The Latvian capital market offers companies an opportunity to raise additional funding for development and diversify their sources of funding for growth, as well as other important benefits. Listing on the capital market demonstrates the transparency and good governance of the company, is an opportunity to attract investors, including from abroad, and attract and motivate qualified employees interested in the growth of the company through the allocation of personnel shares and personnel stock options.
This article analyses these and other benefits provided by the Latvian capital market for the companies, also focusing on the opportunities for start-ups to raise investments in the capital market.
Characteristics of the Latvian capital market
The Latvian capital market is relatively small, and it will take time to reach the level of development of, for example, the Swedish market. But the potential for development is immense, and continuing on the path of development as "the new Nordics", the Latvian capital market has great potential to catch up with the more successful European capital markets.
The Latvian capital market offers opportunities to companies according to their preferences, needs and stage of development – there is the regulated market, which is a capital-raising platform for companies with longer work experience and the highest standards of transparency and financial reporting, as well as the First North market, which is suitable for smaller companies with promising growth plans. This market allows enjoying all the benefits of being a public company, while having more lenient listing and disclosure requirements.
Currently, the Latvian capital market is characterised by the following indicators: the regulated market has 20 issuers – 11 share issuers and 9 debt security issuers, while the First North (unregulated) market has 11 issuers – 3 share issuers and 8 debt security issuers.
In 2022, capitalisation of the regulated market reached 2193.0 million euro, while capitalisation of the First North market stood at 222.5 million euro.
If a company decides to enter the Latvian capital market, it should choose a market that can provide the highest possible value added at that stage of its development. At the same time, it will take time and financial investment in any case, but it can certainly provide more added value for the company in the long run. The potential benefits are discussed later in this article.
Opportunities and benefits in the Latvian capital market
The benefits of the capital market, whether in the case of initial public offering or bonds, include diversification of funds and independence from traditional ways of raising funding. For example, bond issuance has a number of important advantages, and bonds are highly desirable as a source of funding for several reasons. Firstly, it is an opportunity to obtain funding outside the banking sector, where collateral is not mandatory, and the terms are defined by the bond issuer, which is very important given the sluggish bank lending.
Secondly, it is support to the company's cash flow, the possibility to use the funds throughout the term, as repayment is only due at the end of the term, and the possibility to raise a relatively larger amount of funding than just from the banking sector. This is seen as a significant benefit, which results in the good reputation and visibility of the company and represents an opportunity to bring the company's operations up to the highest standards, as issuance requires compliance with certain requirements, i.e. the market imposes discipline and provides a sometimes much-needed view from the sidelines.
Finally, a bond issue is one route to an initial public offering, which opens up even more opportunities for the development and growth of the company.
An important aspect of both share and bond issuance is the quality mark that the issuer obtains when it enters the capital market. The Latvian capital market is relatively tightly regulated, given that we are bound by the European Union regulations which impose very strict requirements on market participants. If an issuer has complied with these requirements and has a successful capital market launch, this is a very important signal to potential investors of the good governance and transparency of the company.
Expanding upon the topic of attracting investors, the capital market is an excellent tool for attracting investors, as they will certainly prefer to invest in a company that is well-governed, well-organised and transparent. This also applies to attracting foreign investments, as foreign investors are more likely to invest in a company that has entered the Latvian capital market.
In today's world, corporate governance and sustainability issues are of key importance alongside financial performance. Entering the capital market ensures that the company will definitely pay more attention to these issues and that they will be properly addressed within the company. The participants of the Latvian capital market are advised to comply with the Latvian Corporate Governance Code, which includes best practices in corporate governance. At the European level, new requirements are also being developed on sustainability issues, which are also binding on the participants of the Latvian capital market.
When it comes to environmental and sustainability aspects, we should also mention blue and green bonds – securities that allow investing in the implementation of various projects related to climate and environment. They can be a way to attract an investor's attention, taking into account the global trends showing that these issues are increasingly becoming a decisive aspect in choosing which companies to invest in and which not to.
Another aspect that is very important for a company on the capital market is the possibility to attract a more qualified workforce, i.e. an employee will definitely be more attracted to a company that has been successful on the capital market, because to the employee, it means that the company is well-governed, including in personnel matters.
In respect of personnel matters, personnel stock options and personnel shares could be highlighted as a successful motivational tool. In Latvia, these tools are regulated by the Commercial Law, but they are also popular motivational tools in other parts of the world. Personnel shares are granted immediately, but personnel stock options give an employee an option to buy company shares or receive them for free within a certain period of time, upon the achievement of certain targets. It is part of the staff incentive and remuneration package.
The benefit for the employee in this case is that the stock option price is usually below the market value. These shares provide the employee with the opportunity to receive dividends; the employee may be granted voting rights and the employee may sell these shares. The personnel shares also benefit from tax relief. This tool ensures that the employee feels involved in the company's work, is part of the decision-making process and feels motivated to contribute to the company's development. In addition, the employee receives additional income, which in many cases will be particularly motivating. This will certainly motivate the employee to stay with the company in the long term, as well as attract skilled workforce to the company.
The investment-raising aspect cannot be forgotten either in situations when the investors are the employees themselves. An additional benefit could be an increase in interest in the company – a successful implementation of the personnel option plan also ensures a good reputation and public image for the company. Overall, personnel shares and personnel stock options offer a range of benefits to both the employer and employee, so this mechanism should certainly be used more widely in the future.
An additional benefit of entering the capital market in the case of a share issue is the involvement of shareholders in the company's activities, which can provide additional vision and expertise for the company's development. Shareholders can make a real contribution to the company's development, resulting in a direct dividend benefit. This could be particularly important for companies providing services of public interest, such as building and waste management, public transport, etc., which are used by everyone in their daily lives. In this case, the shareholder may not only be a shareholder, but also a customer of the company who uses the services on a daily basis, so the motivation to both buy shares and engage with the company will be higher, creating more added value.
Opportunities for start-ups in the Latvian capital market
A start-up is a capital company with high growth potential, whose core operation involves the introduction of a scalable business model and the design, manufacture or development of innovative products. According to the "Strategy for the Development of the Start-up Ecosystem 2022–2025", 512 companies defined in the local and international databases as start-ups and up to 7 years old or founded between 2015 and 2021 have been identified in Latvia. Currently, no start-ups have entered the Latvian capital market; however, the capital market offers opportunities for start-up development that could replace other available forms of support and ensure faster development of the companies concerned.
In the case of Latvia, there is a wide range of state support available for start-ups – support tools offered by the Law on Aid for the Activities of Start-up Companies, start-up visas, research and development support programmes, acceleration funds, seed and pre-seed funds, as well as other essential and development-enhancing forms of support. In addition, an initiative is planned in the context of the Initial Public Offering Fund, i.e. the establishment of a Latvian and Lithuanian Cross-Border Cooperation Fund aimed at providing access to funding for innovative companies by investing in companies for their further listing on the Baltic capital market (it is planned to initially raise state budget funds of 20 million euro from Latvia and Lithuania, as well as involve the private sector in the later stages to expand the Fund's investments).
In other parts of the world, start-ups are making extensive use of the opportunities offered by the capital markets to grow their businesses. While the Latvian capital market cannot currently offer the same opportunities, start-ups could gain significant added value there. In the case of Latvia, the most suitable option for start-ups would be a bond instrument, which would already allow them to gain additional investments, visibility and experience necessary for a future share issue on the First North market or on the regulated market.
Other benefits of capital market participation for start-ups include access to capital, raising investments, credibility, building visibility, attracting a highly skilled workforce and many more.
Support mechanism for potential issuers
If you would like to assess your options for participating in the Latvian capital market, you are invited to apply for the support mechanism "Securities Sandbox". This is a unique form of support where the potential issuer receives an initial assessment and recommendations on what needs to be improved in order to enter the Latvian capital market, prepared by the leading Latvian capital market experts, free of charge. The support mechanism may be used by private companies as well as public and local government capital companies. Both companies intending to issue shares and those that intend to raise funding by issuing bonds may apply for advice. This mechanism has been successfully used by several Riga local government capital companies.
More information on the support mechanism is available on Latvijas Banka's website.