We have compiled a list of questions and answers related to the impact of the ongoing Coronavirus (COVID-19) outbreak on CapMan. The information was updated on 20 March 2020.
1. How are CapMan’s operations prepared for the COVID-19 situation?
We have taken measures to secure the health and well-being of our employees, our customers and partners and are predominantly working remotely for the time being. Due to the nature of our business, we are well-equipped and prepared for remote work and have been able to adapt to this situation more or less seamlessly. Although we forego face-to-face meetings in lieu of virtual meetings, our operations continue more or less as usual.
2. What is the financial impact of COVID-19 outbreak for CapMan?
The impact on CapMan’s operating segments can be structured as follows:
Management Company business:
Management fees: Management fees per fund are determined at the establishment of a fund and are paid to the management company, i.e. CapMan, twice per year based on the original fund size, including commitments, over the fund’s investment period (generally five years) following which management fees are determined based on the at-cost value of the underlying portfolio. These fees are long-term and highly predictable, and we see little volatility in the near/mid future.
Future management fees are affected by a) New funds raising: if ongoing fundraising projects are postponed or delayed, management fee growth may be affected. b) Exits from funds: Exits following the end of the investment period reduces the aggregate at-cost price of the remaining portfolio, on which management fees are based. If exits are delayed due to increased uncertainty in the market, management fees will remain stable.
Carried interest income: The increased uncertainty, the impact on value creation in the portfolio and delays in exit processes may impact the timing and magnitude of funds to generate carried interest, but it is too soon to tell what the impact will be. CapMan does not provide guidance regarding carried interest.
CaPS and JAM service fees are largely recurring and stable, and we see little impact to those for the time being. Scala’s business is more susceptible to market risk as it is dependent on fundraising projects and is therefore more volatile.
CapMan’s balance sheet is roughly 31% cash, bank and liquid assets, 35% PE and Credit assets, 23% Real Estate assets and 10% Infra assets. Figures are as of 31 December 2019. Of these, Real Estate and Infra have defensive characteristics and are more likely to perform better compared to e.g. listed equities in this market. The impact is most likely hardest felt in the PE portfolio, although to what extent is yet to be determined. In general, the private equity asset class is less affected by short-term market shocks and volatility compared to listed equities, but some impact may take a longer time to process in full.
All in all, it is still too early to tell what the impact for our business will be, as all depends on the length and magnitude of the ongoing situation. Given the stable and predictable nature of management fees and high level of recurring fees, we are in a relatively good position compared to many other industries and businesses.
3. What is the non-financial impact?
The situation tests our processes and may lead to new ways of collaboration and potentially more cost-efficient business practices across the organisation.
4. Is CapMan taking action to reduce expenses?
Given the current uncertainty, we are conservative regarding our cost structure and explore options to maintain functioning operations while maintaining prudent cost control. If need be, we are ready to adjust our cost structure in line with our income.
5. What is CapMan’s liquidity position and how will the COVID-19 situation impact it?
CapMan had approx. MEUR 55 in cash & liquid assets as of 31 Dec 2019. We will pay MEUR 20 in dividends and equity repayment for 2019. Our equity ratio was 60% and interest-bearing net debt only MEUR 9.3. Given incoming management fees and service fees, our cash flow situation is solid, which puts us in a good position to weather this situation.
6. Is CapMan’s dividend policy impacted?
CapMan’s policy, launched in 2018, is to pay an annually growing dividend. We have not made any changes to the policy.
7. Is CapMan’s ability to pay dividends impacted? Will dividend distribution as decided by CapMan’s 2020 AGM be delayed?
The decision regarding dividend and equity repayment distribution, 13 cents per share for 2019, was made at the 2020 AGM and will be paid to shareholders on 20 March 2020.
Our ability to execute our dividend policy depends on many things, among others our earnings per share for the period and total distributable earnings. We remain committed to our dividend policy despite these exceptional times.
8. What is the impact of the COVID-19 situation on CapMan’s private equity strategies and funds?
The situation for portfolio companies is changing by the day, and we expect all companies to be impacted in some way, with some industries being harder hit than others. As revenue and cashflow always drop faster than adaption measures take effect, we have already earlier initiated actions in all portfolio companies. Some businesses may need additional liquidity in the interim. The increased uncertainty also impacts the transaction environment with delayed exit processes as a result. In terms of new investments for the Buyout XI fund, the team is proceeding with the current pipeline.
9. What is the impact of the COVID-19 situation on CapMan’s real estate strategies and funds?
The effects will vary depending on the segment. Hotels, cinemas, restaurants and events venues are likely to suffer a large short-term fall in income. Shopping centres and high streets will see decreased footfall and spending. Leasing decisions will be delayed as tenants assess the impact on their business. Office markets in Nordic capital cities have limited quality space, and companies tend to take a longer-term view on their workplace strategies. In this unprecedented time, we may renegotiate leases and step in to support tenants at risk. Deal flow may be slowing down, especially related to international transactions. Fundraising for CapMan Nordic Real Estate III proceeds as planned.
10. What is the impact of the COVID-19 situation on CapMan’s infra strategies and funds?
The asset class is relatively defensive to external shocks like pandemics, but it is not totally isolated from the general economy and society. The fund’s three existing assets (concession-based ferry business Norled, district heating Nydalen Energi and fiber-to-the-home platform FiberCo) are largely immune to the impact of virus in their short-to-medium term revenues. There are some delays in the launch of auction processes and lengthening of bilateral negotiations. However, it is anticipated that most counterparties will remain responsive and actively working on the projects. The Infra team is actively working on achieving a final close for the fund this spring.
11. What is the impact of the COVID-19 situation on CapMan’s credit strategies and funds?
Short-term impact is likely to remain small to moderate. Long-term impact is less pronounced than for PE funds, but the solidity of the portfolio companies and their economic situation has an impact on debt payments, especially in cases of liquidity crunches or defaults.
12. How will the COVID-19 situation affect management fees?
13. How will the COVID-19 situation affect ongoing fundraising?
The situation may lead to delays in the fundraising process, with delays in both first and interim closes. It is still too early to tell what the impact will be. The underlying appetite for private assets strategies remains strong, and due to the characteristics of the asset class, investment decisions are likely to be strategic rather than opportunistic in nature.
14. How will the COVID-19 situation affect service fees?
15. Will the COVID-19 situation affect how and when funds start generating carry? Are some funds more affected than others?
See 2. As there may be more volatility related to private equity funds, we expect the effect to be more pronounced in these.
16. How will the COVID-19 situation affect CapMan’s fair values?