Problems and perspectives of the development of investment funds

With the growth of domestic economy and the accumulation of private capital to the population began to offer new investment instruments that constitute an alternative to bank deposits. On the background of overheating real estate market and a severe shortage of investment instruments people’s interest in securities is visibly growing. This gives grounds for hope that the savings of the population will gradually be directed more towards the development of domestic business, rather than blowing a “bubble” in real estate or the support of foreign manufacturers of cars and luxury items.

Nevertheless, at present a major role in supporting long-term initiatives of the private sector along with banks play a developmental institutions, large institutional investors and financial-industrial groups. More recently in the capital markets of Kazakhstan have begun to appear new “players” – private equity funds (private equity funds), which, unlike portfolio investors invest directly in real assets or obtaining control of the business (the acquisition of its controlling stake). Depending on the investment strategy of private equity funds can be of various types: from venture capital and start-up to buy out and mezzanine.
The vast majority of private equity funds in the CIS countries are of the type “business development funds” or funds “middle stage”. Investment targets for these funds – companies that have worked well and which need additional capital to a new level. Development funds are characterized by medium-risk and relatively high yields, which makes them very popular. In the world there are vast amounts of such funds, they vary greatly in size, from tens of millions to many billions of dollars. In the CIS, the dimensions of such funds – from the tens of millions to two billion dollars.

In the eyes of many companies, the recipient an important advantage of direct investment funds is that they provide capital, but leave the reins of power in the hands of owners and managers. This distinguishes them from strategic investors, who prefer to have complete control over the enterprise. Unlike banks, private equity funds do not require a deposit and fixed periodic payments, while providing access to its extensive connections, improving the strategy and tactics of business.

What is the technology of the private equity fund? In general, it consists of a selection of investment projects, committing the transaction, work together to improve the capitalization of the acquired assets and exit the fund of direct investments from the project at a profit. So, after the signing of a cooperation agreement the company and private equity funds begin joint work on the implementation of investment projects and increase the capitalization of the company. Typically, the fund protects their interests through their representatives on the board, but possibly a broader representation in government. Any investor, investing in a private company, is a substantial risk – because such companies are not subject to scrutiny of exchange controls. The investor must be able to independently monitor the work of the company and affect its activity.
For private equity interest companies that have the following properties, in descending order of importance:

 • The willingness of shareholders to cooperate;

• top-notch management and a healthy corporate governance;

• transparent and clear ownership structure and finance;

• strong financial position;

• a growing market and a growing market segment;

• Availability of clear competitive advantages and opportunities for scaling;

• Strategy development – a realistic and ambitious;

• a clear business plan.

 The presence of the first six points – is necessary. Last two points are often finalized together in preparation for the investment.
The size of the project should be adequately correlated with the size of private equity fund: as a rule, no more than 20% (sometimes up to 10%) and no less than 5-7% of the fund, while fund generally seeks to obtain a blocking minority stake investee company (from 25% to 50%). Sometimes, funds may acquire a controlling stake, but it is more the exception than the rule. The syndicate several funds usually act as one, and can jointly invest in projects that are for a fund is too large. Sometimes private equity funds acquire at least 25% of the shares, in which case they try to secure the blocking rules in investment agreements.

Low standards of corporate governance.

 First of all, the problem of providing investors with regard to accurate, timely and reliable financial and operational information, as well as the lack of interest among managers to be accountable to third parties. Even under good circumstances, the relationship between investors and their management companies are complex, but in the absence of sound corporate governance conflict markedly worse. Especially the issue becomes problematic in the family business. Typically, an entrepreneur who built a successful business from scratch, not accustomed to reporting to external shareholders, the interests of the owner and the business are inseparable, and cash flows of the company are often confused with the family. This tradition of autonomy, lack of transparency and independence are deeply rooted in corporate culture of companies in most countries of the CIS and rarely violated only when acutely raises the question of raising funds externally.
Many entrepreneurs, for example, have never been independently audited or introduce international accounting standards that require every professional investor. According to common practice, is a “double” or even “triple” Accounting for the minimization of tax payments, which complicates the task of the team conducting the «due diligence», in obtaining a reliable picture.
Also, the companies often have problems in the form of legal proceedings or environmental violations, which investors will learn too late, ie A big problem is “skeletons in the closet. Many large companies have disguised subsidiaries, offshore transactions and other schemes for tax evasion. Even the desperate need for investment from outside is not able to overcome the resistance of managers to pressure foreign investors to conduct painful reforms necessary to increase transparency and improve the business value.

Even the desperate need for investment from outside is not able to overcome the resistance of managers to pressure foreign investors to conduct painful reforms necessary to increase transparency and improve the business value.
It is not surprising that many equity fund managers in conducting a comprehensive review considered the most difficult to assess the level of competence and integrity of the initiators of the project partners.
The problem of corporate governance do not lose relevance after the investments undertaken. An investor needs a regular flow of reliable financial and operational information to monitor the activities of the company and participate in making important decisions that affect future results. As a rule, the board of directors created a new structure with clear lines of authority between him and the executive. Nevertheless, minority shareholders are often faced with another reality, when new board members do not have sufficient authority to carry out the necessary solutions, and their use of the veto to block a controversial decision, paralyzing the activities of the company.

Limited legal instruments to protect investors’ rights

The problem of weak corporate culture compounded when the legal system does not provide a reliable mechanism for conflict resolution. Throughout the world, well-written and executable legal instruments provide the basis for all financial transactions. Typically, financiers, bankers, or whether direct investors usually have little control over firms in which they invest, and strongly depend on the legal system that protects their rights.

Investor protection is relevant at all stages of the investment process: the placement of newly issued shares to investors, participation in company management and disposition of shares in the company. Investment agreements usually do not contain many of the necessary from the standpoint of investors’ positions, as their performance in terms of Kazakhstan’s law is impossible or considerably hindered.

In particular, the powers of government business entities regulated by domestic legislation in a rather tough, peremptory manner. So, in joint stock companies cannot set specific, not provided for by law, the classes of shares with differing rights management company. Rigidly fixed quorum of the general meeting of shareholders. In the joint stock company cannot change the statutory percentage of votes required for adoption of a decision. Not envisaged by the legislation the possibility of transferring some issues for consideration by the committees and commissions formed by the shareholders or members.
In general, private equity investment experience has shown that, regardless of literacy to enter into agreements fixing the conditions and circumstances of the relationship between investors and companies, there are limited legal leverage in the event of disagreement with company management. Insufficient protection of shareholder rights and the negative experience of being in a minority shareholder often force fund managers to change investment strategy towards the acquisition of a controlling stake.

Non-functional capital market

Every aspect of the investment of private capital is determined by the need to provide a profitable outlet in a certain period of time. In developed countries like USA and UK, a well-functioning IPO market provides the fundamental conditions for the successful existence of the entire industry of private equity. Without a reliable option out of the IPO market for the fund are limited to repurchase shares of the initiator or management (management buyouts), selling to a strategic investor or a financial investor who specializes in the final stages of development.
According to most empirical data output, implemented through the IPO, provides a greater increase in the value of the company, rather than through the alternatives, such as a sale to a strategic investor or back to the initiator of the project (through the management buyout). For example, in U.S. venture funds earn an average of 60% per annum, when exiting through IPO, and 15% - when to sell a stake to private investors. In addition, IPO – a sort of “seal of quality” business, financial transparency and a high level of corporate governance. The fact of the success of the IPO increases the capitalization of the company and improve its reputation. Of course, the withdrawal of the company’s IPO – not an easy task, and subsequent exit from the fund company should be made carefully so as not to derail the course of shares traded.

In Kazakhstan, as in many emerging markets, primary market functions as a tool for raising capital for a small number of large companies, and in the secondary market is dominated by an even smaller number of large firms. Low market liquidity and scanty volume of transactions, lack of interest the general public to exchange transactions, and excessive volatility of quotes do not give the Kazakhstani securities market sufficiently attractive to potential domestic issuers.

Low market liquidity and scanty volume of transactions, lack of interest the general public to exchange transactions, and excessive volatility of quotes do not give the Kazakhstani securities market sufficiently attractive to potential domestic issuers.

 As for the prospects of private equity investors in Kazakhstan, in my opinion, despite all the difficulties, we can expect their rapid development in the near future, as gradually creates the necessary preconditions for this: the accumulation of private capital, the growing number of qualified personnel, the development of corporate culture improvement of legislation to protect minority shareholders’ rights, the development of RFCA and the weakening of the tax burden on transactions with securities. The state should be interested in the development of private equity funds, as they contribute to the qualitative and quantitative economic growth. Private equity funds invest in businesses based on the most effective technologies and best standards, and indirectly affect the entire industry, forcing suppliers and competitors also raise their efficiency and business standards. Not accidentally, in the U.S. there is a law under which pension funds can be sent to private equity funds, including venture capital funds, dealing with new technologies, up to 1% of its assets. In addition, the same is a multibillion-dollar U.S. government program to support private equity investments, primarily of the same venture.

In the light of Kazakhstan’s WTO accession can be expected that globalization, with its emphasis on open wounds and low barriers to trade and investment will increase competition between countries and firms for scarce financial resources. At the same time for domestic companies and private equity funds will expand access to finance global funds. This will spur competition among investors, which will reduce the price of money and profitability. In this case, it is hoped that in the strong capital inflows, there will an integrated system of financial institutions in the industry, private equity, which will make your tangible contribution to improving the efficiency and competitiveness of the domestic economy.

Conclusion

In conclusion I would like to observe short review of work.

At the present stage of development of Kazakhstan as a new independent state, orienting to the market economy, the main direction of economic reforms is to develop and implement investment policy aimed at ensuring high economic growth and raising economic efficiency.

To solve these problems, as well as to ensure the structural transformation of the economy through a program of the government’s actions to deepen reforms in the context of limited domestic sources of financing essential attraction of foreign capital in the economy.

Development of investment funds in our country coincide with stock exchange. In 2008, along with reducing of fund indexes it was negative dynamics in development of investment funds.

Consider dependence of indicators of income on unit investment fund from investment strategy of UIF. Analyzing cost of units in different moments in the economy’s life, it is noticed that on the increasing market UIFs with aggressive strategy (investments in shares) have large incomes, but on reducing markets conservative strategy (investments in obligations state securities) are more attractive.

Situation in our country does not distinguish from situation in the world, but just one moment is that amplitude on our growing market is rather more than in well-developed stable markets. In long-term perspective economy always grows and if investors is interested in creation of future capital but not time incomes that’s why investments in unit investment funds and joint-stock investment funds are the most suitable.

Every investor in order to avoid losses before purchasing should estimate period of investments. If the period is less than 3 years, it would rather input money in deposits in banks.

The main conditions of involving foreign capital:

· Creation of stable and developed normative base for activity of investors on the territory of Kazakhstan;

· Stability of tax system;

· Creation of consulting and information systems that provides with solving investment decisions;

· Development relationship of investment funds with international foreign organizations;

· Creation of privilege conditions for foreign and local investors.

Nowadays conditions are similar to 2008. Shares are cheap, cost of units is reducing, unconfidence in future turnover of market made many investors to stop their activities. But after fall, it would be growth.