Finland

Author: | Published: 4 Jan 2001
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Article updated on August 2nd

The following is mostly based on information gathered by the Finnish Venture Capital Association (FVCA), and includes only the transactions carried out by the members of the FVCA.

In 1999, Finnish venture capital investors made 325 investments worth a total of ¤285 million ($240 million). Almost ¤130 million of this was invested in target companies in south Finland. Initial investments formed two thirds of all investments, and over 90% of the invested amount. The average size of an initial investment was approximately ¤1 million. Private independent funds made up 90% of the investments, while the public sector accounted for 10%. Companies engaged in telecommunications, electronics and information technology formed a significant part of target companies.

In 1999, Finnish venture capital investors raised euro656 million-worth of new capital. The main sources were: insurance companies - euro187 million (29%); pension companies - euro180 million (28%); capital markets - euro92 million (14%); special government financing institutions - euro78 million (12%); banks - euro70 million (11%); and companies - euro5 million (1%).

The volume of the capital under management amounted to Fmk2 billion ($283 million) at the end of 1999. The capital under management includes the investments made, plus capital available for investment. Most of the capital under management is in the form of investment commitments from the institutions. This means that the investment in the fund is made on the basis of the management company's drawdown notice when a suitable target has been found. So only a part of the capital is actually held by the venture capital funds. Of the capital under management, 82% was held by private funds, and 18 % by public investors.

The number of divestments totalled 101 in 1999. Value of divestments was over euro60 million (at cost).

By comparing this with figures from 1998 one may easily conclude that the venture capital industry is growing rapidly: in 1998 raised new capital was euro330 million and investments in target companies were euro190 million. At the end of 1998 approximately euro1.3 billion were managed by fund management companies. The growth is expected to continue.

 Leading venture capital investors in Finland
 Public players
  • Sitra (the Finnish National Fund for Research and Development) invests in technology companies and venture capital funds, both in Finland and abroad. It focuses its investment in early-stage technology companies and other promising technology firms. It provides a non-profit matching service that promotes contacts between business angels and small and medium-sized companies.
  • Finnish Industry Investment has mainly acted as a fund of funds and will invest directly in the future money raised in privatizations.
  • Finnish Fund for Industrial Cooperation (Finnfund) finances profitable enterprises in emerging countries and is co-sponsor of the emerging markets energy fund.
 Private players
  • 3i Finland
  • Bio Fund
  • CapMan Capital Management
  • Eqvitec Partners
  • Fenno Management
  • Holtron Capital
  • Leonia MB Group
  • Merita Capital
  • Nexit Ventures
  • Nordic Mezzanine
  • OKO Venture Capital
  • Sponsor Capital
  • Stratos Ventures
 Foreign players
  • EQT Partners
  • Industry Capital
  • Nordic Capital


Market trends

The venture capital industry is crossing borders in many senses. The trend seems to be that some of the new larger funds, as well as some management companies, will be set up abroad. This is to attract foreign investors with more flexible taxation.

Several cross-border investments have been made. Swedish private equity funds have made investments in Finland (the most recent being Industri Kapital 2000 Fund, which acquired the tinting systems business of Tikkurila CPS from Kemira). CapMan's mezzanine investment in Utfors, a Swedish internet and telecoms operator, shows Finland to be investing in foreign companies. In addition to Scandinavian countries, Finnish venture capital investors have been actively looking for target companies in the Baltic counties.

Foreign private equity investors may offer more opportunities, and in some cases, more financing for Finnish companies. So far, however, the first financing rounds have usually been made by Finnish investors, and in many cases foreign investors prefer to have a Finnish investor as a co-investor.

In order to compete with foreign investors in large acquisitions, Finnish private equity companies already have, or are planning to set up, larger funds. The size of CapMan's new mezzanine fund, Finnmezzanine Fund III, is approximately euro150 million. As there are only a limited amount of Finnish institutional investors (which, even though they have increased the amounts they invest in private equity funds, tend to diversify their portfolios by investing in foreign funds as well), larger funds also require foreign investors and international fund-raising. Some Finnish management companies have considered using an placement agent in fundraising, which has not been necessary previously. So far the most significant foreign investors in Finnish funds have been the European Investment Bank and European Investment Fund.

Correspondingly, growth and increasing competition in the venture capital industry also encourages management companies to seek foreign investee companies.

Large Finnish companies have also made private equity investments. For example, Sonera Corporation makes direct investments and investments in private equity funds in different countries.

FVCA

The Finnish Venture Capital Association (FVCA) was established in 1990. FVCA´s objectives are: to develop venture capital activities and practises in Finland; to represent its members' views and interests in discussions with the government and institutions; to provide a forum for the exchange of views and experiences between members; to spread information on matters related to the interests of members and companies funded by venture capital; to arrange courses and seminars and assist in improving professional practice; and to liase and co-operate with international and national venture capital associations. FVCA is a member of the European Venture Capital Association (EVCA). The chairman of EVCA is also the managing director of Finnish player CapMan Capital Management.

FVCA has 41 full members (up from 30 in 1999) and 38 associate members. Membership has been approved for equity investors and risk financiers representing public and private investment capital, captive funds and corporate ventures. Associate membership can be given to organizations and individuals with an interest in the venture capital industry, such as auditing and law. The full members also include one foreign company (in addition to EQT Partners, subsidiary of EQT Partners): the Swedish company Industri Kapital.

First Finnish venture capital company goes public

Some of the members of the FVCA (for example Menire and Norvestia) are publicly quoted companies. These, however, do not manage and invest third-party assets.

Private equity firm CapMan (CapMan Capital Management's parent company) has launched a reorganization which is to culminate in a listing on Helsinki Stock Exchange in spring 2001. CapMan will merge with Vestcap, a company formed from the demerger of Finvest. The assets of Vestcap will consist of most of Finvest's stockholding in Mandatum Bank. Both Finvest and Mandatum Bank are publicly quoted. The merger will result in a new, stock-exchange listed company, CapMan Oyj. As a result, CapMan will also gain the second-largest holding in Mandatum Bank, with a 20% stake and 23.6% of voting rights.

The company expects its listing to open up a number of attractive opportunities to enhance its business and increase its shareholder value, including through acquisitions, and wishes to underpin its position as one of the leading private equity investors in northern Europe.

CapMan manages more than euro860 million in assets, entrusted by Finnish and foreign institutional investors. It has invested nearly euro300 million in companies in Finland, other Nordic countries and the rest of Europe. In addition to this, a European fund of funds, Access Capital, managed by CapMan's affiliated company, has so far invested more than euro80 million in nine European equity funds.

3i acquired Finnish SFK Finance

In spring 2000 3i Group acquired SFK Finance, a venture capital investor in the Finnish telecommunications, IT and environmental technology sectors. SFK Finance was renamed 3i Finland on completion of the transaction. The office in Helsinki increases 3I's network to 35 offices in Europe. 3i intends to expand its business to other Scandinavian countries.

SFK has led and managed venture capital investments in almost 90 growth companies. SFK specializes in growth companies in telecommunications, software, electronics and information technology, environmental technology, and systems and equipment for the forest industry. Being part of a larger venture capital investor is expected give it a better competitive position, to open up opportunities to close larger deals including MBOs or MBIs, and raise more funds from foreign investors. The acquisition may also broaden its investment strategy.

Stratos Ventures Fund

A new fund dedicated to the mobile and mobile internet sector was set up towards the end of 2000. This fund, located in Guernsey but managed primarily from Finland, is expected to be the first of several funds to be formed under the same management.

Nexit Ventures

Nexit Ventures, specializing in investments in early-stage and start-up enterprises engaged in the mobile internet business, closed its Guernsey-based Nexit Infocom 2000 Fund in September 2000. The Fund raised approximately euro100 million from European institutional investors. Nexit Ventures seeks investee companies from its offices in Helsinki and Silicon Valley.

Significant investments and divestments

In autumn 2000, Industri Kapital's Industri Kapital 2000 Fund acquired the tinting systems business of Tikkurila CPS, the world's leading supplier of advanced tinting systems, from Kemira. Kemira retained a minority interest of approximately 30% in the business. Finnish MB Funds and the company's management are minority investors in the new company.

In June 2000 Iobox, a Finnish wireless portal company which was expected to be listed, was sold to Terra Mobile, a Spanish joint venture 51% owned by Telefónica Móviles and 49% by Terra Networks. The purchase price was euro230 million. Before the sale of Iobox, 77% of the company was owned by venture capital investors, among them Morgan Stanley Dean Witter Capital Partners, Alta Berkeley Associates, SFK Finance, Eqvitec Partners, TLcom, BancBoston Capital, Pino Ventures, Eden Capital, Robertson Stephens and Alta Berkeley Nordic/CapMan.

Other significant transactions include SFK's and CapMan's investment in the flooring business group, with an annual turnover of nearly euro100 million, formed by Upofloor Oy (purchased from Uponor Oyj) and Oy Karelia Parketti; MB Funds acquiring Panda, a Finnish sweet and candy manufacturer; and at the end of 1999, investments in PI-Consulting, Enator-ryhmä, Starckjohann and A&R Carton.

In addition, investment in the technology sector has rapidly increased. The trend is for several financing rounds to take place before the intended IPO or trade sale. The technology sector has also gained several venture capital investors, participating in the same funding round, helping the target companies to raise more money, while at the same time helping the venture capital firms to divide the investment risk among themselves.

Legal issues, instruments and structure of venture capital funds

There is no specific legislation on venture capital in Finland. Management companies or venture capital funds are not considered to be investment firms , other entities with a specific legal nature, and in general, their activities are not subject to Financial Supervision.

Most Finnish venture capital funds are limited partnerships for fiscal reasons, with the management company as general partner, and the investors limited partners. The Finnish Act on Limited Partnerships allows the parties considerable freedom in drafting all necessary documentation for setting up and managing the funds. The funds have mostly been closed-end funds with an average term of 10 years. However, there seems to be some pressure to shorten the life span, especially for funds concentrating on technology investments.

The documentation for Finnish funds bears a strong resemblance to English ones. Normally the fund pays a management fee to the management company, based on the commitments and/ or capital invested by the fund. In addition, the management company takes a percentage share of the fund's profit which exceeds a certain hurdle rate (carried interest; market standard approximately 20%, hurdle rate 6% -8%), with or without a catch-up clause. Often the management company is obliged to deposit a certain percentage of its carried interest to an escrow account in order to ensure the repayment of any excess amount received.

The venture capital funds have used a variety of investment instruments, share capital, convertible debentures, warrants, subordinated loans and profit loans. Some funds are specialized in mezzanine financing, while others make only equity investments.

MBO arrangements, in particular, have kept lawyers busy by including an extended variety of different agreements (sale and purchase, shareholders' financing agreements (including equity, mezzanine and senior instruments) and agreements for key employees). Owing to the fiduciary duty of the management firm to the fund's investors, legal due diligence by an outside counsel is a standard issue in almost all the venture capital deals. As with most growth companies, the primary targets of venture capitalists are technology driven. Law firms with strong IPR teams are in increasing demand.

Setting up funds in foreign countries, international fundraising and the increase of international investment transactions are setting a higher requirement level for the expertise and networks of lawyers advising management companies.

CIM Creative Industries Management established its first fund

In early 2001 CIM Creative Industries Management established its first fund, Venture Fund for Creative Industries. The Fund had its first closing at approximately 22 MEUR. CIM makes equity investments in content companies; mainly growing and internationalising companies engaged in entertainment, education and IPR industries. The primary focus is in content that is not dependent on a specific technology or distribution channel.

Jorma Routti, former head of the Finnish National Fund for Research and Development (SITRA), former dean of Helsinki University of Technology and former Director General of Research at the European Commission, is a member of the CIM management team. The London based fund management company ProVen Holdings Ltd is a shareholder in CIM Creative Industries Management.


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