Baltic states join list of fastest-growing global economies Jason Corcoran 10 Oct 2007

Financial News On LIne
October 10, 2007

The Skype internet phone call phenomenon has been a hot calling card for the Baltics, which are appearing on the speed dial of private equity investors for telecommunications and more.

Membership of the European Union in 2004 and a consumption boom has transformed Latvia, Lithuania and Skype’s home of Estonia into some of the fastest-growing economies in the world.

Draper Fisher, a venture capital firm, made a 100-fold return on its investment in internet telephony provider Skype when it was sold to online auctioneer eBay for $2.6bn (€1.8bn) in 2005. Skype allows users to make unlimited free calls over the internet to anywhere in the world.

Now Blackstone Group, one of the world’s largest private equity funds, has been chosen as a strategic partner for the $575m management buyout of Latvian IT and telecoms companyLattelecom. Blackstone is to invest $178m for a 51% stake in Lattelecom, which is majority-owned by the Government.

While Blackstone has no plans to set up shop in Latvia or set aside regional allocation, the group said it would look at individual deals in the area on merit.

A spokesman said: “This is our first foray into the Baltics. The deal’s been approved by the legislature but it’s not closed yet because we need regulatory approval. All our funds are global. We have no specific sector allocation or a regional one and we will invest in the region again if we think we can add value.”

Rival Carlyle Group is also scouting for opportunities in the Baltics and throughout central and eastern Europe from its new office in Warsaw. AIG Global Investments is trawling the same ground for its €523m ($740m) New Europe fund.

But the region remains the preserve of small domestic funds and mid-market regional players such as Advent International, Argus Capital, Enterprise Investors and Mid Europa Partners, which have established relationships with local financial institutions for sourcing and executing deals as well as for co-investment opportunities.

Craig Butcher, a founding partner at Mid Europa, said: “You have to be opportunistic because these are smaller markets than we prefer. Lithuania has four million people, Latvia 2.3 million and Estonia 1.3 million.”

Mid Europa has made two investments: Latvia and Lithuania mobile operator Bité, in February, and Baltic Rail Services in 2002, which was sold this year for a profit of €38m. The €450m acquisition of Bité ranked the largest buyout in the Baltics and among the largest in central Europe.

The firm has raised more than €1bn for buyouts in central Europe, a record for the region, and lifted the fund’s hard cap from €1.25bn to €1.5bn.

According to Butcher, the pipeline for investments of between €50m and €200m in equity remains strong. He said: “We have a large pipeline of deals in various things in the Baltics, which may or may not come to something. We are looking at consumer lending, transportation and infrastructure, retail, telecoms and broadcasting.”

Home-grown private equity firm BaltCap is raising a €100m fund, having made three investments from a €50m fund raised in 2001.

Managing partner Peeter Saks said: “The Blackstone deal is significant because these funds have been overlooking us. Each country is tiny on its own but together we are the size of Sweden, and the three states are homogeneous, especially for certain sectors such as telecoms and mobiles.”

BaltCap looks at investments of between €5m and €15m. In June, the firm sold its minority position in mobile virtual network operator Zetcom to Latvijas telecoms group, for an undisclosed amount. It also recently exited a position in Baltic office supplies company Daily Service for a 35% return on investment.

While secondary placements are the favored option for exits, Saks said liquidity on the regional OMX exchange was also attractive for initial public offerings.

Alta Capital, an Estonian firm, is expanding with investments in food and fashion. It controls a growing range of fashion and lingerie brand names in the Baltics and has acquired a Latvian construction company and biofuel developer.

The firm, which has offices in the Baltic capitals of Riga, Tallinn and Vilnius, was set up in 2001 by former investment bankers. Alta founder Indrek Rahumaa said the fund had no specific investment horizon, which allowed his team to manage investments with a long-term view to operational development.

Rahumaa said Alta was building a portfolio of regional companies capable of operating in the three states and the Polish market. He said: “We believe transforming local players into regional companies decreases the operational, sales and marketing pressures that smaller companies are facing due to the increased proportion of chain retailers and their bargaining power.”

Underscoring its ambition, Alta purchased a majority stake in Mieszko, a Polish confectionery, last year from the US’ Darby Overseas Investments.

Alta has also moved into real estate and energy and owns Alta Real Estate Partners and Latvijas Energoceltnieks, which is involved in energy and telecommunication infrastructure projects.

Estonia and Latvia were the two fastest-growing economies in the enlarged EU last year – GDP grew by 11.4% and 11.9% respectively – while the latter was among the top five in the world.

However, market observers fear the post-Soviet economies are in danger of overheating, with inflation soaring and current account deficits at record highs. Fund managers point to how expensive equities have become on local exchanges and how the nearby Russian market is providing better investments and higher returns.

Marcus Svedberg, chief economist at Nordic fund manager East Capital, said: “The most likely scenario is a soft landing, although we are concerned about Latvia and the risk of psychological contagion in the other markets.”