2023 February-March Analysis

Georgia’s fledgling capital market attracts new investment funds, asset management companies

Georgia’s new investment law has created new opportunities for investment in the country and inspired businesses to expand.

In 2022, four investment funds and four asset management companies were authorized and registered by the National Bank of Georgia (NBG) under the law. Two of the asset management companies have initiated funds: Foresight Investment Group registered Foresight Capital, a $30 million fixed-income fund in March; and TBC Asset Management registered a diversified loan portfolio, a $5 million interval fund (closed-end fund that periodically redeems its units from unitholders), in February.

Natalia Beruashvili COP of Economic Governance Program and USAID David Hoffman at the USAID Economic Governance Program-organized forum, Investment Funds as Business and Opportunity for Other Businesses – Alternative Mechanisms for Attracting and Making Investments in Georgia

The emergence of new investment funds and asset management companies underscores the impact the new law is already having on the market. Georgia’s lack of a well-developed capital market created a barrier to rapidly relocating resources, which is necessary to support economic growth. The new law helps create a more attractive environment for foreign institutional investment. It outlines the principles used to regulate and supervise funds, which will ultimately help Georgia create a deeper and more efficient financial sector.

The law was developed with critical assistance and support from USAID’s Economic Governance Program, which included assisting the National Bank of Georgia and the Ministry of Economy and Sustainable Development in finalizing the Law on Securitization, an important part of the reform. It is also working closely with asset management companies and private sector associations to promote the new market services created by the capital market reform.

“The USAID Economic Governance Program supports the development of the capital market, as it facilitates access to and diversification of finance. It provides businesses with new opportunities to attract capital to develop,” noted Natalia Beruashvili, chief of party at the USAID Economic Governance Program.

The law is part of a larger reform that has the potential to help businesses address the financing gap that has crippled them in the past. It also opens new opportunities for increasing private investments for Georgian businesses and individuals as an alternative to bank financing.

USAID’s Senior Private Sector Development Advisor David Tsiklauri and the USAID Economic Governance Program’s Chief of Party Natalia Beruashvili addressing the Parliament on the securitization reform

Capital markets have the potential to unlock funds that would otherwise be frozen in traditional banking products. Salome Skhirtladze, the head of the Securities Supervisory Department at the NBG, says that the reform will help the corporate sector expand its funding sources, particularly for innovative ideas and projects. The NBG has been driving the reform and is playing a crucial role developing the other legislative and regulatory tools needed to establish a modern capital market ecosystem in the country.

“In terms of general economic benefits, we think that funds are especially interesting for our market because certain types of funds can provide risk capital to companies, and such capital is usually accompanied by experienced asset management expertise. Hence, these companies receive knowledge and risk capital (equity) to achieve their strategic goals, and that is quite an exciting arrangement for us,” she notes.

Foresight Investment Group Investment Officer Rati Morchiladze also agrees that the new law will facilitate the development of local capital markets and make Georgia’s financial system more competitive.

“This legislative initiative has the potential to address two fundamental challenges in the Georgian economy: one, the insufficient and qualitatively suboptimal financing for businesses and two, the lack of alternatives for Georgia’s residents to place their capital and savings. The ultimate beneficiaries of this process will be savers and investors on one side and Georgian businesses on the other.”

Morchiladze says Foresight Investment Group, which was one of the first asset management companies to be licensed by the NBG under the new law, has already registered and launched its first investment fund, Foresight Capital. Fundraising for the fund is underway.

Levan Tsutsunava, a partner at Elysium Asset Management, credits the law with Colliers International’s decision to enter Georgia’s investment fund market. “If the Georgian Law on Investment Funds had not been adopted, we would not have decided to enter this business. Without this law, it would be very difficult to manage — or even engage in the business of investment funds in general,” he said.

Irakli Kilauridze, another partner at the firm who also represents Colliers International in Georgia, says the company initially wanted to enter the investment fund market eight years ago but changed its mind due to the lack of a reputable regulatory setup. “The adoption of the new law on funds created a very good opportunity to offer properly structured investment alternatives to both local and foreign investors,” he says.

The law also introduces international best practices that will create a favorable investment climate and attract large institutional investors with significant foreign participation. Reaching a critical mass will be crucial to the capital market’s success.

Kilauridze notes that thanks to the law, investment funds run by asset management companies like Elysium are investing in the economy. “Investment funds create a base, which provides the possibility for investors to have an exit, or leave the project, which, frankly speaking, is very difficult in Georgia precisely because such investment funds do not exist. Hence, this will attract new foreign and domestic investments in the economy and, also, will create a way to exit and increase liquidity for existing investors and developers.”

Managing Director at TBC Capital Mary Chachanidze says the new law enabled TBC Capital to establish TBC Asset Management, launch the first credit fund in the country, and attract over a dozen investors to date. “In May, we closed the first $5 million transaction of the fund. We attracted money from 17 investors: 88% are individuals and 70% of those are foreign investors.”

“Investing in funds is new for the Georgian market,” she adds. “However, in a short period, we attracted investors’ interest in the new fund, which confirms the high level of trust in the local and international markets for both institutions.”