At present the fund so far has 40 million euros ($34 million or 624 million kroons) in preliminary capital, which will be increased to 50 million euros in six months.
The fund plans to seek long-term capital growth opportunities in companies that are expanding, newly privatized or are capable of returning about 30 percent of the investments annually.
According to Ruth Laatre, a partner in BaltCap Management, which manages the fund, 30 percent is the average revenue that investors are expecting to receive but it is not an objective.
"The expectations of the companies are sometimes more ambitious," said Laatre. "We do not expect to find as many large companies as we did in the past, because most are capable of finding resources themselves from foreign markets, which sometimes offer bigger funds than we do," said Laatre.
The equity investments BaltCap is planning will range from 1 million euros to 7.5 million euros. Laatre said that the fund is looking for a 30 - 40 percent share in companies, but in small companies it is ready to take majority positions.
"The companies we are looking for should be market leaders in some field. They should have a good product, good export opportunities and strong management," said Laatre. "We come when the company needs money for expansion or it is bringing a new product on the market and we leave after we have managed to grow."
The fund also expects to get a seat in a council or management board in order to have a say in the company's development.
Laatre said that the company exits mainly via strategic sale or primary listing after a three- to five-year holding period.
Besides large and medium companies BIF III is also looking for small companies. The size of the Baltic SME (Small and Medium-sized Enterprise) Fund, which is intended for funding smaller companies thanks to the support of the European Union and PHARE funds, is 8 million euros and will be increased to 12 million euros after additional investments.
The target companies of the Baltic SME Fund should have a maximum turnover of 40 million euros, maximum assets of 27 million euros and no more than 250 employees. The rest of the investment criteria are the same as BIF III's, said Laatre.
According to Laatre, part of the additional money that is necessary for both funds would come from present investors.
European Bank for Reconstruction and Development and other foreign institutions own the fund.
Current BIF III investors include the EBRD and a number of Finnish financial institutions and other investment institutions based in the U.K. and Norway.
Laatre said that Finnish investments have been the largest since the creation of the first Baltic Investment Fund in 1995, and other investors were found later. In Finland, BaltCap has a head office which also handles investor relations. Other offices are situated in Estonia and Lithuania.
The only private investors that profit from the success of the companies' investments are the management members of BaltCap. Laatre said that ownership in BaltCap is the main motivation for people working for the fund with such a long investment period. Eight years is the maximum lifetime of the fund, during which BIF III has to be capable of getting out of the companies profitably.
The three well-known Finnish and Estonian institutions SITRA, CapMan and Suprema own the other half of BaltCap.
SITRA is a Finnish National Fund for Research and Development, which has created similar funds in Finland. CapMan is one of the leading private equity fund managers in the Nordic area, which, according to Laatre, recently joined up with BaltCap and is a big help in finding Finnish investors. Suprema is the leading investment bank in the Baltics, and also advised the previous management company of the two Baltic Investment Funds.
At present BaltCap manages three Baltic Investment Funds totaling more than 65 million euros. The first 10 million euro fund was established in 1995, and the second one, which included 15 million euros, in 1998. Both have been fully invested, said Laatre.
"We increased the amount of total capital in the third fund because we have higher aims now," said Laatre. "We did not increase the fund that much in 1998 because it was a critical period, when the values of the companies were falsely reflected due to the stock exchange boom."
"For BIF III we started looking for investors from London, Switzerland, Denmark and Sweden. Previously we had only EBRD and Finnish investors," said Laatre.
She said that although investing in the Baltic companies is very risky, it might also be very profitable. Laatre said that BaltCap prefers long-term investors, who are ready to invest their money for three to four years or longer if necessary.
"Our message to the investors was that the Baltic region is one of the fastest growing regions in Europe and especially needs long-term capital. We have gone through an economic recession and only the strongest companies, which are competitive or have found new markets in Europe, have survived."
She said that the alternative investment opportunities in Estonia are not as attractive as investing in an equity fund. "There are few companies noted on the Tallinn Stock Exchange, but investing there is not liquid enough. The other alternative, investing in loans, is not popular among investors," said Laatre.
Laatre said that all of the investments BaltCap has finished have been very successful. They included the Estonian construction company EMV, which was listed on the stock exchange, the Estonian brewery A. Le Coq, which was sold to its majority owner, and the Lithuanian brewery Svyturys.
Laatre said that the investors pay taxes on the revenue in their home country, according to the rules of the U.K. protectorate Jersey, where the fund is registered.
Laatre said that investors in the Baltic Investment Fund are satisfied with it, especially those whose country has a double taxation contract with Estonia. She also said that the legislation of Jersey is more stable compared to the Baltic countries, which will change with EU negotiations.
"I have also set big expectations for the investments in the biggest IT company Microlink, the Lithuanian refrigerator producer Snaige and the Lithuanian IT company Informacines Technologies," said Laatre.
According to Microlink CEO Allan Martinson, BIF was the first financial investor to make an investment in Microlink in the beginning of 1999.
"It was a brave move at that time, when investing in Baltic IT industry was not as popular as it is today," said Martinson."BIF enabled Microlink to start fast expansions. BIF's investment was the first big one in a row of following transactions in the next year-and-a-half, when a number of funds invested about 50 million euros in Baltic IT companies. BIF was certainly a pathfinder."
At present BIF has invested a total of about $25 million in six Estonian companies and eight Lithuanian companies. Laatre said that the fund has not invested in Latvia, because the companies it has been interested in have not had a proper business plan or the management.
"But Latvia is an unknown country for us with many opportunities, and we are planning to open a representation there at the end of November," said Laatre.