Banks Fleeing Risk Whet Kazakh Appetite for Higher Returnsby
Manager of Kazakh reserves looking to Europe, Southeast Asia
Kazakhstan chases higher returns with alternative investments
The same hunt for yield that drove investors into emerging markets like Kazakhstan now has the Central Asian nation looking to Europe as a destination to park some of its oil wealth.
With Western banks unloading stakes in private-equity firms and hedge funds to meet higher capital requirements and comply with rules meant to dial back risks, the custodians of $800 million of Kazakhstan’s reserves are pouncing on such opportunities to squeeze out higher returns.
The central bank’s unit that specializes in alternative investments such as private equity, infrastructure and real estate is now focusing on Europe and Southeast Asia to ride out a period of low global interest rates, said Yeszhan Birtanov, chief executive officer of National Investment Corp., which is set to get about $2 billion more under management, starting this year.
“Considering that interest rates are in negative territory, we need to seek out and consider other options for investment to achieve sufficiently attractive returns for our reserves,” Birtanov said in an interview during a lunch of horse-meat steak in the Kazakh commercial capital of Almaty.
As the crash in crude prices jolted the Kazakh economy, the government raided its National Oil Fund, which collects energy revenue, to support the budget and state programs. With inflows dropping by almost two-thirds last year from 2011-2014, the stockpile shrank to $61 billion at the end of December. That is a decline of more than 20 percent from its peak 2 1/2 years ago.
That’s added urgency to an effort to lift returns. Under the terms of a decree approved by President Nursultan Nazarbayev in December, a bigger share of its “savings part” -- which accounts for most of the fund -- will be funneled into higher-yielding assets. Adopting a “balanced” strategy, 5 percent of that money will go into alternative instruments for the first time, with 60 percent held in bonds and 35 percent in equity. Previously, debt accounted for 80 percent and the rest was placed in stocks. The remaining “stabilization” portion of the fund will be capped at $10 billion.
“We’ll look for projects that will provide long-term returns,” Birtanov said. “For many investment managers who are under pressure from low yields on securities, 2017 will be a turning point. Besides, there’s a high chance of a correction in stock markets.”
His outfit is leading the charge into alternative investments bolstered by the $2 billion it may get from the National Oil Fund, an amount it wants to allocate over a period of about three years starting in 2017. It’s already working with a fund of private-equity funds and a fund of hedge funds and started to look for a strategic partner for investment into real estate and infrastructure, according to Birtanov.
While Birtanov declined to name its partners, National Investment Corp. allocated more than $350 million of the $800 million in reserves it handles to Grosvenor Capital Management, a fund of hedge funds, and money manager Hamilton Lane Advisors in 2015, then CEO Berik Otemurat said at the time.
To get the necessary professional expertise, Kazakh managers favor going through funds that invest in other funds, Birtanov said. Under the current allocation, 50 percent is poured into private equity and 30 percent in hedge funds, with 10 percent each planned for infrastructure and real estate, he said. The same breakdown will be used for assets received from the National Oil Fund, he said.
Starting in the first quarter of last year, the central bank unit began acquiring stakes in private-equity funds sold by existing partners and expects to get the first distributions soon, Birtanov said. National Investment Corp. plans to put about 30 to 40 percent of its private-equity portfolio into “secondaries,” he said. The unit expects to receive distributions from investments in secondaries and co-investments in the near future, he said.
“We recommended moving away from excessive diversity and concentrate on funds with specific strategies,” Birtanov said. “This allowed us to increase profitability by investing, for example, in credit hedge funds.”
Under a plan to allocate about $160 million, the first investments in real estate and infrastructure will be made this quarter through a fund of funds, he said. Private debt funds, including those that invest in distressed debt, are also becoming attractive, according to the company.
There’re “a lot of opportunities” for investment in Europe as a result of regulatory changes for banks, according to Birtanov. “Strong growth” in countries like Malaysia, Indonesia and Vietnam also makes Southeast Asia an appealing destination for Kazakh assets, he said.
“We see our task in maximizing profit for the central bank,” Birtanov said. “In the future, I believe we’ll become one of the National Bank’s important divisions.”