NestCap acquires profitable SMEs with proven business models and long-term value creation.
NestCap'i partner Ivo Remmelg. Author: Andras Kralla
How to exit without exiting? The Swedish model to the rescue..
Keeping up with business news isn’t the most enjoyable activity for many entrepreneurs these days – one crisis is chasing after the other, and businesses must weather themselves for storms on every imaginable front. Inflation, health crises, fuel and energy crises, disruptions in supply chains… the punches just keep coming in. Of course, there are some entrepreneurs who see opportunities in challenging times but formulating a clear plan and following it in an unpredictable cluster of crises is a near-impossible task for even the most prescient fortune tellers. Uncertainty burdens and depresses and makes one think existential thoughts.
Still, there have been several news bulletins about increased activity on the M&A markets, as several prominent entrepreneurs have opted for selling away the fruits of their labours. Another interesting trend in the business news has focused on ensuring progeny and succession in family businesses. The timing is perfect for these topics to emerge now, as a 2018 survey by business daily Äripäev calculated that the majority of entrepreneurs fall in the 34-44 age group, yet over 20 thousand business owners are aged 55 and over. This is the age when people start asking themselves - “how do I go on from here?”
Family succession isn’t always an option in the corporate world
What choices are left to entrepreneurs who have been building their business on their own or with a few friends for the last 30 years? 60-year-olds are incredibly vital, still eager to enjoy the best that life can offer and yet keen to maintain an active role in the business community as well. However, decades of stress and working ridiculous hours have often left their mark on their health and their family relations, and let’s face it – any successful business leader would like to take a moment to enjoy their achievements without losing their grip on the game. Spending a long time doing something monotonous with the same people may also lead to fatigue or the realisation that a change is needed for either the founder or the business to reach new heights and set new goals.
Can the business be trusted in the hands of the next generation? What if there is no desire to continue in the family business? There aren’t too many success stories of family dynasties in the Estonian business community, because not everyone is born a natural business leader or a visionary founder. Old grandpa’s farm didn’t stay afloat forever, even though the crop yield was excellent and there was a shiny new car in the garage. Most successful companies in fact fail to maintain their success for decades. An article published by KPMG in 2015 stated that the average lifespan of a Fortune500 company is 30-40 years, just barely over the span of a generation. New competition emerges, new technologies become available and the dynamics of conducting business are in a constant flux. Rooted preferences and methods become an obstacle, which may lead businesses on the path to self-destruction.
Selling to competition may hurt staff and partners
Possibly the easiest way for unburdening oneself completely from a business shareholding would be selling to a competitor. Any enterprise, which after years of hard work and dedication has found success in a particular niche, is of great interest to its competitors as a potential asset for increasing market share or entering uncovered export markets. This however raises concerns over safeguarding the interests of the company’s partners, clients, and staff. How to protect them from changes which might hurt their well-being? These stakeholders and their input have been largely responsible for the success of any corporate entity, as most partnerships are built on years of cooperation and loyalty, which the new owner may not value as highly.
Successful Estonian entrepreneurs have certainly been approached at different times by various funds interested in acquiring their holdings. The founder is left with a wad of cash, but without control over the enterprise. Add to this the regret over seeing your crown jewels boosted up and sold to an even more anonymous owner only a few years later at a considerable profit, and the result can be compared to a bitter hangover after missing out on the jackpot despite winning some petty cash. The joy of seeing some extra zeros on your balance statement could be short-lived, as inflation voraciously claims its stake of the pie and the pressure to find a relatively risk-free asset class for safekeeping investments and cash resources builds up to a panicky frenzy. Several business founders have admitted that if given the possibility, they would invest the profits from selling their businesses back into their companies, as it’s the safest investment they know personally. However, most growth funds are not interested in such partnerships and although the company may witness a new and stronger level of corporate governance, the original founders have very limited options for enjoying these benefits after selling their majority stakes.
The Swedish model for investing in SMEs
There isn’t a single investment vehicle on Estonian or other Baltic stock exchanges investing in local SMEs, offering partial exits to founders and allowing investors to participate in the success of these enterprises. Sweden on the other hand has dozens of such perpetual investment funds consolidating successful SMEs and listing the group assets on the stock exchange. The focus isn’t on earnings from selling assets, but on improving the corporate management quality, improving export capabilities, and achieving economies-of-scale effects for the portfolio enterprises over several decades. The most prominent Swedish funds operating in this segment are e.g., Volati, Storskogen, Teqnion, Röko and Novax.
The benefits of this model include keeping the original owners involved in their businesses, the possibility to swap a share of holdings for cash and the remainder for equity in the fund. This approach effectively solves a variety of issues, ranging from how to re-invest the cash-out, how to ensure a reasonable living standard for the next generations and how to maintain the stability and export competitiveness of the enterprise. New investors will find access to an alluring asset class that would normally be out of their reach. Listing each individual enterprise separately for public trading would be inefficient and resource-consuming but consolidating dozens of successful SMEs into a single group to be listed on a Scandinavian stock exchange could bring some spark back into the eyes of Estonian entrepreneurs and pension fund managers.
Under the radar
Nestcap has been quiet about the activities. That does not mean, nothing is going on. You can have first peek what has been cooking there from our Partners' linkedin post.
You can see the whole post by following this link.
What I have been cooking for a last year? I guess, now is right time to make it public.
2021 was pretty active with Angel investments, scoring 21 startups with either follow-on or first ticket. But as you may well know, typically 1 out of 10 invested startups becomes a success.
That’s why I have started with my partners Ott Jalakas, Martin Hoolma and Avo Kaasik a new fund https://www.nestcap.ee. It is a SME buyout fund, acquiring profitable growing companies in Baltic Sea region. Our fund is different from Private Equity, Venture Capital and Secondary funds who need to exit their holdings typically within 10 years without providing any liquidity in between and where upside is not guaranteed. Our fund will be evergreen and with a target to be listed in few years.
Why did we start it? We could have been sailing across the seas, fishing and enjoying life. Why this struggle?
We can not just sit still.
It has limited downside, as we only invest into growing profitable companies.
We are copy-pasting this model, as it works really well in Sweden, Canada and lot of other places.
It has promising upside, diversification and liquidity.
Most of those SME have started earning money from day 1 without being over-invested by the Venture money.
It is very nice opportunity for SME owners to diversify and get some liquidity by becoming investor themselves in our fund.
Have not really seen any reasons, why not.
Our current licenses allow to have it sized up to 100 million €. As it is our baby, we invest our money and are all in, but we would also like to share this opportunity with other investors (this is not public offering- it’s only intended to friends and acquaintances).
I hope I can post some good news about our first acquisitions pretty soon!
The Fund is officially registered!
This is very good news for Estonian entrepreneurs, who have done a lot of hard work and achieved good results. It's time to switch gears.
NestCap founders are all entrepreneurs himself and have good experience in building companies from the scratch or jumping in at a later stage to make them flourish.
Sure, every company is different, but there are some basic things, it's the lifecycle of the people and their companies. With the explosive growth of the internet, all has changed.
The market is not just 400 km from your location, the market is now global. Communication instant and supply chain international.
If the entrepreneur has been doing his consistent job from day to day for 20+ years, growing just a bit faster than inflation, then the world around him has changed.
Startups are coming and taking your job. It has been seen with companies like Bolt, now way larger than all Estonian taxi companies combined, and Wise, whose market cap is 7 Billion, that's 7 times larger than LHV, the bank in Estonia.
Same as always does not work anymore. Now more than ever, entrepreneurs have to think globally and understand the financial world, mergers, acquisitions, stock markets, job markets, pandemics, commodity markets, economies of scale, inflation, and billions of other things.
This is not just possible while running your everyday business! Shall those entrepreneurs bequeath their company to their children with all those uncertainties?
NestCap will come to help. We offer at least 2 times better valuation to the company owners, liquidity, diversification, strong financing, and peace of mind.
Come and talk to us. Let's make the world a better place for you, your children, and your customers and suppliers! Together!