What do instant messaging company Skype, fintech unicorn TransferWise and data visualisation company Infogram have in common? These companies have their roots in the Baltic region and are some of the highest valued companies in Northern Europe.
Consisting of three small countries on the Baltic Sea with a combined population of just over six million, Latvia, Lithuania and Estonia represent a niche market for private equity.
Baltic private equity and venture capital firms raised €1.3 billion from 2010 to 2019, with a record €490 million gathered last year, according to a report from Deloitte. Over the last decade, about half of that capital came from local pension funds and development banks including the European Investment Fund, European Bank for Reconstruction and Development and Estonia’s KredEx. Since 2014, the share of private capital – family offices, corporate pensions and high-net-worth investors – has increased and made up 64 percent of commitments last year.
Investors’ attraction to the Baltic region isn’t entirely about the domestic economies but the wider opportunities in the “New Nordics” market, that is composed of small countries with shared values, strong EU political and judicial institutions, and with open economies largely dependent on exports.
These regional connections are a main draw for LPs, according to Kristjan Kalda, founder of BaltCap and former chairman of the Estonian Private Equity and Venture Capital Association. He adds that the investor base of Baltics-based GPs has diversified in the last few years with capital coming from Finland, Switzerland and the UK. As a result, professional managers have popped up, most of which started out as business angels and family offices and have now launched their own VCs, Kalda notes.
Exit volume has been another development, with divestments jumping 127 percent from 2015 to 2019, per Deloitte. Large buyout firms and strategics have become active players. BaltCap last year sold automotive classifieds portal Auto24 to Apax Partners-backed Baltic Classifieds Group. Blackstone picked up a €1 billion majority stake in Luminor, the third largest bank in the Baltics, in late 2018. Karma Ventures last month sold Estonian start-up Plumbr to US-listed software company Splunk.
The EIF is one of the biggest LPs in the region and provides equity capital to SMEs through its two Baltic Innovation Funds. Fund 1 is a 2012-vintage, €130 million fund of funds that is fully committed across six GPs, while Fund 2 is a 2019-vintage that has backed one manager so far.
Deal activity and capital raising figures for the region are on an upward trajectory, but the number and scale of investable opportunities in the Baltics makes it challenging for LPs to deploy capital, according to Nathalie Chollet, head of northern Europe for lower mid-market investments at EIF.
“The fact there aren’t as many active funds limits the competition. The co-investment capacity is also not fully developed,” she says. However, GPs are playing to their strengths and are using their regional connections for add-ons outside their home market, which makes them more visible to international players, Chollet notes.
These regional connections are essential when originating deals, especially proprietary ones, if one is on lockdown at home during the pandemic, says Deimante Korsakaite, executive partner and IC member of INVL Baltic Sea Growth Fund, managed by INVL Asset Management. The growth and buyout manager gathered €165 million in February – the largest fund for the region – and has already deployed and committed more than 40 percent.