Nordic Capital on understanding value in tech

Fredrik Näslund, partner at Nordic Capital, explains how the GP defines tech-investing and where to find value.

This article is sponsored by Nordic Capital. 

Fredrik Näslund

Private equity firms, competing with strategic buyers for richly valued assets, have emerged as a force to be reckoned with in the technology space. GP-owned businesses are also sought-after targets for strategics looking to buy. We asked Nordic Capital partner Fredrik Näslund what is driving growth and where the opportunities are.

Technology is a very broad term. How do you define it?

Nordic Capital has been investing in this sector for over 15 years now with a focus on software and payments. Within software we zoom in on application software which includes analytics and business intelligence, content services, customer experience and CRM, and enterprise resource planning. We also look at infrastructure software and vertical-specific software such as fintech, legal tech, health tech, etc. The Nordic area benefits from specialist clusters of some of these sub-segments, including payments, and Nordic Capital focuses on finding opportunities where we can create growth at the company level.

Which segments are growing fastest?

Application software businesses are generally growing at around 10-15 percent. But you can also find sub-segments which are growing faster. The sub-sector of enterprise planning, where Nordic Capital’s portfolio company Board International is active, is for example growing at around 30 percent.

Board is the global leader in planning tools. It provides software that sits above all of a company’s systems and collects data ranging from HR to financial planning and budgeting, to ERP and operational planning.

The global retailer H&M uses Board for their staff planning in all 6,500 stores. The Board software allows businesses to collate data on, for instance, sales patterns, bookings, pipelines and even the weather, and to conduct advanced predictive analytics on the back of historical numbers.

Payments is another fast-growing area where we are investing.

How does your team keep up with technological advances? Is disruption more of a challenge or an opportunity?

We have a network of tech experts that are in touch daily with developments. Nordic Capital is a typical growth investor. For us, disruption is more of an opportunity than a threat because we seek those kinds of opportunities. We look for companies on the non-legacy end. Technology is significant to the end-game but inbetween it is about how to run a company, how to grow, how to spend the money and in what order, how to build out a sales force, how to develop leads from a webpage into a qualified lead in the most efficient way, how to use the software to do that, etc. Our team, chairmen and group of advisors are very experienced and know how to support the companies in each area.

What is driving this pace of growth in general across the tech sector?

Big themes are automation of work previously completed manually or semi-manually and the general digitisation of the corporate world. Digitisation is opening a whole new way of doing business using low to no-touch technology. That is a very important trend.

Another is automation where software tools can perform tedious work previously done by human hands. We see this in, for example, the healthcare sector.

The customer journey is changing. In payments, customers can go online to be onboarded through a low or no-touch process and conduct transactions. For this, businesses need an electronic identity tool, as well as an online document handling and storage solution and other automated customer experience tools.

This means software for some specific industry verticals is growing very fast, for example financial services and professional services, including for management consultants and law firms. Both are using more automated software to share documents securely and populate templates. Utilities is another sector behind the curve, as – to some extent – are the construction, real estate and healthcare sectors.

Are you always looking at payments with a tech angle?

Nordic Capital has done a lot in payments: three merchant-facing platform investments, always with a high degree of technology. The first was Point International, which was a reseller of payment terminals where Nordic Capital invested a lot into the software that runs the terminal and created one of the largest global software solutions for payment terminals. This was one of the best deals ever for Nordic Capital.

In addition, the investment in Bambora was hugely successful. We worked closely with the management team to digitise the customer onboarding and increased intake from 200 to 3,000 customers a month.

During the holding period, Bambora invested into new technology and employed more than 170 new developers. It hit the market with new products and also initiated a strong business and performance culture. Nordic Capital helped Bambora to focus on sales excellence and make 13 add-on acquisitions.

Three years later, in 2017, Bambora was exited to Ingenico, who approached us. We always map out potential buyers and exit mainly to strategic buyers. That is part of our playbook. And the business continues to grow rapidly within Ingenico. We are proud and happy for that and it demonstrates that Nordic Capital builds solid businesses.

With Trustly, a direct payment provider, Nordic Capital is investing into and assisting in spreading technology to the market. Trustly is growing rapidly. Its network includes more than 4,000 banks in Europe, it reaches around 350 million European consumers and it just completed the add-on acquisition of Silicon Valley-based PayWithMyBank, which increases the reach to over 600 million consumers in both Europe and the US.

Trustly is headquartered and regulated in Sweden but within the EU it can passport its payment institute certification. This is an area where the EU has been very active. Payment Services Directive II instructs banks and financial institutions to open their infrastructure to other regulated entities if the consumer grants permission and this is something we have taken advantage of with Trustly from the beginning.

Did you invest in Trustly ahead of the EU directive?

Three or four months before. Regulation is fertile ground for software opportunities. Looking forward, the EU will be very active in authentication and identification and the Nordics is a leader in this growth area.

With new legislation, secure solutions will become even more important. In April, Nordic Capital acquired Norwegian digital identity pioneer Signicat. Five of their largest clients are other Nordic Capital portfolio companies. We tracked and assessed the success of Signicat for a long time before acquiring the company.

How do you source deals?

Nordic Capital focuses on core sectors where we have deep experience, long-term involvement and a deeply-rooted local presence which builds relationships with sellers, board, management teams and advisors. We take a long-term approach to understanding potential investment opportunities, sometimes tracking a business for several years before acquisition.

We have a dedicated T&P team of around 15 people internally who monitor between five and 10 companies each in our shadow portfolio. This is a structured way of identifying around 100 companies that would fit Nordic Capital’s investment strategy and focus on growth. They constitute most of our pipeline and provide most of the completed transactions. Trustly is one example – Signicat is another – of a deal that surfaced through this process.

In addition, we have built a network of advisors, CEOs, chairmen and tech specialists who present opportunities to us. Every opportunity is filtered through an established list of up to 30 KPIs covering the business model through to the business’s positioning in the value chain, growth of the end market, level of recurring revenue, customer churn, employee and customer KPIs and the degree of customer upsell.

You have been investing in tech for almost 20 years. How have you seen entry multiples change and what do they look like today?

They go up and down and lately they have been mostly up. It is a bifurcated market. The companies that are really strong performers with a solid market position and non-legacy technology tend to trade for a high multiple and the less-loved companies may not even trade at all.

For the fast-growing companies we look at, the multiples are in the teens and above. Trustly grew 90 percent in 2018. Board is growing at 100 percent. People are willing to pay for quality. Nordic Capital also buys companies that are growing at 5-15 percent and then the multiples are more in the lower teens.

That puts some pressure on you to create value. How do you go about doing that?

Nordic Capital’s approach to ownership includes an industrial mindset and emphasis on operational contribution which generates most of the value creation. Growth is accelerated by helping portfolio companies expand into new markets and geographies, develop their product range, enter innovative industrial combinations and strategically reposition.

Our T&P playbook maps the five key processes in a technology business: commercial excellence; research and development efficiency; product management; people and performance; and what we call ‘fuel for growth’, which is related cost-efficient scalability. In addition to our team and our network of chairmen and advisors, we also have functional and operational experts that we call ‘black belts’ deployed in various executive roles.

For example, in commercial excellence or go-to-market applications we address questions like how to expand the sales force, how much a business should pay a salesperson, what’s fixed, what’s variable, etc.

We have expertise with extensive pricing experience that help management address how to price a product and repackage it. We love companies with a strong product offering to which we can add our commercial acumen and push.

How do you define ‘fuel for growth’?

‘Fuel for growth’ is the fifth chapter in our playbook. We always want to see the portfolio businesses scaling, and an important element is expanding internationally.

If a company is growing staff with 30-40 percent every year, we always take a step back every 18 months to make sure the business employs the right people and has the right structure. This step back will distil the organisation and make it stronger. Focus is key!

What is your role in R&D?

Creating an efficient R&D engineering process is often done in conjunction with product management. Product management is the gearbox between sales on one hand and engineering on the other.

If you have a very strong product management function, they will pick up what sales want to sell and provide a roadmap to R&D detailing what they should focus on and when and how those products should be developed. That’s key. Our goal is to improve R&D efficiency by 30-40 percent.

On the product management side, our goal is to shorten the time to market. A key KPI is increasing the amount of time engineering spend on a new product to more than 50 percent.

And people?

People are at the heart of business and their performance is one of the most direct contributors to success. For this reason, strategic HR and portfolio talent development is a key element of Nordic Capital’s approach to ownership excellence and applied throughout the investment cycle to support management.

An excellent example is Bambora where people and performance was a key to improving the business culture. We’ve drawn on that successful experience and have introduced new KPIs and more experts.

For instance, Cint, which is a market research technology business, has recruited many people and spent a significant amount of time on the ground assisting management in the US to bring in new salespeople and establish new sales centres. The number of employees has increased from 140 at acquisition in 2016 to 285 today, including additional staff from the add-on acquisition in August of US-based consumer sampling platform P2Sample.

Cint has always had a very efficient R&D team. We have spent a lot of time on the product management function in order to scale it globally. Local knowledge is important. We have helped to adapt the Cint product to the US market and sales have risen from less than 5 percent in the US to more than 60 percent.

The business turned over around $30 million when Nordic Capital bought it in 2016. Three years later it is around $100 million. Organic growth has accelerated during the ownership period from 20 to 35 percent, an almost 50 percent increase. It has been spectacular.

Now we are assisting the teams in Trustly, Macrobond and Board to build out in the US.