Annual Report 2015

Fund investments

Active interaction

In fund investments, an investment is made in a fund that is managed by an external management company and has a number of other investors in addition to Finnish Industry Investment. When making the decision to invest, the management company’s approach to responsible investment and corporate responsibility issues is assessed. Any avenues for influencing these issues are explored in this early phase. We also look for responsibility in the management company’s own corporate activities as well as in its investment operations. Responsible investment principles are presented in contract documentation.

We maintain regular contact with the funds in our portfolio. On these occasions also responsible investment is discussed. In this way we ensure that a management company is aware of our responsible investment policy and endeavours to operate in conformance with it. Such discussions allow us to ascertain the level of responsibility in a fund manager’s investment policy, to form a view of any challenging investments in the portfolio, and to encourage any development needed. Over the operating period of a fund, we monitor development of the fund manager’s corporate responsibility and responsible investment policies, and engage in active dialogue to enhance both parties’ knowhow.

Management companies have gladly adopted the concept of responsible investment, and strengthened their in-house principles for responsible investment while promoting corporate responsibility in their portfolio companies. Progress has been remarkable. Some five years ago, few management companies were familiar with the concept of responsible investment, while several years ago only some had strengthened or otherwise actively promoted in-house principles for responsible investment. In 2015, however, almost all management companies have established principles for responsible investment. It is increasingly common for a management company to be proactive as a responsible investor and to utilise corporate responsibility tools in developing portfolio companies’ operations and in creating value. Investors in Finnish M&As and buyouts, in particular, have activated and deployed the theme of responsibility in their investment operations.

Case: Vaaka Partners

Managing Director Juha Peltola describes the company’s corporate responsibility: 

Vaaka Partners’ mission is to create new opportunities and value for promising medium-sized companies, for their stakeholders, for their management and for investors in our funds. The company’s values are to operate honestly and responsibly, and to uncompromisingly apply the highest professional standards. A commitment to the principles of responsible investment is for us a natural fit.

Vaaka Partners’ aim is to improve risk-adjusted return over the long term by addressing environmental, social and governance (ESG) issues in its investment activities. We believe that embedding ESG aspects into our operations lowers the risk of investments while probably also improving returns and broadening exit opportunities. In its investment operations, Vaaka Partners complies with all relevant aspects of the UN Principles for Responsible Investment. We apply the materiality principle by actually guiding resources into the main factors associated with responsible investment, instead of into mere formalities.

Our portfolio companies operate in many different sectors, and most of them are Finnish companies. On the other hand, their order/supply chain can also include foreign companies, some of which operate in developing markets. The importance of ESG issues varies, and depends on the special features of the sectors involved. In ESG matters, Vaaka Partners factors in differences between specific companies and sectors, applying the materiality principle at the company level.

To achieve the goals of responsible investment, ESG issues are integrated into all activities in the management company and its investment operations, both in preparing new investments and during the ownership of portfolio funds and companies. Our Corporate Governance Guidelines booklet, which provides instructions on portfolio companies’ board work, is one tangible and visible aspect of ESG. According to these instructions, ESG matters are a permanent item on agendas in the annual cycle of portfolio companies’ Boards of Directors. A portfolio company’s own ESG plans are reviewed not only by that company’s Board of Directors but also by Vaaka Partners’ team, with a view to sharing expertise.

An example case is the Musti ja Mirri chain, the market leader in the Nordic countries for pet accessories. Musti ja Mirri’s strategy has been to streamline the supply chain of products and to build its own product brands in a number of product categories. As a result, the company has numerous suppliers in, for instance, developing Asian countries. We initiated discussions about ESG issues with the company’s management in autumn 2012. The management’s initial reaction was to deliberate the matter. Very quickly, however, the potential that responsible investment offered for strengthening its position of market leader as a consumer brand was spotted, particularly with regard to competitors, who have not actively considered this opportunity. The company rapidly developed a new Code of Conduct for its suppliers. The Musti ja Mirri chain signed and joined the UN’s Global Compact initiative in March 2013.

This example case highlights the fact that successfully addressing responsible investment in an investor’s portfolio companies starts with their management’s belief in the positive business benefits of doing so, and with their management’s desire to adopt ESG procedures. Imposing instructions from outside will not achieve lasting results; it must instead be approached in the same way as other change projects. In the best scenario, ESG can be implemented as a normal part of business operations, further strengthening the company’s competitiveness.

Responsible investment will probably develop in future towards more systematic methods, targets and measurements. Measuring and reporting are not, however, an end in themselves but instead are clever and responsible ways of supporting business objectives. Following this path, ESG issues will be of positive importance in our portfolio companies and will support business development over a longer time span.

Case: Verdane Capital Advisors

Managing Partner Bjarne Lie describes how the company implements its corporate responsibility policy:

Verdane Capital Advisors' (Verdane) primary goal is to build long-term value and generate strong returns for investors in Verdane funds. Our active approach to Responsible Investment formally began six years ago, strongly supported by dialogue with our Limited Partners, and sees impact on three different levels, extending outwards from the organisation itself, to the funds and their portfolio companies, to society at large.

The largest potential sustainability benefits stem from the 95 portfolio companies the funds own, because activities in these companies can have a very real impact. Also,  this is the area facing the most exposure to economic risks relating to sustainability and, more broadly, reputational factors. Therefore, Verdane's RI work focuses primarily on the portfolio companies, throughout every stage of the investment process.

Sourcing:
When evaluating potential investments, specific ESG-related checklists on opportunities and risks are used in the investment committee discussions. In addition, there's increasing attention to consumers/buyers' sensitivity to ESG matters, and a desire to tap into the megatrends such as urbanisation, resource scarcity and climate change. For example, Bemz (Swedish) provides mass customised covers for IKEA sofas and armchairs, allowing clients to refurbish and upgrade furniture whilst significantly reducing use of materials. The company is very nicely positioned within the circularity theme and resource use is important to both internal and external stakeholders.

Investment:
The fund currently investing (Verdane Capital VIII) and its predecessor funds have all made commitments relating to ESG, such as investment exclusions relating to specific sectors or UN Global Compact.

Ownership:
The main opportunity to positively build a sustainability focus lies here. At the beginning of the ownership phase, specific goals and relevant themes are established in a 100-day plan, typically involving each portfolio company's top management in workshops. Verdane holds positions on the boards of all important portfolio companies and expects all companies to consider sustainability when setting strategic goals, as well as having sustainability (or ESG) as a standard item on the board agenda. For example, over the past eight years' holding period, we helped advance the ideal of energy efficiency as the core to Wireless Maingate, which has included helping consumers understand how and when they spend energy, adjust the pricing of energy and attaining better load balancing on the grid.

Exit:
We believe that for a well-managed portfolio company, the focus on sustainability can create quantifiable business value during the company's exit process, both by minimising risk for the potential new owners and by highlighting potential. To ensure that sustainability is captured and used to its full potential, it is one of the parameters used for scoring potential sell-side advisors (i.e. whether the advisors have relevant sustainability competence to ensure optimal positioning of the company for exit). We also ensure that sustainability information is part of any information pack or online data room pertaining to the company sale.

We strive to continuously develop our sustainability approach. A particular focus in 2015 was to broaden the firm's approach from risk minimisation to thinking holistically about opportunities created by global challenges (such as resource scarcity). A full day workshop was held with the entire team to increase awareness and discuss specific opportunities in portfolio companies.  In 2015, sustainability was also incorporated into relevant "best practice areas", firmly linking RI and Verdane's value creation methods.

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