In terms of private equity investment in Central and Eastern Europe (CEE), 2013 was not a promising year for the region, with a recorded 22% drop from 2012, according to the European Private Equity and Venture Capital Association. Despite the drop in overall investment, growth capital and buyout deals increased year over year. Growth capital investments and buyout deals increased by 53% and 39%, respectively. KITE Invest spoke with the Managing Director of the Estonian Private Equity & Venture Capital Association (EstVCA), Kristiina Vassilkova to get a better understanding of private equity industry in Estonia.
KITE Invest: What in your opinion are some of the factors that have attributed to the ebb and flow of investments in the CEE region?
Kristiina Vassilkova: The CEE region is representing a fraction of total European private equity & venture capital market – only 1% of all the funds raised, 2,2% of all European investments. Poland represents roughly half of it. This is due to the fact CEE private equity & venture capital markets and eco-systems are still very young and in the development phase; while Western Europe, particularly the UK has already a long history and boasts multi-billion PE funds. Statistics for CEE can be a bit deceiving – bigger deals, bigger funds, different investment phases of the funds, etc can still easily distort the whole picture as the total amount of investments or funds raised is rather small. However, the markets are developing and growing over time and this means CEE has a lot of untapped growth opportunities
KITE: In terms of private equity and venture capital investment, what main aspects differentiate the Baltic States from the rest of the CEE region?
KV: The Baltics and particularly Estonia are on the radar of global VC investors and mainly thanks to the success of Skype, which was developed in Estonia and as a heritage sparked the wave of tech startups, and a very active VC and angel investing community. To highlight: GrabCAD, the so-called Facebook for engineers, was recently acquired by listed US-Israeli 3D printing giant Stratasys at over €77m, the largest exit in Estonia since Skype. Transferwse, a fintech company founded in the UK by two Estonians (one of them being the first employee of Skype back in the days) has its IT development, customer support and payment operations in Estonia. The company offers peer-to-peer money transfer services and recently attracted €22m from leading VC investors and Sir Richard Branson.
As private equity funds are generally region focused and Baltics are very small it has been more the playground of smaller regional players and investors. However, thanks to the recent fund of funds initiatives of European Investment Fund and EBRD, the Baltic region will see a spike in terms of fundraising, number of funds and as of consequence, an increase in the number of private equity investments in the coming years.
KITE: In the 2013 economic survey conducted by Eurochambres over 55,000 entrepreneurs from across Europe were interviewed, finding that the Baltic countries – Estonia, Latvia and Lithuania – received across the board top rankings of consumer and business confidence. Why do you think the Baltic countries received such rankings?
KV: Baltic countries are small but open economies and mainly relying on exports. In order to achieve economic growth, one has to create attractive environment for the investments and businesses and this is what Baltic economies have been aiming to achieve.
KITE: In terms of Estonia in particular, what are some of the defining characteristics of the Estonian industry? (Investment type and investors) What makes Estonia stand apart from its Baltic counterparts?
KV: Baltic countries are often seen as very similar but are actually quite different in terms of their development and business environment. Estonia is known for being a technologically advanced country and is often dubbed as e-Estonia for offering e-solutions to its residents such as voting online, conducting banking online, filing taxes online, signing contracts online etc. Perhaps what also makes Estonia stand apart from its neighbors are lower taxes, almost no public debt, adoption of euro starting 2011, strong corporate governance standards and very low corruption level. Also very close and strong economic and cultural ties with Nordic countries play important role
KITE: Can you touch on the main sectors that are currently attracting investment in Estonia and are there any investment opportunities you could highlight in particular?
KV: Starting at the end of 2014, Estonia is opening its e-services to the rest of the world by introducing e-residency to foreigners. This will allow foreigners from around the world to establish a unique digital identity and do business with benefits of the EU without physical presence.
E-residents will be able to register a company online in Estonia in minutes, file taxes with few clicks, sign contracts and legal documents from over seas, open bank accounts and use it online, and much more. The expected number of e-Estonians is 10 million by 2025 compared to the population of just 1.3 million people.
The first e-resident card was given last week to Edward Lucas, senior editor at The Economist in London, followed by US venture capitalists Steve Jurvetson and Tim Draper from DFJ Ventures (Draper, Fisher, Jurvetson).
(more info on e-residency can be found here:)
KITE: EstVCA was founded in 2010 and current assets under management are € 267 million and the goal for 2020 is to have € 1 billion under management. Please explain the significance of this goal for both the Association and the industry. What measures is the EstVCA taking to achieve this goal?
KV: When it comes to financing, companies still heavily rely on banks in Estonia and knowledge about private equity & venture capital is still relatively low, despite the fact that there are quite a few success stories already and startup scene is buzzing.
EstVCA’s goal is to help bring up the new generation on professional private equity & venture capital fund managers who could unleash the talent and nourish the high-growth potential companies in the region. Together with the local governments, European Investment Fund and EBRD important steps have been already taken ranging from establishing a pan-Baltic fund of funds for educating and training local GPs and LPs.