A private-equity fund solely dedicated to investing in Pakistan was closed December,2007, capping a year in which the country was one of the hottest emerging markets despite its political turmoil.
JS Group, a Pakistani financial services group, is the sponsor and a large investor in the new JS Private Equity Fund, which was closed on Dec. 31 at $158 million.
The fund, launched in 2006, is likely the third or fourth private-equity fund to invest solely in Pakistan. There are also several regional funds with a mandate to invest in Pakistan. Compared with neighboring India, however, Pakistan has a virtually virgin private-equity market.
In Karachi, the benchmark KSE-100 stock index rallied 47% in 2007 through Dec. 27, making it one of the best-performing emerging markets and nearly matching the gains of India's Sensex index. In comparison, Indonesian shares gained 52% and Brazil 40% in 2007.
"I could understand why a lot of foreign investors are a little spooked by what is happening in Pakistan," said Stephen Smith, partner at JS Private Equity. "Those less experienced in emerging markets will become very nervous."
After Bhutto's killing, the stock exchange was closed for several days and when it reopened on Dec. 31, the market tumbled 4.5%. Subsequently, however, the market has slowly pared its losses. The KSE-100 index is virtually unchanged on the year as of late Thursday.
Smith, however, believes that the political premium is likely overstated and that Pakistan's economic growth and unpenetrated private-equity market offer big opportunities for investors willing to take the risk.
Pakistan has a population of $160 million and its GDP growth has averaged 7% over the past five years. According to a recent United Nations report, Pakistan's GDP is expected to grow 6.2% or more in 2008.
Pakistan is one of the so-called "Next 11" countries singled out by Goldman Sachs as having the potential to offer tremendous investment opportunities, akin to those of leading emerging markets.
"The real thrust of the fund is to provide expansion capital to businesses that are domestic-demand driven," Smith said. "Things have really changed in Pakistan over the last five years. You have the emergence of a fledgling middle class."
The fund sees opportunities in both export-related industries, such as textiles, leather and medical supplies, as well as domestic-demand related industries, such as consumer goods, media and advertising. Smith also sees opportunities in inefficiencies in infrastructure, transportation and logistics, as well as agriculture and horticulture.
"[About] 25% of its economy is agricultural and horticultural and yet the amount of wastage of those products is extraordinarily high, because the infrastructure points are not very efficient," Smith said.
The JS Private Equity Fund has already made two investments. The first is a control investment in Optimus, the Hertz franchise in Pakistan, which specializes in long-term vehicle contract-leasing to businesses. The second is a minority investment in Engro Asahi Polymer & Chemicals, the only Pakistani producer of PVC resin.
Focus on institutional investors
JS Group has been doing private-equity style deals in Pakistan for a long time, but it was only in 2006 that it decided to create a formal fund, targeting professional institutional investors.
With a $40-million investment, CDC Group, a British government-owned fund of funds that invests in emerging markets, is the largest investor in the JS fund. Other investors include the International Finance Corporation; Samba, one of Saudi Arabia's leading financial groups; the Asian Development Bank; the Swiss Investment Fund for Emerging Markets; and PROPARCO, a subsidiary of the French Development Agency dedicated to financing the private sector.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win," said Brian Lim, portfolio director at CDC Group.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win."
— Brian Lim, CDC Group
"What we did look at was the history of the economy over successive generations of rulers," Lim said. "There did seem to be an economic will for liberalization, for FDI [foreign direct investment]. The one certainty is the economy has worked very well over the recent past. We're hopeful that things will resolve themselves on the political front."
Another reason to enter the Pakistani market is that there is very little competition among private-equity players, Lim said.
"In many sectors there were companies that could grow even faster, but the capital wasn't there," he said.
While neighboring India is experiencing a private-equity boom, Pakistan remains largely overlooked by the industry. There are only a handful of other private-equity funds solely dedicated to Pakistan. Among them are the $100-million TMT-SEAF Pakistan Growth Fund and the $300-million Abraaj BMA Pakistan Buyout Fund L.P. Several regional funds also have a mandate to invest in Pakistan.
In comparison, there are approximately 110 to 120 funds focused primarily on India, according to estimates from the Emerging Markets Private Equity Association.
That estimate looks conservative compared with that of Evalueserve, a global research and analytics firm, which estimates that approximately 200 funds are actively investing or fundraising in India.
"It's a very, very different market from India and China," Smith said. "We like to think we're helping to develop the market. We're a long away from what I'd call a competitive market for private equity. It means that we have to do a lot of patient education."
Source: MarketWatch, January, 2008
Here's an ET article on private equity and debt markets as propellers of economic growth:
Let’s start by asking why are most investors in financial assets only interested in stock and bond markets, to the extent that even the premier CFA institute examinations and most university programmes almost solely focus on these two.
Here is why. These are the only two saving vehicles (asset classes) that are large, liquid and have visible prices. World public equity market capitalisation at $50 trillion (Bloomberg) and bond market debt outstanding at $95 trillion (CityUK), provides decent saving depth for global GDP (annual income) of $65 trillion.
The tangible asset market, mostly real estate (but including under/over-ground commodities and personal property), is even larger at $150 trillion, but is illiquid, due to relatively large ticket deal sizes and non-standardisation and hence is called an ‘alternative asset class’.
Private equity or shares of unlisted companies are interesting. They are grouped as alternatives due to liquidity constraints and big deal sizes, but otherwise seem the same securities, ie equity.
Before I elaborate, let’s try to ascertain the total size of private equity market. According to Credit Suisse 2011 Global Wealth Report, total net wealth in the world is $231 trillion. From this, we minus the value of ‘real’ assets, stock markets and $5 trillion in cash and demand deposits. The size of bond market is not included in the calculation as one person’s bond asset is another’s liability and it cancels out. Hence, estimated value of private companies comes to $30 trillion, which is smaller than the public equity market but still huge.
Conclusion: Private equity presents a huge universe of opportunities and can certainly add value to High Net Worth (HNW) portfolios containing only stocks and bonds, by both increasing return and lowering true volatility at the same time. It is certainly an alternative investment class, but not only because of low liquidity, but rather because it marries management science with pure investment.
Here's a ET report on USAID helping lunch a private equity fund in Pakistan:
The United States and the government of Pakistan hosted the ‘US-Pakistan Business Opportunities Conference’ in Dubai, where USAID in association with the Abraaj Group and JS Private Equity Management (JSPE) announced the creation of the ‘Pakistan Private Investment Initiative’ which will launch two new private equity funds focused solely on Pakistan’s dynamic and fast-growing small- and medium-sized businesses.
USAID Administrator Dr Rajiv Shah announced that USAID will provide a seed investment to capitalise the funds which will be matched by Abraaj Group and JSPE with investments of their own, as well as private funds raised from other limited investors.
“We are seeding individual funds with $24 million each. The Abraaj Group and JSPE will match or exceed our commitment. We fully expect them to exceed that contribution,” said Dr Rajiv Shah. “Pooled funds will initially be $100 million which we expect will grow many fold into hundreds of millions of dollars in investment for small and medium businesses.”
The announcement came at the end of the first day of the conference. “By partnering with Abraaj and JS Private Equity Management, USAID capitalises on these companies’ expertise to make smart investment decisions that will grow the Pakistani economy, create jobs, and generate profits for investors who seize the economic opportunities that Pakistan presents,” Shah said.
Speaking at the conference US Ambassador Richard Olson said, “The United States is one of the largest investors in Pakistan, and the US government supports Pakistani business leaders by offering access to finance, facilitating business deals, and strengthening business education.”
“With 190 million potential customers, Pakistan is a huge emerging market opportunity for US companies,” Ambassador Olson observed.
The conference, sponsored by the US government, was attended by 200 American, Pakistani and Emirati businesses including Gillette, Citibank, General Electric, Procter and Gamble, Abraaj Group, Big Bird Group, Coca-Cola, Conoco Phillips, Engro, Estee Lauder, Goldman Sachs, IBM, Monsanto, Nishat Group, and the Saif Group.
Here's an Express Tribune report on a new private equity fund in Pakistan:
Private equity is poised to take off in Pakistan, with contrarian investors betting that the country is endowed with far greater potential than news reports chronicling Taliban bombings, the war in neighbouring Afghanistan or an evolving democracy’s frequent bouts of political drama might imply.
While Pakistan is undoubtedly a high risk play, investor sentiment has improved following a smooth transition at general elections in May and pledges by the new government of Prime Minister Nawaz Sharif to tackle a stubborn power crisis that has stifled manufacturing.
“I feel like being a kid in a candy store,” said Shaharyar Ahmed, 32, who started his career as an equity researcher at Goldman Sachs in New York, but who returned to his native Pakistan last year. “So many companies, amazing returns, growing in leaps and bounds – it’s a buyers’ market.”
Ahmed and his collaborator Isfandiyar Shaheen, 30, are at the vanguard. As co-managers of Cyan Capital, a $50 million private equity fund set up by the Dawood Hercules Group, one of Pakistan’s biggest conglomerates, they must prove that they can find finance-starved companies ready for rapid expansion.
But the risk-hungry duo have now forsaken budding careers in the United States financial industry in the belief that somewhere in Pakistan’s ranks of unglamorous, overlooked family businesses lie hidden the seeds of future corporate giants.
“There’s a new wave of interest in private equity,” said Chairman of JS Private Equity Ali Jehangir Siddiqui while talking to Reuters. “There are certainly some funds that are stepping up to the plate, we hope that there will be more.”
The new funds all aim to introduce the private equity model that is now familiar in rich and poor countries alike: groups of investors buy stakes in privately owned companies in return for a say in how they are run.
The theory is that an injection of capital and management savvy will turbo-charge the best of Pakistan’s family-run enterprises, creating jobs for a restive, youthful population and lucrative returns for the funds when they sell their stakes.
“It doesn’t take a rocket scientist to figure out how much you can do in this country, it’s absolutely green,” said Cyan’s Shaheen, a Pakistani who began his career in US investment banking but now lives in Karachi. “It’s like the Wild West.”
Cyan’s confidence in Pakistan’s prospects stems in part from the sheer size of the market in a country of 180 million people, where many conservatively run companies have shied away from scaling up their businesses into nationwide operations.
Companies listed on the Karachi Stock Exchange have grown their profits by at least 13-15% annually since 2009, according to one market analyst. With 49% returns in 2012, the market was among the world’s top performers....
A perennial outsider, Naqvi was born in Pakistan and built his career in the Middle East, no easy feat in a region where Arab prejudice against Pakistanis is common. The fourth child of a plastics manufacturer in Karachi, Naqvi graduated from the London School of Economics. After four years at Arthur Andersen and a short stint at a Saudi conglomerate, he used $50,000 in savings to start an investment advisory firm, Cupola, in Dubai in 1994. In his first deal he raised $8 million for a duty-free-kiosk business and received an $800,000 advisory fee. Five years later, in 1999, he pulled off a complex deal that involved purchasing another business-services company, Inchcape Middle East, for $102 million, with $4.1 million in equity. Naqvi then sold off pieces of the company for a total of $173 million. With the proceeds of that transaction he founded Abraaj in Dubai in 2002.
In summer 2012 Abraaj acquired London-based Aureos Capital, which gave it a global network of offices. Now the combined company does deals in the range of $20 million to $100 million. It has majority stakes in nearly half its portfolio companies, such as the Colombia-based D1 supermarket chain, which grew from 18 stores in 2010 to more than 280 today; Ghana-based ice cream maker Fan Milk International, a coinvestment with Paris’ Danone; and Pakistan’s Karachi Electric Supply, into which Abraaj invested $360 million in 2008.
Arif Naqvi, chief executive of Dubai’s Abraaj Group, hates the way Westerners speak about his part of the world. His private equity firm, he says, does not operate in emerging markets or, worse, frontier markets.
“We have taken the risk out of investing in what the West mistakenly calls ‘emerging markets,’ ” he says in elegant, Pakistani-accented English from a Madison Avenue outpost. “ They’re growth markets,” he insists.
While his remarks contain a healthy dose of marketing, Naqvi has a point. His $9 billion private equity firm–currently the largest investor in emerging markets outside of Brazil, Russia, India and China–has a track record many developed-world money managers would kill for. Despite operating in places where the rule of law often comes into question, limited partners report an impressive 17% annual return since inception in 2002.
Naqvi, 55, considers the notion of risky emerging markets a myth–part of what he calls “universally practiced hypocrisies.” He reminds a visitor that in 2008 the biggest risk on the planet came not from the developing world but from the financial capital of the modern era, New York City. Why, he asks pointedly, “have you not attached a risk premium to doing business with Wall Street banks?”
In a clubby world of global dealmakers, Blackstone, KKR and Carlyle get most of the headlines, but Abraaj is the undisputed private equity king of investing in the seemingly dangerous markets of Asia, Africa and Latin America. There is no shortage of big investors wanting to get into its newest funds. So far in 2015 the firm has sucked in $1.4 billion in fresh capital, giving Abraaj the largest pool of institutional money now pointed at sub-Saharan Africa in the world.
The firm currently has 300 limited partners, including the Gates and Skoll foundations, the World Bank’s International Finance Corporation (IFC) and the European Investment Bank.
“I view them as having more depth and breadth [in emerging markets] than the bigger players,” says Jin-Yong Cai, CEO of the IFC, which has invested $200 million in Abraaj funds and $70 million directly with Abraaj in deals, including an electric company in Karachi and a home loans company in Ghana.
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