Investing in risk capital funds – The role of a government supported

fund-of-funds and the mission to promote economic growth

Baltic M&A and Private Equity ForumRiga, 25 October 2013

Jouni Hakala, Chairman of EFVIN

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Content

Risk capital as an instrument to generate economic growth

Venture capital and public sector investments

European Venture Fund Investors Network (EVFIN)

Case Finland: Finnish Industry Investment Ltd

Way forward…

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Risk capital as an instrument to generate economic growth

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Evaluating the contribution of private equity to economic growth*

• Relevant dimensions of private equity activity:

*Source: Exploring the impact of private equity on economic growth in Europe, A report prepared for the EVCA by frontier economics, May 2013.

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Evaluating the contribution of private equity to economic growth*

• Private equity attracts investible funds into Europe providing much needed risk capital for businesses. In the 12 largest private equity markets in Europe, private equity invested almost €250 billion in more than 19,400 companies between 2007 and 2012. Of this, an estimated €50 billion was raised from outside Europe.

• Private equity builds businesses that are more innovative than non private equity-backed firms. Patents granted to private equity-backed businesses between 2006 and 2011 are likely to be worth up to €350 billion. Private equity participation increases the number of patent citations by 25%. With increased numbers of citations corresponding to greater economic value, this suggests it uses resources more effectively to deliver higher returns on investment. In some sectors, private equity finance can be up to nine times more effective than non-private equity financing.

• Private equity boosts productivity by improving management, operational expertise and production processes. Private equity backing also leads to improved productivity (measured by EBITDA (earnings before interest tax, depreciation and amortisation) per employee) of 6.9% in large private equity backed companies over a six year period.

• Private equity contributes to the creation of up to 5,600 new businesses in Europe annually. Venture capital investment directly leads to the creation of 2,800 new companies across Europe each year. In addition, a ‘spill-over’effect - caused by knowledge sharing, networking and inspiring role models- leads would-be entrepreneurs to create approximately 2,800 more businesses each year.

*Source: Exploring the impact of private equity on economic growth in Europe, A report prepared for the EVCA by frontier economics, May 2013.

Innovation, productivity, competitiveness

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Net sales in Finnish portfolio companies

Statistics Finland: Net sales of Finnish limited companies grew on average approx. 5.4% in 2011 compared to 2010.

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Job creation in Finnish portfolio companies

Statistics Finland: the number of jobs in Finnish limited companies grew on average approx. 1.4% in 2011 compared to 2010.

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Venture capital and public sector investments

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Venture funds have raised €22bn during last 5 years; importance of government agencies is high

• The share of Public actors’ capital in VC-funds has been increasing in Europe

Source: EVCA

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European venture capital market

• Finland’s private equity and venture capital market is fairly developed, since the supply of venture capital funding is in relation to GNP at a good level internationally

Source: EVCA

Average Venture returns have been disappointing in Europe (and in the US…) for the last 10 years

Source: EVCA

Note: Five-year rolling IRRs

Note: Five-year rolling IRRs

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European Venture Fund Investors Network (EVFIN)

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Set up in March 2011 in response to the continuing funding crisis affecting the VC industry across Europe

A platform for dialogue gathering 10 major national VC operators (€24 bn under management) representing 8 European countries

Mostly public Fund of Funds, they all foster equity financing for SMEs through supporting best VC funds and contribute to develop domestic VC markets

Members: Caixa Capital (Portugal); Capital Dynamics (UK); Capital for Enterprise (UK); Bpifrance (France); Enterprise Ireland (Ireland); Finnish Industry Investment (Finland); KFK/BGK (Poland); PMV (Belgium); SRIW (Belgium) ; TANEO (Greece).

About EVFIN

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Share best practices among EU LPs & develop a common understanding of the EU VC market

Encourage pan-EU joint initiatives to address the VC crisis

Act as a partner to the European Institutions by providing input regarding projects and policies related to SMEs financing

Offer opportunity for a constructive dialogue between all stakeholders of the EU VC industry (EIB Group, EVCA, Gps etc.)

EVFIN initiative has developed from the conclusions of the EU Council meeting of February 2011 which called on the EU Commission to present proposals for putting in place a EU VC scheme building on EIF and national operators

EVFIN Objectives

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Case Finland : Finnish Industry Investment Ltd

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Economic and societal impact

Investments worth

€516min funds that

havetotal capital of

€8,4bGovernment’s

€470m investments have grown

into€575m

Investment inFoF Growth

€54m Total capital of

FoF Growth

€135m

Portfolio companies generate

€7,5b in

revenue

Investor directly or through funds in

510 companie

s

40 000 employees in portfolio companies

Investments total

€720m

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Investment stage

Fund investments• Early-stage• Growth• Buyout• FoF Growth10

5

1

Seed Start-up Early growth Expansion

Direct investments

Buyout

Direct investments

Venture capital(Start Fund I Ky)

15 €m

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Investments and commitments €719m (31.12.2012)

19%

28%

17%

21%

8%

8%Early-stage funds €136,3m

Growth funds €204,8m

Buyout funds €121,3m

Direct investments €147,7m

Start Fund I Ky €54,6m

FoF Growth €54,0m

64%

29%

7%

Fund investments

Increasing the supply of growth financing for Finnish companies

Enhancing investments of foreign VC/PE funds in Finnish companies

Developing the Finnish VC/PE market

Managing FoF Growth

Return on investment

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Direct investments

Increasing the supply of growth financing for Finnish companies

Enhancing the internationalisation of Finnish companies

Renewing economic structures

Return on investment

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VC/PE market in Finland

Source: FVCA

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VC/PE market in Finland

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19951996

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20012002

20032004

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20072008

20092010

20112012

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2 1 1 3 4

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Financial result 1995-2012

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Examples of fund investments

Investment

yearFund Focus

FII/FoF Growth commitme

nt m€

Fund size m€

Other investors

2012 Sentica Buyout IV Ky Mid-market buyouts 22 114,2EIF, Etera, Ilmarinen,

LähiTapiola, Euro Choice

2012Vaaka Partners Buyout

Fund II KyMid-market buyouts 30 101

Etera, Ilmarinen, Alpinvest, BP Pension

2012 Creandum IIINordic early-stage technology

companies7,5 92,5

International institutional investors

2012Lifeline Ventures Fund I

Ky

European early-stage healthcare, games and technology companies

6 20Ilmarinen, Sitra, Finnvera,

Juurento Invest

2012 Vision+ Fund I KyDigital consumer products,

games and mobile applications11,5 26 Nokia, Microsoft, Sitra

2011 Power Fund IIIEuropean early and growth stage cleantech companies

20,0 42,2 EIF, Varma, Sitra

2011 Open Ocean Fund III European early and growth stage software companies

15,0 40,0 EIF, Michael Widenius, private investors

2010 Conor Technology Fund II Ky

Finnish and Nordic start-up technologies

20,0 46,5 FoF Growth, EIF, Etera

2010 Northzone VI L.P. Nordic venture capital 7,5 129,9 International institutional investors

2009 DFJ Esprit Capital III L.P. UK and Nordic technologies in start-up and growth phases

10,0 80,0 International institutional investors

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Examples of VC/buyout investments

CompanyNumber of staff

Products/services

FII investment

m€

Total investment

m€Co-investors

Add. information

Mendor Oy 30 (33)Diabetes care

products2 8,1

LSP, Ilmarinen, Biothom,

Risto SiilasmaaDirect investment

The Switch Engineering Oy

150 (280) Power conversion

technology2,7 20

VNT, Vacon, Semikron

Start Fund

Eniram Oy 45 (51) Maritime emission

control systems1,2 6,3 Conor, Ferd Direct investment

Beneq Oy 70 (70) Nanocoating technology

4 15 Via Ventures Direct investment

Valmet Automotive Inc.

820 (1600) Automotive

contract manufacturing10 20 Pontos

International acquisition

Holiday Club Resorts Oy

400 Recreational services 3,9 30,1 Varma Acquiring ownership

to Finland

3 Step IT Oy 150 (200) IT-leasing services 4,3 8,6 Etera Strengthening

ownership structure

Pohjolan Design-Talo Oy

150Residential construction

services8 38 CapMan

Growing player in a traditional field

Finnprotein Oy n/a Soy protein 8,5 100 Varma, Etera, PontosGreenfield investment

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FoF Growth

• Established by FII (40%) and Finnish pension funds (60%) in 2009, total capital 135M€

• Investment focus on venture and growth funds• To date: Commitments 110 million > 10 funds > 52

companies > 4300 employees > 475M€ in revenue • Impact on fund raising:

FII investment in FoF Growth

FoF Growth Capital raised by funds in portfolio

0

100

200

300

400

500

600

700

800

OthersEIFFoF GrowthFII FII investment in FoF Growth

MEU

R

12,5x

730M€

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Way forward…

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Charlie Chaplin: Modern times (Granger)

Investing in Growth

www.industryinvestment.com