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Finnish market comes of age

A recent flurry of notable deals in Finland has raised the region's profile among private equity players. Jari Vikio and Paulus Hiden of Borenius & Kemppinen discuss the deals and describe the impact this has had on the industry.

In June 2000, the private equity giant 3i acquired one of Finland's oldest venture capital companies, SFK Finance Oy, which was thereafter renamed 3i Finland. The acquisition has clearly enabled the Finnish 3i team to set their hands on larger transactions. As an example, in March 2002 3i and Sonera (the Finnish communications and mobile-based services provider) completed a E111.5m buyout of Sonera Info Communications Ltd, now known as Fonecta.

Fonecta provides electronic and operator-assisted directory services and has set becoming the leading global provider of enhanced directory services as its objective. The deal was executed using the combined expertise of 3i's specialists in London and Helsinki. 3i and funds managed by the company acquired a 70 per cent shareholding in Fonecta and Veronis Suhler funds participated with a 28 per cent stake. Fonecta's management holds the remaining two per cent.

CapMan pie, a Finnish private equity house quoted at the Helsinki Stock Exchange since April 2001, serves as another example of the internationalisation and consolidation trend in the fund management business. Although CapMan's affiliated companies have earlier made investments in the Baltic countries, CapMan's first real step abroad was taken in September 2001 when it completed the transaction under which it acquired the Danish private equity company Nordic Private Equity Group.

Following the acquisition of the Swedish private equity company Swedestart Management in spring 2002, CapMan group now has offices and approximately 70 employees in Helsinki, Stockholm and Copenhagen. The latter transaction also comprised the acquisition of a part of the carried interest generated by one of Swedestart's earlier funds and a co-investment arrangement between CapMan and Swedestart latest technology fund.

Nordic Private Equity Group's focus on mid-sized buy-outs and Swedestart's focus in technology investments was seen to complement CapMan's focus in mid-sized buy-outs and technology investments. Having raised E166m of new capital in the beginning of 2002 in the first closing of its latest equity fund CapMan Equity VII (based on Guernsey and Sweden), CapMan seems to be ready to challenge competitors on a Nordic scale. CapMan's latest investments include Extra Group, the leading staffing company in Finland; Kultajousi Oy, a retail jewellery chain; EItel Networks  Oy, a specialist in design and construction of power transmission and telecommunications networks.

In January 2002, Sponsor Capital Oy, a private equity company owned by its management, raised a E107m buy-out fund, doubling the capital under its management. Sponsor Capital has made seven investments of which three have been divested. These exits were the listings of Teleste (transfer systems, equipment and components for telecommunication networks) and Exel (sports goods manufacturer) and, in 2001, the sale Sponsor Capital's holding in Ensto, a company providing electrification products and components for electricity transmission.

Lately there have not been many investments that would rise above the others due to their size or otherwise. One of the largest investments planned in 2001; the combination of the speciality chemicals companies Kemira Oyj, Dynea Oy and Sydsvenska Kemi AB, initiated by Industri Kapital, was not completed. This was because the Finnish parliament, after serious objections from the public and certain employee organisations, seemed reluctant to approve a transaction in which the Finnish State would have lost its controlling position in Kemira.

One new market anomaly that may prove to be of interest to private equity companies and their portfolio companies, is Privanet Capital, an investment services provider that offers private limited companies the possibility to have their shares traded via the internet on a restricted market. The Finnish  Securities Markets does not allow  private limited companies to be quoted on an official stock list but Privanet acts on a restricted basis: all services are available to registered customers only. According to Privanet its clientele consists of both (typically high net worth) individuals and institutional investors such as venture capital funds. Privanet has, for example, arranged an issue of shares by Mehilainen Oy (a leading Finnish private healthcare services company, a portfolio Company of CapMan) to its personnel and doctors. Nearly 20 per cent of the over 1700 people with a subscription right took part in the offering.

New contractual trends
Perhaps reflecting the changes in expectations towards the IT companies, nowadays an increasing number of shareholders' agreements (and sometimes articles of association) of IT investee companies contain provisions on ‘liquidation preference' and ‘anti-dilution'. Liquidation preference means, in connection with an exit, deviating from the principle that any consideration received from an exit would be distributed to the shareholders of the portfolio company pro rata to their shareholdings. On the basis of anti-dilution provisions an investor may be entitled to receive more shares in case the portfolio company enters into further equity (or equity-related) financing with a lower valuation than that used in the investor's investments.

These clauses require cautious attention from both the commercial decision-makers and the lawyers drafting the agreements. The varying results of these clauses in different situations such as different types of restructurings should be foreseen and, in addition, one should always bear in mind that at least Finnish legislation does not take such arrangements into account anyhow. There is basically no praxis at all how potential disputes on these issues should be resolved.

A few setbacks and some figures
After, or as a result of, the dot.com boom private equity investors have had a few setbacks as well. In March 2001 the first Finnish dot.com company was declared bankrupt.  The company was MatchOn Sports, established in 1999, and it had received over €7 million from CapMan, Aura Capital, Nexit Ventures and other investors.

The company had been operating a sports web portal and it had had  employees in Finland and the UK. MatchOn's Sports was followed by Wapit Oy's bankruptcy in June 2001 and Riot Entertainment's bankruptcy in March 2002. Wapit had provided SMS and.WAP services and its growth had been fuelled by the UK investment bank Durlacher. Riot Entertainment developed games for mobile phones. Within two years it had spent more than E20m of financing received from Nokia Ventures, Softbank UK Ventures, Carlyle Group, CDB WebTech and Stratos Ventures. 

These bankruptcies have also made lawyers face the difficulties relating to immaterial property rights in bankruptcy. Although some IPR's have been successfully disposed of, in some cases it may be difficult to find anyone to whom even the most essential immaterial rights or solutions would be of any significant value.

Regardless of some discouraging experiences within the IT sector, on the basis of the figures gathered by the Finnish Venture Capital Association (FVCA) venture capital investors do not seem to be shocked. The flow from institutional investors to venture capital funds does not seem to have ceased either.

According to preliminary data gathered by FVCA Finnish venture capital investors made 432 worth a total of E344m in 2001. Private independent funds made up 84 per cent of the investments while the government related sector accounted for 16 per cent. By comparing these figures with figures from 2000, it can be concluded that although the number of investments has increased the amount of capital invested has decreased by more than ten per cent and the proportion of follow-on investments had increased. That is investors have concentrated in nurturing existing portfolio companies rather than focusing on new investments.  In 2001, management companies raised E412m worth of new capital. Although this is less than a year earlier, the decline, according to FVCA, was not as drastic as in the US and the rest of Europe. The volume of capital under management rose to E2,653m at the end of the year (an increase of 20 per cent). Of the capital under management E2,306m was held by private venture capital funds and E347m by public investors. These figures do not contain the capital held by such private equity companies that do not raise separate funds. On the exit side, the number of divestments totalled 111 in 2001. The value of divestments was E108m (at cost). The market decline has lead to consolidation and to trade sales being the most common exit form. During 2001 nine new venture capital investors joined the FVCA.

Copyright © 2002 Borenius & Kemppinen

Jari Vikio is a partner and Paulus Hiden a lawyer at Borenius & Kemppinen in Finland.

Borenius & Kemppinen is one of the largest and most experienced law firms in Finland. The firm provides a full range of high quality legal advice and services in all fields of corporate and business law. For more information please visit www.borenius.fi