Shareholder Letters


Extract from 2021 Annual Report

Dear Fellow Shareholders,

I am writing this, my fourth letter to Georgia Capital shareholders, at a time of significant global and regional geopolitical tension, with the Russian-Ukrainian conflict entering its fourth week. We all hope and pray for a swift resolution to the hostilities. In addition to the devastating impact of the war so far in Ukraine and the dramatic dislocation of people, there is increasing evidence of the potential economic impact across the region. In Georgia, we expect to see lower economic growth in 2022, with the exact impact dependent upon the length of the conflict. Georgia does have a strong track record of resilience in the face of such challenges, and I expect that resilience to continue. Georgia Capital is also well positioned to withstand the potential pressures, with a strong mix of business investments in defensive sectors, and very well managed, and conservatively positioned, operating companies.

Against this background, I want to reflect on how the last few years have changed many of the ways in which we operate – both personally and professionally – but have not changed the key principles of our investment philosophy. We have always sought to invest in high quality businesses with great market positions, high returns and the ability to deliver sustainable earnings growth – this has continued during 2021, and we will continue to do so in the future. The significant challenges and uncertainties of the last few years – be they the global pandemic or the current geopolitical tensions – have reminded us, however, to ensure that we always manage our investments in conservative ways. For Georgia Capital that means avoiding excessive leverage, and investing mainly in capital efficient/capital light sectors and opportunities.

I have always highlighted that we must be constantly mindful of the risks we face, whilst continuing to create investment opportunities. During 2021, we focused almost exclusively on successfully balancing the varying risks and opportunities in an ever-changing, very volatile environment where it was extremely difficult to predict the short and long-term impacts of the global pandemic on our people, our businesses, and our country. By adopting a relatively conservative approach to managing our investment portfolio, our cash management and balance sheet leverage, I believe that your company successfully navigated these challenges over the last twelve months. This is evidenced by the strong delivery of our key strategic priorities, most particularly the sale of our water utility business at a premium to its independent valuation, and exceptional Net Asset Value (NAV) per share growth. Our investee businesses, both listed and private portfolio businesses, have delivered outstanding risk management and earnings growth, resulting in improved valuations.

I spoke last year of Georgia Capital’s core enablers – strong corporate governance; the development of highly talented management teams; and access to both domestic and international capital markets – and, more particularly, our priority to ensure that we invest in defensive industries and sectors. During 2021, your company saw the benefit of these core enablers as, despite the challenging external environment, we were able to deliver strongly, achieve all of our key strategic priorities – which I will discuss in more detail later in this letter – and report a 31.0% growth in our NAV per share during the year. In Sterling terms, reflecting the appreciation of the Georgian Lari (GEL) over the last twelve months, this increase in NAV per share was almost 40%. That Georgia Capital came into the pandemic in good fundamental shape was proved by the strength of our resilience and performance.

The wider economic environment and the regional markets in which Georgia operates and trades, have not been for the faint-hearted over the last few years. A combination of the global pandemic, rising levels of inflation, interest rates and oil prices have all combined to create a challenging external environment, and these challenges have been exacerbated more recently by the heightened geopolitical tensions. In terms of managing through the impact of the pandemic, the Government of Georgia has done extremely well. Having initially provided sizeable economic support to assist affected households and businesses, and to support the entire healthcare system, the Government decided early in 2021 that Georgia had to “learn to live” with the virus as quickly as possible. This led to many of the previous restrictions being relaxed, and ensured that Georgia and Georgians operated sensibly, with fewer “lockdown light” restrictions, in a way that sought to effectively manage the balance between the epidemiological and economic risk factors, thereby enabling the economy to recover strongly and international tourism to restart. Virus cases did pick up as we moved into 2022 with the arrival of the Omicron variant and a vaccination rate that has remained low. But this wave has already peaked and ongoing initiatives by the Government should boost vaccination take up rates across the country over the next few months. Going forward, however uncertain the evolution of the virus could be, we believe that the Georgian healthcare system, Government and society as a whole, are better prepared to manage any potential further pandemic impact.

Our macroeconomic environment

From a macroeconomic perspective, Georgia’s economic recovery from the effects of the global pandemic continued to exceed expectations throughout the year, with real GDP posting double-digit growth at a preliminary 10.6% year-on-year in 2021. On the domestic side, the recovery was driven by an accommodative fiscal policy as well as robust lending (total loans increased 18.1% y-o-y in constant currency terms). On the external side, economic activity was supported by record remittance inflows (up 25% y-o-y in 2021), record merchandise exports (up 27% y-o-y in 2021) and tourism revenues rebounding to 52% of pre-pandemic levels in the second half of 2021. The Georgian Lari performed robustly, appreciating by 6% against the US Dollar during the year. The real effective exchange rate (REER) has also followed a similar trend for seven consecutive months since May and is now approaching its long-run trend. The currency appreciation was driven by strong foreign demand for Georgian exports (including a partial recovery in service exports), robust remittance inflows, tight monetary policy and accelerated foreign currency lending. Supported by higher-than-expected real GDP growth and GEL strengthening, the Government lowered its public debt-to-GDP ratio to 51% by the end of 2021, down from 60% at the end of 2020, and the overall budget deficit projection for 2022 has been narrowed to 6.8% of GDP. The deficit is planned to be reduced further to 2.8% of GDP by 2023, returning below the 3% ceiling within Georgia’s mandated 3-year period.

The National Bank of Georgia tightened the refinancing rate by a cumulative 250 basis points during 2021, responding to higherthan-expected inflation and the potential risk of entrenched inflationary expectations. Rising prices have mostly been caused by imported inflation and headline inflation reached 13.9% in December 2021 (9.6% on average in 2021), temporarily boosted as a result of last year’s Government utility subsidy base effect that has remained in play in early 2022.

Recent geopolitical tensions will have clear implications on global and regional macro trends. Uncertainties relating to the outcome of the conflict as well as the economic impact of the sanctions on Russia remain high. Despite potential spillovers on Georgia, risks are manageable due to the wide diversification of FX flows in the country. Foreign currency inflows (export, remittances, tourism revenues) increased by 29% in 2021 compared to 2013, while flows from Russia decreased significantly. Further tourism revenue recovery is expected as 2021 tourism-related revenues were only at 38% of the pre-pandemic level. Moreover, NBG’s reserves have increased consistently and now stand at US$ 4.0 billion, as of February 2022, and provide ample cover.

At the portfolio companies’ level, none of our businesses is materially exposed to Russia or Ukraine, except for the wine business, where 61% of the 2021 revenues were generated from sales in these markets. However, with less than 2% of our overall total portfolio value as at 31 December 2021, any adverse development across the wine business is not expected to be material for the Group.

Delivering on our strategic priorities

This Annual Report will go into greater detail later, but let me highlight here how we continued to deliver on our strategic priorities in 2021.

Our key strategic priority, announced a year ago, was to dispose of one of our large portfolio companies and I am delighted that, in what continues to be a challenging global environment, we successfully completed the sale of the Group’s water utility business to a high-quality international strategic investor, FCC Aqualia. The value achieved of US$ 180 million for 80% of the water utility business represents a 30% premium to its independent investment value at 30 June 2021 and translates into 2.7x MOIC in US$ (3.6x MOIC in GEL) and 20% IRR in US$ (27% IRR in GEL). The disposal also has a very significant positive impact on the Group’s leverage profile, reducing the market value leverage from 24.2% as at 31 December 2021 to 19.2%. The sale represents our most significant monetisation event to date and marks the completion of the full investment cycle for one of our large businesses from acquisition and development, to cash exit. Our announcement of the sale of the water utility business during the pandemic once again underlines the resilience of our portfolio. In addition, the partnership with FCC Aqualia, the fourth largest water management company in Europe, brings international expertise to the water utility business, whilst also benefiting the country’s sustainable development.

In addition to the Water Utility disposal, the following notable events took place in 2021:

  • The sale of US$ 45.0 million commercial real estate properties with an 11.3% premium to their book value as of 31 March 2021, translating into 2.1x MOIC in US$ terms and demonstrating continued progress towards our previously announced strategic priority to divest, over the next few years, subscale portfolio companies which do not have the potential to reach GEL 500 million equity value;
  • The buyout of the minority shareholders in our retail (pharmacy) business, agreed at renegotiated terms, providing the path to GCAP’s 100% ownership and stretching over six-year/tranches at 5.25x EV/EBITDA;
  • The expansion of the education business in the affordable segment through several investments, in line with our capital allocation programme;
  • The resumption of the Group’s share buyback and cancellation programme with an initial US$ 10 million, which was further increased with an additional US$ 10 million in early 2022;
  • US$ 65 million Eurobond tap issuance in March 2021, which enhanced our liquidity and once again demonstrated our superior access to international capital markets;
  • Lastly, as our portfolio companies continued to deliver on their individual strategic objectives, our NAV per share increased by 31.0% y-o-y in FY21 and more than doubled since the start of the COVID-19 pandemic.

Reviewing our strategic priorities

Our existing strategy, which we initially announced in November 2020, seeks to ensure that we invest only in sectors or corporate opportunities that have the potential to grow to an equity value of GEL 0.5 billion or more over a 3-5 year period. In our experience, these larger companies are more attractive to international strategic and financial buyers, and this certainly proved to be the case with regard to the sale of the water utility business to a global strategic partner whose technical and specialist knowledge in the industry will help take the water utility business through the next phase of its development.

The disposal of the water utility business created both substantial value for GCAP shareholders and brought in significant cash proceeds which were received in February 2022. In the short term, the net cash proceeds are being held in cash and cash equivalents and yield-bearing marketable debt securities, pending a wider strategic review by our Board to determine the appropriate deleveraging, capital return and investment policies in light of the prevailing economic outlook, and our share price and discount to net asset value. This Board review will be completed shortly, and we will make a further announcement at our upcoming Investor Day, which will be hosted by Georgia Capital’s management team on 9 May 2022 in London.

Capital allocation and dividends

As the economic recovery in Georgia continued throughout 2021, we increasingly sought to transition from what, in response to the significant uncertainty at the beginning of the pandemic, was a cash accumulation and preservation strategy, to a revenue and business growth strategy. We allocated capital in two key areas of business investment, and this translated into investment of GEL 18.3 million predominantly in our investment stage businesses:

  • GEL 13.7 million was allocated to the education business for the capacity expansion of the existing campus of Buckswood (mid-scale segment, GEL 4.0 million), the acquisition of the land and building of a new campus location, and capacity expansion of the existing campus of Green School (affordable segment, GEL 5.8 million), and the acquisition of an 81% equity interest in Georgian-Austrian School Pesvebi (GEL 3.9 million).
  • GEL 3.7 million was allocated to Renewable Energy for the development of pipeline HPPs (Darchi and Zoti) and wind farm projects.

Having recommenced our share buyback and cancellation programme in August 2021, c.1.5 million shares (c.3% of issued capital) had been repurchased as of 18 March 2022 for a total value of GEL 39.8 million. From August 2021 through the year-end, 823,582 shares were repurchased under the programme, and a further 119,162 shares for the management trust.

During 2021, Georgia Capital collected GEL 74.4 million in dividends, of which GEL 14.5 million was received from Bank of Georgia, GEL 11.5 million from healthcare services, GEL 11.5 million from retail (pharmacy), GEL 14.9 million from P&C insurance, GEL 2.0 million from medical insurance, and GEL 20.0 million from the renewable energy businesses. Looking forward to 2022, we currently expect approximately GEL 90-100 million in dividends from our investee companies.

Value creation

Our portfolio value increased by 24.4% to GEL 3.62 billion during the year, reflecting 23.5% and 28.1% growth in the value of our private and listed businesses, respectively. The private portfolio value growth of GEL 558.9 million mainly reflects the net impact of a) GEL 592.3 million value creation, b) investments of GEL 18.3 million, predominantly in the education and renewable energy businesses, and c) a decrease of GEL 59.9 million due to dividends received by Georgia Capital from the private portfolio companies.

Our listed investment – Bank of Georgia – delivered a remarkable performance in such a challenging environment, with an annualised ROAE of 25.8% and strong 19.8% loan book growth, on a constant-currency basis, during 2021. The loan book growth was largely driven by continued strong loan origination levels in all segments, but predominantly in the consumer, micro and SME portfolio. The Bank is clearly making significant progress in its digital transformation, which is leading to strong customer franchise and revenue generation growth. Reflecting the strong economic recovery, BoG’s share price increased by 36.7% in 2021, strongly supporting our NAV growth with GEL 164.1 million value creation. In addition, the Bank restarted its regular dividend programme with an interim dividend in November 2021 that generated GEL 14.5 million dividends for Georgia Capital and, on 22 February 2022, the Bank announced its board’s intention to recommend a final dividend for 2021 of GEL 2.33 per ordinary share at the Bank’s 2022 Annual General Meeting. This will make a total dividend paid in respect of the Bank’s 2021 earnings of GEL 3.81 per share.

The operating performance of our various private portfolio investments was also exceptional, as evidenced by the aggregated revenue and EBITDA growth rates in 2021 of 23.8% and 34.9% respectively. This performance is even stronger compared to the 2019 pre-pandemic comparisons, with equivalent growth rates of 33.9% and 38.5% respectively. The individual performances of our private businesses are described in greater detail later in this report.

Environmental, social and governance

 At Georgia Capital, we recognise the increasing importance of the environmental, social and governance (ESG) issues that we all face. There is significantly more detail later in this report and in our first Sustainability Report with regard to the good progress we are making and we are committed to providing more information to highlight our good work on ESG matters. We have a strong track record on governance issues, but will be increasingly focusing on communicating our progress on environmental and social issues as well. This is a significant issue, owned and regularly discussed at Board level. We are committed to conducting our business in an environmentally, socially responsible and sustainable manner in order to reduce the environmental impact of our operations, while at the same time improving social performance to enhance long-term returns to you, our shareholders.

Our Responsible Investment Policy is now fully integrated into our investment and portfolio management processes and procedures, and is firmly guided by the leading responsible investment and ownership principles. We have aligned with, and have adopted to the extent applicable to our company: 

  • United Nations-backed Principles of Responsible Investment (UN PRI) – 6 Principles.
  • UN Global Compact – 10 Principles. Georgia Capital is a signatory to the UN Global Compact.
  • UN Sustainable Development Goals (UN SDGs).
  • Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.

Who before what – the strength of our people

Our management and people continue to be the foundation of Georgia Capital’s success. Since quality people are our main asset, as in past Annual Reports, I want to reaffirm to you, our shareholders, my belief in that quality. This is not a difficult task, as in my everyday experience I meet external people of all kinds reviewing our businesses who are invariably impressed by the quality of our various teams of people. I firmly believe that the quality of the team in our water utility business was a significant selling point in the recent sale of the business to FCC Aqualia.

At the Georgia Capital level, and in each of the operating companies, I am able to look to the future with great optimism. I would not be able to do that without being confident in the knowledge that we have attracted, and continue to attract, the best talent available to constantly nurture and grow our businesses. We do not invest in businesses unless we have certainty that we have the very highest calibre of people to run them. I want to thank all of our colleagues for their continuing and unwavering support, throughout what have been unprecedented times.


While the management teams in our portfolio companies have demonstrated a strong focus on and success in navigating the challenges and opportunities created by the pandemic, Georgia Capital has continued to deliver on its key strategic priorities, whilst we too have managed the, often daily, challenges of the continuing impact of the global pandemic. Looking ahead, assuming the Russia-Ukraine conflict does not spiral out of control, the direct implications for Georgia’s economy and our businesses are manageable. Based on our proven governance, capital discipline, and sound capabilities to invest, grow and monetise businesses, I believe Georgia Capital is in a very good place to take advantage of emerging opportunities in Georgia and deliver consistent NAV per share growth.

Irakli Gilauri
Chairman and Chief Executive Officer

24 March 2022