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What should the industry and governments do to promote development of VC and PE in the Baltics?

What should the industry and governments do to promote development of VC and PE in the Baltics? Dr. Agris Preimanis Senior Economist, Financial Institutions European Bank for Reconstruction and Development Baltic M&A and Private Equity Forum. Thursday, 24 October 2013. Roadmap.

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What should the industry and governments do to promote development of VC and PE in the Baltics?

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  1. What should the industry and governments do to promote development of VC and PE in the Baltics? • Dr. Agris PreimanisSenior Economist, Financial InstitutionsEuropean Bank for Reconstruction and Development • Baltic M&A and Private Equity Forum Thursday, 24 October 2013

  2. Roadmap How does Baltic VC/PE compare? VC/PE in Baltics: • Important for economic growth? • Attractive to investors? How can sector be developed? • VC ecosystem • R&D and its effectiveness • Attracting capital and changing its composition Can Baltic VC/PE sector catch up with the best in Europe?

  3. PE penetration levels • Baltics don’t compare favorably… • Source: EVCA. Market statistics, country of portfolio company.

  4. VC penetration levels • …but doing better in terms of VC • Source: EVCA. Market statistics, country of portfolio company.

  5. Gradual progress … • … challenging period for the sector globally • Source: EVCA. Market statistics, country of portfolio company.

  6. Bucking the trend in VC • Source: EVCA. Market statistics, country of portfolio company.

  7. Number of companies is growing • Much more to come • Source: EVCA. Source: EVCA. Market statistics, country of portfolio company.

  8. Do Baltics need VC/PE sector? • Provides long-term financing, strong governance and commercial and technological know-how to companies • Fosters competitiveness • Also, positive ‘externalities’ • Encouragement of entrepreneurship, transparency, good governance, etc. • Highly relevant (and needed) in Baltics…

  9. Attractive asset class to investors? Asset class can provide attractive returns • But diversification across funds, vintages and (to the extent possible) geographies is important Don’t have returns data for Baltics • But some well-publicized success stories Central and South Eastern Europe (CSE), Russia and CIS have yielded strong returns

  10. Returns in CSE/Russia/CIS region • Net Horizon Returns IRRs by region • Source: Cambridge Associates, EVCA/Thomson Reuters, Bloomberg and EBRD.* EBRD tracked portfolio pooled end-to-end return, net of fees, expenses, donor grants and carried interest.

  11. Returns is not the only consideration… Investors also look for diversity of fund managers, vintages, proven track record, etc. Not there yet in Baltics…only a handful of fund managers with • Strong track record, over multiple fund generations • Large enough scale to absorb the minimum investment size of large global investors Small size of Baltic economies is also a consideration

  12. Macro prospects … • … also an important consideration (particularly for large global investors) • Prospects in Baltics are similar to CIS, Latin America and MENA • Better than CEE (and advanced countries) • But lagging large emerging markets like China and India • Source: World Economic Outlook, April 2013. IMF.

  13. Can VC/PE in Baltics be developed? • Even small can be attractive! • Some progress, particularly on VC • But comprehensive improvements are required • More fund managers with strong track record • More (domestic and international) capital • Stronger (pan-Baltic) VC/PE ecosystem • More conducive regulatory framework • Both private sector and state has a role to play • Strategy needs to be tailored to different parts of the life-cycle

  14. VC/PE financing life-cycle

  15. Practical observations • Some of means to improve Baltic VC/PE sector • Improving VC ecosystem • Role of R&D and improving its effectiveness • Increasing of (private) capital

  16. Improving VC ecosystem: examples Private sector, IFIs and Government Agencies have a role to play • Capacity building: conduct training across various levels of stakeholders from institutional capital providers to entrepreneurs • Regulation/legislation: address regulatory and legislative challenges affecting the sector • Networks: improve networks among the VC/PE ecosystem stakeholders across the Baltic States and in other countries • Early stage development: enhance support for commercialisation of ideas • Availability of information: improve availability of data on VC/PE funds, their investments and returns

  17. How to improve? Capacity building: entrepreneurs and regulators regarding the functioning and merits of VC/PE sector fund managers and local investors regarding how to structure a fund, fundraise and create marketing materials Regulation/legislation affecting the VC/PE funds: eg, procurement/public tendering laws which can render it difficult for national agencies to tender VC/PE funds

  18. How to improve? cont. Networks: pan-Baltic level: interactions of VCAs Beyond the Baltics: better links into the global value chain from the Baltics Data: creating a pan-Baltic returns index local VCAs, with input from EVCA; IFIs like EBRD can help kick this off Early stage development: improve the collaboration of technical universities with the business community facilitate further technology transfer and commercialisation of ideas, which will assist in increasing VC activity in the Baltics

  19. Why does VC ecosystem matter? • Helps improve viability of funds • Improved capacity, know-how, sourcing of deals • More viable investee companies, improved exit opportunities • Helps attract investors… • …by making funds more viable • Improved access to markets, enhanced transparency • Ultimately: makes the VC/PE sector more viable

  20. Knowledge economy environment v VC • Group of countries with conducive ‘knowledge economy’ environment… • …have a higher level of VC penetration • Source: EVCA, World Bank.Adjusted Knowledge Economy Index is an average of three constituents (Economic Incentive Regime, Education and ICT) of the World Bank’s Knowledge Economy Index. • Source: EVCA, World Bank.

  21. R&D/innovation • An important driver of growth and competitiveness • Intricately linked to VC (and PE) sector • Level of R&D and its structure between public and private is important • So is effectiveness with which R&D spend is transformed into outputs • Level of R&D and structure of R&D/innovation system matters a great deal for the VC sector • VC can also play a critical role in improving effectiveness of R&D spend, particularly in commercialization part

  22. R&D/innovation across countries • Source: OECD, Eurostat.

  23. Private v public R&D • Source: OECD, Eurostat.

  24. Example of R&D/innovation outcomes • Source: World Bank.

  25. Illustration of R&D/innovation effectiveness • Source: OECD, Eurostat, World Bank.

  26. VC is intricately linked (illustration) • Development of VC sector needs to be viewed in the context of development of R&D/innovation system • Needs to become an integral part of planning of R&D/innovation policies • Source: EVCA, OECD, Eurostat, World Bank.European countries only.

  27. Sources of capital Private capital should take precedence • But in some situations role for capital from Government agencies Different approach to different parts of financing life-cycle • Government financing should be viewed as transitional/catalytic • Only in some parts of VC life-cycle it might have a more permanent role

  28. Government agencies have a role even in UK… • Source: EVCA.

  29. …and overall in Europe • Source: EVCA.

  30. In Baltic VC/PE funding is dominated by Government agencies • Source: EVCA.

  31. VC and PE – caching up with Europe • Source: EVCA. • Source: EVCA.

  32. What are non-government sources available? • Source: EVCA.

  33. How to get there? • Requires more quality funds, better ecosystem, etc. • Effort from private sector and governments… • Private sector investors – ‘show me the money’ • Capital from Government agencies needs to increasingly • Focus on catalyzing private capital • Move to parts of the financing life-cycle where (at this stage) private capital not available even for quality fund managers • (to extent possible) support pan-Baltic fund managers

  34. Concluding remarks There is scope to develop the Baltic VC/PE sector • Can help drive growth and competitiveness Gradual progress is being made • Particularly in the VC segment Comprehensive work needs to be done • Not just about increasing capital • Need to create conducive ecosystem • Keep VC in mind when structuring R&D/innovation policy Smart capital from Government agencies is needed • Private sector needs to follow

  35. Dr. Agris Preimanis • Senior Economist, Financial InstitutionsEuropean Bank for Reconstruction and Development (EBRD) • +7 925 527 1257+44 791 2070631Preimana@ebrd.com

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