Matthew Collin in Tbilisi -

It was Christmas 2006 and a little revolution was under way in Georgia. But this time, in this former Soviet republic known for its turbulent history, it was nothing to do with politics. People were wandering curiously around the aisles of a brand-new, European-style supermarket in the capital Tbilisi, inspecting the imported goods freshly stacked on the shelves. Some of them were there to shop, but for others it was more of a sightseeing excursion.

The large Populi store opened near a central square where, for years, impoverished Georgians had brought fresh fruit and vegetables to sell. Fewer than two years later, many of these small traders have been banished, while Populi has become a Georgian retail phenomenon. It is now the leading supermarket chain in the country, with 32 stores nationwide and further expansion planned.

"Georgians were not accustomed to buying in supermarkets, but this is changing," says Eli Enoch, CEO of Tbilisi-based Galt & Taggart Capital, one of Populi's main investors and a key player in the supermarket chain's success. Last year, Populi's profits grew by 187%, Enoch says - an indication of why "frontier markets" like Georgia can be so attractive for investors: "You simply can't see these sorts of growth rates in more developed economies."

Galt & Taggart Capital was set up in 2006 by the Bank of Georgia, the market leader in the country's banking sector, to take advantage of precisely such opportunities. "Since then, we've more than doubled our net asset value, and the share price - although it peaked really early and then came down - has also doubled," says Enoch, who worked in Israel for several years before returning to his home country.

Because Georgian law doesn't recognise investment funds, Galt & Taggart Capital is structured as a company and listed on the Georgian stock exchange, but operates like a "quasi-fund," Enoch explains. Bank of Georgia owns 65% of the company, foreign asset management companies specialising in the former Soviet Union such as Parex, Firebird and East Capital, own around 30%, while Georgian businessmen own the remainder.

Retail focus

Its main investment focus is the Georgian retail and consumer sector - food, electronics, cars, fitness and travel. The sector is backward and underdeveloped in what is still, despite growth of 12.4% last year, a poor former-Soviet republic struggling to recover from years of post-communist decay. "That's where the opportunity arises, because valuations are quite low," says Enoch.

He believes that wine is one of main growth prospects. Georgia has a winemaking tradition dating back thousands of years, and its reds and whites were Soviet favourites. But the sector was damaged by a Russian ban on Georgian wine imports, imposed two years ago amid the continuing political dispute between Georgia's pro-Western government and the Kremlin. Galt & Taggart Capital has invested in Teliani Valley, an upmarket Georgian wine company that escaped the debilitating effects of Moscow's continuing embargo. Enoch believes that, paradoxically, the ban was actually the best thing that could have happened to the Georgian wine industry, forcing previously complacent or poor-quality producers to raise their standards. "We have to face the truth, there was a lot of production of what was simply juice with sugar and flavouring," he says. "Also, the Russian market was too easy and did not make the companies work hard. But now they do - the successful ones who survived are exploring new markets."

Enoch admits that Georgia offers significant challenges as well as opportunities for investors. "A lot of the time you have to educate the market," he says. "It's virgin territory because sophisticated institutional investors have not operated here." He says most of the companies in which Galt & Taggart Capital invests have to be restructured first. Another problem is recruitment: "Frankly, there is a problem with the quality and experience of managers in Georgia."

Instability is another risk factor for the fund, as so graphically illustrated by August's conflict with Russia over South Ossetia. There are also numerous allegations of government interference in companies with links to opposition politicians, and concerns have been raised about the country's legal system. "The majority of investors I've talked to have said there is a risk connected to the lack of independent courts," says Giorgi Gaganidze, an economics expert at the Caucasus Business School in Tbilisi.

At Galt & Taggart Capital, Enoch agrees that foreign investors do have to be careful, but he believes that the potential rewards far outweigh the risks. "The Georgian economy is developing from a very low base," he says. "The market allows you to make some mistakes because the competition in certain sectors is simply not there, or it's weak and unsophisticated. When you have a good vision, you can achieve a lot."

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