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Finland’s first impact fund

Anna Lyudvig
Oct. 2, 2019, 9:25 p.m.
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Word count: 782

In July, OP and Finnfund announced plans to establish Finland’s first impact fund - the OP Finnfund Global Impact Fund I - that will invest into emerging markets. AGF’s Anna Lyudvig speaks with Tuomas Virtala, CEO of OP Asset Management and Markus Pietikäinen (pictured), CIO of Finnfund to learn more.

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In July, OP and Finnfund announced plans to establish Finland’s first impact fund - the OP Finnfund Global Impact Fund I - that will invest into emerging markets. AGF’s Anna Lyudvig speaks with Tuomas Virtala, CEO of OP Asset Management and Markus Pietikäinen (pictured), CIO of Finnfund to learn more.

Anna Lyudvig (AL): What type of Fund is it?

Tuomas Virtala & Markus Pietikäinen (TV & MP): The plan is to create a hybrid fund that will invest in both equity and debt deals. All investments are private market deals and the fund will only make direct investments.

AL: Can you touch more on the Fund's investment strategy?

TV & MP: Creating and managing the fund will be a joint effort by OP Asset Management and Finnfund. The fund will only invest in commercially viable projects with both a lucrative return potential and significant and measurable positive impact in the target market environment, economy and/or society. The fund will invest in the developing markets globally. Some country exclusions may apply as well as some industry exclusions. We are planning to position the fund’s return target between 8-12 % p.a. These levels are based on Finnfund’s track record, the latest deal valuations, growth assumptions and coupon rate levels.

OP Asset Management will be the responsible portfolio manager of the fund and OP Fund Management will provide and manage the fund structure. OP Asset Management is responsible for the portfolio construction of the fund and will choose the deals into the fund as well as manage the overall return level, diversification and risk levels of the fund. Finnfund will be the investment advisor to the fund. Finnfund will be responsible for sourcing, analyzing, deal DD and terms & conditions negotiations, as well as presenting the deals to the fund.

AL: When are you planning to launch the Fund?

TV & MP: We are planning to have the terms & conditions agreed and approved by the Finnish FSA by October. We are also planning to have the first closing at the end of December 2019, subsequent closings are subject to demand and interest in the fund as well as the deal flow we see during the investment period. We will most likely have the fund closed during the first half of 2020. Furthermore, we expect to start the investment period in early 2020, i.e right after the first closing.

AL: What's your fundraising target?

TV & MP: The minimum fund size is planned to be set at $50m, the target will be $100m and we expect a maximum capacity for the fund at around €150m. We aim at being able to launch several follow-up funds during the years to come. For that reason we are prepared to close the first fund at a relatively low AUM amount. The target sizes for the possible follow-up funds are subject investor demand, our experiences in the deal flow & quality of the target markets and naturally market growth (= growth in the number and size of relevant deals).

AL: What opportunities do you see in Africa and in which countries? 

TV & MP: This fund will invest into Africa in addition to other developing markets. The investment process and origination capability of Finnfund will be the base for the investment process. Finnfund has an equity and debt portfolio of approximately €550m. Around half of this portfolio consists of investments into Africa. We see further potential in investments into the Sub-Saharan countries.

AL: What are the risks of investing in this Fund and how will you mitigate those risks?

TV & MP: The fund should be considered as a high risk investment. The risks investors will be exposed to include Developing Market country risks in various formats (e.g economic, political, governance related uncertainties) and typical Private Equity and Private Debt risks (e.g business related risks, risk of defaults, illiquidity of the investments).

The first step to manage risk is to only invest in the deal flow that is approved through the extensive Finnfund investment process. Finnfund evaluates some 500 opportunities a year and makes some 20-25 investments. The team consists of 70 investment professionals with a long emerging market private equity experience. The process follows a typical private equity process including further in-depth ESG and impact assessment.

Risks are also managed through the Portfolio Construction and Risk Management processes of OP Asset Management. OP will, for example, make sure that the portfolio is adequately diversified e.g in terms of debt/equity, country concentration, industry concentration, and single deal size limits. OP will also only choose deals into the fund whose investment merits the Portfolio Managers are adequately able to analyse from financial, sustainability and risk modelling point of view.

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