The Georgia Regional Development Fund (GRDF) is a $30 million risk capital fund that invests in long-term growth-oriented opportunities in growing and dynamic small and medium size enterprises (SMEs) principally operating in areas outside Tbilisi.
As of September 30, 2009, GRDF has invested $21 million into ten Georgian SMEs. Please visit the"GRDF Investments Portfolio" page of our website for information on the GRDF portfolio.
2. How does the Fund define "SME"?
An SME is an organized, limited liability entity (joint stock company or limited liability company) under the laws of Georgia with no more than 250 employees and annual revenue generally no more than $5.5 million.
3. What are risk capital investments?
Risk Capital is a form of financing that up until now has not been readily available in Georgia but is particularly useful for and attractive to expansion-stage businesses.
The fundamental characteristic of Risk Capital Investments is the sharing of some portion of both the risk and the rewards of the investment between the Fund and the Investee. In other words, in exchange for taking higher risks and acting as a partner to the enterprises in which the GRDF invests, the Fund will also participate in the profits of the Investee. While Risk Capital Investments often consist of the purchase of preferred or ordinary equity shares, they may also include debt instruments coupled with participatory features. Such debt may have lower collateral requirements and/or longer maturity dates than that required by commercial banks, with repayment largely tied to the projected cash flows of the business. This tailor-made timing with respect to the repayment of the debt can be achieved through the coupling of debt with equity structures, accelerating interest rates, and/or royalties. Because the Fund's success is tied to that of the Investee, the presence of ambitious and qualified management willing to engage in a close partnership with the Fund is a prerequisite to any investment.
4. What is meant by "partnership"?
Through the provision of Risk Capital Investment the GRDF participates as a partner in both the risks and rewards of the investment/business through equity and/or participatory debt. Participatory debt may have lower collateral requirements and/or longer maturity dates than that required by commercial banks, with repayment largely tied to the projected cash flows of the business determined, for example, by a percentage of company revenues (i.e. a royalty payment). Because the GRDF shares in this risk and reward, the Fund works actively with management to improve the company performance and, in this example, to grow the company's revenues. This includes support with strategic planning, financial controls, marketing efforts, production standards, sales, and profitability. In this way, both the GRDF and the other company owners and managers will work with interests aligned toward increasing the Company's revenue and profit. Because the Fund's success is tied to that of the Investee, motivated and qualified management willing to engage in a close partnership with the Fund is a prerequisite to any investment.
5. Is this an economic aid/grant program ?
No. The GRDF is a commercial investment fund that seeks to make profitable investments in the promising Georgian SMEs with strong management in growing markets.
SEAF's experience managing 20 similar investment funds in more than 30 emerging market economies in Central and Eastern Europe, Latin America, and Asia has shown that risk capital investment in SMEs can be a profitable and commercial market mechanism. It has also shown that, because of the success and sustainability of the companies in which it invests, risk capital investment in SMEs can also have significant, positive developmental results.
6. Does GRDF provide concessionary loans?
No. The GRDF provides Risk Capital Investments. The GRDF is a commercial investment fund that seeks to make profitable investments in Georgian SMEs by working with and supporting strong management in growing markets. As a private investor, the GRDF does not provide loans at rates that undermine or compete with deposit-taking financial institutions. The GRDF aims to achieve returns appropriate for the risk that it bears in each investment.
7. Can the Fund be considered as a competitor to the local financial market? If so, with whom does it compete?
No. The Fund invests in companies by providing Risk Capital. Risk Capital is a form of financing that up until now has not been readily available in Georgia but is particularly useful for and attractive to small, expansion-stage businesses.
The fundamental characteristic of Risk Capital Investments is the sharing of some portion of both the risk and the rewards of the investment between the Fund and the Investee. In other words, in exchange for taking higher risks and acting as a partner to the enterprises in which the GRDF invests, the Fund will also participate in the profits of the Investee. While Risk Capital Investments often consist of the purchase of preferred or ordinary equity shares, they may also include debt instruments coupled with participatory features. Such debt may have lower collateral requirements and/or longer maturity dates than that required by commercial banks, with repayment largely tied to the projected cash flows of the business. This tailor-made timing with respect to the repayment of the debt can be achieved through the coupling of debt with equity structures, accelerating interest rates, and/or royalties.
As such, the identification of ambitious and qualified management willing to engage in a close partnership with the Fund is an important prerequisite to investment, and an important element of the partnership will be the operational and strategic support provided by the Fund ' a component not typical of traditional commercial lenders.
8. Is the Fund still accepting business plans and investment proposals from SMEs and still making investments?
Yes the Fund continues to make investments, and will do so until October 2011 or untll all Fund capital is spent.
To be considered for an investment, please see question № 9 below.
9. To whom should SMEs submit their investment proposals and where can they be submitted?
Prospective Investees may download the questionnaire available on the "How to Obtain Financing" link to the left. Completed questionnaires or a comparable business plan or business proposal should be emailed to grdf@seaf.ge. The questionnaire or business plan/proposal is the first step in the review process, and provides the GRDF the necessary information to determine whether or not the investment proposal merits further consideration. Should further consideration be required, the GRDF will request further information which will include a detailed business plan.
Prospective investees are welcome to contact the SEAF-Georgia office for information or questions prior to and/or after submitting a questionnaire or business plan/proposal.
10. What are the selection criteria?
Companies must be SMEs registered as limited liability entities (joint stock companies or limited liability companies) with a presence in Georgia. Successful candidates for investment will exhibit strong management teams and promising growth potential. Furthermore, the Fund will seek out enterprises that demonstrate commitment to transparency and which seek to take advantage of their comparative advantages to grow within the domestic and/or international markets.
Generally speaking, the most important characteristics of successful candidates for investment are the following:
Strong and partnership-oriented management
Track record of success
Strong position in growing and/or emerging market
Elaborated business growth strategy
Potential to develop economies of scale
Strong potential for cash flow generation
In addition, it should be noted that the GRDF adheres to MCC/MCG Environmental Guidelines, and as such, will ensure that Investees appropriately manage environmental and social risks of their operations and will avoid investments with potentially significant negative environmental and social impacts.
11. Could you describe the selection process and timing of its stages?
The first step in the selection process is to complete a questionnaire about the investment proposal that will provide the Fund with the necessary information to make an informed decision as to whether the proposal is a possible candidate for investment. Once a full questionnaire is submitted to the Fund, it should take no more than 2-3 weeks before an initial review is completed.
If the investment proposal generally meets the Fund selection criteria, a detailed business plan will be required and the proposal will progress through a review process that will require increasing levels of scrutiny and analyses. GRDF staff will comprehensively investigate the finances, management, operations and market of each prospective portfolio company to further determine if the company is an acceptable and attractive investment opportunity. The length of this process depends entirely on the level of cooperation and quality of information that is obtainable from the Company, but generally should not take longer than 2-3 months
With a thorough understanding of the business, the GRDF will work with management to devise aggressive growth and profitability goals for the business. In addition once the risks of the proposal are well understood and strategies to mitigate such risks can be developed, a proper investment structure will be negotiated between the Fund and the potential Investee. The length of the negotiation process depends entirely on the ability of the partners to come to an agreement, but generally should not take longer than 1 month.
Once the management and shareholders of the business accept an initial transaction proposal, GRDF staff will prepare, negotiate and execute legal documentation to execute the investment. This will include formal approval by the Fund,s Board of Directors.
Once the financing is completed, the Fund will work with the company to successfully execute the investment proposal as a partner, enabling the company to accelerate the growth and profitability of the business. For a more complete description of this process, please refer to SEAF's website (http://www.seaf.com/policies.htm).
12. Is the GRDF free to invest in all sectors of the Georgian economy?
Yes, although it should be noted that the GRDF adheres to MCC/MCG Environmental Guidelines, and as such, will ensure that Investees appropriately manage environmental and social risks of their operations and will avoid investments with potentially significant negative environmental and social impacts.
In addition, the GRDF will particularly target those businesses with high potential for dynamic growth. For this reason, the GRDF is especially interested in the agribusiness and tourism sectors.
13. Will GRDF invest only in regions?
No. While GRDF will focus primarily on businesses outside of Tbilisi, the Fund is not limited to investments in such companies.
14. Will GRDF invest in startups?
Yes. However the GRDF will only consider exceptional start-up opportunities. Most investments will focus on existing SMEs with strong management and a track record of success.
15. What is the investment size per project?
The GRDF will generally invest in amounts ranging from $500,000 to $3 million, while the initial investment in a single company will not typically exceed $2 million. The ultimate decision on the total investment package is based on the financial requirements of the company, the growth and value such investment can create, and as further negotiated between the partners.
16. What is the minimum and maximum investment size?
The ultimate decision on the total investment package is based on the financial requirements of the company, the growth and value such investment can create, and as further negotiated between the partners. Generally speaking, the GRDF will invest within a range of $500,000 to $3 million, including follow-on investments.
17. Will the Fund invest according to a schedule or on a case-by-case basis?
The Fund will invest on a case-by-case basis. This means that within the Fund's investment period the GRDF will invest the Fund's capital in only the most promising and dynamic investment opportunities as the Fund identifies or becomes aware of such opportunities.
18. What will the annual average (by number or amount) of investment be? How many total investments will be made?
It is not possible to estimate annual averages as investment decisions are made on a case-by-case basis. The GRDF will invest the Fund's capital in only the most promising and dynamic investment opportunities as the Fund identifies or becomes aware of such opportunities. Depending on the market and the opportunities available within it, the Fund may invest more in some years than in others.
It is also not possible to determine the exact number of investments because investment size will vary from company to company, though SEAF anticipates investing in roughly 15-20 businesses.
19. What is the minimum and maximum loan maturity?
Loan repayment timing and structures will be largely tailored to the operations of the business, and therefore loan maturities will vary from company to company. However, generally speaking the GRDF will offer loans with a 2-5 year maturity.
20. How will GRDF exit from its agreements with Investees after expiration of the investment term?
An exit strategy will be developed in partnership between the Fund and the Investee prior to any investment and will be documented in the Funds investment agreements. For debt instruments, the exit will be determined according to the terms of the loan. For equity investments, there are generally three exit possibilities:
1. The GRDF and the other owners of the Company may agree to sell, or partially sell, the Company to outside investors or through a public listing.
2. The GRDF may sell its share of the Company to another investor or through a public listing.
3. The GRDF may sell its stake back to the company's management (i.e., a management buy-out) and/or owners.
21. Who is the final decision maker in the investment process?
As the Fund Manager, SEAF is responsible for identifying, screening and structuring potential investments and presenting them to the GRDF Board of Directors for formal approval.
Neither MCC nor MCG play an active role in investment selection or investment approval.
22. What is SEAF?
SEAF (http://www.seaf.com) is a global investment fund manager that provides risk capital and operational support to businesses in emerging markets. Based in Washington D.C. with a European office in Amsterdam, the Netherlands, SEAF's experience managing 30 similar investment funds in more than 30 emerging market economies in Central and Eastern Europe, Latin America, and Asia has shown that risk capital investment in SMEs is a profitable and commercial market mechanism, but also one that has significant, positive developmental results. Investors in SEAF-managed funds include a cross section of public and private institutions, including several of the international finance institutions, local pension funds, insurance companies, banks and family offices. SEAF was contracted by the Millennium Challenge Georgia Fund (MCG) to manage the GRDF.
23. What is SEAF's remuneration scheme?
The GRDF is structured to compensate the Fund Manager (SEAF) with a traditional management fee, an annual performance bonus tied to performance indicators, and a carried interest in the realized returns of the Fund.
24. What is the corporate governance structure of the Fund?
An independent Board of Directors is responsible for overall Fund oversight and formal approvals, which includes oversight of the Fund Manager.
Although capitalized by MCC/MCG, neither MCC, MCG nor the Government of Georgia directly oversee the Fund or the Fund Manager, as this role has been delegated to the Board in order to ensure the independence and commercial nature of the Fund. However, MCC and MCG do review the Fund's operations and governance to ensure that it adheres to the Compact and other documents governing the Fund.
25. Who is represented on the Board of Directors?
The GRDF Board of Directors was appointed by MCG with approval from MCC and consists of five private individuals (three non-Georgians and two Georgians) with extensive private equity investment, private sector management, and/or entrepreneurial credentials.
26. What is the Technical Assistance Facility and who would be assisted?
To complement the Fund, a Technical Assistance Facility has been made available by Millennium Challenge Georgia Fund (MCG) to pay for technical assistance for investees and potential investees. This facility aims to improve the performance of companies in the GRDF portfolio following the investment as well as to help prospective companies prepare for investment by the Fund. The Facility may pay for a portion of the cost of consultants hired by the investees or potential investees or other technical assistance activities that will build the firm's operational capacity or expand its business, thus building firm value.
27. What happens to the GRDF at the end of its 10-year life?
Towards the end of the life of the Fund, the MCG will establish a 'Trust' that will take over ownership of the Fund from MCG. All proceeds from the Fund will be transferred to the Trust. All funds of the Trust will be used for the benefit of charitable organizations in Georgia.
