6 The Government’s positions on the supply of capital for Norwegian business and industry
The main tasks of the capital market are to channel capital to where it provides the greatest return on investment, to spread risk and facilitate payment and settlement. The capital market is business and industry’s source of external financing, and consists of both public and private players. In addition to providing financing of business and industry, owners can also contribute expertise vital for the companies. The Government views a diversity of ownership as a strength for business and industry’s access to capital and expertise.
In the Norwegian mixed economy, the State holds a relatively large percentage of the total share capital. At year-end 2005, the State owned 34.3 percent of the shareholder values on Oslo Børs. Foreign investors play a key role, and in recent years have accounted for 60 – 70 percent of daily trading on the Oslo Børs. In autumn 2005, foreign investors overtook the public sector as the largest ownership sector with shareholdings worth 37.1 percent of the shareholder values on Oslo Børs.
National ownership is one instrument that serves to ensure that companies retain their headquarters and research activities in Norway. Foreign ownership for its part serves to provide transfer of expertise from international environments. The development of the petroleum sector demonstrates the benefit of an interaction between foreign capital and expertise, and a strong national and state ownership commitment. State ownership as a form of organisation has provided a platform for Norwegian companies in the petroleum sector to develop expertise that in turn can be exported to other parts of the world.
One general problem in the capital market is that the party who requires capital and an external investor often have different information about the investment. If the enterprise has better information than the investor, this reduces the investor’s means of distinguishing good from bad projects. The result may be that investors are reluctant to invest in a venture in spite of the fact that its commercial prospects seem to be sound. The disparities in information between company and investor seem to be greater when the company is at an early stage of its development.
The Government maintains that on the whole there is no shortage of capital in Norwegian business and industry. However, it believes that challenges still exist in segments of the capital market and that the future will reveal a need for strategic investments. State ownership may prove decisive in ensuring head-office functions of key enterprises in Norway in the years ahead. We are seeing an increased tendency for Norwegian knowledge based enterprises to be sold off as soon as they reach international standing. Norway is reliant on good contact with strong international competency and capital environments, and in many instances the sale of a company may result in our failure to establish long-term knowledge and competency environments in Norway. We risk undermining the results of long-standing research and development, which are not in any way reflected in short-term share prices. Consequently, we need to devise a better strategy for ensuring national ownership of key enterprises in the knowledge society. The commitment to the Soria Moria Declaration will contribute to remedy this.
Promoting investments in the capital market also means having promising projects to invest in. Measures to bring projects to a stage at which they become commercially attractive to private capital may also be a step towards promoting value-creating enterprise.
6.1 Access to capital for start-ups/entrepreneurs
Entrepreneurs have a need for both capital and expertise concerning business opportunities and further development of their products. That need varies however, depending on where in the start-up phase the individuals find themselves. The earlier on they are in the phase, the greater the need for a system whereby the investment of capital can be linked into an offer involving demand for «knowledge services».
The Norwegian Government’s Soria Moria Declaration states that the Government will be looking to establish an entrepreneur bank. There are already state schemes in operation for promoting enterprise start-ups. The majority of the existing initiatives are coordinated under Innovation Norway. The authorities offer various types of scholarships, grants and loans for the development and establishment of enterprises, for developing and adapting inventions and for participation in incubators. In some of the schemes, the districts are prioritised. Through the innovation policy instrument system, dedicated programmes have also been set up for expertise and networks.
An investment bank would be one means of further coordinating measures aimed at start-ups. There may be a need to facilitate coordination in cases where it is appropriate to employ different schemes simultaneously in a project, and in order to streamline a project and simplify applicants’ opportunities for finding out about all the various schemes.
On this basis, the Government intends to institute a survey of how start-up financing can be improved, including assessing the establishment of an entrepreneur bank, improvements to the instruments for start-ups under Innovation Norway, and other instruments.
6.2 Commercialisation of research-based business concepts
The Government believes that Norway still faces a challenge in exploiting its research investments for value-creating undertakings.
Increasing investments in the capital market is also a question of having sound projects to invest in. Commercialising the results of research promotes the development of new products, services and new enterprises. Thus, the commercialisation of research results is significant for the adaptability of Norwegian business and industry. By fostering conditions conducive to the uptake of research-based innovations with commercial potential, Norway will be able to generate further profitable business activities. This applies to research-based innovations from both research institutions and private firms.
Through legislative amendments in recent years, the universities and technical colleges have gained new opportunities and a more explicit responsibility for commercialising their research results. The universities and technical colleges have seen a considerable increase in activity in this area. The Government will further develop the instruments that support and follow up on the commercialisation activities ongoing at Norway’s research institutions.
There are also grounds for questioning whether Norway has untapped potential for commercialisation of research results in the shape of spin-offs from existing business and industry. The Government will therefore be following up the instruments for commercialisation of research-based innovations in Norwegian enterprise.
Figure 6.1 There are great expectations in the market for further commercialisation of farmed cod. Fisheries research is responsible for the National Cod Breeding Programme. The new breeding facility at Kraknes near Tromsø is currently under commissioning. Experience garnered from salmon breeding indicates that an active breeding programme is one of the most important factors in successful commercial production of cod. Cod fry is particularly sensitive to the initial feed. The photo shows feeding of cod in tubs at Ewos Innovation.
Within the framework of research grants, the Government will be giving priority to initiatives that contribute to enhance commercialisation of research-based business concepts.
6.3 Increased State capital in the market for non-listed shares
In the Government’s opinion there is no apparent lack of capital in the market for non-listed shares (often referred to as the private equity market, see box 6.1). Firstly, this is due to a substantial increase in access to capital in recent years. Secondly, the problem is just as closely linked with access to sound and relevant venture projects. However, this does not mean that all projects that should have financing actually get it. A filtering of projects in these phases is commonplace. A US study reveals that only 1 per cent of enterprises that applied for investments from projects funds actually secured them (Lerner 2002). Nonetheless, the Norwegian Government believes that there is justification for the State to engage in this market.
Textbox 6.1 In collaboration with the private sector the State has increased access to private equity in Norway
Private equity (PE), or active owner capital, is the designation for share capital in non-listed companies. The market is an important source of financing for new start-ups and young companies. The market also finances restructuring of more established undertakings.
In private equity, investments in companies for capital owners are placed by specialised investment managers (so-called venture and buyout funds). Early-stage companies or companies undergoing restructuring require not only capital but also expertise and networks in order to succeed. This is offered by specialised fund managers. By actively contributing both capital and expertise, the aim is to generate growth and greater profitability. Private equity funds are therefore important for innovation and readjustment in an economy.
The Norwegian private equity scene has evolved rapidly in recent years. The establishment of the public investment fund Argentum Fondsinvesteringer in 2001 with a capital base of NOK 2.45 billion, has contributed to this growth. As an investment fund, Argentum invests in specialised investment companies who in turn invest in companies (fund-in-fund model). Argentum buys only minority shares and the business is restricted to the Norwegian and Nordic PE market. The company is headquartered in Bergen, with a branch office in Oslo. As at mid-May 2006, Argentum had committed itself to investments worth approx. NOK 2.6 billion in 17 different funds. This has brought, or will bring, Norwegian business and industry innovators approx. NOK 6.7 billion in risk capital from Norwegian and international investors.
Through a government seed funding scheme managed by Innovation Norway, long-term, subordinate loans are offered to private investment companies who focus on investments in the initial phases of start-up enterprises.
In the period 1998 – 2000 the seed funding scheme served to establish one national and five regional seed funds. Committed capital in these funds at mid-2006 totalled NOK 776 million, of which loans from Innovation Norway accounted for NOK 388 million.
In 2003 and 2004 it was decided to establish further seed funding schemes. Through the new seed funding schemes the aim is to establish ten new private seed funds. Four funds are to be national and six are to be geared to the Norwegian districts. Fully capitalised, the new seed funds will have NOK 2.4 billion under their management, of which NOK 1.37 billion are subordinate loans from Innovation Norway. At mid-October 2006, three national and one district fund have had committed the necessary private capital.
Source Argentum and the Ministry of Trade and Industry
Purely from the market perspective, there would normally be reason to assume that the Norwegian State, as a substantial financial actor in both the Norwegian and international financial markets, would keep some of its capital in non-listed enterprises in order to achieve satisfactory diversification of its portfolio. A second argument for State involvement in the market for unlisted shares is the institutional basis. The ventures segment is a relatively recent phenomenon in Norway. It may therefore be the case that the institutional basis in Norway is weakly developed compared with other countries. A public fund based on market return requirements, i.e. with an objective of achieving as high a financial return on investment as possible has the external effect of professionalizing the market.
A third reason is that the State has the option of engaging in projects if they would be profitable for socioeconomic purposes and would not be able to secure financing through private schemes. State involvement on these grounds requires evidence of such profitability potential and that the authorities are in a position to realise this potential. The anticipated return on such projects should be proportional to the risk they represent.
6.3.1 Argentum
Argentum is a government-owned investment company that participates with minority shares in specialised private equity funds. Besides requirements regarding return on investment, a fund-in-fund is charged with developing manager environments by imposing requirements and providing follow up for the investment companies. Argentum has had this type of role in developing the Norwegian market for non-listed enterprises. Increasing investments in Argentum will serve to increase the risk-adjusted anticipated return on the State’s total financial placements. This type of solution also allows existing expertise on this market to be utilized, which increases the probability of a positive return on investment from the fund. One positive external effect of increased investments in Argentum will also be that this contributes to further building of the market’s professionalism.
On that basis, the Government will be following the capital situation for Argentum, including performing a detailed evaluation, before possibly returning to the Storting with questions concerning the supply of more equity capital.
6.3.2 Seeds
The Government maintains that insofar as capital is lacking in the Norwegian capital market, this is most likely in the earliest phases. In recent years, the State has been involved in setting up a number of new seed funds under private ownership, to which the State contributes risk mitigation and subordinate loans. The 10 new seed funds will in total furnish the market for seed ventures with NOK 2.4 billion if they are fully subscribed. Of this, the government loan amounts to NOK 1,367 million. It is expected that private investors will provide the remainder. The Government will be assessing whether the State should increase its contribution to the seed funds, including reviewing whether it is more expedient to contribute equity rather than loan capital through a fund-in-fund structure of the same type as Argentum. This review will be considered in the context of the general review of requirements to be performed, cf. Chapter 6.5, Reviews of other funds.
6.4 Marine funds
The Government will be contributing to opening up opportunities for increased value creation, as it exists in the marine sector. The marine sector consists of traditional commercial fishing, aquaculture and sea farming, the fisheries industry, service providers and producers and new industries based on the exploitation of marine resources. The majority of these activities are located on the Norwegian coast and represent an important foundation for profitable and secure employment.
The State is currently a substantial contributor to public investments in relevant marine research in which the commercialisation of research is also a prioritised area. The industry itself also contributes actively to financing through the Fishery and Aquaculture Industry Research Fund with close to NOK 100 million per annum (tax on exports).
The already established seed funds are also a source of capital for projects in the marine sector. At the same time, the marine sector receives considerable financial support through the instruments managed by Innovation Norway. Innovation Norway also manages a marine value-creation programme, amounting to a proposed framework of NOK 75 million. As of 2007, within the value creation programme, funds can be used for selected development projects capable of marketing the marine sector and generating higher prices in the Norwegian enterprises’ end markets.
Norway is currently a large supplier of unprocessed fish. The high level of costs in Norway is one of the factors that make it challenging to compete in the fish-processing sector. There are also considerable risks associated with the necessary innovations in technological development, equipment and new solutions for strengthening the marine value chain’s links to markets with high purchasing power. Technology and process development will promote better use of the advantage inherent in having direct access to the fresh raw materials.
The development of new aquaculture species is a promising area for future value creation in the marine sector. However, one fundamental problem is that it takes a long time to get fish breeding, disease and survival generally under control. Fish farming is also risk-laden because of the long production time from when the fry is released into the pens until the fish are ready for harvesting, while the capital tied up in the biomass in the sea is substantial.
The exploitation of marine resources through biotechnology / bio prospecting also holds value-creation potential, but the risk is very high inter alia due to the fact that it can take up to 10 years to provide return on investment. Commercialisation of products based on biotechnology usually entails intensive and research-based development processes and costly documentation of the products used as ingredients in medicinal products and the like. Commercialisation therefore requires substantial access to long-term, expert and venture capital (both equity and loan capital).
It is important that developments in the marine sector are achieved jointly between private and public actors, and private actors play a key role on the financing side. Government aid will consist of venture capital, including owner’s capital.
On that basis, the Government propose to set up a separate national fund for marine industries. The final structure and organisation of the fund will require further consideration.
6.5 Reviews of other funds
The Government will review the need for and the possible structure of national funds in order to promote improved access to capital in areas where a special need is identified.