Catalysing capital to Finnish companies

In 2017, Tesi made excellent progress in attracting capital to Finnish funds and companies. Fund-raising remained buoyant in 2017, for both venture capital and buyout funds. Tesi and the KRR funds-of-funds are major investors in the venture capital and private equity sector in Finland. In 2017, Tesi raised KRR III with a total capital of € 150 million.

Continuing the trend for the previous year, 2017 was a brisk year for fund investments. A Finnish venture capital fund broke the limit of € 100 million for the first time in over 15 years when Inventure Fund III raised a total € 110 million.

“Inventure’s fund-raising process is a positive indication that investors’ confidence in venture capital is returning, although fund-raising for venture capital and smaller buyout funds can still not be described as easy. On the other hand, the market is starting to mature for larger buyout funds, which have raised funds quickly and reached their target sizes,” explains Director Matias Kaila, who heads Tesi’s Fund Investment team.

Tesi made commitments totalling € 60 million in altogether seven venture capital and small buyout funds in 2017. In addition, Tesi made a commitment of € 60 million in KRR III, a fund-of-funds it manages. An estimated one-half of KRR’s capital is invested in venture capital funds, and one-half in small buyout funds.

“The KRR funds have had great success, as demonstrated by the fund-raising for the new fund. KRR I has progressed to the stage where we are seeing solid returns from both venture capital and buyout funds. Returns from exits have been good, and the funds still have a lot of unrealised value in good companies,” says Kaila.

MORE PRIVATE CAPITAL NEEDED. In 2017, Tesi made excellent progress in attracting capital to Finnish funds and companies. During the year, Tesi and the KRR funds’ portfolio funds raised seven times the amount of Tesi’s own investment.

International funds in Tesi’s portfolio invested altogether € 27 million in Finnish companies. Possibly of even more value, however, is the expertise that they invested in the companies and brought to the market.

“Investing in international funds enables us to encourage investors already interested in Finland and show them a potential deal flow,” Kaila points out.

Venture capital investments no longer underperform buyout investments in Finland.

According to Kaila, the priority now is to boost private capital. Tesi collaborates with the Finnish Venture Capital Association and Tekes Venture Capital in encouraging small private Finnish players – such as pension trusts, industry-wide pension funds, foundations and family investment companies – to invest in funds.

“Tesi’s portfolio is developing very favourably and exit activity continues to be strong. Venture capital investments no longer underperform buyout investments in Finland,” Kaila points out.

Tesi will focus even more strongly on attracting international capital into venture capital and small buyout funds, while continuing to support larger growth funds should their fund-raising require.

“We also keep our eyes open to see if there are other areas in which we could help to develop the market so that Finnish companies can grow and create jobs.”

Kaila predicts that the conventional borders between venture capital and buyout funds will continue to be eroded.

“Buyout investors are increasingly aware of the opportunities and risks attached to technology. This is reflected in the greater interest buyout investors have in earlier-stage growth companies,” concludes Kaila.

FROM AVOIDING REPUTATION RISKS TO SEEKING OPPORTUNITIES. Kaila feels that both private equity investors as well as companies have started to think of corporate responsibility in a new way. Whereas earlier the emphasis was on regulation and avoiding reputation risks, the focus has now shifted to business opportunities arising from responsibility.

Private equity funds have often been criticised for using tax havens to evade taxes. Tesi’s policy is to invest in funds domiciled in countries that exchange information and have proper tax agreements in place.

International funds in Tesi’s portfolio invested altogether €27m in Finnish companies.

“In terms of taxation, private equity funds are pass-through entities. The companies backed by private equity funds pay their taxes in their country of domicile, just as investors do. It is more a way of structuring the investments, and not a question of avoiding taxes. International fund structures are preferred because they make it easier for international fund investors to invest in funds,” adds Kaila.

Tesi requires all its portfolio funds to adopt the principles of responsible investment, and to apply them in practice. In this way Tesi’s team can, in its discussions with portfolio fund managers, increasingly focus on seeking business opportunities.

Kaila points out that first-time teams’ focus is increasingly on start-ups that solve global challenges.

“Responsibility is not perceived as a separate function. Instead, it has become an integral part of profitable business. It is becoming a business asset, and not a reporting burden,” sums up Kaila.