“A businessman should select what is more important for him – to be the sole owner of business without growth or to attract an investor to a project that increases the value of his business”.
Askar Dostiyarov, who became the Chairman of Management Board of Kazyna Capital Management JSC in February of this year determined that one of the strategic tasks at the new positions will include the promoting the development of private equity market in the country. Actually, this task was initially posed to the Company whet it was established, but then the “Fund of Funds” successfully went into routine extraction of profit from projects already invested with its participation. About how now KCM’s team is resuscitating a return to its core task, said the head of the Company in interview to “Къ”. Ivan VASILIEV - Askar, could you tell me what is the reason of your coming to a new company?
- The reason why I came to Kazyna Capital Management is the negative results of financial activity in 2016. Before I served as the Managing Director in Baiterek Holding, which is the sole shareholder of Kazyna Capital Management, and I was sent here so that I could understand the reasons for low indicators as well as to develop and implement a plan to improve the business of Kazyna Capital Management. And apart from operational activities there were questions to the business model: how active it is, how effective the company is in terms of implementing its mission.
And what did you see? What were the results?
- As of February 2017 or for the ten-year period of its existence, KCM established 12 private equity funds. They had a mandate to finance projects both in Kazakhstan and beyond.
What have I come across with? First, it was necessary to understand that 12 funds for 10 years - is it a lot or not enough. Secondly, it was necessary to understand how well the resources disposed by the Funds are used. And what's the main, what impact does KCM have on the development of private equity market in the country? Apart from strategic tasks, the agenda also included open issues of operational activities and effective cooperation with our partners and managers within existing funds: low investment activity, weak monitoring, no systematic approach to management and administration, weak database of new investors. This is all that we started to work with this spring.
- How are the things today?
– Nine months have passed since I joined the Company, and we can see improvements in financial and operational results. We started with unsatisfactory results of the first quarter, but in the second and third quarters of this year KCM achieved performance over and above target for all planned indicators. In particular, KCM's investments in private equity funds for 9 months of 2017 amounted to KZT 4.1 billion with a plan of KZT 979 million. During this period, the Funds with participation of KCM financed projects in the area of automation and robotics, media industry, processing and other industries. This helped the Company to increase our investment portfolio up to KZT 66 billion or by KZT 6 billion higher than the plan figure. Net income for 9 months of 2017 amounted to KZT 4.2 billion with a plan of KZT 1.5 billion, i.e. it exceeded the planned level by almost 3 times. In 2016, the Company was at a loss which amounted to KZT 2 billion. In general, I think that by the end of the year we will maintain positive dynamics in all respects: investment activity, net profit and attracting new investment. - What are the new investments?
- Over the past few months the corporate decisions have been adopted for establishing three new funds with total capitalization of circa $ 600 million. We have already launched one of them - a joint fund with the Development Bank of Kazakhstan with capitalization of KZT 33.5 billion ($ 100 million). With regard to another fund, early November saw the visiting of the working group to Beijing and Hong Kong, where we met with private investors and state-owned companies. Before the trip to China we held negotiations with three potential investors. Based on the results of the meetings, we managed to interest two more big players and this will increase the capitalization of the Fund from $ 300 million to $ 400 million. Moreover, we have reached an agreement that at least 75% of the Fund’s capital will be invested in Kazakh projects, although before that it was an about 50% figure. This is a victory for us. Currently we are already heavily working on the establishment of the fund. The third fund will be established with a pool of local and foreign private investors. Now they have already confirmed the readiness to be our partners. I want to note that this fund is a tenge fund (KZT 33 billion) and this makes it attractive for Kazakh companies as a source of long-term investment.
What does it say about? Or 12 funds for ten years, or 3 funds for 9 months - it seems to me, the difference is obvious. If we make an absolute comparison, the current dynamics are three times higher than the historical ones. - And what happens to the existing funds?
- We have reviewed our relationship with managers of existing funds. As an investor, KCM began to ask new questions. For example, with regard to the funds with low investment activity - we carefully study their activities and help managers to activate it. In the event that we do not see positive dynamics, the issue of redistributing money to other, more efficient funds is being raised. Moreover, we managed to reduce significantly the management costs of such funds. If earlier their annual management fee ranged from 2 to 2.25% of the fund's size, now we reduced it down to 1.5-1.85%. By the way, with regard to the new fund with Chinese investors, the management fee will not exceed 1.5%. This is significantly lower than the generally accepted world practice - 2-2.25%. I have a principle in my life: “Do not be afraid of big expenses, but of small income”. Therefore, we do not revise the fee of effective funds. Efficiency is measured not only by the number of projects, but also by the ability to search for and create a profitable investment. - Why do existing funds have low activity?
–The objective reasons may include a well-developed bank financing. It allowed businessmen to go to banks, get required amount of loan and finance their growth without attracting investment in equity. In addition, our businessmen as a whole are not accustomed to entering someone into equity because there is a certain misunderstanding of the private equity instrument and the role of the fund as an investor. This complicated the operation of managers in search for investment. There were transactions involving private equity funds, but we cannot say that such form of investment has taken root in Kazakhstan and gained popularity. Plus, several devaluations of the national currency, global financial crisis and as a result lack of interesting investment.
- May be it was premature for private equity funds to come to Kazakhstan?
- In the middle of the 2000s, the banking system was already developed in Kazakhstan and the stock market was actively operating. Development of the private equity market was the next natural step. Establishment of Kazyna Capital Management in 2007 was a timely and correct decision that allowed to create the ecosystem for application of the private equity instrument. Within its framework, a critical mass of professionals was to be formed who know how funds are established, how to manage efficiently thereof, how properly to invest and exit from projects.
- And how much is the private equity market developed today?
- At the beginning of 2017, we identified over 20 large participants in the private equity market with total private equity over $ 24 billion. They are divided as follows: family-offices and business conglomerates, international institutional investors, quasi-public funds, private equity funds. Family-offices and business conglomerates are dominating in terms of value of assets under management - 95% of total market value. However, despite the capitalization, we do not have a developed private equity market due to the lack of a large number of independent players. For example, apart from KCM’s funds, we see a number of Russian funds or funds from far abroad that are considering and entering into Kazakh projects, but there are a few of them to say that we have operating segment of private equity market.
- When KCM was established, it seems to me there were two scenarios for development of events. According to the first of them, you have capital which is fully invested in establishment of a limited number of funds. After that you calm down, are involved in administration and expect exits from projects. If we were a private structure, it would be normal. In the second scenario, you have sufficient capital to create a critical mass of players in the private equity market for its further independent development. As the development institution, KCM failed to create such an ecosystem, i.e. the Company was developed according to the first scenario: it invested all the money, established 12 funds and now it is involved in administration. And in fact, it seems to me, at some point of time the Company went into some kind of sleeping mode.
– In order to get out of this sleeping mode are any new injections required, and how does the shareholder relate to this?
- As a whole, injections are required but I think it is wrong to apply now to the shareholder for new money. Therefore it was decided to change the business approaches: to redistribute money, to activate the business of existing funds, to establish new funds with minimal participation of KCM, to search for other directions for development of the private equity market. For example, within the framework of the joint fund established with the Development Bank of Kazakhstan, as expected KZT 33.5 billion will be attracted for the private equity market, of which 97% are allocated by DBK. As a result of our initiatives, the market received additional investment liquidity and the Development Bank – a chance to offer its customers a new product and increase the bankability of its projects.
It's probably accompanied by criticism...
- Those are not criticized who do nothing. From this point of view, we treat any criticism positively. I will give one example, why the DBK-KCM fund was established. As a development institution, DBK is actively implementing project financing. These are the projects that are often implemented from scratch. Before launch the project has no cash flows. The Bank is ready to provide it with a grace period for interest payments. However, the accrued interest should be secured by pledge or capital as requested by the Bank. This is one of examples when the bank says "no" to economically attractive projects with firm offtake-contracts. This fund was established in order to expand the "narrow neck", which may enter into the capital of such projects. A businessman should select what is more important for him - either to be the sole owner of business without growth or to attract an investor to a project that increases the value of his business. Risks are minimized for the Fund and the Bank. This is the synergy of two development institutions. Our fund manager knows that this is a project of the Development Bank of Kazakhstan. The project has a financing plan; this project will be put into operation and will manufacture products with firm offtake-contracts.
- Are these the last your initiatives or are you going to offer something else to the market?
- This is a kind of "manual" initiatives. We have identified several other factors that should be addressed. Having talked with existing funds, we found out that often investors "pursue" the same assets in our country. Therefore, the market is also not developed. There are a lot of companies that require investment. And the funds are not ready to enter the projects with unclear exit strategy. Having studied international experience, we came to the conclusion that besides the above-mentioned reasons, the private equity market also largely depends on the development of the stock markets, both at the stage of attracting investment and at the stage of exit from projects. Low level of development of financial markets in Kazakhstan prevents the attraction of international private and institutional investors. Absence of some components such as trading platforms for small and medium-sized businesses, secondary market for private equity funds and excessive legislative requirements in the stock market restrict the access to private equity for a wide range of companies. For development of the private equity market we are discussing with the funds various alternatives for providing exits from projects - this is a separate trading platform for SMEs based on the stock exchange, OTC market and market of specialized MIFs. In December of this year we will have a round table with participation of representatives of the Kazakhstan Stock Exchange, several brokers, our fund managers, businessmen, where we wish to discuss all these proposals: which of these alternatives are the most acceptable for all. If results of this round table are positive, then we will try to do something in 2018.
– There was information that some Kazakh companies would be selected as pilots for placement on the Hong Kong Stock Exchange...
“This is another initiative that was born during our trip to Hong Kong. We asked our partners to arrange a meeting with top management of the Hong Kong Stock Exchange and investment companies. As a result, we agreed that we will try to implement a pilot IPO on the basis of the Hong Kong Stock Exchange involving one or two Kazakh companies with participation of our funds. If we succeed, then the future fund managers will have a chance to exit projects. With regard to the Hong Kong Stock Exchange, we have a long list of potential projects that correspond to the parameters. Now we expect that fund managers and project owners will provide a feedback and confirm their interest. As soon as they do it, we will send this long list to Hong Kong to our colleagues, they will analyze it and give their opinion - on what projects they are ready to work with. In fact, we acted as an intermediary for all participants in this potential interaction that is our assistance in developing the market may be different. Still this is not our niche, but we want to help and we go beyond our mandate.
- And through what forces all this is carried out?
- KCM is just 24 people. It is a small company with a large staff involved in management of a huge portfolio of projects. Taking into account the functionality and new initiatives that our structure deals with, the efficiency rate of our employees is over the top even by the standards of private business.
- Do you personally have time for something else while doing this?
- I try to find time for sports. For example, I go to the boxing club. This is a club for "white-collar", it's not quite fitness but not boxing in the so-called "black halls". I like my boxing classes - you focus on training, because if you think in parallel about something else, you will definitely miss a punch. Boxing is the philosophy, it's an intelligent sport. It does not matter how much punches you miss, the main thing is not to leave them unanswered. It is not important how somebody is prepared both physically and functionally, but who will beat whom. I like this box, it is interesting for me. The victory is not only due to aggression and nonsense; it is a victory due to selection of the right strategy. Everything like in life.
- I will you victories in all areas and thank you for the interview.