Analysing CapMan’s financial performance
The long-term nature of the funds managed by CapMan has a significant impact on analysing the company’s financial performance. As CapMan funds typically have a 10-year life cycle and most investments are held for four to six years, the Group's financial performance needs to be analysed over a longer time span than the quarterly cycle.
Predictability of CapMan’s main sources of income
Fee income comprises management fees from funds and other service fees.
It is relatively straightforward to forecast the level of future management fees, as funds are active for a number of years and management fee percentages are agreed for the entire life of a fund. Total management fee income increases with new fundraising, and therefore the success of fundraising represents an important indicator for any analysis of CapMan. The level of management fee income declines as exits are made. The fee base also decreases when the investment periods of individual funds end, and the basis for calculating management fees switches from a fund’s original size to the acquisition cost of its remaining portfolio. Annual management fees for CapMan funds are typically 0.5-2.0%, depending on the type of fund, and are on average approx. 1% of the capital under management.
Other service fees include fees from CapMan’s service business comprising purchasing scheme (CaPS), fundraising advisory services and other services related to fund management, among others.
Carried income interest
The timing of carried interest income is less predictable and is best analysed by monitoring the overall development of a fund’s portfolio rather than that of its individual portfolio companies.
In the case of funds yet to enter carry, analysis should focus primarily on the performance of a fund’s overall portfolio rather than that of its individual investments. As funds typically make 10-15 investments, their success is not dependent on any one investment. Particular attention should be paid to:
- The ratio of paid-in capital and distributed cash flow to investors, and
- The fair value of a fund’s portfolio.
Information on these factors is reported quarterly in CapMan’s interim reports, and by analysing this information one can estimate the amount of capital and return to be paid needed for a fund to transfer to carry.
In the case of funds that are already in carry, their carried income interest potential can be evaluated by reviewing their portfolio and their individual investments. In practice, an analysis of the latter can help estimate how much of a portfolio’s remaining fair value is associated with each portfolio company and what its impact on carried interest will be. When analysing individual investments, it is important to remember that when a fund is in carry CapMan will receive carried interest income from all of its cash flows, including those generated by investments sold below their original acquisition cost. This is because fund investors have already been repaid the capital they originally invested, together with their preferential returns.
Changes in the fair value of investments
The fair value of CapMan’s own fund investments can vary significantly from quarter to quarter, which makes predicting their future development relatively difficult. Fair value is influenced by the historical and projected development of individual investments and by how the indicators of listed peer companies perform, as well as factors such as changes in exchange rates. Changes in the value of listed companies, however, should not be seen as a reflection of similar changes in the fair value of CapMan’s own fund investments, as these investments are spread across funds that invest in a variety of sectors, as well as real estate.
When assessing the impact of CapMan’s own fund investments on its financial performance, one need to review the spread of these investments between investment areas and funds. The larger CapMan's investment in a particular fund is, the bigger the impact of the performance of an individual portfolio company or property in that fund is on CapMan, either via changes in fair value or realised returns. In practice, majority of CapMan’s fund investments and commitments are concentrated in its buyout funds, and around half of this is in the CapMan Buyout VIII fund.
CapMan’s valuation of its portfolio companies is based on International Private Equity Valuation Guidelines (IPEVG) principles, and valuations are made quarterly as part of CapMan Plc’s interim reporting process. Real estate valuations are carried out by independent third-party experts. The valuation process is described in more detail here.
Valuation of associated company Norvestia
The fair value change of Norvestia reflects the fair value change of Norvestia's portfolio. The shares held for trading are valued at the latest trade price. Fair value for fund investments is based on net asset value. Bonds are measured at fair value based on the last trade price. If the investments have no active market, the fair value is measured using various valuation methods that are usually based on forecasted cash flows. Investments in private equity funds are valued based on the fair value of the private equity fund management company, which is the generally accepted practice in the industry. Value is based on the IPEVG principles. Valuation of loans and other receivables is based on the amortized cost using the effective interest method. Fair values of derivative contracts are based on quoted market rates or, in an illiquid market, on values determined by the counterparty.
Additional information about the valuation of Norvestia can be found on www.norvestia.fi/en.
When is the best time to evaluate CapMan’s individual investments?
- When a fund is in carry, the fair value of its portfolio can be established by analysing its portfolio companies to provide an estimate of their carried interest income potential.
- When a fund is approaching carry, an analysis of individual portfolio companies will indicate what proportion of the portfolio’s fair value they account for, and the impact an exit from these companies would have when the fund transfers to carry.
- Where CapMan is a major investor in a fund, changes in the fair value of portfolio companies or real estate will impact CapMan Plc’s result through changes in the fair value of CapMan’s own investments.
Analysts following CapMan
- Pohjola Bank, Helsinki
Niclas Catani, tel. +358 10 252 8780
Sauli Vilén, tel. +358 44 025 8908