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Investment risks

General risk factors in the business field where the group operates

Risk factor, related to the change of the legal status of the Company

After the issuance of the Licence by the LB on 22 December 2016, the Company started to operate not only according to the Law on Companies and Law on Securities and other related legal acts, as it was until obtaining a Licence, but also under the Law on Collective Investment Undertakings and other related legal acts, which establish certain specific obligations in respect of the protection of Company’sshareholders and certain operating restrictions, e.g. the Company is entitled to invest the managed funds following the requirements of the investment strategy of the Company, certain limitations of the applicable laws are applied to the Company with regards its investments, their diversification, management thereof, etc. Furthermore, the Company’s operating expenses might be increased because of the requirements to conductperiodic property’s assessment, protect the Company’s property in the Depository and other.

It should also be noted that investments into Shares of the Company (holding a Licence) are related to higher than average, long-term risk. The Company cannot guarantee that the shareholders will get invested funds back. Therefore, Shares of the Company are suitable only for investors, who seek higher long term returns but could afford to take higher than average risk, including loss of principal.

General risk

The value of an investment into real estate can fluctuate in the short term depending on the general economic situation, real estate lease and sale prices, demand and supply fluctuations. Investments into real estate should be made for a medium or long period in order that the investor could avoid the risk of short-term price fluctuations. Investments into real estate are related to higher than average risk. If investments are not profitable or in case of other unfavourable circumstances (inability to pay creditors in time), bankruptcy proceedings can be instituted against the Company. Redemption of the Shares is limited, i.e. a shareholder cannot demand that the Company or the Management Company, which took over its management, would redeem the Shares. But a shareholder will have a possibility to sell Shares in the secondary market.

Real estate development risk

Real estate projects developed by the Company can take longer than planned or cost more than planned and return on investments of the Company may decrease for this reason. Managing this risk, the Company will assign sufficient resources for control over the budgets and performance terms of real estate development projects.

The recent global sovereign debt crisis could result in higher borrowing costs and more limited availability of credit

Due to on-going recession and financial disturbance in Europe the availability of capital can be limited and therefore the cost of borrowing can increase. Poor economic situation in Greece, Spain, Cyprus and some other EU member states might further negatively affect the commercial situation of many banks operating in Europe. In addition, the risk of lower consumer confidence can have an adverse impact on financial markets and economic conditions in the EU and throughout the world and, in turn, the market’s anticipation or reflection of these impacts could have a material adverse effect on the business of the Group’s business in a variety of ways:
–       difficulty or inability to acquire capital for further Group’s acquisitions and to cover financial obligations of current debt;
–       increased risk of weak financial condition of the Group’s debtors resulting from current economic situation, etc.

Risk of inflation and deflation

There is a risk that in case of inflation the value of a Share will grow slower than the inflation, which would result in the return lower than inflation. In such a case, the real return earned by persons who sold the Shares of the Company in the market from increase in the value of the Shares can be smaller than expected. In case of deflation, there would be a risk that the value of the Company’s investments will decrease by reason of the drop of the general price level.

Geopolitical risk

There is a risk that geopolitical changes can have an effect on activities of the Company (e.g. conflicts of States, internal conflicts in neighbouring States, insurrections, wars) and for this reason the investment value of the Company can decrease or it may be impossible to sell the Company’s investments at the desired time for the desired price.

Macroeconomic environment

Real estate development tends to follow the general developments in the macroeconomic environment. Interest rates, unemployment, inflation, private consumption, capital expenditure and other macroeconomic indicators have significant influence on real estate developments and hence the operations and the potential profitability of the Group.

Favourable developments in the macroeconomic environment increase demand for real properties, allow the real estate companies to increase rent rates of properties and other prices related to activities of the Group. Adverse developments increase pressure on real estate prices, rent rates and yields. Hence the Group’s results are dependent on general macroeconomic environment and adverse developments in the environment might lead to reconsideration of some of the Group’s development plans, negative pressure on prices and rents of the Group’s properties or other changes in relation to the Group’s properties that might have a material adverse effect on the Group’s business, results of operations, financial condition and profitability.

Eurozone risk

Recent turmoil related to some of the Eurozone economies may affect the Group’s operating environment, either directly or indirectly through common currency and monetary policy changes. Prolonged and deep national budget deficits of certain Eurozone countries may adversely impact all the area’s attractiveness. Full or partial collapse of the Eurozone might have a material impact on the Group’s business.

Cyclicality of the real estate sector

Real estate development is a cyclical sector. The number of real estate related transactions fluctuates significantly depending on the stage of the real estate cycle. Cyclicality in the Baltic countries has been relatively high lately as a fast growth in prices fuelled by availability of cheap financing was followed by a steep decline as a result of financial crisis. In the future the Baltic real estate market might regain the lost momentum, again inflating the price levels, which might be followed by overheating of the market and downward pressure on the prices, thus, starting the next real estate cycle.

Risks relating to doing business in the Baltic States

Lithuanian, Latvian and Estonian markets as emerging markets are subject to greater risks than more mature markets, including legal, economic and political risks. Lithuania, Latvia and Estonia have experienced significant political, legal and economic changes and liberalization during the last two decades of transition from the planned economy to a market economy.

For the purposes of accession to the EU, Lithuania, Latvia and Estonia implemented significant social and economic changes, as well as reforms of their legal and regulatory framework. As a result, the volume of Lithuanian, Latvian and Estonian legislation and other regulations has increased and is expected to increase further pursuant to the obligation to apply European Community law.

Lithuanian, Latvian and Estonian civil codes and corporate, competition, securities, environmental and other laws have been substantially revised during the last two decades as part of Lithuania’s, Latvia’s and Estonia’s transition to a market economy and to meet EU requirements and standards. The new legislation remains in part largely untested in courts and no clear administrative or judicial practice has evolved.

Changes in customer preferences

Real estate sub-markets where the Group is operating in (commercial real estate) are subject to changing customer trends, demands and preferences. In particular, customer trends, demands and preferences may vary depending on economic factors, as well as customer preferences for the style of developments. The Group reassesses different risks, including potential changes in customer preferences, at different phases of a project. Should the Group find changes in customer preferences or other potential threats to the profitability of a project, the Group tries to adjust the project outline to meet the changed market expectations. However, there can be no assurance that the Group will be able to recognise such changes and adapt its existing developments or planned developments in timely fashion to suit such changes in customer preferences. If customer preferences in the markets where the Group operates cease to favour the Group’s developments, this could have an adverse effect on the business, results of operations and financial condition of the Group.

Increase of salaries

The Group is dependent on administrative services which are labour cost sensitive. Though workforce is cheaper in Lithuania and in Latvia than in western EU Member States, the difference should decrease constantly as the Lithuanian and Latvian economies are catching up with the average of the EU. Willing to remain competitive and retain its relations with administrators, contractors and other third parties the Issuer may be forced to increase its expenses on administrative services at a faster pace than it used to do previously. If the Issuer fails to retain healthy relations with third party service providers by increasing these costs, this may have a considerable adverse effect on the Issuer’s financial situation and business results.

Risk factors characteristic of the group

Risk of the management and human resources

The success of the Company’s investments will largely depend on decisions taken by persons in the Management Company who are responsible for management of the Company and on experience and capabilities of the said persons. There is no guarantee that the same persons will always remain responsible for management of the Company, however efforts will be used that activities of the Company would always be taken care of by properly qualified persons.

Transactions with related parties

There are quite a few transactions with related parties. Detailed information about such transactions is presented in Section 4.13 Related Party Transactions. Following applicable taxation legislation, transactions with related parties must be conducted at arm’s length. In spite of the fact that the Company’s Management uses all efforts in order to ensure the conformity with the above-mentioned standard, a theoretical taxation risk remains here, i.e. the risk that applicable taxes will be calculated according to prices applicable at arm’s length in case it is determined that certain transactions were conducted disregarding this principle, also the risk that relevant fines and default interest will be imposed. Besides, neither the Company nor its Subsidiaries have approved their transfer pricing policy.

Dependence on external financing

The Group’s cash inflows currently are sufficient to finance operating cash outflows and to pay monthly instalments of repayments and interests payments of bank borrowings. However, further development of the Group’s activities will require substantial amounts of capital to fund capital expenditures. For this reason, failure to secure adequate levels of external financing might limit the Group’s growth plans and place it at competitive disadvantage as compared to well-capitalized peers. Failure to obtain external financing may lead to forced sale of assets at unfavourable prices or even cause insolvency which may have a material adverse effect on the Group’s business, results of operation or financial condition and may destroy the shareholders’ value.

The Group is exposed to various risks due to long duration of real estate development projects

The core business of the Group is to ensure steady return from the current portfolio of assets. However, in order to achieve that the Group has to work on real estate development projects. The process of real estate development from the identification of the potential project to the disposal of the developed property usually lasts several years. Accordingly, the Group’s acquisition and development activities are subject to significant risks of non-completion and loss due to:

–       changing market conditions, which may result in diminished opportunities for acquiring desired properties, higher than expected development costs, lower than expected rental rates and lower than expected disposal prices;
–       competition from other market participants, which may diminish the Group’s opportunities for acquiring desired properties on favourable terms or at all;
–       the Group’s inability to acquire land at commercially acceptable terms or obtain detailed planning, including construction rights to the acquired land;
–       budget overruns and completion delays;
–       the Group’s potential inability to obtain financing on favourable terms or at all for individual projects or in the context of multiple projects being developed at the same time;
–       failure to meet the covenants in financing agreements, which may result in the lenders accelerating the repayments of loans under cross-default provisions;
–       defects in the legal title to land acquired by the Group, or defects in approvals or other authorisations relating to land held by the Group;
–       defects in acquired or developed properties, including latent defects in construction work that may not reveal themselves until many years after the Group has put a property in service and potential environmental damages;
–       potential significant amendments to the existing governmental rules and regulations or fiscal or monetary policies or introducing of a new governmental rules and regulations or fiscal or monetary policies applicable to the Group’s existing and future operations;
–       potential liabilities relating to the acquired land (incl. for example obligation to make certain investments and potential environmental damages), properties or entities owning properties for which the Group may have limited or no recourse;
–       property appraisers use assumptions, which are not stable and subject to changing market conditions which leads to fluctuations in property values.

Although many of these risks are beyond the control of the Group, any negative change in one or more of the factors listed above could adversely affect the business, results of operations and financial condition of the Group.

Dependence on small number of large projects

A small number of large projects in or near the capital cities of Lithuania and Latvia form substantially all of the Group’s development business. Concentration of large projects may increase the volatility of the Group’s results and increase its exposure to risks attaching to individual projects. Larger projects may also lead to proportionally larger cost overruns, which may negatively affect the Group’s operating margins. Geographic focus on capital cities of Lithuania and Latvia makes the Group vulnerable in case of a downturn in the property market in any of those cities.

Management believes that relatively few major projects in a limited number of geographic locations will continue representing a major part of the Group’s business in the foreseeable future. If the Group fails to achieve the expected margins or suffers losses on one or more of these large projects or if the property markets significantly deteriorate in Riga or Vilnius, this could have a material adverse effect on the Group’s results of operations or financial condition.

Inaccuracy of the forecasts

The Group’s profitability partly depends on its ability to forecast market prices, rents, property related costs, anticipated working capital needs, availability of financing, property values, etc. In connection with the Group’s acquisition of property for its development business, the Group bases the purchase prices it agrees for the property in part on projections of development costs, property values at the time of sale, future market rents, availability of financing and anticipated working capital etc. If the Group’s projections are inaccurate, it could experience lower profits, which could have a material adverse effect on its results of operations and financial condition.

Lack of insurance cover and specific reserves for indemnifying damages

The properties belonging to the Group could suffer physical damage caused by natural disasters, fire or other causes, resulting in losses which may be not fully compensated by insurance. The Group has obtained insurance coverage for its properties, which it believes to be in line with standard industry practice. The insurance covers, for example, losses and liability resulting from fire, break-in, diffusion, robbery, vandalism, pipe leakages, lightning, explosion, implementation of the extinguishing system storm, etc.

However, liability insurance aimed to cover damage caused to third parties is only some of the Group Subsidiaries’ insurance policies. A number of the Subsidiaries have valid business interruption insurance. However, insurance coverage is subject to limits and limitations and some risks (e.g. certain natural disasters and terrorist acts) are not covered by insurance for various reasons (e.g. because such risks are uninsurable or the cost of insurance is, according to Management’s belief, prohibitively high when compared to risk).

Even if the insurance is adequate to cover Group’s direct losses, the Group could be adversely affected by loss of earnings caused by or relating to its properties. The occurrence of any of the above referred harmful effects or insufficient insurance coverage may have a material adverse effect on the business, results of operations and financial conditions of the Group. This inter alia means that the Group could:
–       lose capital invested in the affected property as well as anticipated future lease income or sale proceeds from that property;
–       be held liable to repair damage caused by the event; and
–       remain liable for any debt or other financial obligation related to that property.

In addition to that the Group does not maintain separate funds nor does it set aside reserves for the above-referred types of events.

Risk related to lease agreements

The Group’s lease agreements may be divided into two categories: non-cancellable fixed-term lease agreements and cancellable lease agreements entered into for an unspecified term. For the cancellable lease and sublease agreements, tenants must notify the administrator 3–6 months in advance, if they wish to cancel the rent agreement and have to pay 3–12 months’ rent fee penalty for the cancellation. According to non-cancellable lease and sublease agreements tenants must pay the penalty equal to rentals receivable during the whole remaining lease period.

The Group seeks to use both types of agreements, depending on the market situation and the properties in question. Lease agreements entered into for an unspecified term involve nevertheless a risk that a large number of such agreements may be terminated within a short period of time. The Group aims at renewing the fixed term lease agreements flexibly in cooperation with its tenants. There are, however, no guarantees that the Group will be successful in this. In order to prevent tenants from terminating the lease agreements, the Group may also be forced to agree on the reduction of rent fees. The reduction of rent fees payable to the Group under a large number of lease agreements and/or concurrent termination of a large number of lease agreements could have a material adverse effect on the Group’s business, results of operations and financial condition.

Reliance on the administrator of the Company’s property

On 2 January 2013 the Company has entered into an agreement with a third party for property management and administration services on part of Company’s asset portfolio. The detailed list of buildings, administered, based on this agreement is provided in Section 4.20 Investment Restrictions. Under this agreement the third party, as an administrator of the property, is committed to increase Company’s value and maintain high quality of service for buildings’ tenants and employees. In case of change in administrative prices in the market, new contracts under less favourable conditions can be entered into with administrator, which may directly influence the increase in Company’s costs.

Interest rate risk

There is a risk that in case of fast recovery of the global economy or increase in inflation, central banks will increase interest rates and it will be more expensive to service loans in connection with the Company’s investments, therefore, the value of the Company’s investments can decrease. In order to avoid this risk, the Management Company shall seek that the Company would get most of its loans at fixed interest rates. If it seems necessary, the Company shall hedge against interest rate risk when entering into relevant transactions.

Furthermore, interest rate risk mainly includes loans with a variable interest rate. On 26 August 2014 the Company and Šiaulių Bankas AB entered into a credit agreement for EUR 15.35 million credit (on 29 January 2016 a credit was increased by EUR 4.5 million) with variable interest rate – 6 month EURIBOR and fixed margin. In addition to that, on 15 July 2015 the Subsidiary Dommo Biznesa Parks SIA and ABLV Bank AS entered into a credit agreement in an amount of 3 million with variable interest rate – 3 month EURIBOR and fixed margin. Rising interest rates will increase the Group’s debt service costs, which will reduce the return on investment. If considered necessary, the Group will manage interest rate risk by entering into financial derivatives’ contracts.

Leverage risk

Leverage risk is related to possible depreciation of real estate objects acquired with borrowed money. The bigger the leverage, the higher probability of this risk is. The level of borrowings of the Group was 42% of its investment property market value as of 30 June 2016 (47% as of 31 December 2015).

Credit risk

The Company has given and may have given loans to other companies, therefore, in case of deterioration of the financial condition of those companies, there is a risk that the Company will not get back all the loans granted by it.

Risk of spin-off from Invalda INVL AB

On 29 April 2014 the Company took over 30.9% of the assets, equity and liabilities of Invalda LT AB (currently, Invalda INVL AB). If certain obligations of Invalda INVL AB were not known at the time of the spin-off and for this reason were not distributed to all companies operating after the spin-off, all the companies operating after the spin-off will be liable for them jointly and severally. The liability of each of those companies for these obligations will be limited by the amount of the equity, assigned to each of them according to the terms of spin-off. Thus, there is a risk that if the obligations of Invalda INVL AB are not distributed, the Company will be liable for obligations of Invalda INVL AB, which according to the terms of spin-off are assigned to the Company. The Company does not have any information that the reorganisation of Invalda INVL AB was performed improperly and/or that some of the obligations of Invalda INVL AB are not distributed.

Reorganisation risk

The Company after the reorganisation – the Merger of Former Parent Company with the Company (previous name – Invalda nekilnojamojo turto fondasAB), which continues its activities after the Merger, took over all the assets, equity and liabilities of the Former Parent Company (for more information on the reorganisation please see Section 4.3 History and Development of the Group). For any and all the obligations of the Former Parent Company after the reorganisation, the Company took responsibility.

Liquidity risk

This is a risk to incur losses due to low liquidity of the market, when it becomes difficult to sell assets at the desired time at the desired price. In management of this risk, the Company will regularly monitor the real estate market, will get ready for the property sale process in advance, in this way reducing the liquidity risk. Acquiring Shares, the shareholders also assume the risk of securities liquidity – in case of a drop in demand for Shares or delisting them from the stock exchange, investors would find it difficult to sell them. In case of deterioration of the Company’s financial situation, the demand for Shares, as well as their price may decrease. Liquidity risk also covers the cash flow disruption risk incurred by the Company due to late payments and/or full default on monetary obligations by insolvent tenants.

Total investment risk

The value of the investment in real estate can vary in the short term, depending on the general economic conditions, rent and purchase prices of real estate, demand and supply fluctuations, etc. Investment in real estate should be carried out in the medium and long term, so that the investor could avoid short-term price fluctuations. Investing in real estate is related to higher than medium risks. Failure of investments of the Group or under other ill-affected circumstances (having been unable to pay for the creditors) can have a significant adverse effect on the Group’s performance and financial situation or in the worst case scenario bankruptcy proceedings may be initiated.

Investment diversification risk

This is a risk that one bad investment can have a significant effect on the results of the Company. In order to reduce this risk, the Company will have a sufficient number of different real estate objects in its portfolio, in this way maintaining the proper diversification level.

Tenants’ risk

The Company will seek to let real estate objects at as high prices as possible. Though currently the rent is paid in time (overdue obligations of tenants are very small and are not significant for activities of the Company), there is a risk that upon change (deterioration) of the economic situation the tenants will default on their obligations – this would have a negative impact on the profit and cash flows of the Company. In case of late performance of a large part of obligations, the ordinary business of the Company may be disrupted, it may be necessary to search for additional sources of financing, which may be not always available. The Company, in case of failure to earn planned income from lease or to maintain a high percentage of occupation of the buildings, can face the problem of costs that are not compensated by permanent tenants. This risk may manifest itself in case of big increase in the supply of rented premises and reduction in demand, drop in rental fees. In case of a failure to let the premises at planned prices or in planned scopes, also in case current tenants terminate their lease agreements, the income of the Company could decrease, whereas fixed costs would remain the same. Accordingly, the profit of the Company would decrease.

Risk of financial intermediaries

The Company will also incur risk by keeping funds in bank accounts or investing into short-term financial instruments. Currently, no short-term financial instruments are being acquired, excess funds are kept in bank accounts or are used to cover obligations of the Company.

Risk of insolvency of the Company

In case of realisation of one or several of the risks indicated in this Section, which would have a negative effect on the value and/or liquidity of investments of the Company, this can result in the Company’s solvency problems, when the Company will be incapable of fulfilling its obligations. In such a case, shareholders can lose all their funds invested into the Company.

Sub-lease agreement risk

In 2007 the Company has sold 5 real estate properties and entered into the operating lease agreement with the buyer until August 2017. For more information on this agreement please see Section 4.16 Material Contracts. All these properties are sub-leased to third parties. For the remaining part of the contract the Company is incurring about EUR 20,000 loss (future rent income from subleased premises minus contractual lease payments and estimates of maintenance and management expenses of leased premises) per month due to this sublease arrangement. This amount varies depending on the income from the sub-lease, property maintenance costs incurred and the rent fees paid.

The Group’s reputation may be damaged

The Group’s ability to attract purchasers of property, attract and retain tenants, raise the necessary financing for the development projects as well as retain personnel in its employment may suffer if the Group’s reputation is damaged. Matters affecting the Group’s reputation may include, among other things, the quality and safety of its premises and compliance with laws and regulations. Any damage to the Group’s reputation due to, for example, including but not limited to the aforementioned matters, may have a material adverse effect on the business, results of operations and financial condition of the Group.

Dependence on IT systems

The Group is dependent on a variety of 3rd party developed and used IT systems and web-based solutions for operations, including internal accounting and management information systems, handling of customer and tenant information, project designs and specifications, and general administrative functions. Failures or significant disruptions to the 3rd parties’ IT systems could prevent them from providing their services to the Group efficiently. Furthermore, should the 3rd parties experience a significant security breakdown or other disruption to their IT systems, sensitive information could be compromised and their operations could be disrupted which in turn could harm Group’s relationship with its customers and suppliers, or otherwise have a material adverse effect on the Group’s business, results of operations and financial condition.

Risk of valuation of the Company’s assets

The assets of the Company will be evaluated according to the main rules set in the Articles of Association and the Accounting Policy of the Management Company. Valuation of individual assets held by the Company shall be performed by two property appraisers, however such valuation of assets shall be only determining the value of the assets, which does not automatically mean the exact sale price of an investment held by the Company, which depends on many circumstances, for example, economic and other conditions, which cannot be controlled. Thus, the sale price of investments held by the Company can be higher or lower than the value of assets determined by a property appraiser.

Competition risk

The Company, investing into investment objects, will compete with other investors, including, without limitation, with other investment companies or real estate investment funds. Thus, there is a risk that competition with other investors will demand that the Company would conduct transactions at less favourable conditions than it would be possible in other cases.

Risk related to the duty to redeem shares of the Company

Legal acts provide for a duty of the Company in certain circumstances to redeem its Shares from the shareholders that requested such redemption (please see Articles of Association). Accordingly, if the Company becomes subject to the duty to offer to the shareholders redemption of its own Shares and if such a redemption is requested by the shareholders holding a significant number of Shares, the Company can be forced to sell its investments urgently, which can significantly reduce the return earned by the Company from sale of its investments. This risk is planned to be managed by means stipulated in the Articles of Association.

Risk factors related to the company’s shares (investments thereto)

Past performance risk

The past performance of the Company and its investments is not a reliable indication of the future performance of the investments held by the Company.

No guarantee of return

The shareholders and investors of the Company should be aware that the value of an investment in the Company is subject to normal market fluctuations and other risks inherent in investing in securities. There is no assurance that any appreciation in the value of the Shares will occur or that the investment objectives of the Company will be achieved. The value of investments and the income derived therefrom may fall as well as rise and investors may not recoup the original amount invested in the Company.

Market risk

Acquisition of Shares entails the risk to incur losses due to unfavourable changes in the Share price in the market. A drop in the price of the Shares can be caused by negative changes in the value of assets and profitability of the Company, general share market trends in the region and in the world. Trade in Shares can depend on comments of financial brokers and analysts and announced independent analyses about the Company and its activities. If the analysts give an adverse opinion about prospects of the Shares, this can also have a negative effect on the price of Shares in the market. In assessing Shares, non-professional investors are advised to address intermediaries of public trading or other specialists in this field for help.

Turmoil in emerging markets could cause the value of the Shares to suffer

Financial or other turmoil in emerging markets has in the recent past adversely affected market prices in the world’s securities markets for companies operating in the affected developing economies. There can be no assurance that renewed volatility stemming from future financial turmoil, or other factors, such as political unrests that may arise in other emerging markets or otherwise, will not adversely affect the value of the Shares even if the Lithuanian economy remains relatively stable.

The market value of Shares may be adversely affected by future sales or issues of substantial amounts of Shares

All the Shares of the Company may be provided for sale without any restrictions and there can be no assurance as to whether or not they will be sold on the market.

The Company cannot predict what affect such future sales or offerings of Shares, if any, may have on the market price of the Shares. However, such transactions may have a material adverse effect, even if temporary, on the market price of the Shares. Therefore, there can be no assurance that the market price of the Shares will not decrease due to subsequent sales of the Shares held by the existing shareholders of the Company or a new Share issue by the Company.

The marketability of the Shares may decline and the market price of the Shares may fluctuate disproportionately in response to adverse developments that are unrelated to the Company’s operating performance

The Company cannot assure that the marketability of the Shares will improve or remain consistent. Shares listed on regulated markets, such as Nasdaq, have from time to time experienced, and may experience in the future, significant price fluctuations in response to developments that are unrelated to the operating performance of particular companies. The market price of the Shares may fluctuate widely, depending on many factors beyond the Company’s control. These factors include, amongst other things, actual or anticipated variations in operating results and earnings by the Company and the Subsidiaries and/or their competitors, changes in financial estimates by securities analysts, market conditions in the industry and in general the status of the securities market, governmental legislation and regulations, as well as general economic and general market conditions, such as recession. These and other factors may cause the market price and demand for the Shares to fluctuate substantially and any such development, if adverse, may have an adverse effect on the market price of the Shares which may decline disproportionately to the operating performance of the Company and/or the Subsidiaries. The market price of the Shares is also subject to fluctuations in response to further issuance of Shares by the Company, sales of Shares by the Company’s existing shareholders, the liquidity of trading in the Shares and capital reduction or purchases of Shares by the Company as well as investor perception.

Dividend payment risk

Though the Company has approved its dividend payment policy, payment of dividend to Shareholders is not guaranteed and will depend on profitability of activities, investments plans and the general financial situation. For more information regarding payment of dividend by the Company please see Section 4.14.3 Dividend Policy as well as Part X of the Articles of Association, which is incorporated by reference to this Prospectus.

Liquidity of the Issuer’s Shares is not guaranteed

It may be possible that in case an investor wants to urgently sell the Issuer’s securities (especially a large number of them), demand for them on the exchange will not be sufficient. Therefore, sale of shares can take some more time or the investor may be forced to sell shares at a lower price. Analogous consequences could appear after the exclusion of the Company’s Shares from the Secondary List of Nasdaq. Besides, in case of deterioration of the Company’s financial situation, demand for the Shares of the Company and, at the same time, their price may decrease.

Risk of conflicts of interest

There is a risk that there will be situations when interests of the Management Company (or persons related to it) and the Company or shareholders will differ or interests of individual shareholders will differ, i.e. there will be a conflict of interest. When it is impossible to avoid a conflict of interest, the Management Company must ensure that shareholders are treated fairly. Employees of the Management Company must immediately, as soon as they become aware of such information, notify the Investment Committee about a potential or existing conflict of interest. The Investment Committee, approving of investment decisions, shall take into account the information presented to it about potential or existing conflicts of interest. The Investment Committee shall immediately inform the head and the Board of the Management Company about conflicts of interest it is aware of. Following legal acts regulating organisation of activities of collective investment undertakings, the Management Company has implemented appropriate measures for avoiding and managing conflicts of interest, which enable to perform the activities of managing the risk of conflicts of interest and managing conflicts of interest independently, in order to avoid/reduce the risk of conflicts of interest or properly manage a conflict of interest when it occurs.

Risk of major shareholders

Most Shares (approx. 80%)and votes carried by them are held by several Major Shareholders, who controls Invalda INVLAB andthe Management Company, and therefore they can exercise materialimpact on the Company. There are no guarantees that the position of these shareholders will always coincide with the opinion and interests of the Management Company, minor shareholders. For more information on Major Shareholders of the Company please see Section 4.12 Major Shareholders.

Risk related to forward looking statements (statements in the future tense)

This Prospectus includes forward looking statements, which are based on estimate, opinion, expectations and forecasts regarding future events and financial trends that will possibly have an effect on the activities of the Company. Forward looking statements include information about possible or presumable results of the Company’s activities, investment strategy, contractual relationships, borrowing plans, investment conditions, effect of future regulation and other information. For more information on the forward looking statements please see Section 1.3 Forward Looking Statements. The Company cannot assure that forward looking statements will reflect future events and circumstances fully and correctly. The Company, the Management Company and its employees do not undertake to adjust or modify statements in the future tense, except to the extent required by laws and the Articles of Association.

Risk of changes in laws and regulations

There is a risk that upon changes in legal acts of the Republic of Lithuania or the states where assets of the Company are invested, such changes in legal acts can have a negative effect on the protection of the Company’s investments, their profitability and value or such changes in legal acts can have a negative effect on rights and interests of the Company otherwise. Taking that into account, the Company will invest only into assets located in the Member States of the EU.

Risk related to possible liability of the Company

There is a risk that the activities of the Company and the general performance results of the Company can be negatively affected by demands and claims regarding non-disclosed or non-identified obligations and/or violations in connection with investments acquired by the Company, which may result in the Company’s liability for such obligations and/or violations and for this reason the value of the Company’s investments and, at the same time, the price of the Shares can significantly decrease.

Risk related to uncertainty of legal regulation of activities of the Company

Legal acts of the Republic of Lithuania do not clearly regulate the legal status and activities of a closed-end type investment company. Therefore, there is a risk that legal actions may be taken against the Company and/or the Management Company, including, without limitation, disputing obtaining of a License for a closed-end type investment company, powers of the Management Company to manage the Company, also enforcing recovery from the assets of the Company for fulfilment of obligations to creditors of shareholders and/or the Management Company or demanding that shareholders and/or the Management Company fulfil outstanding obligations of the Company.

Tax risk

Lithuanian tax legislation which was enacted or substantively enacted at the end of the reporting period may be subject to varying interpretations. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Management is not aware of any circumstances that could lead to significant tax charges and penalties in the future that have not been provided for or disclosed in these financial statements. Uncertain tax positions of the Company and of the Subsidiaries are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognized based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period.

There is also a risk that upon changes in economic conditions, political situation in the country or due to any other reasons, new taxes on shareholders, the Company or investment objects of the Company will appear or the rates of current taxes will increase, therefore the price, liquidity and/or attractiveness of the Shares or the value of investments of the Company may decrease.

Taxation and legal risk

Upon change of legal acts related to equity securities or the national taxation policy, this may result in the change of attractiveness of the Shares. For this reason, the liquidity and/or the price of the Shares may decrease.

The Issuer does not fully comply with Nasdaq Corporate Governance Code

The Issuer does not fully comply with Nasdaq Corporate Governance Code: it has not formed the Nomination and Remuneration Committee, no public statements are made regarding the Company’s remuneration policy, etc. (exhaustive information about its compliance with the Code is given in Appendix 2 of the Annual Report of the Company for the year 2015).