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Building Baltic bridges vital to region’s buy-and-builds

While the Baltic region may not yet be able to house sizable private equity deals, strategies to build out portfolio companies into neighbouring countries could provide a neat solution. Mikkel Stern-Peltz reports

Despite their relatively diminutive size, the Baltic states do not lack ambition when it comes to opportunities for private equity and venture capital in central and eastern Europe.

Consisting of three small countries on the Baltic Sea with a combined population of just over six million, the Baltic countries represent somewhat of a niche market for private equity.

Indeed, at the Baltic Private Equity and M&A Forum held in Tallinn at the end of October, Sebastian Król – partner at Poland-headquartered GP Enterprise Investors – said Baltic companies were often too small for his firm's mid- and lower-mid-market remit.

He also pointed out that running a buy-and-build strategy from scratch in the Baltic region would be impossible on a traditional private equity investment horizon of three-to-five years, because the region's size would be prohibitive for quickly building a regional player in CEE.

Love thy neighbour
 However, it was widely agreed at the Baltic Private Equity and M&A Forum that the region has one thing in particular that stands out as attractive to private equity investment: its neighbours.

The Baltic region borders Poland, Russia and Belarus to the east, while sharing a sea border with the Nordic countries to the east. Excluding Russia for ongoing geopolitical reasons, the Baltic states' remaining neighbours have a combined population of 75 million people.

Poland is the largest and most mature market for private equity in CEE and the Nordic countries are home to some of Europe's largest buyout firms, so Baltic companies able to bridge that gap would instantly increase their appeal to private capital.

At the conference in Tallinn, there was some discussion about whether the Baltic countries should be considered a consolidated region at all, since Estonia associates more with its Nordic neighbours, and Latvia and Lithuania lean more towards Poland. However, expansion across the Baltic states has proven a workable growth model for companies in the region.

Underlining this point, a panel of LPs at the Baltic Forum broadly agreed that an increased focus on unifying the region and Nordic cooperation are among the key challenges to increase investment.

Baltic buy-and-build
 The task of funding and building a local company to a size and scope where it is attractive for large private equity players presents a good opportunity for local GPs.

Due to the size of the region, the Baltic stock markets are underdeveloped, and not necessarily a good option to raise capital for rapid expansion, leaving the limited number of local GPs to pick and choose assets without substantial competition.

In November, Baltic GP BaltCap had been making hay with three acquisitions in the region, and the common denominator in all three deals was the intention to consolidate in the companies' respective sectors and build a regional market leader.

Building a local Baltic business into a global company is not unheard of. Latvian cosmetics brand Stenders has built a worldwide presence - without substantial outside investment.

Private equity firms may also want to look to the region's history of venture-backed successes. Skype was founded in Estonia, in cooperation with Swedes and Danes, and became the largest ever tech exit in the Baltic region. More recently, Transferwise – a London-based fintech company founded by Estonians – gained the coveted unicorn status – a company valued in excess of $1bn.

The Baltic region currently features two buyout houses, BaltCap and newcomer Livonia Partners, both of which follow traditional generalist buyout strategies. Despite the market's size, Livonia founder Kaido Veske said it should be big enough for both Livonia and BaltCap, without a need for differentiation between the two.

BaltCap's November deal spree would suggest the private equity dearth is not for lack of potential targets. Indeed, Monica Vandervorst, principal in the equity fund investments team at European Investment Fund, told the forum's attendees the Baltic market is under-served and still has room for more private equity funds as multiples remain quite conservative, below 10x.