Investors seek to polish Pakistan into equity jewel

By providing seed money and expertise, funds are aiming to grow family-run businesses into corporate giants in an untapped market that one equity expert compared to the ‘Wild West’

By Matthew Green  /  Reuters, KARACHI, Pakistan

Sun, Aug 04, 2013 - Page 14

With its brisk kidnap industry, dirty politics and robust murder rate, Pakistan’s commercial capital, Karachi, is an unlikely destination for a pair of go-getting financiers fired with the follow-the-money ethos of Wall Street.

Yet the risk-hungry duo have forsaken budding careers in the US financial industry in the belief that somewhere in Pakistan’s ranks of unglamorous, overlooked family businesses lie hidden the seeds of future corporate giants.

“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.”

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 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 Pakistani Prime Minister Nawaz Sharif, a wealthy business mogul, to tackle a stubborn power crisis that has stifled manufacturing.

Ahmed and his collaborator. Isfandiyar Shaheen, 30, are at the vanguard. As co-managers of Cyan Capital, a US$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.

Washington, which is slowly mending its roller-coaster relations with Islamabad, seems to share Cyan’s confidence. In June, US development agency USAID pledged US$48 million as seed capital for two private equity funds to invest in small and medium-sized Pakistani businesses.

The Abraaj Group, a Dubai-based emerging markets fund, and Pakistan’s JS Private Equity, which pioneered private equity investments in Pakistan in the late 2000s, have both pledged to match the contribution, the US embassy in Pakistan said.

“There’s a new wave of interest in private equity,” JS Private Equity chairman Ali Jehangir Siddiqui said. “There’s 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 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 percent to 15 percent annually since 2009, according to one market analyst. With 49 percent returns last year, the market was among the world’s top performers.

However, to make their bet pay, Ahmed and Shaheen will have to be diplomats as well as financial engineers, persuading patriarchal heads of family-owned businesses to embrace an alien investment concept touted by upstarts half their age. Shaheen and Ahmed spend much of their time explaining how private equity works to owners who might be fearsome entrepreneurs, but innately wary of exposing their clannish, cash-in-hand operations to the young men’s newfangled ideas.

One company head was particularly reticent to share his accounts with Cyan since he feared the young men might be sizing him up for a ransom demand on behalf of kidnappers. At least 70 percent of the companies they visit keep double books — one for the tax man and one containing the true profits.

Given the difficulty many small or medium-sized companies have in securing affordable bank loans in Pakistan, the new crop of funds believe there should be plenty of demand for their finance, provided firms are open-minded enough to listen.

JS Private Equity says predominantly negative perceptions of Pakistan favor investors bold enough to plunge into one of the last, big unexplored frontiers for private equity deals.

“People get a very slanted view of Pakistan internationally, which is why we get this very advantageous risk-reward trade-off,” said Steve Smith, a partner at the fund.

Cyan’s Ahmed left Pakistan at 19 to attend college in the US, where he would join Goldman Sachs and later the International Finance Corporation (IFC), the private-sector arm of the World Bank. He said five years spent sealing IFC private equity deals in Asia and Africa was ideal preparation for his new mission in Pakistan, though not for his first day at work.

In April last year, the airliner ferrying him to Karachi made an emergency landing at the city’s airport. Passengers were marooned on the listing vessel as a slick of leaked jet fuel pooled under the fuselage. They were later rescued unharmed.

“The only walk-away point from the experience was: I want to fix the airline industry,” Ahmed said.

Ahmed would later be robbed at gunpoint outside a restaurant in Karachi’s upscale Clifton District. Undaunted, he and Shaheen have met more than 230 companies from across Pakistan in sectors from food processing and warehousing, to telecom and dairy.

In the next few months, the pair are hoping to make Cyan’s first private equity investment, saying they have 10 to 15 potential deals in their pipeline that could soak up a combined equity capital of more than US$200 million.

Despite the wall of suspicion the pair often face, they believe their promise to instill clear corporate governance will ultimately appeal to owners weary of the feuds that so often weaken family-run empires and unlock higher returns for all.

“It’s not a matter of ‘if,’ it’s a matter of ‘when,’ and I believe that ‘when’ is now,” Shaheen said. “That’s the contrarian bet that we are taking.”