Earnings model

CapMan has two operational segments: Management Company and Services and Investments. Both segments derive their income from the value development of unlisted Nordic and Russian companies and Nordic real estate.

The Management Company and Services business includes the management of CapMan’s private equity funds, which invest in portfolio companies and real estate, as well as private equity services. Investments comprise CapMan’s own investments in the private equity asset class, including investments in own funds and Norvestia.

Sources of income

1. Fee income

Fee income comprises management fees from funds and other service fees.

As a fund manager, CapMan receives management fees during a fund’s entire period of operations. This fee is typically based on the fund's original size during its investment period, which is usually five years. Thereafter the fee is typically based on the acquisition cost of the fund's remaining portfolio. 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 are usually 0.5-2.0% of a fund’s total commitments, depending whether the fund is a real estate fund, a mezzanine fund, or an equity fund. In the case of real estate funds, management fees are also paid on committed debt capital. The average management fee percentage paid by CapMan-managed funds is approx. 1%.

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.

CapMan aims to ensure that its fee income cover the Group's operating expenses. The latest fee guidance is presented in the most recent interim report.

2. Carried interest income

Carried interest refers to the distribution of the profits of a successful private equity fund among fund investors and the fund manager responsible for the fund's investment activities. In CapMan’s earnings model, carried interest means a share of a fund’s cash flow received by the fund manager after the fund has transferred to carry. The fund transfers to carry after a preferential annual return, typically 8% p.a., has been achieved for the fund.

The recipients of carried interest in the private equity industry are typically the investment professionals responsible for a fund's investment activities. In CapMan's case, carried interest is split between CapMan Plc and funds’ investment teams. The table of funds published in CapMan’s interim reports details CapMan Plc’s share of a fund’s cash flow if it is in carry.

CapMan applies a principle where funds transfer to carry and carried interest income are based on realised cash flows, not on a calculated and as yet unrealised return. As the level of carried interest income varies, depending on the timing of exits and the stage at which funds are in their life cycle, predicting future levels of carried interest is difficult.

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

  1. The ratio of paid-in capital and distributed cash flow to investors, and
  2. 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.

Please see our FAQ for more information about carried interest.

Fees and carried interest, M€

3. Income from own investments

CapMan invests broadly in the private equity asset class. CapMan’s largest individual investment is its 28.7% stake in investment company Norvestia. CapMan’s own funds constitute another significant portion of own investments. CapMan invests 1-5% of the original capital of new funds, depending on fund demand and CapMan's own investment capacity. By investing from its own balance sheet, CapMan aims to even out potential fluctuations in its financial performance, as income from investments is reflected in earnings more rapidly than carried interest income. Unlike other income sources, however, the income from CapMan’s own investments can be negative.

CapMan typically finances around 50% of its investments with debt financing, to enhance its return on equity. Investments impact CapMan’s financial performance through realised returns and fair value changes.

Income from own investments is booked based on the change in fair value of investments.

Investments and commitments by type, M€

Fair value change of own investments, M€

Valuation of investments

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 fair value of CapMan’s own 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.

Valuation of associated company Norvestia

CapMan books its 28.7% share of norvestia at the adjusted Net Asset Value (NAV) of the associated company. The impact on CapMan's income is based on the fair value change based on the change in Norvestia's NAV.

Norvestia invests mainly in Nordic unlisted companies, growth-oriented listed companies, private equity funds, Nordic listed equity, bonds and hedge funds.