Uzbek upstart banks on privatizations
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Central Asia

Uzbek upstart banks on privatizations

Silk Capital is making a big bet on the liberalization of the country’s financial system – a crucial test case of international demand for the nation will be the boutique investment bank’s own offshore IPO.


Alisher Djumanov and Sardor Koshnazarov have spent more than a decade exploring frontier markets including Mongolia, Myanmar and Mozambique, dealing with unwelcoming governments and nervous foreign corporations. 

These two Uzbek nationals know what it is like to beat a hasty retreat when fractious politics overshadows economics. But their latest bet – on their home country – may be their boldest yet.

When Uzbekistan’s authoritarian president Islam Karimov died in 2016 after 27 years in charge of the former Soviet republic, he was succeeded by his prime minister, Shavkat Mirziyoyev. 

To the surprise of many, Mirziyoyev turned out to be something of a reformer, who quickly announced steps to open up the economy.

His government’s landmark reform was to scrap the official exchange rate, which pegged the Uzbek som to the dollar, in an effort to eliminate the black market and attract foreign investment. The currency immediately fell 48% against the dollar on September 5, 2017.

But reforms have not stopped there. In January 2019, Mirziyoyev signed a law creating a capital markets agency, an anti-monopoly committee and a state asset-management agency, which will handle privatizations. 

The last of these gave more details about that long-discussed privatization plan in February 2020 that suggest it is pushing ahead with one of the most crucial changes needed in the economy.

Bank executives interviewed by Asiamoney acknowledge that more private-sector involvement in the financial system is imperative, even though they doubt the government will be willing to loosen its grip over the country’s biggest lenders by much. State-owned banks owned 84% of assets in the banking system as of February 1, according to official figures. The bulk of their lending is to state-owned companies, many of which would not be deemed fit to borrow if subjected to the scrutiny of proper due diligence, according to multiple sources in the country.

Alisher Djumanov_300

Alisher Djumanov, Silk Capital

What role can there be for an ambitious investment banking boutique in this market? Djumanov and Koshnazarov are determined to find out. Since they set up Silk Capital, a small investment banking firm, three years ago, they have already made an impact, winning mandates for several capital market deals and mergers and acquisitions.

Winning local mandates is one thing, though. The two bankers have now given themselves a tougher task: convincing global investors that their country, and their business, is worth a punt. They are planning to list Alfin ESG, a holding company that will take over Silk Capital, on the London Stock Exchange’s Alternative Investment Market before the end of the year.

Alfin ESG is being pitched as a holding company for a variety of financial assets in Uzbekistan. Although the first investment of the listed entity will be in Silk Capital, Djumanov plans to make Alfin ESG into a financial conglomerate. This will come from a mix of investments in existing businesses and the creation of new ones.

The banking investments will be in existing entities: on investment banking through its stake in Silk Capital, as well as by buying part of an existing privately owned bank. 

Alfin will create new businesses in: digital finance, where it will mainly target small and medium-sized enterprises; asset management, where it will create a firm that invests in Uzbekistan and other countries in Eurasia; and Islamic finance, where the goal is for a number of international firms to join it as co-investors. 

Alfin wants to help its clients raise as much as $10 billion in equity and debt financing over the next 10 years.

The details are still being worked out and remain subject to myriad approvals. The deal has not even been fully mandated yet. But Djumanov and Koshnazarov already have a target in mind: they want to raise $25 million from the listing in London, with more to come later from the sale of more shares in the holding company.

It will be a test of appetite among global investors for a country that is, finally, starting to open for business.

Embryonic markets

The embryonic nature of Uzbekistan’s domestic capital and financial markets means there is little business to go around – and most of the deals that do go ahead are tiny by international standards – but Silk Capital has already made its presence felt since opening its doors in April 2017.

In July, it placed the bulk of Asia Alliance Bank’s Som50 billion ($5.2 million) bond, a seven-year deal that offered investors 400 basis points over Uzbekistan’s 16% base rate. Another local broker, Depo Invest Trust, also worked on the deal, although Silk Capital executives say they placed the vast majority of the bonds.

Silk Capital tried hard to drum up foreign demand for Asia Alliance Bank’s bond, but failed; the bankers predict it will probably take several deals before international investors become comfortable with Uzbek credits. 

The firm may have more success advising Asia Alliance’s management on a potential sale to a foreign strategic buyer: Japan’s Sawada Holdings is already lined up.

Silk Capital is advising other corporations on potential bonds including Uzbek Leasing, a company created by state-owned National Bank of Uzbekistan but that is now partly owned by Malaysia’s Maybank. 

It is also working on privately placed sukuk issues from Uzbek companies, deals that will largely target investors in Malaysia and the Middle East.

We try to bridge the hurdles for private-sector companies by allowing them to raise capital from international investors. But unless the government has a meaningful attempt at privatization, it will be hard for private-sector institutions like Silk Capital to compete - Alisher Djumanov, Silk Capital

As for the mergers and acquisitions advisory business, Silk Capital has a few deals in the pipeline. It is working alongside a regional investment bank on a deal for a Central Asian food and beverage company that wants to buy a bottling plant in Uzbekistan. 

It has won mandates from a group of foreign investors eager to buy a bank, and from another client who is keen to buy an insurance company. It has been picked by an international retail business to help it find local acquisition targets.

So far, Silk Capital has few rivals. Uzbekistan’s biggest banks still see loans as the main source of funding for clients, while foreign banks are noticeably absent from the game. Kazakhstan’s Halyk Bank set up a local arm, Tenge Bank, in 2019 – Kazakh companies appear to be particularly enthusiastic about the opportunities in Uzbekistan – while Georgia’s TBC Bank already has a preliminary licence. But big, global investment banks are still largely ignoring the opportunities in Uzbekistan.

They are unlikely to do so for long. 

In February, the government announced that 781 state-owned companies will be privatized, while another 41 state entities will be turned into corporations, according to Djumanov. He says the state’s asset management agency, which is leading the privatizations, has invited Silk Capital and other firms to provide advice, forcing it to “scramble to expand” the investment banking team so it can make the most of this great opportunity for business.

Rival bankers tell Asiamoney that unravelling the state’s overwhelming control of the economy will be difficult. 

Although plenty of small companies could no doubt be removed from state control, the country’s lumbering businesses and the banks that keep them afloat are hard to divorce. The government has explicitly ruled out 50 companies from privatization, including metal miners, telecommunications providers, oil and gas companies and the National Bank of Uzbekistan, the country’s biggest lender.

Djumanov thinks these privatizations are critical, both for the country and for his business.

“We try to bridge the hurdles for private-sector companies by allowing them to raise capital from international investors,” he says. “But unless the government has a meaningful attempt at privatization, it will be hard for private-sector institutions like Silk Capital to compete.”

State dominance

The dominance of the state clearly gets in the way of developing the business.

“Our key client base would be the private sector,” says Djumanov. “We’re in touch with so many entrepreneurs in the country. We hope they will be the future champions of the economy in the next 10 years, but we face an uphill struggle here.” 

The other obvious source of revenue is taking Uzbek companies offshore. This is one area where global banks will compete. Uzbekistan made its debut in the offshore bond market in February, selling a $1 billion, dual-tranche deal that was managed by bookrunners Citi, JPMorgan and Gazprombank. 

Sanoat Qurilish Bank, a state-owned bank, followed with a $300 million bond in November, picking Citi and JPMorgan as global coordinators and Commerzbank and Raiffeisen Bank International as joint bookrunners.

The LSE listing of Alfin ESG and becoming part of a well-capitalized group will allow Alfin Capital/Silk Capital to become one of the leading investment banks in the country over the next five years - Alisher Djumanov, Silk Capital

More Uzbek borrowers are now reported to be considering offshore bonds. 

The National Bank of Uzbekistan and Navoi Mining and Metallurgical Company are both planning $300 million bonds, according to Reuters. But in the equity markets, the only international deal on the cards is Silk Capital’s listing of parent company Alfin ESG.

“The LSE listing of Alfin ESG, and becoming part of a well-capitalized group,” Djumanov says, “will allow Alfin Capital/Silk Capital to become one of the leading investment banks in the country over the next five years, even considering the eventual arrival of regional and perhaps global names in this market.”

Djumanov also owns Uzfin, an entity that previously formed a bigger part of his vision, as he told Euromoney, Asiamoney’s sister publication, in 2018, when his plans were still at an early stage. Uzfin still exists, but it is now a special purpose vehicle holding a portfolio of public equities.

Silk Capital expects to double its staff this year, from seven to 15 employees. The listing of Alfin ESG will go a long way to helping Djumanov and Koshnazarov find the money they need to fund their ambitious expansion plans. The company could raise as much as $100 million from secondary share sales. By 2025, they want to have more than 100 employees.

“This team has a competitive edge,” says Djumanov. “It’s a group of well-connected Uzbeks who are really committed to this market. Sardor and his colleagues have unrivalled expertise in investment banking in the country. There is no question about that. Now we feel it’s time for Silk Capital to be part of a larger, independent financial services group.”

Different paths

Djumanov, 47, and Koshnazarov, 44, have been working together for the last 12 years. But they have followed different paths to get to where they are.

Djumanov earned a masters in international affairs from Columbia University and an MBA from Oxford before beginning his career in banking. He started on the debt capital markets desk at Credit Suisse First Boston, working in Zurich and London and focusing on deals from Central and Eastern Europe.

He then worked at Renaissance Capital in Moscow, brokerage Auerbach Grayson in New York and finally Ernst & Young, where he became head of corporate finance in central Asia. In 2008, he created Eurasia Capital, one of several investment bank boutiques he founded over the course of a busy decade.

Sardor Koshnazarov_300

Sardor Koshnazarov, Silk Capital 

Koshnazarov also opted for postgraduate education at a British institution, getting a masters in international finance from Westminster University in 2000 after graduating from Tashkent’s University of World Economy and Diplomacy, where he specialized in international economics. But he did not immediately go to work for a financial institution. Instead, he moved back to Tashkent to work for the ministry of economy. He became head of the foreign trade department before leaving in 2006. 

He next took a job as an economist on a United Nations private-sector development project in Uzbekistan. In 2008, he teamed up with Djumanov at Eurasia Capital Management.

Koshnazarov has since become Djumanov’s most trusted partner, several times upending his family to explore opportunities in fast-growing markets that the two men felt presented exciting investment opportunities.

Mongolia was one such place where he lived between 2009 and 2012, working on a variety of deals for local businesses before a local management buyout, which eventually led to a domestic listing. 

In 2013, Djumanov was busy launching Africa Asia Capital, to tap opportunities in Mozambique, and Mandalay Capital, another boutique firm, this time based in Myanmar.

Koshnazarov and his family moved to Myanmar, where he took over the newly created firm. The founding of Mandalay Capital was a bet on Myanmar three years after an election challenged the power of the military junta and led to the freedom of prominent opposition leader Aung San Suu Kyi. 

But there were roadblocks to further growth in the market.

One was financial: the government’s decision to bar foreign investors from the local stock exchange was a clear blow to a foreign-minded operation (this rule was set to change as Asiamoney went to press). The other was political: a clampdown by Myanmar’s government on the minority Rohingya population in 2016 led to a sharp reversal of international attitudes to the country.

“The early years were very positive,” says Koshnazarov. “We helped local business groups attract international financing, for example a British oil and gas company, which we helped win a coveted tender with a local business group. 

“But the backlash to the conflict with the Rohingya changed investor sentiment dramatically,” he adds. “A lot of our international clients told us their interest in the market was depleting. We decided this once-promising market was no longer offering us the best opportunities available.”


Is Uzbekistan now offering Djumanov and Koshnazarov the best opportunities? They certainly think so. Other international observers are also paying more attention. The European Bank for Reconstruction and Development re-entered the country in 2018. 

In an interview with Euromoney in January 2019, Clemente Cappello, chief executive of fund manager Sturgeon Capital, talked up the potential impact of reforms on the economy.

But the failure of Mandalay Capital in Myanmar points to a crucial lesson: it can take years for foreign investors to work up the courage to enter a country, but only a short time to pull out if things go wrong. 

Silk Capital is doing its best to convince foreign investors of the potential of Uzbekistan, but the government’s reform efforts will need to continue if it is to attract a swathe of global investors.

Readers looking for a good indication of foreign investor appetite for Uzbekistan should keep their eyes on the LSE in the second half of this year. There they will be able to see the fate of a plucky Uzbek holding company with ambitions to grow rapidly, and to bring its country along with it.