Report by the Board of Directors
The decline in Finland’s GDP continued for the second successive year in 2013, and was largely due to a contraction in the country’s traditional export industry. The aggregate amount of investment in Finland also continued to decline for a second year. There are promising signs of restructuring, however, as total investment in early-stage and growth-stage companies has increased appreciably in recent years. Venture capital and private equity seem increasingly important for stimulating the economy and fostering growth.
Some €790m* of venture capital and private equity was invested in Finnish portfolio companies, significantly more than the previous year (€616m). Most of this increased investment went to early-stage and growth-stage companies. Foreign investment accounted for some 40% of total investment, which is a positive step towards internationalisation of both Finland’s venture capital & private equity and of portfolio companies.
There was strong growth in the number of exits in 2013. Exits at purchase price from Finnish portfolio companies totalled €994m* (€365m in 2012).
Altogether €446m* of new capital was raised by Finnish venture capital and private equity funds, broadly the same as the average amount for preceding years. Slightly less than one-quarter of the capital raised by funds came from foreign investors. The total amount of capital managed by Finnish venture capital and private equity funds remained at around €5.5 billion.
* Source: FVCA’s preliminary statistics for 2013
There was marked growth in Finnish Industry Investment’s deal flow in 2013. The company screened some 250 projects seeking venture capital or private equity funding during the year. Finnish Industry Investment made new investments in 2013 totalling €130m.
The parent company made new investments, totalling €93m, in six venture capital and private equity funds. Commitments were given to three venture capital funds and two buyout funds. In addition, the largest commitment, €60m, was given to the newly-established FoF Growth II fund. The company exited from four funds that came to the end of their term. Capital calls amounting to €43.9m (€57.5m) were paid to funds. Altogether €54.4m (€28.6m) was returned to the company from funds.
New direct investments in companies amounted to €27.4m (€22.3m) at year’s end. The main focus of direct investments was in hi-tech companies in the process of internationalising and in companies operating in the service sector. Of these, first-round investments (in seven companies) accounted for €14.3m and follow-on investments (in 10 portfolio companies) for €13.1m. The parent company exited during the financial year from six companies fully (EMC Talotekniikka Oy, Northland Resources S.A., European Batteries Oy, Maventa Oy, Abutor Oy and Top-Sport Suomi Oy) and from five companies partially. The impact of the exits on the company’s financial result was €-4.5m.
The subsidiary Start Fund I Ky invested a total of €0.3m in two portfolio companies during the review period, and exited from seven portfolio companies fully and from one partially. The impact of the exits on the company’s financial result was €0.2m. At the end of 2013, Start Fund had 25 portfolio companies and the fund had called in €61.4m of its total capital.
During the review period the Group acquired the subsidiary Tesi Industrial Management Oy, which invested €9.4m in Aker Arctic Technology Oy’s shares.
Income statement and financial position
The Group’s loss for the year was €7.6m (€7.3m profit in 2012). Income from funds increased compared to 2012, but there were more write-downs in the value of private equity and venture capital investments.
Sales gains from direct investments in portfolio companies entered under other operating income in the consolidated accounts amounted to €0.7m (€1.5m). Other operating expenses for the Group amounted to €7.7m (€2.3m). This figure also includes sales losses of €5.1m on direct investments in portfolio companies.
The Group’s financial income included distribution of funds’ profit amounting to €16.8 (€7.3m) and interest yield from direct investments totalling €3.4m (€3.9m). The aggregated net amount of downward valuations of investments was €-27.9m (€-14.3m). The total impact of investments on profit was €-11.4m (€-0.8m).
The impact of consolidated income from liquid securities on the Group’s profit was €9.7m (€14m). At the end of the financial year the balance sheet value of liquid securities included in current assets and cash in hand and at banks totalled €188.2m (€200.7m). The market value of assets on the balance sheet date amounted to €199.6m (€210.9m). Investments in liquid securities ensure adequate liquidity to cover commitments. At the end of 2013 the parent company’s unpaid commitments totalled €273.7m (€221.6m). Unpaid commitments consist almost entirely of commitments to funds with an average payment period of over 4 years.
The parent company’s balance sheet total at the end of 2013 was €565.3m (€576.8m). The Group’s balance sheet totalled €561.5m (€569m). The company’s shareholders’ equity stood at €563.8m (€575.2m) at year’s end and the Group’s shareholders’ equity was €559.7m (€567.4m).
The parent company’s equity ratio was 99.7% (99.7%). The Group did not hold any interest-bearing liabilities at the end of 2013. The book value of the Group’s investments was €367.7m and the fair value €418.9m.
Organisation, administration and personnel
At the end of 2013 the special law governing Finnish Industry Investment’s operations was amended. The amendment entered into force on 15th January 2014 and provides for a decree, entering into force on 1st February 2014, to replace the government decision setting policy guidelines for investment activities. The amendment broadens Finnish Industry Investment’s operating scope. In addition to conventional private equity and venture capital investment, the company can in future invest in projects that promote the Finnish government’s industrial policy.
The Group structure changed during 2013. The parent company acquired 100% ownership of Tesi Industrial Management Oy, which in future will focus on direct investments in major industrial projects. Tesi Industrial Management Oy acquired a 66.4% holding in Aker Arctic Technology Oy in December 2013. Other subsidiaries are Start Fund Management Oy, Start Fund I Ky, and Tesi Fund Management Oy, all of which are wholly-owned by the Group.
At the Annual General Meeting held on 26 March 2013, the following members were elected to the Board of Directors: Jukka Alho (Board Chairman, M.Sc. (Eng), born 1952), Urpo Hautala (Senior Advisor, Ministry of Finance, B.Soc.Sc. (Eng), born 1958), Sari Lounasmeri (CEO, The Finnish Foundation for Share Promotion, M.Sc. (Econ), born 1975), Inka Mero (Founder, KoppiCatch Oy, M.Sc. (Econ), born 1976), Leena Mörttinen (Director, Confederation of Finnish Industries EK, VTT, born 1967), Mika Niemelä (Director of Finance, Ministry of Employment and the Economy, M.Soc.Sc.), born 1975) and Tuomo Rönkkö (President & CEO, Maintpartner Oy, M.Sc. (Eng), born 1955). Tuomo Rönkkö resigned from the Board on 13 January 2014. Other posts held by Finnish Industry Investment’s Board members are presented on Finnish Industry Investment’s website. In 2013 the Board of Directors convened 14 times and average attendance was 92.9 %.
Finnish Industry Investment Ltd’s President & CEO during the review period was Juha Marjosola, M.Sc. (Econ). The company employed an average 30 people during the year. Two new employees were recruited in 2013, one of which on a fixed-term contract. Two people resigned from the company. At year’s end 12 women and 18 men worked in the company. Of the personnel, 73% have a higher academic degree.
Finnish Industry Investment is administered by the Ministry of Employment and the Economy and reports regularly on its operations to the Ministry. The company’s operations are governed by a special law and a decree relating to the law, amongst other legislation. In accordance with the special law governing Finnish Industry Investment’s operations, the company is empowered to take a higher risk than usual in individual investment decisions. The company’s investment activities must nevertheless be managed as a whole in a way that ensures investments are adequately diversified and that does not legally jeopardise the primary obligation for profitable operation over the long term.
In line with the company’s economic policy, most of Finnish Industry Investment’s investments are allocated to venture capital, the return on which has historically been low in relation to the risk. In managing the portfolio, high risk-taking is balanced with more mature-stage investments.
Finnish Industry Investment’s risk management policy, confirmed by the Board of Directors, sets out the principles for risk management and promotes the identification, evaluation and management of risks. Risk management enables the company to pursue its strategy and achieve its goals through ensuring business continuity by minimising vulnerability and protecting business-critical operations. An auditing committee and a remuneration committee appointed by the Board operate within the company. The Board makes investment decisions and supervises the implementation of investments. The Board continuously assesses strategy and updates its strategy at least once a year. Strategic risks are managed by regularly evaluating the company’s operations and business environment. Operational risks are managed by good corporate governance.
The company’s main business risks are related to private equity and venture capital, and are managed by spreading investments across various business sectors and investment instruments. The risks related to each investment are also managed by regularly monitoring portfolio companies and contributing to their business development. The ratio of investment volume to available capital is continuously monitored. At the end of 2013 the ratio of investments and commitments to shareholders’ equity was 114.5 %, whereas the guidelines set by the Ministry of Employment and the Economy limit the ratio to 150%.
The ratio of fund investments and direct investments is under regular control. The guidelines issued by the Ministry in 2013 limit the ratio of direct investments to all commitments and investments to a maximum 35%. At the end of 2013 Finnish Industry Investment’s direct investments, including Start Fund I Ky and Tesi Industrial Management Oy, accounted for 28% of the total.
The adequacy of liquidity for investments and other cash liabilities is constantly monitored and managed. The guiding principle in making new investments is to retain liquidity despite cyclical fluctuations in the economy. The amount of unpaid commitments in relation to liquidity was 137% on 31 December 2013.
Investments in liquid securities are made at the selected risk level in compliance with the investment policy confirmed by the Board of Directors. Investments in liquid securities aim to ensure adequate assets for private equity investing and other payment transactions. Liquid security investments are spread across direct interest-based investments, and bond and equity funds, with the emphasis on interest-bearing investments with a high credit rating. The market volatility of liquid securities is monitored regularly and counterparty risk is managed by selecting partners carefully. Liquidity risk is managed by regularly planning and monitoring cash flows. Most of the company’s cash flows and investments are denominated in euros.
Board’s proposal for the distribution of profit
The parent company’s distributable earnings on 31 December 2013 after the loss for the financial year of €11,331,026.75 amounted to €93,972,273.47. No significant changes in the company’s financial position have occurred since the end of the financial period. Taking into account the company’s liquidity, unpaid commitments and confirmed investment plan for 2014, the Board proposes to the Annual General Meeting that no dividend be distributed for 2013. The company has one class of share and 23,210 shares. The share capital is €253,992,200.
Events after the financial year
The law regulating Finnish Industry Investment’s activities was amended after the end of the financial year. More details about this are given in the paragraph above describing the company’s administration.
In collaboration with four pension funds, Finnish Industry Investment has established the FoF Growth II fund, which has now started its investing operations. Finnish Industry Investment invested €60m in the new fund. The Finnish government plans to increase Finnish Industry Investment’s share capital by €30m during spring 2014 as part of the arrangements for establishing the fund.
There was an upswing in Finland’s venture capital and private equity market during 2013. Brisk activity is expected to continue in the venture capital and private equity industry in 2014, given the general economic recovery.
The Alternative Investment Fund Managers Directive (AIFMD) will also have an impact on the venture capital and private equity industry in Finland. The implementation of the directive was delayed and is now scheduled for 2014. Under the new legislation, fund managers will have to, inter alia, register or apply for a licence from the Financial Supervisory Authority, depending on the amount of managed funds involved. The legislation aims to improve investor safety and increase transparency.
Finnish Industry Investment’s goal is to channel venture capital and private equity into companies’ growth over economic cycles. Investments also promote development and internationalisation of Finland’s venture capital and private equity market. The company’s aim for 2014 is to make new investments amounting to some €80, depending on the prevailing market situation.
|Key Figures, Group|
|Profit/loss for the financial year, €m||-7.6||7.3||-12.6||-6.2||-11.6|
|Shareholders’ equity, €m||559.7||567.4||510.0||522.6||528.8|
|Balance sheet total, €m||561.5||569.0||512.0||524.3||529.9|
|Unpaid commitments, €m||270.1||217.5||244.0||280.3||289.1|
|Investments at acquisition price, €m||493.2||476.8||425.9||386.7||314.3|
|Investments and commitments at acquisition price, €m||763.3||694.2||669.9||666.9||603.3|
|Reductions in value of investments, €m||125.6||114.1||105.9||100.0||93.2|
|Investments at book value, €m||367.7||362.7||320.0||286.6||221.1|
|Ratio of investments and commitments to shareholder's equity||1.1||1.0||1.1||1.1||1.0|
|New commitments made during the financial year, €m||130.2||57.1||78.0||105.8||64.6|
|Return on equity||-1.4 %||1.4 %||-2.4 %||-1.2 %||-2.2 %|
|Equity ratio||99.7 %||99.7 %||99.6 %||99.7 %||99.8 %|
|Expenses per balance sheet total||1.1 %||1.0 %||1.1 %||1.0 %||0.9 %|
|Salaries and fees for the financial year, €m||2.9||2.8||2.4||2.4||2.2|
|Fund investments, number||88||86||84||84||86|
|Funds, number of portfolio companies||446||434||407||388||368|
|Parent company, number of direct portfolio companies||45||44||44||41||30|
|Start Fund I Ky, number of portfolio companies||25||32||35||51||64|
|Tesi Industrial Management Oy, number of portfolio companies||1|
|Number of portfolio companies, total||517||510||486||480||462|