Interview by Jānis Šķupelis, Editor-in-Chief of the Investors' Club
"We have ambitious private companies that are developing and financing themselves through both banks and public markets. It's a pleasure to see that. The question is, what is happening and what will happen with state-owned companies," Raivis Jānis Jaunkalns, partner at “BDO Latvia”, tells the Investors' Club.
Why does the capital market in Latvia seem unable to really get going?
The main thing we see is that our state-owned companies are not really moving forward. There are not many such companies in neighboring countries either, but they are still listed on the stock exchange. There have been suggestions that, say, 25% of “Latvijas valsts meži” (“Latvian State Forests”) or “Latvenergo” should be listed. This would certainly be interesting, as investors would have access not only to private but also to state offerings. This would allow private investors to buy shares in companies whose services they use.
Data shows that there are currently 8 share and 13 bond issuers on the Latvian stock exchange. Adding the Alternative List, the number is slightly higher. However, this percentage of GDP is still much lower than in Lithuania and Estonia in terms of both shares and bonds. If "airBaltic's" initial public offering (IPO) had gone ahead, it would have been more interesting.
Thus, the market here is not interesting to large foreign investors or anyone else. Many industries are actually dominated by companies whose largest shareholder is the state. There is also a decision to buy out a telecommunications company from foreign investors. The question is: what will happen next? Will it be listed on the stock exchange? And what will be done with the money – will some undisclosed defense budget be “covered up”, or will the money be spent in some other way?
What is the reality of attracting capital through share issues in the country? What are the main problems?
There aren't many cases where this happens. In my opinion, bonds are more attractive to investors because they (offering conditional liquidity) still have a maturity date. There is also a certain percentage that can be counted on.
In my opinion, there are no startup companies in Latvia that have implemented or attempted to implement an IPO at an early stage. When talking to our colleagues in the United Kingdom and other large markets, it is normal for a startup company with a good story to attract money through an IPO. It is a riskier approach, but it can work. In Latvia, the assumption is that you have to be "airBaltic" or another industry leader to go public.
The reality here shows that issuing debt is relatively simpler. There is also a good track record that it works in the Baltics. It is a more private matter who the shareholders are and whether they want to list part of their core business. The largest companies are state-owned, and that is already a political decision. It is also relevant whether the major shareholders of private companies see business sense in an IPO solution. In the end, bonds are more popular here than stock listings.
How difficult is it for Latvian companies to conduct an IPO or raise capital through bonds?
We have good consultants. In my opinion, "Signet Bank" has a very good approach, as it is able to find investors for various scenarios and successfully help companies enter the stock market. The question is what the company itself needs and understands better at a particular stage of development. The main thing is the limit in euros – what can be attracted in the local market? For example, "Eveling Group" chooses to issue large bonds outside the Baltics – on the Frankfurt Stock Exchange – because there are larger investors there.
What is the experience with the ability to enter other capital markets outside our stock exchange?
The companies that plan to do so and are doing so can be counted on the fingers of one hand. Large institutional investors buy up most of the issue. Their requirements usually also outline which specific European stock exchange such securities will be listed on. Companies need to look at what these requirements are.
It is clear that if you are a public company, quarterly reports, corporate governance and other issues are an investment on the part of the company itself, which does not stop when capital is raised. This increases administrative costs and is somewhat more complicated. However, when taking the next steps, it certainly helps to have internal processes in order. This also increases the value of the company and makes it easier to attract capital in the future. The first step is definitely the hardest, but it has to be taken.
How does this process affect the company's development strategy?
It is part of the strategy. You cannot decide one day to raise funds and rely on the fact that in two or three months' time this will happen through a public offering. There is usually a fairly long preparation process, for example, assessing whether the financial statements comply with international standards. Now there are also sustainability reports, which must be prepared to at least some extent. But this is part of the company's strategy and development plan, which goes hand in hand with an increase in its value and recognition. A company's listing is a mark of its quality and should also help in its long-term business development.
How different are the requirements for issuing securities elsewhere, for example in Frankfurt?
I am not an expert on the specific details. However, there is a more detailed prospectus there. It is often created in collaboration with consultants, which makes the process more expensive. Overall, though, it's not that different from the Baltics anymore. I'd like to believe that at least in the European Union, the bar isn't that different. The main thing is whether you're interesting to that market and whether that market is interesting to you.
To sum up: what factors determine the choice between the local and international markets?
Mainly, it is the amount of money that needs to be raised. It depends on where the big investors are. As far as I know, only a couple of energy companies have managed to attract hundreds of millions in Latvia and the Baltics. If it's 10 million, then you probably don't need to rush to Frankfurt or London, because the process isn't cheap.
Will our market end up being pushed aside?
The question is how many companies can try the local capital market. Double listing, which is not so popular here yet, may also be relevant. This also comes back to the attracted euros and recognition. It is easier to "grow" in the local market. If additional financing is needed, the company can go to a more global market. In my opinion, both IPOs and bond issues have been successful for us. From what I have heard from clients, no one has ever regretted it.
What needs to happen to improve investor activity?
I agree with those who say that state-owned companies should finally be listed, because then there would be financial sense and motivation to invest and "push" local small investors. That would also start the ball rolling. We need one or two success stories, and then the rest will follow. There are sectors in Latvia that are dominated by state-owned companies. They have stable revenues and cash flow, which allows them to do so. The logical path would be to finally list something big that we could also partially own ourselves.
Is it realistic to ever solve such problems, taking into account politics, economics, and demographics, for example?
This is a somewhat depressing question. We ourselves feel the demographic challenges in the labor market, and they are also relevant to our clients. In the long term, artificial intelligence aspects are definitely inevitable. There is also the attraction of colleagues from other jurisdictions.
On the other hand, there are many positive developments that educate people about the capital market. As thinking and generations change, everyone can think more about the third pension level, which is good in Latvia with its personal income tax relief.
We come back to the fact that this is a major political decision. However, given all the discussions about the budget deficit, this would be an even more logical step. At some point, we will get there – perhaps we should not borrow abroad, but offer well-performing companies on the stock exchange and finance the economy from our own revenues. I hope that this will happen sooner rather than later, before the hole gets even deeper.
Of course, the question arises as to why there is so much political resistance to listing these companies. Seeing seemingly good financial results, one may get the feeling that there is something else on the other side of the coin. But we will never know until such companies go public and publish their quarterly data. It is difficult to find the financial statements of some of these companies. In other words, the financial results of state-owned companies are not always as easy to find as those of private companies.
It should be the other way around.
Yes. Especially if the company is able to pay out significant dividends on a regular basis. We have ambitious private companies that are developing and financing themselves through both banks and public markets. It's great to see that. The biggest question is about state-owned companies. The capital that can be attracted and turned over there is proportionally very, very large. In my opinion, this is no longer so complicated – the path has been paved. The important thing is to get started, set ambitious goals, work in a strong team, and then everything will definitely work out!
"We have ambitious private companies that are developing and financing themselves through both banks and public markets. It's a pleasure to see that. The question is, what is happening and what will happen with state-owned companies," Raivis Jānis Jaunkalns, partner at “BDO Latvia”, tells the Investors' Club.
Why does the capital market in Latvia seem unable to really get going?
The main thing we see is that our state-owned companies are not really moving forward. There are not many such companies in neighboring countries either, but they are still listed on the stock exchange. There have been suggestions that, say, 25% of “Latvijas valsts meži” (“Latvian State Forests”) or “Latvenergo” should be listed. This would certainly be interesting, as investors would have access not only to private but also to state offerings. This would allow private investors to buy shares in companies whose services they use.
Data shows that there are currently 8 share and 13 bond issuers on the Latvian stock exchange. Adding the Alternative List, the number is slightly higher. However, this percentage of GDP is still much lower than in Lithuania and Estonia in terms of both shares and bonds. If "airBaltic's" initial public offering (IPO) had gone ahead, it would have been more interesting.
Thus, the market here is not interesting to large foreign investors or anyone else. Many industries are actually dominated by companies whose largest shareholder is the state. There is also a decision to buy out a telecommunications company from foreign investors. The question is: what will happen next? Will it be listed on the stock exchange? And what will be done with the money – will some undisclosed defense budget be “covered up”, or will the money be spent in some other way?
What is the reality of attracting capital through share issues in the country? What are the main problems?
There aren't many cases where this happens. In my opinion, bonds are more attractive to investors because they (offering conditional liquidity) still have a maturity date. There is also a certain percentage that can be counted on.
In my opinion, there are no startup companies in Latvia that have implemented or attempted to implement an IPO at an early stage. When talking to our colleagues in the United Kingdom and other large markets, it is normal for a startup company with a good story to attract money through an IPO. It is a riskier approach, but it can work. In Latvia, the assumption is that you have to be "airBaltic" or another industry leader to go public.
The reality here shows that issuing debt is relatively simpler. There is also a good track record that it works in the Baltics. It is a more private matter who the shareholders are and whether they want to list part of their core business. The largest companies are state-owned, and that is already a political decision. It is also relevant whether the major shareholders of private companies see business sense in an IPO solution. In the end, bonds are more popular here than stock listings.
How difficult is it for Latvian companies to conduct an IPO or raise capital through bonds?
We have good consultants. In my opinion, "Signet Bank" has a very good approach, as it is able to find investors for various scenarios and successfully help companies enter the stock market. The question is what the company itself needs and understands better at a particular stage of development. The main thing is the limit in euros – what can be attracted in the local market? For example, "Eveling Group" chooses to issue large bonds outside the Baltics – on the Frankfurt Stock Exchange – because there are larger investors there.
What is the experience with the ability to enter other capital markets outside our stock exchange?
The companies that plan to do so and are doing so can be counted on the fingers of one hand. Large institutional investors buy up most of the issue. Their requirements usually also outline which specific European stock exchange such securities will be listed on. Companies need to look at what these requirements are.
It is clear that if you are a public company, quarterly reports, corporate governance and other issues are an investment on the part of the company itself, which does not stop when capital is raised. This increases administrative costs and is somewhat more complicated. However, when taking the next steps, it certainly helps to have internal processes in order. This also increases the value of the company and makes it easier to attract capital in the future. The first step is definitely the hardest, but it has to be taken.
How does this process affect the company's development strategy?
It is part of the strategy. You cannot decide one day to raise funds and rely on the fact that in two or three months' time this will happen through a public offering. There is usually a fairly long preparation process, for example, assessing whether the financial statements comply with international standards. Now there are also sustainability reports, which must be prepared to at least some extent. But this is part of the company's strategy and development plan, which goes hand in hand with an increase in its value and recognition. A company's listing is a mark of its quality and should also help in its long-term business development.
How different are the requirements for issuing securities elsewhere, for example in Frankfurt?
I am not an expert on the specific details. However, there is a more detailed prospectus there. It is often created in collaboration with consultants, which makes the process more expensive. Overall, though, it's not that different from the Baltics anymore. I'd like to believe that at least in the European Union, the bar isn't that different. The main thing is whether you're interesting to that market and whether that market is interesting to you.
To sum up: what factors determine the choice between the local and international markets?
Mainly, it is the amount of money that needs to be raised. It depends on where the big investors are. As far as I know, only a couple of energy companies have managed to attract hundreds of millions in Latvia and the Baltics. If it's 10 million, then you probably don't need to rush to Frankfurt or London, because the process isn't cheap.
Will our market end up being pushed aside?
The question is how many companies can try the local capital market. Double listing, which is not so popular here yet, may also be relevant. This also comes back to the attracted euros and recognition. It is easier to "grow" in the local market. If additional financing is needed, the company can go to a more global market. In my opinion, both IPOs and bond issues have been successful for us. From what I have heard from clients, no one has ever regretted it.
What needs to happen to improve investor activity?
I agree with those who say that state-owned companies should finally be listed, because then there would be financial sense and motivation to invest and "push" local small investors. That would also start the ball rolling. We need one or two success stories, and then the rest will follow. There are sectors in Latvia that are dominated by state-owned companies. They have stable revenues and cash flow, which allows them to do so. The logical path would be to finally list something big that we could also partially own ourselves.
Is it realistic to ever solve such problems, taking into account politics, economics, and demographics, for example?
This is a somewhat depressing question. We ourselves feel the demographic challenges in the labor market, and they are also relevant to our clients. In the long term, artificial intelligence aspects are definitely inevitable. There is also the attraction of colleagues from other jurisdictions.
On the other hand, there are many positive developments that educate people about the capital market. As thinking and generations change, everyone can think more about the third pension level, which is good in Latvia with its personal income tax relief.
We come back to the fact that this is a major political decision. However, given all the discussions about the budget deficit, this would be an even more logical step. At some point, we will get there – perhaps we should not borrow abroad, but offer well-performing companies on the stock exchange and finance the economy from our own revenues. I hope that this will happen sooner rather than later, before the hole gets even deeper.
Of course, the question arises as to why there is so much political resistance to listing these companies. Seeing seemingly good financial results, one may get the feeling that there is something else on the other side of the coin. But we will never know until such companies go public and publish their quarterly data. It is difficult to find the financial statements of some of these companies. In other words, the financial results of state-owned companies are not always as easy to find as those of private companies.
It should be the other way around.
Yes. Especially if the company is able to pay out significant dividends on a regular basis. We have ambitious private companies that are developing and financing themselves through both banks and public markets. It's great to see that. The biggest question is about state-owned companies. The capital that can be attracted and turned over there is proportionally very, very large. In my opinion, this is no longer so complicated – the path has been paved. The important thing is to get started, set ambitious goals, work in a strong team, and then everything will definitely work out!
