Here are some of our frequently asked questions and answers about CapMan as an investment.
Operations and organisation
1. How are CapMan’s operations structured?
The CapMan Group (the Group) is comprised of CapMan Plc and its subsidiaries and associated companies. CapMan has subsidiaries in Finland, Sweden, Norway, Guernsey, Luxembourg, Cyprus and the United Kingdom. These subsidiaries act as fund management and/or advisory companies for the Group’s funds that in turn make direct investments in portfolio companies or in real estate assets, or as investment companies.
CapMan’s most significant associated company is Norvestia Plc, of which it owns 28.7%. Maneq Investments Luxembourg is another significant associated company, which includes CapMan’s ownership in 2005-20011 Maneq funds and long-term receivables from these funds. Maneq funds are described in more detail in section 15.
All CapMan’s subsidiaries and associated companies are listed in the Notes to the Accounts in the Financial Statements section of the company’s Annual Report.
The Group's key investments strategies are Buyout, Real Estate, Russia and Credit. CapMan also classifies Norvestia as a key investment strategy, which invests in listed shares both directly and indirectly, credit instruments, private equity and other funds and makes minority investments in unlisted companies. CapMan has furthermore two other investment areas (Technology and Life Science), which do not make new investments. The Group has also three service teams: (1) Scala Fund Advisory, (2) Fund management, including Back Office and Legal, and (3) CapMan Purchasing Scheme. In addition, the Group has Finance, IT, Communications and Human Resources functions.
2. Who are CapMan’s investors?
CapMan’s fund investors are professional investors, including over 120 Nordic and international institutional investors (e.g. pension funds and insurance companies).
3. What is CapMan’s investment approach?
Each investment team and fund has its own clearly defined investment strategy. We aim to increase the value of the businesses and real estate that we invest in. We achieve this by selecting the targets carefully and setting clear objectives for our value creation work and actively creating value in each stage of the investment process. A successful investment calls for input from a motivated and experienced team that is familiar with various industries and situations. We seek to employ the best professionals both to CapMan and our portfolio companies. CapMan invests broadly in private equity from its own balance sheet.
4. How does CapMan add value to the companies or real estate it invests in?
We are active owners in all our portfolio companies and real estate properties. This means that we appoint a dedicated team of professionals for each company/property for the entire investment period to develop it together with its management/tenants. The value creation is most often based on the companies’ growth, improved profitability and strengthened strategic position.
CapMan also utilises its Board Network to bring new connections and in-depth sector knowledge to CapMan’s investment operations. The network is comprised of business leaders with long careers in various industries.
5. Which are CapMan’s primary sources of income?
CapMan’s main sources of income are fees, carried interest income and returns on our own investments. More information about all three is available here.
6. How does CapMan calculate its capital under management?
Capital under management refers to funds' remaining equity investment capacity and capital already invested at acquisition cost. The capital under management increases with new funds raised and declines through exits.
7. When does a fund transfer to carry?
To transfer to carry, a fund must return its paid-in capital to investors and pay a preferential annual return on this. The preferential annual return is known as a hurdle rate, which is regularly set at 8% IRR p.a. When a fund has transferred to carry, the remainder of its cash flows is distributed between investors and the fund manager. Investors typically receive 80% of the cash flows and the fund manager 20%. When a fund is generating carried interest, the fund manager receives carried interest income from all of the fund's cash flows, even if an exit is made at below the original acquisition cost. In the past, an average time for CapMan funds to transfer to carry has been 6.6 years.
Noteworthy issues when assessing transfer to carry:
- As a fund manager CapMan does not receive carried interest income from individual investments but rather from a fund’s overall performance. The first exits made by a fund do not typically generate carried interest income, because they still return paid-in capital to fund investors or annual preferential returns. These exits may, however, impact CapMan' s result through its own fund investments.
- When analysing the timetable for a fund to transfer to carry, the ratio of cumulative cash flows already received by investors to paid-in capital needs to be examined.
- The fair value of the portfolio, including any net cash assets of the fund, indicates the amount of distributable capital to investors at the end of the review period.
- When estimating cash flow, it should be noted that some funds have capital that is not yet paid in.
- Following any previous distribution of profits, new capital paid in, as well as annual preferential returns, must be paid to investors before a new distribution of profits can be made.
8. Why is carried interest distributed to the fund manager?
Carried interest is typically used in the private equity industry to align the interests of investors and fund managers. As the earnings potential represented by carried interest is very significant for a fund manager and its investment professionals, it is in their interest to manage investment activities as profitably as possible. Investors benefit from investment professionals being motivated to maximise everyone’s returns.
9. What is CapMan’s valuation policy with regards to funds’ investments?
CapMan determines the fair value of funds’ investments based on International Private Equity and Venture Capital Valuation Guidelines. Factors taken into account in valuation include the acquisition price, nature of the investment, local market conditions, comparable companies’ trading values on public exchanges, current and projected operating performance and financing operations subsequent to the acquisition of the investment.
10. What is CapMan’s dividend policy?
CapMan aims to pay at least 60% of its earnings per share as dividends to its shareholders. More information on historical dividends can be foundhere.
11. Why do not all exits impact CapMan’s result?
The result impact of an individual exit depends on the size of CapMan’s investment in the fund, from which the exit is made and whether that fund is in carry. If CapMan’s investment in the fund is significant, the result impact depends on the relation between the value at exit and the latest fair value estimate. Often the result impact of an exit is already accounted for in the fair value change before the actual exit. The quarterly fund status and the required cash flows to transfer a fund to carry are presented in our interim reports. Only a small share of CapMan’s funds is currently in carry. The majority of CapMan’s funds are in the exit and value creation phase and have long-term carry potential.
12. Who decides the compensation of CapMan’s management and employees?
The Remuneration Committee is responsible for the execution and supervision of CapMan’s compensation schemes. All members of CapMan’s Remuneration committee are independent. In 2016, Karri Kaitue was elected Chairman and Dirk Beeusaert and Claes de Neergaard members of the Remuneration committee. According to the Finnish Corporate Governance Code, the majority of the members of the remuneration committee have to be independent. The CEO or any other member of the Management Group is not entitled to sit on the Remuneration Committee. The duties of the Remuneration Committee are defined in the charter of the committee and shall reflect the requirements of the company. CapMan follows proper corporate governance standards where e.g. the compensation of employees has to be approved by a supervisor (the one-over-one principle) and the compensation of the CEO and the Management Group is decided by the Board of Directors based on the recommendation of the Remuneration Committee. CapMan publishes its remuneration statement annually as per recommendations.
13. How is CapMan’s compensation scheme in line with its year-end result target?
CapMan revised its compensation scheme during 2013 and the updated scheme came fully into force at the beginning of 2014. CapMan’s new compensation scheme consists of short-term and long-term compensation schemes.
The short-term scheme covers all CapMan employees and its central objective is earnings per share, for which the Board of Directors has set a minimum target. Short-term bonuses for investment teams are based on the result of the Management Company business for their respective investment partnership, and the minimum level of earnings per share provides the basis for receiving bonuses.
The long-term scheme consists of carried interest payable to investment teams and stock option programmes for CapMan’s key personnel. The carried interest payable to investment teams is based on the success of investments made in the corresponding funds. This arrangement is in line with international industry practice. Currently CapMan Plc has two stock option programmes – Option Programme 2013 and Option Programme 2016 – in place as part of its incentive and commitment arrangements for key personnel. The Board of Directors decides annually on the distribution of stock options to the key personnel employed or recruited by the Group.
14. Do CapMan’s Management Group and Board of Directors own CapMan shares?
Latest information related to shareholdings of CapMan’s Board of Directors and Management Group is shown under Insider issues.
15. What has been the role of Maneq investments in CapMan’s compensation scheme?
The Maneq investment scheme was established in 2002 with the objective of incentivising personnel over the long-term. Maneq funds (2002-2011) operate on the same principles as other CapMan funds, enabling CapMan and the personnel to invest in portfolio companies together. In addition to equity, the funds include debt financing partly from external banks and partly from CapMan at prevailing market conditions. The return profile of Maneq investments is largely consistent with that of CapMan’s own fund investments. The Maneq investment scheme was terminated in 2011, after which no new Maneq funds have been established.