There is a widely known and discussed shortage of Finnish hands-on owners, which means that growth stories are too often sold to foreign ownership before they can become world class plays. Over the years, the management companies of Finnish private equity funds (“PE”) have grown to represent a force to be reckoned with as majority owners that can successfully cultivate regional businesses into national and sometimes even Nordic champions. Multiple studies note that these PE (and VC) backed companies employ more people and grow faster than their “privately” held peers.
That’s all well and good except for the deal size. An average Finnish PE fund cannot do deals that exceed EUR 100 million, and for many, this cap is even smaller. The reason for this lies in the size of these funds, as for example a EUR 200 million PE fund cannot allocate more than EUR 30–40 million to any one transaction due to investment policy rules that aim to facilitate a diversified portfolio of more than 10 investee companies for each PE fund. Apply your average available senior loans (given the liquidity of the market at the time and the line of business of the target) and sometimes some mezzanine financing, and you have the recipe for the deal size for a Finnish PE fund.
What’s more, despite the fact that even the biggest global PE houses with multibillion euro fund sizes (think Carlyle, Apollo, CVC and the likes) syndicate, Finnish PE funds are, for historical, sometimes opaque reasons, mostly unwilling to syndicate amongst themselves. The end result? All the plus EUR 100 million deals (save for industrial buyers, naturally, of which there is also a shortage in Finland) go to Swedish or Anglo-Saxon PEs.
Is this good for Finland?
Rumour has it that Finnish limited partners, that is entities that invest in the PE funds, have not always been keen on Finnish PE houses having a European (or sometimes even Nordic) investment policy and fund size has maybe been one way of limiting geographical expansion. I will leave it up to the educated reader to suss out the answer to the following question: Is this good for Finland?
The Finnish market has already seen two SPACs (Virala and Lifeline) and there are more in the pipeline. SPACs first raise funds in an IPO and then go out to look for a deal. In the de-SPAC transaction, they then buy a company subject to the approval of the independent board members and shareholders’ meeting. SPACs can be used for multiple investments as well, but this is seldom the case. The SPAC can raise additional funds (equity or debt) and/or offer its shares to the owners of the target, enabling transactions that are several times the size of the original SPAC.
Similarities to blind pool VC and PE strategies are obvious except for the diversification (which the investors will accomplish through their other listed and unlisted investments) and holding period (SPACs being evergreens after the de-SPAC). The good news is that Finnish PE houses can use SPACs to solve the above-mentioned deal size problem, although this is limited to only one deal at a time but there is nothing preventing the same team from establishing a new SPAC after each de-SPAC transaction.
SPACs are not limited to PE teams as they have been used abroad by other reputable deal makers and management teams. One hopes that an established track record from bigger SPACs will ultimately allow Finnish PE houses to raise larger billion-euro funds and compete head-to-head with Swedish and Anglo-Saxon PE houses. In the meanwhile, let us enjoy the larger Finnish ownership that SPACs facilitate while the IPO market lasts.