What’s behind the blue-sky outlook for Iceland’s investment climate
By: Investable Universe
Tags: Iceland, Venture Capital, Biotechnology, Exchange, Renewable Energy

Iceland is open for business and actively seeking investment participation in its listed and private markets, as it seeks to integrate a decade-plus of recovery from the Global Financial Crisis and a rising profile in energy and technology R&D into a broader investment landscape.

Speaking at the opening of a virtual trade and investment expo produced by Promote Iceland and the Icelandic Consulate in New York, Foreign Minister Guðlaugur Þór Þórðarson touted the decades-long close partnership between Iceland and the U.S. — Iceland’s single-largest trading partner — as a foundation for continued, warm economic ties.

He noted that the U.S. was the first country to recognize Iceland’s independence (from Denmark) back in 1944, with the relationship deepening via security cooperation through NATO, and common values. Minister Þórðarson said both governments have taken steps in recent years to make the cooperation even stronger.

“We are constantly working on improving the platform for foreign investors to operate in Iceland, and we are hard at work improving access for Icelandic investors into the U.S.,” he said, citing ongoing efforts through the so-called Icelandic Bill in the U.S. Congress that would grant access to the E-1/E-2 Visa program for substantial investors and traders from Iceland.

Minister Þórðarson noted that Iceland’s investment portfolio for foreign investment is remarkably diverse, encompassing energy-intensive industries, gaming, technology, life sciences, real estate and pharmaceutical companies.

“My view is that trade and investment are the key,” he said. “When you are an investor in a country, you get to know the country really well.”

More verticals

Helga Valfells, Founder and Managing Partner of VC firm Crowberry Capital and Chairman of the Icelandic Venture Capital Association/FRAMÍS characterized Iceland’s tech startup ecosystem as one “primed for growth,” citing the country’s startup-friendly regulatory environment, a creative, outward-oriented, can-do culture, and its strategic mid-Atlantic location, four hours from the U.S. East Coast and three hours from mainland Europe.

Valfells said that recent venture capital investments in Iceland had centered on three primary verticals: life science and health, fintech/software and gaming, areas where the country has a proven startup track record and a stable of experienced entrepreneurs.

But the portfolio is rapidly expanding, with emerging verticals including food technology, where she pointed to Icelandic startups Marel and Valka, which develop innovative equipment for food processing (Marel in poultry, meat and fish, and Valka in seafood only).

Additionally, Iceland is attracting increasing interest in sustainable energy, due to its experience with geothermal and hydroelectric energy, and as a hub for experimentation around carbon capture technologies.

Valfells noted that foreign investors can access Iceland either through investing in listed companies, although there are not many (a conspicuous example is the gaming startup Unity Technologies, which listed on the New York Stock Exchange in September at an initial valuation of $13.7 billion); acquisition (as was done when NetApp acquired Icelandic cloud computing firm Q-Stack in 2017), direct investment along with co-investors (as U.S. based VC firm Andreessen Horowitz did earlier this year when investing in cloud-native gaming developer Mainframe; or investing in VC funds (for example, in partnership with FRAMÍS).

A hidden gem

Though Iceland’s listed market is small — its equity market consists of 23 listed companies with a market capitalization of $10 billion, approaching half of Iceland’s total GDP — it is mighty, said Nasdaq Iceland CEO Magnus Hardarson. He said that liquidity on the Iceland board, as measured by trading activity relative to market size is comparable to its Nasdaq Nordic sister exchanges, driven by interest from pension funds, private companies, and international investors. Issuers include strong representation from banking, insurance, real estate, retail and telecommunication firms.

Nasdaq Iceland is the only listing venue in the country, sharing common infrastructure with Nasdaq’s other Nordic exchange in Copenhagen, Helsinki and Stockholm. The market operates in a resilient macroeconomic environment that has shone through during covid, Hardarson said, as reflected in long-term credit ratings for Iceland of A by S&P and Fitch, and A2 by Moody’s.

Hardarson attributed this resilience to several factors: healthy debt ratios in its public and private sectors, and among households; a healthy current account balance; a strong net international asset position; a well-capitalized and increasingly efficient banking system; well-functioning stock and bond markets; sound fiscal and monetary policies supported by low debt and large currency reserves, and a flexible economy characterized by a high level of innovation.

The exchange also houses a robust fixed income market, including a fast-growing sustainable bond segment and active government and covered bond markets, with $23 billion in market capitalization and 174 listed bonds and bills, and average daily trading volume of $53 million. Hardarson explained that while bond yields have come down sharply due to central bank rate cuts and the economic effects of covid, Icelandic debt is still attractive by international standards, drawing interest from pension funds, mutual funds and financial institutions.

“The Icelandic bond market is a hidden gem, which unlike many bond markets, is highly transparent and wide open to both domestic and international banks and brokers, and now offers a fast-growing sustainable bond segment,” he said.

Hardarson explained that trading in Nasdaq-listed bonds takes place much like equities: via active trading on-exchange through buy and sell order matching. The Icelandic market is distinctive for how much of this volume occurs on exchange. Liquidity in government bonds is supported by four primary dealers, with three market makers in covered bonds. In less than two years since rolling out the first sustainable bond (issued by the city of Reykjavik), Nasdaq Iceland now offers nine sustainable bonds from six municipal issuers, approaching half a billion dollars in market capitalization, more than doubling year-to-date.

Additionally, there is promising outlook for growth in the equity space, where Nasdaq’s goal is to double the size of the equity market relative to Iceland’s economy over the next decade.

“I believe we are close to a tipping point when it comes to participation by international and retail investors,” Hardarson said, citing several factors in support of this view: in May 2021, MSCI will officially classify the Icelandic market, a designation bringing it into alignment with international markets. Iceland’s government has signaled an intention to provide incentives to individual investors to buy shares. This is occurring at a time of growing interest in equity markets on the part of individual investors and an environment of low interest rates.

He also noted that Iceland’s central bank is “actively listening to feedback” from domestic and international market participants, adding, “I think it’s safe to say [this] will make it easier” for overseas investors to commit capital (with fewer administrative burdens) in Iceland. And finally, a recent merger of the Icelandic Central Securities Depository (CSD) with the Nasdaq CSD, bringing trade settlement in line with international standards. Additionally, the country recently introduced regulatory changes to facilitate public offerings of up to EUR 8 million without requiring a published prospectus.

A position of strength

Katrín Júlíusdóttir, Managing Director of the Icelandic Financial Services Association and former Minster of Finance and Economic Affairs, said that Iceland had not been untouched by covid-19, but entered the crisis in a solid financial position and took quick action to stem more widespread economic damage.

“[Covid] has of course hit the Icelandic economy like the rest of the world,” Júlíusdóttir said. “We were in a good economic position when it hit — which is very important — with low debt ratios, low public debt, and a strong financial system. It was important for us to enter this pandemic and the economic effects…from a position of strength.”

She noted several measures that the Iceland government introduced quickly to prevent a payment crisis developing into a full-scale debt crisis. In March, for example, Iceland passed a bill offering temporary deferral of household and corporate loans through the country’s banks, a program that ultimately supported ISK 150 billion (about $1.1 billion) or 7 percent of outstanding household loans, and corporate ISK 295 billion (about $2.2 billion) or 17 percent of corporate loans. Katrin Júlíusdóttir noted that 97 percent of all companies and households that requested such deferrals were approved, and that requests appear to have peaked over the summer months.