Innovation fund to boost Baltic investment

VILNIUS - The European Investment Fund (EIF) together with Lithuania, Latvia and Estonia is launching an initiative which aims to encourage venture capital investment in Baltic companies, reports ELTA.
Over the next four years, the Baltic Innovation Fund (BIF) will invest 100 million euros into private equity and venture capital funds, encouraging risk capital investments in small- and medium-sized enterprises and their growth.
On Sept. 26, the EIF and representatives of the three Baltic States signed the BIF management contract in Vilnius. EIF is investing 40 million euros, while the national agency of each country, Lithuania’s Investment and Business Guarantees (INVEGA), Latvia’s Guarantee Agency and Estonia’s KredEx are allocating 20 million euros each.

Lithuanian Prime Minister Andrius Kubilius, who took part in the signing ceremony, said that the establishment of BIF will increase the region’s attractiveness for innovations. “The establishment of BIF is yet another step discussed many times in the Baltic Council of Ministers. I am glad that today we are making it a reality. I hope that the establishment of BIF will make the entire Baltic area even more attractive for innovations,” said the PM at the signing ceremony.
The fund will the money into private equity and venture capital funds over the next four years through a ‘fund of funds’ process to further develop equity investment into local companies.

European Investment Fund Chief Executive Richard Pelly stated, “This initiative is a result of close cooperation between the EIF and the three member states from the Baltic region to create a long-term investment scheme that will attract additional private finance and implement the best market standards for equity investing in businesses. EIF is proud to have led this process and looks forward to the implementation of investments, beginning in 2013.”

According to Andrus Treier, Chief Executive Officer of KredEx, the new fund is a financing solution that has been missing from the Baltic market. “BIF is an excellent illustration of the three Baltic States acting together, enabling to make small capital markets together more attractive for investors and creating further financing possibilities for enterprises. Close cooperation with EIF as an experienced and well-known investor ensures that the best market standards are followed, giving additional assurance to possible private and institutional investors. Without such cooperation it would be very hard to attract venture capital investments in comparable size.”

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 will be expected to attract an additional and equivalent amount of private finance from pension funds and private investors, which will double the amount of investment capital within the program. Across a 4 year investment period, between 3 to 6 fund managers will receive investment commitments which will then be invested into innovative high-growth SMEs (small and medium sized enterprises).

EIF said that importantly, the Baltic Innovation Fund is the result of strong cooperation between the three Baltic States and the EIF that is unique in its nature across Europe and places the region in a position to benefit from greater levels of private investment than before. Furthermore, the three governments are taking a lead in this process by investing into the Baltic Innovation Fund through their respective national agencies and utilizing the revolved Structural Funds from previously successful SME support schemes to do so. This unique trans-national process provides a real opportunity to further develop the Baltic private equity and venture capital market.

The Baltic Innovations Fund will open up new opportunities for cross-border investments in new, creative IT projects, Estonian venture capital investor Allan Martinson said in an interview with the Nozare.lv business portal.
At the moment, the problem is that state funds must always be invested in the same country; for instance, Latvia cannot invest its share of joint European resources for micro to medium enterprises in a Lithuanian or Estonian company. The Estonian Development Fund cannot invest in a Latvian company. On the other hand, it is impossible for a venture capital company to be successful if it only does business in one country, said Martinson, adding that he was very pleased that the BIF would finally change this situation.

Funds that are active in just one country are forced to invest in “anything that moves,” notes Martinson. For instance, the Estonian Development Fund has invested money in foundries, wind generators, and such, but one cannot be an expert at everything, adds Martinson.

Thanks to the BIF, the amount of venture capital available in the region will increase significantly. A serious venture capital fund should cover an area with at least 50 million residents, and it must have the capacity to analyze hundreds of applications for financing every year, says Martinson.
Venture capital is very transnational in nature, because it is impossible to run a commercially successful venture capital company in a market with less than 50 million people. Also, a venture capital fund with a capacity of less than 10-20 million euros makes no sense, because such funding will not be sufficient.

At the moment, there are just two “real” venture capital funds in the Baltic countries - both are privately funded and both located in Estonia, says Martinson. One is Ambient Sound Investments, established by former Skype co-founders who have invested 30 to 40 million euros altogether. The other is Martinson’s own MTVP, which manages around 17 million euros provided by Estonian and Finnish investors, as well as one Latvian private investor.