Three questions for the Baltic states’ largest fund

INVL Asset Management held a €165m final close on its latest fund and will back up to 10 companies in the Baltics, Scandinavia and Central Europe.

INVL Asset Management closed its debut Baltics-focused growth fund on €165 million, the largest fund raised for the region.

INVL Asset Management is part of Invalda INVL, an asset management group in the Baltic region which manages over €1 billion of assets.

The Vilnius, Lithuania-based firm began raising INVL Baltic Sea Growth Fund at the end of 2018 with a €200 million target.

Capital raised for the vehicle will back up to 12 companies in the Baltic States, targeting deals with a ticket size of between €10 million and €30 million, and will employ a buy-and-build strategy, according to a statement. The firm has already made two investments in the healthcare and civil engineering sectors.

Investors in the fund include the European Investment Fund, Estonia’s LHV pension funds, INVL pension funds as well as private and corporate investors.

Private Equity International caught up with Deimante Korsakaite, executive partner and IC member of the fund, to find out more about the firm’s capital raising efforts and how the fund will be deployed.

How was the fundraising process?

Deimante Korsakaite, INVL
Deimante Korsakaite, INVL

Fundraising is always both fun and tough. As a first step, we had to secure our anchor investor EIF, which committed €30 million before December 2018.

It is difficult to fundraise outside the region. First, the Baltic region is still thought of as being part of Central and Eastern Europe, instead of being acknowledged as the new Nordics. One of the first reactions when CEE is mentioned is the political instability of Hungary and Poland. Although the Baltics are much more stable and pro-EU, it is hard to convince investors that we are a separate region. So, the Baltics is even more overlooked and underfunded, as it attracts just a fraction of the CEE region’s capital raising efforts.

Another problem is that investors overlook the Baltics’ qualities, including its high-growth economies (top-line growth in many countries remains 2x or close to 2x above that of the major western European markets); increasing consumer demand, strong EU political and judicial institutions; and greater political stability.

What were some of your LPs’ concerns as you were raising capital and how were they addressed?

The first thing is the risk of investing in CEE region, and its historically not delivering the returns that investors desired.

We have liberal, business-friendly economic policies achieved through a series of free market reforms over the last few decades. As a result, the business climate in the region is now among the best in the world, as exemplified by the Doing Business ranking, where Estonia ranks 12th; Lithuania, 16th; and Latvia, 19th. The World Economic Forum in 2016 included the Baltic States in its list of Europe’s top 10 entrepreneurial hot-spots.

Another concern was on the region’s political stability. Scandinavian banks deem Baltics as their home market, with a hard-working and highly skilled labour force, strong education system, proximity to large and affluent markets and prudent government policies, among others. In addition, the valuations of local companies are two times lower.

Western Europe is truly crowded in terms of players and competition for deals in all strategies, stages and industries. In the Baltics, competition is not as fierce in the mid-market. Entry multiples for companies with enterprise values of below €100 million could be as low as 5x normalised EBITDA. There are also many companies which may not be ready yet for auction sales but are in need of local PE managers to take them to the next level of their life cycle.

Exit risk is also a concern for some LPs. Our strategy is to invest in those companies that are already large enough for the region (or if they are smaller then they have a clear buy-and-build case), and use those companies as a platform for regional expansion. Such companies attract their investor base from outside the region and do not create difficulties in exits.

How is the point in cycle affecting your investment approach?

We are spending a lot of time discussing downside scenarios, discussing how potential targets are resilient to possible external shocks. Our investment approach is that we underwrite investment only if our base case scenario shows an IRR of 20-30 percent and cost of capital 2.5x-3.5x. We also prepare pretty aggressive downside case scenarios. You can generate lower returns, but you definitely can’t lose money of your investors.