Tallinn Stock Exchange chief: Investors' expectations have shifted

Kaarel Ots.
Kaarel Ots. Source: Priit Mürk/ERR

Small, growth-oriented companies have found it harder to raise funds recently as investors are expecting them to make profits rather than grow, said Kaarel Ots, head of the Tallinn Stock Exchange.

On Monday, cargo bike producer Hagen Bikes, which had been trading on the Tallinn Stock Exchange's First North list, was forced to cancel its secondary share offering due to low interest. Autonomous robot delivery vehicle developer Clevon, which is not buying out small shareholders, will also leave First North next week.

Ots said there is no such thing as an average listed company and that investors should make individual assessments about where they have opted to invest, as well as how companies are coping with the changing macroeconomic situation. 

"What has been the reality for about ten years, since 2015-2016 - and has now changed significantly - is the rampant money printing in Europe, America and other countries. Quite a number of things have happened with that. One is, that for listed companies, not just those on the First North, their values have gone up. Why were they are growing like yeast? The finger was pointed at the money printing," Ots said.

According to Ots, it has now become clear that the money printing has led to a broad-based rise in the cost of living, which in turn, drove down share prices of major technology companies in early 2022. "In hindsight, it was an overreaction as their prices have bounced back. But why did they come down?  The ultra-low interest rates for many years, with zero and even negative interest rates, created a situation in which investment funds needed to invest in increasingly risky assets and companies in order to earn the same amount of returns," he said.

As a result, there was a global boom of startups, which found it very easy to raise money.

"It's still predominantly been private equity. The ones that have come onto the stock market are those that want to be more transparent than other companies and they have seen the benefits for themselves," Ots said, adding that in many countries, this money has laid the foundations for the startup ecosystem.

While real estate and stock prices rose rapidly as a result of central bank policies, inflation has now begun to have an impact on everyday life and interest rates have also risen rapidly, Ots said. "It's a change in the macro picture that is particularly affecting companies, whose business plans, or a large part of their business plans, were built on the premise that they could grow on the back of favorable investment funds. Now that money is no longer favorable," he said.

As to whether the failure of the alternative corporate stock exchange may also harm the reputation of the Tallinn Stock Exchange, Ots said that looking at the daily investment landscape, it is clear that the money hasn't gone anywhere, referring in particular to LHV's issuance of bonds.

"The fact that some companies are failing in their operations is nothing to be ashamed of. They try to find all sorts of reasons, or any kind of explanations as to why they can't raise money. However, very often the business plan simply doesn't work and there is nothing unusual about that. The fact that a business plan doesn't work for a listed company is just as logical as it not working for any company," Ots said.

According to Ots, downward revisions to values can also be seen to affect very well-known companies, just not as transparently as for listed companies.

Ots added that, for over a year, investment and venture capital funds have been saying they expect companies to turn a profit. "It shows how out of balance we were for a long period of time, when something like turning a profit now seems unprecedented," he said.

Many of the companies struggling today are growth-oriented and generally at the startup-stage, with growth plans built on the foundations of cheap money, Ots said. "Now it's essentially no longer possible to do that, at least not at those prices."

By way of example, it took less than a year for Clevon, which went public in 2022, to realize they actually needed much more money than they had previously planned for, so they opted to delist.

"It seems to me that this pendulum is moving at a terrifying speed. Somewhere between 2016 and 2017, everyone was looking for growth at any cost. Profits - nobody even paid attention to them. It was all about frantic growth. Now the pendulum is moving to the other extreme due to the big discovery that money has a price. It's as if everyone assumes that every startup should turn a profit in next to no time. I think both extremes are extremely unhealthy for investors," Ots said.


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Editor: Michael Cole

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