Private Equity in the Caucasus: The Frontier of Frontier Markets?
In most markets, the answer is an easy “No.”
But there are always exceptions, especially in emerging and frontier markets.
And one of the best examples is the Caucasus region – primarily Georgia, Azerbaijan, and Armenia, along with parts of Russia and Turkey.
Private equity is very new in the region, but that presents some advantages – like the ability to get in without the normal prerequisites, as our reader today did:
Origin Story: Financial Reporting to Investing in the Caucasus
Q: Can you explain how you got into the industry?
A: Sure. I’m originally from one of the countries in the Caucasus region, and I became interested in private equity during my last year of my undergraduate studies.
Many of my classmates chose to work at Big 4 firms, but I wanted something more hands-on and operational, so I joined an import/export firm as a Financial Manager.
It was a combined FP&A and accounting/reporting role, and I learned a lot at first, but it became routine within a year.
I started looking for jobs via my campus career database and randomly came across a private equity Caucasus-focused fund that was seeking an Investment Analyst.
I went in for a single interview, which was 100% fit-based with no technical questions, and won an offer shortly after that. They liked how my previous experience include a mix of finance and operations.
I loved that private equity job, but I also wanted more exposure to bigger firms, so I moved to a commercial banking role next. The capital markets are far less developed here, so a lot of talent is still concentrated in commercial banks.
Next, I attended a top MBA program, did an IB internship at a bulge-bracket bank, and planned to rejoin the bank full-time and use that experience to work at a larger PE fund.
I changed my plan after the internship ended because I realized I didn’t want to work in investment banking first – so I decided to apply directly for roles at larger funds instead.
Q: How common is your story?
What are most PE firms in this region seeking, and how do most candidates get into the industry?
A: They look for the same qualities as private equity firms anywhere else: Strong financial acumen, financial and operational experience, the ability to work long hours and independently close deals, etc.
The three countries here are all very small (total population in the 15-20 million range), so international experience and education are well-regarded.
Interview processes tend to be extremely informal, similar to mine, because there are only a handful of true PE firms and they don’t focus on traditional leveraged buyouts.
You’re unlikely to receive case studies, modeling tests, or technical questions.
Firms are more willing to overlook a lack of traditional IB experience and hire smart, motivated people who know something about finance and can pick up the rest on the job.
Private Equity Caucasus: Georgia, Armenia, and Azerbaijan
Q: I see. You mentioned that there are only “a handful of true PE firms.”
Can you explain that? Which firms operate there, and which industries do they focus on?
A: There are quite a few “financial institutions” in these countries, but most of them are commercial banks (a few dozen in each country) or state-owned investment funds.
To qualify as a real private equity fund, the firm must have the Limited Partner/General Partner structure.
A few examples of funds that qualify include the Caucasus Growth Fund, managed by SEAF (Small Enterprise Assistance Funds) Georgia, and the Georgian Co-Investment Fund, launched by the former prime minister.
Other “investment firms,” but not necessarily real PE funds, include the Azerbaijan Investment Company, Caucasus Energy & Infrastructure, and PASHA Holding.
Some of the larger commercial banks here, such as Ameriabank in Armenia and the Bank of Georgia, also have merchant banking or private equity divisions, and a few investment firms in surrounding countries have also taken an interest in the region.
Finally, there are also various state-owned investment funds. The work is similar, but the compensation ceiling is lower because the “2 and 20” fee structure doesn’t exist.
One example is the State Oil Fund of Azerbaijan (SOFAZ), which has invested in major infrastructure projects and expanded into real estate and equities over time. Another is the JSC Partnership Fund in Georgia, which does minority-stake equity deals.
The most common industries here are agriculture, energy, infrastructure, tourism, and real estate.
Deals are often financed with a combination of debt and equity, but traditional leveraged buyouts are rare.
Q: Thanks for that summary.
What were the best and worst parts of the job?
A: The best parts were the ability to make a meaningful impact, get a lot of client exposure, be responsible for deals, and manage the portfolio.
The learning curve was also steep, and the hours were flexible (even though, as in other regions, they were long).
The biggest downside of the job was the limited promotion opportunities. That is a drawback of private equity anywhere, but it’s especially bad in emerging/frontier markets because PE funds are small and staff turnover is low.
Some funds keep you around and give you more responsibility over time, but won’t necessarily promote you or even indicate whether or not you’re on the Partner track.
Q: And what were the work culture and compensation like?
A: The work culture was quite good because teams were small. Unlike large banks, they did not care about face time at all. I came in and left the office whenever I wanted, and no one cared as long as I finished my tasks.
Compensation was a significant discount to London pay, but there’s also a massive difference in the cost of living: In Tbilisi (Georgia), for example, you can rent a good studio apartment in the center of the city for less than $500 per month.
You’ll earn significantly less in absolute USD/GBP terms, but you’ll have a better lifestyle if you work in one of the capital cities here instead of London.
To Banking… or Back to Private Equity?
Q: Thanks for that summary.
To return briefly to your story, why did you decide against starting out in investment banking as a post-MBA Associate and then moving back to private equity?
A: From what I saw during my internship, it is fairly easy to move from IB to PE at the Analyst level, but it becomes progressively harder as you move up the ladder.
A large, brand-name bank might have given me a small advantage in moving to a large PE firm, but the lack of a structured recruiting process for Associates removed much of that advantage.
Also, I didn’t like many aspects of IB: You don’t “own” deals in the same way, you have less meaningful client interaction, and you don’t have any skin in the game.
I felt it was silly to spend a few years creating PowerPoint slides and doing menial work just for a slightly better chance of moving to a larger PE fund.
Plus, there’s less bureaucracy and office politics in buy-side roles, which appealed to me.
Q: Great. Good luck with your transition, and thanks for your time!
A: My pleasure.
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