Georgia Capital: Well-Managed Investment Holding at Discount

Gokul Raj Ponnuraj of Bavaria Industries Group presented his investment thesis on Georgia Capital (UK: CGEO) at European Investing Summit 2021.

Thesis summary:

Georgia Capital is an investment holding firm that was spun out of Bank of Georgia in 2018. (In this case, Georgia refers to the country rather than the US state.)

The key parameters Gokul Raj generally looks to judge the attractiveness of an investment firm or a holding conglomerate are as follows, in 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 detailed below, Georgia Capital ticks all the above boxes positively and hence may provide an attractive investment opportunity.

1) The CEO and team have a 20-year track record of delivering 18%+ compounded shareholder returns. They have the best deal flow in Georgia 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.

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.

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 cost is less than 0.7% of AUM. 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.

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About the instructor:

Gokulraj Ponnuraj is a value investor with a focus on small and mid-cap compounders and spin-off’s with a bias towards emerging markets. He has been investing in the Indian markets for more than ten years and in global markets for the last four years. Gokul manages the public equities portfolio at Bavaria Industries Group. The firm uses its balance sheet assets (permanent capital) to invest in opportunities with an attractive risk-reward trade off. Gokul holds a Master in Finance degree from London Business School and a CFA charterholder.

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