A channel for investing in the most difficult markets

Another way in which Finnfund supports enterprises in developing countries is indirect, via private equity funds. The underlying reason is that it can be difficult for small and medium-sized enterprises in very poor and fragile countries to obtain risk-tolerant capital, typically in the form of equity-rated finance.

Equity funds can put together high-risk financing for projects and enterprises that would not normally have access to financial services. They also offer other forms of support, such as sectoral knowledge or skills in environmental questions. This is the rationale for fund investments in the poorest and most fragile countries, where there is a shortage of reasonably priced finance.

At the end of 2016 17.5 percent of Finnfund’s investments in developing countries were being channelled indirectly via private equity funds. At that time Finnfund was a participant in 42 funds to a total of about EUR 143.7 million, an average of EUR 3.4 million per fund.

No new decisions to invest in equity funds were made during 2016. Most of the equity funds in which Finnfund participates provide finance for micro, small and medium-sized enterprises that would be hard or impossible to finance directly in a cost-effective way. The focus is on funds that provide capital for business expansion, investments that would not be possible without the finance that funds offer.

Fund investments are generally decided and managed by teams that combine equity investment skills obtained from developed markets with comprehensive knowledge of the local market. By using private equity funds, Finnfund reduces the risk of operating in low-income countries.

The remainder of Finnfund’s fund investments are in funds that concentrate on specific sectors, such as renewable energy, sustainable forestry, agriculture or microfinance. Such funds typically operate in several countries, transferring expertise of various sectors across borders.

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 investment. This allows development finance institutions like Finnfund to move on to new projects where adequate commercial finance is still not available.

Funds are typically established for a fixed duration of about ten years. A fund usually invests subscribed capital in its first few years, after which its efforts shift to developing its investments and finally to exiting them.

Income of EUR 182 million to host countries from fund investments in 2015

Enterprises financed via equity funds can achieve significant development impacts. For example, the enterprises that Finnfund financed via funds in 2015 paid EUR 182 million in taxes and official charges to the countries where they were operating. Figures for 2016 are being compiled in spring 2017.

Most of the private equity funds that invest in developing countries are domiciled in international financial centres. Funds investing in Africa are generally registered in Mauritius. Luxemburg is also commonly used. The countries of domicile are conduits, through which subscriptions from many different countries flow to where they will be invested. Equity funds do not pay taxes to their countries of domicile but the enterprises that receive investments pay taxes in the countries where they operate, as do fund participants in their home countries.

Finnfund is opposed to tax avoidance, corruption and money laundering. It does not practice or tolerate aggressive tax planning. Like many other development finance institutions, we encourage countries of domicile to create transparent tax regimes by investing only in funds registered in countries that are in compliance with the progressively stricter requirements of the OECD Global Forum. The list of fund domiciles that are not eligible for equity fund investments by Finnfund can be found on the Global Forum website.

In 2016 the following countries were on the OECD Global Forum list: Andorra, Anguilla, Antigua and Barbuda, Barbados, Costa Rica, Curacao, Guatemala, Indonesia, Israel, Kazakhstan, Lebanon, Micronesia, Nauru, Samoa, Sint Maarten, Trinidad and Tobago, Turkey and Vanuatu. Listed until 26 July 2016 were Liberia and St. Lucia. On 26 July 2016 the United Arab Emirates was added to the list. Finnfund does not invest in enterprises or funds registered in these countries.

More information:

Key figures

Development impacts
Principles for equity fund participation


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