A Strong Start for the Latvian Fund

As many as three office center acquisitions in less than a year, and one of them is considered the most expensive real estate transaction in Latvia in 2018. The market entrant is not a foreign company but rather the Latvian investment fund SG Capital Partners AIFP (SG Capital Partners). In an interview with M2 magazine and the portal varianti.lv, the fund’s Chairman of the Board, Harijs Švarcs, reveals that the company’s portfolio will continue to expand.

We have become accustomed to the fact that the majority of companies and funds investing in Latvian commercial properties in recent years are of foreign origin. SG Capital Partners is a Latvian company, registered in 2017.

How did the idea for such a company arise?

“In the past, I worked at Swedbank, where I managed financial assets for pension funds. Latvian pension funds hold more than €4 billion, while Baltic pension funds together exceed €10 billion. These funds should not be idle – money must work and generate returns. Selecting the right investment objects is not an easy task. We wanted to invest more in Latvia and the Baltics, but… the available options were very limited, leading to more funds flowing abroad. This was a concern for Latvian politicians. Every time pension fund representatives visited the Saeima (Parliament), they were asked the same question: “Why aren’t Latvian pension savings benefiting our country but are instead placed abroad?” The pension fund representatives logically replied that they were willing to invest domestically but needed transparent financial instruments and stable, well-structured assets with good returns and understandable risks. At that time, there were simply no secure and transparently structured assets in the Latvian real estate market. That’s when I started thinking about the need to create a real estate fund that meets the requirements of institutional investors (which include pension funds).”

Experience from Ektornet and the Formation of SG Capital Partners

In response to the 2007–2009 real estate market crisis, Swedbank established Ektornet, the largest distressed asset management division in the country, tasked with managing problematic assets whose owners could no longer meet their mortgage obligations. Ektornet’s portfolio included thousands of properties, and the company employed around 100 trained specialists with experience handling complex assets. They dealt with fraud involving repossessed properties, legal, financial, and technical issues, and participated in litigation. This provided them with unique expertise.

Once this team, trained to work within the structured Scandinavian approach, completed its mission in 2016—selling the properties and returning funds to Swedbank’s shareholders—it became redundant. The mission was accomplished.

“At that point, together with some of the professionals from this team, we decided to create SG Capital Partners Fund. We developed our strategy, engaged in negotiations with institutional funds, particularly pension funds. We demonstrated our expertise and shared our vision for creating an attractive real estate investment product… They trusted us.”

Does this mean you no longer have any cooperation with Swedbank?

“Our fund is a completely independent entity. One of the key requirements from our investors is that the fund manager must be independent and not controlled by any single financial institution. This ensures adherence to the established strategy, avoids conflicts of interest, and prevents external pressure from altering the investment policy. Our fund was created for a period of eight years, which can be extended by two more years, making the maximum planned lifespan ten years.”

Supervision and Investor Protection

Note: SG Capital Partners is registered with the Latvian Financial and Capital Market Commission, meaning it operates under strict regulatory oversight. The fund must comply with similar requirements imposed on banks and other financial institutions, including capital adequacy rules and investor protection measures.

The fund’s primary focus is to attract investments from Baltic pension funds. Once collaboration agreements were secured, the team began searching for suitable properties.

Investment Returns and Risk Evaluation

“When divesting properties from the SG Capital Partners portfolio, our goal is to achieve a net profit of 8% per year. This is the target return for the entire portfolio at the point of sale.”

An 8% annual return is a strong figure, especially considering that all Latvian pension funds closed the previous year with negative returns.

“Pension funds are interested. However, both the real estate and stock markets are subject to fluctuations. Pension fund professionals understand this well – one year, prices may fall, while in another, they rise. Commercial real estate has advantages over stocks, such as inflation-adjusted rent agreements, which are difficult or impossible to implement in other financial instruments. Unlike deposits and bonds, commercial real estate is a tangible asset that is protected against inflation.”

Current Portfolio and Transactions in 2018

SG Capital Partners currently owns three properties, all acquired in 2018:

1. Brīvības iela 39 (Sniķers House) – 2,482 m², purchased for €6.3 million, primarily financed by SEB Bank.

2. Duntes Nami, Duntes iela 3 – 7,334 m², price undisclosed.

3. SWH Office Center – 40,000 m², the largest real estate deal in Latvia in 2018, and third-largest in the Baltics.

“Following additional construction, SWH Office Center could be expanded by another 25,000 m².”

Future Plans and Market Outlook

“Since the second half of 2018, when SG Capital Partners gained visibility in the press, we have been receiving more direct offers from brokers. Each week, we analyze new investment opportunities. However, we are selective and patient – if a deal doesn’t meet our criteria, we wait for a better opportunity.”

The fund collaborates with SEB, Luminor, and Citadele, but banks have become more cautious in lending, raising interest rates for investors.

“We aim to obtain BREEAM certification for all our properties. SG Capital Partners is the first real estate fund in the Baltics focused on sustainability and energy efficiency. Our first certified property is Brīvības iela 39.”

Expansion Beyond Riga?

“We have no plans to invest outside Riga. We explored Vilnius and Tallinn, but higher prices and lower returns made Riga more attractive. We are not in a race to overpay for properties.”

SG Capital Partners’ future investment targets include office and retail properties with a minimum value of €10 million, stable cash flow, and optimization potential.

Article: https://www.varianti.lv/lv/blog/detail/article/4227