Article by Ulf-Henrik Kull and Tommy Holmström
This article first appeared in Europe Buyout Review 2003
Finland poses a challenging but extremely interesting market for the private equity industry. While this is mainly due to global factors, there are also some particularly noteworthy domestic features.
During recent years, Finnish private equity firms have had to work extremely hard on their fundraising. The slowdown of the global economy has significantly reduced opportunities for traditional investors to invest in private equity funds, i.e. the domestic financial institutions. The reasons relate mainly to the general reduction in value of their investment portfolios and as the permissible proportional allocation on investments is restricted, a general slowdown effectively reduces commitments to private equity investments. However, there has been a lot of debate on the conservative investment guidelines of Finnish financial institutions and the fact that their investments do not seem to perform very well in the longterm.
The other major factor obstructing fundraising is taxation. Finnish buyout funds are without exception structured as limited partnerships, which provide several benefits for domestic investors, but a tax ruling in 2002 confirmed a rather unfavourable treatment of foreign investors. This is regrettable, since Finnish buyout funds according to public sources on the average perform better than their European peers and should hence attract foreign investors. Intensive lobbying is currently taking place to change the tax law in this respect.
The fundraising challenges also interact with the investment and exit markets. As investors need to show returns with an increasingly shorter investment horizon, there is significant pressure on private equity firms to show a good track record. The prevailing exit market is as difficult in Finland as elsewhere, mainly due to the dead IPO market. However, there are some signs of improvement as the last months have seen a few successful exits and there appears to be reason to believe that more will come.
While the current market situation is difficult it also provides for excellent investment opportunities due to low valuation. Particularly companies listed on the Helsinki Stock Exchange have been interesting acquisition targets and the market has recently seen a number of PTOs. It appears that this is not only due to global slowdown but it is also considered that companies listed on stock exchanges in smaller economies tend to be valued lower than those listed in the major markets.
There is also a lot of buyout investment activity taking place on the private side. It seems that the trend is increasingly moving towards secondary buyouts (with both domestic and international players), which accordingly has a positive impact on the exit market.
In conclusion, the foreseeable prospects of the Finnish buyout market are positive.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.