GEO

New USD 6bn Georgian Co-Investment Fund: Transparency will play a role in its success

25 November, 2013

Former Prime Minister Bidzina Ivanishvili presented and launched a private investment vehicle in late September which he says will stimulate private sector investment in Georgia. Ivanishvilli said the private equity fund has received USD 6 billion from private investors – equal to approximately 38% of Georgia’s GDP.

Alongside other private investors, Ivanishvili said that he will invest USD 1 billion of his personal wealth in the new Georgian Co-Investment Fund (GCF). 80% of these funds will be invested in the Georgian economy over the next five years, and 20% will be invested internationally. This appears to be the most important domestic economic policy initiative to have been launched since the Georgian Dream Coalition came to power almost one year ago, although it is funded by private investors, not the Georgian government.

The GCF could prove vital for securing large-scale financing for some of Georgia’s much needed but expensive infrastructure and business projects. Speaking at the launch of the GCF, Ivanishvili said that the Fund will help to attract investments for a deep sea port in Anaklia, close to the administrative boundary line of breakaway Abkhazia. This project will be of significant value in maintaining Georgia’s position as a regional logistics corridor and increasing its utility as an East-West transport link. A deep sea port is efficient as it allows for more containers and PanaMax (extra large) vessels.

This is a project with broad political support – the previous UNM government, with the financial support of the state-owned Partnership Fund, initiated the development of a deep sea port in this coastal area near Anaklia. Ivanishvili said efforts are currently underway to set up a consortium to raise funds for the port; “It may become one of the largest projects in Georgia,” he said. In an email to TI Georgia, the CEO of the GCF, George Bachiashvili, wrote that, “to his knowledge, the government is looking for the best alternative among several proposed locations” for the port, and that “an official decision regarding which of the proposed projects to implement is yet to be announced.”

The GCF is unique in Georgia as it is not limited to being a minority shareholder (like the state-owned Partnership Fund) and can finance 75 per cent of an investment project if necessary. This could help more investment projects be implemented, bringing positive benefits to the Georgian economy and employment rate.

But there are no publicly available details about GCF’s investment projects or oversight mechanisms on the website, and they do not intend to publish their financial statements. Some of GCF’s announced investors (detailed further below) appear to have a record that should be subject to close scrutiny. Given it's huge potential financial firepower and importance to the Georgian government and economy, the GCF must institute an independent, experienced oversight board, and be transparent about who it's investors are and what they are seeking to invest in. This openness will be important to attract investors, whether they wish to co-invest with the Fund or in a project that may be in competition with a GCF-backed project.

Transparency and accountability will be key. Thus, it will be important for the Fund to provide sufficient information about its planned projects and activities, as well as its co-investors, the Fund’s ultimate beneficial owners and the amount of financing given.

What will the GCF invest in

At the launch, the Fund’s leadership said it will invest approximately 1.6 billion each year in the Georgian economy, and confirmed in an email to TI Georgia that 80 applications had been made to the GCF by private investors for co-investment finance. GCF says it has selected ten projects which are currently at the due diligence and implementation stage, but declined to give any further information on them. According to Bachiashvili, by the end of 2014 the GCF hopes to have at least 1 billion co-invested in two large hydro projects, one manufacturing project, one agribusiness project and a couple of hotel projects.

The Co-Investment Fund and the Partnership Fund

The GCF will operate alongside state-owned funds (most importantly the Partnership Fund which is being restructured as a sovereign wealth fund, and its subsidiary, a recently announced venture fund for innovative projects). These funds will to some extent compete with each other to fund projects in the same market sectors (energy, real estate, tourism, agriculture, manufacturing etc.) and in seeking to offer investors a choice of co-investment support: with “some differences in the mandates as to what size of projects could be done, with what time horizons and with what level of equity participation,” GCF’s CEO, George Bachiashvili, told TI Georgia. Bachiashvili was simultaneously serving as head of GCF and deputy head of the Partnership Fund until one week before the launch of GCF when he resigned from the Partnership Fund.

A Private Fund with Huge Potential Impact: Requirements for Good Governance

The Georgian Co-Investment Fund is structured as a private equity fund, and as such is 100 per cent privately owned by its investors. Its stated aim is to “attract top class strategic investors to the country,” as well as “providing high returns to our investors.” The team will be under pressure to deliver profitable returns.

At this point, it is unclear if funding is already in place, and how much each investor has committed to the fund at this stage. While Ivanishvili named Anaklia port as one of the GCF’s probable projects, in response to questions, CEO Bachiashvili, who is 28 years old, sought to stress that investors – including Ivanishvili – are limited partners and have no say regarding investments undertaken by the GCF.

GCF has a complicated ownership and management structure: registered in the Cayman Islands, it has two subsidiaries, one in Luxembourg and one in Hong Kong. According to the Fund, "capital raised in the Cayman Islands will be invested in Georgia via either the Hong Kong or Luxembourg entities. The Fund is managed by a Georgian company, GCF Partners, which is 42% owned by the CEO, Bachiashvili; 16% owned by Levan Vasadze, and 42% owned by Ucha Mamatsashvili. There is currently a lack of information about how the Fund will operate and be governed independently of its investors. In an email requesting clarification on the role of Vasadze and Mamatsashvili, Bachiashvili replied they are “shareholders of the management company… [they] don’t have any active involvement or access to the funds which are managed by GCF Partners.”

The Fund’s website does not currently detail any oversight mechanisms and there is an empty page for ‘board of advisors’. Bachiashvili says that this information will be updated and that the duties of the advisory board will include: “to review borrowings, the progress of projects, any potential conflict of interest between the General Partner, the Manager or any of its Associates and GCF Partners and the appointment/removal of auditors.” He added, “Levan Vasadze [one of GCF’s shareholders] will most likely be one of the members of the advisory board, along with Andrew Kakabadze and several other persons which the investors are to suggest.”

Bachiashvili replied to TI Georgia that the GCF “follows best industry practices for fund governance”. Asked to detail these, Bachiashvili and a GCF’s spokesperson replied that “these are being put in place by the Fund’s international legal advisors as well as by its management.”

The Georgian Co-Investment Fund is privately owned but it is a significant part of the government’s investment policy, it has a huge amount of capital, the success or otherwise of its investments will potentially have significant repercussions for the economic sectors it invests in as well as for Georgian citizens, for these reasons it should be visible, accountable and must formulate a strong governance framework that ensures operational independence from its investors and the government.

The backers of the Fund

Bachiashvili announced the following investors at the launch, these are also listed on the GCF’s website: the Dhabi Group (United Arab Emirates – UAE), RAK Investment Authority (UAE), the State Oil Fund of the Republic of Azerbaijan, Batumi Industrial Holdings Limited (owned by the Kazakh state-owned KazTransOil), Calik Holdings A.S (Turkey), Milestone International Holdings Group Limited (China), Bidzina Ivanishvili, Alexander Mashkevich, and the estate of the late Georgian oligarch Badri Patarkatsishvili, but did not confirm how much each investor will commit to the Fund and when. Bachiashvili explained that each investor commits their funds to a pool, although if the GCF decides to implement a project that does not strictly fall within the GCF’s mandate, they offer it to different investors and the project may be financed from outside the GCF’s investors’ pool.  

TI Georgia spoke with investors and international financial institutions who are concerned about the potential reputational risks of co-investing alongside some of GCF’s investors.

For example one investor, Alexander Mashkevich, became a billionaire in the mining sector in Kazakhstan. According to the Belgian State Prosecutor, in June 2011, it dropped money-laundering and fraud charges against Mashkevich and his two business partners in return for a fine. It was one of the longest-running criminal cases in Belgium.

Another investor, Ahmet Calik, the founder and current chairman of Calik Holdings, had close business and political connections to President Saparmurat Niyazov (“Turkmenbashi”) of Turkmenistan, who until his death in 2006 was considered to be one of the world’s most totalitarian and repressive dictators. Up until 2004, Calik held a number of political positions in Turkmenbashi’s regime, including Minister of Textiles, Economic Advisor to the President, and Turkmen Energy Resources’ International Marketing Advisor. During this time, he became a billionaire and Calik Holdings grew to include 34 companies operating in a diverse range of sectors from energy, oil, textiles, to a bank in Albania. A US wikileaks cable from 2007 reports that during a dinner with Ambassador Richard Hoagland, Ahmet Calik told the ambassador that President Niyazov “treated him like a son.” According to Global Witness, approximately 75 per cent of Turkmenistan’s state spending at the time occurred off budget, the country currently ranks 170th out of 176 countries in TI’s Corruption Perceptions Index. Calik Holding’s CEO, Berat Albayrak, was appointed in 2007, when he was 26-years old, he is the son-in law of Turkish Prime Minister Tayyip Erdogan.  

By committing to incorporate stronger due diligence procedures and publicly releasing its annual financial statement, the degree of trust in the Fund will be increased. GCF's Chief Financial Officer, Thea Jokhadze, declined an interview with TI Georgia to elaborate on the Fund’s due diligence procedures. TI Georgia asked Bachiashvili to detail what due diligence checks were performed on potential investors before they were accepted as investors by GCF, and if these checks reflected official criminal investigations and allegations of money-laundering and corruption, he and a spokesperson replied: “We are not in position to comment on our Limited Partners and their possible past, current or future records and information. Taking into account all of the information we have on our investors, they are all acceptable to GCF.” Bachiashvili challenged the veracity of above information on its investors as, “non-factual”. 

Agriculture Sector Investments

Bachiashvili announced that the Fund will invest a total of half a billion dollars in agriculture. The agricultural officers confirmed in an interview they are reviewing 15 agribusiness project applications including a USD 40-50 million dairy farm and processing plant, a vegetable processing plant and other proposals concerning greenhouses. The US ambassador to Georgia, Richard Norland, who attended the launch of the Fund, asked how it will be able to invest freely under the terms of a recent law that bans non-Georgians and companies with foreign shareholders – such as this fund – from either buying agricultural land, or companies which own agricultural land, until December 2014.

In an email to TI Georgia, Bachiashvili said that, “the fund is actively looking at one agricultural opportunity together with investors from Ukraine, however in this particular case owning the land is not crucial for the project, a long term lease is enough.” According to the GCF's agricultural officers this is a potential USD 40-50 million dairy farm that would be co-funded by Ukrainian Terra Food Group, where George Kikvadze, GCF’s managing director of agricultural investments, is simultaneously working as Group Director, responsible for Terra Food Group’s strategy and investments.

TI Georgia is currently challenging the constitutionality of this law at the Constitutional Court (Mathias Huter v Parliament of Georgia), we believe this law is unconstitutional, is harmful to all investors in the agricultural sector and damages the wider economic interests of Georgia.

Author: Eva Anderson