Calmer waters

When Nycomed, the Swiss pharmaceuticals business backed by ([A-z]+)-based private equity firm Nordic Capital and other investors, was linked to a multi-billion-euro bid for Belgian chemicals firm Solvay, scepticism was widespread. Given that Nycomed's balance sheet was already saddled with €1.8 billion of debt, analysts wondered how it would go about winning the support of banks for a hefty new acquisition finance package. As bolt-on acquisitions go, this was undoubtedly at the more ambitious end of the spectrum. A banker quoted in the Financial Times in a July report put the sceptics' case succinctly: “I don't understand why they are doing this and how they are going to finance it.”

As it turned out, such questions never needed to be answered. At the end of September this year, Abbott Laboratories of the US stepped up with a winning bid for Solvay of around €4.5 billion. But despite the doubts over whether Nordic Capital would have been able to get banks onside for such a large deal – plus the apparent evidence of strategic bidders' superior purchasing power – the mere involvement of a private equity firm in the auction of such a large business was a cause for optimism within the private equity market. It was a sign, after all, that the large GP groups are at least thinking big – even if their ability to act big is still constrained.

Nordic private equity practitioners, like their counterparts in all other mature private equity markets, will seek solace where they can find it. The region has not, after all, been spared the shocks of global financial and economic turmoil. Anders Fast, a partner in the Stockholm office of international law firm Baker & Mackenzie, says that, until summer last year, the firm was regularly involved in buy and sale processes on behalf of private equity firms. Since then: “There has been less and less deal activity and we have been more involved in restructuring work on behalf of several companies, banks and private equity firms in the Nordic region.”

In sober fashion, Fast adds: “Before the summer [this year], a lot of people were saying things would pick up in the autumn. What we've seen is that it hasn't really come back yet. The downturn has started to stabilise but activity is still pretty slow. There is a feeling that things will improve in 2010, but much depends on the banks and the availability of capital.”

NORDIC NUANCES
This may ring true of most private equity markets but, in taking the temperature of the Nordic region from those on the frontline, it becomes clear that there are some interesting nuances in this part of the world – whether for better or worse. On the downside, many Nordic deals struck at the height of the market have exposure to industries that the crisis has been particularly cruel to. Take automotive, for example – the Nordic region is home to leading car makers such as Saab and Volvo; as well as a plethora of suppliers reliant on the industry's wellbeing. An indication of possible problems in the pipeline arrived in March this year when Plastal – a supplier of vehicle plastics which had been owned by Nordic Capital since 2005 – filed for bankruptcy after what it described as the industry's “unprecedented downturn”.

“Everyone has one or two investments at least that have gone bankrupt or face severe restructuring, but no-one's portfolio is just a box of rotten eggs”

Harald Mix, founding partner at Stockholm-based private equity firm Altor Equity Partners, agrees that traditional Nordic strengths such as capital goods have been “hit hard by the drop-off in demand”. He also believes – as a result of the problems that large, highly leveraged deals are likely to face – that “the jury is out” on whether the Nordic region can retain its longstanding reputation for out-performance compared with other mature private equity markets. In addition to Plastal, signs of stress emerged at Finland's Sanitec, an EQT Partners-owned bathroom maker which renegotiated its financial structure in January following a default on loan repayments, and Dometic, the Swedish caravan maker, which saw control shift from pan-European private equity firm BC Partners to its 25 lenders in September following a debt-for- equity swap (though BC Partners did manage to get its money back from the deal).

In light of the tougher market conditions, some say they would not be surprised to see shrinkage in the number of GPs active in the region. However, despite the emergence of problem cases within portfolios, there is little expectation that locally based GP groups will face major structural problems in the near future. One local professional puts it this way: “Everyone has one or two investments at least that have gone bankrupt or face severe restructuring, but no-one's portfolio is just a box of rotten eggs.” [The same source does, however, express the view that succession issues within some of the region's leading GPs may make fundraising “interesting” next time around].

DOWN, DOWN – AND BACKUP?Nordic private equity volumes peaked in 2005 and have been on a downward trend since. With deal levels so low in 2009 year-to-date, it will be hoped that the trough has been reached

SEEKING A SECONDARY SOLUTION
Various pressures have forced Nordic LPs to find ways of restructuring their private equity programmes – the secondary market stands to benefit

In the wake of the financial crisis, it was well documented that the “denominator effect” had thrown LP portfolios out of kilter and resulted in many of them being over-allocated to private equity. In the Nordic region, this was compounded by restrictive rules which set limits on the amount of private equity exposure an organisation is allowed to have.

In Norway, there are external rules which dictate, for example, that a pension is allowed a maximum 7 percent allocation to private equity as a percentage of its total assets under management. In Sweden, the limit is frequently an internal rule and hence self-imposed. In any case, the rules mean that Nordic LPs had to respond swiftly to the crisis. In some cases, this meant pleading for a temporary exemption to the rules. It also meant the need to re-balance portfolios – and perhaps exploring the secondaries market as a tool to assist them with this.

Till Gutzen, a partner at Nordic secondaries specialist Cubera Private Equity, says his firm – which does direct and indirect secondary deals where there is a Nordic angle – has looked at 120 potential deals in the last two and half years and completed seven. He adds: “A lot of LPs are re-thinking their programmes. Some are over-exposed to certain sectors or to the Nordic region, some have regulatory boundaries. Others want to buy more of the funds they are already in. The large programmes know they can use the crisis to tailor their programmes and fine-tune their portfolios.”

Gutzen says the Nordic deal market is just starting to regain some momentum, with finance of up to SEK5 billion (€483 million; $717 million) now available for deals from local banks. Hence: “The capital will be called and they [the LPs] will need that capital from somewhere. Some have understood that, some haven't.”

Those that have understood have no doubt been putting out a few calls to secondaries firms like Cubera.