Alternative investments: Cyan - tailoring private equity to local market

The firm is creating an ‘eco-system’ to get around the informational asymmetry problem.

KARACHI: It is tough to be a private equity investor in a country with a small public equity market that does not have enough investment avenues into the growth sectors of the economy. For Cyan, the key to being a successful private equity firm in Pakistan appears to be to create an “eco-system” of businesses that the company maintains relationships with.

Executives at the newly-created merchant bank say this approach is geared towards simultaneously solving the information problem faced by most investors, as well as the trust deficit that many private equity firms face when they initially approach companies for an investment.

The company has created two platforms: the Entrepreneurs’ Exchange and the Executive Partners Network, both of which are designed to help the company leverage knowledge and expertise into a deal flow that can eventually generate returns for its investors.

The Entrepreneurs Exchange – the most recent of which was held in Karachi on December 24 – allows a platform for the founders of new companies within a specific sector to meet and talk to each other about the problems and opportunities in their sector. Cyan benefits from the conversation by deepening its knowledge of the sector while also building relationships with companies it may later be able to invest in.

“If you break down information barriers, you can unlock a lot of potential,” said Samad Dawood, the CEO of the company.

Cyan was created late last year by restructuring Central Insurance, a company owned by the Dawood Group, and listed on the Karachi Stock Exchange. That makes Cyan highly unusual in being a publicly listed private equity firm.

“It would be unfair to leave retail investors out of the growth story,” said Dawood in an interview with The Express Tribune.

The firm’s investment strategy for now seems focused on finding partners in high-growth segments of the economy which it has identified as agribusiness and food, logistics and transportation, consumer goods, small and medium scale specialist manufacturing, and technology. Cyan executives have asked The Express Tribune not to disclose the amount of capital they currently have to deploy.

Yet the firm seems committed to remaining within the growth equity segment of the market – meaning it plans to shun large buyouts or investing in start-ups and instead will focus on investments in companies that are already up and running and need capital for expansion and growth.

“There is too little money chasing deals in Pakistan right now,” said Isfandiyar Shaheen, the company’s head of growth equity. “Ours is a very process-driven approach. We want to understand our partners’ business before we start looking at their accounts. We do not pretend to understand their businesses more than them, but rather simply offering insights in a manner that is useful to them.”

This seems to be geared around the traditional Pakistani hesitance to share accounts, a hindrance that is often a deal-breaker for most institutional investors. Shaheen, however, says that having a sound understanding of company’s business model allows outside investors to understand the possibilities of leakages a lot better than any exercise in forensic accounting.

This approach may well be adopted by some of the other private equity investors looking to deploy capital in Pakistan, including one fund backed by the Islamic Development Bank. The country seems to be attracting a lot of attention from alternative investors.

“The general consensus among private equity investors is: this place has been sucking for while. There has got to be an upside,” said Shaheen.

At a later stage, Cyan hopes to attract both domestic and regional institutional investors. For now, however, the search for the ideal investment opportunities continues.

Published in The Express Tribune, January 7^th, 2012.