THE STRATEGY

Kazakhstan 2015 | FINANCE | VIP INTERVIEW

TBY talks to Erlan Ospanov, Managing Partner & CEO of Verny Capital Group, on investing in private firms, the Talan Towers project, and targets for 2015.

Can you elaborate on the history and evolution of the group, in particular how Verny Capital was able to turn itself into one of the largest groups in Kazakhstan specializing in making direct equity investments in private companies?

Verny Capital was established in 2006, and has developed substantial expertise and valuable relationships across core industries through our private equity investment activities. The company was founded by three partners, namely Timur Issatayev, Garik Mikaelyan, and I. Later on our fourth partner, Fedor Popandopulo, joined us. We are the four management partners in Verny Capital Group. There are investment funds under us, and most of these started in Kazakhstan due to Kazakh legislation. We manage the assets of private individuals in these funds, and we have a cornerstone investor, Bulat Utemuratov, who is the main shareholder in the funds. He owns all the assets, and we as a team manage these funds and assets. We follow the private equity philosophy, and we try to do this as much as possible here in Kazakhstan. Investment periods are from three, five, to seven years, and we are looking for high yields of 15%-20% a year. We always think about the exit strategy when we acquire any new acquisition, and unlike typical equity philosophy, we do business with strategic partners. Partnerships are an important part of our business model. We are a diversified group, and we have our own expertise and experience. At Verny Capital, many of us come from a banking background; however, together we do business in gold mining, metallurgy, telecoms, hotels, commercial real estate and property development, cement production, infrastructure, and security.

You are involved in many key sectors of the national economy, but which sector are you interested in exploring?

One of the major industries we are not represented in is the oil and gas industry, and we also do not have a presence in railroads or transportation. Since Verny Capital was established in 2006, our assets have grown to $4 billion. We became a diversified group, we have expertise and experience, and, for our strategic partners, we offer expertise on how to do business here in Kazakhstan and other CIS countries. I can say that all of our partners are happy to do business with us here. Verny Capital is an active partner, and not just an investment partner. We participate intensely in the strategic management of each of our investments.

“Since Verny Capital was established in 2006, our assets have grown to $4 billion."

Can you elaborate on the most recent iconic project you have been involved in?

Currently, it is the Talan Towers, which is a mixed-use building with two towers of 30 stories with offices and a hotel plus luxury apartments in the second tower. The hotel is the Ritz-Carlton. In between will be a three-level luxury retail gallery, two levels of underground parking, and a large ballroom. The project is running well, the first phase (offices) should be finished by 2015, and the hotel and retail gallery should be completed by the end of 2016. The launching and start-up operations will commence at the beginning of 2017. Between the commissioning of the building and the opening, there is the so-called pre-opening period for the hotel. The real estate development business is not purely a private equity business. Most private equity companies are looking for opportunities to acquire distressed and undervalued companies, in order to bring in value and increase their capitalization.

What has to be done to enhance the attractiveness of Kazakhstan for international investors?

I think that attractive conditions should be declared for investors, such as low income and property taxes. For other prospects, Kazakhstan is a mineral-rich country; one of the competitive advantages to using mineral resources is that you can process and combine them locally with an attractive local tax regime. Just recently, a new package of attractive conditions was also declared. This is a special tax regime, and in some cases could even be zero tax for property, income, and some reimbursement of capital expenditures. In the pipeline we have plans to build some factories, and these conditions are attractive to us.

What is your commitment to bridging the gap between corporate policy and social responsibility? How are you positioned to support the country, not only economically, but also socially speaking?

A good example is Verny Capital's investments in Kazakh Economic University. This is purely a manifestation of our corporate social responsibility. For us, as an investor, it is non-profit—philosophically and logistically it is because we do not distribute any dividends. We do not take any withdrawals from this company. All earnings are reinvested into the institution's infrastructure. We are constantly changing the old Soviet-style institute and continue to convert it into a modern local economic and business university because we believe that education and knowledge can make the world a better place for all. We see the lack of quality, local professional knowledge in many industries in Kazakhstan—from hotel management to fast food—and we think we can contribute to improving this situation. Since 2006, we have wholly improved the financial governance, and financial management and performance, and recently we started to do in-depth research. We invited the University of Michigan to be involved, and in 2014 we created a Foreign Academic Counsel. This consists of famous academics such as Robert Blackwell, John Deutch of MIT, and Sergey Karaganov from Moscow. At the beginning of 2014 we started in-depth reforms in the educational process, which is complicated and challenging. We have already changed 20% of the teaching staff and continue to bring in new people. Our goal is to change dramatically within five years. We have a new brand concept, and have spent a great deal of time on this.

What is the importance of human capital here?

This is an important issue in Kazakhstan; the history of conducting business here is short, as it is only 20 years since we obtained independence, and this is the story for all CIS countries. There is a lack of experienced people here, such as business administrators. There is also the obstacle of having a post-Soviet country. In Soviet schools we had very specific subjects to learn; however, now, in a global economy, other professions have to be learnt. For example, there are only a few schools that prepare people to work in real estate, property allocation, and facility management. Most property managers here are self-educated. For that reason in our university, the Kazakh Economic University, we just established a new faculty teaching hospitality and restaurant management. We also have plans to establish a real estate department.

Do you have any specific targets set for the end of 2015? What is your strategy to achieve your goals?

We have a number of strategic goals in each particular company that we own. I have already mentioned Talan Towers, and we also have goals for our gold mining company, Raygorodok. We are planning to finish 70% of the exploration work. In telecoms, we take a part in the management of Beeline, which is part of VympelCom Group, in Kazakhstan and Kyrgystan, where there is strong competition, and we wish to raise our market share with a goal of increased capitalization. By the end of 2015, we have to achieve substantial changes in our economic university as well. Our goal is to execute some exits and restructure our new portfolio because there is a cycle to our work. We are thinking about new partnerships. We have some plans to build grain and wheat processing plants in the pipeline, and we are also working on other mineral resource opportunities. We are considering food industries as well. In the short term, we are interested in finding partners in the wheat and grain segment. In addition, we are looking to get into transportation. We are hoping to extend our partnerships. We are open to new partnerships with global players in different industries. We know how to do business here, and we know which opportunities are present. We can brief and guide potential partners through all of the prospects in Kazakhstan, and we consider Verny Capital to be an experienced and reliable partner.

© The Business Year - October 2014