Clare Nuttall in Almaty -
Aureos Capital has made its second Kazakh investment by buying a stake in Derzhava Corporation and the emerging market-focused private equity firm plans to close two more deals by the end of the year. Further proof, say analysts, that the combination of the global crisis and the subsequent recovery is opening up new opportunities for private equity in Kazakhstan and the wider Central Asian region.
Aureos bought a 49% stake in Derzhava, a manufacturer of paints, lacquers and varnishes, through its Aureos Central Asia fund, which closed at $70m in 2008. The size of the deal has not been revealed, but Aureos makes investments in the $2m-10m range.
Founded in 1998 by a group of local businessmen, Derzhava has a market share of 6.93% across the entire Kazakhstan paint products market, according to IGM Consulting Company. However, within the niches where it operates, Derzhava is the main producer in the country. "No other Kazakhstan-based companies are active in the niches where we are operating," says Derzhava CEO Nariman Mamedov. "We are aiming to increase our market share to around 10% following the investment from Aureos. We don't expect to compete with the market leaders, but in the niches where we are situated, there are very good [prospects] for growth."
Derzhava's total production capacity is 12,700 tonnes of finished products a year, but due to its low level of working capital, the company is currently only using 40% of its capacity. "This company, like many companies, suffered from insufficient working capital. With our investment, it has new perspectives for growth," says Talgat Kukenov, managing director of Aureos Central Asia.
Speaking to journalists in Almaty, Mamedov said that Kazakhstan's paint products market is seasonal, but that with Aureos' investment the company would be able to boost production to up to 90% of capacity at peak times. The investment will also be used to develop the manufacturing process, and to improve Derzhava's sales, marketing and PR operations. "We are joining the business for five years maximum. Within this period, the company must boost sales and manufacturing, and increase its market share," says Kukenov. "As expected, the fund will exit from the project in the future. A potential exit scenario would be the sale of our stake to a major international strategic investor."
The Derzhava deal, which was announced on October 5, is the third investment from the Aureos Central Asia fund, which plans to close one or two more deals by the end of this year. Previously, the fund, whose main focus is on Kazakhstan in addition to other Central Asian and Caucasian countries, has invested into Kazakh leasing company Leasing Group and Bishkek-based cable television company Ala TV. Investors in the fund include Kazyna Capital Management, International Finance Corporation, the UK's Commonwealth Development Corporation. and the European Bank for Reconstruction and Development.
Private equity was slow to get off the ground in Kazakhstan. Entrepreneurs are reluctant to give up equity stakes in their businesses, and with cheap credit readily available through the mid-2000s, there was little incentive to seek alternative forms of finance. After the crisis hit and cheap credit dried up, businesspeople were more willing to work with private equity investors, but by then many companies were too over-leveraged to be attractive. Now, however, there are more opportunities as balance sheets getting cleared up and Kazakhstan's economy is back to steady growth.
Most of the private equity and venture capital funds active in Kazakhstan were established with investments from Kazyna Capital Management, the investment arm of sovereign wealth fund Samruk-Kazyna, or its subsidiary the National Innovation Fund. The NIF was the cornerstone investor in four domestic venture capital funds, while KCM has invested into larger private equity funds including the Macquarie Renaissance Infrastructure Fund, CITIC Kazyna Investment Fund I and the ADM Kazakhstan Capital Restructuring Fund, in addition to Aureos Central Asia. "For us, it's very important that investment capital that such instruments as private equity works here and we are always stably working with the funds in which we invest in Kazakhstan," says Alexey Ten, managing director of KCM.
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