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Finland invested 0.307% of its GDP in private equity in 2003, the last year for which figures are available from the European Venture Capital Association.
This placed the country third in Europe, behind the UK and Sweden, with an investment just ahead of the European average of 0.288%. (This average is skewed upwards because of the relatively huge amount of investment from the UK.)
Finnish pension funds are a part of this trend, investing up to 5% and above of their portfolios in private equity. But unlike pension funds in most other European countries, their investment strategy is focused on domestic companies. This is partly because they prefer to start out in the sector which they know best. It is also partly for political reasons, with some funds believing they should be putting money back into the economy to create more jobs.
Like pension funds elsewhere, the main reason for investing is to get potentially higher returns than in other asset classes, as well as to achieve diversification.
Ari Tolppanen, chief executive officer of private equity fund managers Cap Man Group, believes that one of the reasons Finnish pension funds are long-standing investors in private equity is that they have enjoyed very good returns from early Finnish and Nordic funds.
“Finnish pension funds, especially the bigger ones, have been in this asset class since the early and mid-1990s,” he says. “Over the years, they have increasingly allocated to private equity, and many have their own private equity departments. They are pretty comfortable investors now, with a good diversification. ”
According to Pekka Hietaniemi, executive director, Nordic Mezzanine, the adviser to Nordic Mezzanine funds, investing locally means that Finnish pension funds feel they can dispense with some external expertise. “They go into domestic funds by themselves,” he says. “The bigger pension funds also invest directly in companies.”
Once their domestic investment is ticking over, pension funds will then look elsewhere, says Hietaniemi.
“They look first at other Nordic countries, then further afield to Europe,” he says. “The smaller ones use funds of funds or gatekeepers to advise them when they invest internationally. The largest ones are now investing in the US. But they are not interested in other global regions, except to a small extent in Asia.”
A typical example is the €6bn Tapiola Mutual Pension Insurance Company, which has invested in private equity mainly over the past 10 years. Tapiola Pension’s current allocation to private equity is about 1.5% of total assets.
In fact, its first investments, made in the 1980s, were direct investments in Finnish unlisted companies. There are currently about 40 of these, spanning a range of industry sectors including technology, life sciences and old economy companies.
The first commitments to funds were made in the mid-1990s, but the focus was then still on direct investments, and the individual fund commitments were quite small in size. So the fund portfolio is quite young.
The fund portfolio consists of investments in Nordic private equity funds, with a couple of global funds of funds. These include funds from MB Funds, Cap Man, Industri Kapital and Nordic Capital for Nordic buyout exposure, and Eqvitec and Bio Fund for venture.
“We first invested directly, in order to increase our knowledge of Finnish unlisted companies,” says Esko Raunio, head of private equity; no external fund managers are used for direct investments. “With private equity investments, we have achieved much higher internal rates of return than for public equities. However, the investments made through funds are younger than those made direct, so are more in the J-curve.”
Raunio says Tapiola Pension has not been immune from poorly-performing investments. “It happens every now and then,” he says. “For instance, everybody was investing in venture in technology-type companies at the end of the 1990s, and valuations were too high. But investors had no idea what these businesses were actually doing.”
“The stock market crash made people more hesitant for a while, but now they have substantially reduced their investment in venture capital, and invested more in more mature businesses,” says Hietaniemi. “However, allocations to early-stage investing are largely limited to government bodies.”
“The stock market crash had an effect in Finland, with many exits postponed for several years,” says Tolppanen. “The postponements were not just IPOs, but also industry sales, since multiples are lower for industrial buyers too. However, our funds are 10-to 12-year funds, so there is nobody to enforce an exit in poor conditions.”
Cap Man Group, whose funds have attracted most of the major Finnish and Swedish pension funds, provides a range of investments from life sciences through buyouts to IT and communications.
Tolppanen says that the flavour of the month for Finnish pension funds is mid-market buyouts. “However, there are also signs that investment in venture is coming back,” he says. “As fund managers, however, we have a very positive outlook – Finnish investors continue to have an appetite for private equity.”
Tapiola Pension is one fund likely to prove him right. Raunio says that the intention is to raise its private equity allocation to 2 or 3%, using funds.
“We are planning to invest more in funds outside the Nordic region, such as the UK, Western European and pan-European funds, as well as US venture,” he says.

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