Ben Aris in Berlin -

The population of Kazakhstan is small, but the interest in the country is big and growing. Compass Asset Management was one of the very first asset management companies to appear in Kazakhstan almost immediately after the laws to create them were passed by parliament. After two years of offering mutual funds to domestic investors, since May Compass has branched out with a series of funds targeting international investors looking for exposure to the oil-rich country and has already raised hundreds of millions of dollars.

Compass Asset Management is part of the Visor Group, a leading Kazakh industrial group with about $1.5bn of assets. Visor also owns a leading investment bank of the same name and is controlled by two Kazakh businessmen who made their first money in cement. The asset management company was a new direction for Visor and registered in 2003 just as parliament was pushing through the first laws to regulate mutual funds.

CEO Mikhail Derkavski

"Compass began life with three classic onshore mutual funds that have about $50m under management, invested by the nascent middle class. Dedicated to investments into Kazakh-listed companies, the funds have returned an annualised 40% since inception," says Fiezulla Saidov, chief operating office at Compass, who cut his teeth at ABN Amro's offices in Tashkent and Moscow.

But the real excitement started this year when the company launched the first of three offshore funds to raise significant amounts of money from foreign investors. The funds target investment opportunities in the classic five "Stans", as they are known to investors dealing with the region - Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan and Kazakhstan - with an even split between private equity and portfolio investment.

"Kazakhstan is going through a very positive transition. It continues to be a natural resources based economy, but as the per capita income has broken through the $4,000 level, there is enough money about now to fuel consumption driven growth that will allow the development of a more balanced economy," says Compass' CEO Mikhail Derkavski.

Mountains to climb

The first to launch was Tau Capital (tau means mountain in Kazakh), which was floated on London's Alternative Investment Market (AIM) in May this year and raised $250m - at the time one of the 10 biggest IPOs the market had ever seen.

A closed-end fund, Tau was set up as a joint venture between Visor and Spencer House Capital Management, a UK asset management company run by Lord Jacob Rothschild and Richard Horlick, former head of investment at Schroders.

Oil revenues have primed the pump in Kazakhstan, but the trickle down of petrodollars is now financing the growth of most other sectors of the economy. And, more interestingly, as the oil money continues to pour in, it has now spilled over into the neighbouring Stans as Kazakh investors look for similar opportunities in the other countries in the region.

Lord Rothschild is no stranger to Kazakhstan, having already invested into the big state-controlled gas company KazMunaiGaz and some of the republic's privatized banks. Tau's managers are targeting young companies in the service sector, bridge equity financing, recapitalizations and companies likely to list. Less-liquid stocks offer particularly interesting opportunities, according to Horlick.

The second offshore fund is called Kazakh Compass. Set up in cooperation with Capital Partners Securities (CPS), part of Japan's giant Nomura Group, the fund was marketed to retail investors in Japan and closed in May. Listed on the Dublin Stock Exchange, it raised $80m with a minimum investment requirement of $100,000.

"Europe is our obvious natural investor base, but we were approached by CPS, who had set up a very successful fund with Dragon Capital in Vietnam and wanted to create the same thing in Kazakhstan, targeting Japanese retail investors," says Derkavski. "Japan has one of the highest savings rates in the world and tapping into even a small part of this $14 trillion under management there could clearly bring in a lot of resources."

The third closed-end fund is called (confusingly) Compass Kazakhstan and is off to a slower start after the first round of financing raised just $13m. The problem apparently was that the managers were running around getting all the documents in order and didn't give investors enough time to complete their own due diligence and, importantly, visit Kazakhstan to see for themselves the lay of the land. Compass is planning to host a look-and-see conference in September in Almaty before the fund closes with, they hope, some $300m of funds.

While the first two funds are aimed at retail and medium-sized investments from those who want to test the Kazakh waters before plunging in, Compass Kazakhstan is targeting institutional investors and has a minimum investment requirement of $2m. Also, unlike the other two, Compass Kazakhstan will not be listed and looks a lot more like a classic hedge fund in structure.

"We will serve as a bridge between the Western capital and the opportunities in Kazakhstan and the rest of the region, which was behind the decision to do a hybrid private equity and portfolio fund," says Derkavski. "The opportunities here are not fully appreciated by the outside world. Kazakhstan's economy is more advanced than Russia's, the bank system is more sophisticated, the pension reforms have gone further and ownership rights are clearer. All this is proving to be very attractive to Western investors who are only discovering Kazakhstan now."

The three funds are only just getting into the game, but have already closed four investment deals - two each in Uzbekistan and Kazakhstan - and have another four deals moving into the final stages.

"Central Asia is still emerging, but there is a huge amount of opportunity here" says Saidov. "Even when you compare Almaty or Uzbekistan to Moscow, the first thing that you notice is the lack of shops. In both countries there are only about one or two chains, whereas in Moscow the competition between the supermarkets is already white hot. We still have all that ahead of us."

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