Infortar announced earlier this week that it made a voluntary takeover bid to Tallink shareholders, which was accepted by 21.71 percent of shareholders. Following the transaction, Infortar will increase its stake in Baltic Sea shipper Tallink to 68.47 percent.

Although not explicitly stated, the largest sellers were most likely funds owned by the investment giant Citigroup. This is the latest instance of an international major investor selling shares of a company listed on the Tallinn Stock Exchange and exiting or planning to exit the Estonian stock market. This trend is considered one reason for the decline in the local stock market.

The overall index of the Tallinn Stock Exchange has fallen by over 7 percent in the past year. A few days ago, the annual decline was nearly 10 percent. The departure of international giants like Citigroup and BlackRock from the Estonian stock market is concerning, and there is talk of selling pressure on the Tallinn Stock Exchange.

Valeria Kiisk, board member at Redgate Capital, told ERR that Citigroup's sale of Tallink shares is not good news for the Tallinn Stock Exchange, especially considering that Tallink shares were sold below market price.

"There has been talk of selling pressure on the Tallinn Stock Exchange for some time now, with foreign investors unwilling to accept geopolitical risks and seeing very few opportunities in our market. This is the first major, I wouldn't call it a panic sale, but still a sale with a negative tone because they sold below market price, meaning the offer was quite low," Kiisk said.

"There has been talk for quite some time that foreign investors wanted to leave as soon as the war started. However, there haven't been panic sales so far; they still wanted to get a decent price for their assets," she added.

Infortar offered Tallink shareholders €0.55 per share, which was indeed below the market price.

Peter Priisalm, head of investments at Avaron, told ERR that since Citigroup's representative also sits on Tallink's supervisory board, they likely discussed at length how Citigroup could exit Tallink as profitably as possible. In the end, Tallink was the winner, acquiring the shares at a good price, he noted.

"It can also be inferred that Citigroup's funds had not adequately secured their options for exiting the investment in a more favorable way, meaning they had cornered themselves to some extent. On the other hand, it suggests that Tallink, despite having a long-term major investor, could not offer a more attractive exit opportunity, resulting in a very modest return on investment for them. Another conclusion is that exiting through the Tallinn Stock Exchange does not work well for major investors," Priisalm said.

Kiisk noted that the Tallink share transaction also sent a negative signal outside Estonia. "Specifically talking about Tallink, the signal that foreign investors are leaving is certainly negative. Even in good times, it wasn't very easy to attract them to Estonia," she said.

Priisalm also mentioned that such events have a definite negative impact. "Investment managers communicate internationally, and if someone has bad experiences in the Baltic market, that information spreads to other investors. As a result, it becomes more difficult to attract international major investors to Baltic issuances. This particularly affects issuances that aim to raise a significant amount of capital," he said.

Priisalm added that the role of larger institutional foreign investors on the Tallinn Stock Exchange has diminished, but the main reason is not the war in Ukraine, now in its third year.

"One reason is certainly that there are very few attractive growth stories on the stock exchange in which it is possible to invest millions of euros, given the limited liquidity. The geopolitical risk escalation can also be blamed, although the decline in institutional investor activity has been a long-term trend that began years before the full-scale war in Ukraine," he said.

The excessive transparency of the share register is also a problem for major investors, allowing anyone to see who acquired or sold shares a few days earlier.

"This is an advantage for small investors, whose quantities do not affect the market. However, if a major investor wants to buy or sell shares over a longer period without moving the market price, it becomes very difficult to achieve this goal when the entire local investment community is already buzzing about the first few trading days' transactions. Considering all these factors, the 'cocktail' offered by the Tallinn Stock Exchange creates very little appetite for investment among major investors," Priisalm said.

Companies might drop plans for IPOs

At the same time, the departure of one or two major investors does not excessively impact the local stock market; the larger effect is psychological, Kiisk said. For example, some Estonian companies planning initial public offerings (IPOs) may postpone their plans due to the loss of significant international investors.

"I think there is a lack of confidence for IPOs, and the absence of international investors is a major bottleneck. When considering going public, international investors who take long positions are always the most desirable initial step. You need such investors because they are the ones that ensure price stability. If this 'leg of the stool' falls off, there are fewer options, and this could mean that the issuance fails, which no company wants," Kiisk said.

Kiisk cited the IPO of Port of Tallinn as an example, which brought new international investors to the Tallinn Stock Exchange.

"Institutions that were not previously on the Tallinn Stock Exchange came from that IPO, and it opened up opportunities for them to start increasing their positions. Okay, not many major issuances followed where they could take positions because other bad news came. But now there are no international investors, and this is bad news because it would help our market's liquidity and attractiveness," Kiisk said.

Could a state-owned company succeed in attracting investors to Estonia?

Based on the example of the Port of Tallinn, one could assume that if the government decided to list an attractive state-owned company on the stock exchange, it would attract international interest and potentially draw some major investors back to the local stock market.

"State-owned companies are always a significant magnet for mobilizing investors when it comes to new (stock exchange) companies. They attract a crowd that is easy to engage through state-owned enterprises, bringing new investors as well," Kiisk noted.

According to Priisalm, listing large companies with higher liquidity would enhance the international attractiveness of the Tallinn Stock Exchange. However, local state-owned companies are relatively small by global standards. For instance, trading in Enefit Green on the Tallinn Stock Exchange amounted to €72 million last year, less than €300,000 per day, and trading in Port of Tallinn amounted to €19 million, less than €100,000 per day.

"If a foreign investor wanted to exit their position over, say, 10 days, averaging about 20 percent of the daily turnover, then with Port of Tallinn, they could only invest around €150,000, which is more the size of a wealthy individual investor's position. Institutional investors managing billions of euros typically do not make such small investments," Priisalm said.

On the other hand, the departure of major investors has created a situation on the Tallinn Stock Exchange that might prompt the government to delay decisions on listing state-owned companies.

"When I think of the state-owned companies that have already gone public, like Port of Tallinn, their current stock price is lower than the initial offering price. This puts them in a position where they need to decide whether to proceed with the issuance in the near future or later. Will they dare, will they find anchor investors and institutions? I don't know. Domestically, pension funds might take some positions, but they can't take too large a concentration. That's why we have always had international investors in recent years, and if that collapses, new questions arise," Kiisk said.

Efforts to concentrate on local investors needed

With the departure of international giants, the Tallinn Stock Exchange has been left relying on two main pillars: local retail investors and local major investors, specifically companies with larger balance sheets. In simpler terms, the stock exchange now depends on local capital.

Retail investors are active and were not negatively impacted by Monday's Tallink transaction, noted Kiisk. "There were no panic sales, which one might have expected since retail investors are very emotional – when negative news comes, they start selling; when positive news comes, they start buying," she said.

However, the influence of retail investors is small. At the same time, local major investors have become increasingly stronger.

"Companies considering going public should focus more on being attractive to a large number of local investors as the latter's investment capacity has significantly grown over the years," said Priisalm.

Kiisk added that uncertainty in the economy might keep international investors away from Estonian companies in the near future.

"When Port of Tallinn went public, our tax system was presented to international investors as very transparent, with lower income tax rates and so on. That is no longer the case. This raises questions for new investors about the transparency of our tax regime, our political situation and so on. I think our economic outlook is not great, which is a major red flag for some investors," Kiisk said.

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