PASHA Holding is involved in essentially every major sector of the economy. How do you go about organizing such a multi-faceted holding group?
Currently, that is at the top of our agenda. From 2006 to 2012, we worked in an opportunistic way, trying to capture as much of the market share and clients as possible. After 2012, the situation changed in the region and the large markets that surround Azerbaijan were affected. We started thinking about optimization and improving corporate governance in terms of trimming costs and removing inefficiencies. Previously, we were loosely running the corporate agenda from the center of PASHA Holding; however, we realized that we needed some stronger controls to prepare ourselves for the economic slowdown. In 2014, we started to talk to McKinsey & Company in order to shape our strategy more efficiently and create an organizational structure that would yield a more efficient management model. We completed the project at the beginning of 2015, and now we are actively implementing this new corporate governance model, leading to the creation of more units, such as a banking group at the corporate center level. In the banking sector in Azerbaijan, we own two banks and we also expanded to own two regional banks, namely PASHA Bank Georgia and PASHA Bank Turkey. The need for further coordination was clear. The model we used was sophisticated by international standards, which required us to raise our capacities to meet these international levels. Now, we are much better equipped to deal with an economic slowdown. When business development is lagging, it is a good time to look internally to minimize costs and optimize the processes. That was the main purpose of this project.
How do the private equity services provided by PASHA Holding foster growth and competitiveness as a method of alternative financing for potential firms in Azerbaijan?
We were pioneers in experimenting with this; however, it requires a certain level of sophistication from the other side as well. There are certain issues we are still dealing with—the penetration of the banking sector into the economy is still limited, corporate governance standards are not adopted, and there are also some issues with basic financial management in local companies. We have developed a model where we can assist these companies through our private equity investment fund, rather than our banks. Because this is a risky model, we have also required some of our candidate clients to do some reforms in terms of financial management and corporate governance. In our private equity portfolio, we have around 10-15 projects. Some of them are already signed and some are in the process of due diligence. There are still issues we need to work on in this model, like exit strategies. For this model to be successful, there has to be capital markets, which are limited in Azerbaijan at this stage, and strong strategic sponsors, which we are helping to develop. We must also have more active participation from foreign investors, which the government is working to support; however, the critical mass needed is still not there. I would like private equity to become a pillar of business for PASHA Holding because the upside is enormous. We are the first; no one has even experimented with it yet. On the private equity side, we are incurring all the risks, but could potentially gain all the upsides.
Are there any sectors of the economy in which PASHA Holding is looking to expand?
We are looking at tourism as a potentially booming sector going forward, and we are initiating a couple of pilot projects in agriculture. We believe the next boom in Azerbaijan should be agriculture. Almost all of Azerbaijan has fertile soil and the markets are close. However, the nearby Arab and European markets demand we certify our agricultural products. Certification is one of the elements of the chain that is not yet in place. To enter other markets and export in a systemic way, our producers need to upgrade their capacity in many ways. PASHA Holding has two fairly large pilot projects in agriculture and, based on the success of those, we will design our future plans accordingly. This is a challenging sector because you operate on much slimmer margins and you have to be efficient. In addition, you have to be excellent at developing both local and international markets. Countries such as the UAE and Saudi Arabia have a large capacity to purchase agricultural goods; however, we do not produce on that scale yet. For the short term, we are looking at this agricultural experiment. We try to maximize our return from our traditional sectors, but also try to position ourselves in terms of diversification for the future in other sectors.
PASHA Holding is a minority equity holder in a SOCAR polymer project. What was the impetus behind PASHA Holding's involvement in this investment?
There is a new era of industrial development in Azerbaijan. The petrochemical industry is being redeveloped in accordance with best practices and modern technologies. Our goal is to see how these types of projects are managed. We have a minority interest, but, in absolute terms, it exceeds the limit that we usually allocate for individual projects in our mainstream program. We have invested around $25 million in this project. We made this exception because the project was intriguing from many different points of view. It will be interesting to see how the completed project will enter the market as commodity prices fluctuate. The project coordination and planning was carried out at a very advanced level, to the credit of SOCAR. We are happy that SOCAR brought other local large business groups to participate as well. We have a 10% interest in this project.
PASHA Holding has established itself in countries abroad. What is your focus for investment strategies outside of Azerbaijan?
We are a regional group. We looked at some of the potential expansion opportunities three years ago, including Western Europe, but we decided it was premature. Our strategy for 2015-2017 is focusing on establishing our footing in the region—in Azerbaijan, Georgia, and Turkey. We are the only private bank that has an arm in each of those countries. Our niches include private equity within the mainstream business and private banking. If we can properly position ourselves for the future, there will be quite an impressive upside on those sectors, even though they are sensitive. We are welcoming these challenges, but focusing on our main areas of strengths. We don't want to sacrifice our traditional strong sectors such as banking, insurance, and construction to develop new investments; they should develop with a coherent plan and without subsidization from the primary segments. For example, in 2015, 70-75% of our net profits were contributed by retail banking. If the capital markets develop according to plan we could spin off some of our assets and put them in the market to get an upside in terms of funding and access to other markets. The Istanbul stock exchange is a potential venue where we could list some of our small assets—maybe 10-15% of shares—just to see how the market reacts. That may be part of the next strategy. For our three-year strategy, we are focusing more on securing the gains made over these last 10 years and then we will design the strategy of how to enter new ventures, such as agriculture.