Latvia in focus

The private equity and venture capital industry in Latvia originated in the mid-1990s, when several local and pan-Baltic funds were established. Over the years the Baltic private equity industry has developed, and awareness and popularity of private equity financing has increased among entrepreneurs. However, compared to European standards, the market is still young.

Like the rest of Europe, deal activity in Latvia this year has been very low, despite the attractiveness of low valuations of potential target companies. This is partly due to a lack of funds among private equity and venture capital players, but more significantly due to the uncertainty of the region's economics.

However, the near future could provide excellent opportunities for those with money to invest in Latvia. With bank financing almost completely stopped and state support systems for financial instruments taking time to implement, private equity players with dry powder are in an excellent position to invest in carefully selected companies. With market growth rates at double digits over the last few years, valuations and vendor expectations reached high levels. But with the current limited competition on the financing side, the levels of valuation have come to reasonable levels.

Fundraising is likely to be one of the main challenges for the Latvian private equity industry in the future. Firstly, the negative publicity surrounding the brand name of Latvia at the moment is likely to deter international investors from investing and forces most local players to limit their fundraising efforts to local Baltic institutional investors, mainly pension funds. Secondly, because of the relatively small size of the Latvian market, securing commitments from foreign investors has historically only be possible if the fund targeted at least all three Baltic States, or had a regional Eastern European focus.

There are some positive signs though. One of the main developments in 2009 was a competition organised by European Investment Fund within the JEREMIE initiative (Joint European Resources for Micro to Medium Enterprises). The aim was to establish several venture capital and start-up funds providing seed, start-up and expansion financing to SMEs in Latvia, with total capital commitments of EUR35m. The initiative received interest from both local and foreign players, mostly due to the difficult fundraising situation. The newly established funds are expected to start their investment period in autumn 2009.

The Latvian Venture Capital Association was founded in 2003 with the aim of promoting Latvian private equity and venture capital industry interests, and currently has 17 members from the private equity community. In 2009 the LVCA has worked to increase awareness of private equity as an alternative financing tool in the difficult economic environment, and one of the most appropriate ways to foster economic growth. An important step was reached when the minister of economics publicly recognised the need to foster the development of venture capital and private equity in Latvia as one of the ways to support entrepreneurship and help salvage the economy.

This year also saw the formation of private equity associations in Lithuania and Estonia as well. The three Baltic associations will work together to educate industry players; raise awareness of private equity; and generate investor interest in the Baltic region.

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