Equity funds as a channel to difficult markets

The great majority (76.8 percent, including financial institutions) of Finnfund’s investments go directly to companies operating in developing countries but at times it makes sense to route financing via private equity funds.

Equity funds can put together high-risk financing for smaller projects and enterprises which operate in poor and fragile countries and would otherwise remain outside the remit of financial services. Well-managed funds can also provide enterprises with other forms of support such as sectoral knowledge or skills in environmental questions.

Most of the equity funds in which Finnfund participates concentrate on a certain territory or a specific sector such as renewable energy, sustainable forestry, or microfinance. Most of them provide finance for micro, small and medium-sized enterprises that would be hard or impossible to finance directly in a cost-effective way.

Before making an investment, Finnfund analyses the equity fund’s strategies and, where necessary, makes its own proposals. It is also important that the fund is managed competently and in line with Finnfund’s principles. If these conditions are met and the decision to participate is made, Finnfund often joins the fund’s supervisory board, to ensure that fund resources are invested sustainably and appropriately for development. Equity funds are required to produce comprehensive reports on their investments and other matters, such as the taxes they pay.

In 2017 Finnfund made 3 investments in developing countries via equity funds. At the end of 2017, it was a participant in 41 equity funds, to a total of about 167 million euros, an average of 4.1 million per fund.

Most fund co-investors are other development finance institutions. Other participants include insurance and pension companies from host countries. However, foreign institutional investors do not generally become involved until there is a track record of success.

As a country or sector previously regarded as challenging begins to develop, and as private equity operations become established, institutional investors take more interest in fund participation. This allows development finance institutions like Finnfund to move on to new projects where adequate commercial finance is still not available.


Companies financed by Finnfund via equity funds pay taxes in the countries where they operate and report annually on tax paid. A major objective and result of Finnfund’s work is the tax and other fees, paid by enterprises financed, to the public sector in the countries concerned.

Many private equity funds that invest in developing countries are domiciled in international financial centres. Resources pass through these conduits on their way to countries where they will be invested. Such financial centres generally provide clear and predictable legislation and tax regimes, as well as conditions for the equal treatment of fund participants from different countries. The participants pay taxes in their home countries, so the exchange of information between national tax officials is important.

The group of European development finance institutions (EDFI) has a set of common principles for investments in financial centres.

Finland’s Ministry for Foreign Affairs, which steers Finnfund’s operations, has instructed it to invest only in equity funds registered in countries that are in compliance with the progressively stricter requirements of the OECD Global Forum. At the same time, Finnfund urges countries of fund domicile to create transparent tax regimes.

The OECD Global Forum maintains a list of countries whose legislation is non-compliant or only partially compliant with international norms. Finnfund does not participate in equity funds registered in these countries. The list is constantly updated so its composition varies, as does the state of compliance of countries. Finnfund is monitoring developments in this field; other such lists exist but, hitherto, the Global Forum list is regarded as dependable and internationally influential.

More information:

• Key figures
• Development impacts of projects 
• Responsibility
• Principles for equity fund participation
• Responsible tax 

 
 
Finnfund

Finnish Fund for Industrial  
Cooperation Ltd. (FINNFUND)

Uudenmaankatu 16 B
P.O. Box 391 FI-00121 Helsinki, Finland
tel. +358 9 348 434
fax +358 9 3484 3346
www.finnfund.fi