A new dawn

February this year saw part of the former independent fund-of-funds team at Proventure set up a new private equity business for Finnish OKO Bank subsidiary – OKO Asset Management. OKO Private Equity Funds Limited is run by the three key former Proventure personnel Ari Jauho, Ulla Niemelä and Samuli Sipilä who each hold equal minority stakes in the business.

The team is still managing the private equity portfolios of the Pohjola and Suomi insurance group which Proventure acquired in 2004 and which Jauho and Sipilä were hired to manage. The agreement comprised commitments in some 80 private equity funds in Europe and the US for a total amount of around €600m. As part of the deal, Proventure also had a discretionary mandate to make new investments on behalf of Suomi for an additional amount of €200m.

OKO Private Equity Funds Limited now has a new fund-of-funds to invest, which reached a first close this summer at €63.6m from Finnish investors. The vehicle has a target of €100m with a cap of €180m and is now targeting investors outside Finland for the latter part of the fund raising.

EVCJ: You were formerly part of an independent fund-of-funds team known as Proventure – could you explain your background and how the team now works as part of OKO Bank?

AJ: I, and almost all of the team members in OKO Private Equity Funds Limited, worked until early this year at Proventure, which provided private equity asset management services to fund-of-funds and separate account clients until the end of last year. Before joining Proventure in 2004, I worked for Pohjola Group PLC, which is now also a subsidiary of OKO Bank PLC.

OKO Private Equity Funds Oy is a subsidiary of OKO Asset Management Ltd, a subsidiary of OKO Bank PLC. OKO Asset Management Ltd is the second largest asset manager in Finland, with around €31bn funds under management. OKO Asset Management Ltd owns the majority of OKO Private Equity Funds Limited and the three key employees (Ulla Niemelä, Samuli Sipilä and myself) own equal minority shares. Our investment decisions are made fully independently by the team. Ulla Niemelä, Samuli Sipilä and I (as chairman) are the investment committee members. Investment managers Pasi Pihlajamaa and Timo Hara also attend investment committee meetings and everyone must be one hundred percent behind the new investment to be made.

In marketing we co-operate closely with OKO Asset Management Ltd and its institutional asset management team with more than 10 professionals who are continuously contacting institutional clients and supporting our marketing efforts.

EVCJ: OKO Private Equity launched its first fund-of-funds this year. Could you tell me a bit more about it?

AJ: We launched our first fund-of-funds, Selected Private Equity Funds I Ky, in April and made the first closing just before the summer break in June with €63.6m. The target size of the fund is €100m with a cap of €180m. The focus is pretty much the same as the team has had for years: European lower mid-market buyouts with a fund size between €100m to €1bn. We typically invest in country-specific funds, but we also make some investments in smaller pan-European funds. We have already completed investments into two European lower mid-market funds, one in UK and another in France.

EVCJ: What is the main focus of OKO Bank and how does OKO Private Equity Funds fit into the group’s strategy?

AJ: There are two main business lines in OKO Bank PLC: Insurance business and banking and asset management business. OKO Bank PLC acts as central bank for Finnish co-operative bank OP Bank Group, and is responsible for OP Bank Group’s liquidity and international business.

In the last few years, OKO Bank PLC has been focusing on building up its asset management business. The establishment of OKO Private Equity Funds is a natural step to further boost the banks’ asset management business. The bank already had a hedge fund and real estate business and was missing a private equity programme as part of its asset management services programme.

EVCJ: I see you have also invested in mezzanine funds – where do you source your deals and what is the current climate like for mezzanine investments?

AJ: We indeed made some mezzanine fund investments before 2003 but only into private equity mezzanine funds which take either equity or equity warrants and don’t just invest in the debt side. We also made quite a few mezzanine co-investments together with underlying mezzanine funds. The reason for co-investments was to reduce costs, which are more important when investing in mezzanine because of lower expected returns. On the investment side, the mezzanine market has recently been very tight and we have not made any mezzanine investments since 2003. I suppose that currently the mezzanine market is just starting to get more interesting and those smaller focused mezzanine funds just raised will likely have a favourable period to make new investments.

EVCJ: What is your due diligence procedure?

AJ: We are very prudent in our due diligence, that usually includes several meetings with management teams. It is also our aim that all of our investment professionals meet management team members. We always visit the management company’s offices and go through documents that they have made in relation to their investments. In addition, we do comprehensive reference checking, especially if we are backing a new management team.

We make sure we incorporate legal due diligence early and closely in our due diligence process. We put a lot of emphasis on terms and conditions and sometimes we have rejected deals because of inadequate terms and conditions. Typically when we are negotiating with managers about terms and conditions our in-house lawyer, COO Ulla Niemelä and the investment team member taking part in the negotiations will both be present.

EVCJ: Where do you see the next hot sector – has venture finally made a comeback?

AJ: European venture is certainly getting more interesting. There are some good venture managers in Europe who have survived the first difficult years of this decade. These players have learned their lessons and are stronger than ever, both on the technology side and in life sciences. There are also some good development capital funds, which typically invest in growth businesses quite similar to venture companies, but which are slightly more mature and, more importantly, are cash flow positive. From a macro perspective clean tech and sustainable technology funds also have good prospects. However, with our venture investments we are keen to invest in proven teams, and in many cases these clean tech funds are relative newcomers to the market with not much of a proven track record.

EVCJ: Do you also invest in direct deals and if so do you do co-investments?

AJ: Currently we do not do direct investments, but we are managing investments in circa 100 underlying different funds which are providing us with a steady flow of good quality deals and so we’re definitely not ruling out the possibility in the future of starting a co-investment programme.

EVCJ: What are your views with the current investment environment and the credit crunch? What will this mean for returns for funds of this years’ vintage?

AJ: In general market turbulence increases risk premiums of all investment assets including private equity investments, so now it is definitely a better time for private equity funds to be making investments than in the first half of this year, because return expectations are undoubtedly higher.

On the other hand, according to the Wall Street Journal, by August 46 leveraged financing transactions, mainly arranged to support large buyout transactions, had been pulled from the market, representing US$60bn in funding. Bearing this in mind, especially in the larger end of the buyout sector, the investment pace will certainly slow down as it will remain difficult to arrange debt financing for large transactions that need large syndications. It is also likely that we will see fewer recapitalisations than we have seen in the past.

Most of our fund managers are actually excited by the turmoil, because they are anticipating more favourable buying opportunities in the next few months especially in the lower mid-market which is our main focus area.

I expect the latter part of this year will be a good time for mid-market funds to invest and to focus on adding value operationally, but we aren’t expecting a great time for exits at the moment.

EVCJ: What are your plans for the next year?

AJ: At the moment we are managing our first fund-of-funds and two separate accounts. This year we may make another two investments for our fund-of-funds. Next year, I expect that we will commit up to €250m, mainly into European lower mid-market funds. We will probably make around 10 new commitments.