While the Baltic region suffered a huge reversal of fortunes during 2008 and 2009, Estonia, Latvia and Lithuania have emerged more quickly from the global recession than most. While the outlook is not universally rosy – for example, unemployment is high, though falling - economic prospects are strong. GDP growth forecasts for this year are around 5% – among the highest in the developed world and well above the European average.
At the Estonian Venture Capital Association’s Investors’ Forum this week, delegates heard how the three Baltic governments are positioning their economies to flourish in the long term. In part, they intend to do this through encouraging private equity investment, which at present is seven times below the European average as a proportion of GDP, but is seen as crucial to building a vibrant ecosystem of SMEs.
One of the key steps in this initiative is the Baltic Innovation Fund (BIF) - a vehicle launched by the European Investment Fund that has just received formal letters of intent to invest from the three Baltic governments.
The BIF is a EUR100 million specialist fund of funds investing in Baltic private equity, venture capital and mezzanine funds. This will be a highly significant vehicle, in a region where 80% of private equity deals are below EUR5 million in size. It will invest the capital into several regional funds, which will in turn raise at least another EUR100 million of private capital. The total pool of new private equity capital in the market will therefore be at least EUR200 million with the first investments to begin in 2013.
Via local managers or co-investments, this money will be invested into local enterprises, boosting access to finance, stability, growth prospects, employment and capital expenditure levels – as well as regional economies.
Following receipt of the letters of intent, the BIF is set to have a four-party agreement in place by mid-September. Fund manager proposals will be considered by the European Investment Fund from October before the investment period begins in January 2013.
In addition to this announcement, the Investors Forum also heard rallying calls from a number of senior figures, highlighting the Baltics’ positive dynamics and strong positioning for growth. Robert Bergqvist, Chief Economist of the SEB Group, cited the favourable geographical location of the Baltics for intra-regional trade flows as a source of competitive advantage – a foundation to attraction foreign direct investment that would further strengthen the landscape. He also emphasised the favourable power of globalisation for emerging markets, making the Baltics an attractive location for private equity and venture capital, despite its limited size.
Other positives include a very low level of governmental debt, enabling economic policy flexibility and reducing uncertainty seen in other European countries. This is partly the result of the discipline shown by regional governments during the crisis. Much of the pain was taken early on, and currency risk was eliminated thanks to euro pegs in Latvia and Lithuania. The pricing of CDS on sovereign bonds, which is better than many larger countries in Europe, reflects this positive perception.
In addition, the region has a low-tax and low-bureaucracy environment. In fact, the three countries are all ranked in the top 30 countries globally (Latvia: 21st; Estonia: 24th; Lithuania: 27th) in terms of ease of doing business, not far behind Germany in 19th place and ahead of the likes of Portugal and Spain.
Priit Perens, Head of Swedbank Estonia, echoed the positive tone of many at the forum by suggesting sentiment had improved considerably after coming out of the crisis. “Deleveraging is over, banks in the Baltics are well capitalized and actively looking for lending opportunities,” he said.
Hermes GPE Chief Executive Alan MacKay, meanwhile, said prospects for the region were “as good as anywhere in the Western Hemisphere”.
It was noted, however, that the biggest challenge for private equity in the Baltics is, and will remain, the size of the market. The three countries combined are home to just 6.6 million people, which to give some comparison is less than population of Bulgaria and only a little larger than that of Finland. This has clear implications in terms of investor appetite and allocations.
In conclusion, Rimantas Zylius, Lithuanian Minister of Economic Affairs, was quick to applaud the role private equity has had in helping companies to survive the crisis and thrive on the other side, making it clear that the regional governments consider the BIF as a valuable partner in helping to improve the marketplace and facilitate cooperation between the countries, and ultimately bring in more private investors to the region over the long term.
The Baltic Investors Forum in Tallinn was organised by EstVCA with the support of European Investment Fund and European Bank for Reconstruction and Development.
For further information please contact:
Mari-Liis Lind
Executive Secretary
Estonian Private Equity and Venture Capital Association
Tel: +37256225325
E-mail: info@estvca.ee