Moving on from a year of the pandemic

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Jan Sasse

CEO

We will remember the year 2020 as one of the most extraordinary in our work history. The coronavirus pandemic caused social suffering and impacted businesses in Finland and throughout the world. Working methods changed across industries. Digitalisation and remote work took great leaps forward. Tesi’s year did not go according to original plans, either. What the year showed, however, was the importance of strategic implementation capabilities and agility in surprising and difficult situations.

Even in challenging circumstances, we were able to not only provide crisis financing, but also continue our normal investment activities, ensuring the success of Finnish companies in the future. In 2020, we made investments totalling over EUR 240 million.

At the start of last year, we were about to get going in implementing our new strategy in a favourable business climate. But in March, the arrival of the coronavirus pandemic forced us to re-evaluate our priorities. Together with our stakeholders, we promptly started assessing the situation and planning tailored instruments to help Finnish SMEs over the worst of the crisis.

As part of the state’s corona support package, the first step we took was to ensure stabilisation financing is available to those middle-sized companies that are facing an acute liquidity crisis and do not have other financing options on hand. The criteria of stabilisation financing were formed in so that it focuses precisely on companies that have faced difficulties due to the corona situation. After the initial spike, the demand for stabilisation financing has been relatively moderate. During the year, we made investment decisions from the programme in 12 companies amounting to altogether EUR 57.4 million.

In the spring, in close cooperation with the local venture capital sector, we started planning the Venture Bridge programme to bridge innovative growth companies to their next financing round during the corona situation. After its launch in June, the demand for the financing has remained stable, declining only slightly toward the end of the year. By the end of the year, we invested EUR 12.4 million in 14 companies .

We also explored the feasibility of an equity financing programme for companies in the smaller size range. After a thorough analysis, this project was shelved because the costs of the programme were found to outweigh its benefits and impact when compared to other forms of state support available.

Analysis and insight

During the corona crisis, we have striven to help both companies and the government with our financing instruments and by producing data and analyses about the situation faced by SMEs. We conducted a three-part survey in extensive stakeholder co-operation in order to form a neutral and real-time outlook of the situation. The survey covers external factors, internal procedures, and the impact of interventions to support SMEs. Helsinki GSE, Ministry of Economic Affairs and Employment, Business Finland and Finnvera took part in the planning of the survey, the results of which have also been used in broader impact modelling by professor Vesa Vihriälä’s working group investigating the effects of the corona crisis on the Finnish economy. The data was also given to the Ministry of Finance and the Bank of Finland and is publicly available for everyone to utilise (in Finnish).

The results of the survey show that Finland’s economy has so far weathered the corona crisis with less damage than expected while simultaneously taking its first transformative steps. Although the crisis has significantly complicated companies’ business, their adaptability has been better throughout than anticipated. Many companies have been able to compensate decline in sales by reducing their operative costs. EBITDAs show that companies have been largely able to keep their businesses profitable.

The results of the survey show that Finland’s economy has so far weathered the corona crisis with less damage than expected while simultaneously taking its first transformative steps.

There has, however, been large, industry-specific differences in recovering from the crisis – the situation representing the so-called K-curve. Outlook for the ICT sector has improved significantly during the year. However, demand in the global market determines the way to a great extent, especially in our industrial sector. Order intake in industrial companies has started to recover but is still significantly behind the pre-crisis levels and full recovery is expected to take much longer. Small businesses with limited resources to adapt are at the most disadvantageous situation. Based on the survey results, most companies cannot implement any more cost-saving measures.

The effects have also been felt in the venture capital and private equity sector, although the crisis has had a lesser impact than expected. No disruptions to 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. Funds have experienced a slowdown in fund-raising, but it is still too early to predict whether this will continue.

The impacts of the pandemic on international investors’ activity Finland will also become evident later as the negotiations for the realised funding rounds had already begun prior to the corona crisis. In general, the supply of venture capital has not, for the time being, declined as significantly as was initially feared. Rather, international investors’ activity was in fact higher in early 2020 than the year before.

Investments produce both social impact and profit

Despite the coronavirus crisis, we have continued with our normal investment activities. During the year, we invested over EUR 240 million in funds and companies, including a commitment of EUR 65 million 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.

KRR IV , raised just before the pandemic, will contribute to the creation of new funds over the upcoming years. KRR IV total capital is EUR 175 million, which will be invested in 10–14 Finnish VC/PE funds between 2020–2025.

With fund investments, we develop the Finnish VC/PE market long-term. Fund investment volumes remained roughly the same compared to previous years, although there were some delays in fund-raising. Icebreaker.vc, Superhero Capital and Open Ocean raised new venture capital funds in 2020, in all of which we have invested as well. New growth and buyout funds were raised by CapMan Growth, Verso Capital and Sponsor . In addition, we made a commitment to GOS’s s pilot debt fund. Furthermore, Tesi invested in numerous companies that have a societally important impact, enabling their growth and internationalisation. These companies include Fifax that farms fish more sustainably on dry land; Swappie, which refurbishes and then retails smartphones and IQM, building Finland’s first-ever quantum computer. The joint investment program by Tesi and EIB has played an important role in enabling larger funding rounds during 2020.

Despite the challenging year, there were also successful exits. Kaiku Health will continue its global growth under the ownership of Swedish Elekta, a leader in radiotherapy technology. Europe’s third largest producer of folding carton, Austrian Mayr-Melnhof Group, signed a contract for the entire stock of Kotkamills Group Ltd. The transaction is subject to regulatory approval. The exits give boost to Finland’s ecosystem in otherwise challenging circumstances and create a sound base for Tesi’s future investment operations through returning profits

From responsibility to beneficial impact

The themes of responsibility and societal impact continued to draw attention in the VC/PE industry in 2020 as well. In the autumn, we conducted interviews to chart investors’ understanding of responsible investment and their methods for promoting it in their portfolio companies. Some 30 fund managers who manage active funds in our portfolio took part in the interviews. We found that the interviewees unanimously felt that corporate responsibility is essential to profitability, especially over the long term. Each investment team had also a responsibility policy. However, methods for reporting and communications varied widely, and managers rarely used any responsibility standard. There was a general desire to promote diversity, but practical challenges were seen as an obstacle.

In 2021, we will continue our active development work around the themes of responsibility and impact. We strongly believe that Finnish growth companies have a vital role in solving global challenges, and we want to enable the growth and internationalisation of these companies. This year, our objective is to achieve harmonised methods of working in a socially beneficial and responsible way that can be put into operational use in investment activities. We also continue to systematically develop value creation procedures as part of our investment activities. We have already begun this work by asking our stakeholders for views, and we will share our insight with the market as well.

In 2021, we will continue our active development work around the themes of responsibility and impact. We strongly believe that Finnish growth companies have a vital role in solving global challenges, and we want to enable the growth and internationalisation of these companies. This year, our objective is to achieve harmonised methods of working in a socially beneficial and responsible way that can be put into operational use in investment activities. We also continue to systematically develop value creation procedures as part of our investment activities. We have already begun this work by asking our stakeholders for views, and we will share our insight with the market as well.

We strongly believe that Finnish growth companies have a vital role in solving global challenges, and we want to enable the growth and internationalisation of these companies.

Looking ahead

It seems that so far Finland’s economy has weathered the crisis with limited damage while simultaneously the first transformative steps are being taken. This presents a good springboard for capitalising on post-crisis peaks in demand and supports economic reform over the longer term.

However, the coronavirus crisis is not yet over. The upcoming spring will indicate how the order intake of industrial companies develops and how the ending of the temporary bankruptcy legislation in Finland impacts companies. Tesi will remain fully prepared to meet the demand for financing also during 2021, and the recapitalisation decisions made in the Finnish state’s supplementary budget places Tesi in good stead to do this. We will continue to closely monitor the situation through our stabilisation and Venture Bridge programmes. Active measures may also be needed to support the operations of companies facing difficulties in 2021.

Per our strategy, we will continue our operations in 2021 with emphases on responsibility and societal impact, value creation, internationalisation as well as on sharing market insight with our stakeholders to develop the Finnish VC/PE market. We expect there to be no major changes in the special focus areas of our investment activities.

We have worked in close collaboration with growth companies, the VC/PE industry and decision-makers throughout the year, toward a common goal. Tesi staff have shown a splendid degree of flexibility in an operating environment undergoing profound change and have managed to fully respond to the challenges such change presents. I want to thank all our stakeholders and staff for the flexibility and solution-orientation they have exhibited, both of which enabled us to prepare for the exceptional measures taken during the corona situation and still, for the most part, continue the investment activities according to our strategy.

Tesi’s 2020 financial statements and Corporate Responsibility Report will be published on Tesi’s website in March 2021.