Private equity morning 4 group

Privatization as a private equity opportunity in Uzbekistan

Privatization has become a central issue of the economic policies of nations in the developed and developing world. One of the objectives of privatization is, to transfer ownership to private investors so that the enterprise will become efficient and profitable. In Uzbekistan case by case privatization program has implemented in three steps by trade sale method since 1992.
Since 1998 the country started the privatization of industrial giants, enterprises in oil and gas sector, chemical, metallurgical and machine-building industries is being conducted, and starting from 1999 it is carried out with wide attraction of foreign capital. However, the privatization was slowed down by inefficient government management and lack of transparency.
Privatization program approved for the next three years (2007-2010) includes 994 enterprises that should be sold for private ownership through open tenders. Of these, 363 enterprises represent key sectors of the economy (oil and gas, agricultural, chemical, construction, energy, etc).
The privatization in Uzbekistan represents an opportunity for Private Equity investors who want to hold part of their assets in emerging markets. Uzbekistan as a private equity destination has several advantages. The country is the largest in terms of population and second largest economy in Central Asia, after Kazakhstan. It has significant natural resources, including one of the world largest reserves of gas, gold and uranium. The country has the sophisticated transport infrastructure that connects Asian and European markets. Also these state owned enterprises are highly inefficient and need improvements in their operations and private management expertise to make profits. Thus there is a great upside potential for PE investors that can turn around these enterprises and make them leading companies in Central Asia.
The private equity market in Uzbekistan is in early development stage with high growth potential. There are only few small scale PE funds that started to operate in Uzbekistan. They have several attractive sectors to invest and actually make significant profits in future.
Attractive Investment Sectors for PE funds.
The private equity investors may buy into largest banks in the country. These banks need foreign investors to enhance their lending capacities to small and medium sized companies. Currently the banking sector of the country has few foreign institutional investors and may present attractive valuations for private investors. However, in the future we may see more foreign banks buying Uzbek banks and paying higher prices to get their share of growing financial industry.
The next sector that is in demand is utilities, especially in electricity transportation. There are several foreign companies that bought old electricity grids, and committed to improve their capacity and reduce energy waste. Since the country has constantly growing demand for electricity and other energy sources, private equity investors could coinvest with utilities companies that have ability to introduce efficient technologies and create an effective energy management company.
Another private equity destination could be in oil, gas and mining sectors. Although these industries are highly regulated, they need significant foreign investments. There are numerous examples of companies that combine their assets in several emerging economies, such as in Russia, Kazakhstan, Ukraine and Uzbekistan and list their companies in global stock exchanges. That is one possible exit strategy for PE investors in addition to M&A opportunity with larger energy and mining companies that are looking into emerging markets in Central Asia.
In conclusion, I would like to emphasize that Uzbekistan economy is presenting multiple opportunities for global investors in its several important industries. The most attractive industries from my point of view are banking and finance, electricity transportation, mining, oil and gas extraction. The country has launched a wide scale privatization program in these industries that need inflow of foreign direct investments and private management expertise. Improvement of management and investments could make these state owned companies more efficient and thus profitable. PE investors have experience in turning around sub-efficient companies and have significant financial capabilities and industry networks. PE funds with experience in emerging economies could make great returns from privatization opportunities in Uzbekistan.

** Investment in the distressed asset or bond as PE opprtunity in Korea **

South Korea is now facing its second biggest economic challenge since the 1997-1998 financial crisis triggered by the global financial turmoil

Many companies are on the verge of financial bankruptcy. The most urgent task for the country is to restructure the enterprises.

Korea Development Bank (KDB), which is expected to become a private bank in September, is again making their best efforts to expedite corporate restructuring as their original role to promote the corporate investment for the domestic economic downturn.

As the result of such an effort KDB is planning to launch various funds such as a ‘turnaround fund’. KDB has devised a plan to raise the fund supply up to 32 trillion won this which will be designed to promote firms' facilities investment and ease liquidity shortage and stabilize the financial market

In particular, in order to provide liquidity for local firms which are unable to get funds in the capital market, KDB has issued one trillion won in primary collateral bond obligation (P-CBO) based on its special contribution worth 83.34 billion won to Korea Credit Guarantee Fund.

It will hand over the corporate bonds of cash needed companies to a special purpose company (SPC) which will issue around one trillion won in P-CBOs on these bonds.

KDB has also launched a 100 billion-won turnaround fund, as more companies have become unable to make the debt payments during the economic slump. The fund is aimed at giving ailing SMEs a second chance to survive. The bank contributed 100 billion won and plans to attract private equity funds (PEFs) to join in to expand the fund up to one trillion won.

This buyout fund will acquire the stakes of the distressed companies and try to turn them around over the next two -three years, and seek to sell them preferably to the previous owner at higher prices.

The fund will invest in those companies with high growth potential damaged by financial troubles, particularly those suffering from wild fluctuations of the local currency

In addition KDB also plans to create a one trillion-won separate PEF in the first half in order to expedite the restructuring of local conglomerates. This plan comes as conglomerates are reluctant to sell their non-core assets and business units

Under the plan, companies may secure more cash and improve balance sheets by selling their assets to a PEF established by KDB. Then, the fund will share the proceeds from the acquired asset with the firm.

The original owner will be given the right to bid first when the PEF wraps up the investment after three to five years. If the asset is sold to a third party, the proceeds will also be shared between the fund and the original owner.

KDB's PEF scheme came as creditor banks, led by KDB, were working to sign agreements with highly leveraged business groups to improve their financial health. They conducted a review of the 2008 balance sheets of 45 major business groups and found that 14 of them were financially unhealthy.

Lastly in a move to prevent large business groups from becoming insolvent, the bank plans to support their restructuring and help them normalize their operations by providing consulting services based on its restructuring experience in the past.

KDB has been continually playing the pivotal role to invest in the distressed assets like major Korean corporations including Kia Motors, Daewoo Motor, Daewoo Shipbuilding, Daewoo Heavy Industries & Machinery

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