Private equity in focus

Private equity is a type of private capital financing raised through non-traditional sources such as venture capital and leveraged buyout firms. It can be injected at different stages of a company's development, from the initial idea to the final transition to public company status. The forms of investment vary: equity, debt, hybrid, and derivatives. Opportunities to analyze this market are limited by the data available due to its non-publicity.

Over the past 10 years, there has been significant growth in the global private equity market. Private equity flows are both a driver of business growth and the economy's health indicator.  In recent years, global economic disruptions like COVID-19 and the conflict in Ukraine have led to global risk rise and capital flows from emerging to developed markets.

These shifts have also impacted Central Asia: sanctions against Russia and Western investors leaving the Russian market have resulted in the loss of the largest market for scaling projects, however increased the opportunities for Central Asian countries to attract investors looking for a new location in the region. In this context, it is even more crucial to develop cooperation between the Central Asian countries and to position them as a single market in the investment landscape.

Kazakhstan’s private equity market is at the early stages of development, with state-driven institutional investors and international development institutions playing a significant role. The key domestic investors in Kazakhstani businesses are family offices, some of which operate on PE principles, business conglomerates, and groups of companies. The private equity market is rather closed, as transactions are mainly between non-public companies. The limited limited publicly disclosed portion is insufficient for a reliable understanding of the market. 

Qazaqstan Investment Corporation JSC, as a backbone investor, initiated the second major private equity market research this year (the first one was conducted in 2019) to promote transparency and market development. The research was conducted by the Baker Tilly team in October-November 2023, and the results have been published on the website of Qazaqstan Investment Corporation in the middle of December.

We surveyed market participants and the Kazakhstani business community to collect their views on the status and prospects of the private equity market.  The full survey results are available in the report, and here are some extracts.

Private Equity can be sourced from external and internal sources. External sources include foreign direct investments which were in the range of $21-29 billion in 2012-2022, except for 2015 and 2020 when the figures fell to the range of $15-17 billion because of the escalating conflict in Ukraine and the COVID-19 pandemic. Most investments flowed into mining, growing higher since 2017, while investments in professional, scientific, and technical activities dropped. Also, a rise in manufacturing investment took place in 2021-2022.

Over the last 10 years, the largest investors in the Kazakh economy (about 30%) have been Dutch companies - partially due to the specifics of transactions structuring and corporate governance decisions of KZ companies, so this might not reflect the real ultimate country of the investor. The Netherlands' share of total investment inflows was relatively stable over the period. The United States were the second largest (about 18% of total investment in Kazakhstan in 2022), growing its investments 2.5 times since 2012 (9% CAGR). Switzerland ranked third (10% in 2022).

As for the disclosure of M&A deals and the raising of financing by private companies, according to the S&P Capital IQ system’s available data and the survey results, an average of about 68 deals worth KZT 8.9 billion were completed per year during the period under review, of which KZT 4.9 billion was equity financing and KZT 4.0 billion was debt financing. However, the volume of deals is rather sensitive to the macroeconomic situation and varies significantly from period to period.

The activity of classical private equity funds has increased since 2017, with QIC funds participating in 45% of closed deals out of the $4.8 billion disclosed deal volume invested by Private Equity Funds (PEFs) and family offices (FOs) in 2012-2022. Also, venture capital funds’ activity in Kazakhstan has risen since 2019, following the global trend.

Traditional PEFs and venture capital funds tended to focus on non-controlling stakes, while the FOs surveyed preferred taking control. 75% of PEF deals were in the form of primary capital, based on the public data and survey results.

Transaction volume by type of investor

The funds with state and quasi-state participation prevailed in the value of disclosed transactions in 2012-1022 (66%), funds with international LPs or GPs were second (33%). However, there is no available information on fully private Kazakhstani PEFs operating under classic principles of private equity, implying establishment of funds, attracting money from limited partners, the presence of a general partner who specialize on managing investments and reporting of the fund. This was probably due to the lack of appropriate legal framework for this type of organization structure prior to the launch of AIFC. Many of the interviewed market participants noted launching AIFC as a positive factor, opening access to a broader range of financial instruments and organizational structures under British law than were available in Kazakhstani legal framework. Interviewed AIFC staff noted an increase in fund establishment activity. According to AIFC data, at the end of the first half of 2023, the value of assets under management of AIFC companies increased by 43%, while the assets of investment funds increased by 199% YoY.

Overall, the results of the survey indicate a cautiously optimistic view of the market: about a half of the respondents found it difficult to forecast market growth; of those who shared their views, about 20% expect growth under 10%; another 15% expect growth above 20%. Given that large deals create discrepancies due to the small value and number of deals, as well as the closed nature of this market, any short-term forecasting becomes difficult. Based on the interviews, as well as our observations from our valuation and transaction advisory practice, the Baker Tilly team expects an increase in deal activity within Central Asia, resulting from macroeconomic and capital shifts within the region. We believe that the activity of backbone investors such as QIC in private equity, MOST, Astana Hub in venture capital, and full utilization of AIFC opportunities, will facilitate attracting new investment in Kazakhstan, their spillover across the region and increase the maturity of private equity ecosystem.

You can find the full version of the Private Equity in Kazakhstan report here.

Baker Tilly Qazaqstan is a rapidly growing consulting firm in Kazakhstan. Since 2015, we have been operating as an independent member of Baker Tilly International, one of the top ten global accounting and consulting networks. Baker Tilly International has one of the strongest transaction advisory practices in the region, focusing on small cap and mid-market businesses. Baker Tilly China won the Annual Best M&A Financial Service Award at the 2023 China Mergers and Acquisitions Summit this year.

Baker Tilly Transaction advisory services in Kazakhstan include Valuation, M&A deal advisory, due diligence, fundraising support, post-investment control, and feasibility studies for target companies in Kazakhstan and international capital markets, covering over 125 countries. Our international network provides us with a global reach, which, combined with our thorough understanding of local business, creates solutions carefully tailored to meet the client’s needs.

We cover the full scope of corporate finance advisory tasks for any company looking to succeed in Kazakhstan's domestic market.

We collaborate to use our skills, resources, and local expertise to help our clients grow locally, nationally, and globally.

Ramina Nazyrova, MRICS, Valuation Partner, Baker Tilly Qazaqstan Advisory LLP

Olga Zagidullina, CFA, Symbat Assaubayeva, Daria Samodurova, Magzhan Saidalin, Kamila Zharykbassova