Do you have questions about CapMan or the private assets industry? We have compiled a list of the most frequently asked questions, complete with answers, here.
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.
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, Credit, Growth and Infra. The Group further has three service teams: (1) Scala Fund Advisory, which offers advisory services to private equity fund managers, (2) CapMan Procurement Services (CaPS), which offers purchasing and procurement services to growth companies, and (3) JAM Advisors, which offers analysis, reporting and wealth management services. In addition, the Group has Finance, Back Office, Legal, Communications & IR, IT and Human Resources functions.
2. Who are CapMan’s investors?
CapMan’s customers are professional investors. Over 200 Nordic and international institutional investors (e.g. pension funds and insurance companies) invest in CapMan’s funds.
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 or income profile of the businesses, real estate and infrastructure 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 also invests in private assets, mainly our own funds, from our own balance sheet.
4. How does CapMan add value to the companies, real estate or infrastructure 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/asset 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.
6. How does CapMan calculate its capital under management?
Capital under management refers to the remaining investment capacity, mainly equity, of funds and capital already invested at acquisition cost or at fair value, when referring to mandates. As capital under management is calculated based on the capital, which forms the basis for management fees, investment capacity includes in addition to equity also debt for such funds where debt is included in the fee base. Capital increases as fundraising for new funds progresses or as investments are executed under investment mandates and declines as exits are completed.
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 fund investors, the fund manager and the investment professionals?
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’s objective is to pay an annually increasing dividend to its shareholders.
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 portfolio company or real estate or 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 residual 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. The composition of the Remuneration Committee is presented here. The majority of the members of CapMan’s Remuneration committee are independent in accordance with the Finnish Corporate Governance Code. 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’s compensation scheme consists of short-term and long-term compensation schemes.
The short-term scheme covers all CapMan employees, excluding CEO and CFO of the company, 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 an investment based long-term incentive plan for key employees. Participants in the plan are committed to shareholder value creation by investing a significant amount into CapMan Plc shares.
At the end of the reporting period, CapMan Plc had two stock option programmes, Option Programme 2013 and Stock Option Programme 2016, in place as part of its incentive and commitment arrangements for key personnel. Following the decision of the new long-term incentive plan, CapMan will not grant new options from the ongoing option plans 2013 and 2016.
14. Do CapMan’s Management Group and Board of Directors own CapMan shares?
Information related to shareholdings of CapMan’s Board of Directors and Management Group is compiled on an annual basis in CapMan’s annual reports. Managers’ transactions are further reported continuously as stock exchange releases in line with regulatory requirements.