FUNDS: East Capital finds huge demand for its Central Asia fund

By bne IntelliNews June 18, 2007

Nicholas Watson in Prague -

In a sign of how seriously foreign investors are starting to take the economic progress of Central Asia and the Caucasus, the Scandinavian investment firm East Capital closed its new fund centred on the region within months as it raced toward its $100m target size.

"We closed the fund almost immediately as demand was so big," says Aivaras Abromavicius, Partner of East Capital and manager of the East Capital Bering Central Asia Fund, which is up 8% since its inception at the end of February. "Those who made good money in the Baltics and Ukraine are looking for the next big thing."

By many measures, Central Asia and the Caucasus, particularly Kazakhstan, Georgia and Azerbaijan, are exactly that.

Aivaras Abromavicius

What's particularly appealing about Central Asia, says Abromavicius, is that it's still relatively under-researched and somewhat overlooked, meaning there are many opportunities for those able to put in the time and effort. Also, the region's amazing rate of growth is coming from a low base. "Just because it's coming from a very low base doesn't mean it's anything bad. On contrary, it means growth will continue for longer," says Abromavicius.

And that growth is impressive. Kazakhstan's GDP grew 10.6% in 2006 and most analysts reckon it will grow another 10% this year, bringing it above $100bn. Kazakh President Nursultan Nazarbayev told a group of investors on Friday that the ex-Soviet state has set a goal of achieving a GDP figure of $300bn by 2015.

As mighty as Kazakhstan's growth is, the top prize goes to Azerbaijan, whose GDP grew 34% last year, making it the fastest growing country in the world. In the first four months of 2007, Azerbaijan retained the leading position in the CIS in terms of annual GDP growth with 37.1%, followed by 11.1% in Armenia, 10.5% in Kazakhstan and 9.1% in Kyrgyzstan.

What’s driving this growth in the region is, of course, the massive interest in its natural resources, particularly oil and gas.

Kazakhstan, where the fund puts 90% of its money, relies on its energy industry for roughly 30% of its GDP and over half of its export revenues, which has led to concerns about the Dutch Disease – an economic phenomenon that occurs when large influxes of foreign currency distort exchange rates and ultimately hinder growth in the non-energy sector. However, in its latest report on the country, the IMF cites "impressive" growth in the non-oil sector that could help avoid oil-related growth problems, and it's here that East Capital is looking to increasingly invest.

Currently, the fund is invested 40% into commodities and 40% into banking and finance. The balance of 10% is being put into domestic-related sectors such as telecommunications, construction and real estate - parts of the economy that are benefiting from the trickle-down effect of the boom in raw materials and those areas unlikely to be targeted by capricious governments on a state-grab of assets.

Good governance

Another reason that East Capital favours Kazakhstan over the other countries in the region is that contrary to many expectations, the standard of corporate governance is surprisingly good.

"Kazakh companies are in pretty good shape with regards to corporate governance, you can't complain too much to be honest," says Abromavicius. "We have more worries in Ukraine than we do in Kazakhstan."

The reasons for this are several-fold. First, the local securities watchdog and the central bank are adequately fulfilling their functions are regulators of the capital markets and banking system, respectively. Part of this is related to the fact that the country's admired pensions system invests heavily in both in the banks and stock market, so the state has a huge stake in making sure they remain transparent, stable and honest.

Also, Abromavicius notes that for many years the Kazakh government has helped fund local students who wanted to study abroad, with many opting for MBA programmes in the US and Europe. These students are now returning in droves to take advantage of the great opportunities the economy is offering, bringing with them sound business practices and good language skills.

A pool of good management is especially important for fund managers like East Capital, whose Central Asia fund, like all its offshore funds, invests in private equity as well as listed companies. In terms of private equity, East Capital typically looks for pre-IPO companies rather than those trying to raise venture capital, because the firm is primarily a financial investor as oppose to one that involves itself in the day-to-day running of companies.

"We hold a number of companies involved in the local market who we believe will do IPOs within a year or two and perhaps even a London listing too," says Abromavicius.

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