Recent developments of the Baltic Venture Capital Market
During the past two years there has been a tangible growth in the Baltic venture capital market. The Baltic States’ governments have been trying to encourage new investments and have improved business environment. Moreover, financial results of the companies’ were improving, more deals were made in the private equity market and new venture capital funds have been established. Therefore, venture capital as the subject becomes more and more relevant nowadays and its importance tends to grow in the Baltic States. One of the main reasons which stimulates venture capital growth is the support of the governments of the Baltic States and the European Union. The definitions “private equity”, “venture capital”, “buyout” are often heard recently in this context and may cause confusion even to those who are not new to the capital markets. In order to avoid any more confusion it is necessary to distinguish between essential differences of “buyout”, “venture capital” and “private equity”.
“Private equity” as a definition is used in two different contexts. Most frequently the term “private equity” is used as a category of assets that involves venture capital, buyout, mezzanine and other subcategories and means equity securities of the companies that are not publicly traded on a stock exchange. However sometimes private equity is used in terms of a buyout, which means the purchase of the company’s shares by acquiring controlling interest in the respective company. The main difference, distinguishing buyout from the venture capital is the object that the investors acquire. Venture capital investors normally invest into the companies at their early stages, which require investments for their development or companies at their initial stages e.g. start-ups, seeds. Meanwhile, undervalued mature companies with stable cash-flow are usually the targets of the buyout funds. The debt is essential element in the acquisition of the companies by a buyout funds, hence the term of LBO (leveraged buyout) is widely used in the private equity industry. In case of a leveraged buyout, the current and future financial situation of the company is usually carefully evaluated in order to assess the level of the debt (leverage) the company could service.
There is no doubt that venture capital is beneficial for the local economy because of its stimulation of the development of IT, biotechnology, clean tech companies, creation of new job positions as well as new sources of tax revenues for the state. For this reason European Union and member states support and finance the establishment of the venture capital funds.
“Startup” of Venture Capital Market with the help of JEREMIE initiative
In 2007, European Commission in cooperation with the European Investment Bank and the European Investment Fund (EIF) have started the JEREMIE initiative. It encourages the use of financial engineering instruments to improve access to financing for small and medium-sized enterprises via structural funds interventions. Investments according to the JEREMIE initiative can take the form of equity, loans and/or guarantees. The manager of the JEREMIE fund is EIF. This organization is responsible for distribution of the initial 725 million euros the European Union contributed to the initiative and later the profit reinvestment into other companies, ensuring the funds can be re-used several times.
EIF indicates that the Baltic Sea Region is of key importance to EIF: in 2011, it has committed 0,7 billion euros to this region, 63% of which were guarantees and 37% of which were equity. The first Funding Agreement for a JEREMIE Holding fund in the Baltic States was signed in July, 2008 between the Latvian Ministry of Economics and EIF.
In Latvia in June, 2010 EIF and Imprimatur Capital have established the first specialist technology seed and start-up fund in Latvia with its size of 3 million euros(1). Imprimatur Capital also manages Imprimatur Capital Technology Venture Fund. Imprimatur Capital Seed Fund has made its tenth investment in December, 2012.
In year 2010 Latvian BaltCap launched BaltCap Latvia Venture Capital Fund with its overall capital amount of 30 million euros(2).
In Lithuania on 1 October, 2008 the Funding Agreement between EIF, the Ministry of Economy of Lithuania and the Ministry of Finance of Lithuania was signed, which amounted to 290 million euros.
Lithuanian Private Equity and Venture Capital Association provides information that there are four venture capital funds formed under the JEREMIE initiative in Lithuania: „Baltcap“, „Business Angels fund“, „LitCapital“ and „Practica“. In January, 2010 Business Angels Investment Fund I, managed by joint stock company „MES INVEST“ and joint stock company „Strata“ was established in Lithuania. The initial amount of the fund was 8,42 million euros, and the current portfolio consists of 14 companies(3).
In year 2010, BaltCap established a 20m EUR Lithuania SME Fund, of which 14mEUR were provided by the EIF-managed JEREMIE Holding Fund and further 6m EUR by various Baltic financial institutions, including SEB Venture Capital, LHV Asset Management, Swedbank Asset Management and DnB NORD Asset Management(4). In the year of 2012 Lithuania SME Fund made its sixth investment.
Later in 2010 there was an investment fund LitCapital established with capital of 25 million euros(5). The current portfolio of the fund consists of 5 companies.
In the middle of 2012 EIF and Practica capital established two funds under the JEREMIE initiative: Practica Seed Capital Fund and Practica Venture Capital Fund. EIF has committed 6 million euros into Practica Seed Capital Fund, and 15,7 million euros into Practica Venture Capital Fund(6). Practica Seed Capital Fund had made three investments by the end of 2012 and continues to look for and invest into target companies at a fast pace.
Lithuanian Private Equity and Venture Capital Association provides information that there were 23 deals made until the end of year 2011. The total capital invested by the end of 2011 amounted to 25,7 million euros, 1,6 million of which were invested in 2010. It can be accounted, that over 75 million euros were contributed to the Lithuanian venture capital funds under the JEREMIE initiative and only a third of this amount had been deployed until the end of 2011. This means that there is still a lot of “dry powder” in the venture capital funds left, and venture capital market should continue to flourish.
It is important to mention that capital in the currently raised venture capital funds should be fully invested by 2015. The Lithuanian Ministry of Economy expects that there will be 687 million Litas of private capital attracted and 917 enterprises backed-up under the JEREMIE initiative in Lithuania until the end of 2015. It should be noted that the expectations of the Lithuanian Ministry of Economy include funds under the JEREMIE initiative contributed in all forms, i.e. as loans, guaranties, venture capital etc. Nevertheless these forecasted numbers are still very impressive for a young venture capital industry in Lithuania.
Unfortunately Estonia has not followed the suit and hasn’t signed any agreements for the JEREMIE funding so far.
In summary, there were comparatively large amounts of capital contributed to the Baltic venture capital markets and the amounts tend to grow as European Union and EU member states have already launched new initiatives for the development of venture capital markets in the European Union. Investments made by venture capital funds per deal have increased substantially which in turn forces these funds to invest in the companies at their later stages even though these investments were traditionally the focus of the growth capital investors. As an example of such trend several latest investments of Baltcap Lithuania SME Fund into Coffee Inn, a Lithuanian chain of coffee shops, as well as Impuls, a Lithuanian health club chain, can be mentioned.
Despite the number of successful initiatives under the JEREMIE program until now, a new initiative dedicated to boosting equity investments into the innovative Baltic companies was launched by EIF, Lithuania, Latvia and Estonia lately. The newly established Baltic Innovation Fund will invest 100 million euros into private equity and venture capital funds acting as a Fund-of-Funds over the next four years. EIF, as a manager of the Baltic Investment Fund, considers investments into venture capital and private equity funds with proven experience and insight into the Baltic market as well as co-investments together with business angels, family offices and institutional investors into early to growth phase small and medium sized enterprises. EIF declares that the investment process for the Baltic Innovation Fund will begin in 2013 when EIF will start to process transactions with selected fund managers. Each fund manager is expected to attract an additional and equivalent amount of private finance from pension funds and private investors which should double the amount of investment capital.
Latvian Guarantee Agency announced that it has launched a tender to select up to three managers for newly established three new local venture capital funds on 2 August, 2012. Each of the newly established funds initially shall administer 10 million euros portfolios, which for the best performing funds may be increased to 15 million euros. These funds will be financed from the JEREMIE Structural Fund initiative in Latvia, which hopes that there will be up to 40 million euros invested in Latvian enterprises.
In addition, the European Commission has submitted proposals for the new Programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) for the years 2014-2020. The budget of the said programme is planned to be 2.5 billion euros of which approximately 1.4 billion euros shall be allocated to financial instruments. There are approximately 690 million euros planned for the equity and venture capital in the same programme. COSME is expected to contribute 1.1 billion euros to an annual increase in European Union’s GDP, 1 200 new business products, 400 million euros annually in additional turnover for assisted companies.
Considering the above mentioned, it is obvious that in the near future venture capital markets in the Baltic States are going to expand even more rapidly, providing new opportunities and opening new possibilities to the players of the private equity and venture capital markets.