Guy Norton in Almaty -

Eurasia Capital Management (ECM) has created the first ever Uzbekistan-dedicated hedge fund. The Uzbekistan Growth Fund was launched in early September with initial capital of just $5m, but ECM founder and managing partner Alisher Ali Djumanov believes that there is the potential to grow the open-ended investment vehicle substantially over the next couple of years.

"We think that there are at least $100m of potential investment projects out there," says Djumanov, adding: "We can have a meaningful impact in Uzbekistan with this dedicated country fund."

The new fund will invest across a variety of asset classes, thus giving investors broad-based exposure to the Uzbekistan economy, which Djumanov claims has strong development prospects. "There is clear upside potential to Uzbekistan, it could be a $100bn economy versus the $20bn one it is now."

ECM will focus on five main asset classes in Uzbekistan. The first will be what Djumanov terms "credit opportunities" - essentially high yield collateralized debt instruments. "We are looking to take advantage of the lack of availability of bank financing in Uzbekistan - even major exporters struggle for working capital."

Djumanov believes that ECM will be able to originate deals offering 20%-plus yields, with downside risk mitigated by being backed by property or other receivables, or the option to convert the debt into equity stakes. The second investment focus will be on publicly traded equities. Although there are no internationally listed companies in Uzbekistan Djumanov says that there is a healthy supply of locally traded stocks in high-quality companies with strong financials. As well as Uzbek-sum denominated equity plays, there are also US dollar-denominated stocks available on the Tashkent stock exchange.

State property

ECM is also looking to take participate in the latest phase of the privatization process in Uzbekistan. "The Uzbek government is selling off small and medium-sized enterprises, which often have distressed financials, but have good land banks which are ripe for redevelopment," says Djumanov, adding that the authorities in Tashkent are encouraging industrial companies to move to the outskirts of cities, thus creating prime city centre development plots.

The next element of the fund will focus on property and property-related investments. "There are plenty of opportunities to work with local developers and buy into the still strong property cycle in Uzbekistan." He says that real estate valuations in Uzbekistan are still relatively low compared to neighbouring Kazakhstan, while there is still demand, especially in the retail and office development spheres. "There are lots of renovation opportunities in Uzbekistan, which are easier to realize than greenfield developments."

Finally, ECM will also look at private equity and venture capital-type investments in the country. "If you have the right people, which we think we do, you can build meaningful businesses in Uzbekistan," says Djumanov. "What we like about Uzbekistan is the pool of entrepreneurial talent that exists there."

The Uzbekistan Growth fund is the fifth investment vehicle launched by ECM in the last three years and follows in the footsteps of other pioneering ventures such as the Mongolia Discovery Fund, which was the first international fund to focus on the country. Other investment opportunities include the firm's flagship fund, the Central Asia Opportunity Fund, which Djumanov claims is the best performer in the region, up 92% since its inception at the end of 2005.

The next fund off the block will be the Eurasia Credit Fund, which will seek pan-regional exposure to local debt and money markets. At the latest count Singapore-headquartered ECM had around $200m under management invested in nine countries - Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan and Uzbekistan.

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