The INVL Baltic Sea Growth Fund (INVL BSGF), managed by Lithuanian asset manager INVL Asset Management (subsidiary of Invalda INVL Group), is looking for more opportunities in Latvia to invest in companies seeking resources for growth and cross-border expansion.
With €165 million to invest in the Baltic region, INVL BSGF partner and investment committee member Vytautas Plunksnis says “Latvia is one of the target countries for the fund. We are very keen to do more in Latvia, invest in local companies and help them to develop from local to regional champions.”
Invalda has in total €1.5 billion of assets under management in the region and its several other funds invest in real estate, forestry, renewable energy, and technology among other sectors. INVL BSGF’s largest investment in Latvia to date is in the recycling and waste management company Eco Baltia, where the fund has a 53% share. While many people in Latvia may see Eco Baltia as a company that simply takes away trash from their business or residence, Plunksnis says that the investment value in the company is in recycling and recovering useful materials such as plastics and metal.
“If you just collect trash and bring it to the landfill, it's not the business which is interesting for us. In many areas you can do recycling and be part of the circular economy. Our view is that recycling and reusing the resources in a sustainable manner is of critical importance and this is what creates actual value” he says.
After investing in Eco Baltia, INVL BSGF also helped the company to acquire Eco Service, a similar company in Lithuania. However, the fund’s investment interests go beyond environmental services and evidences that the fund is industry agnostic - it owns a stake in a private Lithuanian medical clinic chain InMedica, the second largest in the country, and is managing InMedica’s ongoing merger with Latvian-owned Medica, the largest private medical services group in Lithuania, which is owned by Latvian Repharmgroup.
Plunksnis explains that in the Baltic countries, “private healthcare is a very small part of the overall healthcare market, because it is still dominated by state-owned, clinics and hospitals. As people get more affluent, they more and more are willing to bypass the queues, have a good customer experience and get the quality services. And we strongly believe that the growth possibilities in this sector are really huge.”
Improving corporate governance
Bringing in INVL BSGF as an investor and partner can also have positive impacts in addition to more funds for expansion, because the fund’s experts can help improve corporate governance and best management practices. INVL BSGFExecutive Partner and Investment Committee member Deimante Korsakaite explains: “We bring to the table benefits beyond the ability to expand business, - we help founders with the team development and corporate governance. If you look at many family-owned businesses, they really need this (management) team development as many of them though being great entrepreneurs lack this expertise. We can help them to fully embrace best practices regarding performance management, business systems and the processes.”
Both INVL BSGF partners stress that the fund’s main investment targets are developing and, by Baltic regional standards, “mature” companies facing growth, international expansion, and, in some cases, generational and life-stage challenges. Entrepreneurs and founders who were young in the early 1990s may want to finally enjoy the fruits of decades of effort or find that family members may not want to continue the businesses they started.
“For family business owners our entry can offer them wealth diversification, so they can exit partially, get some liquidity and still stay with us in the company,” Korsakaite says, saying that INVL BSGF can help prepare a business for an owner’s complete exit a few years down the line by, in addition to financing expansion, improving the company’s governance.
“It's surprising how much improved corporate governance can bring to the business. It really brings surprising results. There's the financial sophistication private equity brings to the company apart from the capital for growth. As a business owner you can get two bites of the same apple. The first bite is when we are coming in. The second bite is after we develop and grow the business together and exit together. So, the second bite is from exiting a bigger business and as a rule is larger than the first one.”
Asked about other investment companies that may be seeking opportunities in Latvia, the INVL BSGF partners point to the relatively new (founded in 2013) Livonia Partners and BaltCap, a private equity company that has been in business since the 1990s. Both competitors share INVL BSGF ‘s approach to seeking established and operating businesses to grow and develop, rather than early-stage start-up investments.
“Those are two good funds, they are our main competitors in the region,” Plunksnis says, adding that Swedish-based East Capital has also been in the Baltic markets since the 1990s, but mainly invests in stock-exchange listed companies.
Asked about the “elephant in everyone’s room” - the Covid-19 pandemic, Korsakaite says:” We've seen somewhat slowed down communication at the beginning of this year. It was kind of harder to source the new deals or lead them to further stages, especially if you engage with people you don’t know. When things are open and you can drive around, actually meet people, discuss opportunities then it's way easier, comparing to when you are locked at home with no chance of live conversation. S it was, harder to source new deals.”
The INVL BSGF partner also sees an impact on the important issue of valuating a potential investment and, in some cases, even convincing an owner to exit a company in troubled times. “In terms of the valuations there are a lot of risks in some sectors, because it's really hard to say whether the shifts or changes (caused by the pandemic) are permanent, hard to establish how to actually normalise the EBITDA and get comfortable with the target’s financial forecasts and future performance” she says, adding that “what we see is that some sellers (exiting a company) are becoming even more reluctant to sell, just because they ask ‘what am I going to do with the money?’” in volatile conditions.
Plunksnis comments “My message to entrepreneurs would be that disruption creates opportunity. For example, I strongly believe that local manufacturing businesses will become more competitive because nobody would like to wait for long shipments from China. And we see shifts in some sectors already, uh, like the big retailers, who favour flexible local manufacturing companies.”