The Finnish private equity and venture capital market in 2003
has been marked by a considerable increase in expansion and buyout
investments as well as by a continuing trend of follow-up
investments. While investors look forward to 2004, they must
prepare for substantial legal developments that will affect the
private equity and venture capital business in general.
In 2003, the total number of investments dropped only slightly
from 2002 (based on third quarter figures). The market has
continued to favour less risky expansion and buyout investments on
more traditional businesses. Most investors now require companies
to show revenue and ready products or service models as a
precondition for an investment. It is therefore not surprising that
high-tech companies seeking seed or start-up financing have been
hit the hardest. Also, the investment flow to biotech and life
science companies has virtually come to a halt.
The Finnish private equity and venture capital market in general
has not yet fully recovered from the dip after the strong years of
1999 to 2001 and it is waiting for positive economic signals from
Europe and the US. Certainly, opening the IPO market in Finland
will eventually have a big influence on venture capital activity.
There have been practically no IPOs in Finland from 2001 to
date.
Statistics of 2002 to 2003 and notable transactions
The market trends are well evidenced in the statistical
information provided by the Finnish Venture Capital Association
(FVCA), covering investments of almost all big players on the
Finnish private equity and venture capital market.
In 2002, Finnish private equity and venture capital investors
concluded a total of 462 investments (449 in 2001) in 259 target
companies (294 in 2001). The total invested capital rose to €391
million ($477.5 million) from €340 million in 2001. But, when
broken down by stage distribution, expansion financing amounted to
€149 million and 38% of the total investments (up from €80 million
and 24% in 2001) and buyout financing amounted to €130 million and
33% of the total investments (up from €53 million and 16% in 2001).
Most of the expansion and buyout investments were initial
investments. The amount of seed, start-up and early-stage financing
dropped to €97 million from €171 million in 2001. The value of
follow-up investments increased in 2002 and over two-thirds of
seed, start-up and early-stage financing was follow-up investment.
Some notable investments in 2002 by FVCA members include the
acquisition of Fonecta Ltd (formerly Sonera Info Communications
Ltd), worth €111 million, by funds managed and advised by 3i Group
plc and an investment worth DKr250 million ($41 million) to RGS90
(a Danish waste management company) by funds managed and advised by
CapMan Group.
The exit market slowed down in 2002, totalling only €105 million
(173 exits) compared to €116 million in 2001 (134 exits). At the
same time the write-offs increased from €29 million in 2001 to €38
million in 2002. In 2002 the total capital raised by Finnish
private equity and venture capital funds was €657 million, double
the amount raised in 2001 (€321 million).
The latest FVCA third quarter statistics show a decrease in both
the invested amount (€255 million compared to €309 million by the
third quarter in 2002) and the number of investments (a total of
306 compared to 327 in 2002) and a substantially similar breakdown
of investments by stages as in 2002. But the greatest change is in
the amount of initial investments in seed, start-up and early-stage
companies, which totalled only €12 million up to the third quarter
in 2003 compared to a total of €28 million in 2002. The number of
exits is on the rise, totalling €128 million already (of which 40%
are write-offs). The amount of new capital raised by Finnish
private equity and venture capital funds up to the third quarter
2003 has been only €104 million after the record-breaking year
2002.
Investments in 2003 by FVCA members include the acquisition of
Nordkalk Corporation (a limestone products producer) worth €270
million by NK-Holding Oy (an investment vehicle owned by funds
managed or advised by CapMan Group, Ahlström Capital and other
Finnish investors), the acquisition of Noiro (cosmetics and
detergent business) worth €100 million by funds managed by CapMan
Group, the acquisition of Suomen Autokatsastus Oy worth €59 million
by MB Rahastot Oy and the acquisition of Huoneistokeskus Oy (a real
estate brokering company) worth €47 million by Sponsor Capital
Oy.
The FVCA is member of the European Private Equity and Venture
Capital Association (EVCA) and follows the EVCA definitions for
development stages and business sectors.
Finnish documentation and investment structuring
In Finland, no specific legislation covers private equity and
venture capital funds and management companies. Finnish private
equity and venture capital funds are mostly structured as limited
partnerships (kommandiittiyhtiö), similar to limited
partnerships in most European countries. Investors participate as
limited partners with limited liability and the management company
acts as the general partner. The Finnish Act on Limited
Partnerships allows considerable freedom in drafting documentation
for private equity and venture capital funds. Partnership
agreements must be registered to the National Board of Patents and
Registration of Finland, so they usually contain only certain
minimum provisions required by law - more substantial issues are
covered in a separate shareholders' agreement.
The contractual terms and mechanics of Finnish private equity
and venture capital funds follow the market practice of other
European jurisdictions. Similarities include drawdown and profit
distribution mechanisms, key man clauses, distributions in specie,
parallel funds and re-investments. But a feature that is more
common in Finland than in other European countries is the concept
of an investment committee, consisting of representatives of the
investors. The investors may participate in the decision making
through an investment committee and usually even have a veto right
with respect to the fund's investments and divestments. It has
become popular for Finnish management companies to set up offshore
funds to attract foreign investors and to gain tax advantages.
In Finland, most investments in target companies are concluded
as equity investments, although in recent years quasi-equity
investments (non-equity securities convertible to equity) have
become more popular (16% of the total investments in 2002 were made
by quasi-equity instruments according to the FVCA statistics). The
investment documentation also follows European standards, although
in seed and start-up investments the investment process and
investment documentation tend to be lighter. The FVCA has recently
revised its model shareholders' agreement, which contains terms
used in Finnish private equity and venture capital investments,
reflecting Finnish market practice.
Legal developments
In Finland, private equity and venture capital funds or
management companies are not considered investment firms or other
entities subject to the supervision of the Finnish Financial
Supervision Authority. But the Finnish Securities Markets Act was
amended in 2002, and it now requires any legal entity to prepare a
prospectus when marketing tradable securities to the public in
Finland (the public generally meaning more than 100 persons or
entities). Although this is not a likely case in marketing private
equity funds, such evaluation must be made on a case-by-case
basis.
A Finnish private equity and venture capital fund structured as
a limited partnership is considered to be a transparent accounting
unit and a legal entity not subject to taxation. Instead, the
income of a fund is taxed as the income of the partners. The tax
status on foreign limited partners in Finnish private equity and
venture capital funds was unclear until a ruling of the Finnish
Supreme Administrative Court in 2002 stated that foreign partners
of a limited partnership are also deemed to have a permanent
residence in Finland for tax purposes. As a result of the ruling,
foreign entities investing in Finnish private equity and venture
capital funds are subject to 29% corporate income tax. This tax
treatment has greatly increased the need to set up offshore
vehicles for foreign investors. But the Finnish Ministry of Finance
has already noted this, and it is considering new legislation to
address it.
A substantial amount of new legislation is under consideration
that will have direct or indirect influence on private equity and
venture capital activity in Finland, most of which is prepared
under the loose Entrepreneurship Policy Programme framework adopted
by the Finnish government (partially in line with the EU Risk
Capital Action Plan (RCAP)). The most important issues under the
programme are the revision of the Finnish Companies Act (presumably
as of 2006), the revision of capital and corporate taxation
(presumably as of 2005), the revision of tax treatment regarding
stock options of small and medium companies and the revision of the
tax status of foreign investors in Finnish private equity and
venture capital funds.
The new Companies Act, as the Finnish Ministry of Justice
proposed it in a report published in May 2003, includes radical
amendments to the capital and stock system of Finnish limited
liability companies which, if realised, would ease investment
structuring of Finnish companies. The proposed changes would allow
more flexible valuation adjustment and exercise of anti-dilution
structures, increased possibility to create new classes of shares,
more flexible distribution of dividends and reduced procedural
rules regarding stock options. The proposed Companies Act also
includes less procedural rules concerning company administration,
which may put the focus on investment documentation and corporate
governance guidelines.
Furthermore, the Finnish government issued a statement in
November 2003 outlining the general guidelines regarding the
revision of capital and corporate taxation, expected to take effect
as of January 1 2005. The proposed changes include abolishing the
avoir fiscal system, reducing corporate income tax to 26%
(from 29%) and reducing capital gains tax to 28% (from 29%). There
is also a rather ambiguous statement on the use of holding
companies to avoid personal income tax, which if put into
legislation may affect fund and investment structures.
The changes in legislation referred to above, together with the
adoption of IAS standards and Basel II capital requirements, must
be carefully evaluated and taken into account by fund managers and
their advisers in Finland when considering fund and investments
structures in the future.
Author
biography
Antti Hemmilä
Borenius &
Kemppinen
Antti Hemmilä advises on venture capital, mergers and
acquisitions, insolvency and general corporate law questions. He
has wide experience in advising small and medium companies on
numerous M&A and financing arrangements, representing both
companies and providers of finance.
Mr Hemmilä is in charge of legal issues relating to corporate
law and M&A transactions at the branch office of Borenius &
Kemppinen at the high-tech centre Innopoli 2 in Espoo. Mr Hemmilä
received his master of laws degree in 1997 and was admitted to the
Finnish Bar Association in 2001.
Attorneys at law Borenius & Kemppinen
Ltd
Yrjönkatu 13 A
FI-00120 Helsinki, Finland
T +358 9 615 333
F +358 9 6153 3499
www.borenius.com
antti.hemmila@borenius.com