Finland is turning to venture capital financing as it searches for ways to jolt the economy out of a recession without jeopardizing its AAA rating.
The northernmost euro member wants to attract investors for a new 1 billion-euro ($1.28 billion) program and help startup companies without adding to its budget deficit. Finland is promising that investors who buy into the venture will take the lion’s share of potential profits. The program will also target growth companies.
“The debt crisis caused investors to retrench from this riskier startup funding,” Petri Peltonen, head of the enterprise and innovation department at Finland’s Economy Ministry, said in a telephone interview. “We’re now trying to attract private investors to take more risk that will help boost economic growth and create jobs.”
While Finland has weathered the crisis better than southern Europe, its economy contracted for a second time in four years in 2012, stretching government finances as the nation faces a fifth consecutive year of budget deficits. Finnish bonds with maturities longer than one year have lost 0.2 percent this year, compared with a 0.7 percent gain for euro-area government bonds, according to Bloomberg/EFFAS indexes.
Though Finland has taken some steps to temper its austerity zeal, the six-party coalition is moving ahead with tax increases and spending cuts.
Prime Minister Jyrki Katainen has said that retaining the country’s top credit rating and halting debt growth by 2015 are the government’s overarching fiscal goals.
The yield spread between benchmark 10-year Finnish notes and similar-maturity German bunds has widened to about 22 basis points from as narrow as 13 basis points in January.
The government decided in March to add 500 million euros to planned spending cuts and tax increases, starting next year. The effect of the measures will be softened by a cut in the corporate tax rate to 20 percent from 24.5 percent.
Finland is struggling to adjust to the decline of Nokia Oyj, once the world’s biggest maker of mobile phones, and as domestic stalwarts Stora Enso Oyj and UPM-Kymmene Oyj battle a slump in the European paper industry. Europe’s two biggest papermakers have shuttered production lines and cut jobs in response to falling demand for paper, in part as consumers shift to online media.
Finland’s economic growth will peak at 2.1 percent in 2015, before slowing to 1.6 percent in 2017, after a 0.2 percent contraction in 2012, the Finance Ministry estimates. Sluggish demand has prompted companies to cut jobs, pushing unemployment to 8.7 percent in February from 7.7 percent a year earlier. An aging population is adding to the strain on government coffers.
“After the decline of Nokia and the paper industry, Finland has been puzzled as to where growth would come from,” Tuulia Asplund, an economist at Svenska Handelsbanken AB in Helsinki, said by phone. “Even if no new Nokias emerge, this program demonstrates the government’s willingness to find new sources of output.”
Finland’s general government budget deficit will match last year’s 2.3 percent of gross domestic product before narrowing to 1.7 percent next year and 1.2 percent in 2015, the Finance Ministry said on March 27.
Finland is the only euro member to enjoy a stable AAA rating at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Germany, Luxembourg and the Netherlands are also rated AAA, though with negative outlooks from at least one of the three ratings companies.
In Finland’s venture capital program, about 10 funds will invest in about 100 companies, helping to create about 6,000 jobs over five years, according to an estimate by the Economy Ministry. That projection is based on results of a prior fund investing in growing companies and an impact assessment by the Finnish Venture Capital Association, the ministry said.
The state will reallocate 20 million euros each year of existing funds through Tekes, the financing agency for technology and innovation, into startup funds. About 30 million euros will be channeled annually through Suomen Teollisuussijoitus Oy into funds that help companies in a more advanced stage.
Investors will benefit from an “asymmetrical” model of profit sharing, Peltonen said. Losses and about 4 percent to 6 percent of the profit will be split equally by the state and private equity in the startup funds. Additional profit would go to private investors.
Investors will benefit as the government’s involvement will boost the funds’ size and potential profits for funding growth companies, Peltonen said.
“Private capital will drive the actual funding choices to allow their business hunch to pick the target companies that gain financing,” he said.