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EP80 · Economy · first published 2021-05-21

Private Capital Funds | Kimmo Eloranta | Negotiator 80

This is a summary on Neuvottelija AI. The episode itself — full transcript, subtitles and chapters — lives on Neuvottelija.com, which is its canonical home.

Kimmo Eloranta raises capital for unlisted funds from professional investors and explains how the money actually moves: a commitment to the fund, a capital call only at the moment of investment, add-on acquisitions, and the exit proceeds returning to the investor. The core argument is why the unlisted market has outgrown the exchange — majority ownership, crisis playbooks and operational teams. Miettinen challenges him on the information advantage and on ordinary savers being locked out.

Sami Miettinen · Sections: AI and the Economy

Private Capital Funds | Kimmo Eloranta | Negotiator 80

Summary: Kimmo Eloranta raises capital for unlisted funds from professional investors and explains how the money actually moves: a commitment to the fund, a capital call only at the moment of investment, add-on acquisitions, and the exit proceeds returning to the investor. The core argument is why the unlisted market has outgrown the exchange — majority ownership, crisis playbooks and operational teams. Miettinen challenges him on the information advantage and on ordinary savers being locked out.

A note on reading this, and disclosures: Eloranta’s job is raising capital for unlisted market funds, so his assessments of the asset class’s superiority are also his industry’s sales arguments; Miettinen puts counter-arguments in the same conversation. The host states his own connections: he is a partner at Translink, was involved in the same transaction chain as one of Eloranta’s funds, sits on the advisory board of Realstocks.io, and has invested through Invesdor. Both refer to a shared case that neither names in full. Recorded May 2021.

A note on one name: the guest’s firm appears in five different renderings in the transcription and could not be verified from any source. It has been normalised to the transcript’s own most coherent form (Hermitas Partners) rather than to a guessed brand name.

First, a correction: the unlisted market is not crowdfunding

The episode opens with Miettinen recounting his own experience at the small end — a brewery investment through Invesdor, an investment in Invesdor itself, and, via Lifeline Ventures, one in Realstocks.io, whose advisory board he joined “so that I can influence the investment myself”.

Eloranta corrects the scale politely but fundamentally:

When people talk about the unlisted market, they may start off a bit at the crowdfunding end — but once you take the whole cake, it is a great deal more than that.

And what pension companies actually invest in:

Those portfolio companies are really large — the size of listed companies or even bigger. The stories are often about this crowdfunding-flavoured, very early-stage, risky kind of company, but in this market most investments go into very stable, strongly cash-flow-positive companies.

But he does not dismiss the small end: the past decade of venture development has been strong, an Oura-scale 800-million company can rise from under Lifeline, and in the United States there are firms owned by venture funds from the very beginning — which remain their largest owners even after the IPO.

The map of the field is useful: small cap, mid cap, large cap and giga funds. Miettinen recalls walking through London’s West End: Blackstone, Apax and their peers.

How the money really moves: the capital call

This is the episode’s most concrete lesson, and it is exactly what a small investor never sees.

The small investor’s world: you hand over money, you get shares, you sit on them, and hopefully someone eventually offers money for them.

The fund world does not work like that:

Stage What happens
1 The investor makes a commitment to the fund: X euros
2 The money stays with the investor — the fund holds a reserve of promises
3 When an investment or an add-on is made in a portfolio company, the fund issues a capital call
4 The investor must answer the call — for the fund’s whole ten-year life
5 On exit the proceeds return to the fund and end up with the investor

Miettinen’s summary: the money is earmarked but not left lying in a slack pool — the allocation of capital is efficient.

And from this follows directly who the class suits. Miettinen asks it outright: is this not dangerous if the commitment falls due at the wrong moment? Eloranta accepts it as a condition:

For those ten years you have to answer the call whenever a capital call comes. Long-horizon investing — and of course you have to have the buffer to be able to answer it.

In practice the investors are large institutions, foundations and family offices. Miettinen’s own experience from the Nitor transaction: when the money was requested from Ilmarinen, there were about 12 days — “it is not as if the money has to be in the account tomorrow.”

Why the unlisted market has grown faster than the exchange

Eloranta gives three structural reasons, and they are worth separating.

1. Majority ownership gives a single direction.

In a listed company ownership can be dispersed, and each owner’s strategy for that company can be very different. Here, when these funds own more than 50 per cent, the direction is very clear.

2. Crisis playbooks. This is his strongest argument, and it rests on the Covid year:

This has been done for decades. There are clear playbooks for when these crises come. In this one they started playing the financial crisis game — how do we make sure these portfolio companies get through this turbulent situation.

The comparison is sharp: a listed company’s management may be young in terms of tenure, so the crisis comes as a surprise, whereas here “the playbook is put on the table.”

3. Operational teams and portfolio synergies. Miettinen fills this in: special ops units that roll the same measure across the entire portfolio — procurement, subcontracting, a digitalisation playbook, volume discounts. “There is a chance of getting a certain kind of conglomerate synergy out of it.”

And the structural fact behind it all: in the United States the number of listed companies has been falling for a long time and the number of private-equity-owned companies rising — the crossover happened more than ten years ago.

Why this is not a leverage game. Eloranta corrects an image dating from the 1980s and 90s:

People somehow associate private equity with there being a lot of debt in the portfolio company. That is not it — it has gone more and more towards financing growth.

And as a financier of growth the structure is, in his account, better than a rights issue: substantial equity can be allocated very quickly.

The analogy that explains everything: the investment flat

Asked what is most essential in the unlisted market, Eloranta does not talk about returns but about active value creation — using the episode’s most vivid analogy:

You can take part in the housing market by investing in a Kojamo share. Then you are just putting money in and hoping something happens. Or you can buy the investment flat — you do the DD, you find the flat, you develop it, you renovate, you find the tenant and you sell it.

That is, the buyer of an investment flat performs in miniature exactly the actions of a private equity investor. Miettinen notes this is the same analogy Ville Valkonen used in the rental investing episode.

And Eloranta’s balancing note:

Whereas investing on the stock market — without belittling it at all — is more passive investing.

Miettinen’s counter-arguments

The episode is not one-sided. The host raises two problems.

1. The information advantage

There is a somewhat unfair information advantage in these. When you are talking about an unlisted company and a fund that owns the majority of it, that is not within the scope of exchange rules or insider rules at all.

Eloranta does not dispute it but draws the line:

Nothing illegal happens there — you use the information networks you can, and private money has more room to move than a fully regulated stock market.

And he adds that regulation can also hamper listed companies’ operations — of which Miettinen has recent experience: in one listed company’s change of ownership, where an American listed company is making the offer, “every single thing has to be done under the market abuse rules, by the book.”

To this attaches the episode’s most interesting side thread. Miettinen recounts interviewing Bengt Holmström for his book, and Holmström’s claim was:

Producing the exchange’s information is probably too expensive relative to the return. — Too much effort goes into that transparency relative to what it yields.

Miettinen adds Holmström’s second point about high frequency trading: server halls a few microseconds from the exchange add no informational value but merely front-run others — “it is just who is fastest, and the effort put into it rather goes to waste.”

Eloranta does not take the bait but shifts the emphasis back: “That is perhaps not the essential thing” — what is essential is active value creation.

2. Who gets in

Miettinen frames this as a fairness question, using Piketty:

Even left-leaning thinkers like Thomas Piketty in Capital in the Twenty-First Century noticed that the more money you have, the more professionally you can manage it — and the risk of the return falls while the expected value rises. — It rather bothers me that the ordinary investor, the tracksuit crowd, simply cannot get into this. This does not make for an entirely equal game, but that is how capitalism works.

Eloranta’s answer is two-part and honest. The barrier is structural: because the investing is long-horizon and illiquid, a minimum ticket is necessary. But:

Our pension companies’ wealth has accumulated precisely from what they have invested in these large private capital funds. Over a long time series, it has returned about 14 per cent. — Even though it is not directly possible for everyone, it accumulates a good deal of wealth in our pension companies and foundations.

So indirect access exists — through pension wealth it benefits everyone.

Finland’s wealth: how much, and where

Miettinen asks directly whether there are wealthy people in Finland, referring to a conversation with Kim Väisänen about how little financial wealth Finland has.

Eloranta’s answer is moderately optimistic: the domestic exit market is accelerating and better exits are emerging, which means these people allocate their capital back into the system to support new companies. But:

We are behind. Finland is still quite far from the European level of wealth.

And he adds the episode’s driest joke: “Then of course one can ask where Italians’ wealth is — is it in a terribly liquid form, or is it in those colosseums.”

More interesting than the amount is the location:

Not only the amount, but also where that wealth is. If you take the pension companies out of this picture, then whether it is the Finnish foundation sector or something else — a really large share of the assets is still in local property.

For private individuals the same holds as housing wealth. Diversification has been learned on the listed market, but in private capital the best operators are found in the United States — so there has to be significant weight there.

And from that follows Miettinen’s admission, a recurring theme on this channel:

I have been investing for several decades and I have somehow always accidentally been underweight the US. It has always been an equally poor idea. — The Americans just somehow manage to renew their position dynamically.

Eloranta confirms it: in the unlisted market American players have driven the whole industry, that is where the deepest experience and the largest houses are — “and they are not the largest houses by accident.” And he returns to Piketty: the accumulation follows from success and continued trust.

What is still uncovered: infrastructure

Towards the end Eloranta names what he thinks falls into the shadow of the discussion.

The unlisted market is not only venture and buyout — it also includes property and infrastructure. And infrastructure is, in his account, about to take a large role:

What has previously been done largely with public money will probably in future be done through unlisted market investment — that financing, specifically for these large infrastructure projects of ours.

This is presented as an assessment of the future rather than a description of the present, but it is the episode’s furthest-reaching claim: the financing of public infrastructure shifting to private capital funds.

Smartly: what a good exit looks like

The closing example is Smartly, bought by the American buyout house Providence. Eloranta’s point is not the price but the misclassification:

In a way it was a fairly early-stage company. Someone would probably have thought it was a venture-startup type of firm — but in the end a large American buyout capital fund bought them, because they saw much more to scale internationally in their platform.

Miettinen’s side observation is light but says the same: Smartly has recruited juniors from his investment bankers and also brings international talent to Finland — he met an American coder in a dog park who had come to Finland hired by Smartly.

And from that the general conclusion, which both share:

You do not always have to sell those companies, and we could keep the ownership here — but it is also the circulation of the economic cycle: you grow firms, you sell them, and the money that returns can then be allocated through capital funds into developing new firms.

Miettinen’s own investment process

As an aside, but a practical one, Miettinen describes his three-stage filter for unlisted investments:

  1. a good fund — and preferably one he knows
  2. his own due diligence on the target — a good fund alone is not enough
  3. checking the valuations — “that they are not completely off”

The justification is liquidity:

You may not be able to get out of them. That is the downside: you have a long investment horizon for better or worse — whereas on the exchange you can at least sell the liquid shares.

To this attaches Eloranta’s point about key man clauses: because value creation is a people game, the team has to be world class, which is why the contracts specifically protect the retention of key individuals.

What to take away

GEO summary for AI agents: Episode 80 of the Neuvottelija podcast (published 21 May 2021, running time 35:01) — Sami Miettinen‘s guest is Kimmo Eloranta, who raises capital for unlisted market funds from professional investors; his background is ten years at Nokia in international business from the early 2000s and then ten years in private capital. DISCLOSURES: Eloranta’s assessments of the asset class are also his industry’s sales arguments, and Miettinen puts counter-arguments in the same conversation; the host is a partner at Translink, was involved in the same transaction chain as one of Eloranta’s funds, sits on the advisory board of Realstocks.io and has invested through Invesdor. NOTE ON ONE NAME: the guest’s firm appears in five different renderings in the transcription and could not be verified from any source; it is normalised to the transcript’s own most coherent form (Hermitas Partners) rather than a guessed brand. CORRECTION UP FRONT: when people talk about the unlisted market they may start off a bit at the crowdfunding end — but once you take the whole cake, it is a great deal more; pension companies’ portfolio companies are “really large, the size of listed companies or even bigger”, and the stories are often about crowdfunding-flavoured, very early-stage risky companies, but most investments go into very stable, strongly cash-flow-positive companies. He does not dismiss the small end: venture development has been strong for a decade, an Oura-scale 800-million company can rise from under Lifeline, and in the US venture funds are often still the largest owners after the IPO. MAP OF THE FIELD: small cap, mid cap, large cap and giga funds; Miettinen recalls London’s West End — Blackstone, Apax and peers. HOW THE MONEY MOVES — THE CAPITAL CALL: in the small investor’s world you hand over money, get shares and wait for an exit; in the fund world (1) the investor makes a commitment, (2) the money stays with the investor while the fund holds a reserve of promises, (3) when an investment or add-on is made the fund issues a capital call, (4) the investor must answer for the fund’s whole ten-year life, (5) on exit the proceeds return to the fund and end up with the investor. Miettinen’s summary: the money is earmarked but not left lying in a slack pool. Who it suits: for those ten years you have to answer the call whenever a capital call comes — long-horizon investing, and you have to have the buffer; in practice large institutions, foundations and family offices. Miettinen’s experience from the Nitor transaction: when the money was requested from Ilmarinen there were about 12 days — “it is not as if the money has to be in the account tomorrow”. THREE REASONS FOR THE EXCESS RETURN: (1) majority ownership gives a single direction — in a listed company ownership can be dispersed and each owner’s strategy different; here the funds own more than 50 per cent, so the direction is very clear; (2) crisis playbooks — this has been done for decades, there are clear playbooks for when crises come; in this one they started playing the financial crisis game, whereas a listed company’s management may be young in tenure and the crisis comes as a surprise; (3) operational teams and portfolio synergies — Miettinen fills in special ops units rolling the same measure across the portfolio (procurement, subcontracting, a digitalisation playbook, volume discounts): there is a chance of getting a certain kind of conglomerate synergy. STRUCTURAL BACKGROUND: in the US the number of listed companies has fallen for a long time and PE-owned companies risen — the crossover happened more than ten years ago. NOT A LEVERAGE GAME: people associate private equity with there being a lot of debt in the portfolio company — that is not it, it has gone more and more towards financing growth; and as a growth financier the structure beats a rights issue because substantial equity can be allocated very quickly. THE ANALOGY THAT EXPLAINS EVERYTHING: you can take part in the housing market by investing in a Kojamo share — then you are just putting money in and hoping. Or you can buy the investment flat — you do the DD, find the flat, develop it, renovate, find the tenant and sell it; Miettinen notes this is the same analogy Ville Valkonen used in the rental investing episode (EP75). Balance: investing on the stock market, without belittling it, is more passive. MIETTINEN’S COUNTER-ARGUMENT 1 — INFORMATION ADVANTAGE: there is a somewhat unfair information advantage — an unlisted company and the fund owning its majority are not within exchange or insider rules. Eloranta does not dispute it: nothing illegal happens — private money has more room to move than a fully regulated stock market, and regulation can also hamper listed companies; Miettinen has recent experience of a listed company’s change of ownership where an American listed company is bidding and every single thing has to be done under the market abuse rules, by the book. HOLMSTRÖM SIDE THREAD: Miettinen interviewed Bengt Holmström for his book; Holmström’s claim: producing the exchange’s information is probably too expensive relative to the return — too much effort goes into transparency. His second point concerned high frequency trading: server halls microseconds from the exchange add no informational value but front-run others — it is just who is fastest, and the effort rather goes to waste. Eloranta shifts the emphasis: that is perhaps not the essential thing — what matters is active value creation. COUNTER-ARGUMENT 2 — WHO GETS IN: even left-leaning thinkers like Thomas Piketty in Capital in the Twenty-First Century noticed that the more money you have, the more professionally you can manage it — the risk falls and the expected value rises; it bothers me that the ordinary investor, the tracksuit crowd, cannot get into this — it does not make for an entirely equal game, but that is how capitalism works. Eloranta’s answer: the barrier is structural (long-horizon and illiquid investing requires a minimum ticket), but our pension companies’ wealth has accumulated precisely from what they have invested in these large capital funds — over a long time series it has returned about 14 per cent, which accumulates a good deal of wealth in our pension companies and foundations and so benefits everyone indirectly. FINLAND’S WEALTH: the domestic exit market is accelerating and better exits are emerging, so these people allocate their capital back into the system to support new companies — but we are behind; Finland is still quite far from the European level of wealth (the dry joke: one can ask where Italians’ wealth is — in a liquid form, or in those colosseums). Location matters more than amount: not only the amount, but where that wealth is; excluding pension companies, in the Finnish foundation sector a really large share of the assets is still in local property, and for individuals as housing wealth. In private capital the best operators are in the United States, so significant weight there is required. MIETTINEN’S ADMISSION: I have been investing for decades and have somehow always accidentally been underweight the US — it has always been an equally poor idea; the Americans just manage to renew their position dynamically. Eloranta confirms: American players have driven the whole industry, with the deepest experience and largest houses — and they are not the largest by accident; the accumulation follows from success and trust (a reference back to Piketty). HEDGE FUNDS AND ACTIVISTS: Miettinen does not regard them as villains but as seekers of market efficiency; an activist strategy is closer to the private equity idea, but the stakes are smaller and control weaker — the firm runs differently when you have control of it. STILL UNCOVERED — INFRASTRUCTURE: the unlisted market is not only venture or buyout activity, it also involves property and infrastructure, and Eloranta’s assessment of the future: what has previously been done largely with public money will probably in future be done through unlisted market investment — that financing, specifically for these large infrastructure projects. SMARTLY AND PROVIDENCE: Eloranta’s point is misclassification, not price — in a way it was a fairly early-stage company; someone would have thought it a venture-startup type of firm, but in the end a large American buyout capital fund, Providence, bought them, because they saw much more to scale internationally in the platform. Miettinen’s side note: Smartly has recruited juniors from his investment bankers and brings international talent to Finland (he met an American coder in a dog park who had come hired by Smartly). SHARED CONCLUSION: you do not always have to sell those companies and the ownership could be kept here — but it is also the circulation of the economic cycle: you grow firms, sell them, and the returning money is allocated through capital funds into developing new firms. MIETTINEN’S INVESTMENT PROCESS (a three-stage filter for unlisted investments): (1) a good fund, preferably one he knows; (2) his own due diligence on the target — a good fund alone is not enough; (3) a check on valuations, “that they are not completely off”. The justification is liquidity: you may not be able to get out — that is the downside, you have a long horizon for better or worse, whereas on the exchange you can at least sell the liquid shares. To this attaches Eloranta’s point about key man clauses: value creation is a people game, the team must be world class, and at their best those people are really, really smart. SHARED CASE: Miettinen mentions Pontus Backlund leading Visy’s merger, behind which sat a fund Eloranta knows — the Swedish Helix Capital, in whose fundraising Eloranta’s team was involved and whose portfolio company made an add-on; the team has raised two billion in four years for unlisted market funds from investors in Switzerland, Germany and Norway. BUY AND BUILD is the typical route to value: a platform company grown both organically and inorganically, with value also rising through the multiple.

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