Description
Georgia Capital - Emerging Compounder
You can read the formatted presentation of Georgia Capital's investment thesis in the following link
Disclaimer - I have used information, extracts, and images from Edison Research, Georgia Capital, Bank of Georgia, TBC Bank, Vanshap Capital, Lacuna and other public reports.
Brief - Investment Thesis
Georgia Capital is an investment holding firm listed in London that was spun out of Bank of Georgia in 2018. The key parameters that we generally look to judge the attractiveness of an investment firm, or a holding conglomerate are as follows in the same order of importance:
1.) Do we trust the ability and the character of the management team to compound shareholder value? Do they have an investment edge to deliver strong returns?
2.) Do they invest in an asset class that has attractive opportunities and are difficult to access for us directly?
3.) Does the firm have high quality assets that would compound in value by continuously reinvesting cash flows at attractive rates that we would anyways love to own?
4.) Are the underlying assets reasonably valued? Is there a significant discount to NAV? Is the cost base and tax leakage at the holding level reasonable?
5.) Is the management team rightly incentivized to unlock shareholder value? Are there clear catalysts for valuation re-rating?
As you can see below, we believe that Georgia Capital ticks all the above boxes positively and hence provide an attractive investment opportunity.
1.) CEO and team have a 20-year track record of delivering 18%+ compounded shareholder returns. They have the best deal flow in Georgia across sectors and a clear edge to attract top class management teams because of access to permanent capital and dominance in the local market (the pre-spin group used to control 15% of the country's GDP).
2.) Georgia is a high growth country with limited long term capital availability. It is an attractive investment pool for growth investments because of a low per capita base and a progressive macro regime. Less than 20% of Georgia Capital's portfolio is publicly listed and the remaining portfolio is made up of difficult to access private assets with good economic characteristics.
3.) The portfolio of the firm is well diversified with strong defensive businesses in financial services, healthcare, energy, education etc which have a combined ROE profile of 20% and provide long runway for growth. Most importantly, Georgia has a 0% corporate tax regime if the capital gets reinvested in the country and has a 0% capital gains tax. This allows the management team to allocate capital wisely across their businesses with zero tax leakage, making the firm a mix of conglomerate and a private equity holding business.
4.) The discount to NAV is 50% even when you mark the portfolio conservatively on look through earnings or cash flows (levered cash flow yield on their non-banking operating business is above 25%). The net management cash cost is less than 0.7% of AUM and less than 2% of AUM when you include share options. The firm aspires to grow NAV by 10X over the next 10 years.
5.) The CEO takes no salary as cash and is paid in shares that vest over 6 years. His incentives are rightly aligned with us, and the management team is clear about the need to reduce the NAV discount. They want to sell one of their medium sized portfolio firms to buy back stock aggressively at the current levels, providing a clear catalyst.
Georgia - Macro Overview
Management’s - Value Creation Track Record
In 1994, Binstosbank was privatized and became Bank of Georgia. The bank listed on the Georgian Stock Exchange in 2000 and in 2004, a new, western-educated management team, including the current CEO of Georgia Capital, replaced the prior management team. This new team set the bank on course to becoming a strongly performing, market-leading institution in a reforming and growing market.
Since new management took control in 2004, assets at the bank have grown 34x and book value per share (inclusive of private equity operations) compounded at 18.8% and shareholder value at 25% CAGR through Q1 2018 before the demerger. In 2006, BoG listed on the LSE and in 2012 the group graduated to a premium listing.
Good Portfolio of Diversified Businesses
Bank of Georgia - Leader in a duopoly market