Too few long-term investments, those reaching far into the future, have been made into Finland. When such investments are made, they do not always promote structural change and regeneration. Private equity provides a solution for this challenge.
Private equity stands for investments made into the equity of privately held companies, those not listed in public stock exchanges, through private equity funds. Private equity comes in two main forms: Venture capital (VC) focuses on high-growth startup companies. For example, Mendor, a company focusing on diabetes management, established in 2006 in Helsinki, has received over ten million euros of venture capital. Buyouts, on the other hand, focus on redirecting established companies, many of which are SMEs, into new directions. For example, in the case of Kotkamills, a Finnish private equity firm bought a loss-making paper mill and turned it into a profitable cardboard maker with the help of nearly 200 million euros of investments.
In this book, we study the economic roles of Finnish private equity firms and Tekes, the Finnish Funding Agency for Innovation, from various perspectives. We find that both the VC and buyout firms are agents of positive change from the viewpoint of employment and productivity. They increase the desire and capability of growth of their target companies and thereby feed the “hunger for growth”. Through their target companies, venture capitalists also have a more indirect but an equally important role: they promote the creative destruction and regeneration of the enterprise sector and the utilization of new knowledge, which is the single most important factor in explaining the growth of welfare in the long run.
In Finland, approximately 100 new target firms come under the umbrella of private equity each year; the number of target firms in any stage of development is 5–10 times larger at any given moment. The firms that have received private equity at any time of their history is less than half a percent of the corporate population but more than five percent of total business sector employment in Finland.
The relationship between Tekes and venture capitalists is a symbiotic one; Tekes is typically involved in the earlier stages of the development of startup firms, whereas venture capitalists come along during the later stages of commercialization and growth. The role of Tekes is less important for buyout firms.
The developing of private equity markets starts from the understanding of the whole private equity cycle and from alleviating its bottlenecks. At the same time, one must be aware that it makes less sense to develop the industry itself unless private equity fund investing and potential target companies also develop into the same fashion.
In Finland, private equity investing is a young industry that is in a virtuous circle. This also means that its agents are in the steep-sloped stage of their learning curve. A lot can be done to feed such virtuous circle, but what is most needed at the moment is giving it more time to develop further.
Finnish Venture Capital Association (FVCA), Tekes – the Finnish Funding Agency for Innovation
Taloustieto Oy, Helsinki 2016