Annual Report 2012

Report by the Board of Directors

Business environment

General economic development was modest in 2012, and Finland's GDP is expected to remain broadly the same as that for the previous year. Finnish industry underwent restructuring and consolidation, which impacted growth figures.

The prevailing economic uncertainty was also reflected in venture capital and private equity activity. The sluggish economy has prolonged the lifetime of many funds, as the performance of portfolio companies fell below expectations and exits were delayed. The establishment of new funds often took longer as fundraising became more challenging. Altogether €442m (€419m in 2011) of new capital was raised by Finnish venture capital and private equity funds*.

A total of €616m was invested in Finnish companies, slightly less than the previous year (€848m) *. There was a decline in the volume of both venture capital and buyout investments. Almost one-third of investments came from foreign sources investing mainly in M&As and buyouts. Exits at acquisition cost from Finnish portfolio companies totalled €286m (€434m in 2011)*. The turnaround of capital slowed in the economic downturn.

* Source: FVCA's preliminary statistics for 2012

Investment activities

Finnish Industry Investment had a robust deal flow in 2012, screening over 200 projects seeking venture capital or private equity funding. The company made new investments in 2012 totalling €57.1.

The parent company made new commitments amounting to €32.5m (€29.1m in 2011) to four funds. There were new fund investments in two venture capital funds and two mid-market buyout funds. The company exited from two funds that came to the end of their term. Capital calls amounting to €60.1m (€59.7m) were paid to funds. Altogether €29.3m (€44m) was returned to the company from funds.

New direct investments focused on technology companies, buyouts and the mining cluster. The parent company made direct investments totalling €22.3m (€47.1m). Of these, first-round investments in six companies accounted for €14.2m and follow-on investments in 11 portfolio companies for €8.1m. During 2012, the parent company exited fully from altogether five portfolio companies (BioTie Therapies Corp., Lacell Oy, Top-Sport Oy, Konepaja Ceiko Oy, Blue White IT Oy (formerly Academica Oy) and partially from three. The impact of the exits on the company's financial result was €1.3m.

The Stabilisation Financing Programme was terminated at the end of the year. Investments made through the programme in 2009-2012 amounted in total to €60m in 15 companies. The net sales and profitability of the investee companies showed gains during the period covered by the programme. Some €20m has been earmarked for follow-on stability investments.

The parent company increased its commitment to subsidiary Start Fund I Ky by €5m to €65m. The additional investment safeguards the follow-on financing needs of the fund's portfolio companies. The subsidiary Start Fund I Ky invested a total of €2.3m in five portfolio companies during the review period and exited from five portfolio companies. The impact of the exits on the company's financial result was €0.2m. At the end of 2012, Start Fund had 32 portfolio companies and the fund had called in €60.9m of its total capital.

Increase in share capital

The company made two private placements of shares to the Finnish government, which subscribed for 5,000 shares, paying €50,000,000 for them. The number of company shares rose from 18,210 to 23,210 and the company's share capital increased from €203,992,200 to €253,992,200. The increase in share capital will be used to invest in the mining cluster and in promoting companies' growth. The Finnish government's investments in Finnish Industry Investment Ltd's equity totalled €470m at the end of the review period.

Income statement and financial position

The Group's profit for the year was €7.3m (€12.6m loss in 2011). Profits, both from investments and from liquid securities, improved compared to the previous year.

Sales gains from direct investments in portfolio companies entered under other operating income in the consolidated accounts amounted to €1.5m (€0.8m). The Group's financial income included distribution of funds' profit amounting to €7.3 (€11.8m) and interest yield from direct investments totalling €3.9m (€2.7m). The aggregated net amount of downward valuations of investments was €-14.3m (€-35.3m in 2011). The total impact of investments on profit was €-0.8m (€-17.1m).

The impact of consolidated income from liquid securities on the Group's profit was €14.0m (€9.9m). At the end of the financial year the balance sheet value of liquid securities included in current assets and cash in hand and at banks totalled €200.7m (€187m). The market value of assets on the balance sheet date amounted to €210.8m (€191.5m). Investments in liquid securities ensure adequate liquidity to cover commitments. At the end of 2012 the parent company's unpaid commitments totalled €221.6m (€245.8m). Unpaid commitments consist almost entirely of commitments to funds with an average payment period of over 4 years.

The parent company's balance sheet total at the end of 2012 was €576.8m (€521.3m). The Group's balance sheet totalled €569m (€512m). The company's shareholders' equity stood at €575.2m (€519.3m) at year's end and the Group's shareholders' equity was €567.4m (€510m).

The parent company's equity ratio was 99.7% (99.6%). The Group did not hold any interest-bearing liabilities at the end of 2012. The book value of the parent company's investments and commitments was 103% (110.7%) of shareholders' equity at the end of 2012. The book value of the Group's investments was €362.7m and the fair value €411.6m.

Administration and personnel

Finnish Industry Investment Ltd's President & CEO during the review period was Juha Marjosola, M.Sc. (Econ). The company employed on average 29 people. Three new employees were recruited in 2012, one of which on a fixed-term contract. At year's end 12 women and 17 men worked in the company. Of the personnel, 72% have a higher academic degree. There were no changes in the Group's structure during 2012.

A personnel survey was conducted in 2012. The results show that the satisfaction level of personnel is good compared to peer companies and has risen compared to the last survey in 2010.

Corporate responsibility

Finnish Industry Investment emphasises responsibility in all its activities and also requires that its portfolio companies operate responsibly in the environmental and social arena as well as in matters relating to finance and administration. The company's corporate responsibility policy focuses on key themes for a government-owned investor: economic impact and responsibility, responsible investment, human resource management and internal procedures. Finnish Industry Investment publishes a Corporate Responsibility Report in 2013.

Risk management

Finnish Industry Investment is administered by the Ministry of Employment and the Economy and reports regularly on its operations to the Ministry. The company's operations are governed by a special law and a Government Resolution, which define the basis for investment policy and risk-taking. In accordance with the special law governing Finnish Industry Investment's operations, the company is empowered to take a higher risk than usual in individual investment decisions. The company's investment activities must nevertheless be managed as a whole in a way that ensures investments are adequately diversified and that does not jeopardise the statutory obligation for profitable operation over the long term.

In line with the company's industrial policy, most of Finnish Industry Investment's investments are allocated to venture capital, the return on which has historically been low in relation to the risk. These venture capital investments include for example those made in the early stage, high-technology and cleantech sectors. In managing the portfolio, high risk-taking is balanced with more mature-stage investments.

Finnish Industry Investment's risk management policy, confirmed by the Board of Directors, sets out the principles for risk management and promotes the identification, evaluation and management of risks. Risk management enables the company to pursue its strategy and achieve its goals through ensuring business continuity by minimising vulnerability and protecting business-critical operations. An auditing committee and a remuneration committee appointed by the Board operate within the company. The Board makes investment decisions and supervises the implementation of investments. The Board continuously assesses strategy and updates its strategy at least once a year. Strategic risks are managed by regularly evaluating the company's operations and business environment. Operational risks are managed by good corporate governance.

The company's main business risks are related to private equity and venture capital investments, and are managed by spreading investments across various business sectors and investment instruments. The risks related to each investment are also managed by regularly monitoring portfolio companies and contributing to their business development. The ratio of investment volume to available capital is continuously monitored. At the end of 2012 the ratio of investments and commitments to shareholders' equity was 103%, whereas the guidelines set by the Ministry of Employment and the Economy limit the ratio to 150%.

The ratio of fund investments and direct investments is under regular control. The guidelines issued by the Ministry in 2012 limit the ratio of direct investments to all commitments and investments to a maximum 35%. At the end of 2012 Finnish Industry Investment's direct investments, including Start Fund I Ky, accounted for 28% of the total.

The adequacy of liquidity for investments and other cash liabilities is constantly monitored and managed. The amount of unpaid commitments in relation to liquidity was 105% on 31 December 2012.

Investments in liquid securities are made at the selected risk level in compliance with the investment policy confirmed by the Board of Directors. Investments in liquid securities aim to ensure adequate assets for private equity investing and other payment transactions. Liquid security investments are spread across direct interest-based investments, and bond and equity funds, with the emphasis on interest-bearing investments with a high credit rating. The market volatility of liquid securities is monitored regularly and counterparty risk is managed by selecting partners carefully. Liquidity risk is managed by regularly planning and monitoring cash flows. Most of the company's cash flows and investments are denominated in euros.

Board's proposal for the distribution of profit

The parent company's distributable earnings on 31 December 2012 after profit for the financial year of €5,820,262.03 amounted to €105,303,300.22. No significant changes in the company's financial position have occurred since the end of the financial period. Taking into account the company's liquidity, unpaid commitments and confirmed investment plan for 2013, the Board proposes to the Annual General Meeting that no dividend be distributed for 2012. The company has one class of share and 23,210 shares. The share capital is €253,992,200.

Events after the financial year

The value of Finnish Industry Investment's investment in the company Northland Resources declined substantially after the end of the review period. Northland Resources has announced that it has applied for corporate restructuring. The value of the investment on 31 December 2012 was €5.5m. In March 2013 the value of the investment was some €0.5m. The downward valuation of the investment is expected to have a significant negative impact on Finnish Industry Investment's financial result for 2013.

The Finnish government decided on 17January 2013 to change the use of capital raised from the share issue implemented for Finnish Industry Investment in 2009. The unused portion, some €20, of the €100 Stabilisation Financing Programme that was separately managed for the period 2009-2012 will now be targeted at investments in marine cluster companies and in the bioeconomy and cleantech sectors.

Prospects

The economy is expected to recover in 2013 and return to growth in 2014. Expectations of growth during the start of the year have already boosted share prices. As economic recovery reinforces confidence in the future, the volume of corporate acquisitions is likely to increase.

The venture capital and private equity industry in Finland will be affected in 2013 by the implementation of the Alternative Investment Fund Managers Directive (AIFMD). Under the new legislation fund managers will have to, inter alia, register or apply for a licence from the Financial Supervisory Authority, depending on the amount of managed funds involved. The legislation aims to improve investor safety and increase transparency.

Finnish Industry Investment's goal is to channel venture capital into companies' growth over economic cycles. The focuses of investments will be high added-value companies seeking international growth, the mining cluster, the bioeconomy and cleantech sectors, and the marine industry's cluster companies. All investments will continue to promote development of Finland's venture capital and private equity market. The company's aim for 2013 is to make new investments amounting to some €70. The prevailing market situation and deal flow will have a strong effect on the volume of new investments.

Key figures
2012 2011 2010 2009 2008
Profit/loss for the financial year, €m 7.3 -12.6 -6.2 -11.6 -23.8
Shareholder's equity, €m 567.4 510.0 522.6 528.8 390.5
Balance sheet total, €m 569.0 512.0 524.3 529.9 391.5
Unpaid commitments, €m 217.5 244.0 280.3 289.1 300.2
Investments at acquisition price, €m 476.8 425.9 386.7 314.3 259.2
Investments and commitments at acquisition price, €m 694.2 669.9 666.9 603.3 559.4
Reductions in value of investments, €m 114.1 105.9 100.0 93.2 69.7
Investments at book value, €m 362.7 320.0 286.6 221.1 189.4
Ratio of investments and commitments to shareholder's equity 1.0 1.1 1.1 1.0 1.3
New commitments made during the financial year, €m 57.1 78.0 105.8 64.6 152.1
Return on equity 1.4 % -2.4 % -1.2 % -2.5 % -5.9 %
Equity ratio 99.7 % 99.6 % 99.7 % 99.8 % 99.7 %
Expenses per balance sheet total 1.0 % 1.1 % 1.0 % 0.9 % 1.1 %
Personnel, average 29.0 26.0 25.0 24.0 21.0
Salaries and fees for the financial year, €m 2.8 2.4 2.4 2.2 1.8
Fund investments, number 86 84 84 86 86
Funds, number of portfolio companies 434 407 388 368 339
Parent company, number of direct portfolio companies 44 44 41 30 26
Start Fund I Ky, number of portfolio companies 32 35 51 64 73
Number of portfolio companies, total 510 486 480 462 438

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