Clare Nuttall in Almaty -

Private equity in Kazakhstan has so far been small scale and sporadic, despite growing interest from global firms. But the creation of nine new funds with government backing has suddenly made over $1bn available for private equity investment in the country and the task in 2011 will be to put this money to work.

Kazyna Capital Management, the private equity arm of the Samruk-Kazyna sovereign wealth fund, has set up or co-founded nine funds since its creation in 2008. These funds have used a combination of Kazakh government money, western private equity experience, and financial commitments from deep-pocketed sovereign wealth funds and family offices in China and the Middle East. In total, funds with KCM participation are targeting over $3.3bn, of which $1.3bn will be allocated for Kazakhstan.

The most recent fund to be created was the Kazakh-Tajik Private Equity Fund, which had its first close in 2010 at $30m and may eventually grow to as large as $80m. According to Abay Alpamyssov, chairman of KCM's management board: "There are risks connected to investing in Tajikistan, but the country has high potential."

He cites the hydroelectric power sector, noting that if Tajikistan's hydro potential were fully realised, it would be able to provide the entire Central Asian region with cheap energy. Other areas of interest are agriculture and mining. China currently has a monopoly on rare earth metals production, but Tajikistan is also rich in such minerals. Rather than targeting only Tajik companies, the fund could also invest into Kazakh businesses that are already active in Tajikistan, since this will reduce investment risks.

Similar funds are due to be created for two other Central Asian countries, Kyrgyzstan and Mongolia. KCM has discussed the creation of a fund of around $100m for Mongolia, which is currently attracting a lot of interest from investors. Conditions for setting up a $101m fund for Kyrgyzstan - where Kazakhstan is already be biggest investor - have been agreed, but its creation has been delayed due to the political uncertainty in 2010.

The best China

KCM intends that its funds will channel money from China and the Middle East to Kazakhstan and the rest of Central Asia. "When KCM started work, we spent time identifying who could really invest in private equity in Kazakhstan, because we are not a well known destination on the international private equity map," Alpamyssov tells bne. "It is quite clear that the number of investors is limited to the big names such as the [European Bank for Reconstruction and Development] and [International Finance Corporation], and some sovereign wealth funds such as [China's] Citic Group. We have attracted the Emirates' sovereign wealth fund IPIC as an investor for one of our funds, but I think it is clear that the biggest financial capacity is concentrated in China. It is not by chance that we are working closely with our Chinese colleagues."

The Citic-Kazyna Investment Fund I is $200m in size. And there is an agreement between KCM and Citic that two $400m funds could be created in future, bringing the total up to $1bn.

A new fund was set up in October by several prominent Hong Kong investors in partnership with KCM in 2010. The fund closed on $400m, but interest in a second fund could potentially be high. The Kazakhstan Hong Kong Development Fund will focus on the oil and gas, minerals and related sectors. "If the portfolio companies get quite big, we could consider IPOs in Hong Kong," says Alpamyssov.

Other funds to have been set up by KCM include a dedicated restructuring fund, the Macquarie Renaissance Infrastructure Fund, and a nanotechnology fund set up with Russia's Rosnano. "We have a number of other ideas for new funds, which we are discussing with our partners and the government," Alpamyssov says. "We are discussing the possibility of establishing an agriculture fund for the [Commonwealth of Independent States] with a leading investment company. Kazakhstan, Russia and Ukraine have strong potential in agriculture. We have seen some volatility in soft commodities like grain and rice, which is an issue for some countries. Some players would like to secure supplies of food."

Putting money to work

Now that the first nine funds have been set up, KCM's main work will be to start making investments. "To develop the industry, we wanted to bring in investors with expertise. We are working with the management teams of Macquarie Group, Renaissance Capital, Aureos Capital and ADM Capital, which helps us to grow our local human capacity," says Alpamyssov, adding that KCM is also working to build up its own team, which currently includes 10 investment professionals, most of them Kazakhstanis with international experience.

Private equity is not altogether a recent phenomenon in Kazakhstan - firms such as Russia's Baring Vostok closed a few deals in the mid-1990s - but investments are still relatively rare. In the boom that preceded the international economic crisis, Kazakhstan-based entrepreneurs were reluctant to give up equity stakes in their businesses. Debt, which was cheap and readily available, was the most popular funding instrument.

Now the situation has changed dramatically - many businesses are under pressure and over-leveraged, and banks are cautious about issuing new loans, forcing companies to look for alternative sources of funding. "Before KCM was created, there were just a handful of private equity deals in Kazakhstan. I know some big players are considering investment opportunities in Kazakhstan, but I think investments will continue to be made on an occasional basis," says Alpamyssov. "I think our funds will bring most private equity investment to Kazakhstan, because the funds we create consider Kazakhstan as a priority country, or in some cases the only country where they can invest."