CEO’s review

A year ago, I began my CEO’s Review by telling that it is at the core of our strategy to create added value for our shareholders. When I look in the rearview mirror towards the past year, I can rather straightforwardly state that the strategy in question has not materialized at all. Our share price has decreased about 76 percent during 2018, and our financial performance has weakened as well. Our turnover has fallen 40.65 percent, to about 8.29 million euros, and our operating profit has become heavily negative (-3.37 million euros). Simultaneously, the cost structure of the company has continued to grow and has increased close to 20 percent in comparison with the previous year.

The situation of the Company has been responded to by planning a new strategy for the Company and by preparing significant cost-cutting measures. The tight and onerous planning to create a new strategy and a savings program, that was started during the end of the year, was published to the personnel, owners and other public on 7 January 2019. Based on the measures, the expenses of the group are aimed to be halved, and the business operations are changed towards operations that create continuous cash flow.

To be able to even plan a new business model and implement such drastic savings on the cost structure and personnel of the company, the defects that have caused the weakening of the financial performance must be precisely clear.

Undoubtedly the largest factor that explains the decreasing of turnover have been the accusations targeted at the Company that relate to the bankruptcies of companies that belong to the Lapis group, and the reputational risk that has occurred because of them. The public discussion regarding the Lapis matter has set sales-related challenges for the Company, as there have been an unusual number of articles about Privanet and its connection to Lapis during the year in the press. Naturally the situation became acute when the Company announced on 29 October 2018 that investors’ actions for damages have been served on Privanet Capital Markets Ltd. The claims for damages have been targeted jointly and severally at the previous management of Capital Markets as well.

At the beginning of 2018 the sales force of the company was still very strong. At the time, the largest problem was that the sales were focused on investments that had low margins for the earning of the Company. During the rest of the year, a lot of time has been spent to resolve the matter in Privanet Capital Markets that is responsible for the sales of the group, and the company has been completely reorganized and the business model has been sharpened. In the process, the management and control of sales have been reorganized, as Roy Harju and Matti Heiskala, who were part of the previous management of the company, quit the operations of the group, and Kimmo Lönnmark (Master of Laws) started as the acting CEO of Privanet Capital Markets Ltd at the beginning of 2019.

The expenses have been increasing in Privanet already for years. This has been well-grounded in many ways, as the number of clients has increased remarkably, and our industry has been a target of constantly growing interest. The funding for growth companies outside the banks has been growing already for several years. In addition, the core objectives of the company have been internationalization and the development of significant finance technology to intensify growth funding and secondary market for unlisted companies. These matters have required a substantial amount of recruitments and investments. In addition, lots of external consulting has been acquired in legal, IT, and marketing services, for example.

As I made a forecast in the half-yearly report, the general market turbulence increased significantly at the end of 2018, and the volatility ascended remarkably. Investors became more reversed, which could also be seen in the demand for securities of unlisted companies at the last quarter of the year. Other factors that weakened our result were write-downs in own investment activities, mainly relating to Lapis, as well as increased depreciations of the group.

There were also positive matters that took place in Privanet in 2018. At the end of the year we got to launch the Norwegian branch office, and the opening ceremony was organized on 24 October 2018 in Oslo. The first crowdfunding round on the platform was successful as well, as the Norwegian Wiral Technologies AS raised close to 5,7 million Norwegian crowns in the service. In connection with the opening, a collaboration arrangement with the Oslo stock exchange was also launched relating to the secondary market for unlisted shares in Norway.

In Slush, a development project of Privanet, Nordea, OP Group, Tieto and Asiakastieto was published, in which the trading and shareholder management of unlisted shares is digitalized through block chain technology. We are aboard in creating a digital platform in which parties can be identified internationally in a reliable manner. Block chain technology has been one of the most-discussed matters in finance technology, and this joint project has aroused significant interest outside Finland as well.

The structure of the group was further clarified at the end of the year, when Privanet Group Plc bought all the shares of Privanet Securities Ltd from Privanet Capital Markets Ltd. Both subsidiaries are now located directly under the parent company of the group.

Privanet is going through a radical transition as a company. I have a strong view that the business operations that the Company has chosen, i.e. the funding of growth companies and their secondary markets, will be growing heavily during the following years. I have all the reasons to believe that with the new cost structure and business strategy Privanet has all opportunities to get back to a very profitable business path. The decision on savings has been difficult but inevitable. At the same time, we must take care of Privanet’s employees and tied agents. The beginning of the year has been hard for our entire personnel. I believe that those, who stayed to build a new Privanet, are ready to sacrifice a lot for Privanet, and I am confident that Privanet will also take care of these people for decades.

Privanet’s reputation has been damaged because of business operations that have been carried out in the past. In this situation, it is very important to create an image of what we do today in Privanet for our clients, future clients, and companies that seek funding. Our job is to search the most interesting growth company stories in Finland, enable the realization of the dreams of the companies together with our clients, as well as to enable excellent profit opportunities for our investors’ capital.

Karri Salmi
Chief Executive Officer
Privanet Group Plc