Levan Surguladze, PhD, former Director of Risk Control, New York’s UBS Investment Bank, is getting directly involved in the management of Caucasus Financial Services (CFS) – Georgia’s first independent full-service investment bank. The FINANCIAL interviewed Dr. Surguladze, regarding the company’s role in development of capital market and investment banking in Georgia and the way the U.S. specialist envisions CFS outlook in 2008.
Q. Considering your highly impressive international work-experience at World’s top investment banks: UBS (New York); Barclays Capital (New York); Deutsche Bank (London) as Senior Vice President and American Stock Exchange (NASDAQ – AMEX), why should working in Georgia be interesting for a professional with a total of 9 years of Wall Street experience?
A. Stability and rapid economic expansion in Georgia in recent years, resulted in pressing need to develop local capital market – an important intermediary, along with commercial banks, between capital suppliers and local capital users. The local market is far from what it was like in 2005. It was two years ago when I was told that the new generation of capital market products and services that CFS intended to pioneer in Georgia could be too early to deal with, whereas today everyone familiar with the business claims it’s just the right time and the capital market is entering its early but rapid development phase. This is the major motivating factor for me to get directly involved in CFS management. This is very challenging as a great deal of effort is needed to bring and adjust western expertise to the local market.
I must admit that it is a great pleasure to work with CFS team members as these are excellent professionals selected among hundreds of applicants, holding advanced degrees from Western institutions and have attended corresponding trainings in the USA and elsewhere.
Some team members hold international professional designations, e.g, CM&A (Certified in Mergers & Acquisitions), etc.
Q. CFS Investment Bank was established in 2005 by local and foreign Wall Street professionals to facilitate financial intermediation through introducing new capital market products to the Georgian market. How was the idea of founding CFS developed?
A. CFS Investment Bank, which started its operation in 2005, was an unprecedented infrastructural element contributing to the overall capital market development in Georgia. Since it was not quite obvious for which particular type of products and services would market be more receptive first, the strategy of wide coverage with highly diversified business lines offering wide spectrum of products and services has been adopted. CFS operates four business lines: Investment Banking, Investment Fund, Brokerage & Asset Management, and Financial Consulting. The idea was to uncover then existing latent demand for these products and services by actually offering them to the local market participants.
On the other hand, CFS diversified business portfolio demonstrates its ability to efficiently manage business risk and to shift focus according to market opportunities – taking advantage of and capitalizing on revenue opportunities where they arise and reallocating resources at the right moment, when conditions change.
Q. CFS claims to be Georgia’s first independent full-service investment bank. What are the new services that the company offered that were unfamiliar to the local market before?
A. The whole range of the products and services offered by CFS were new to the local market. The company was a pioneer in bringing that international expertise to the country and, as far as I know, remain to be the only organization engaged in this business in Georgia.
I should emphasize, though, that there are about 17 companies in Georgia, which offer particular services like brokerage on Georgian Stock Exchange. CFS as a licensed shareholder member of the Georgian Stock Exchange also offers these services through one of its business lines.
Q. How could you explain the fact that banks in Georgia, even as big as SocGen and HSBC are mostly oriented at retail banking?
A. Those two global banks, HSBC and Societe Generale operate in Georgia as commercial banks, while both have their investment banking arms operating elswhere in the World. The Georgian capital market is too small for the time being to satisfy huge apetite of those investment banking giants. The infrastructure, including proper legislative framework has to be developed and the local capital market has to be brought to attractive levels, before global investment banks will show their interest in entering Georgian market. This is a challenge CFS and companies alike should undertake to prepare the ground for the investment banking giants to come in. By introducing a new generation of capital market products and services to the local market, CFS aims to develop the local capital market, making it more attractive to foreign investors as well.
Q. Galt & Taggart Securities is also engaged in investment banking. Do you see much room left for the competition?
A. I’m familiar with the two directions Galt & Taggart is engaged in: research reports and brokerage services on the local stock exchange.
I would welcome fair competition in the field as it would increase people’s awareness to the products and services offered by investment banks.
Q. CFS operates four business lines: Investment Bank, Investment Fund, Brokerage & Asset Management, and Financial Consulting. Could you please highlight the success stories in each direction over the past 2 years?
A. CFS Investment Bank includes two sub business lines of Investment Banking and Money and Capital Market Products and Trading.
Under Investment Banking CFS offers the services of Mergers & Acquisitions, Debt & Equity Underwriting and Project Finance. CFS Mergers and Acquisitions services cover all phases of the transaction, including but not limited to search and target identification, due diligence, valuation, deal negotiation and execution. Through its Debt & Equity Underwriting services CFS Investment Bank assists companies in raising funds for growth and development.
To name a few, CFS worked as a Lead Manager on Eurobond issuances for leading Georgian banks. An increasing demand for issuing local debt securities is also manifest. CFS as a Lead Manager and Placement Agent has successfully completed issunce of two putable local corporate bonds for Elite Electronics. These were first and so far only corporate bonds issued in Georgia by nonfinancial organization.
CFS Capital Market Products and Trading business sub-line provides access to a wide range of fixed-income, equity and currency products as well as services in the areas of structured finance / securitization. CFS was first to offer a highly innovative financial engineering product of collective financing of a pool of local companies based on securitization of a portfolio of newly issued debt of these companies.
CFS Investment Fund is being developed as a collective investment vehicle which enables small and medium size investors to invest in highly rated mutual funds. The investment fund pools together investor capital and creates one diversified portfolio consisting of the shares of these investment funds.
As for Financial Consulting, I would emphasize an ongoing project of the Basel II compliant financial risk management and control infrastructure development for local bank(s).
CFS Brokerage & Asset Management provides services to individuals and institutions in Georgia. As a shareholder member of the Georgian Stock Exchange and a licensed brokerage company authorized to trade on the GSE, CFS provide full and discount brokerage services to the clients.
CFS provides global brokerage services through which individuals and institutions can trade on their own accounts on global securities and mercantile exchanges throughout the world, including but not limited to New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange and many more (access to total of about 50 exchanges).
Q. CFS has acted as Lead Manager of the issuances of one year and three year corporate bonds by Elit Electronics in the aggregate amount of USD 3 Million. Placement of the Bonds was to close on October 7. Could you provide statistics for the first corporate bonds story in Georgia?
A. The project itself was a great success as these were first local bonds issued by non-financial organization. These bonds have a put option embedded, providing liquidity enhancement and risk hedging features. The bond holders can exercise put option and withraw their investment at anytime up until bond maturity. CFS has worked out necessary legal and other infrastructure for the public placement of these bonds.
Q. On May 8, 2007 CFS and Axis jointly launched REIF (Real Estate Investment Fund). Could you name the small investors who got interested in this investment vehicle allowing them to invest in a brand new high profile real estate project?
A. Real estate is regarded as one of the best-developed fields in Georgia and by means of launching the brand new product, CFS offered the small investors who couldn’t afford to buy a whole apartment to acquire at least a small part of real estate. Even with an investment as low as USD 800 one could become the owner of just one sq.m. of appartment.
The small investors involved in this project were ordinary people. They did brave to accept the challenge and didn’t miss the opportunity to take a chance with the innovative product that could perfectly work in their favour.
However CFS faced obstacles in terms of legislation while implementing this project as there’s no regulation adequate for implementation of these types of funds.
REIF is designed and implemented by CFS as an analogue of Real Estate Investment Fund – the first of a kind in Georgia. Participation in REIF was an opportunity for a wide spectrum of investors willing to invest in the rapidly growing real estate market in Georgia. REIF is incorporated as an independent legal entity and is managed by CFS under its Asset Management business line subject to management agreement.
Q. After taking a direct look at the market locally, how could you define the 2008 outlook for capital market and investment banking development in Georgia?
A. As I mentioned, the local capital market is entering its early but rapid development phase and CFS is very well positioned to take the challenge and further strengthen its leadership on the market. I am very optimistic for the coming 2008 and beyond.
Interviewed by Kate Tabatadze, The FINANCIAL
