Shareholder Letters

Chairman and CEO Statement

Extract from 2019 Annual Report

Dear Fellow Shareholders,

In this my second letter to Georgia Capital shareholders, in what have recently become unprecedented times, it feels almost inappropriate to focus on the performance of our businesses by looking in the rear-view mirror. To the extent that this is our 2019 Annual Report I will do this in an abbreviated way, and then I will focus on our response to the challenges created by the potential economic impact of the global Coronavirus pandemic. Challenges that, as I write this letter, we know are likely to be significant but are evolving so rapidly that it is almost impossible right now to quantify them definitively.

Firstly, let me highlight the key issues for the Group in 2019. 

2019 was a significant year of capital allocations and progress for Georgia Capital. We successfully converted active pipeline deals into 11 acquisitions, while our total portfolio value increased to GEL 2.3 billion. Our NAV per share increased 5.7% in 2019 on the back of strong value creation across our private portfolio companies and disciplined share buybacks. NAV per share allocated to private businesses grew by 20.9%, while NAV per share allocated to listed businesses decreased by 8.4%.

In terms of what we track as value creation, our private portfolio businesses generated GEL 168 million value (18.6% growth in value during 2019), which was partially offset by a GEL 34 million decrease in the market value of our listed assets reflecting the lower GHG share price. We increased our stake in GHG from 57% to 70.6% on 18 December 2019 following the completion of a share exchange facility, whereby GCAP issued 3.4 million new shares in exchange for a 13.6% equity stake in GHG. The number of outstanding GCAP shares decreased by 1.7% in 2019, driven by our share buyback programme and the subsequent cancellation of 2.7 million shares.

During 2019, dividend inflows from our portfolio businesses increased 69% y-o-y to GEL 122 million, which was supported by strong cash flow generation at late stage portfolio companies. GCAP’s stand-alone FY19 cash inflow of GEL 113 million was supported by GEL 40 million interest income, while management expenses were managed below our targeted 2% level. Our resources available for deployment remained high at GEL 364 million at 31 December 2019.

On an IFRS basis, revenue (at GEL 1.5 billion) and gross profit (at GEL 590 million) were up 14.8% and 19.7%, respectively, in 2019, largely as a result of strong operating performances across our businesses, the launch of greenfield projects and a number of acquisitions. Consolidated EBITDA was up 21.4% y-o-y to GEL 272 million. Consolidated IFRS net profit was GEL 604.3 million in 2019 (up from GEL 26.2 million in 2018). Georgia Capital recorded a gain of GEL 589 million from a change in the accounting basis.

Listed businesses

A significant increase in the Bank of Georgia share price provided GEL 165 million value creation to Georgia Capital during 2019 on the back of more than 20% loan portfolio growth supported by a 26% return on equity and increased dividend payments. However, the Georgia Healthcare share price decreased by 40% during the year despite strong underlying business fundamentals. Following the completion of its three-year investment programme in 2018, the continued double-digit growth in EBITDA and operating cash flow enabled GHG to generate significant amounts of free cash flow totalling GEL 77 million in 2019, up from GEL 14 million in 2018.

Private businesses

Our private businesses delivered a healthy GEL 168 million value creation in 2019 driven by continued growth in operating performance, the first-time valuation of greenfield projects and enhancement of valuation multiples. I was delighted that the value creation, excluding multiple changes, was GEL 145 million across our private portfolio companies. There is significant information on the performance and strategies on all of our businesses later in this Annual Report.

Last year I identified three key principles for the acquisition and new business side of our business model: Who before whatThink twice before buying; and Cash is, was and always will be King. We made good progress on each of these key principles during 2019.

Who before What

Our team of people continues to be the main asset of Georgia Capital. Even in these difficult times our number one goal is not to do mass lay-offs and maintain the talent pool we have. Attracting and developing talent is not an easy task and obviously we want to continue to maintain our existing talent. We feel that all of our businesses are headed by great management teams and we believe that across the portfolio companies the depth of the management bench is solid. In addition, we came up with innovative partnership structures with local entreprenuers with good track records, where talented entrepreneurs are our minority partners in certain ventures and they continue to manage the company. At the same time they have our support in institutionalising the companies by introducing financial discipline, risk management and improved governance. This is obviously important in areas where companies are expected to grow rapidly. We are using these partnership structures in the education business. Where we bought majority equity interests in three schools, the former majority owners have remained our minority partners and continue to manage their respective businesses. At the same time, we are reinvesting together in the growth of the schools. These partnerships are extremely efficient as we do not need to maintain back office support for the education business as the schools have remained independently managed by our minority partners.

We have continued to develop talent internally and, at the Georgia Capital level, we have promoted Ia Gabunia to a newly created role of Chief Exit Strategy Officer. Ia became a key member of the top management team and will oversee the establishment of structured exit processes from our portfolio companies, as we are now starting to engage in the active price discovery of portfolio assets held. In addition, we have continued to support and develop talent internally and ensured that new portfolio acquisitions came with high quality management teams.

Think Twice Before Buying

Our main goal remains to buy companies at affordable prices, with key investment criteria being MOICs combined with IRRs together with ROIC to ensure appropriate expected returns on the total invested capital in each portfolio company. During 2019, we particularly focused on acquisitions in the private school education market, and we were extremely successful in acquiring three high quality schools – British Georgian Academy; Buckswood International and Green School – at prices ranging between 5.6x - 6.4x 2020 EV/EBITDA. We also made significant progress in buying assets in the promising energy sector.

Cash is, was and will Always be King

A key focus at the portfolio company level is the ability to grow operating cash, and generating and preserving cash is even more important during the global Coronavirus pandemic.

During 2019, we continued to make substantial investments in growing the business both operationally and via acquisitions, and this was supported by GEL 122 million of dividend income from a combination of our listed investments and our private portfolio companies. In a post-Coronavirus environment, we expect these dividend flows to reduce, and cash preservation will be our key priority in the near future, a theme I will discuss further later. At the end of 2019, the Group held GEL 364 million in cash, liquid funds and loans, which is a comfortable buffer in these turbulent times.

Capital Allocation

We invested GEL 358 million in existing and new portfolio businesses in 2019, of which: GEL 113 million was for the non-cash acquisition of the 13.6% stake in GHG, GEL 68 million was used for pipeline and new business area acquisitions and was invested across our new education, auto service and digital services businesses. In addition, GEL 57 million was allocated for the development of pipeline hotels, and pipeline or bolt-on acquisitions in renewable energy projects and the beer business; GEL 49 million for commercial real estate properties valued at c.10% yield (in US$ terms) was allocated to the commercial real estate business, and GEL 2 million was allocated to the evaluation of new investment opportunities. Since 31 December 2019 we allocated a further GEL 38.7 million (US$ 13.8 million) capital for the buyout of the 34.4% minority shareholder in Renewable Energy. The buyout allows us to become a 100% owner of the existing and pipeline high quality wind and hydro assets with strong dollar-linked cash flows. In line with our 360-degree investment analysis, we spent GEL 125 million on share buybacks in 2019. Following the completion of the US$ 45 million share buyback programme, we cancelled 2.7 million shares and transferred 0.7 million shares to the management trust. Additionally, the management trust also spent US$ 17 million on its share purchase programme during 2019.

Perhaps the most significant of our new pipeline business investments was the GEL 49 million invested in high quality revenue, large and growing, but fragmented private school education market, where we secured three high quality partnerships with excellent management teams across premium, mid-level and affordable private schools. Through these carefully selected partnerships, we now have a clear pathway to approximately 11,000 learners and to more than 50% of our targeted GEL 70 million EBITDA by 2025.

Impact of the Coronavirus COVID-19 global pandemic

The full extent of the impact from the Coronavirus pandemic is currently difficult to assess and is unlikely to be fully understood for some time – at least until the severity and duration of the outbreak both in Georgia and worldwide become much clearer. The Georgian Government has initially responded rapidly and effectively, both in terms of managing the spread of the virus within Georgia, and in announcing a series of support measures designed to mitigate the potential economic impact in Georgia of the global spread of the virus.

Within our businesses we have implemented a series of contingency measures to ensure the protection of both our employees and our customers. This has been our immediate priority. Cash remains king, and we are now focusing on cash accumulation and preservation. I am writing this letter in the early stages of the Coronavirus impact, and we are currently reviewing all of our planned capital investment programmes in all of our portfolio companies. Each business is reviewing its cost profile and we will expect to deliver cost management efficiencies throughout the Group. Both of our listed investments, Bank of Georgia and Georgia Healthcare, have announced the deferment of any dividend decision until the full economic impact of the COVID-19 pandemic is better understood. These are extremely sensible decisions that, as investors in the businesses, we fully support.

In short, we are “battening down the hatches” until we better understand the short and medium-term economic impact, and we will accumulate cash, reduce our investment programme and rigorously review our cost base. I am sure investment opportunities will arise but, at this stage, that is for another day.

Macroeconomic environment

During 2019, the Georgian economy remained robust. GDP growth was 5.1% in 2019, up from 4.8% in 2018. As net exports continued to improve, the current account (CA) deficit shrank significantly to 5.1% of GDP in 2019, a major improvement compared to the 2016 highs of 12.5%. Tourism inflows showed resilience despite the air travel ban imposed by Russia, as we had 5.4% growth in 4Q19, while 2019 tourism revenues were up by 1.4% y-o-y. Average inflation was 4.9%, above the targeted level in 2019, leading the NBG to tighten its monetary policy by 250 bps to 9.0%. Georgia’s strong progress was acknowledged by rating agencies as both Fitch and S&P upgraded ratings of Georgian sovereign bonds from BB to BB with stable outlooks in 2019. Clearly this progress will now be significantly challenged for the remainder of 2020, as the country, and the world, come to terms with the full economic effect of the global pandemic. As I write this note, any clear picture as to exactly what that impact will be remains elusive, but we will monitor macroeconomic developments carefully, particularly given Georgia’s reliance on tourism and tourism-related activities, and adapt our businesses appropriately.


Over the last two years we have laid strong foundations for significant value creation across all our private businesses, which together with continued strong cash flow generation across our late stage businesses, have driven good NAV per share growth. I expect the Georgian economy to remain resilient to the economic challenges ahead, and I know our portfolio businesses are doing everything in their power to husband their resources to manage efficiently and effectively to ensure they remain very well positioned to withstand the challenges ahead.

Irakli Gilauri
Chairman and Chief Executive Officer

7 April 2020