Finland is used to being applauded as a success story. Following a recession in the early 90s precipitated by the collapse of the neighbouring Soviet Union, the country has been widely hailed as achieving the admirable combination of a thriving, free-market economy (which grew by six percent last year) and a strong sense of social responsibility evidenced by generous welfare provision.

Hence, it came as something of a surprise when, on September 4, the UK's Financial Times published a ‘special report’ on Finland which questioned whether the picture traditionally painted of the country was, in reality, a little flattering. The report (the cover story of which was entitled “All is not as it appears in frozen land”) pointed to demographic trends – notably a rapidly ageing population – effectively creating a ticking time bomb of financial pressures. Finland would struggle to address these pressures, the report suggested, given an employment growth rate and level of job creation that should both theoretically be far higher given the strength of the economy.

The culture is one of high taxes and narrow income differences

Tuomo Rassio

The report has become a talking point among private equity professionals in Helsinki. Of those whose opinions were canvassed for this article, several mentioned the report without any need for prompting. It also met with a response from leading Finnish daily Helsingin Sanomat, which ran an editorial commenting on how strange it was to read negative views of Finland when everyone had become so accustomed to studies that overwhelmingly reached positive conclusions.

Tuomo Raasio, head of buyouts at Capman, the listed alternative assets manager based in Helsinki, said that what impressed him most was the editorial's modest conclusion that “if that's how it seems [to outsiders] then that's probably how it is”. Raasio says he agrees with some of the report's suggestions: including the accusation that Finland lacks the entrepreneurial dynamic that would help address the job creation problem. “Finland has a lot of good managers and great technology, but it's never been a very entrepreneurial country,” he says. “We have a disproportionately large number of universities, but studying entrepreneurialism is not popular. In addition, the culture is one of high taxes and narrow income differences.”

Finnish managers tend to be characterised as highly professional but riskaverse. If true, one assumes it would gravitate against the ambition of private equity firms in the country to work with management in growing companies quickly. In fact, Raasio notes the existence of an interesting dichotomy. Whilst reluctant to form start-ups, Finns appear keen to get involved in buyouts. This trend, insists Raasio, does not contradict their riskaverse nature. “Buyouts are seen as great news because you can become an entrepreneur in a safer kind of way. You don't need to set up the business and you don't have 100 percent of it: you have a stake in its success while someone else holds the majority. We have people queuing up to participate in our deals.”

This helps to explain why, since recession, Finland has been home to a small but thriving group of domestic mid-market private equity firms, complemented by the presence of investors based elsewhere in the Nordic region such as EQT and Industri Kapital and even some international funds. As an aside, local professionals note that Paroc was viewed as a seminal deal in terms of Finland's evolution into a truly global private equity market. The Finnish insulation products firm was acquired by Bahrain-based investment firm Arcapita for €620 million ($854 million) in June last year.

Opinions of domestic GPs are generally favourable. “Like many institutions we began investing in the local market first and our view is that some of the private equity firms operating in the Finnish mid-market are among Europe's best,” says Katja Salovaara, a portfolio manager at Ilmarinen Mutual Pension Insurance Company with responsibility for investing in private equity funds. Their success means that many Finnish funds can invariably meet their relatively modest fundraising targets mostly or wholly from existing investors, which tend to be those Finnish institutions, like Ilmarinen, that have backed them since inception. Among the more prominent of these firms are: MB Funds, which closed its latest fund in the summer on €250 million; Sentica Partners; Midinvest Management; Sponsor Capital; and OKO Venture Capital, the private equity arm of OKO Bank, Finland's third-largest banking group. A new firm, Intera Equity Partners, joined this established group earlier this year. Headed by former Capman senior partner Tuomas Lang and ex Leonia Banking Group CEO Harri Hollmen, Intera posted a first close of its debut fund on €85 million in June. The fund has a final target of €100 million.

According to local professionals, Finnish funds have been largely unaffected so far by the heated debates about the morality of private equity investment that have put their peers elsewhere in Europe under the microscope. This seems surprising in a Nordic country where social welfare is such a priority (in neighbouring Sweden, for example, which has a similar model of government, buyout professionals have found their levels of personal wealth subjected to intense scrutiny).

Ville Kivelö, a co-founder of the Helsinki office at German and Nordic M&A advisory firm MCF Corporate Finance, is not alone in struggling to identify a reason as to why Finnish private equity has remained off-radar. “All tax information in Finland is made public,” he points out, “and this means that the press has frequently run stories about the salaries of chief executives of listed companies. But criticism of private equity has been almost nonexistent. Coverage has, on the whole, been quite favourable.”

One reason for private equity's charmed life in Finland is likely to be that examples of the highly leveraged mega-buyouts that have generated most controversy elsewhere are extremely rare in the country. Nonetheless, there is still a general sense of surprise and relief that the asset class is viewed agnostically at worst and, at best, seemingly with a degree of admiration.

One source notes the favourable coverage afforded to Primaca Partners, a domestic fund launched two years ago that raises capital on an evergreen basis from co-investors rather than through an LP structure – and, as a result, stresses its ability to provide long-term support to portfolio companies. The source says: “They have had very positive coverage – you could argue almost too favourable. It's not like they're a charity. They'll sell for the right price.”

The image of private equity also looks good in the eyes of Finnish management teams. Says Hannu Isohaaro, a partner and Finland country manager at 3i Nordic: “Managers have seen many successful exits and have seen people enjoying the fruits of their success. Therefore, it's quite easy for us to talk to management teams. How owners view us is probably the bigger question.”

The benign backdrop against which private equity operates in Finland seems fitting within the broader context mentioned at the outset: namely, the Finnish economic success story. But while, as also noted, possible malfunctioning in the broader economy now appears to be prompting a little self-examination, a similar feeling of vulnerability within the private equity market is also now discernible.

After all, another talking point in Helsinki during PEI's visit was the news that emerged in August, first revealed on sister website, that Stockholm-based EQT was overhauling its Helsinki office. The move saw three senior deal professionals depart the company, with senior partner Udo Philipp drafted in from EQT's German operation to run Helsinki on an interim basis.

The move was designed as a proactive step to renew EQT's Finnish operation and help the Helsinki office – which has not made an investment since 2005 – replicate the firm's strong performance elsewhere in Europe. “The other offices in the network are moving forward exponentially, and the Finnish office has not been keeping pace,” an investor said. “The firm wants to bring the same level of dynamism as it has elsewhere.”

While ripples on the normally calm surface of a starred investor such as EQT naturally grab attention, it could be argued that isolated examples such as these say little about prospects for the market as a whole. In this respect, of more concern is a feeling – widely expressed – that sources of deal flow are becoming limited for Finland's growing band of GP groups.

“There are quite a large number of players but the number of deals is not so huge,” says Pekka Hietaniemi, an executive director in the Helsinki office of intermediate capital provider Nordic Mezzanine. “Since 1999 we have viewed Sweden as the largest Nordic market and Finland as a place where the tap tends to get turned on and off. You get periods where it can be pretty dry.”

Opinions of secondary buyouts have, of course, changed markedly since the days when they first appeared on the European landscape. Many people today – including, conveniently enough, many in the limited partner ranks – tend to view such deals as a valid evolution from one phase of a company's growth to the next. Nonetheless, where such deals come to dominate, questions may remain about a market's ability to offer attractive opportunities from other sources.

In Finland, it is notable that many recent deals have been of the secondary variety. Examples include: Eltel Networks, a telecom firm sold by Industri Kapital to 3i; Inspecta, a testing, inspection and certification business (MB Funds to 3i); A-Inspection, a driving services firm (MB Funds to Bridgepoint); Komas, a supplier of mechanical sub-assembly systems (Midinvest Management to CapMan); and Keycast, a maker of cast steel parts (OKO Venture Capital to The Riverside Company). Further examples are plentiful.

For the time being, there is little to disturb the smooth progress of both the Finnish economy and its small but highly credible private equity market. But until questions are answered regarding the long-term sustainability of both, the Finnish success story is still awaiting confirmation of a happy ending.