Tesi’s Interim Review 1.1.−30.6.2019

Tesi (Finnish Industry Investment Ltd) made new investments and investment commitments amounting to €76m (€87m).
Investments made in Finland by Tesi and its co-investors during the review period totalled €456m (€327m).
Tesi’s international investor partners invested altogether €24m (€85m) in Finnish companies.
Profit after taxes was €13m (€46m).

Tesi’s CEO Jan Sasse comments on the review period:

Finland has risen to the pole position in European statistics measuring venture capital investments in startups relative to GDP. Finland’s heightened attractiveness to international venture capitalists and other international investors is driving monetary growth in the country’s market. Another important development trend is financing rounds with sizes of €25m, and even €100m, led by international venture capital funds, which are rare for investments in companies. On the other hand, seed phase funding and startup financing of companies has not grown in recent years, although these are essential for continued positive development over the long-term and for enabling the growth of today’s more diversified mix of companies.

Investments made in Finland by Tesi and its co-investors during the review period totalled €456m. We made new investments and investment commitments amounting to €76m. Our international investor partners and portfolio funds made investments in Finnish companies totalling €24m.

Our Circular Economy programme will provide altogether €75m financing to a broad spectrum of companies operating in the circular economy sector. During the review period, we invested in foam glass manufacturer Uusioaines Oy, whose parent company Partnera Glass Recycling acquired Swedish Hasopor AB.

A new financial mechanism between the European Investment Bank (EIB) and Tesi enabling exceptionally large investments in growth companies was deployed for the first time with our investment in wireless connectivity developer Wirepas. Tesi channels financing guaranteed by the European Fund for Strategic Investment (EFSI) as equity investments in support of SMEs and innovative mid-cap companies. Investments are always made hand-in-hand and on equal terms with one or more private lead investors.

Our personnel participated in intensive strategy work, extending our vision to 2030. Our strategy is founded on the ability of companies to produce solutions to global problems, and calls for well-timed financing, skilled ownership and effective networks. We are constructing a data model to facilitate the fact-based identification and analysis of market bottlenecks. We plan to share fundamental information about the VC/PE market drawing on in-house data, public data and accumulated industry experience.

Our operations are aimed at making a significant positive social impact that will also highlight the importance of self-measurement in guiding corporate activities. We also want to promote the pursuit of responsibility and positive impact in our funds’ management companies and in our portfolio companies as an integral element of operating profitably and sustainably.

Business environment

Finnish early-stage growth companies have succeeded in attracting more venture capital financing relative to GDP than any of their European peers. The quality and innovativeness of our companies and entrepreneurs are rising, and international investors are increasingly attracted to Finland. In addition to large volumes of risk capital, international investors participating in financing rounds contribute the support of their organisations’ expertise and networks, enabling Finnish companies to implement ambitious growth strategies. When they succeed, these companies could become flagship companies in their own clusters, and in so doing support widespread positive development of the surrounding ecosystem.

Venture financing rounds of over €10m in size have become more common since 2015. A new market phenomenon in 2018-2019 has been the raising of individual financing rounds of over €25m. For the very first time in Finland, financing rounds of over €100m were raised during the review period. This is partly due to longer-term risk financing being available to the best companies. Funds raise large-scale financing rounds for very few companies, however, while seed phase funding and startup financing for companies have not increased. Diversification of Finland’s investment industry and financing is dependent on increasing the size of Finnish funds and augmenting the interest of international venture capital funds.

Finland’s market still has room for growth in minority investments (growth investments) in later growth-stage companies. This observation is supported by the FVCA’s Invest Europe statistics. Minority investments in growth are needed not only to diversify the market but also in generational changes.

Investment operations

Tesi made new investments and investment commitments amounting to €76m during the review period.

In fund investments, we gave commitments totalling €64m to seven funds. The market received a new entrant when Åland-based Evolver transformed itself from a deal-by-deal investor into a fully-fledged private equity fund. The Evolver I Ky fund will continue the team’s earlier investment strategy of making control equity investments in Finnish and Swedish owner-led SMEs.

We made direct investments of €12m in 12 companies (including Kaiku Health, Kotisun, Unisports, Uusioaines, Wirepas and Zsar), and a first-round investment in Wirepas.

Wirepas, developer of a wireless connectivity platform, raised €14.4m in financing, an exceptionally large amount for Finland. Our investment in Wirepas is the first to deploy the new joint financial mechanism between Tesi and the European Investment Bank (EIB) that allows exceptionally large investments in growth companies.

We made a follow-on investment from the Circular Economy programme in foam glass manufacturer Uusioaines Oy, whose parent company Partnera Glass Recycling acquired Swedish Hasopor AB, a company operating in the same sector. Together they form Europe’s leading foam glass manufacturer. In addition to economic profitability, being impactful produces new solutions. For example, glass waste continues to be recycled as a substitute for expanded clay aggregate in earthworks.

International co-investors were involved in six of the direct investments we made during the first half of the year, investing altogether €9.6m in portfolio companies. These companies included, for instance, Wirepas. Our international portfolio funds made investments totalling €14.4m in three Finnish companies.

Profit, balance sheet and cash flow

Profit after taxes for the review period amounted to €13.4m.

VC and PE investments produced an overall net loss of €3.6m, made up of €11.3 net gains from funds and €14.9m net losses from direct investments. There were decreases in the fair value of many direct investments due to operative factors and changes in the market environment.

The net gains from financial securities was €25.4m, corresponding to a 6.3% return for average capital.

The balance sheet total at the end of the review period was 1.1 billion euros and shareholders’ equity amounted to 1 billion euros. The cumulative change in retained earnings from Tesi’s operations amounted to €354m at the end of the review period.

Altogether €43.2m was returned from the company’s investments during the review period and net cash flow was €-3.2m. A total of €38.8m was returned to Tesi from investments in funds and €4.4m from direct investments.

Investments under management

Our investments under management at the end of the review period totalled €1,220m. Investments under management also include investments made by the FoF Growth funds as well as investments channelled from the European Investment Bank via the EU’s EFSI financing mechanism.

Prospects for year end

After the review period, we invested in IQM Finland and also in Picosun, a provider of advanced ALD (Atomic Layer Deposition) thin film coating technology. IQM, a spin-out from Aalto University and VTT Technical Research Centre of Finland, raised altogether €11.2m. The company develops systems that will enable future development of the world’s first scalable quantum computer. Domestic investment boosted Picosun’s capital by €12m. The company’s ALD thin film technology is based on a Finnish invention that is essential for the functioning of modern electronics in many everyday devices. Applications of the technology will widen in scope to include, for instance, health technology. In addition, we made a fund investment in the Lifeline Ventures IV fund, which invests in early-stage companies.

We also started preparations for raising a new fund: FoF Growth IV. By continuing the FoF Growth funds’ operations, we will ensure seamlessly sustained support for fundraising in Finland’s investment ecosystem.

In the second half of the year, we will realise from our deal flow a number of fund investments and direct investments that we have systematically prepared during this review period. Despite the growing economic uncertainty, solving global problems opens up a market that favours new creative companies reinforced with partnerships. Technology can solve the world’s major problems effectively, further strengthening the link between impact investing and profitability as well as making positive social and environmental impacts. Alongside the mitigation of climate change, impact investing by funds can easily target, for instance, health and education technologies, materials or food technology.