Clare Nuttall in London -
After a first close on $100m in June, the Kazakhstan Capital Restructuring Fund (KCRF) will soon start investing into financially distressed companies in the Central Asian country.
The fund is the first in Kazakhstan that will target the many companies with a sound business model but a bad balance sheet. The fund's management team also plans to make growth-capital investments into companies that can't access bank finance or other forms of capital.
The seed investors of the KCRF are Kazyna Capital Management, a subsidiary of Kazakhstan's sovereign wealth fund Samruk-Kazyna, and the European Bank for Reconstruction and Development (EBRD), which each committed $49.5m for the first close. Emerging markets investor ADM Capital, the fund's management company, invested the remaining $1m. The fund will target up to $225m for its final close, and the EBRD and Kazyna may each commit an additional $22.5m. Investments are also being sought from third-party investors.
Speaking at the first close of the fund, Samruk-Kazyna's CEO said it would "bring much needed-help for Kazakhstan business." He added that there was "no doubt" the fund would contribute to the financial recovery of Kazakhstan's small business sector.
Anthony Stalker, a partner at ADM, says the KCRF will focus mainly on the small and medium-sized enterprise sector, and avoid the extraction industry. "We are targeting two types of opportunity. First, we will provide financial restructuring and liquidity injections to companies in financial distress. We are seeing many companies that started out with a good business, but over-loaded their balance sheets with debt in the good times before the crisis," he says. "The second area is growth finance, providing liquidity to companies with no access to capital markets or bank finance. Because the banks are not in lending mode, it's a very real opportunity to go in and provide capital to companies."
ADM is in the process of setting up an office in Almaty, and the first investments will be made as the fundraising process continues. "We are not going out and aggressively marketing the fund," Stalker tells bne. "The fundraising environment is very difficult at present and Kazakhstan is not at the forefront of investors' minds. We would like to go out and set up the office and start investing while we raise the balance of the fund."
Several private equity firms have shown an interest in Kazakhstan since the financial crisis first impacted on the banking and real estate sectors back in 2007. They include the Carlyle Group, whose president David Rubenstein paid a visit to Kazakh President Nursultan Nazarbayev in May 2009, and a number of smaller players. All were attracted by the expectations of cheap deals in a country virtually guaranteed due to its rich commodity resources to return to strong growth in the near future. However, investments didn't follow, largely because of the continuing gulf between buyers' and sellers' price expectations.
However, Stalker expects ADM's model to go down well with Kazakh business owners. The firm, which was founded in 1998 amid the Asian crisis, will use various tools including restructuring, rescheduling, refinancing, debt-equity swaps, liquidity management or direct equity investments.
Like other private equity investors, Stalker believes the fundamentals of the Kazakh market are sound. "Kazakhstan was one of the first countries to reflect the global liquidity slowdown and is recovering well before the West," he says. "It's a country with a very large natural resources base, and a good balance sheet despite the problems caused by the banking crisis and the influx of cheap money to the building sector."
ADM also expects to invest in Kazakhstan through its ADM CEECAT Recovery Fund, which will invest on similar principles in the wider Central and Eastern Europe region.
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