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Fund hotels a new trend, niche seen also for Estonia
FEIF2014 parallel session 2: FUND ADMINISTRATION

Fund management is about to see further consolidation with the recent trend of fund hotels springing up, however there is an opportunity for Estonia to grab a share in niche fund management services, experts noted at the Finance Estonia International Forum in Tallinn.

Frederic Blomme Sekund, vice president of Swedbank Securities Services said that the trend in Sweden is to move fund management into complex fund hotels. A fund hotel is basically a fund management company that is fully responsible for all the back-office services. For example, a client comes to the fund hotel and says he would like to set up a UCITS fund. Fund hotel sets up prospectus, controls compliance, risk, fund administration, etc, he explained.

In this way it is possible to get a hold of full business and you are able to charge more if you serve the whole package, Sekund said.

Yves Lacroix, partner of Arendt & Medernach said that fund hotel structure is good for private banking and family offices, where manager does not have to worry about compliance aspect. All large banks offer this service in Luxembourg, Lacroix, who is himself placed in Luxembourg, told.

The experts noted that the fund administration business is captured by big players as size really matters. Luxembourg is the choice country when it comes to outsourcing. In niche areas there are less larger players dominating the market and this could also be an opportunity for Estonia to grab a share, they said.

Talking about the recent topics in fund management, the experts noted that close cooperation between the regulators and market participants is very important. “It is not a real customer protection case where FSA just takes away the licence,” Sekund explained the importance of regular communication with authorities.

Explaining the success of Luxembourg as a success story as a fund capital, Lacroix noted that the legal framework there is simple, easily understandable and short. It does not take too long to implement new laws – usually less than a year. The regulators are also always open to discuss issues with market participants and they are keen to find joint solutions. Furthermore, it is important to have a good tax regime that is going to stay like that also in the future, he added. “It is important not to change the rules, if changed, it will take ages to regain trust, “ Lacroix said.

Estonia has potential for next FinTech start-up, experts say
FEIF2014 parallel session 4: FINTECH

Estonia has been a successful start-up country and it would not be a surprise if the world will see the next successful FinTech start-up from here, Rain Rannu, the founder of Fortuma said.

The FinTech market has been struggling from innovative products with banks using the same systems from 1960s. Nasir Zubairi, Principal of New Buckland said that capital market, where the real money is, has though seen a lot of investments into systems. However the SME and retail banking is not the case as there seems to be no sense in investing – the customers would not switch the banks and not much money is earned anyway, he said.

Rain Rannu, the founder of Fortumo added, that one must however look wider than just volumes. “It reminds me what everybody thought of iPhones at the beginning which were considered too expensive. But look what happened in 3-4 years. Do not underestimate start-ups,” Rannu said.

Rannu said that consumers do not care much about fancy technology, they want service that offers real value, such as TransferWise and SMS loans. “In our industry there is another new digital wallet every week but none of them has been able to attract any significant user base,” Rannu said.

One potential for innovation could be cryptocurrencies, such as bitcoin, Rannu suggested. In concept it is great – real-time transaction across globe, at zero cost; yet it is difficult to use on consumer level and has high cost in converting into “real money”.

Rannu said that he can’t see any reason why Estonia cannot have a successful FinTech start-up. Estonia has a lot of people who are not happy to work for big companies and the world practice has shown that they are the ones who create start-ups. Obviously you also need eco-system and capital. “I am optimistic and I do not see there is anything missing for success,” Rannu said. Zubairi thought however that Estonians are too reserved and there is a gap in marketing. “It might be useful to get these capabilities from overseas,” he said at the Finance Estonia International Forum in Tallinn.

Paolo Andrez: Business angels take lead in equity financing
FEIF2014 parallel session 1: PRE-SEED & SEED INVESTORS

Business angels have become the main source for equity financing and crowdsourcing platforms provide successful co-operation angles for them,
Paolo Andrez, business angel and president emeritius of EBAN, said.

Andrez said at the Finance Estonia International Forum held in Tallinn today that in Europe angel investors invested 5.5 billion euros in companies last year compared to 2 billion euros by venture capitalists. Angels have become the main source of equity financing, and the case is same in the U.S, he said.

Andrez said that crowdfunding platforms are perfect places to test the attractiveness of new products. “Through these platforms we can easily see if there is a market for this product,” he said. The crowdsourcing companies also tend to have higher valuation because of good publicity due to crowds behind them. Andrez added that it is a good idea for companies with already 60% of angel investor money to attract the rest via crowdsourcing.

On the minus side he mentioned that crowdfunding does not provide good opportunities to exit from the companies with profit. “Platforms should prepare for it,” he warned. Andrez said it is a question of time when the different platforms will be evaluated based on who can offer better returns.

Andrez said that Estonia should be proud that it is the number one country in the world in terms of angel investor money divided by GDP. It is a success story, however the other countries are not sleeping. For example Denmark is now launching tax credit for angel investors, also Finland, Sweden and Latvia are about launching their moves. “If you do not do something, then you will be overpassed by neighbour countries,” he said.

It will for example be good to create a credit investment fund for business angels, he suggested, adding that the government could invest there. Usually governments in Europe give grants for start-ups but Andrez said he does not believe in free money. “It should rather be a smart money, which is more sustainable,” he said.

Government bonds to create liquid capital market in Estonia, EBRD director says
FEIF2014 plenary session: How are the markets important to Estonia developing and how is the cooperation between Estonian and those markets evolving?

Liquid and versatile capital markets will boost the economy and government should take the lead by issuing government bonds, André Küüsvek, Director of Local Currency and Capital Markets Development at EBRD said.

We just celebrated the 10th anniversary of EU enlargement, the first part of which saw a massive convergence growth for new countries. After 2008 the situation changed and today the GDP index in real terms for the most new member countries is smaller than in 2007, Küüsvek said at the Finance Estonia International Forum held today in Tallinn.

Küüsvek said that each of those countries were financing growth on imported capital through foreign banks. The FDI was at 5-7% of GDP in average with strong portfolio investments. Today, FDI is still positive at 2-3%, but portfolio investors are now leaving and the flow negative. The bank lending that used to grow 35% annually, is now flat.

“My bottom line is that we need to find new ways of finances, for example developing bond market,” Küüsvek said. For example Poland has been a success story that came through the banking crises with 20% higher GDP index because of well-developed domestic capital market including pension funds, stock market etc.

The government in Estonia has currently a government debt of 10% which should be increased to 15-20% by issuing bonds, Küüsvek said. That would create liquidity in the market and create needed benchmarks. Large state-owned companies could then follow which can bring new breathing to the stock exchange with minority stakes listed, he added.

At the same time it is important to keep attracting new capital from abroad. The question is how to do it: take for example Romania, which benefitted from the momentum of capital markets by presenting its fast growth story to the world, Küüsvek, who has been with the EBRD for 18 years, added.

Foreign Trade minister says government helping to finance startups

Estonia’s government wants to ensure that variety of financial instruments is available to companies in order to overcome the weaknesses of current macro-economic situation, Anne Sulling, minister of Foreign Trade and Entrepreneurship of Estonia said.

Sulling said at the opening speech of the Finance Estonia International Forum held in Tallinn today that the government has been busy working on implementing new initiatives to boost for growth in the bank-loan dominated economy.

For example, 145 million euros of European structural funds will be directed into a variety of financial instruments. Furthermore, a 100 million euros Baltic Innovation Fund was set up by Baltic governments and European Investment Fund to support growth stage investments.

Sulling said that Estonia is internationally known as a start-up nation, where everybody is developing something. To cater for start-ups, the government has set aside 60 million euros to the Estonian Fund of Funds. This will be dedicated to invest in early and very early stage companies—the ones that have the most difficult time attracting investments.

According to Sulling, one of the most notable recent achievements of attracting foreign capital to Estonia has been the attraction of back-office operations of different international companies. The minister quoted one back-office company in Estonia who said that Estonia is an open economy with relatively low costs and a cutting-edge ICT infrastructure that make Estonia an ideal base for business process outsourcing.

André Küüsvek: Eesti peaks suurendama riigivõlga
Äripäev, Ken Rohelaan (17.06.2014)

Eesti peaks suurendama riigivõlga, mis täna moodustab ligi 10% SKPst, 15% peale, ütles EBRD (Euroopa Rekonstruktsiooni- ja Arengupank) kohaliku valuuta ja kapitaliturgude arendamise juht André Küüsvek.

Finance Estonia konverentsil esinenud Küüsveki hinnangul oleks isegi 20% suurune riigivõlg maailmas esmaklassiline näitaja, mis võimaldaks valitsusel tuua turule võlakirjad ja luua likviidsust. „Suured ettevõtted võivad järgneda. Kui riigiettevõtted viiksid börsile väikesedki osalused, siis see võiks börsile tuua teise hingamise,“ ütles ta.

Küsimuse peale, kust tuleks Eesti jaoks investorid, ütles Küüsvek, et neid tuleb otsida traditsioonilistelt turgudelt, kuid pakkuda tuleb kasvulugu. Rohkem tuleks kaasata riiki, et investeeringud saaksid hoo sisse. Tema hinnangul peaks Eesti investeerima infrastruktuuri, mis aitaks erasektoril areneda.

John Moran: Alternatives to bank financing will benefit the economy
At FEIF2014 plenary session: How are the markets important to Estonia developing and how is the cooperation between Estonian and those markets evolving?

European economy is too bank dependent and there must be more alternatives to soften the impact of future banking crises as well as assist smaller companies to finance their growth, John Moran, Secretary General of Department of Finance of the Republic of Ireland said.

Moran said at the Finance Estonia International Forum held in Tallinn today that being a small country, such as Ireland and Estonia, can be an advantage as it allows for higher flexibility. There is notable international investor money seeking home and especially smaller countries need to attract these investors, he added. Make yourself attractive for other countries investors and start with simple things, such as providing information on infrastructure projects online, the Irish added.

Moran said that the European economy is too bank dependent – approximately 80% of the economy is tied to bank loans compared to only 20% in the U.S. The recent experience of banking crises in Ireland forces us to think how to become less banking dependent, he said.

Getting capital might not be a problem for bigger companies, but there must be alternatives available for the early stage companies to grow. For example in Ireland, investment vehicles into real estate that bypass traditional banks have been introduced, Moran added.

Opening words of the FEIF by the Minister of Foreign Trade and Enterpreneurship Anne Sulling

Ladies and gentlemen,

I am very happy to welcome you all at the Finance Estonia International Forum of 2014 here in Tallinn, Estonia!
The times today are challenging. The macroeconomic environment is rather weak, we’ve seen the ECB cut its deposit rate to an unprecedented minus -0,1% and the growth forecast for the next years is not showing very high numbers. But at the same time this gives a good reason for all of us to take a moment and reflect, what could be done different to help boost the economic growth, besides the ECB’s monetary policy measures.

For a small open economy like that of Estonia we know that growth may only come from exports.

Now, in order to ensure good export performance, we also need to ensure that our businesses have acess to a variety of financial instruments to help meet their financing needs.

It has been said that our economy is too dependent on bank lending, that taking a loan is always not an optimal solution and that it is not always available to those in need such as start-ups. But while complaining, we have also been busy working on implementing new initiatives to help resolve that.

In the new EU financing period, the Estonian government has decided to direct 145 MEUR of the structural funds into a variety of financial instruments—venture capital, guarantees, loans, and credit risk insurance.

To support growth and expansion stage investments, the Estonian government cooperated with Latvian and Lithuanian governments and the European Investment Fund to set up the Baltic Innovation Fund, with a 100 MEUR investment capacity, which aims to boost equity investments through 5 of its subfunds into small and medium sized enterprises with high growth potential in the Baltic region.

It is important to note that the setting up of the Baltic Innovation Fund with the help of the European Investment Fund–which has lent the BIF its reputation for credibility–has also mobilized the local private investors and pension funds, whom we’ve always liked to take a more active part in investing in Estonia.

It has been said that Estonia is a start-up nation. I have often come across foreign investors who mention that they like Estonia because they like the fact that everybody here is developing something. The state has also done its bit here by helping finance the numerous incubators and science and development parks that provide the nurturing conditions for start-up companies.

In order to cater for the startups investment needs, the government has set aside 60 MEUR to be invested into an Estonian Fund of Funds, that is dedicated to invest in early and very early stage companies—the ones that have the most difficult time attracting investment. Among the subfunds, it is also foreseen that a co-investment fund will be set up with business angels.

I would also like to praise the good initiatives taken up by our private sector actors. For example, in 2012 we saw the birth of Estonia’s Business Angels Network. Today EstBAN has already more than 70 members who are looking for good investment opportunities. To prove the good work they’ve done EstBAN was awarded the best newcomer title at the European Business Angels congress in Dublin last month.

I am also very proud of the work Finance Estonia has done in promoting Estonian businesses and financial services exports abroad.

One of the most notable achievements has been the attraction of back-office operations of different international companies to Estonia. And there are also good reasons for bringing back offices to Estonia! We have a very transparent business environment and a simple tax system. Our world-famous e-government solutions make transactions with the state very efficient and easy. We also have a very highly skilled labor force, and a disproportionally high share of the workforce educated for the needs of the financial services industry.

As one of the companies already running its back office from Estonia put it: “Estonia is an open economy with relatively low costs and a cutting-edge ICT infrastructure that make Estonia an ideal base for business process outsourcing.

I hope that over the next 2 days you will have the opportunity to listen and learn from each other’s ideas and experiences, and you will come up with further ideas on how to improve our smaller and medium sized businesses access to finance.

If there is anything on the part of the state that could be done to help implement, I would like to be the first one that you contact and let know!

I wish you productive discussions and openness to new ideas!
Thank you!