The management of the Development Fund’s direct investments will be restructured

May 20, 2016
The state will organise a call to restructure the management of the Estonian Development Fund’s investment portfolio. Both Estonian and foreign bidders are free enter. There are plans to hand over the management of the portfolio from the investment company SmartCap to a new private fund which will continue to keep custody of the state’s investments into the current portfolio and will make follow-up investments into the portfolio. Teams with a potential conflict of interest in fund management may be excluded from the call.

In August 2014, the council of the Estonian Development Fund decided to restructure the investment activity of the Development Fund. Ville Jehe, the Chairman of the Council of the fund, said that the Estonian venture capital market has developed rapidly in the last few years due to the activity of SmartCap which was created as an affiliate of the Development Fund. Jehe remarked that considering the current development phase of the venture capital market, the state’s role should change and it should concentrate on the shortcomings that the private sector cannot handle.

“The development of the market has reached a stage where there are enough private fund management companies and the state itself no longer needs to provide a fund management service,” explained Jehe. From now on, SmartCap’s investment strategy will center on funds that finance the activities of accelerators. A procurement was recently announced to find partners for accelerators.

Lehar Kütt, the Director of KredEx, said that the state has to ensure that the current portfolio is managed according to best market practice. “In cooperation with the European Investment Bank, we will announce a call to find a new private fund management company that will continue to manage the state’s portfolio investments in rapidly developing companies and will keep making follow-up investments,” explained Kütt.

Antti Perli, Member of the Board of SmartCap, emphasized that this is not a sale. In order to restructure the management of investments, a decision has been made not to privatise the assets or outsource the portfolio management service, but to transfer the portfolio and liabilities to a separate fund that will be founded and managed by a new private fund management company. The participation of individuals with a potential conflict of interest in fund management may be restricted. The fund management company chosen in the contest should invest its own finances to the new fund and manage it according to market conditions. Proceeds from previous sales of shares (exits) and companies from which SmartCap will exit before December 31, 2016 will not be transferred.

The fund managed by the private fund management company will continue investing activities based on the existing principles – it will invest in the equity of companies and investments can only be made together with private investors. The risk diversification conditions will also remain the same – up to 10% of the finances may be invested in one company, in exceptional cases this number may rise to 25%. All the candidates can propose the management fee themselves. Perli added that because the fund is currently in the phase of exiting from investments, the fee rate is dependent on the acquisition costs of the managed assets and that it should decrease in the course of the exits. Potential fund management companies can also propose the size of the own contribution.

The detailed terms of the call will be published on the website of SmartCap and based on the current plan, this should take place in the middle of June.

The first step in finding a new fund management company is the submission of applications, this round will take place from the middle of June till the middle of July. In this phase, the candidates will be judged based on their previous activity and experience. Under the direction of the European Investment Bank, a selection committee will be formed. It will be made up of three independent experts and will make the first decision based on the past history of the candidates by August. Qualified candidates will make it through to the second round where they will become thoroughly acquainted with the portfolio and assets and present their visions. By October, the selection committee will make a decision on the winner for which they will consider the candidates’ vision for the future. It will be followed by the last stage – technical negotiations with the fund management company that won the contest and the creation of the fund.

The new fund should start operations on January 1, 2017. At the moment, there are 15 companies in the portfolio of the Development Fund and SmartCap. By the start of 2017, the fund should have approximately 10 million Euros of uninvested finances which can be used for follow-up investments in current portfolio companies.

Additional information:

Antti Perli
Member of the Board of SmartCap
Phone: +372 51 6130

Ville Jehe
Chairman of the Council of the Estonian Development Fund and SmartCap
Phone: +372 504 0813

Lehar Kütt
Director of KredEx
Phone: +372 521 5068