15 Jul The Icelandic Enterprise investment fund supporting vital industries through crisis to recovery
Thorkell Sigurlaugsson, Chairman of the Board, Enterprise Investment Fund, reveals the investment opportunities Iceland’s pension funds see emerging in the country’s post-COVID-19 economy
Iceland has experienced a very impressive economic recovery since 2008, in part due to the work of Iceland’s Enterprise Investment Fund (EIF). Can you explain the role that the fund has had, some of its achievements over the last 10 years and where it is heading now?
Companies in Iceland had a major problem after the financial crisis as we were affected more than most other countries. All of our banks went bankrupt and the pension funds were badly hurt as well because they were large investors in many of the country’s companies. To mitigate the damage, 16 of the pension funds created a private equity fund, the Icelandic Enterprise Investment Fund EIF. The fund’s objective was to invest in Icelandic companies that were significantly impacted, especially those that were important for Iceland’s infrastructure or major industries.
Iceland is a small economy with 360,000 inhabitants. The pension funds invested $300 million in the fund, which was about 2 percent of Iceland’s gross national product (GDP)—so it was an important contribution that they were making. EIF bought some of the companies facing problems and then changed the companies’ structures. Some were sold, some merged with other companies and then listed on the stock exchange. Later, Landsbankinn—which is a state-owned bank and the largest bank in Iceland—came in as an investor, as part of EIF’s investment in some of the companies that were owned by the bank.
I’ve been sitting on the board of this fund since the beginning end 2009 and have been chairman for most of that time. Because of the diverse ownership of the fund, it was important to have its management at arm’s length, so that the owners could not interfere in the investments in any way.
EIF’s first investment came in early 2010. It was in Icelandair, a fairly large airline and the national carrier that was listed on the stock exchange, but it was in major difficulties. We invested 30 percent in the company together with another local bank. At the same time, we faced another problem that made Icelandair´s operation even worse: the Eyjafjallajökull volcano erupted, which closed down most aviation in northern Europe. In the end, however, this turned out to be an excellent advertisement for Iceland—many tourists came here afterwards and we built up our significant travel industry. Tourism accounts for close to 10 percent of GDP and 35 percent of export earnings in Iceland. Over the past 10 years, the industry has become one of the country’s key economic pillars, attracting over 2 million visitors in 2019 or close to six-fold the number of inhabitants in Iceland.
Icelandair Group’s financial restructuring was very successful. The airline has since enjoyed great progress, although, currently, COVID-19 has cast a shadow over the aviation industry worldwide. The EIF’s profit from the restructuring of Icelandair Group was $83.5 million after having invested $26 million in 2010. Unexpectedly, Icelandair now needs to go through financial restructuring once again.
EIF’s largest investment came at the beginning of 2011, when we bought a few companies from the national bank of Iceland—Landsbankinn. The most significant asset was the fisheries company Icelandic Group, which had operations worldwide, 23 subsidiaries and over 3,100 employees. The company was split up and sold in separate sales. In total, the EIF invested $115 million in Icelandic Group, while the profit from the investment amounted to $145 million.
The fund then bought Teymi, which had operations in the IT and telecommunications sectors in Iceland. The EIF began by splitting Teymi into two companies, one for the telecommunications part and the other for the IT part. The goal was to build two large companies in each sector, which subsequently might be listed on the stock market. That proved to be a correct move.
Various IT subsidiaries were merged to build the company Advania, making it one of the Nordic countries’ largest IT companies. The company was subsequently sold to Swedish investors in 2014 and it is now one of Scandinavia’s leading IT companies, operating from 25 locations in Norway, Sweden, Denmark, Finland and Iceland. EIF’s profit from its investment in Advania gave the fund a reasonably good internal rate of return (IRR) rate of 10 percent.
Secondly, we have Vodafone—Teymi’s telecommunications operations were continued under the Vodafone brand. The company was eventually listed on the Icelandic stock exchange market, Nasdaq Iceland. IRR from the investment in Vodafone was 46 percent, with a profit amounting to $27 million.
Following on from that, what would you describe as the best success stories from Iceland and the strongest companies that have survived the bank crisis?
Some companies in Iceland were not heavily damaged after the financial crisis. First of all, our power companies were fine, as their customers were mostly aluminum smelters. With assistance from the banks, our most important industry—the fishing industry—managed to maintain its position in fishing and selling its products internationally. But many families were badly hurt and lost their homes. Due to currency loss, loans increased and monthly down payments. Rebuilding the banking system and the final negotiations with foreign lenders was the most impressive part of the financial success Iceland has achieved since the financial crisis.
The construction industry was very badly affected by the financial crisis, with most companies going bankrupt. They had gradually been rebuilt and new ones established until COVID-19 emerged 10 years later, leading to a new uncertainty. Sometimes, however, it helps that Iceland is small, acts quickly and has a strong culture of working together. This is something we are experiencing again during the coronavirus crisis.
To what extent has the fund improved good governance and good financial and sustainable financing within companies?
I hope and believe we have learned a lot from the banking crisis. The problem in that crisis was that bankers were too greedy, had too much access to foreign capital and were not socially responsible, in my opinion. Social responsibility and good corporate governance in general has improved since then, as well as the governance of the central bank and the banking system. But not all crises are the same—now we have a different one in the fight against COVID-19. Now we have to work together with other countries in fighting the global climate change, which might be a more difficult battle that the current coronavirus one. In Iceland, there is still work to do. I think one important thing is to regain trust between the government and the public—therefore, social responsibility, innovation, sustainability and trust are key words in many ways.
To what extent do you think the lessons learned during the 2008 crisis could help Iceland recover faster from this new crisis? Can we expect the country to rise again from the ashes like it did in 2008?
Yes, I think so. I believe Iceland will be one of the countries that will emerge fastest from the crisis. We have managed to do a very good job in protecting the elderly here in Iceland, where the pandemic has been tackled primarily by three institutions: the Directorate of Health, the Department of Civil Protection and Police Emergency Management and the Chief Epidemiologist. The political authorities in Iceland took a strong stance of letting the scientists and experts lead the way. As a result, every day for over two months, Icelanders watched press briefings from the heads of these institutions—commonly referred to as the Trio—who would give updates, lay down the rules and answer questions.
Part of Iceland’s success can be linked to a special police force that was assembled to trace infections and quarantine people. Its results were incredible, with only a handful of positive cases coming from unknown sources. A two-week quarantine at home for anyone who came into contact with a COVID-positive individual meant that the spread of the disease slowed down enough to ensure our medical services could handle the load. The hospitals, clinics and private genetics company Decode tested over 15 percent of the nation in just over two months. The national hospital’s floors of intensive care units (ICUs) were split up into COVID and non-COVID spaces, a special clinic was created to observe and follow up on patients, and a sort of rearguard was established with former ICU nurses and first responders to share the load.
What were the lessons learned from 2008 that could help the country recover faster from this new crisis?
I think, in many ways, in 2008 we did not work as closely together as one nation and did not realize the extent of the problem before it was too late. During this pandemic, we shared information and had an open dialogue about what plans we have for recovery. During the 2008 crisis, the pension funds, government and banking system came up with recovery plans but were not necessarily coordinated in how to assist in building up the community. The COVID-19 situation is very different. It hurt the tourist industry very badly and that is where the main problem lies. During this crisis many people have lost their jobs, mostly in the travel industry. Other industries are damaged as well, but not to the same extend.
The uncertainty now is what will happen in other countries and how will other countries recover, because Iceland is so dependent on international trade and tourism. We, along with other countries, have to be very careful about how we open up our borders. Generally speaking, we are very dependent on natural resources, the fishing industry, energy-intensive industry and tourism. The fish stock, waterfalls and geothermal energy, as well as the beauty of our landscape and wilderness, are natural resources used to build our export industries. Even though human capital and a highly skilled and educated labor force are necessary, we are heavily dependent on nature. We have to strengthen our knowledge industries and intellectual property, and better use our intellectuals in Iceland, the young well-educated people, to build up sustainable businesses that provide higher incomes.
Is there any possibility for the fund to expand its duration to cope with the current crisis?
The fund will be closed—it has sold off all its assets and we are in the process of closing it down. But the challenge now is that the government has used much of its available funding to rebuild Icelandic companies and the country from this COVID-19 crisis. Going forward, the pension funds, which hold about $36 billion, approximately 25 percent more than Iceland´s yearly GDP, could participate in infrastructure investments where the government doesn’t have the same capacity to invest as before, such as roads and all kinds of water and power systems. I think there are other infrastructure projects being carried out by the government where the pension funds and private investors could come in as well. Public-private partnership projects are an obvious option. I also believe the pension funds have a clear role and opportunity in venture-capital (VC) funds that focus on certain industries. The funds will continue to invest in listed companies in Iceland but, due to limited opportunities and a risk in local currency, they currently have to invest more abroad.
Do you see any opportunities for foreign investors to take part in a reconstruction of Iceland’s economy after COVID-19?
Yes, I think so, especially in the VC and intellectual property sectors. The fishing industry is closed for foreign investors except as a minority owner. The travel industry might be of interest, especially the larger companies like hotels, Icelandair and possibly some of the adventure-travel companies. Land close to our salmon rivers have been of interest to the British billionaire Jim Ratcliffe, but that could be more of a hobby or sport interest. Foreign investors might see opportunities for wind energy parks and salmon farming in Icelandic fjords, but both areas might have some restrictions in place from an environmental or national ownership point of view.
It is definitely interesting for foreign investors to look at the positive location of Iceland between the U.S. and Europe. We are in the European Zone, having the benefit of free trade and a close relationship with the European Union (EU) but not being a part of that institution. Iceland also has good relationships with the U.S., and U.K., which is leaving the EU, Asia and the rest of the world. I would also like to mention the University of Iceland and Reykjavik University as good cooperators, as well as numerous startup companies. One thing I could mention, which is obviously a benefit, is how small and relatively isolated the population is. Within the health and pharmaceutical sectors, and many others, Iceland can therefore be a positive testing ground. There are endless opportunities in Iceland together with various companies, the government and the pension funds. We are very open for international cooperation.
What would be your final message to our readers?
Look at the opportunities in Iceland and work with our companies and individuals. Learn from us and educate us as well—because there are so many things we could have in common. Good cooperation is very important and beneficial for Icelanders and international companies, universities or individuals. Few countries in the world have built up such a professional fishing management system based on quality and sustainability. The same is true with the clean energy from Icelandic waterfalls and geothermal energy. We have a stable government, a well-educated and skilled workforce, and excellent transport connections by air to both North America and Europe as well as extensive maritime transport. There are also major opportunities within the knowledge industry sector based on software or other technology. Iceland is open for business in all fields where innovation, sustainability and social responsibility is at the forefront.