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Legal and fiscal environment

Despite the lack of specific legislation governing private equity and venture capital in Finland, the market is relatively investor-friendly, says Jari Vikio of Borenius and Kemppinen. He provides a general overview of the investment climate and details some recent deals.

There is no specific legislation on venture capital investments or venture capital funds in Finland. Nevertheless, the Finnish legal environment has proven itself relatively advantageous to private equity and venture capital.

In general, the structure utilized for private equity funds in Finland is a limited partnership (kommandiittiyhtiö) with a limited liability company as the general partner and investors as limited partners. This structure has proven its usefulness as it gives considerable flexibility for drafting the necessary documentation for the creation and management of the funds. The structure's further advantages are limited liability and tax transparency for investors. There have been no plans to create a specific structure aimed at private equity funds and management companies or funds are not considered as investment companies or other entities subject to a specific control by the Finnish Financial Supervision Authority.

Most funds are closed-end funds with an average term of ten years. For technology-oriented funds there is, however, some pressure to shorten the funds' term. Normally, the fund pays a management fee calculated on the basis of the commitments or the capital invested by the funds. The management company also receives a percentage of the profit of the fund exceeding a certain hurdle rate. Quite often the management company sees itself under the obligation to deposit a percentage of its carried interest into an escrow account in order to ensure the reimbursement of any excess amounts it has received.

Investments by venture capital funds are carried out using a variety of instruments such as share capital, convertible debentures, warrants, subordinated or profit loans. There are funds specializing in mezzanine financing, while others are active only in the field of equity investments.

The corporate tax as well as the capital gains tax rate is 29 per cent. The avoir fiscal system is used in order to avoid double taxation on corporate income and dividends.

Statistics

In 2000, Finnish venture capital investors made 418 investments for a total value of FMK 2.4bn ($359m). Initial investments formed approximately two-thirds of all investments and nearly 80 per cent of the invested capital. Private independent funds made up 88 per cent of all investments while the government-related sector accounted for 12 per cent.

In 2000, venture capital investors raised at total of FMK 3.3bn in new capital. The sources of this new capital were: insurance companies (FMK 1.136bn, or 34 per cent); pension companies (FMK 598m, 18 per cent); special government financing institutions (FMK 529m, 16 per cent); funds of funds (FMK 295m, 9 per cent); capital markets (FMK 210m, 6 per cent); companies (FMK 186m, 5 per cent); and banks (FMK 152m, 5 per cent). Over 85 per cent of the funds came from domestic institutions and only 15 per cent were raised from international investors.

At the end of 2000 the total volume of all venture capital under management (including both investments actually made and capital available for investments) amounted to FMK 13.1bn. Most of the capital under management is in the form of investment commitments from institutions. This means that the investor makes the investment in the fund merely when a suitable target has been found. Only a part of the capital is actually held by the venture capital funds. FMK 11.2bn of the capital under management was held by private venture capital funds and FMK 1.9bn by public investors.

In 2000 the number of divestments amounted to a total of 142, whereas the value of all divestments was FMK 586m (at cost).

Market trends

Competitiveness and profitability has remained strong in Finland over the past few years, and the growth in investments has been relatively fast. However, while companies increasingly aim at strengthening their position on the international markets by investing abroad, the domestic investment has been hampered to some extent. In the medium term, the investment rate is projected to grow as long as the competitiveness remains good.

Although figures for private equity investment and divestment across Europe in the first six months of 2001 generally show a decrease in investment activity reflecting in part the economic downturn the figures for private equity investment in Finland have continued to increase rather rapidly. In 2000, Finnish venture capital and private equity investments grew 40 per cent by the amount invested. Investment in Finland is holding up reasonably well compared to other European countries, which according to the EVCA mid-year 2001 figures, have generally suffered a rather large decline in investment activity in 2001.

There has been some growth in the allocation of investment to high-tech and computer related businesses. In Finland the emphasis seems to be increasingly set on early stage investments. A change of localization towards seed and start-up investments is clearly perceptible. Additionally, the percentage share allocated to high-tech investments was 54 per cent of the total amount invested.

The present trend in the Finnish venture capital industry appears to be increasing activity abroad. In practice, at least the medium-sized funds as well as some management companies tend to set up operations abroad. The main rationale being the desire to attract foreign investors with more flexible taxation.

Several cross-border investments, including both investments by foreign private equity in Finland and Finnish investments in foreign companies, have taken place. However, the first financing rounds have so far customarily been made by Finnish investors. Additionally, foreign investors normally prefer to have a Finnish investor as a co-investor.

The FVCA

The Finnish Venture Capital Association (FVCA) was established in 1990 by 18 founding members. Its membership is open to 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. The FVCA's objective is to develop the venture capital activity and practices in Finland by the following means:

• representing its members' views and interests in debate with the government and other institutions;
  
• providing a forum for an exchange of views and experiences between members;
  
• spreading information on matters relating to the interests of the members and companies funded by venture capital;
  
• organizing courses and seminars and improving professional practices; and
  
• liaising and cooperating with international and national venture capital associations.

The FVCA has 44 full members (30 full members in 1999, 41 in 2000) and 43 associate members (a year earlier 38 associate members).

Recent events and transactions

In April 2000, a Finnish private equity firm CapMan PLC launched a major reorganization. The project culminated in the company going public on the Helsinki Stock Exchange in April 2001. The first step in CapMan's reorganization was to merge Vestcap, a listed company formed in the demerger of Finvest, to CapMan. The remaining Finvest has thereafter reinvented itself as a listed fund of funds being managed by Linna Advisers (with an advisory agreement with Swiss partner). Finvest had to cancel its FMK 240m secondary offering in February 2001 due to the market turmoil and is now expected to resort to private placements.

The merger of Vestcap and CapMan (former CapMan Partners) was registered in the Finnish trade register and took effect on April 2 2001, on which date the trading in CapMan B-shares on the Main List of the Helsinki Stock Exchange started.

CapMan is one of the leading private equity investors in the Nordic countries with approximately E1.15bn ($1.02bn) under management in 12 different equity funds. In addition, the fundraising for CapMan's seventh private equity fund CapMan Equity VII started during 2001. The funds managed by CapMan have invested in about 100 companies in Finland and abroad and have to date exited from almost 30 companies, of which six are listed on the Helsinki Stock Exchange. In addition to investments in the portfolio companies, CapMan also invests in equity funds via its affiliated company Access Capital Partners. To date, Access Capital has invested in about 20 European equity funds.

In April 2001, CapMan announced that it had decided to acquire the Danish private equity investor Nordic Private Equity Group (NPE). The company became a wholly-owned subsidiary of CapMan on September 28 2001. NPE specializes in mid-sized buy-outs and manages two equity funds with approximately E35.4m in capital. These funds have invested in nine companies and three companies still remain in the portfolio. The funds will not make any new investments. The acquisition was carried out as a share exchange with NPE's three owners and key personnel.

In January 2001, Eficor, an investment bank with focus on technology companies, and Holtron, a Finnish venture capital and ICT company, merged their businesses. Eficor offers internet and mobile financial services for corporate finance, venture investment and stock trading activities to both private and institutional investors. The services of the Holtron Group range from business development to venture capital financing to seed companies. The assets of the two funds managed by Holtron total E10m.

In early 2001, CIM Creative Industries Management established its first fund, Venture Fund for Creative Industries. The fund had its first closing at approximately E22m. The fund makes equity investments mainly in growing and international companies active in the fields of entertainment, education and IPR industries. The primary focus of the fund is not dependent on a specific technology or distribution channel.

In January 2001, the Danish/American venture capital player 2m Invest announced the acquisition of Menire Advisors, the venture capital management company of the listed Menire Company, creating a Pan-Nordic venture company.

In March 2001, the first closing of Access Capital II, a fund of funds with parallel Guernsey and French vehicles managed by Access Partners (a joint venture of a French-Italian management team and CapMan), was made at E200m.

In spring 2000, a Finnish venture capital broker, Privanet, was founded. Privanet connects companies seeking venture capital and eventual investors by providing a continuous funding channel for growth companies and alternative investment opportunities for investors. Privanet Capital Group consists of three companies: Privanet Capital Corporation and its fully-owned subsidiaries Privanet Ventures and Privanet Securities. Privanet Ventures is the corporate finance unit of Privanet, whereas Privanet Securities acts as a broker/dealer. The parent company of the group, Privanet Capital Corporation, is a full member of the FVCA.

Significant investments

In August 2001, the Cabinet Committee on Economic Policy of the Finnish government approved the sale of the state-owned shares of Kemira to Dynea owned by the Swedish Industri Kapital. The objective of the restructuring was to form a new Nordic chemical industry group in which the state of Finland would have a 34 per cent holding. The government had been vested with the power to bring the Kemira as a condition precedent, shareholding down to 15 per cent. The government was to obtain the necessary power from the Finnish Parliament to renounce all the state's interests in Kemira.

However, on 3 December 2001 the Finnish government decided to withdraw its proposal for the Kemira restructuring from the parliament and the transaction will therefore not be completed. Apparently the public debate on the transaction threatened to cause unreasonable inconvenience for the operations of the companies involved in the arrangement.

Borenius & Kemppinen, Yrjonkatu 13A, FIN-00120 Helsinki Finland
Tel: 358 9 615333
Fax: 358 9 615 33499
www.borenius.fi

This article was first published in the International Financial Law Review Private Equity & Venture Capital guide 2002.

Copyright © IFLR 2002