© Liepa Skopina /Borenius 1

2 Lauris Liepa 27 April 2006

© Liepa Skopina /Borenius3 CIS & EAST EUROPEAN WEALTH MANAGEMENT FORUM, Riga, April 2006 Private Equity and Venture Capital Investments in Latvia Legal Environment

© Liepa Skopina /Borenius 4 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.

© Liepa Skopina /Borenius 5 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.

© Liepa Skopina /Borenius 6 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.  Examples: Baltcap Management Latvia, EKO Investors, Hanseatic Capital Latvia.

© Liepa Skopina /Borenius 7 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).

© Liepa Skopina /Borenius 8 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.Kommanditgesellschaft

© Liepa Skopina /Borenius 9 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.

© Liepa Skopina /Borenius 10 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.

© Liepa Skopina /Borenius 11 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.

© Liepa Skopina /Borenius 12 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.

© Liepa Skopina /Borenius 13 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.

© Liepa Skopina /Borenius 14 Limited liability partnerships: legal solutions  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 15 Contact information Attorneys at law Liepa, Skopina /BORENIUS  Address:Lacplesa str. 20a, Riga LV-1011 Latvia  Phone:  Fax:   Web:

© Liepa Skopina /Borenius 16 Thank you!