Nordic private equity house CapMan does not make things easy on itself. Its mission statement: “To be the best-performing European private equity firm”.

“These guys are extremely competitive,” says Lennart Simonsen, who joined the firm as CEO in June 2010. “Do they want to be seventh-best? No. You need to have an ambitious vision.”

CapMan has always had ambition and a pioneering spirit. It is just over 10 years since it listed on the Helsinki Stock Exchange, for example. “Subsequently very many other private equity firms have followed - which one could take as vindication of that move,” says Simonsen.

Unlike the Blackstones and KKRs of the world, however, CapMan is a micro-cap (€84m) in a super-cyclical corner of the most beaten-up sector in the markets. A public listing leaves nowhere to hide; its shares are down 40% year-to-date, and 73% from the heady pre-crisis levels of €4. But it also instils a rigorous discipline. Simonsen cites one of the three key decisions made as part of the strategy review that followed his appointment: CapMan will not make any more technology investments. The risk-return profile simply hasn’t proven sustainable.

“That meant taking a hit on reduced management fees and restructuring costs,” says Simonsen. “A private partnership would find that kind of decision almost impossible to make because it immediately affects your own economies, as a team and an individual. As a public company we know that we have a brand to defend.”

At the strategy review, defending the brand was defined as focusing on performance, simplifying the business and creating agility to form a basis for expansion. Alongside the withdrawal from tech, this led to the sale of most of CapMan’s 35% equity stake in Access Capital Partners - a Paris-based fund of funds it helped to found in 1999 - to Pohjola. This year saw it offloading its real estate consultancy business.

“The idea of the consultancy practice was to complement the investment capability with a development capability - a team that could travel Finland sniffing out opportunities and manage commercial estates,” says Simonsen. “From a standalone domestic perspective, that still makes a lot of sense, but we want to develop the investment business further - for instance, into the Nordics - and we had to decide if we could expand the consultancy in the same way. We decided that was not where we wanted to deploy resources.”

That leaves CapMan with €3.4bn of capital under management, split roughly equally between private equity and real estate. There are currently 12 live private equity funds, mostly in Nordic mid-market buyout, but including one Russia nano-cap fund (acquired when CapMan bought country specialist Norum in 2008), and one fund pursuing three to five-year active ownership strategies through minority stakes in publicly-listed small and mid-caps. In addition it has four real estate funds and four mezzanine funds. Seven funds have already been terminated since the firm started in 1989.

Longer-term, the vision is to exploit fully the potential synergies between these four ‘entrepreneurial partnerships’ - buyout, Russia, public markets and real estate - and this complex ambition is one reason why there must first be a process of simplification at the firm.

“We have a tremendous amount of capability - geographical reach, experience through different markets, different types of expertise,” says Simonsen. “We feel there would be nobody else in the world that has that special combination.”

CapMan always had a culture of embracing change, but bringing in a new CEO added a special sense of renewal to its latest review. Simonsen’s predecessor, Heikki Westerlund, who gave up the role when he was nominated to be the chairman, had doubled the firm’s capital under management during his five-year tenure - and by seeking out Simonsen, who had led Roschier Attorneys on an eight-year international expansion, CapMan’s headhunting task force signalled their ambitions for further growth.
“I would like to think my excellent lawyering skills were not the foremost reason CapMan hired me,” Simonsen says, wryly. “My sense is that they wanted a leader to take the company forward.”

And the road the firm has chosen? Simplification and synergies are all directed towards creating a private equity firm that invests for the long term but has the agility - a key word for Simonsen - to roll with the changes. “It’s about making sure we have the high ground and can see the changes that we need to make ahead of time,” he says. “That’s how you make choices of your own, rather than having choices thrust upon you.”

It probably helps that CapMan is a micro-cap just like the companies it invests in. What better way to reflect on one’s own business strategy than by pursuing value-adding developments at similar companies?

“We have a long-term strategic agenda when we initially go in, of course, but there are always a million things happening - so this agility is something we look for when we are buying companies,” says deputy head of buyout Markus Sjöholm. “When we and our companies plan for the next year we look at scenarios rather than setting out a strict budgeting process, for example.”

Creating the foundations for agility is crucial in private equity, where there isn’t the luxury of being too tactical with defensive or pro-cyclical exposures. It is important to identify industries where there is fundamental growth to be generated in Western Europe, Sjöholm explains, and that is why healthcare remains a focus.

“But it’s also important to find other, perhaps more cyclical industries that have those growth prospects,” he adds. “Design-Talo is a good example - a Finnish company specialising in turnkey deliveries in pre-fabricated housing that we invested in this year. We’ve been open to investing in cyclical industries where we can find unique business models, flexibility in the cost structure and access to credit. The fact that there is a lot of cash on balance sheets which is assumed to be seeking out opportunities in non-cyclical industries has led to pretty high valuations - so, if anything, it is the non-cyclicals whose attractiveness is limited today.”

In the same vein, the days when private equity funds could rely on readily-available exit routes are long gone. Again, long-term strategy combined with flexibility and agility is the key.

“During your holding period you need to focus on updating your value-creation plan so that you are not too reliant on the timing of an eventual exit,” says Sjöholm. “That’s also why our portfolio companies have always had long-term financing in place; we have never had three-year bullet financing that creates that kind of exit-timing pressure on companies.”

The road ahead for CapMan’s portfolio companies looks formidably tough. But it is arguably even tougher for CapMan itself, getting ready for fundraising in 2012 in an environment of falling markets and an industry increasingly dominated by an elite handful as investors consolidate their portfolios. But, of course, that is why that ambition to be the best in Europe is not just empty marketing puff - it is an absolute necessity.

Having grown its capital under management steadily over the past 5-7 years, boasting 86% of its investors in two or more of its funds and almost two-thirds committing to six or more, it is clear that CapMan’s limited partners buy into the vision. Perhaps, as the gloom lifts from global risk markets, the public market investors will rediscover their faith again, too.