Transcript Document

1
© Liepa Skopina /Borenius
Lauris Liepa
27 April 2006
2
© Liepa Skopina /Borenius
Private Equity and Venture
Capital Investments in
Latvia
Legal Environment
CIS & EAST EUROPEAN WEALTH MANAGEMENT
FORUM, Riga, 27 - 28 April 2006
3
© Liepa Skopina /Borenius
Venture capital industry in Latvia
Individual funds operating for almost a decade.
Latvian Venture Capital Association (LVCA) is
an industry association established in 2003:
 Members (currently 15) are the key players of
the industry as well as intermediary
organizations.
 LVCA attempts to serve as a medium between
its members themselves, members and public
sector and members and foreign partners.
4
© Liepa Skopina /Borenius
In Brief: Risk capital industry in Latvia
Current structure of the market:
 In comparison with other CEE countries the number of
risk capital investments made in the Baltics is low and
businesses are relying on traditional means of
financing.
 The current trend my change.
 Potential increase of interest rates by the European
Central Bank and given high level of the rates set by
the Federal Reserve should increase the demand for
alternative modes of business financing
 Competitive constraints should allow entry of
additional players to satisfy this demand.
 The legal environment facilitates such an entry.
5
© Liepa Skopina /Borenius
Operation of risk capital firms and funds
Operational risk capital firms are set up in Latvia in the form of limited
liability companies:
 Often private limited liability company structure is chosen since there are
few mandatory requirements for establishment of such, e.g., minimum
share capital of LVL 2000 and at least one member of the board;
 Level of taxation of profits for companies is beneficial – income tax
amounts to 15% and no withholding tax is applicable to payments to the
EU countries;
 Relatively low operational costs/overhead.

6
Examples: Baltcap Management Latvia, EKO Investors, Hanseatic
Capital Latvia.
© Liepa Skopina /Borenius
Operation of risk capital firms and funds
Operational risk capital firms are mainly responsible for the
following:
 Potential project searches and evaluations;
 Intermediation between the investors and the business,
e.g., selling the investment idea;
 Overseeing the company management after an investment
entry has been made;
 Defining the moment of exit as well as preparation of the
exit process
 For instance, year 2005 saw 2 successful exits from mobile
telecommunications companies (SIA DT Mobile and SIA Zetcom)
by Baltcap as well as 3 entries of risk capital companies into AS
Liepajas Maiznieks (Baltcap), AS Elko grupa (East Capital Amber
Fund) and SIA Trials (Askembla Growth Fund).
7
© Liepa Skopina /Borenius
Operation of risk capital firms and funds
How is the financing structure set up?
 The operational companies are not making investments in
the business themselves.
 External investors are sought willing to make their capital
contributions.
 In some cases funding from government or the EU structural
funds may be available in order to promote risk capital
industry in Latvia.
 If Latvia is selected as an incorporation venue a limited
liability partnership (Kommanditgesellschaft) under the
Commercial law shall be set up to allow participation of the
investors.
8
© Liepa Skopina /Borenius
Risk capital funds: limited liability partnerships
Structure of a limited liability partnership under the
Commercial law:
 Registered with the Commercial Register of the Register of
Enterprises of the Republic of Latvia;
 Governed by the partnership agreement, even though
Latvian commercial law is built on German traditions, with
respect to limited liability partnerships Anglo-American
level of flexibility can be achieved.
 Two types of partners:
 General partner – typically the risk capital company, managing
the fund;
 Limited partners – investors contributing their funds to the
partnership and limiting their liability.
9
© Liepa Skopina /Borenius
Limited liability partnerships – the agreement
For the risk capital company the agreement should:
 Ensure that the management fee and its payment is structured to
provide the optimum performance;
 Provide management and decision making flexibility;
 Ensure easy access to funds from the investors.
For the investors the agreement should:
 Provide limited albeit strict control over some activities of the
company, e.g., via supervisory board where nominee investors sit;
 Ensure flexible paying-up mechanisms for capital contributions of
the investors in several commitments in order to minimize the
amount of capital at standstill;
 Provide for viable mechanism for covering the expenses, return of
monies invested as well as payment of the return on investment at
the realization of the investment/end of the fund’s life period.
10
© Liepa Skopina /Borenius
Limited liability partnerships – the agreement
Structure and main components of the agreement:
 Defining the aims of the fund;
 Appointment of the general partner and accession criteria for
investors (the limited partners);
 Capital contributions of the partners and procedures for payment of
the capital contributions/issuance of drawdown notices;
 Capital contribution/debt ratio of the fund;
 Investment periods and illegible/prohibited investments;
 Rights and duties of the general partner (the fund management
company), the amount and payment of the management fee;
 Rights and duties of the limited partners (the investors);
 Assignability and substitution of the general partner’s and/or the
investors’ rights and duties;
 Advisory/supervisory board and control structures for the general
partner;
 Distribution of the proceeds upon exits/termination of the life of the
fund;
 Miscellaneous: reports, valuations, non-compete, confidentiality,
etc.
11
© Liepa Skopina /Borenius
Limited liability partnerships: benefits of the structure
Partners pay taxes for the profits extracted from the
partnership after distributions/termination of its life.
Thus far the activities of limited liability partnerships set up as
funds is not regulated by Latvian financial supervision
authority.
Investors (limited partners) may benefit from 10-15% return
on their investment (average market data).
Fund management companies (general partners) normally
work for 3-4% management fee of the amount of the fund
per year and obtain some return on investment upon exits.
12
© Liepa Skopina /Borenius
Limited liability partnerships: business opportunity
The structure of the market for risk capital activities and
the current legal environment have created business
opportunities for:
 Fund management companies set up in the form of
limited liability companies and becoming the general
partners of LPPs;
 Investors operating as any legal entities or individuals
and becoming limited partners of such LPPs by making
capital contributions and gaining return on their
investments as a result of the activities of the
management companies.
13
© Liepa Skopina /Borenius
Limited liability partnerships: legal solutions


14
Attorneys-at-law Liepa Skopina/BORENIUS have the
relevant experience for:
 Setting up an operational risk capital company in the
form of limited liability company;
 Drafting and negotiating limited liability partnership
agreements addressing the issues mentioned above;
 Conducting legal due diligence exercise and reviews of
potential businesses attracting risk capital investments;
 Advising on the most beneficial structure from the
regulatory and taxation point of view.
Attorneys-at-law Liepa Skopina/BORENIUS are
member of Latvian Venture Capital Association.
© Liepa Skopina /Borenius
Contact information
Attorneys at law
Liepa, Skopina /BORENIUS





15
Address:
Phone:
Fax :
E-mail:
Web:
Lacplesa str. 20a, Riga LV-1011 Latvia
+371 7 201 800
+371 7 201 801
[email protected]
www.borenius.lv
© Liepa Skopina /Borenius
Thank you!
16
© Liepa Skopina /Borenius