditions and instruments that are required to attract financing”.
- We see that companies experience lack of funding at the beginning of business organization and for non-sop business. In order to get an attractive issuer that could make a good IPO, it needs to be nurtured. Therefore, one of directions of our strategy includes an issuer that wants to attract capital and a private investor ready to develop a project from startup to IPO. For our part, we have already started establishing a start-up platform which as expected will be finished in 1Q2018, - said the Head of Kazakhstan Stock Exchange. - What we are discussing now is a more significant step. KASE has infrastructure. The exchange and legislation in Kazakhstan provide a lot of benefits. In this regard, we are ready to cooperate on the establishing such a platform. Exchange is a place of concentration of efforts.
However entrepreneurs and investors need to resolve a number of serious issues in order to reach a consensus.
Kairat Mazhibayev, Chairman of the Board of Directors of RG Brands made a speech on behalf of SME: “The question is that the capital is fixed in dollars. A dollar is also in liabilities of shareholders. And such liabilities hamper the growth. Such liabilities need an annual 25% return on profit in dollars. KZT exchange rate to USD has moved from KZT 140 to KZT 340 per USD. It may be easily calculated how much a company should generate. Actually this is impossible. And I see the solution in the fact that international development institutions need to revise their currency of assets and currency of companies’ liabilities”.
Orynbassar Kuatov, Partner of ADM Capital explained that two things are very important for private equity funds: to understand an exit option during entering and to understand that the relations that are built with a potential partner will be transparent and fruitful. He is convinced that pilot projects in this direction will raise a whole layer of problems, starting from withdrawal of stakes from ownership of an LLP, obtaining consent of owners, class of shares etc.
- Ideally, this platform in the future should become a home for SME. This will be a platform for investors who benefit from investing in various projects and in projects that need liquidity for further growth. Development of SME creates a basis for sustainable economic growth of a country, - summed up Askar Dostiyarov.
The first dialogue platform demonstrated that there is an interest of all parties, but much will depend on the current supply and demand, both from investors and private equity funds. Now Kazyna Capital Management JSC intends to establish a working group that will collect all suggestions and develop the SME financing vehicles.