Four questions on Nordic Capital’s €9bn Fund XI

Nordic Capital XI is the largest fund raised in the firm’s history, raking in about €3bn more than its 2020-vintage predecessor.

Nordic Capital has held a final close for its 11th flagship fund on its €9 billion hard-cap, just five months after its first close.

Private Equity International reported in early October that Nordic was set to close its latest flagship, raising about €3 billion more than its €6.1 billion, 2020-vintage predecessor. Nordic Capital XI had a target of €8 billion.

Fund XI had a 100 percent re-up rate by capital from Fund X investors, according to a statement. More than one-third of LPs in Fund XI were from North America, while 31 percent were from Europe, 23 percent were from Asia and 10 percent were from the Middle East. Public and private pensions funds made up over 40 percent of its LPs base; sovereign wealth funds at about 23 percent; fund of funds, 14 percent; and the remainder, endowments, family offices and financial institutions.

Existing investors have come back in large numbers, of which a good percentage have stepped up their commitments, managing partner Kristoffer Melinder told PEI.

“In addition, we have about €2.5 billion of capital raised from new LPs – mainly institutional investors. In many cases, they’ve been waiting for a long time. We had a quick fundraise in 2020, and they missed the opportunity for timing reasons.”

Nordic made a GP commitment of about 5 percent to Fund XI, relatively in line with prior vehicles, Melinder noted. The firm’s portfolio company management teams and industrial advisers also put up capital for the GP commitment, according to the statement.

Capital raised from the vehicle will follow the same strategy – investing in the firm’s core sectors of healthcare, technology and payments, financial services, and industrial and business services. The firm has thus far secured three deals: Copenhagen-based speciality insurance underwriter RiskPoint Group; biotech company Equashield; and Swedish vehicle glass repair company Cary Group.

Here’s more from Melinder on how macro conditions could affect deployment and how the firm thinks about currency risk in the portfolio.

How do you plan to deploy €9 billion in a period marked by volatility? Is now a good time?

Nordic Capital - Kristoffer Melinder
Melinder: Valuations are the big debate now

It’s definitely a good time. Think of the opposite – if you didn’t have €9 billion to deploy. It doesn’t mean that we are going to rush and deploy capital quickly: we understand that this is a very volatile environment. And in the private markets – as is usual – prices don’t come down as quickly.

While we are macro resilient in our style of investing, the uncertainty on the macro side means that we’re quite cautious in how we address the market. We see a lot of opportunities, but we’re cautious… We won’t unilaterally say that this is a massive buying opportunity all of a sudden.

With tougher market conditions, it’s generally harder to get debt financing for larger deals. However, I think for the right business it is still positive and there’s interest in the market. For us, we’re less reliant on debt, so that’s not stopping us from making investments.

Are you anticipating attractive buying opportunities at lower prices?

We spend a lot of time on sourcing. We avoid auctions and do more bilateral discussions with owners – that’s how we generate most of our dealflow.

In the current market, the bid-ask spread is larger, and it takes longer to agree on deal terms.

We like our strategies. We want to continue to invest in our core sectors. This is where we continuously see good opportunities – no change there.

Valuations are the big debate now, but we invest in the right sectors and strategies. Those companies we look to invest in will continue to be successful even in a higher inflationary environment or a recession. We invested with an expectation that this will happen: this is why we are more focused on valuations in our investment decisions.

How are you thinking about currency risk in your portfolio?

We try to be currency-agnostic. It’s something that we try to neutralise in how we structure deals, either with natural hedging or [balancing] it in the portfolio with debt. That’s how we try to work with currency.

With much bigger movements these days, I think that would temporarily impact the value of companies. Largely, we have a global portfolio which is quite balanced between dollars and euros. We’re a euro fund, but most investors are dollar-denominated, and our fund does benefit from these moves. At the end of the day, our investors will be happy if we also deliver good dollar returns.

Some of your peers are doing an increasing number of smaller platform deals and more bolt-on acquisitions alongside large deals as debt financing gets tougher. Do you expect to do the same?

We’ll continue to do both. We partner with LPs for larger deals, so we will be able to do multibillion-dollar deals selectively. We also spend time looking at fast-growing yet smaller businesses, which would take us down to, for example, a €200 million investment in some companies as well.

In any given time, we will have a number of smaller businesses in the portfolio which can be expanded through bolt-ons. We like that we have a steady dealflow of these opportunities, but also the classic, mid-sized opportunities where you put between 4 and 5 percent of the fund into a business.