Tesi’s year 2020: Ensuring financing for Finnish SMEs amid corona pandemic

CEO Jan Sasse comments the year:

“During the corona crisis, we have striven to help both Finnish companies and other stakeholders with our financing instruments and by producing data and analyses about the situation faced by SMEs. In addition to providing crisis financing to companies in the form of our stabilisation and Venture Bridge programmes, we have continued with our normal investment activities. During the year, we invested €248m in funds and companies, including a commitment in KRR IV fund-of-fund managed by Tesi, other fund commitments and direct investments as well as stabilisation and Venture Bridge financing due to the corona situation.

Despite the prevailing economic climate, the Finnish venture capital and private equity market did not experience the disruption anticipated. In venture capital in particular, companies raised record high investment rounds and company valuations rose steeply. This was also reflected in Tesi’s profit for the year, which amounted to €179m. Positive performance by portfolio companies (unrealised net gains €179m) and successful exits (realised net gains €46m) contributed to our strong financial result for the year.

However, the pandemic is not yet over. It will become clearer in spring 2021 how the order intake of industrial companies develops and how the ending of the temporary bankruptcy legislation in Finland will impact companies. Tesi will remain fully prepared to meet the demand for financing generated by the pandemic also during 2021.”

Business environment

Finland’s economy has so far weathered the COVID-19 crisis with less damage than expected, and corporate financing has remained relatively stable. Although the crisis has significantly complicated companies’ business, their adaptability has been better than anticipated. Many companies have been able to compensate for a decline in sales by reducing their operative costs and, in general, have managed to keep their businesses profitable. However, recovery from the impacts of the crisis has varied greatly from sector to sector.

The effects of the crisis have also been felt in the Finnish venture capital and private equity sector, although to lesser extent than expected. No disruptions at the systemic level were identified, and the volumes of euro-denominated transactions remained buoyant. On the other hand, there are signs of a decline in transaction volumes. Fundraising activities of funds have slightly slowed down, but it is too early to predict whether this will continue. In general, the supply of venture capital has not, for the time being, declined as much as was initially feared. Rather, international investors’ activity was in fact higher in early 2020 than the year before. A notable trend is the continued rise in the valuations of venture capital backed companies during 2020. The same can be observed in many other risk asset classes on the global capital market, such as publicly traded stock. The phenomenon can partly be attributed to central banks continuing their highly reflationary monetary policy due to the pandemic, which in turn has resulted in an ever-increasing flow of capital into riskier investments in the low-interest environment.

Investment operations

In 2020, Tesi made new investments and commitments amount­ing to €248m (€133m in 2019).

Tesi gave commitments totalling €82m (€89m) to nine funds. Tesi gave three commitments to Finn­ish venture capital funds (Superhero Venture Fund 2020, Open Ocean Fund 2020, Icebreaker Fund II) and three commitments to growth and buyout funds (CapMan Growth II, Verso Fund III, Sponsor Fund V). Tesi also invested in GOS Private Debt I, a new type of debt fund. Additionally, Tesi gave commitments to Verdane Edda II, which actively supplements Finland’s market, and to a Finnish fund (details to be published later). Tesi’s Finnish portfolio funds attracted altogether €755m from investors. In addition, Tesi made a commitment of €65m in KRR IV, a fund-of-funds it manages. The total capital of KRR IV is €175m.

Tesi made direct investments amounting to €38m (€43m) in 19 companies. Of these, Tesi made initial investments totalling €24m in six companies (Nordic Rescue Group, Upcloud, Swappie, Varjo Technologies, Unikie, Fifax). Tesi made follow-on investments amounting to €14m in 13 portfolio companies. Overall, a total of almost €230m in new risk capital was chan­nelled into these portfolio companies. Of this total amount, some €125m came from international investors.

In 2020, Tesi launched two special investment programmes to ensure Finnish SMEs receive financing through the corona crisis. Stabilisation financing offers fast-track assistance to profitable mid-sized companies facing an acute cash crisis caused by the pandemic. Demand for stabilisation financing was initially brisk but remained moderate throughout the autumn. By the end of the year, Tesi had made investment decisions totalling €57.4m in 12 companies under the programme. From these, investments were made in 10 companies, amounting to €51m. Venture Bridge is focused on innovative companies that seek international expansion and need financing for their next investment round. By the end of the year, Tesi had made investment decisions totalling €13.8m in 15 companies of which €12.4m was invested in 14 companies under the programme.

Financial performance

Financial performance was strong in 2020, in line with the trend of previous years, resulting in a profit of €179m (€78m). The Group’s net gains from venture capital and private equity investments totalled €226m (€65m). Net gains from funds were €127m (€42m) and from direct investments €103m (€23m). The increase in funds’ net gains was due to successful exits from portfolio companies and a general rise in valuation levels. Net gains from direct investments also derived mostly from a general rise in valuation levels and successful exits. Net gains from special investment programmes launched during the year were negative, €-4 million. Net gains from financial securities amounted to €4 million. The pandemic depressed investment valuations early in the year, but because of the revival of the market towards the end of the year, returns on investments were positive.

The Company’s cumulative profit from operations, including the figure for the 2020 financial year, amounted to €598m. The cumulative amount with which the Finnish government has capitalised Tesi from the very start of its operations is €819m. IRR for the Finnish state’s investments in Tesi is 5.1% after taxes.

The Group’s balance sheet totalled €1,499m (€1,130m) at the end of the year and shareholders’ equity grew to €1,417m (€1,088m). Carrying value of funds was €558m (€419m) and direct investments €402m (€291m).

The total amount of investments under management at the end of 2020 was €1.9 billion. In addition to Tesi’s own investments and commitments, this includes the capital of the KRR I – IV funds that Tesi manages, as well as the EIB funds managed by Tesi in the EFSI co-investment programme.

The Finnish state recapitalised Tesi in the 2020 supplementary budget II by €150 million to finance the stabilisation programme due to the corona situation. In preparation for any worsening of the economic situation, the Finnish state committed €250m for recapitalising Tesi in its supplementary budget IV. The additional capital will be channelled flexibly, according to the market situation, into venture capital investments, Tesi’s stabilisation programme, and in fund investments over the next two years to mitigate the disruption caused by the pandemic. The appropriations from the supplementary budgets already paid, and those to be paid in the future, will be returned to the Finnish state when Tesi exits the investments.

Prospects

In 2021, Tesi will continue to follow its strategy, giving high priority to responsible operation and positive social impact, value creation, internationalisation, and the sharing data and insight aimed at developing the Finnish venture capital and private equity market. The objective is to achieve harmonised methods of operating and investing in a socially beneficial and responsible way, and to systematically develop value creation procedures as part of our investment activities. This work has already been started by asking our stakeholders for insight, and Tesi will share the best practices with the market in the future.

Tesi will continue to use its fund investment activities to promote the long-term development and internationalisation of Finland’s VC&PE market. Tesi will give high priority to sparring with Finnish funds’ management teams and to scaling up their internationalisation, as well as to building networks and developing the fund investor base. The international fund operations will supplement Finland’s own venture capital and private equity market. With direct investments, Tesi aims for shorter-term impact by sharing risks with private investors. When screening projects, Tesi will pay greater attention to the positive social impact of potential target companies. In portfolio companies, Tesi will focus on value creation, active ownership and positive impact in collaboration with other investors.

Tesi will remain fully prepared to meet the demand for financing generated by the pandemic also during 2021. The recapitalisation decisions made in the Finnish state’s supplementary budget places Tesi in good stead to do so. Tesi will continue to closely monitor the situation through the stabilisation and Venture Bridge programmes.

The strong financial performance of recent years, combined with the expertise and networks the organisation has accumulated, provides Tesi with a sound framework for promoting Finnish companies’ growth and internationalisation well into the future.

Annual General Meeting

Tesi’s Annual General Meeting was held on 22 March 2021. Kimmo Jyllilä was elected Chairman of Tesi’s Board of Directors. Mia Folkesson, Anniina Heinonen, Minna Helppi, Riku Huttunen, and Pauli Kariniemi were elected members of the Board of Directors.

Read more:

Tesi’s annual review 2020

Corporate responsibility report 2020

For further information, please contact:

Jan Sasse, CEO
jan.sasse@tesi.fi
+358 (0)40 861 9151

Tesi (Finnish Industry Investment Ltd) is a state-owned investment company that wants to raise Finland to the front ranks of renewed economic growth by investing in funds and directly in companies. We invest profitably and responsibly, hand-in-hand with co-investors, to create the world’s new success stories. Our investments under management total 1.9 billion euros. www.tesi.fi | @TesiFII