By Kazim Alam
KARACHI: Marking a significant breakthrough in the country’s nascent private equity industry, Cyan Limited is expected to close two major transactions before June 30.
Speaking to The Express Tribune, company CEO Sulaiman S Mehdi said one of the two private equity deals is in the logistics sector.
One of the three private equity firms registered in Pakistan, Cyan is part of the conglomerate of business tycoon Hussain Dawood. Its shares are traded publicly, with 28.7% shareholding resting with the general public at the end of 2013.
“We have reviewed and visited more than 300 companies in the last three years. The potential of scaling up these small and medium-size businesses is just mindboggling,” Mehdi said.
A private equity firm typically buys a major stake in a privately held company, uses borrowed money to scale up its operations, improve cash flows, enhance profits, and finally sell it to other companies or cash out through a public listing. Private equity firms operate under a two-tiered model, which consists of a management company and a fund. Outside investors put large sums of money in the fund while the management company, also known as general partner, uses it to identify, invest, turn around and eventually sell private businesses with high growth potential.
“Larger financial institutions, especially banks, are eagerly talking to Cyan. They want us to bring them private equity transactions. ‘We want to co-invest with you,’ they say. The future of Cyan is very, very bright,” Mehdi said.
Cyan is currently looking for private equity investments in seven sectors, namely pharmaceuticals, healthcare services, animal protein, education, logistics, retail, telecom and banquets and wedding halls.
Besides a sizeable market share and scalable business model, Cyan makes sure that a company it is targeting to invest in must have revenues of at least Rs500 million, earnings before interest, taxes, depreciation and amortisation (EBITDA) of at least Rs100 million and should be seeking to raise at least Rs350 million.
Incorporated in 1960 as Central Insurance Company, Cyan has existed for the large part of its 55-year history as a ‘captive insurance company’ with its shares trading on both Karachi and Lahore stock exchanges. However, its insurance licence was revoked in 2011 and its status changed into that of an investment entity. Meanwhile, the company remained listed on the bourse and yet shareholders didn’t lose a single rupee.
In fact, what followed in terms of cash pay-outs can well be called unprecedented.
The company paid cash dividends of 675%, or Rs67.5, per share in 2014. With 58.6 million outstanding shares, Cyan paid more than Rs3.9 billion in dividend last year. This is remarkable, especially in view of the fact that Cyan’s market capitalisation is currently Rs7.3 billion.
The net profit of Cyan for 2014 clocked up at Rs898.7 million, which is 23.5% less than the earnings of Rs1.1 billion in 2013.
Admittedly, earnings that currently appear on Cyan’s profit-and-loss statement originate from public equity only. In other words, Cyan has been earning money since 2012 solely by investing in the shares of publicly listed companies.
“We decided we would feed private equity from public equity,” Mehdi said, adding that the company would not have taken off had it decided to raise funds from outside sources from day one.
Shareholders of Cyan have earned a return of 275% during January 1, 2012, and December 31, 2014. This means the company outperformed the benchmark index of the Karachi Stock Exchange (KSE) by 92%, as the KSE-100 Index went up 183% in the three-year period.
“We are finally at a stage where our private equity transactions have started locking in. Our shareholders know that returns in private equity are way higher than those in public equity,” Mehdi said.
“We only invest in a company where we have the expectation of earning a 30% Internal Rate of Return (IRR). Companies that we have looked into have potentially up to 60% IRR,” he added.
Published in The Express Tribune, March 2nd, 2015.