Streaming ahead

At a time when the value of oil remains a shadow of its former self, investors seem to be placing their hopes on something even more liquid: flowing water. Or at least that’s the case in the Eastern European republic of Georgia, where the Georgian Co-Investment Fund (GCF), a $6 billion private equity vehicle, last month pledged $723 million to a planned cascade of hydro power plants which is set to become one of the region’s largest renewable schemes.

The Tskhenistskali project (Tskhenistskali), named after the eponymous river from which it will produce power, could deliver as much as 347 megawatts (MW) once operational. Such a scheme had been on the cards for a few years already, but signs are that its development will soon genuinely get started: GCF last week signed a Memorandum of Understanding with the Georgian government, which it describes as a binding document entrusting it with the responsibility to deliver the plant.

The vehicle has also signed a feasibility study contract with Icelandic power companies Verkis and Landsvirkjun Power, which Irakli Menabde, managing director of GCF, says effectively marks the “beginning of work on the investment programme”. This preliminary analysis, expected to last eight months, will be followed by a basic design study which he reckons will take another two months. It is after then that GCF will try to enlist official co-sponsors to help it carry the project forward.

It is indeed the vehicle’s eventual aim. GCF was established in September 2013 by Georgian billionaire and former Prime Minister Bidzina Ivanishvili with a view to boost foreign direct investment and economic growth in the country. Described by Menabde as a “plain-vanilla private equity fund”, it is perhaps best understood as a platform offering co-investment opportunities to its members, leaving them the choice to opt in or out on a deal-by-deal basis.

It has a duration of 10 years, with the $6 billion headline figure representing the overall equity it is expected to deploy on behalf of limited partners over its five-year investment period. Known backers of the vehicle include Turkish conglomerate Çalik Holding, the State Oil Fund of the Republic of Azerbaijan and the UAE’s Ras Al Khaimah Investment Authority. Other limited partners comprise regional institutions and family offices. Menabde says GCF has already deployed about $2 billion through energy and infrastructure deals. 

The fund has for now taken on 100 percent of Tskhenistskali’s equity, he explains, but it is currently negotiating a deal with two potential co-investors which would likely see them acquire a stake in the project. Leverage is to be introduced in due course, with a target debt-to-equity ratio of about 60/40. The latter could be further syndicated as the project develops, Menabde says. “Our aim is to create an environment where international institutions, such as pension funds, are comfortable investing in Georgian projects.”

The vehicle’s fee structure is an integral part of this strategy: GCF will collect a 2 percent charge on invested funds – not committed capital – and has a double-digit hurdle rate. “We also offer flexibility on a deal-on-deal basis,” adds Menabde. Should it deliver on its promises, the venture could thus prove lucrative for limited partners: while Menabde does not specify a target return for GCF’s involvement in Tskhenistskali, he notes that the fund has a minimum internal rate of return (IRR) threshold for investment of 17 percent.

At $6 billion, the fund is worth about 36 percent of its host country’s GDP. That raises questions as to whether GCF will find enough large-scale opportunities to deploy the rest of its virtual kitty within the next three years. While its investment remit remains restricted to Georgia’s small economy, however, the vehicle pins its hopes for expansion on the country’s advantageous location: Turkey could for instance represent a vast export market for its surplus power. Perhaps a good enough reason for prospective co-investors to remain connected.