5. Determination of fair value
Basis for determination of fair value for venture capital and private equity investments
The determination of the fair value of the Company’s venture capital and private equity investments is, in accordance with industry practice, based on Private Equity and Venture Capital Valuation Guidelines (IPEVG). Due to the nature of typically illiquid venture capital and private equity investments, the determination of the fair value of investments requires FII’s management to use judgment and make estimates.
According to the fundamental principle of IPEVG, fair value reflects the price that would be received in an orderly arm’s length transaction on an active market between hypothetic participants at the measurement date. Accordingly, fair value does not reflect the price that would be received in a so-called forced sale. Fair value measurement uses either one most suitable valuation technique or several complementary methods that are widely recognised in the industry. When determining fair values, the Company pays special attention to the estimated future profitability and business risks attached to the portfolio companies, especially relating to the financial condition of the companies.
Investments in venture capital and private equity funds
The starting point for the determination of the fair values of the Company’s investments in venture capital and private equity funds, i.e. the fair values of the holdings in the funds, are the values reported by fund managers (so-called net asset value or NAV). Fund managers derive the values for the holdings from the fair values determined by the fund in accordance with IPEVG for its investments in target companies, adding/deducting any other assets/liabilities of the fund. The determination of the fair values of holdings in the funds excludes unpaid fund commitments relating to the holdings, to which the Company is legally committed together with other investors of the funds.
Holdings in funds are typically more illiquid instruments than direct venture capital of private equity investments. The Company’s fundamental investment strategy is not to buy or sell holdings in funds during the term of the funds.
The measurement of the holdings in funds may deviate from the amounts reported by fund managers, if the fair value reported by the managers is not considered to reflect the real fair value of the investments or if the reported fair value refers to a different point of time. Deviation from the value reported by the fund manager is always based on fair value testing performed by the Company. Fair value is always tested for funds classified to a risk listing determined by the Company. The risk listing comprises those funds whose investment operations have, according to a risk review performed, not developed as originally determined and the results of whose investment operations are expected to clearly fall short of the targets set previously.
Direct venture capital and private equity investments
Depending on the varying overall status of the portfolio companies, the determination of the fair value of the Company’s direct venture capital and private equity investments is based on either on the one most suitable valuation techniques or a combination of several complementary methods. The techniques applied comply with IPEVG and include recent transactions in the portfolio companies’ own instruments, valuation multiples of peer companies and discounted cash flows. Both the selection of techniques and the actual valuation performed by using the techniques requires substantial use of estimates and judgment by the management of the Company.
The fair values of the Company’s investments in debt instruments are typically estimated through the viewpoint of the value of the portfolio companies’ businesses (fair value without liabilities), because, in the Company’s venture capital and private equity investments, debt instruments are often an integral part of the total investment in the portfolio companies together with the Company’s investments in equity instruments.
The fair value determination process for venture capital and private equity investments
Fair values of the Company’s venture capital and private equity investments are determined by the responsible investment teams. Thereafter, valuation proposals prepared by investment teams are assessed within a separate risk management function before the valuations are introduced to the Management Group for approval. After the Management Group, the values are considered by the audit committee and finally approved by the Board of Directors.
Fair value hierarchy for financial assets measured at fair value
FII’s venture capital and private equity investments include a minor amount of quoted equity securities. Investments in venture capital and private equity funds classified as financial securities are quoted, their market prices are observable and there is an active secondary market for the fund units. The fair values of all other equity and debt investments as well as investments in venture capital and private equity funds are determined using valuation techniques that to a significant degree rely on company-specific, unobservable inputs.
Fair value hierarchy and related input levels are defined by IFRS 13 as follows:
- Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
- Level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.
- Level 3 inputs are unobservable inputs for the asset or liability.
At the highest level in the fair value hierarchy are quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1 inputs), and at the lowest level are unobservable inputs (level 3 inputs). A quoted price in an active market is most reliable evidence of fair value and it shall, as a rule, be used in the determination of fair value whenever available.
When the inputs to be used to measure the fair value of an asset or a liability are categorised within different levels of the fair value hierarchy, the item is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The tables below show an analysis of the hierarchy of fair value measurements.
Fair value hierarchy for financial assets measured at fair value | |||||||
31 Dec 2015, thousand euros | Level 1 | Level 2 | Level 3 | Total | |||
Venture capital and private equity funds | |||||||
Venture capital | 129,622 | 129,622 | |||||
Later stage | 154,177 | 154,177 | |||||
Funds of funds | 42,300 | 42,300 | |||||
Direct investments | |||||||
Venture capital | 36,429 | 36,429 | |||||
Later stage | 13,263 | 83,973 | 97,236 | ||||
Financial securities | |||||||
Interest funds | 317,141 | 317,141 | |||||
Fixed income funds | 85,412 | 85,412 | |||||
Other investments | 17,009 | 17,009 | |||||
Total | 432,825 | 0 | 446,501 | 879,326 | |||
Direct investments includes share investments €106.9m and debt investments €26.8m | |||||||
31 Dec 2014, thousand euros | Level 1 | Level 2 | Level 3 | Total | |||
Venture capital and private equity funds | |||||||
Venture capital | 115,850 | 115,850 | |||||
Later stage | 144,015 | 144,015 | |||||
Funds of funds | 25,450 | 25,450 | |||||
Direct investments | |||||||
Venture capital | 22,486 | 22,486 | |||||
Later stage | 31,524 | 74,837 | 106,361 | ||||
Financial securities | |||||||
Fixed income funds | 196,354 | 196,354 | |||||
Equity funds | 56,094 | 56,094 | |||||
Total | 283,972 | 0 | 382,640 | 666,612 | |||
Direct investments includes share investments €107.5m and debt investments €21.1m | |||||||
1 Jan 2014, thousand euros | Level 1 | Level 2 | Level 3 | Total | |||
Venture capital and private equity funds | |||||||
Venture capital | 115,084 | 115,084 | |||||
Later stage | 150,681 | 150,681 | |||||
Funds of funds | 17,119 | 17,119 | |||||
Direct investments | |||||||
Venture capital | 21,871 | 21,871 | |||||
Later stage | 31,529 | 83,579 | 115,108 | ||||
Financial securities | |||||||
Fixed income funds | 140,736 | 140,736 | |||||
Equity funds | 45,524 | 45,524 | |||||
Direct bond investments | 11,927 | 11,927 | |||||
Total | 229,716 | 0 | 388,334 | 618,050 | |||
Direct investments includes share investments €104.8m and debt investments €32.1m | |||||||
Changes in level 3 financial assets measured at fair value: | |||||||
Investment classification , thousand euros | 1 Jan | Total gains and losses recognised in the income statement | Additions | Decreases | Transfers into level 1 | 31 Dec 2015 | |
Venture capital and private equity funds | |||||||
Venture capital | 115,850 | 21,011 | 23,035 | -30,274 | 129,622 | ||
Later stage | 144,015 | 38,863 | 33,336 | -62,037 | 154,177 | ||
Funds of funds | 25,450 | 11,721 | 11,964 | -6,835 | 42,300 | ||
Direct investments | |||||||
Venture capital | 22,486 | 10,293 | 5,647 | -1,998 | 36,429 | ||
Later stage | 74,837 | 23,970 | 19,119 | -25,560 | -8,394 | 83,973 | |
Total | 382,640 | 105,858 | 93,102 | -126,704 | -8,394 | 446,501 | |
Change in unrealised gains and losses recognised in income statement under net gains from venture capital and private equity investments for assets held at the end of period: | 53,930 | ||||||
Investment classification , thousand euros | 1 Jan | Total gains and losses recognised in the income statement | Additions | Decreases | 31 Dec 2014 | ||
Venture capital and private equity funds | |||||||
Venture capital | 115,084 | -5,219 | 22,433 | -16,448 | 115,850 | ||
Later stage | 150,681 | 3,687 | 31,631 | -41,984 | 144,015 | ||
Funds of funds | 17,119 | 1,451 | 8,766 | -1,885 | 25,450 | ||
Direct investments | |||||||
Venture capital | 21,871 | -10,252 | 10,982 | -114 | 22,486 | ||
Later stage | 83,579 | -27,501 | 24,713 | -5,954 | 74,837 | ||
Total | 388,334 | -37,835 | 98,524 | -66,384 | 382,640 | ||
Change in unrealised gains and losses recognised in income statement under net gains from venture capital and private equity investments for assets held at the end of period: | -40,265 | ||||||
Sensitivity analysis for level 3 financial assets | |||||||
Investment classification | Fair value 31 Dec 2015 thousand euros | Valuation model | Non-observable input or implicit valuation parameters | Applied input or implicit valuation parameters (weighted average) | Change in measurement if input changes +/- 20% | ||
Venture capital and private equity funds | |||||||
Venture capital | 129,622 | Values reported by fund management companies | 25,924 | ||||
Later stage | 154,177 | Fair value | +/- adjustments made as a result of | 30,835 | |||
Funds of funds | 42,300 | value testing made by the Company* | 8,460 | ||||
Direct investments | |||||||
Venture capital | 36,429 | Target company instrument | Valuation multiples** | EV/Net sales 2015 (2,7x) | 5,968 | ||
Later stage | 83,973 | transactions / Peer group | EV/EBITDA 2015 (6,8x) | 9,872 | |||
Investment classification | Fair value 31 Dec 2014 thousand euros | Valuation model | Non-observable input or implicit valuation parameters | Applied input or implicit valuation parameters (weighted average) | Change in measurement if input changes +/- 20% | ||
Venture capital and private equity funds | |||||||
Venture capital | 115,850 | Values reported by fund management companies | 23,170 | ||||
Later stage | 144,015 | Fair value | +/- adjustments made as a result of | 28,803 | |||
Funds of funds | 25,450 | value testing made by the Company* | 5,090 | ||||
Direct investments | |||||||
Venture capital | 22,486 | Target company instrument | Valuation multiples** | EV/Net sales 2014 (2,6x) | 4,161 | ||
Later stage | 74,837 | transactions / Peer group | EV/EBITDA 2014 (6,0x) | 9,502 | |||
Investment classification | Fair value 1 Jan 2014 thousand euros | Valuation model | Non-observable input or implicit valuation parameters | Applied input or implicit valuation parameters (weighted average) | Change in measurement if input changes +/- 20% | ||
Venture capital and private equity funds | |||||||
Venture capital | 115,084 | Values reported by fund management companies | 23,017 | ||||
Later stage | 150,681 | Fair value | +/- adjustments made as a result of | 30,136 | |||
Funds of funds | 17,119 | value testing made by the Company* | 3,424 | ||||
Direct investments | |||||||
Venture capital | 21,871 | Target company instrument | Valuation multiples** | EV/Net sales 2013 (3,1x) | 3,716 | ||
Later stage | 83,579 | transactions / Peer group | EV/EBITDA 2013 (6,6x) | 11,598 | |||
* Fair value testing of venture capital and private equity funds performed by the Company resulted in a fair value that was, in total, 12 million euros lower than the values reported by fund management companies as at 31 December 2015. Correspondingly, the same fair value testing resulted to a total lower fair value of 14 million euros compared to the values reported by fund management companies as at 31 December 2014. Fair value testing of venture capital and private equity funds was not carried out as at 31 December 2013. | |||||||
** The weighted EV-based valuation multiple calculations include only the impact from those target companies to which applying multiples as a valuation metric is reasonable. For example, in the venture capital allocation, the impact of those target companies which generate still only very limited net sales are not included. Similarly as an example, in the later stage allocation those target companies with a negative EBITDA are not included. Note: EV = Enterprise Value = value of target company's business on a debt-free basis; EBITDA = earnings before interest, tax, depreciation and amortisation. |
5.1 Venture capital and private equity funds | |||
Company | Domicile | Ownership % | Original investment commitment thousand euros |
Aboa Venture II Ky | Turku, Finland | 14.0 % | 1,346 |
Aboa Venture III Ky | Turku, Finland | 30.8 % | 3,500 |
Armada Mezzanine Fund II Ky | Helsinki, Finland | 11.5 % | 5,000 |
Armada Mezzanine Fund III Ky | Helsinki, Finland | 11.4 % | 10,000 |
Armada Mezzanine Fund IV Ky | Helsinki, Finland | 4.9 % | 5,000 |
Balderton Capital V, L.P. | Delaware USA | 3.1 % | 8,074 |
CapMan Buyout IX Fund A L.P. | Guernsey | 3.4 % | 10,000 |
CapMan Buyout VIII Fund A L.P. | Guernsey | 2.8 % | 10,000 |
CapMan Buyout X Fund B Ky | Helsinki, Finland | 13.9 % | 10,000 |
CapMan Equity VII A L.P. | Guernsey | 6.4 % | 10,000 |
CapMan Life Science IV Fund L.P. | Guernsey | 18.5 % | 10,000 |
CapMan Mezzanine V Fund FCP-SIF | Luxemburg | 15.8 % | 15,000 |
CapMan Public Market Fund FCP-SIF | Luxemburg | 7.2 % | 10,000 |
CapMan Technology Fund 2007 L.P. | Guernsey | 10.3 % | 6,300 |
Conor Technology Fund I Ky | Espoo, Finland | 40.0 % | 8,000 |
Conor Technology Fund II Ky | Espoo, Finland | 20.0 % | 10,000 |
Creandum II LP | Guernsey | 10.4 % | 4,783 |
Creandum III LP | Guernsey | 5.6 % | 7,500 |
DFJ Esprit Capital III LP | United Kindom | 12.5 % | 10,000 |
DN Capital - Global Venture Capital III LP | Jersey | 2.1 % | 3,000 |
EQT V (No. 1) Limited Partnership | Guernsey | 0.2 % | 7,000 |
EQT VII (No. 1) Limited Partnership | United Kindom | 0.3 % | 15,000 |
Eqvitec Technology Mezzanine Fund I A Ky | Helsinki, Finland | 42.3 % | 13,770 |
Eqvitec Teknologiarahasto I Ky | Helsinki, Finland | 18.3 % | 12,446 |
Finnmezzanine Rahasto III A Ky | Helsinki, Finland | 9.9 % | 10,000 |
FSN Capital IV L.P. | Jersey | 1.8 % | 9,914 |
Holtron Capital Fund II Ky | Helsinki, Finland | 29.5 % | 2,000 |
Industri Kapital 2000 Limited Partnership VII | Jersey | 5.7 % | 10,000 |
Intera Fund I Ky | Helsinki, Finland | 8.0 % | 10,000 |
Inveni Life Sciences Fund I Ky | Helsinki, Finland | 33.7 % | 10,000 |
Inveni Secondaries Fund II Follow On Ky | Helsinki, Finland | 10.2 % | 1,200 |
Inveni Secondaries Fund II Ky | Helsinki, Finland | 5.0 % | 3,364 |
Inventure Fund II Ky | Helsinki, Finland | 11.5 % | 8,000 |
Inventure Fund Ky | Helsinki, Finland | 24.2 % | 9,850 |
Jokilaaksojen Rahasto I Ky | Raahe, Finland | 34.2 % | 1,850 |
K III Denmark K/S | Denmark | 22.7 % | 10,000 |
Kasvurahastojen Rahasto II Ky | Helsinki, Finland | 46.2 % | 60,000 |
Kasvurahastojen Rahasto Ky | Helsinki, Finland | 40.0 % | 54,000 |
Life Sciences Partners III B.V. | Netherlands | 13.8 % | 10,000 |
Life Sciences Partners IV B.V. | Netherlands | 21.8 % | 10,000 |
Life Sciences Partners V C.V. | Netherlands | * | 5,000 |
Lifeline Ventures Fund I Ky | Helsinki, Finland | 10.4 % | 3,000 |
Lifeline Ventures Fund III Ky | Helsinki, Finland | 19.4 % | 10,000 |
Litorina IV L.P. | Jersey | 3.7 % | 10,325 |
MB Equity Fund II Ky | Helsinki, Finland | 10.0 % | 4,205 |
MB Equity Fund III Ky | Helsinki, Finland | 8.6 % | 10,000 |
MB Equity Fund IV Ky | Helsinki, Finland | 3.9 % | 10,000 |
MB Equity Fund Ky | Helsinki, Finland | 17.4 % | 2,523 |
MB Equity Fund V Ky | Helsinki, Finland | 8.3 % | 15,000 |
MB Mezzanine Fund II Ky | Helsinki, Finland | 5.0 % | 2,740 |
Company | Domicile | Ownership % | Original investment commitment thousand euros |
Midinvest Fund I Ky | Jyväskylä, Finland | 31.4 % | 4,205 |
Midinvest Fund II Ky | Jyväskylä, Finland | 25.6 % | 8,194 |
Midinvest Fund PH I Ky | Lahti, Finland | 25.0 % | 2,000 |
Midinvest Fund YPY I Ky | Mänttä-Vilppula, Finland | 33.3 % | 1,000 |
MVM IV LP | United Kindom | * | 6,885 |
NEXIT Infocom 2000 Fund LP | Guernsey | 6.1 % | 3,333 |
Nexit Infocom II L.P. | Guernsey | 17.6 % | 15,000 |
Northzone VI L.P. | Jersey | 5.8 % | 7,500 |
Northzone VII L.P. | Jersey | 3.0 % | 7,500 |
Norvestor VI L.P. | Guernsey | 3.7 % | 13,059 |
Open Ocean Fund 2015 Ky | Espoo, Finland | 7.1 % | 5,000 |
Open Ocean Fund Three Ky | Espoo, Finland | 11.2 % | 5,000 |
Polaris Private Equity III K/S | Denmark | 2.8 % | 10,087 |
Polaris Private Equity IV K/S | Denmark | 2.4 % | 10,052 |
Power Fund I Ky | Vaasa, Finland | 29.6 % | 5,000 |
Power Fund II Ky | Vaasa, Finland | 23.9 % | 15,000 |
Power Fund III Ky | Vaasa, Finland | 13.0 % | 10,000 |
Procuritas Capital Investors III 'B' L.P. | Guernsey | 6.7 % | 7,063 |
Profita Fund III Ky | Helsinki, Finland | 27.6 % | 11,610 |
Promotion Equity I (A) Ky | Helsinki, Finland | 23.5 % | 4,000 |
Seedcap Ky | Espoo, Finland | 37.8 % | 5,291 |
Sentica Buyout III Ky | Helsinki, Finland | 13.0 % | 15,000 |
Sentica Buyout IV Ky | Helsinki, Finland | 8.0 % | 10,000 |
Sentica Kasvurahasto II Ky | Helsinki, Finland | 23.7 % | 10,224 |
Sentica Terveysteknologia I Ky | Helsinki, Finland | 33.3 % | 3,333 |
Sponsor Fund III Ky | Helsinki, Finland | 5.7 % | 10,000 |
Sponsor Fund IV Ky | Helsinki, Finland | 5.0 % | 10,000 |
Sunstone Technology Ventures II K/S | Denmark | 7.5 % | 7,069 |
Teknoventure Rahasto II Ky | Oulu, Finland | 36.5 % | 5,500 |
Teknoventure Rahasto III Ky | Oulu, Finland | 46.8 % | 7,500 |
Vaaka Partners Buyout Fund II Ky | Helsinki, Finland | 6.7 % | 10,000 |
Vaaka Partners Buyout I Ky | Helsinki, Finland | 19.7 % | 10,000 |
Wedeco Fund III Ky Kb | Vaasa, Finland | 35.1 % | 2,310 |
Wedeco Fund IV Ky | Vaasa, Finland | 45.3 % | 5,000 |
Wedeco Seed Fund Ky Kb | Vaasa, Finland | 25.3 % | 475 |
Verdane Capital VII K/S | Denmark | 7.2 % | 12,097 |
Verdane Capital VIII K/S | Denmark | 3.0 % | 6,553 |
Verdane NVP II SPV K/S | Denmark | 8.5 % | 10,000 |
Verso Fund II Ky | Helsinki, Finland | 10.0 % | 5,000 |
VisionPlus Fund I Ky | Helsinki, Finland | 9.9 % | 5,000 |
800,529 | |||
*Not public information, fundraising in the process. | |||
In addition the parent company owns 100 % of Start Fund I Ky - fund (see note 15. Subsidiaries) | |||
More information from venture capital and private equity investments can be found from the company website www.industryinvestment.com |
5.2 Direct investments | ||||
Company | Ownership % | |||
3Step IT Group Oy | 6.9 % | |||
Aker Arctic Technology Oy * | 66.4 % | |||
Beneq Oy | 14.9 % | |||
Componenta Oyj | 6.3 % | |||
Conformiq, Inc. | 8.1 % | |||
Coronaria Hoitoketju Oy | 6.6 % | |||
Detapo Oy (Pohjolan Design-Talo) | 15.8 % | |||
Enevo Oy | 13.2 % | |||
Eniram Oy | 9.5 % | |||
Incap Furniture Oy | 17.2 % | |||
IonPhasE Oy | 11.8 % | |||
Keliber Oy | 20.0 % | |||
Kotkamills Group Oy | 9.6 % | |||
Lamor Corporation Ab | 10.1 % | |||
LeadDesk Oy | 4.1 % | |||
MariaDB Corporation Ab | 4.8 % | |||
Mekitec Oy | 22.8 % | |||
Mendor Oy | 13.3 % | |||
MetGen Oy | 19.2 % | |||
M-Files Oy | 9.9 % | |||
MultiTouch Oy | 15.3 % | |||
NewIcon Oy | 13.0 % | |||
Nexstim Ltd. | 2.6 % | |||
Onbone Oy | 5.6 % | |||
P2S Media Group Oy (Scoopshot) | 13.6 % | |||
Panostaja Oy | - | |||
Pesmel Oy | 5.0 % | |||
Profit Software Oy | 20.9 % | |||
Rauma Marine Constructions Oy *) | 17.8 % | |||
Rightware Oy | 9.7 % | |||
Sotkamo Silver Ab | 14.1 % | |||
Staffpoint Holding Oy | 20.6 % | |||
Stella Care Oy | 17.3 % | |||
Talenom Oy | 16.3 % | |||
Thermisol Oy | 20.0 % | |||
Unisport-Saltex Group Oy | 13.4 % | |||
Ursviken Group Oy | 24.6 % | |||
Valmet Automotive Oy | 47.5 % | |||
Visedo Oy | 14.0 % | |||
*) Ownership through Tesi Industrial Management Oy | ||||
More information from venture capital and private equity investments can be found from the company website www.teollisuussijoitus.fi |