Kazakhstan SWF makes international move

Kazakhstan’s largest sovereign wealth fund (SWF), Samruk-Kazyna, is preparing to extend its investment activity beyond the domestic market. Following the approval of a new mid-term strategy, the fund will transition towards a more global model typical of established SWFs such as Singapore’s Temasek and Abu Dhabi’s Mubadala. This will augment efforts to diversify Samruk-Kazyna’s portfolio and improve overall profitability.

“In the short term, Samruk-Kazyna will be mostly focused on improving the operational performance of the portfolio companies to be privatised. In the mid term, we will gradually start to increase our presence abroad,” Lyazzat Borankuluva, managing director of Samruk-Kazyna, told fDi Magazine on the sidelines of the 3rd Kazakh-British Business Council and Kazakhstan Global Investment Forum 2019.

Original remit

The Kazakhstan government established Samruk-Kazyna in 2008 with the initial aim of stabilising the economy amid the financial crisis that was battering global markets. As the situation normalised, the fund’s focus shifted on implementing the privatisation programme of dozens of Kazakh companies in its portfolio. This was intended by the government to upgrade company-level governance and the competitiveness of the national economy. 

Samruk-Kazyna is the majority shareholder in most of the country’s biggest state-owned companies, including oil group KazMunayGaz, railway company Temir Zholy and telecommunications company KazakhTelecom. At the end of 2018, Samruk-Kazyna held total assets of Tg25,645bn ($66.4bn), up by 5.4% on the 2017 figure, according to its 2018 annual report.

Revenues went up by 37% to Tg10,116bn in 2018, and generated a profit of Tg1141bn, the report shows. The oil and gas sector continued to take the lion’s share of total revenues, making up 72.69% of Samruk-Kazyna's total revenues for 2018.

New strategy

The decision to diversify Samruk-Kazyna's portfolio away from oil and gas led management to approve a new 2018 to 2028 strategy. “The main idea is to transition the fund from an operating holding to an investment holding, to increase the value of the portfolio, generate financial returns and create wealth for future generations, also by working in partnership with other leading SWFs,” says Ms Borankulova.  

“This means that 2019 to 2020 will see Samruk-Kazyna taking an important step in its development path to have exposure to international markets. As this will be Samruk-Kazyna’s first venture into the international arena, we will implement a phased transition with regards to international investments by gradually increasing our presence in foreign markets. For a start, we will work very closely with external asset managers, leveraging on their international expertise and resources,” she adds.

“Over time, as we climb the learning curve, we will evolve into co-investments with private companies and corporations, including within the framework of government-to-government agreements, as well as with other sovereign funds. Ultimately, our aim is to be able to carry out direct investments in various industries and countries, independently and/or with partners. In order to carry out direct joint investments abroad and in Kazakhstan, the fund intends to establish partnerships with leading sovereign funds and investment companies.”

Different thinking

This new strategy will allow Samruk-Kazyna to follow in the footsteps of Temasek, Mubadala or Malaysia’s Khazanah and develop a portfolio of foreign holdings as a direct investor or co-investor. “Samruk-Kazyna realised that, in order to compete and establish international best practices, it has to look at more international models,” says Diego Lopez, managing director of advisory boutique GlobalSWF.

“It’s clear that, at some point, SWFs have to diversify not only in terms of sectors, but also in terms of geographies," he adds. "Funds such as Temasek and Hazanah have been successful in identifying the right industries for their foreign holdings, and this has brought further success to their portfolios. Samruk-Kazyna now has to do some homework with regards to the assets classes and geographies it wants to invest in. It has to build internal capabilities also by bringing on board foreign professionals with international experience. And it has to develop a network of satellite offices.”

The management of the fund has already taken steps to raise its profile, as well as increase the visibility of Kazakh assets by strengthening ties with international investors and financial institutions. The fund signed memorandums of understanding with Nasdaq Dubai in July 2019 and the China-Eurasian Economic Co-operation fund in April.

“[These moves] may also signal a maturation of the fund, as a responsible direct investment strategy requires significant internal expertise and sound governance structures,” says Paul Rose, associate dean for academic affairs at the Moritz College of Law at Ohio State University. “Samruk-Kazyna has indicated a willingness to co-invest with other SWFs – it signed a few co-investment agreements earlier in 2019 – which will provide invaluable experience on how to make and manage such investments.”

The fund will need a clear mandate and the discipline to stay the course. “SWFs have the comparative advantage of a long-term horizon, but sometimes governments lack the political will to fully use that advantage,” says Mr Rose.

Privatisation objectives

Beyond income diversification, the fund’s 2018 to 2028 strategy embraces three other strategic initiatives designed to: increase the profitability of portfolio companies through digital transformation, programmes that drive operational effectiveness and the modernisation of technologies; streamline the portfolio through the execution of privatisation and divestments programmes, as well as strategic partnerships for current investment projects; implement best corporate governance practices and the execution of sustainable development initiatives.

The current privatisation programme led to the dual listing of Kazatomprom, the world’s largest uranium producer, on the London Stock Exchange and the Astana International Financial Centre. The IPO of KazMunayGaz, airline Air Astana and Kazakhtelecom have been postponed until 2020 to fetch better valuations, finance minister Alikhan Smailov told parliament on November 25, 2019.