Clare Nuttall in Almaty -

As the Central Asia Small Enterprise Assistance Fund nears the end of its 10-year life, its final challenge is to exit its investments.

The fund has had a rocky ride. From struggling to persuade local entrepreneurs to give up an equity stake during Kazakhstan's boom years, to seeing some of its companies shrivel under the credit crisis and restrictive business regulations, its management team have had a difficult job. Nonetheless, it has successfully teamed up with several local entrepreneurs to build successful and still-thriving businesses.

The $10m fund was set up in July 2002, with investments from the US government-backed Small Enterprise Assistance Funds, the Swiss State Secretariat for Economic Affairs, the World Bank's International Finance Corporation and Kazakhstan's National Innovation Fund. It has been fully invested in companies in Kazakhstan, Kyrgyzstan and Uzbekistan.

At the time of its launch, Kazakhstan had recovered from the fallout of the 1998 Russian crisis, oil prices were rising, and the country's five-year economic boom was just starting. But economic growth alone was not enough for the private equity model to flourish. Donald Nicholson, regional director of the fund's management company SEAF-SME Investment Management, lists problems that the fund faced, in particular getting access to accurate financial data on businesses, persuading entrepreneurs to give up an equity stake and - the current issue - finding an exit.

At first, many of the fund's deals either fell through or failed to gain the support of its investors. "We looked at a lot of deals. Some Kazakh entrepreneurs said we were too small, while others were unwilling to give up equity, since it was very easy to take on debt," Nicholson tells bne. Those missed opportunities include a property development deal in Almaty, an investment in a plastic packaging company and an investment into a Kazakh bank - the latter would have made the fund 10 times its investment, according to Nicholson.

The Central Asia Small Enterprise Assistance Fund also faced problems with deals that did go ahead. In one deal, the fund backed the purchase of a plot of land in Kapchagay, one of Kazakhstan's two designated gambling zones, with the aim of building a fuel storage depot. When this fell through, it held onto the land as valuations were increasing. Then came the crisis, and the plans to build a "Kaz Vegas" in the steppe were put on hold. The crisis also affected Business Leasing Kazakhstan, a commercial leasing start-up based on the fund's successful leasing company in Uzbekistan.

By contrast, in Uzbekistan there have been few difficulties finding suitable businesses willing to work with. However, a lack of business development and restrictions for example on currency convertibility have held back the development of some portfolio companies. Central Asia Small Enterprise Assistance Fund's first investment in Uzbekistan was in the hotel sector, but, as Nicholson says, "the big tourist boom never came."

Two other portfolio companies, - New Business World in the pharmaceuticals sector and leasing company Business Leasing - have done better. However, currency convertibility is a problem for both. "New Business World has a small factory in Uzbekistan, and is a local distributor for Novartis, Johnson & Johnson, and Abbot Labs," says Nicholson. "While New Business World remains an interesting business, the big problem in Uzbekistan today is the inability to get currency conversion to pay suppliers. This impacts our pharmaceutical company as well as our leasing business."

Leaving the building

This also presents problems for exits; while Kazakhstan has a relatively active stock exchange and currency convertibility, Uzbekistan has neither. "In Uzbekistan you can buy companies cheaply, but the question is - how to get out? We are starting to prepare for exits in Uzbekistan, but this will be difficult," Nicholson says.

To date, Central Asia Small Enterprise Assistance Fund has had one successful exit, the sale of a El Gas LPG Distribution in Kyrgyzstan. "This was a very good business to be in because it sells bottled gas, which is needed for cooking and heating in houses that are not connected to the national grid," explains Nicholson. "However, it later became harder to get supplies of gas, and we knew that Gazprom was about to enter the Kyrgyzstan market and it would be difficult to compete with them. The market is now controlled by Kazakh and Russian companies, so we got out at the right time. Everyone was happy."

There are still two "stars" in the portfolio - Almaty-based International Clinic for Dermatology and Diagnostics, which operates the Tiffany's and Tiffany Plaza cosmodermatology clinics, and Uzbekistan's largest fish farm Aqua Tudakul.

Tiffany's, which has two clinics in Almaty, gained a strong following among expats and the local moneyed elite, due to its high standards and state-of-the-art equipment. A chain in the country's major cities was planned; although this has been put on hold during the crisis, Tiffany's remains a successful and profitable business.

The fund also invested in what is now the biggest producer of fish in Central Asia. Aqua Tudakul leased a lake in the desert between Bukhara and Navoi. The company is Uzbekistan's largest incubator of fish; it releases young fish them into the lake, then sends out boats to catch them. Some are sold fresh and others processed. The company accounts for 40% of fish sold in Uzbekistan.

"According to statistics, in the Soviet era the average Uzbek ate 10 kilograms of fish a year. By 2000, this was down to under 1 kilogram a year. We did a survey and found that Uzbeks wanted more fish, but they either didn't have access to supplies or they couldn't afford it," says Nicholson, explaining why he backed the business.

With Aqua Tudakul and Tiffany's, Central Asia Small Enterprise Assistance Fund invested alongside a local partner, which in both cases is the driving force behind the business. The exits are already planned; the fund will sell to its local partners. For the rest of the portfolio, the team will have some hard work and creative thinking to do before the fund is wound up in 2012.

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