32. Financial risk management
The purpose of financial risk management is to ensure that the Group has adequate and effectively utilised financing as regards the nature and scope of the Group's business. The objective is to minimise the impact of negative market development on the Group with consideration for cost-efficiency. The financial risk management has been centralised and the Group's CFO is responsible for financial risk management and control.
The policy of the management is to constantly monitor cash flow forecasts and the Group's liquidity position on behalf of all Group companies. In addition, the Group's principles for liquidity management include rolling 12-month covenant assessments. The loan covenants are related to equity ratio and net debt / fund investments ratio. During the financial year all the covenants have been fullfilled.
The Group has a Monitoring team, which monitors the performance and the price risk of the investment portfolio (financial assets entered at fair value through profit and loss) independently and objectively of the investment teams. The Monitoring team is responsible for reviewing the monthly reporting and forecasts for portfolio companies. Valuation proposals made by the case investment professionals are examined by the Monitoring team and subsequently approved by the Valuation Committee, which comprises the Chairman of the Investee Committee, the Group CFO and Heads of investment teams.
a) Liquidity risk
The Group’s cash flow is a mix of predictable cash flow from management fees received and highly volatile carried interest income. The third main component in liquidity management is the timing of the capital calls to the funds and the proceeds received from fund investments.
Management fees received from the funds are based on long-term agreements and are targeted to cover the operational expenses of the Group. Management fees are relatively predictable for the coming 12 months.
The timing and receipt of carried interest generated by the funds is uncertain and will contribute to the volatility of the results. Changes in investment and exit activity levels may have a significant impact on cash flows of the Group. A single investment or exit may change the cash flow situation completely and the exact timing of the cash flow is difficult to predict.
CapMan has made commitments to the funds it manages. Most of the existing commitments are typically called in to the funds within the next four years. As at 31 December 2012 the undrawn commitments to the funds amount to €22.5 (€24.4 million) and the financing capacity available (cash and third party financing facilities) amount to €19.4 million (€31.9 million).
The Group has the following financing arrangements:
The Group had a €15 million long term revolving credit facility from which €5 million was drawn at the year-end. The long term loan in the balance sheet €30 million is fully drawn down, instalment half-yearly. Hybrid bond, no maturity date, call option in 2013 (€29 million drawn at 31 December 2012).
Maturity analysis
31 December 2012, € ('000) Due within
3 months
Due between
3 and 12 months
Due between 1 and 3 years Due between
3 and 5 years
Non-current financial liabilities
Interest-bearing loans and borrowings 20,000 2,678
Current financial liabilities
Accounts payable 860
Interest-bearing loans and borrowings 5,000 4,785
Accrued interests 83
Maturity analysis
31 December 2011, € ('000) Due within
3 months
Due between
3 and 12 months
Due between 1 and 3 years Due between
3 and 5 years
Non-current financial liabilities
Interest-bearing loans and borrowings 28,753
Current financial liabilities
Accounts payable 432
Interest-bearing loans and borrowings 3,125 3,125
Accrued interests 21
b) Interest rate risk
The Group's exposure to interest rate risk arises principally from long-term liabilities. The Group manages cash flow-related interest rate risk by using partly floating interest and floating to fixed interest rate swaps. The objective is that at least half of the interest rate risk is restored to fixed with regard to the loan maturity date.
The interest rate for the hybrid bond is fixed to 11.25%, payable semi-annually. The bond has no maturity but the company may call the bond on 18 December 2013 and then the interest will change, 3 months Euribor + 11.236%, at least 14.25%, payable quarterly.
Long-term loan receivables from Maneq funds are fixed to five-year interest rate periods.
Loans according to interest rate
€('000) 2012 2011
Floating rate 7,678 13,125
Fixed rate 15,000 15,000
Total 22,678 28,125
The effect on profit after tax
€('000) 1 %- change in interest rates -1 %- change in interest rates 2%- change in interest rates
Floating rate 58 -58 116
Excluding the change in fair value of derivative instruments.
c) Credit risk
The Group's exposure to credit risk is limited mainly to loan receivables from Maneq funds. Maneq funds make investments in portfolio companies alongside CapMan funds. CapMan typically has a 35-40% stake in these companies and it finances them with senior and mezzanine loans.
The analysis of possible credit provisions and impairment of loan receivables takes into account that fund solvency observes the J-curve pattern, which is common for private equity funds. The fair value of funds typically falls below acquisition cost in the early investment phase until the first realisations are made. For this reason a more reliable assessment of credit risk may be performed approximately four years after the initial investment date, as repayment solvency is endangered only if the average exit multiple within the investment portfolio equals less than one. CapMan has a historical exit multiple of approximately 3x. In addition the assessment of credit risk incorporates the portfolio companies' expected realisation returns, which are often greater than fair value at that time.  
Loan receivables from associated companies and others
2012
€ ('000) CapMan's receivables total Receivables total
(incl. write-downs)
Capital account at fair value
(excl. external debts)
Funds where fair value < receivables 12,385 12,385 10,089
Funds where fair value > receivables 10,765 10,765 12,760
23,150 23,150 22,849
Other loan receivables 1,217 1,217 n/a
Total 24,367 24,367
Loan receivables from associated companies and others
2011
€ ('000) CapMan's receivables total Receivables total
(incl. write-downs)
Capital account at fair value
(excl. external debts)
Funds where fair value < receivables 8,467 8,467 5,922
Funds where fair value > receivables 15,422 15,422 16,656
23,889 23,889 22,578
Other loan receivables 883 883 n/a
Total 24,772 24,772
The funds with fair value smaller than the loan receivables are primarly new funds. In these funds the value creation related to portfolio companies is still at earlier stage and therefore no write downs have been made to the loan receivables.
d) Currency risk
CapMan has subsidiaries outside of the Eurozone, and their equity is exposed to movements in foreign currency exchange rates (Sweden, Denmark and Norway). However, the Group does not hedge currency as the impact of exposure to currency movements on equity is relatively small. The group is not exposed to significant currency risks, because Group companies operate in their primary domestic markets.
e) Price risk of the investments in funds
The investments in funds are valued using the International Private Equity and Venture Capital Valuation Guidelines. According to these guidelines, the fair values are generally derived by multiplying key performance metrics of the investee company (e.g., EBITDA) by the relevant valuation multiple (e.g., price/equity ratio) observed for comparable publicly traded companies or transactions. Changes in valuation multiples can lead to significant changes in fair values depending on the leverage ratio of the investee company.
Sensitivity analysis of fund investments (excluding funds of funds)
2012 2011
Impact on result before taxes, M€ Impact on result before taxes, M€
Change -10% Change +10% Change -10% Change +10%
Average profitability of portfolio companies -4.84 5.07 -6.10 6.08
Average peer group multiples -6.21 5.99 -6.90 6.85
EUR/SEK FX rate 1.75 -1.43 -0.33 0.27
EUR/NOK FX rate -0.87 0.71 -0.44 0.35
The group's assets measured at fair value at 31 December 2012.
The different levels have been defined as follows:
Level 1 Quoted prices (unjusted) in active markets for identical assets
Level 2 Other than quoted prices included within Level 1 that are observable for the asset, either directly (that is, as price) or indirectly (that is, derived from prices)
Level 3 The asset that is not based on observable market data
€('000) Level 1 Level 2 Level 3 Total
Investments at fair value through profit and loss
Investments in funds 4,008 70,457 74,465
The fund investments in level 3 include mainly the investments in the unlisted companies, and those have no quoted market values.
The group's assets measured at fair value at 31 December 2011.
€('000) Level 1 Level 2 Level 3 Total
Investments at fair value through profit and loss
Investments in funds 3,631 66,536 70,167
The fund investments in level 3 include mainly the investments in the unlisted companies, and those have no quoted market values.