A key policy goal in the three Baltic countries is to bridge the productivity gap with Western Europe. This requires increased investments into corporate innovation and efficiency enhancement. While reinvested profits and bank credit will continue to be their primary source of funds, Baltic companies will find it desirable to diversify their financing instruments. Governments in the region expect that the recently introduced mandatory pension funds will eventually play a major role in the financing of private sector growth. Following the experience of some OECD countries, private equity may be an attractive vehicle to channel pension funds money into innovative firms. To do so, government policy could act as much on the supply as on the demand side by improving information flows between investors and investees, streamlining tax policy as well as adapting relevant pension fund regulations...