Interim / Quarterly Report • Aug 6, 2015
Interim / Quarterly Report
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We estimate our earnings per share to improve from the level achieved in 2014.
CapMan receives carried interest income from funds as a result of a completed exit in the event that the fund already is in carry or will enter carry due to the exit. Our current portfolio holds several investments, which we expect to exit during 2015. The most significant exits are expected to be completed towards the end of 2015.
The fair value development of our own fund investments and that of Norvestia will have a substantial impact on our overall result in 2015. We expect disparity in the development of individual portfolio companies and real estate also during 2015 depending on their industry and geographical location. In addition, our portfolio companies and real estate are also influenced by various other factors, among others the general development of industries and local economies, inflation development, valuation multiples of peer companies, and exchange rates.
We estimate other fees to increase clearly alongside the management fees. Our fees as a whole will exceed our expenses before possible non-recurring expenses related to acquisitions or larger development projects.
"The first six months of the year progressed mostly according to plan. The fair value development of our investments, including Norvestia, and the timing of ongoing exit processes have a profound impact on the result for the second half of the year. "
CapMan became an anchor owner of Norvestia following the acquisition of shares in May. The transaction supports our long term strategy, which is to be an active and versatile private equity player. Norvestia's expertise in private equity is based on minority investments mainly in Nordic entrepreneurial companies.
The exit from Swedish Silex Microsystems is an excellent example that also funds at the end of their life cycle include companies, which may provide material carried interest to CapMan. In addition, our Nordic Real Estate fund agreed on its first exit, which was an office building north of Stockholm. The CapMan Real Estate team was successful in executing their value added strategy ahead of their original schedule."
CapMan Group is a private equity fund manager operating in the Nordic countries and Russia. The Group also makes investments in its own funds. The Group operates through two segments: a Management Company business and a Fund Investment business.
In its Management Company business, CapMan raises capital from Nordic and international institutions for the funds that it manages. The investment teams invest this capital in Nordic and Russian companies and Nordic real estate. The Management Company business has two main sources of income: fees and carried interest from funds. The fees include management fees related to CapMan's position as a fund management company and fees from CapMan's service business comprising purchasing scheme (CaPS), fundraising advisory services and other services related to fund management, among others.
Through its Fund Investment business, CapMan makes investments from its own balance sheet in the funds that it manages. Income in this business is generated by increases in the fair value of investments and realised returns.
In addition to investments in its own funds, CapMan owns 28.7% of the shares in Norvestia Plc. CapMan acquired 21.7% of the shares in May and has made a firm commitment to acquire an additional 7.0% of Norvestia's shares outstanding around October 2015. The fair value change of the associated company Norvestia is booked in CapMan's income statement, based on the change in Norvestia's adjusted net asset value (NAV) as communicated in Norvestia's stock exchange releases. CapMan makes no adjustments to Norvestia's reported figures.
Please see Appendix 3 for additional details about CapMan's business model.
The Group's turnover increased by 5.0% from the comparable period and totalled MEUR 15.7 (January–June 2014: MEUR 15.0). The increase in turnover was mainly attributed to higher carried interest income. Operating expenses totalled MEUR 14.2 (MEUR 13.5) and included MEUR 0.7 of non-recurring expenses mainly related to the acquisition of shares in Norvestia (the comparable period included MEUR 0.1 in non-recurring expenses related to strategic projects). Expenses for the review period included approx. MEUR 0.9 of bonus provisions (MEUR 0.4) for the investment teams based on CapMan's short term compensation scheme.
The Group recorded an operating profit of MEUR 3.0 (MEUR 2.8).
Financial income and expenses amounted to MEUR -1.0 (MEUR -0.8). CapMan's share of the income of investments accounted for using the equity method was MEUR 0.7 (MEUR 0.2).
Profit before taxes was MEUR 2.6 (MEUR 2.2) and profit after taxes was MEUR 2.2 (MEUR 1.9). Earnings per share were 2.0 cents (1.7 cents) after deducting the (net of tax) interest on the hybrid bond for the review period.
A quarterly breakdown of turnover and profit, together with turnover, operating profit/loss, and profit/loss by segment for the review period, can be found in the Tables section of this report.
Turnover generated by the Management Company business during the first half of 2015 totalled MEUR 15.7 (MEUR 15.0). Fees totalled MEUR 13.3 (MEUR 13.6). Fees recorded also include fees generated by CapMan's purchasing scheme (CaPS) and other services.
Carried interest income for the review period totalled MEUR 2.5 (MEUR 1.4) and was mainly due to recognised revenue received from the CapMan Equity VII A and Sweden funds following the exit from Symbio and Silex Microsystems.
The operating profit of the Management Company business was MEUR 1.8 (MEUR 1.9). The profit for the first half of 2015 was MEUR 1.4 (MEUR 1.7). The status of the funds managed by CapMan is presented in more detail in Appendix 1.
Total fair value changes of investments in the first six months of 2015 were MEUR 1.3 (MEUR 1.1 in the comparable period). Fair value changes of fund investments were MEUR 0.9 (MEUR 1.1) representing a 1.6% increase in value (similarly 1.6% increase in the corresponding period in 2014). The overall change in fair value was due to the slightly positive development in several portfolio companies. The aggregate fair value of fund investments as of 30 June 2015 was MEUR 56.5 (30 June 2014: MEUR 63.0). CapMan's share of the change in the net asset value of its associated company Norvestia was MEUR 0.4. The fair value of CapMan's investment in Norvestia was MEUR 44.7 on 30 June 2015.
Operating profit for the Fund Investment business was MEUR 1.2 (MEUR 0.9) and profit for the review period was MEUR 0.8 (MEUR 0.3). The Fund Investment business includes the results of Maneq companies remaining in CapMan's portfolio and CapMan's share of the change in net asset value of associated company Norvestia.
CapMan invested a total of MEUR 2.4 (MEUR 7.1) in its funds during the first half of 2015. Investments were allocated to the CapMan Buyout X, CapMan Mezzanine V, CapMan Russia II and CapMan Nordic Real Estate funds. CapMan received distributions from funds totalling MEUR 1.3 (MEUR 8.7). The majority of the distributions came from the CapMan Real Estate I, CapMan Equity VII and CapMan Public Market funds.
The amount of remaining commitments that have not yet been called totalled MEUR 28.0 as of 30 June 2015 (30 June 2014: MEUR 26.8). CapMan estimates that MEUR 15-20 of the remaining commitments will be called in the next 3-4 years, particularly due to unused investment capacity of the older funds. The aggregate fair value of existing investments and remaining commitments was MEUR 84.4 (MEUR 89.8). CapMan invests 1-5% of the original capital in the new funds that it manages, depending on fund size.
Investments in portfolio companies are valued at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (IPEVG), where fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Real estate assets are valued in accordance with the value appraisals of external experts, as detailed in Appendix 1. The fair value change of the associated company Norvestia is booked in CapMan's income statement, based on the change in Norvestia's adjusted NAV as communicated in Norvestia's stock exchange releases. CapMan makes no adjustments to Norvestia's reported figures.
Investments at fair value and remaining investment capacity by investment area are presented in the Tables section of this report.
CapMan's balance sheet totalled MEUR 150.5 as of 30 June 2015 (30 June 2014: MEUR 112.2). The expansion of the balance sheet was due to the acquisition of shares in Norvestia. Non-current assets amounted to MEUR 125.7 (MEUR 88.6), of which goodwill totalled MEUR 6.2 (MEUR 6.2).
As of 30 June 2015, investments accounted for using the equity method were MEUR 9.1 at fair value (30 June 2014: MEUR 9.3). Fund investments booked at fair value totalled MEUR 56.5 (MEUR 63.0). The adjusted NAV of Norvestia
was MEUR 155.9 on 30 June 2015, of which the book value on CapMan's balance sheet was MEUR 44.7 based on CapMan's 28.7% ownership. Long-term receivables amounted to MEUR 4.0 (MEUR 4.8).
Current assets amounted to MEUR 24.9 (MEUR 23.6). Liquid assets (cash in hand and at banks, plus other financial assets at fair value through profit and loss) amounted to MEUR 16.7 (MEUR 17.6).
CapMan's interest-bearing net debt amounted to MEUR 46.3 (MEUR 17.2). The Group's interest bearing debt as of 30 June 2015 is outlined in the below table.
| Debt amount 30 June 2015 |
Matures latest | Debt amount 30 June 2014 |
|
|---|---|---|---|
| Multi-issuer bond | MEUR 10 | Q2 2019 | MEUR 10 |
| Senior bond | MEUR 15 | Q4 2017 | MEUR 15 |
| Bank financing | MEUR 38 | Q2 2017 | MEUR 10 |
| Long-term credit facility (available) | (MEUR 15) | (MEUR 15) | |
| Hybrid bond* | MEUR 15 | No maturity | MEUR 15 |
*) In line with IFRS standards, the hybrid bond is classified as equity. The interest on the hybrid bond is deducted from equity as interest is paid, which is annually. The hybrid bond has no maturity, but CapMan has the right to redeem it four years after the issue date and the option to redeem it earlier, under certain terms and conditions, two years after the issue date. The hybrid bond was issued on 11 December 2013.
CapMan Plc's bank loans include financing covenants, which are conditional on the company's equity ratio and the ratio of interest-bearing bank loans to fund investments on the balance sheet. CapMan honoured all covenants as of 30 June 2015.
Trade and other payables totalled MEUR 23.4 (MEUR 10.9).
The Group's cash flow from operations totalled MEUR -2.6 for the first six months of 2015 (MEUR -0.7). Income from fund management fees is paid semi-annually, in January and July, and is shown under working capital in the cash flow statement. Cash flow from investments totalled MEUR -35.3 (MEUR 0.5) and includes, inter alia, the investment in Norvestia and fund investments and repaid capital received by the Group. Cash flow before financing totalled MEUR -37.8 (MEUR -0.2), while cash flow from financing was MEUR 25.6 (MEUR 0.5) and included the bank financing used for the investment in Norvestia.
CapMan's equity ratio was 41.5% as of 30 June 2015 (30 June 2014: 57.4%), its return on equity 7.3% (5.9%), and its return on investment 6.8% (5.6%). The target levels for the company's equity ratio and return on equity are 45– 60% and over 20%, respectively.
| 30.6.15 | 30.6.14 | 31.12.14 | |
|---|---|---|---|
| Earnings per share, cents | 2.0 | 1.7 | 3.4 |
| Diluted, cents | 2.0 | 1.7 | 3.4 |
| Shareholders' equity / share, cents * | 72.0 | 74.8 | 76.1 |
| Share issue adjusted number of shares | 86,290,467 | 86,033,855 | 86,163,919 |
| Number of shares at the end of period | 86,316,766 | 86,316,766 | 86,316,766 |
| Number of shares outstanding | 86,290,467 | 86,290,467 | 86,290,467 |
| Company's possession of its own shares, end of | 26,299 | 26,299 | 26,299 |
| period | |||
| Return on equity, % | 7.3 | 5.9 | 6.1 |
| Return on investment, % | 6.8 | 5.6 | 7.0 |
| Equity ratio,% | 41.5 | 57.4 | 57.8 |
| Net gearing,% | 74.5 | 26.7 | 5.0 |
*) In line with IFRS standards, the MEUR 15 (30 June 2014 and 31 December 2014: MEUR 15) hybrid bond has been included in equity, also when calculating equity per share. The interest on the hybrid bond (net of tax) for the review period has been deducted when calculating earnings per share.
Capital under management refers to the remaining investment capacity of funds and capital already invested at acquisition cost. Capital increases as fundraising for new funds progresses and declines as exits are made.
CapMan takes advantage of its geographically extended network and aims to gain new fund commitments from investor groups that have not previously invested in private equity funds. The low interest rate environment has increased investors interest in private equity investments.
CapMan's collaboration with Elite Asset Management continues and CapMan Collection, a non-UCITS fund marketed by Elite, has received additional commitments. The fund mainly invests in private equity funds managed by CapMan and enables private and enables institutional investors to invest in private equity with a structure providing liquidity and a possibility to join with a lower minimum investment.
CapMan prepares for fundraising for a new Credit fund. The fund targets first closing by the end of 2015.
CapMan consults several external clients in fundraising. CapMan believes that these fund advisory services have significant growth potential as part of CapMan's service offering and are expected to increase CapMan's fee income in the long-term.
Capital under management was MEUR 2,953.8 as of 30 June 2015 (30 June 2014: MEUR 3,066.8). The amount decreased slightly due to completed exits following the end of the comparable period. Of the total capital under management, MEUR 1,457.2 (MEUR 1,551.1) was held in funds making investments in portfolio companies and MEUR 1,496.6 (MEUR 1,515.7) in real estate funds.
Funds under management, together with their investment activities, are presented in more detail in Appendices 1 and 2.
The AGM authorised the Board of Directors to decide on the repurchase and/or on the acceptance as pledges of the company's B shares. The number of B shares concerned shall not exceed 8,000,000, and the authorisation shall remain in force until the end of the following AGM and 30 June 2016 at the latest. The AGM also authorised the Board to decide on the issuance of shares and other special rights entitling to shares. The number of shares to be issued shall not exceed 15,000,000 B shares and the authorization shall remain in force until the end of the following AGM and 30 June 2016 at the latest.
Further details on these authorisations can be found in the stock exchange release on the decisions taken by the AGM issued on 18 March 2015.
CapMan employed a total of 105 people as of 30 June 2015 (30 June 2014: 110), of whom 68 (72) worked in Finland and the remainder in the other Nordic countries, Russia, Luxembourg and the United Kingdom. A breakdown of personnel by country is presented in the Tables section of this report.
There were no changes in CapMan Plc's share capital during the first half of 2015. Share capital totalled EUR 771,586.98 as of 30 June 2015. The number of B shares was 80,566,766 and that of A shares 5,750,000 as of 30 June 2015.
B shares entitle holders to one vote per share and A shares to 10 votes per share.
The number of CapMan Plc shareholders decreased by 6.1% from the comparable period and totalled 6,694 as of 30 June 2015 (30 June 2014: 7,130).
As of 30 June 2015, CapMan Plc held a total of 26,299 CapMan Plc B shares, representing 0.03% of both classes of shares and 0.02% of voting rights. The market value of own shares held by CapMan was EUR 27,088 as of 30 June 2015 (30 June 2014: EUR 29,222). No changes occurred in the number of own shares held by CapMan Plc during the review period.
CapMan's compensation scheme consists of short-term and long-term compensation schemes.
The short-term scheme covers all CapMan employees and its central objective is earnings per share, for which the Board of Directors has set a minimum target. Short-term bonuses for investment teams are based on the result of the Management Company business for their respective investment partnership, and the minimum level of earnings per share provides the basis for receiving bonuses.
The long-term scheme consists of carried interest payable to investment teams and stock option programmes for CapMan's Executive Management Group. The carried interest payable to investment teams is based on the success of investments made in the corresponding funds. This arrangement is in line with international industry practice. At the end of the reporting period, CapMan Plc had one stock option programme – Option Programme 2013 – in place as part of its incentive and commitment arrangements for key personnel. The Board of Directors decides annually on the distribution of stock options to the key personnel employed or recruited by the Group.
The maximum number of stock options issued under Option Programme 2013 will be 4,230,000, which will carry an entitlement to subscribe to a maximum of 4,230,000 new B shares. The programme is divided into A, B, and C series, each of which covers a maximum of 1,410,000 option entitlements. The share subscription price of the 2013A options is EUR 0.82 (the trade volume-weighted average quotation of the share during 1 April–31 May 2013 with an addition of 10%), that of the 2013B options is EUR 1.10 (the trade volume-weighted average quotation of the share during 1 April–31 May 2014 with an addition of 10%), and that of the 2013C options is EUR 1.12 (the trade volume-weighted average quotation of the share during 1 April–31 May 2015 with an addition of 10%). The subscription period for 2013A options will begin on 1 May 2016, that for 2013B options on 1 May 2017, and that for 2013C options on 1 May 2018. Receivables from shares subscribed to under these options will be entered in the company's unrestricted shareholders' equity. A total of 1,175,000 stock option entitlements under the Option Programme 2013A and a total of 1,141,667 stock option entitlements under the Option Programme 2013B had been allocated by 30 June 2015.
The terms of the option programmes can be found on CapMan's website.
CapMan Plc's B shares closed at EUR 1.03 on 30 June 2015 (30 June 2014: EUR 1.12). The trade-weighted average price during the review period was EUR 1.00 (EUR 1.09). The highest price paid was EUR 1.09 (EUR 1.23) and the lowest EUR 0.83 (EUR 0.90). The number of CapMan Plc B shares traded totalled 8.5 million (12.3 million), valued at MEUR 8.5 (MEUR 13.4).
The market capitalisation of CapMan Plc B shares as of 30 June 2015 was MEUR 83.0 (30 June 2014: MEUR 90.2). The market capitalisation of all company shares, including A shares valued at the closing price of B shares, was MEUR 88.9 (MEUR 96.7).
In June, funds managed by CapMan agreed to sell their holdings in Silex Microsystems AB, an independent MEMS (Micro Electro Mechanical Systems) foundry. The transaction had a positive impact on CapMan Group's result for the second quarter of 2015 through a total of approx. MEUR 1.5 in carried interest income (net) and fair value changes. The cash flow contribution of the transaction is MEUR 2 for 2015.
In May, CapMan announced its acquisition of 4.4 million shares in Norvestia Plc from Kaupthing h.f. The acquired shares represent a total of 28.7% of all shares and votes outstanding in Norvestia. The transaction is executed in two phases, of which the first (3.3 million shares) was completed in May and the second (1.1 million shares) is executed around October. Norvestia became an associated company of CapMan as a result of the transaction. The details of the transaction have further been described in a stock exchange release published on 12 May 2015.
In March, CapMan updated its financial objectives. CapMan's target for return on equity is over 20% p.a. (previously over 20% p.a.) and the target for equity ratio is 45–60% (previously at least 60%). According to CapMan's new dividend policy, the dividend pay-out ratio is at least 60% of the earnings per share (previously at least 50% of net profit).
In January, funds managed by CapMan agreed to sell their ownership in Cederroth Intressenter AB. The transaction contributes some MEUR 8 to CapMan Group's 2015 cash flow at the closing of the transaction. The closing is subject to the approval of the relevant competition authorities and it is expected to be completed within the third quarter of 2015.
In January, funds managed by CapMan announced the sale of their holding in Symbio S.A., a provider of outsourced product development services. The transaction had a positive impact on CapMan Group's result for 2015 through approx. MEUR 1 of carried interest income from the exiting funds. The transaction contributed some EUR 1.2 million to CapMan Group's 2015 cash flow. The carried interest was recognised in the first half of 2015.
Additional operations of the funds are described in Appendix 2.
There were no significant events after the review period. Additional operations of the funds are described in Appendix 2.
Economic development in CapMan's key markets and structural changes in industries central to CapMan's portfolio companies may affect CapMan's operations by delaying exits and reducing the fair value of the Group's fund investments. Fluctuations in exchange rates could also affect the valuation of CapMan's portfolio companies.
The stock market development and the valuation of industrial investments affect CapMan's valuation of its associated company Norvestia.
The market situation may also impact fundraising conditions by reducing fund investors' willingness and ability to make new commitments to CapMan's funds. Fundraising markets are expected to remain crowded over the short term. A successful fundraising effort will impact the total amount of capital under management, hence resulting in new management fees.
The projections related to the profitability of the Management Company business involve uncertainty especially related to the timing of exits. Due to limitations in forecasting the timing of carried interest and the change in fair value developments, providing financial guidance remains challenging over the short term.
The CapMan Real Estate I fund transferred into carry in 2007. Of the MEUR 27.4 carried interest paid in 2007, some MEUR 6.4 was not entered in CapMan's profit in 2007 but instead left in reserve in case that some of the carried interest would have to be returned to investors in future. CapMan's share of the entered carried interest was approx. MEUR 13.5 and the share of minority owners was approx. MEUR 7.5. However, in light of the current market situation, it is considered unlikely that any further carried interest would be paid from the CapMan Real Estate I fund. Based on the fund's revised outlook, MEUR 1.2 of the reserved MEUR 6.4 was recognised as revenue in the end of 2014. The MEUR 1.2 did not include the minority owners' share. The remaining accrual of MEUR 5.2 in CapMan's balance sheet, including the minority owners' share, is estimated to be adequate to cover the possible return of carried interest.
The company's financing agreements include financing covenants, which, if breached, may result in increased financing costs for the company or stipulate partial or full repayment of outstanding bank loans.
The EU's Basel III and Solvency II regulatory initiatives limit the ability of European banks and insurance companies to invest in private equity funds, and could therefore impact CapMan's fundraising activity.
Stock market valuations and in some cases negative interest rates drive investors to look for alternative investments. Investor sentiment towards private equity remains positive, and almost 80% of investors surveyed by Preqin are looking to either maintain or increase their exposure to private equity within the next 12 months.1 The average current allocation into private equity of Europe-based LPs remains below average target allocation, which implies that there is still room to grow investments into the asset class.2 Generous distributions from private equity funds have enabled investors to reinvest in new funds.3 Buyout funds are the most favoured product among institutional investors investing in private equity.4
The appeal of relative safe havens, such as the Nordic countries, has grown with the increased uncertainty in the Eurozone following Greece's ongoing economic crisis. Reforms to the Swedish public pension system further look to boost the Nordic private equity market following suggestions to increase investment allocations of pension funds into alternative assets.5
High multiples are curtailing buyouts despite rampant overall M&A activity and there is plenty of dry powder available for new investments. 6 Exit markets are booming in Europe as GPs are looking to cash in on high valuations through exits.7 In Europe so far this year, the value of private equity exits totalled BEUR 72.9, which tops the previous record of BEUR 68.7 from the first half in 2007.8 The hot exit market is also pulling average portfolio company holding periods back to historical pre-financial crisis averages of around five years. Holding periods in the Nordic countries are still slightly longer compared to the rest of Europe.9
The total value of real estate transactions amounted to MEUR 2,200 in Finland in the second quarter of 2015. The substantial increase in the investment volume compared to the previous quarter was mainly due to two large real estate portfolio restructurings.10 In Sweden the transaction volume doubled in the second quarter from levels reached in the first quarter, totalling BSEK 42.8.11 Denmark recorded a decrease in real estate turnover with transaction volume totalling some MEUR 600 in the second quarter.12
Real estate investors in Finland continued to focus primarily on prime assets with stable rents, and the yield gap between prime and secondary assets remains high. In Sweden interest towards better secondary properties continued to increase during the second quarter of 2015, pushing yields further down particularly in the cities of Stockholm, Gothenburg, and Malmö. In the Danish real estate market, which is largely dominated by the Greater Copenhagen Area, office yields remained unchanged in the second quarter whereas in the investor-favoured residential market yields lowered further from the level recorded in the previous quarters.13
In the occupancy market prime rents increased during the second quarter in Finland, but in Sweden office rents decreased clearly after peaking in the first quarter of the year. In secondary locations both rents and occupancy rates increased in Sweden driven by strong occupier demand while in Finland the situation remained unchanged mirroring the slow economic recovery of the Finnish economy. In Denmark office rents increased both in the CBD and secondary areas over the second quarter of 2015. Also residential rents continued on the steady growth path demonstrating the strong market fundamentals of the residential market in the Greater Copenhagen Area.14
There is increasing demand for alternative lending in Europe. Private-debt funds account for about 6 per cent of European SMEs' estimated total funding, according to the Alternative Investment Management Association (AIMA), an industry group. AIMA expects that their share of funding will increase to 15-20% within the next five years.15
4 Preqin Quarterly Private Equity Update Q2 2015
6 FT 1 June 2015
1 Preqin Investor Outlook: Alternative Assets, H1 2015
2 Preqin Private Equity Spotlight June 2015
3 Financial Times 1.6.2015
5 Unquote 1 July 2015
The Russian economy weakened in the second quarter of 2015 and growth forecasts remain negative.16 Although a weakening rouble may have a negative impact on the fair value development of CapMan's Russian investments in euros, the economic situation has not yet had a material impact on CapMan Russia's portfolio companies and the team is actively exploring attractive investment opportunities by taking advantage of the decreased competition in the market and attractive valuations, among others. Non-strategic sectors serving Russia's expanding middle class such as IT, B2B services, and healthcare that are the investment focus of CapMan Russia are still expected to continue their growth.
Multiproduct strategies are gaining a following in private equity. According to a panel of private equity professionals at the Danish Venture Capital Association's Nordic Private Equity Summit 2015, more Nordic GPs are likely to follow the recent trend of expanding their fund offerings to include a wider range of assets, such as credit and real estate, in the coming years.17
We estimate our earnings per share to improve from the level achieved in 2014.
CapMan receives carried interest income from funds as a result of a completed exit in the event that the fund already is in carry or will enter carry due to the exit. Our current portfolio holds several investments, which we expect to exit during 2015. The most significant exits are expected to be completed towards the end of 2015.
The fair value development of our own fund investments and that of Norvestia will have a substantial impact on our overall result in 2015. We expect disparity in the development of individual portfolio companies and real estate also during 2015 depending on their industry and geographical location. In addition, our portfolio companies and real estate are also influenced by various other factors, among others the general development of industries and local economies, inflation development, valuation multiples of peer companies, and exchange rates.
We estimate other fees to increase clearly alongside the management fees. Our fees as a whole will exceed our expenses before possible non-recurring expenses related to acquisitions or larger development projects.
7 FT 13 May 2015
8 The Centre for Management Buy-out Research 30 June 2015
9 Unquote 16 June 2015
10 KTI Transaction Information Service (July 2015), CBRE Investment MarketView (Q2 2015)
11 Pangea Property Monthly Update
12 CBRE Investment MarketView Q2 2015
13 Pangea Property Monthly Update, CapMan Real Estate
14 Pangea Property Monthly Update, CapMan Real Estate
15 Economist 27 June 2015
16 Focus Economics July 2015
17 Unquote 18 June 2015
The CapMan Group will publish its Interim Report for 1 January – 30 September 2015 on Thursday, 5 November 2015.
Helsinki, 6 August 2015
CAPMAN PLC Board of Directors
Niko Haavisto, CFO, tel. +358 50 465 4125
NASDAQ OMX Helsinki Principal media www.capman.com
Appendix 1: The CapMan Group's funds under management as of 30 June 2015, MEUR Appendix 2: Operations of CapMan's funds under management January–June 2015 Appendix 3: Description of CapMan's business operations
The Interim Report has been prepared in accordance with the International Financial Reporting Standards (IFRS). The information presented in the Interim Report is un-audited.
| € ('000) | 4-6/15 | 4-6/14 | 1-6/15 | 1-6/14 | 1-12/14 |
|---|---|---|---|---|---|
| Turnover | 8,413 | 8,031 | 15,749 | 15,006 | 39,475 |
| Other operating income | 118 | 117 | 146 | 142 | 226 |
| Personnel expenses | -4,631 | -4,090 | -8,608 | -7,979 | -17,804 |
| Depreciation and amortisation | -80 | -111 | -160 | -212 | -394 |
| Other operating expenses | -2,661 | -2,597 | -5,437 | -5,337 | -11,975 |
| Fair value changes of investments | 904 | -337 | 1,285 | 1,131 | -3,127 |
| Operating profit | 2,063 | 1,013 | 2,975 | 2,751 | 6,401 |
| Financial income and expenses | -578 | -404 | -1,001 | -753 | -1,412 |
| Share of the income of investments accounted for using the | 657 | 327 | 672 | 156 | -44 |
| equity method | |||||
| Profit before taxes | 2,142 | 936 | 2,646 | 2,154 | 4,945 |
| Income taxes | -391 | -182 | -410 | -236 | -980 |
| Profit for the period | 1,751 | 754 | 2,236 | 1,918 | 3,965 |
| Other comprehensive income: | |||||
| Translation differences | 6 | 9 | -53 | 15 | 11 |
| Total comprehensive income | 1,757 | 763 | 2,183 | 1,933 | 3,976 |
| Profit attributable to: | |||||
| Equity holders of the company | 1,751 | 754 | 2,236 | 1,918 | 3,965 |
| Total comprehensive income attributable to: | |||||
| Equity holders of the company | 1,757 | 763 | 2,183 | 1,933 | 3,976 |
| Earnings per share for profit attributable | |||||
| to the equity holders of the Company: | |||||
| Earnings per share, cents | 1.7 | 0.6 | 2.0 | 1.7 | 3.4 |
| Diluted, cents | 1.7 | 0.6 | 2.0 | 1.7 | 3.4 |
Accrued interest payable on the hybrid bond has been taken into consideration for the review period when calculating earnings per share.
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| ASSETS | |||
| Non-current assets | |||
| Tangible assets | 218 | 264 | 236 |
| Goodwill | 6,204 | 6,204 | 6,204 |
| Other intangible assets | 618 | 897 | 756 |
| investments accounted for using the equity | 9,123 | 9,275 | 9,056 |
| method | |||
| Investments at fair value through profit and loss | 56,511 | 62,966 | 55,258 |
| Investments in funds | |||
| Other financial assets | 44,851 | 120 | 121 |
| Receivables | 4,045 | 4,763 | 3,250 |
| Deferred income tax assets | 4,097 | 4,111 | 4,097 |
| 125,667 | 88,600 | 78,978 | |
| Current assets | |||
| Trade and other receivables | 8,143 | 6,017 | 5,959 |
| Other financial assets at fair value | |||
| through profit and loss | 314 | 319 | 319 |
| Cash and bank | 16,403 | 17,296 | 28,650 |
| 24,860 | 23,632 | 34,928 | |
| Total assets | 150,527 | 112,232 | 113,906 |
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| EQUITY AND LIABILITIES | |||
| Capital attributable the Company's | |||
| equity holders | |||
| Share capital | 772 | 772 | 772 |
| Share premium account | 38,968 | 38,968 | 38,968 |
| Other reserves | 27,175 | 27,041 | 27,175 |
| Translation difference | 84 | 141 | 137 |
| Retained earnings | -4,855 | -2,572 | -1,485 |
| Total equity | 62,144 | 64,350 | 65,567 |
| Non-current liabilities | |||
| Deferred income tax liabilities | 1,954 | 1,813 | 1,976 |
| Interest-bearing loans and borrowings | 59,489 | 30,343 | 27,247 |
| Post-employment benefits | 0 | 299 | 0 |
| 61,443 | 32,455 | 29,223 | |
| Current liabilities | |||
| Trade and other payables | 23,431 | 10,860 | 13,734 |
| Interest-bearing loans and borrowings | 3,509 | 4,500 | 5,000 |
| Current income tax liabilities | 0 | 67 | 382 |
| 26,940 | 15,427 | 19,116 | |
| Total liabilities | 88,383 | 47,882 | 48,339 |
| Total equity and liabilities | 150,527 | 112,232 | 113,906 |
| Attributable to the equity holders of the Company | ||||||
|---|---|---|---|---|---|---|
| Share capital |
Share premium |
Other reserves |
Translation differences |
Retained earnings |
Total | |
| € ('000) | account | |||||
| Equity on 1 January 2014 | 772 | 38,968 | 26,107 | 126 | -1,112 | 64,861 |
| Profit for the period | 1,918 | 1,918 | ||||
| Other comprehensive income for the period | ||||||
| Currency translation differences | 15 | 15 | ||||
| Total comprehensive income for the period | 15 | 1,918 | 1,933 | |||
| Share issue | 934 | 934 | ||||
| Options | 74 | 74 | ||||
| Dividends | -3,452 | -3,452 | ||||
| Equity on 30 June 2014 | 772 | 38,968 | 27,041 | 141 | -2,572 | 64,350 |
| Equity on 1 January 2015 | 772 | 38,968 | 27,175 | 137 | -1,485 | 65,567 |
| Profit for the period | 2,236 | 2,236 | ||||
| Other comprehensive income for the period | ||||||
| Currency translation differences | -53 | -53 | ||||
| Total comprehensive income for the period | -53 | 2,236 | 2,183 | |||
| Options | 111 | 111 | ||||
| Dividends | -5,177 | -5,177 | ||||
| Other changes | -540 | -540 | ||||
| Equity on 30 June 2015 | 772 | 38,968 | 27,175 | 84 | -4,855 | 62,144 |
| € ('000) | 1-6/15 | 1-6/14 | 1-12/14 |
|---|---|---|---|
| Cash flow from operations | |||
| Profit for the review period | 2,236 | 1,918 | 3,965 |
| Adjustments | 444 | -3 | 9,439 |
| Cash flow before change in working capital | 2,680 | 1,915 | 13,404 |
| Change in working capital | -3,268 | -1,786 | 1,729 |
| Financing items and taxes | -1,970 | -833 | -3,451 |
| Cash flow from operations | -2,558 | -704 | 11,682 |
| Cash flow from investments | -35,263 | 524 | 2,089 |
| Cash flow before financing | -37,821 | -180 | 13,771 |
| Dividends paid | -5,177 | -3,452 | -3,452 |
| Other net cash flow | 30,751 | 3,924 | 1,327 |
| Financial cash flow | 25,574 | 472 | -2,125 |
| Change in cash funds | -12,247 | 292 | 11,646 |
| Cash funds at start of the period | 28,650 | 17,004 | 17,004 |
| Cash funds at end of the period | 16,403 | 17,296 | 28,650 |
17
The Group reports two segments: Management company business and Fund Investment business
| 4-6/2015 | Management Company business | Fund Investment business |
Total | ||
|---|---|---|---|---|---|
| CapMan | CapMan | ||||
| € ('000) | Private Equity | Real Estate | Total | ||
| Turnover | 6,453 | 1,960 | 8,413 | 0 | 8,413 |
| Operating profit | 1,069 | 124 | 1,193 | 870 | 2,063 |
| Profit/loss for the period | 842 | 89 | 931 | 820 | 1,751 |
| 4-6/2014 | Management Company business | Fund Investment business |
Total | ||
|---|---|---|---|---|---|
| CapMan | CapMan | ||||
| € ('000) | Private Equity | Real Estate | Total | ||
| Turnover | 5,209 | 2,822 | 8,031 | 0 | 8,031 |
| Operating profit | 288 | 1,191 | 1,479 | -466 | 1,013 |
| Profit/loss for the period | 288 | 1,009 | 1,297 | -543 | 754 |
| 1-6/2015 | Management Company business | Fund Investment business |
Total | ||
|---|---|---|---|---|---|
| CapMan | CapMan | ||||
| € ('000) | Private Equity | Real Estate | Total | ||
| Turnover | 11,578 | 4,171 | 15,749 | 0 | 15,749 |
| Operating profit | 1,385 | 387 | 1,772 | 1,203 | 2,975 |
| Profit/loss for the period | 1,108 | 310 | 1,418 | 818 | 2,236 |
| Assets | 6,896 | 265 | 7,161 | 118,506 | 125,667 |
| Total assets include: Investments accounted for using the equity method |
0 | 0 | 0 | 9,123 | 9,123 |
| 1-6/2014 | Management Company business | Fund Investment business |
Total | ||
|---|---|---|---|---|---|
| CapMan | CapMan | ||||
| € ('000) | Private Equity | Real Estate | Total | ||
| Turnover | 10,014 | 4,992 | 15,006 | 0 | 15,006 |
| Operating profit/loss | 240 | 1,660 | 1,900 | 851 | 2,751 |
| Profit/loss for the period | 240 | 1,425 | 1,665 | 253 | 1,918 |
| Assets | 7,188 | 297 | 7,485 | 81,115 | 88,600 |
| Total assets include: | |||||
| Investments accounted for using the equity method |
0 | 0 | 0 | 9,275 | 9,275 |
| 1-12/2014 | Management Company business | Fund Investment business |
Total | ||
|---|---|---|---|---|---|
| CapMan Private |
CapMan | ||||
| € ('000) | Equity | Real Estate | Total | ||
| Turnover Operating profit/loss Profit/loss for the financial year |
28,104 7,230 5,792 |
11,371 3,209 2,569 |
39,475 10,439 8,361 |
0 -4,038 -4,396 |
39,475 6,401 3,965 |
| Assets Total assets include: Investments accounted for using the equity |
6,551 | 766 | 7,317 | 71,661 | 78,978 |
| method | 0 | 0 | 0 | 9,056 | 9,056 |
The Group's income taxes in the Income Statements are calculated on the basis of current taxes on taxable income and deferred taxes. Deferred taxes are calculated on the basis of all temporary differences between book value and fiscal value.
A dividend of EUR 0.06 per share, totalling MEUR 5.2 million in all, was paid for 2014. The dividend was paid to shareholders on 1 April 2015. A dividend of EUR 0.04 per share, totalling MEUR 3.5 million in all, was paid for 2013.
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| Investments at fair value through | |||
| profit and loss | |||
| Investments in funds at Jan 1 | 55,258 | 64,122 | 64,122 |
| Additions | 2,381 | 7,058 | 9,689 |
| Distributions | -1,308 | -8,663 | -12,149 |
| Fair value gains/losses on investments | 180 | 449 | -6,404 |
| Investments in funds at fair value through | |||
| profit and loss at end of the period | 56,511 | 62,966 | 55,258 |
| Investments in funds by investment area | |||
| at the end of period | |||
| Buyout | 29,904 | 32,138 | 30,584 |
| Credit | 2,255 | 3,400 | 2,344 |
| Russia | 4,472 | 4,607 | 3,955 |
| Real Estate | 8,745 | 8,782 | 8,000 |
| Other | 9,627 | 11,577 | 8,315 |
| Fund of funds | 1,508 | 2,462 | 2,060 |
| In total | 56,511 | 62,966 | 55,258 |
| Other investments at Jan 1 | 121 | 94 | 94 |
| Additions | 44,335 | 26 | 27 |
| Fair value gains/losses on investments | 395 | 0 | 0 |
| Other investments at fair value through | |||
| profit and loss at end of the period | 44,851 | 120 | 121 |
Additions for the period include Norvestia's shares at fair value MEUR 44.7.
CapMan's share represents 28.7% of Norvestia's total shares (CapMan acquired 21.7% on 12 May 2015 and will according to the agreement purchase an additional 7.0% around October 2015).
The fair value change of the associated company is booked in CapMan's income statement based on the change in Norvestia's reported adjusted NAV / share.
The associated company has been fair valued through profit and loss because CapMan has been qualified as an investment entity by IFRS 10.
The different levels have been defined as follows:
Level 2 – Other than quoted prices included within Level 1 that are observable for the asset, either directly (that is, as price) or indirectly (that is, derived from prices)
Level 3 – The asset that is not based on observable market data
| € ('000) | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Investments at fair value through profit and loss | ||||
| Investments in funds | ||||
| at Jan 1 | 2,993 | 52,265 | 55,258 | |
| Additions | 18 | 2,363 | 2,381 | |
| Distributions | 0 | -1,308 | -1,308 | |
| Fair value gains/losses on investments | -556 | 736 | 180 | |
| at the end of period | 2,455 | 54,056 | 56,511 | |
| Other investments | ||||
| at Jan 1 | 121 | 121 | ||
| Additions | 44,335 | 44,335 | ||
| Fair value gains/losses | 395 | 395 | ||
| at the end of period | 44,851 | 44,851 |
Fund investments in Level 2 are investments in the CapMan Public Market fund. All other fund investments are included in Level 3. Other investments reported under Level 3 include Norvestia's shares. There were no transfers from one level to another during the review period.
The group's assets measured at fair value at 31.12.2014
| € ('000) | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Investments at fair value through profit and loss | ||||
| Investments in funds | ||||
| at Jan 1 | 5,296 | 58,826 | 64,122 | |
| Additions | 51 | 9,638 | 9,689 | |
| Distributions | -2,579 | -9,570 | -12,149 | |
| Fair value gains/losses on investments | 225 | -6,629 | -6,404 | |
| at the end of period | 2,993 | 52,265 | 55,258 |
Fund investments in Level 2 are investments in CapMan Public Market fund. All other fund investments are included in Level 3. There were no transfers from one level to another during the year.
| Investment area |
Fair value MEUR 30.6.2015 |
Valuation methodology |
Unobservable inputs |
Used input value (weighted average) |
Fair value sensitivity (MEUR) to a +/- 10% change in input value |
|---|---|---|---|---|---|
| Norvestia | 44.7 | Net assets (amended NAV based on Norvestia's stock exchange releases) |
NA* | NA* | NA* |
| Buyout | 29.9 | Peer group earnings multiples |
EV/EBITDA 2015 8.1x |
+/- 3.8 | |
| Discount to peer group multiples |
23% | +/- 1.2 | |||
| Discounted cash flows |
Discount rate; WACC |
11% | -0.6 /+ 0.8 | ||
| Russia | 4.5 | Peer group earnings multiples |
EV/EBITDA 2015 11.5x |
+/- 0.4 | |
| Peer group | Discount to peer group multiples |
34% | -/+ 0.2 | ||
| Real Estate | 8.7 | Valuation by an independent valuer |
NA* | NA* | NA* |
| Credit | 2.3 | Discounted cash flows |
Discount rate; market rate and risk premium |
13% | - 0.1 / value increase based on a change in the discount rate is not booked |
| Other investment |
8.6 | Peer group | Peer group earnings multiples |
EV/EBITDA 2015 11.2x |
+/- 0.5 |
| areas | Discount to peer group multiples |
32% | -/+ 0.3 |
CapMan has made some investments also in funds that are not managed by CapMan Group companies. The fair values of these investments in CapMan's balance sheet are based on the valuations by the respective fund managers. No separate sensitivity analysis is prepared by CapMan for these investments.
The changes in the peer group earnings multiples and the peer group discounts are typically opposite to each other. Therefore, if the peer group multiples increase, a higher discount is typically applied. Because of this, a change in the peer group multiples may not in full be reflected in the fair values of the fund investments.
The foreign exchange rates at the time of valuation have been applied in determining the fair values. Changes in the rates of Norwegian krone or Swedish krona would, in CapMan's estimate, have no significant direct impact on the fair values calculated by peer group multiples. A change in the exchange rate for the Russian rouble have had an impact and they have been taken into account in the valuation of the Russia funds.
The valuation of CapMan funds' investment is based on international valuation guidelines that are widely used and accepted within the industry and among investors. CapMan always aims at valuing funds' investments at their actual value. Fair value is the best estimate of the price that would be received by selling an asset in an orderly transaction between market participants on the measurement date.
Determining the fair value of fund investments for funds investing in portfolio companies is carried out using International Private Equity and Venture Capital Valuation Guidelines (IPEVG). In estimating fair value for an investment, CapMan applies a technique or techniques that is/are appropriate in light of the nature, facts, and circumstances of the investment in the context of the total investment portfolio. In doing this, current market data and several inputs, including the price at which an investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment, are evaluated and combined with market participant assumptions. In selecting the appropriate valuation technique for each particular investment, consideration of those specific terms of the investment that may impact its fair value is required.
Different methodologies may be considered. The most applied methodologies at CapMan include the price of recent investments, which is typically applied in the case of new investments, and the earnings multiple valuation technique, whereby public peer group multiples are used to estimate the value of a particular investment. CapMan always applies a discount to peer group multiples, due to e.g. limited liquidity of the investments. Due to qualitative nature of the valuation methodologies, they are mainly based on CapMan's judgment.
The Group has a Monitoring team, which monitors the performance and the price risk of the investment portfolio (financial assets entered at fair value through profit and loss) independently and objectively of the investment teams. The Monitoring team is responsible for reviewing the monthly reporting and forecasts for portfolio companies. Valuation proposals made by the case investment professionals are examined by the Monitoring team and subsequently approved by the Valuation Committee, which comprises the Chairman of the Investee Committee, the Group CFO and Heads of investment teams. The portfolio company valuations are reviewed in the Valuation Committee quarterly. The valuations are back tested against realised exit valuations, and the results of such back testing are reported to the Audit Committee annually.
The loan instruments held by the Credit funds are valued applying the discounted cash flows-method. However, any increase in valuation is not booked until it is realized. There is no functional secondary market for these types of investments, where a value increase driven by a change in the discount rate could be realised. The funds' investment strategy is to hold the loans until they are repaid.
Investments in real estate are valued at fair value based on appraisals made by independent external experts, who follow International Valuation Standards (IVS). The method most appropriate to the use of the property is always applied, or a combination of such methods. For the most part, the valuation methodology applied is the discounted cash flow method, which is based on significant unobservable inputs. These inputs include the following:
| Future rental cash inflows | Based on the actual location, type and quality of the properties and supported by the terms of any existing lease, other contracts or external evidence such as current market rents for similar properties; |
|---|---|
| Discount rates | Reflecting current market assessments of the uncertainty in the amount and timing of cash flows; |
| Estimated vacancy rates | Based on current and expected future market conditions after expiry of any current lease; |
| Property operating expenses | Including necessary investments to maintain functionality of the property for its expected useful life; |
| Capitalisation rates | Based on actual location size and quality of the properties and taking into account market data at the valuation date; |
| Terminal value | Taking into account assumptions regarding maintenance costs , vacancy rates and market rents. |
24
The fair value change of the associated company Norvestia is booked in CapMan's income statement, based on the change in Norvestia's adjusted NAV as communicated in Norvestia's stock exchange releases. CapMan makes no adjustments to Norvestia's reported figures.
*) Because Norvestia's fair value is based on the adjusted NAV as communicated by Norvestia, and the real estate properties are valued using third party valuation information, CapMan prepares no sensitivity analysis for the inputs used in these valuations. The quantitative unobservable inputs are not reasonably available to CapMan.
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| Interest bearing loans at end of the review period | 59,489 | 30,343 | 27,247 |
Carried interest income is accrued on an irregular schedule depending on the timing of exits. An exit may have an appreciable impact on the Group's result for the full financial year.
| By country | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| Finland | 68 | 72 | 68 |
| Sweden | 23 | 20 | 23 |
| Norway | 0 | 6 | 1 |
| Russia | 10 | 11 | 10 |
| Luxembourg | 1 | 1 | 1 |
| United Kingdom | 3 | 0 | 3 |
| In total | 105 | 110 | 106 |
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| Leasing agreements | 2,896 | 5,391 | 3,523 |
| Securities and other contingent liabilities | 85,813 | 64,230 | 60,002 |
| Remaining commitments to funds | 27,927 | 26,834 | 30,250 |
| Remaining commitments by investment area | |||
| Buyout | 14,120 | 14,080 | 14,632 |
| Credit | 3,314 | 3,544 | 3,716 |
| Russia | 1,959 | 2,135 | 2,288 |
| Real Estate | 3,036 | 1,188 | 3,723 |
| Other | 4,739 | 4,712 | 4,725 |
| Fund of funds | 759 | 1,175 | 1,166 |
| In total | 27,927 | 26,834 | 30,250 |
| € ('000) | 30.6.15 | 30.6.14 | 31.12.14 |
|---|---|---|---|
| Commitments to Maneq funds | 4,090 | 4,090 | 4,090 |
CapMan estimates that MEUR 15-20 of the remaining commitments will be called in the next 3-4 years, particularly due to unused investment capacity of the older funds.
| MEUR | 1-3/15 | 4-6/15 | 1-6/15 |
|---|---|---|---|
| Turnover | 7.3 | 8.5 | 15.8 |
| Fees | 6.8 | 6.5 | 13.3 |
| Carried interest | 0.5 | 2.0 | 2.5 |
| Other operating income | 0.0 | 0.1 | 0.1 |
| Operating expenses | -6.8 | -7.4 | -14.2 |
| Fair value changes of investments | 0.4 | 0.9 | 1.3 |
| Operating profit / loss | 0.9 | 2.1 | 3.0 |
| Financial income and expenses | -0.4 | -0.6 | -1.0 |
| Share of the income of investments | 0.0 | 0.7 | 0.7 |
| accounted for using the equity method | |||
| Profit / loss before taxes | 0.5 | 2.1 | 2.6 |
| Profit / loss for the period | 0.5 | 1.7 | 2.2 |
| 2014 | ||||||
|---|---|---|---|---|---|---|
| MEUR | 1-3/14 | 4-6/14 | 4-6/14 | 7-9/14 | 10-12/14 | 1-12/14 |
| Turnover | 7.0 | 8.0 | 15.0 | 8.1 | 16.4 | 39.5 |
| Fees | 7.0 | 6.6 | 13.6 | 7.9 | 7.2 | 28.7 |
| Carried interest | 0.0 | 1.4 | 1.4 | 0.2 | 9.2 | 10.8 |
| Other operating income | 0.0 | 0.1 | 0.1 | 0.1 | 0.0 | 0.2 |
| Operating expenses | -6.7 | -6.8 | -13.5 | -6.5 | -10.2 | -30.2 |
| Fair value changes of investments | 1.5 | -0.4 | 1.1 | -2.2 | -2.0 | -3.1 |
| Operating profit / loss | 1.7 | 1.0 | 2.7 | -0.5 | 4.2 | 6.4 |
| Financial income and expenses | -0.3 | -0.5 | -0.8 | -0.3 | -0.3 | -1.4 |
| Share of the income of investments | ||||||
| accounted for using the equity method | -0.2 | 0.4 | 0.2 | -0.2 | 0.0 | 0.0 |
| Profit / loss before taxes | 1.2 | 0.9 | 2.1 | -1.0 | 3.8 | 4.9 |
| Profit / loss for the period | 1.2 | 0.7 | 1.9 | -1.2 | 3.3 | 4.0 |
The tables below show the status of the funds managed by CapMan as of 30 June 2015. CapMan groups its funds into four categories in terms of their life cycle as follows: 1) Funds generating carried interest; 2) Funds in the exit and value creation phase; 3) Funds in the active investment phase; and 4) Funds with no carried interest potential for CapMan.
Exits made by funds generating carried interest provide CapMan with immediate carry income, while those in the exit and value creation phase can be expected to start generating carried interest within the next 1-5 years. The carry potential of funds in the active investment phase is likely to be realised over the next 5-10 years. The final category comprises funds that do not offer any carried interest potential for CapMan, either because CapMan's share of carry in the funds concerned is small or because the funds are not expected to transfer to carry.
When analysing the projected timetable within which a fund could transfer to carry, the cumulative cash flow that investors have already received should be compared to the fund's paid-in capital. In order for a fund to enter carry, it must first return its paid-in capital and pay an annual preferential return to investors. In the case of funds in the exit or value creation phase, the table shows the cash flow that must be returned to investors to enable a fund to transfer to carry. The carry potential of each fund can be evaluated by comparing this figure to the fair value of the fund's portfolio. A portfolio's fair value, including its possible net cash flows, provides an indication of the distributable capital available as of the end of the reporting period. Any uncalled capital in a fund (particularly relevant for funds in the active investment phase) should be taken into account when evaluating the cash flow that will be needed to enable a fund to transfer to carry.
The percentage shown in the last column indicates the share of each fund's cash flow due to CapMan as and when the fund transfers to carry. Following a previous distribution of carried interest, any new paid-in capital, together with the annual preferential return payable on it, must be returned to investors before any further distribution of carried interest can take place.
Definitions of the column headings are shown below the table.
| Size | Paid-in capital |
Fund's current portfolio |
Net cash |
Distributed cash flow |
Amount of cash flow |
CapMan's share of |
|||
|---|---|---|---|---|---|---|---|---|---|
| Funds generating carried interest Fenno Program1), FV V, FM IIIB, CME VII B 6), FM III A, CME VII A 6), CME Sweden 6) |
At cost | At fair value |
assets | To investors |
To mgmt company |
needed to transfer the fund to carry as of 30.6.2015 |
cash flow if the fund generates carried interest (investment team share deducted) |
||
| Total | 622.6 | 617.3 | 45.0 | 23.6 | 12.2 | 958.7 | 30.4 | 10-20% | |
| Funds in exit and value creation phase |
|||||||||
| CMB VIII 2) 6) | 440.0 | 401.7 | 160.3 | 174.2 | 0.1 | 292.5 | 328.5 | 12 % | |
| CMPM | 138.0 | 134.4 | 55.8 | 67.5 | 0.0 | 162.1 | 59.6 | 10 % | |
| CMR | 118.1 | 115.5 | 66.5 | 82.5 | 3.5 | 22.0 | 137.5 | 3.4 % | |
| CMB IX | 294.6 | 285.0 | 210.0 | 224.2 | 2.3 | 44.8 | 336.6 | 10 % | |
| Total | 990.7 | 936.6 | 492.6 | 548.4 | 5.9 | 521.4 | |||
| Funds in active investment phase |
|||||||||
| CMM V | 95.0 | 68.9 | 39.0 | 43.0 | 0.3 | 40.8 | 10 % | ||
| CMB X2) | 244.5 | 167.9 | 138.8 | 152.8 | 1.2 | 13.6 | 8 % | ||
| CMR II | 99.1 | 25.1 | 16.9 | 17.0 | 0.6 | 0.6 | 8 % | ||
| Total | 438.6 | 261.9 | 194.7 | 212.8 | 2.1 | 55.0 | |||
| Fund with no carried interest potential for CapMan |
|||||||||
| SWE LS 3), SWE Tech 2), 3), CME VII C6), FM III C, CMM IV 4) , CMLS IV, CMT 2007 2) |
|||||||||
| Total | 552.8 | 523.8 | 114.9 | 107.6 | 2.0 | 391.3 | |||
| Total private equity funds |
2,604.7 | 2,339.6 | 847.2 | 892.4 | 22.2 | 1,926.4 | 30.4 |
| Investment | Paid-in | Fund's current | Net | Distributed | Amount of | CapMan's | |||
|---|---|---|---|---|---|---|---|---|---|
| Funds in exit and value creation |
capacity | capital | portfolio At cost |
At fair value |
cash assets |
To in vestors |
cash flow To mgmt company |
cash flow needed to transfer the fund to carry as of 30.6.2015 |
share of cash flow if the fund generates carried interest (investment team share deducted) |
| phase CMRE II |
|||||||||
| Equity and bonds |
150.0 | 129.5 | 122.2 | 127.6 | 53.7 | 167.8 | 12% | ||
| Debt financing | 450.0 | 301.7 | 175.2 | 175.2 | |||||
| Total | 600.0 | 431.2 | 297.4 | 302.8 | 1.6 | 53.7 | |||
| CMRHE Equity and |
|||||||||
| bonds | 332.5 | 325.1 | 424.9 | 344.8 | 71.4 | 461.9 | 12% | ||
| Debt financing | 617.5 | 542.6 | 459.5 | 459.5 | |||||
| Total | 950.0 | 867.7 | 884.4 | 804.3 | 0.0 | 71.4 | |||
| Total | 1,550.0 | 1,298.9 | 1,181.8 | 1,107.1 | 1.6 | 125.1 | |||
| Funds in active investment phase |
|||||||||
| CMNRE Equity and |
|||||||||
| bonds | 273.3 | 119.4 | 96.4 | 102.4 | 8.3 | ||||
| Debt financing | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Total Funds with no carried interest potential to CapMan CMRE I 5) |
273.3 | 119.4 | 96.4 | 102.4 | 27.8 | 8.3 | |||
| Equity and | |||||||||
| bonds | 200.0 | 192.1 | 62.9 | 34.6 | 207.8 | 27.4 | |||
| Debt financing | 300.0 | 276.6 | 65.5 | 65.5 | |||||
| Total | 500.0 | 468.7 | 128.4 | 100.1 | 4.2 | 207.8 | 27.4 | ||
| Real Estate funds total |
2,323.3 | 1,887.0 | 1,406.6 | 1,309.6 | 33.6 | 341.2 | 27.4 |
| CMB | = CapMan Buyout | CMRE | = CapMan Real Estate |
|---|---|---|---|
| CME | = CapMan Equity | CMT 2007 | = CapMan Technology 2007 |
| CMLS | = CapMan Life Science | FM | = Finnmezzanine Fund |
| CMM | = CapMan Mezzanine | FV | = Finnventure Fund |
| CMHRE | = CapMan Hotels RE | PSH Fund | = Project Specific Hotel Fund |
| CMNRE | = CapMan Nordic Real Estate | SWE LS | = Swedestart Life Science |
| CMPM | = CapMan Public Market Fund | SWE Tech | = Swedestart Tech |
| CMR | = CapMan Russia Fund |
Total capital committed to a fund by investors, i.e. the original size of a fund. For real estate funds, investment capacity also includes the share of debt financing used by a fund.
Total capital paid into a fund by investors as of the end of the review period.
The determination of the fair value of fund investments for funds investing in portfolio companies is carried out using the International Private Equity and Venture Capital Valuation Guidelines (IPEVG, www.privateequityvaluation.com).
In estimating fair value for an investment, CapMan applies a technique or techniques that is/are appropriate in light of the nature, facts, and circumstances of the investment in the context of the total investment portfolio. In doing this, current market data and several inputs, including the price at which an investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment, are evaluated and combined with market participant assumptions. In selecting the appropriate valuation technique for each particular investment, consideration of those specific terms of the investment that may impact its fair value is required.
Different methodologies may be considered. The most applied methodologies at CapMan include the price of recent investments, which is typically applied in the case of new investments, and the earnings multiple valuation technique, whereby public peer group multiples are used to estimate the value of a particular investment. Due to qualitative nature of the valuation methodologies, they are mainly based on CapMan's judgment.
Investments in real estate are valued at fair value based on appraisals made by independent external experts, who follow International Valuation Standards (IVS). The method most appropriate to the use of the property is always applied, or a combination of such methods.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Due to the nature of private equity investment activities, fund portfolios contain investments with a fair value that exceeds their acquisition cost, as well as investments with a fair value less than the acquisition cost.
When calculating the investors' share, a fund's net cash assets must be taken into account in addition to the portfolio at fair value. The proportion of debt financing in real estate funds is presented separately in the table.
This cash flow refers to the profit distributed by funds and the capital they pay back to investors. The figure indicates the size of the cash flow that must be returned to investors as of the end of the reporting period to enable a fund to transfer to carry. A fund's carry potential can be evaluated by comparing this figure to the fair value of its portfolio.
When a fund has generated the cumulative preferential return for investors specified in the fund agreements, the management company is entitled to an agreed share of future cash flows from the fund, known as carried interest.
After the previous distribution of profits, any new capital called in, as well as any annual preferential returns on it, must be returned to investors before any new distribution of profits can be paid.
CapMan's management considers it unlikely, in the light of the market situation, that further carried interest will be provided by the CapMan Real Estate I fund. As a result, the fund has been transferred from those funds in carry. A total of some MEUR 5 of carried interest has not been entered in CapMan's profit but instead left in reserve in case that some of the carried interest would have to be returned to investors in the future.
6) CapMan Group's Board of Directors made a decision in early 2012 to increase the Buyout investment teams' share of carried interest to better reflect prevailing industry practices. In CapMan Buyout VIII fund the investment team's share is approximately 40%, and in CapMan Equity VII funds the investment team's share is approximately 25%.
The operations of the private equity funds managed by CapMan during the review period comprised direct investments in portfolio companies in the Nordic countries and Russia (CapMan Private Equity), as well as real estate investments (CapMan Real Estate). Investments by CapMan funds investing in portfolio companies focus on two key investment areas in the Nordic countries and one in Russia. These take the form of mid-size buyouts (CapMan Buyout), mezzanine investments (CapMan Credit) and investments in mid-sized companies operating in Russia (CapMan Russia). The investment focus of CapMan's real estate funds is on properties in Finland and the other Nordic countries. CapMan also has three other investment areas (CapMan Technology, CapMan Life Science and CapMan Public Market18), which do not make new investments, but concentrate instead on developing the value of their existing portfolio companies. These three investment areas are reported under "Other" in Private Equity.
During the review period, funds managed by CapMan invested in two companies and made a couple add-on investments in existing portfolio companies, totalling MEUR 14.7. The new investments were made by the CapMan Russia II fund in Maximum Education and the CapMan Credit V fund in Delete Group. Add-on investments were largely concentrated in portfolio companies held by CapMan's Buyout and Russia funds. Funds made seven new investments and several add-on investments valued at a total of MEUR 159.6 in the comparable period.
Funds agreed to exit Cederroth Intressenter AB in January and the exit is expected to be completed in the third quarter of 2015. The cash flow received from the exit from Symbio S.A. (exited in 2014) was allocated for the first half of 2015, but the exit process started already in 2014. The CapMan Mezzanine V fund exited Bright Group in the review period. The combined acquisition cost of partial exits completed during the review period was MEUR 22.9. During the comparable period, funds completed four exits and several partial exits with a combined acquisition cost of MEUR 70.9.
Funds managed by CapMan completed the exit from Silex Microsystems AB in July.
18The Public Market Fund is continuing exit and value creation activities in line with its strategy. CapMan participates in the fundraising of a new fund focusing on publicly listed companies, and the fund will pay management fees and carried interests to CapMan based on the commitments to the fund made through CapMan. As a result of the arrangement, Public Market will be reported together with investment areas categorised as "Others".
The CapMan Nordic Real Estate fund invested in the development of City Center BROEN, which is a shopping centre in Esbjerg, Denmark and the development of a residential area in Copenhagen. The fund also acquired an office building and a residential, office and retail building in Copenhagen, as well as an office building to be converted into residential use in central Helsinki. The acquisition cost of the investments was MEUR 30.0 in total. Funds made addon investments to several existing projects totalling MEUR 3.1. Real estate funds were committed to providing financing for real estate acquisitions and projects totalling MEUR 98.1 as of 30 June 2015. CapMan's real estate funds made a number of new and add-on investments totalling MEUR 61.8 in the comparable period, while commitments to finance new projects totalled MEUR 9.3 as of 30 June 2014.
Real Estate funds exited an office building in Helsinki with an acquisition cost of MEUR 11.0. In the comparable period last year, CapMan's funds realised one investment with the acquisition cost of MEUR 11.3.
In July, the CapMan Nordic Real Estate fund agreed to exit the Silverdal I office building in Sollentuna, north of Stockholm. The exit is the first for the fund.
33
Investments and exits made by funds at acquisition cost, MEUR
| Exits* | ||
|---|---|---|
| Funds investing in portfolio companies | 22.9 | 70.9 |
| Buyout | 0.8 44.6 |
|
| Credit | 8.8 0.0 |
|
| Russia | 0.1 3.9 |
|
| Other | 13.2 22.4 |
|
| Real Estate funds | 10.9 | 11.3 |
Total 33.8 82.2
* including partial exits and repayments of mezzanine loans.
In addition, real estate funds had made commitments to finance real estate acquisitions and projects valued at MEUR 98.1 as of 30 June 2015.
| Portfolio at acquisition cost |
Portfolio at fair value |
Share of portfolio (fair value) % |
|
|---|---|---|---|
| Funds investing in portfolio companies | 845.0 | 888.8 | 40.4 |
| Real Estate funds | 1,407.7 | 1,309.6 | 59.6 |
| Total | 2,252.7 | 2,198.4 | 100.0 |
| Funds investing in portfolio companies | |||
| Buyout Credit |
575.2 39.0 |
619.3 43.0 |
69.7 4.8 |
| Russia | 83.4 | 99.5 | 11.2 |
| Other | 147.4 | 127.0 | 14.3 |
| Total | 845.0 | 888.8 | 100.0 |
* Total of all investments of funds under management.
After deducting actual and estimated expenses, funds investing in portfolio companies had a remaining investment capacity amounting to some MEUR 574 for new and add-on investments as of 30 June 2015. Of their remaining capital, approx. MEUR 332 was earmarked for buyout investments (incl. mezzanine investments), approx. MEUR 29 for investments by the Credit team, approx. MEUR 63 for technology investments, approx. MEUR 3 for life science investments, approx. MEUR 109 for investments by the CapMan Russia team, and approx. MEUR 38 for investments by the CapMan Public Market team. Real estate funds had a remaining investment capacity of approx. MEUR 191 which has been reserved for new investments and for the development of funds' existing investments.
CapMan Group is a private equity fund manager operating in the Nordic countries and Russia. The Group also makes investments in its own funds.
Private equity investment means making direct equity investments in companies and real estate. Investments are made through funds, which raise their capital primarily from institutional investors such as pension funds and foundations. Private equity investors actively develop their portfolio companies and real estate by working closely with management and tenants. Value creation is based on promoting companies' sustainable growth and strengthening their strategic position. Private equity investment is of a long-term nature – investments are held for an average of four to six years and the entire life cycle of a fund is typically around 10 years. Over the long term, private equity funds have generated significantly higher levels of returns compared to other investment classes19, and the industry's long-term prospects are favourable. By investing in CapMan, institutional and private investors can benefit from the profit potential of the private equity industry while diversifying their exposure.
The Group has two operating segments: 1) a Management Company business and 2) a Fund Investment business.
In its Management Company business, CapMan raises capital from Nordic and international institutions for the funds that it manages. The investment teams invest this capital in Nordic and Russian companies and Nordic real estate.
The Management Company business has two main sources of income, fee income and carried interest income. Fund investors pay a management fee to CapMan (typically 0.5-2.0% p.a.) during the life cycle of each fund. The management fee is based on fund size less realised exits during the fund's investment period (typically 5 years), after which the management fee is based on the remaining invested portfolio valued at cost. Fees are also generated from CapMan's service business comprising of CapMan Purchasing Scheme (CaPS), fundraising advisory services and services related to fund management. Fees normally cover CapMan's operating costs and generally represent a steady and highly predictable source of income.
The second source of income of the Management Company business is carried interest received from funds. Carried interest denotes the Management Company's share of each fund's cash flow after paidin capital has been distributed to fund investors and the latter have received their annual preferential return (so-called hurdle rate (IRR), typically 8% p.a.). The amount of carried interest generated depends on the timing of exits and the stage at which funds are in their life cycle, which makes advance prediction difficult.
Through its Fund Investment business, CapMan makes investments from its own balance sheet in the funds that it manages. Income in this business is generated by increases in the fair value of investments and realised returns. Fair value is determined by the development of portfolio companies and real estate held by the funds, in addition to general market developments. Revenue from CapMan's fund investments can sometimes be negative.
In addition to its own fund investments, CapMan owns 28.7% of Norvestia Plc's shares. CapMan acquired 21.7% of the shares in May and has made a firm commitment to acquire an additional 7.0% of Norvestia's shares outstanding around October 2015. Norvestia is a listed investment company with approx. 5,500 shareholders. The company invests in listed shares directly or indirectly, bonds, private equity and other funds, and makes minority investments in unlisted companies. The fair value
19 Bain & Company, Global Private Equity Report 2014
change of the associated company Norvestia is booked in CapMan's income statement based on the change in Norvestia's adjusted NAV as communicated in Norvestia's stock exchange releases. CapMan makes no adjustments to Norvestia's reported figures.
As there may be considerable quarterly fluctuations in carried interest and the fair value of fund investments, the Group's financial performance should be analysed over a longer time span than the quarterly cycle.
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