Georgia Capital: Investing in a Nation

May 04, 2023

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Overview

Based in Tbilisi, Georgia (no, not the state), Georgia Capital (GCap) is a private equity firm focused exclusively on the country it is named after. Spun-out from the Bank of Georgia in May of 2018, the firm implements a strategy of buying, developing, and selling assets that are key to the quickly growing Georgian economy. Since its inception, the firm has generated an exceptional 18% internal rate of return (IRR). Management believes they can improve on this record and are certainly putting their money where their mouth is; insider ownership is more than 10%, including Chairman and CEO Irakli Giulauri, who owns 5.2% of the company and takes his whole salary in multi-year stock options. At a high level, these characteristics make GCap a great way to get exposure to a quickly growing, pro-business, pro-West country, with extremely well run fiscal and economic regimes.

Georgia

As a country, Georgia has a very interesting investment case. It offers a variety of characteristics that, when combined, are hard to match anywhere else in the world. Let's double-click on a few of these characteristics:

Growth
- According to the International Monetary Fund (IMF), Georgia grew real gross domestic product (GDP), a proxy for economic activity, by 9% in 2022. This represents the eighth fastest growth rate of any nation in the world. Just as important is the GDP growth per capita, which is often used as a proxy for the wealth of a country on a per-person basis. Though 2022 numbers have not been fully counted, the country is expected to jump from about 5,000 per capita to well over 6,000. By some estimates, this figure could be as high as 6,700 per capita, which would represent staggering growth.
Talent Pool
- When trying to understand a new country to potentially invest in, understanding the country's talent pool is always important. This talent pool is a major part of the development of that country's economy. This is of particular note in Georgia, which has taken in an influx of Russians due to the events of the last year. Many of these immigrants are skilled workers, particularly in the technology industry. The country is still trying to figure out how exactly to handle this influx, but it should be seen as a major positive. By taking in these skilled workers the country should be able to continue to grow both its overall and per capita GDP at high levels
Macroeconomic Setup
- To say that the Georgian government's handling of economic policy since the start of the pandemic has been exceptional would be an understatement. The culmination of this being the following: Georgia has experienced this recent run of exceptional growth while deleveraging the country, raising both tax revenue and interest rates, largely eliminating any inflation or credit problems, and creating a setup for the government to be stimulative. Now let's dive into the numbers that make this rosy picture possible. First, we'll look at the debt situation. The country's debt to GDP ratio (a measure of a country's overall leverage profile to its economic output) is 40%. For reference, the United States is at about 127%. On top of this, the United States is expected to continue running a deficit of about 6%, while Georgia is hovering around 3%. Pretty impressive figures, even when compared to the world's most powerful country. They have also gotten inflation under control, with the Producer Price Index and the Consumer Price Index (PPI and CPI, common inflation measures) being below 1% and 3% respectively. Though they are yet to signal this quite yet, this leaves room for the government to put its foot on the accelerator again, or at least take it off the brake.
Business Stance
- I'm sure that you caught onto the fact that although I claimed Georgia is pro-business, the country has raised tax revenue- something often associated with an anti-business lean by the government. This is a great place to start, as it is illustrative of the Georgian government's view on business. The country does not tax any capital gains or any business profits that are reinvested back into the country. If that doesn't scream pro-business, I don't know what does. This is because the country's leaders take a business-esque approach to running it. Though tax revenue increased by nearly 30% last year and the government's spending increased by about 27%, it was able to do this while only growing operating expenses by 8%. This business mindset is key to the country's economic growth. This is seen through the country's strong marks across all business related categories in rankings put out by the Heritage Foundation, World Bank, and others.
Geopolitical
- In trying to understand Georgia's geopolitical situation, it is best to start in 2008 with the Russo-Georgian War, the first of Russia's recent run of land grabs. The result of this invasion was Russia taking a large chunk of land from Georgia. The remaining country has two key dynamics: it is very pro-West, and it is largely derisked of a Russian invasion. We'll start with the latter point. Because Russia has already taken the land that they believe is theirs, it is highly unlikely that they will come back for more, particularly knowing the country's stance and relationship with the West. Though not an official member, NATO describes Georgia as one of its closest partners. That relationship exemplifies the nation's philosophy. Additionally, the country is a democracy, again showing philosophical alignment with the Western world.
Size
- Georgia's small size acts as a boon for incumbent businesses from two competing perspectives. The first is that its small size allows it to grow more quickly. This is simply the law of large numbers. Additionally, its small size makes it very hard for competing capital to come into the country, especially from those with little knowledge of the nation.

Georgia Capital and its Management

Georgia Capital was spun-out from the Bank of Georgia in May of 2018, taking management and their nearly 19% growth per year track record with it. The resulting company is a private equity firm. The firm's strategy is, ideally, to buy capital-light assets that are key to the Georgian economy, help to develop these assets, and eventually monetize them. Most of the portfolio is in private companies, though we will explore this later. For now, we'll focus on management, their track record, and where they are taking the company.

The more I dug into management the more I liked what I saw. Key management coming to GCap from the larger Bank of Georgia speaks volumes as to where they think the company will go. This is particularly the case with Chairman and CEO Irakli Gilauri. Besides an excellent track record of capital allocation, Gilauri is the epitome of shareholder alignment. He takes none of his salary in cash, rather taking it in options that divest over a six-year period. As a result, he owns more than 5% of the company. This makes it so that Gilauri's financial future is tied to the success of not just GCap, but its shareholders. The incentive to create shareholder value is clear. As Charlie Munger likes to say, "Show me the incentive, and I will show you the outcome."

Portfolio

Now onto the business, or in this case, the portfolio of businesses. Management values these businesses based on their net asset value (NAV). The NAV for each individual business is based on its public market price or an external appraisal It is posted on GCap's website under the "investor toolkit" section for anyone interested. Based on the valuations, and the premium the company often gets when selling, it is prudent to assume these valuations are approximately correct. These businesses listed in order of their NAV are:

Bank of Georgia (~27.4% of portfolio)
Retail Pharmacy (~22.2% of portfolio)
Hospitals (~13.3% of portfolio)
P&C Insurance (~7.0% of portfolio)
Renewable Energy (6.9% of portfolio)
Education (~5.0% of portfolio)
Water Utility (~4.8% of portfolio)
Clinics and Diagnostics (~3.4% of portfolio)
Medical Insurance (~1.6% of portfolio)
Other Portfolio Companies (~8.4% of portfolio)

Though I will not go into these businesses individually, there are a few items of note. The first being that the company is often able to realize premiums to their listed NAV when monetizing assets. This is well illustrated by the 30% premium to NAV the company received when selling the majority of the Water Utility business. It is also worth noting the nature of the businesses. As management will tell you, the company looks to invest in businesses that are capital-light and sustainable. This is true, though it leaves out a couple of key points: the businesses all have strong positions within their industry, and are levered to the growth of the Georgian economy as a whole. This is well exemplified through its 19.9% stake in its former parent, Bank of Georgia. Bank of Georgia is one of two banks in Georgia. This gives the company a dominant competitive position, while inherently levering it towards the growth of the country as a whole. In addition, it has a rapidly growing super-app, which will drive down its costs as it becomes more widely adopted throughout the country. Again, this is just one example, but it is largely representative of the portfolio as a whole.

Valuation

In determining Georgia Capital's value we'll first look at its expected growth rate. Including their record from the Bank of Georgia, which I believe is a fair inclusion, management has a track record of producing about an 18% growth rate in NAV. Management even believes they can improve this record to about 26% a year, which would result in a return of 10x in 10 years. Between management's track record and the Georgian macroeconomic setup, I believe this is achievable. To call that a spectacular return is an understatement. Even if you are more conservative, and think that management will lose some steam and NAV growth slows to 15%, you would end up with returns that should beat most indexes quite easily.

That said, I believe that its 60%+ discount to NAV makes Georgia Capital a particularly interesting opportunity. Putting this into numbers, GCap currently has a market cap of about $445M, while the assets it owns are valued at more than $1.1B- a massive discount.

Publicly traded holding companies, as Georgia Capital is, are valued based on NAV, though with a wide range of values. Often these values are based on the fees paid to the management of the company. For example, Bill Ackman's Pershing Square trades at a similar discount to NAV as GCap due to Ackman's high fees, while Berkshire Hathaway often trades at a premium due to management's rounding error of a salary. For reference, GCap's expenses at the operating level are under 1.5% of revenue, which will likely come down to under 1%. I believe, as management does, that the company should trade in line with their NAV. This will take time to come to fruition, but at a 60% discount just closing the NAV gap would give the company a more than 150% increase in value. Management is actively taking steps to close this gap on both ends by paying down debt and buying back shares. Management is even changing the company's listing, with the primary benefit being the ability to buy back more shares more easily. This should make the company's NAV a base for valuation at much higher levels- before assigning any value to its growth.

Other Items of Note

The company is currently London Stock Exchange (LSE) Premium listed, though will be moving to LSE Standard.
To go with its listing, the company has a second office in London
Over the last year, the company has improved its credit rating to B1 and B+ from B2 and B from Moody's and S&P respectively
The company recently placed the country's largest ever corporate bond offering, worth $80M
Currency fluctuations are a factor here, though figuring out how to play this is largely based on the individual

Summary

As a country, Georgia seems set for a period of strong economic growth. I believe that Georgia Capital is a great way to play it. Between its owned assets and management's track record of creating value, I see no reason GCap's exceptional operational performance will not continue or accelerate with the growth of the country. Even if growth were to slow to 0, you are still buying assets, which would mostly fall into the "essential business" category (a term I am sure no one wanted to hear again), at a 60% discount. The cherry on top? The key decision maker's pay is 100% tied to shareholder return.

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