The private equity and venture capital (below jointly "PE") markets were in an upswing in the whole Fenno-Baltic area during the year 2004. The investment and fundraising volumes increased compared to 2003 in both Finland and the Baltic countries. It should be noted, however, that the PE markets in these countries are quite different from each other. The Finnish market is an established one, with some fifty active PE firms and a total capital under management of more than EUR 3 billion. The Baltic markets, on the other hand, are still new and only starting to develop into the institutional form found in most Western European countries.
PE markets in the whole area are expected to develop favorably in 2005, although the drivers of future growth vary between the markets due to the different development phases. In Finland the growth is expected to be fuelled by positive stock market sentiment, increased exits and planned follow-on fundraisings of established PE firms. In the Baltics the entire PE infrastructure is still under a rapid development phase, with new funds being raised, PE firms being set up, and increasing interest by international PE firms.
Finnish market
The Finnish PE market has experienced a steady, positive development over the past couple of years, since the bursting of the technology bubble in the early 2000s. During January-September 2004 the Finnish PE funds made in total 268 investments worth EUR 281 million, an increase of 8 % compared to the same time period in 2003 (all figures presented exclude funds established outside Finland, e.g. in Sweden, the United Kingdom and the US). Encouragingly, much of the growth came from investments into seed financing, which more than doubled to EUR 22 million. This is a particularly positive development as the alleged difficulty of raising seed funds has been a focus area in the public debate in Finland over the past few years.
The total exit volumes of Finnish PE funds were EUR 143 million (at acquisition cost) during January-September 2004, slightly less than year 2003. The exit volumes seem to have increased towards the end of 2004, however, boosted by confident stock markets, opening of the long-closed IPO window (the IPO of Kemira GrowHow in October 2004 was the first Finnish IPO since December 2000), relatively high volume on the M&A markets and pressures of certain PE funds to make exits. Several Finnish PE funds are approaching the end of their investment period and, in order to succeed in the next fundraising, robust track record through successful exits is necessary. The pressure to make exits is reflected in the increasingly popular secondary buyouts, in which the exit is made through selling the portfolio company to another PE fund.
The fundraising activity seems to have picked up already during the first three quarters of 2004, during which the Finnish PE funds raised committed capital of EUR 147 million, 30 million more compared to the whole calendar year in 2003. Year 2005 is expected to be another good fundraising year with many completed exits to facilitate the fundraising efforts.
Major PE-related transactions in Finland in 2004 included the sale of cleaning and facility management company Engel-Yhtymä by MB Funds for EUR 192 million, sale of network maintenance company Eltel Networks by CapMan to Industri Kapital for EUR 190 million, sale of marine cargo company MacGREGOR by Industri Kapital for EUR 186 million, sale of leading bakery Vaasan & Vaasan by EQT to CapVest Equity for EUR 249 million, and Nordic Capital’s purchase of a 49% stake in IT provider Personec Group from TietoEnator for EUR 73 million.
Two legislative initiatives under consideration may give a further boost to the Finnish PE industry: a complete revision of the Finnish Companies Act (expected to enter into force in 2006) and possible changes to taxation of foreign investments into Finnish PE funds. The proposal by the Ministry of Justice proposes radical amendments to regulation of Finnish limited liability companies. The new act would allow much more flexibility for structuring investments into Finnish portfolio companies, for example, by enabling more flexible valuation adjustments and anti-dilution structures, by increasing possibilities to create new classes of shares and other equity instruments, by allowing more flexible distribution of funds, and by abolishing many procedural rules. Consequently, the changes would make it easier for foreign PE funds to use internationally proven structures with their Finnish portfolio companies, and allow investors to put more focus on investment documentation and corporate governance guidelines instead of Finland specific formalities.
At present foreign investments into Finnish PE funds are seriously restrained through tax legislation, pursuant to which such investments create a "permanent establishment" for the respective foreign investor in Finland. In practice this has resulted in the foreign investor being taxed in Finland for all its income from the PE fund. Consequently, virtually no foreign investors have made investments into funds established in Finland. A solution to this problem is currently being prepared at the Ministry of Finance, but the final outcome and time schedule of the potential changes are still open. A successful amendment to the rules would make it easier for Finnish PE funds to raise funds from abroad without having to set up costly parallel funds on e.g. Channel Islands, as is the prevailing practice day.
In addition, the Finnish corporate taxation was revised in May 2004, effective mainly as of 1 January 2005. The main changes included: (i) reduction of the corporate income tax from 29% to 26%, (ii) reduction of capital gains tax from 29% to 28%, (iii) abolishment of avoir fiscal in taxation of dividends, (iv) abolishment of capital gains tax on sale of certain fixed assets of corporations (not applicable to PE funds), and (v) abolishment of the possibility to deduct liquidation losses through winding up companies.
Baltic markets
PE activities are currently beginning to take ground in the Baltic countries, but the markets are still in their infancy. For example, no statistics on PE activities exists in any of these countries nor are there any national PE associations. However, the pace of development is very rapid, with new PE firms emerging, investment volumes increasing and new funds being raised, for example the Amber Trust II fund that was launched in December 2004 with a target of EUR 125 million.
The major PE firms currently operating in the Baltic region could be categorized into: (i) domestic firms, (ii) local firms controlled by Nordic or other European PE firms, and (iii) international PE firms operating cross-border without physical local presence. Major domestic firms include, inter alia, Cresco, Trigon Capital, Hermis Capital, and LHV. Major local firms controlled by foreign players include Suprema (controlled by Finnish EVLI), Eastcapital (controlled by Swedish Swedbank), Vilniaus Bankas (controlled by Swedish SEB), and Amber Trust (controlled by U.S. Firebird Funds and Danish Danske Bank). CVC Capital Partners is an example of the international PE firms that have invested in the Baltics.
Recent major PE-related transactions are dominated by investments rather than exits, owing to the early development stage of the PE industry, including the purchase of consumer goods retailer UAB IKI by CVC, investment into Baltic Cosmetics Holding by Amber Trust, and purchase of Baltic Motors Corporation by MVC Capital.
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