Something smells fishy about new Georgian fund

By Paul Mackintosh - 07/10/13
Last week we had Latin American private equity; this week we have another emerging market: Georgia. Yes, the country, not the state. And the opportunities turn out to be unexpectedly large: US$6 billion, in fact. The Georgian Co-Investment Fund (GEF), personally backed and even invested by Georgia's billionaire prime minister, Bidzina Ivanishvili, is targeting a figure that would put it in the same league as major buyout funds. This for a country of just over 4.5 million, with a nominal 2012 GDP of only just under $16 billion, or less than three times the size of the fund. 
Potential investors in the fund include Dhabi Group, RAK Investment Authority, State Oil Fund of the Republic of Azerbaijan, China's Milestone International Holdings Group, and various Russian and Georgian magnates. And despite its ostensibly standalone structure as an inventor of third party money, the fund bears all the hallmarks of state-linked funds elsewhere, like China's $15.66 billion China Railway Private Equity Fund. The head of the fund, Giorgi Bachiashvili, is closely linked to the PM, who himself has reportedly invested up to $1 billion of his $6.4 billion personal wealth into the fund. 
According to Georgian sources, the fund will invest in energy, infrastructure, manufacturing, agriculture and hospitality sectors, as well as renewable energy and logistics. Despite its size, the fund' s minimum enterprise value for its target investments is quite small, at only $20 million. That may be realistic, given the likely size of Georgian growth enterprises, but it could lead to the fund being atomized between an awful lot of small investments. 
The private equity industry in emerging markets has often embraced state-linked vehicles to bolster its acceptance and headline numbers in new regions. Governments and state agencies meanwhile are been to jump onto these fashionable vehicles to bankroll their pet projects and achieve their development targets. But perhaps it's time for the global private equity industry to take a firmer line on these entities. I see no mention of the ILPA Private Equity Principles in relation to the Georgian fund, for instance. 
SWFs and closely state-linked funds seem to go together with authoritarian or imperfectly democratised regimes like Scotch and water. And how likely are such entities to pick projects impartially and to submit to outside oversight or reporting requirements, let alone performance targets? I mean, a fund launched by the outgoing PM and backed by Arab despotisms and Russian oligarchs? What could possibly go wrong?