NORDIC INNOVATION FUND (NIF) Frequently Asked Questions and Answers: Fund manager track record and NIF governance: 1. European Investment Fund (EIF) is the largest public investor in Europe, with investments in over 350 funds. a. What makes EIF unique as a fund of funds manager and how will this benefit NIF? EIF has the widest geographical experience of any Fund of Funds manager in Europe having made over 350 investments into Private Equity managers across 32 countries in the EU and neighbouring states. EIF has built a team of professionals across a 15 year period that follows best practice management processes and procedures. EIF s multi country experience sets it apart from any other national player in this field. b. What is the track record of European Investment Fund (EIF) as a fund of funds manager? EIF manages mandates on behalf of mandators that set specific objectives for the deployed capital. Most of the mandates include a significant element of development for policy reasons and do not focus on profitability alone. Hence, the track record has to be measured against the set objectives of the mandator and EIF considers its record to be highly successful which is recognized by the industry and evident in the growing number of new FoF mandates EIF is asked to manage. c. What EIF lessons/experiences can be applied when setting up the Nordic Innovation Fund? EIF currently manages 7 FoF activities for different Member States across Europe worth a value of over EUR 2.1 billion and two further mandates are expected to be signed shortly increasing this amount to over EUR 2.5 billion. These Member States include developed markets such as Germany, the UK and Spain and through these activities alone, EIF has created over 80 equity investment transactions and significant levels of private leverage through the process. For the German (ERP) mandate, EIF has calculated that the leverage level at the portfolio company is equally to a multiple of 12. In terms of lessons learnt, EIF has also established best practice levels of corporate governance that enables all stakeholders to oversee the underlying activity appropriately. 2. How will EIF manage the fund to ensure a minimum inward investment in national enterprises equivalent of each country s investment in NIF? We know how to maximize the level of private investment into these initiatives and how to design and then construct transactions with the selected Fund Managers to ensure the objectives of the FoF are met. We will only invest in Managers/intermediaries who have a proven access to quality dealflow and investment execution capabilities in the target geographies. In addition the geographic allocations are usually included in the documentation as a contractual commitment. EIF will manage this process to ensure that each country s investment in NIF at least matches the level of investment made into that country. If required by the stakeholders, this will be made into a contractual commitment. 1
3. What is EIF s suggested governance structure of NIF? The governance structure for NIF will follow best market practice and build on one of the structures EIF is managing and which have been proven. EIF s Legal Services unit will analyse the best structure to be adopted that meets the final stakeholders needs. 4. Would EIF set up an office in the Nordics to manage NIF activities? EIF may consider a cost efficient solution that enables a greater local presence to be closer to the intermediaries either by establishing an office or utilizing offices of participating national agencies. However, most transactional activities will be carried out by resources based in EIF s main office location in Luxembourg. Financing 5. The proposal states that national investments can be phased into the fund over several years: a. When would the initial national investments occur (in which budget year)? At the very beginning of 2013 if the proposed implementation timetable is correctly followed. However, EIF would expect contractual commitments to be made in 2012. b. What would be the draw down period of national investments into the fund? Does it need to be equal amounts for each budget year of the draw down period? Underlying intermediaries will draw money over their entire lifetime, either to make new and follow on investments or for management fees/costs. As a result, the draw down period of national investments in the NIF can be expected to extend across a minimum of 4 years. Drawdowns will be made on a quarterly basis, on the basis of the expected needs. c. Will there be a first and second closing? Possibly, yes. If certain stakeholders wish to join the initiative at a later date, this can be accommodated (but it is not preferred by EIF as it may mean the selected Fund managers will have limitations on their geographic scope of investments). 6. Could NIF be an evergreen fund? Yes, if all stakeholders wish to adopt this model. Timing 7. Why is this a good time to establish a Nordic Innovation Fund? The Nordic Venture Capital market is characterized by two major trends: 1. The decrease of capital supply: local investors are gradually withdrawing from the asset class, notably pension funds; a number of certain fund managers have either disappeared or turn to other segments than the early stage. The VC market hence requires further support to make up for this negative trend. 2. This need for compensating the lack of capital supply is further justified by the market demand, which is larger than ever. The Nordics continue to get top rank in terms of innovation, competitiveness, R&D output. An analysis by the VC firm Creandum reports that during 2005 2009, the Nordic companies represented 9% of all global billion dollar ICT exits and over the past five years EUR 2.6bn have been generated per year from Nordic tech company exits. And this trend is expected to continue. As a result, the Nordic market remains more than ever a favourable 2
Investment Impact environment for venture investments. Competition for the best deals in the region remains hence high amongst the remaining Nordic VC players. Finally, this positive trend gets further confirmation from the strong appetite from non Nordic VC players who are increasing their presence in the market. 8. The proposed size of NIF is EUR 250M with EUR 125M in total contributions from the Nordic countries. With the leverage of EIF (up to EUR 83m) and private funding into the fund offunds, plus leverage of private money at investment level, what would be the estimated total investment impact of NIF to Nordic companies? EIF s conservative estimate is that the total level of equity investment should be expected to reach EUR 600m at the level of the intermediaries but in fact could reach closer to EUR 1 billion. EIF s experience is based upon proven results created through managing the ERP Dachfonds FoF for the German government and reference contacts for this activity can be given if requested. Rationale and function of the Nordic Innovation Fund: Fund of funds activities: 9. What is the main rationale for the pan Nordic fund of funds (NIF)? As explained in Q7 above, there are multiple reasons why there is a need for setting up NIF at this time. Multiple research reports have highlighted the issues in the marketplace (NBIF, Menon, McKinsey) which explains the significant risk to the Nordic equity market at present at the very time when growth is needed. Additionally, it is worth relating this subject to the increasing levels of global competition, particularly from Asia, and the visible trend of private equity investors to focus on emerging markets. However, with EIF s role as Europe s leading developer of risk capital financing it is fully understandable that EIF seeks to work with the Nordic governments to counter balance and address these issues, hence the creation of the NIF proposal. As stated before, EIF believes that there are major opportunities that lie within the Nordic marketplace and there is a real risk that the potential will be missed in action is not taken. 10. What are the key benefits of setting up a Nordic Innovation Fund, as supposed to national fund of fund activities? In global terms, the individual Nordic markets are limited in size and may suffer from lack of individual attractiveness to international investors. However, the Nordic region as a whole has a strong and recognized brand, a reputation and a well developed track record for creating growth companies in successful sectors. The region is recognized as the tenth largest economic block in the world. As a result, the Nordic market is much stronger together than the sum of the individual parts and can compete better through collaboration than separation. EIF believes that the pan Nordic approach has a significantly greater chance of attracting corporate and private investors than if each country acts alone. 11. How will NIF compliment, coordinate and cooperate with existing fund of funds in the region? While national fund of funds have the advantage of a local anchoring in the target countries, EIF benefits from a pan European coverage which allows it getting access to, sharing and 3
disseminating best market practices. EIF will hence seek to explore any cooperation opportunity with existing local players with the necessary experience, skills and execution capabilities. 12. How will EIF secure involvement and investments from private side corporate investors? Beside foreign corporate investors, has EIF identified potential corporate NIF investors in the Nordics? EIF is currently in discussions with several global, European and Nordic corporations which all share the positive outlook on the Nordic market but which are still assessing the best option to access such market. The Nordic Innovation Fund would hence provide a vehicle for such investors, allowing them a guided access to the market. In return, such corporations are also willing to share the specific industry expertise for the benefit of Nordic VC fund managers. 13. The proposal states that NIF will back existing VC fund managers and establish new teams in the Nordic region. a. How many investible existing Nordic private VC fund managers are identified by EIF? EIF closely monitors the market and is in regular full dialogue with all managers which enables EIF to know the potential pipeline of investment transactions in the region. EIF has invested over EUR 660 million in 43 different funds since 1998 and has backed some of the leading names including Northzone, Creandum and Conor Technology. Full details of EIF s current portfolio can be provided upon request. Through this continued process, EIF knows in detail the expected fund raising plans of managers and hence believes that a steady pipeline of investments is foreseeable and will need coordinated support. b. EIF has already invested in several private VC fund management teams in the region, and presumably still will. How will NIF add additional value to these teams? Would NIF where appropriate invest additional capital into the same teams? As explained, EIF has established a portfolio of investments in the region and will continue to do so. However, more recently EIF has adopted a model of working closely with governments to create FoF mechanisms which pool capital and enable a greater level of market impact to be made. This leveraging model has proven to be successful and is a growing aspect of EIF s business across Europe. EIF has invested EUR 850 million in Nordic managers across the last 15 years but through the establishment of the NIF, EIF would expect that trend to be significantly increased. c. How will NIF go about identifying and establishing new VC fund management teams in the Nordic region in practice? Through EIF s market intelligence, it is often the case that we are approached by new teams before it becomes public knowledge. This process would be expected to continue. Additionally, when the NIF is publicly announced, it can be expected to create further interest from people considering building a new team. EIF would actively promote the news to further encourage this process. d. Approximately what share of the fund of funds activity could go into funding new VC teams as supposed to established ones? All Stakeholders would need to agree on an allocation level to new teams whilst understanding that this should not be regarded as a contractual commitment. Ultimately, a portfolio model will be built reflecting the agreements between all stakeholders. 4
e. How will NIF contribute to spread best management practice to and between Nordic fund managers? EIF regularly explains what it considers to be best management practice and upon the creation and announcement of NIF, EIF would propose to do a roadshow in cooperation with each national VC associations explaining the NIF, the timetable and the best practice standards that EIF will be seeking from fund management companies. Co investment activities: 14. What is the main rationale and value added by NIF for this activity in the Nordic market? Throughout all markets, there is a clear and identifiable growth in the number and type of direct equity investors who are willing to fund equity investments but not willing to be tied to traditional Limited Partnership structures that the VC market operates. Hence, to capitalize upon and further stimulate this area of private investors, EIF has successfully piloted coinvestment facilities that directly co invest into growth SMEs alongside selected BAs/noninstitutional investors. EIF sees a real need to further expand this model as it is expected to play an increasingly important role in equity investments. 15. How will this co investment activity work in practice / how will it be executed? NIF will introduce a co investment facility dedicated to conduct co investments with BAs and other non institutional investors (e.g. family offices) on a pari passu basis. EIF will select the co investors and contract with them directly. Co investments will be conducted under a strict pari passu principle and the co investment part contributed by NIF will always be equal or smaller than the contribution of the private investor to ensure a proper alignment of interest between the parties. Investment decisions will be fully delegated to intermediary. EIF will explore any cooperation opportunity with existing local players with the necessary experience, skills and execution capabilities. 16. Will there be any sector focus or limitations for these co investment activities? Only restricted sectors according to the EIB group policy will be excluded. Co Investments with non institutional investors are well suited to support sectors and geographies often not covered by traditional VC areas and hence provide significant added value to all participating countries. 17. How would EIF/NIF qualify eligible BAs/non institutional investors? Eligible intermediaries would be selected under a proven selection and due diligence process. Selection criteria would mainly be based on the three characteristics significant (BA has adequate resources available to co invest), relevant (BA is prepared and able to conduct several investments over a defined timeframe) and proven (BA has adequate experience). Further, integrity checks and assessment of reputational risk would be a major selection element for a co investment. Seed and Technology transfer activities: 18. What is the main rationale and value added by NIF engaging in Technology Transfer activities? Firstly, the term Technology Transfer needs to be understood clearly. EIF defines this area as the commercialization of new ideas, concepts and business models often at the prerevenue stages. This would include pre seed investment stages. This is where many 5
successful businesses begin life and often they are created through the activities of universities or research institutions, but this should not be considered as the sole source. Investing at these very early stages is both difficult but also crucial to feed the growth of new companies to the marketplace which often benefit later on from later rounds of equity investments. 19. How would NIF identify investible Technology Transfer projects? EIF has been working in this sector for many years and has already established a portfolio of successful transactions including some in the Nordic region eg: Chalmers Innovation Fund in Sweden. Through this, EIF has created a network of contacts at university and research institutions plus contacts with management companies that specialize in this area. EIF will use this network to generate more investible projects across the region and seek to further expand the network wherever possible. 20. How will NIF contribute to increased collaboration and spreading of best practices between tech transfer offices in the Nordics? The Nordic region has a record of informal collaboration in many areas and in some areas it has worked on a pan regional and systemized basis eg: Nordic Seed Capital Summit. EIF would seek to further this good work through the implementation activities of the NIF. 21. What type of national agencies/public investors would be most suitable collaboration partners for NIF s Technology Transfer activities? Partners could be university and research institutions and especially the TT offices but also include national agencies that have specialized in the seed and early stage sectors within each country. Additionally, there are a number of existing entities that have promoted early stage and seed investment activities that would be natural partners to increase the impact in this area. Implementation: 22. How does EIF wish the Nordic governments proceed with their internal decisions? EIF understands that there are many questions related to Nordic governments making decisions of this nature. Firstly, EIF seeks that each government assigns a specific Ministry person to manage the exploration and decision making person that reports progress regularly to the appropriate Minister. Secondly, that person is asked to proactively engage with EIF to address all open issues in a rapid and efficient manner. Thirdly, EIF requests that each government formally issues a Letter of Intent stating the intention to invest in NIF before the end of June 2012. Based upon receipt of these letters, EIF would seek to formalize its capital commitment to NIF by requesting approval from the EIF Board of Directors. Once this is achieved, appropriate legal documentation would be prepared for all stakeholders to sign. 23. What documentation will EIF be able to provide to assist this process? EIF has provided the overall NIF Proposal dated June 2011 to all parties already. Additionally, this document represents a collection of all questions received and EIF has created the appropriate answers. Additional supporting documentation could be provided if required that could cover, for example, the radar of possible VC investments. EIF will continue to work to provide any additional information required to support the principled decision. After which, a sample stakeholder agreement would also be provided to interested parties. 6
24. Is there a deadline for Governments to make their decisions? At the meeting of the Nordic Council of Ministers for Trade and Industry in Helsinki on October 13 th 2011, all government representatives committed that they would manage a process so that in principle decisions would be made before the end of March 2012. As mentioned above, EIF seeks that governments formalize their decisions by sending a Letter of Intent to EIF around that period. Unfortunately, if the process is unduly delayed, EIF will face no other choice than to commit its capital and resources to other regions of Europe. 25. Would EIF proceed to work with a smaller number of countries or just one if that situation arose? The true value of the proposal and the dominant logic behind this is for a pan Nordic approach to enable the maximization of the benefits. If this is not possible, EIF will have to reassess whether it can operate in less optimal ways. Document produced by EIF 6 th January 2012. 7