Northern lights

The Nordic private equity market is something of an enigma. To some limited partners it is an opportunity not to be missed, while others appear cautious. Recent fundraisings suggest GPs have little to worry about – in the short term at least. Andy Thomson reports

Question: what does a private equity firm do when it finds itself the recipient of investor adulation? Answer: exactly what it likes. Just ask the top performing venture funds in the US, where fundraising success is measured by the amount of capital you are able to turn away. In such cases, access for limited partners is a privilege rather a right.

Such belligerence may not be the preserve of a small US venture elite for much longer. Although it may offend the region's egalitarian ideals, the wielding of GP muscle can now be detected in Scandinavia as well. Although Stockholm's Segulah has not yet officially fired the starting pistol on its third fund (understood to be capped at around €250 million), it is a badly kept secret that the firm has been busy corralling LP commitments and may even announce a first and final closing as early as this month.

If Segulah really has joined the ranks of elite funds that can pick and choose their investors, it is institutions from the US that appear to be in favor. A source close to the fundraising says the fund is heavily oversubscribed and that a couple of European investors have been taken a back to find their planned commitments being scaled down to accommodate demand from the US (“positive discrimination” as the same source describes it).

The main reason for the collective clamor is Segulah's position in a sweet spot that is particularly honey-scented for US institutions following advice from their consultants to increase their European exposure. Not only does the firm comply with the current vogue for mid-market and region-specific strategies, it has a steady track record going back about ten years and is acknowledged to be handling generational issues within the management team capably.

But there's more to it than that. For one thing, US investors stretching their investment horizons into what may be unfamiliar territory want the comfort of a relatively transparent and proven market. In this respect, the Nordic region (and particularly Sweden) scores higher than most other parts of Europe. Emerging southern European markets like Spain might offer more exciting possibilities if you pick the right fund. But select poorly and you may suffer less of a battering at the Pamplona bull-run. In Sweden, the track records of many fund managers stretch back around 20 years, and some have delivered stellar returns.

Christoffer Davidsson, a principal at London-based fund placement agent Campbell Lutyens, says those seeking access to Nordic funds see no reason why the region's impressive progress should not continue. “There is a feeling that the larger funds created great track records in the mid-market before growing, but that there is still good money to be made in the space they originated from.”

There has also been a sense of urgency surrounding Nordic fundraising: investors feel the need to jump on the bandwagon now, before it disappears over the horizon. Whereas many GPs in the rest of Europe have tended to delay distributing their private placement memoranda until 2005, the Nordic region has well and truly sated its appetite for capital in the last couple of years.

In the last two months alone, LBO specialist EQT raised €2.5 billion in just six months for its fourth fund while Stockholm neighbor Accent Equity Partners, a mid-market firm, beat its €200 million target with a €250 million debut fund. Accent partner and investment manager Niklas Sloutski endorses Davidsson's sentiments regarding the perceived opportunity: “During the years we have seen a number of funds migrating from small and mid cap transactions to mega funds, moving away from us not only in terms of transaction size but even geography.”

Add to these recent successes some of last year's headline acts such as Altor Equity Partners' closing of a debut €650 million mid-market fund in just four months and EQT rival Nordic Capital's garnering of €1.5 billion for its “substantially oversubscribed” fifth fund and you begin to appreciate the scale of Nordic activity in a generally subdued fundraising environment.

But after Segulah and a number of other recent launches such as Norway's Reiten & Co and Denmark's Polaris Private Equity, the only other major Nordic fund manager with a declared short-term fundraising ambition appears to be Helsinki-based CapMan. A spokesman for the firm confirmed that it would be raising a mid-market equity fund in 2005, having recently announced the first closing of a mezzanine fund on €105 million.

Some observers will cite the old adage about too much money chasing too few deals and conclude that an already mature market could see competition reach unhealthy levels. But in the same way “overheating” is a word that rarely falls from the lips of Nordic meteorologists, so too is it absent from conversations with the region's private equity pros – many of whom say the market could comfortably sustain an even greater population of investors. You even hear this opinion voiced by resident GPs, in spite of what one assumes would be negative implications for their own firms should a more competitive environment take shape.

It is a view that carries some weight. The region's private equity market was considered “mature” long before Altor came along and blew the assumption away. Yes, much of the fund's support was based on founder Harald Mix's outstanding track record at Industri Kapital, but it also reflected his perceived shrewdness in identifying an upper mid-market niche under-served by local investors. Ironically, Altor may find the competition in its space about to hot up as Industri Kapital, following the limited success of its latest fundraising, may be moving somewhat closer to its original mid-market roots.

Local practitioners say a number of midmarket niches could be exploited if only those who have identified them could elicit sufficient interest in their propositions. One area inviting further examination is business turnarounds, a US import that has been latched onto in Europe by a small number of specialists including Alchemy Partners and Rutland in the UK, as well as Nordwind Capital and Orlando Management in Germany. Norway's Credo Partners, which was established last year, claims to be the Nordic region's first focused turnaround player, though Danish quoted conglomerate VT Holding has also evolved into a turnaround specialist after having enjoyed some success on an opportunistic basis.

Explaining the rationale for launching the firm, Managing director Wilhelm Mohn says: “Credo Partners targets underperforming companies for implementing strategic, operational and financial changes for restoring profitablity to create a platform for further growth or a route to exit. Turnaround focused investments remain a largely untapped niche in the Nordic region and Credo Partners represents a first mover institutional turnaround firm in the Nordic market.” Do investors buy that story? Marete Hanetho says thus far Credo has provided equity when needed from “internal resources” but is “discussing the option of raising a fund.”

In addition to firms keen to pursue unfamiliar strategies, others are seeking to differentiate themselves from a predominance of generalist investors by focusing on just one sector. For example, Copenhagen's Dania Capital raised DK600 million (€81 million; $98 million) last year from one cornerstone investor, Fonden Realdania, which is a charitable investment association. The charity, for which improved housing and the preservation of historic buildings are two core aims, was keen to back Dania's focus on the construction and building sector.

Dania, which has yet to complete a deal, had hoped that by this time it would have raised an additional €80 million from other backers, but partner Jørgen Jensen says the priority is now on doing deals, establishing a track record and only then seeking to invite in new investors. The absence of both deals and local institutional support so far is not worrying Jensen. He says the firm is looking to close “one or two” investments by the end of the year, and points out that Fonden Realdania has pledged to back subsequent funds so long as the firm meets return expectations.


Name of fund Name of firm Type of fund Geographic focus 1st/2nd/ Target final Amount closed,
final close total date
Accent Equity Partners I Accent Equity Partners Private equity Nordic region Final lJ€200m €250m, Aug 04
Altor 2003 Altor Equity Partners Private equity Nordic region Final lJ€500m €650m, Jun 03
CapMan Mezzanine IV CapMan Mezzanine Nordic region 1st Unknown €105m, Jul 04
Dania Capital Fond I Dania Capital Private equity Denmark 1st U£160m €80m, Oct 03
Danske PEP 11 Danske Private Equity Private equity N America & Final U£600m €527m, Oct 03
fund of funds Western Europe
EQT IV EQT Private equity Northern Europe Final U€2bn €2.5bn, Aug 04
IK 2003 Industri Kapital Private equity Europe 1st lJ€1.6bn* €500m, Oct 03
Nordic Capital V Nordic Capital Private equity Nordic region Final lJ€1.5bn €1.5bn, Apr 03
Procuritas Capital Procuritas Private equity Nordic region Final lJ€300m €230m, Jun 03
Investors III

Few GPs argue that local investor support for the industry was lacking when it was in its infancy – quite the contrary in fact. But is it just the drive towards diversification that is keeping local LPs away from home-grown managers, or can they, from their closeup view, see things that are making them cautious? When pressed on the point, Bisgaard-Frantzen concedes that something of a herd instinct can be detected in Nordic fundraisings at present. “There is a little bit of hype around and we do see some signs of too much capital being invested in certain funds.” This is a measured assessment: in private, some investors express rather blunter views about what they see as the potential formation of a bubble.

On the other hand, one should not jump to negative conclusions too readily. Some trepidation expressed by certain investors about particular funds does not add up to a picture of the region's LP and GP communities ignoring each other. Take a look at the venture space and you find state-backed organisations such as the AP Funds in Sweden and Vaekstfonden in Denmark stepping in to administer first aid to survivors from the tech crash wreckage. And a number of the region's pension and life insurance companies have demonstrated loyalty to the once fledgling buyout firms that have become the high-profile hitters of today – accepting those firm's strategic evolutions along the way.

The bottom line is that for today's mid-market Nordic funds the attitude of local investors matters little when their international counterparts are beating a path to their door. When it comes to investing the money, their challenge is to prove that the reputation of the Nordic region as a profitable hunting ground for private equity investors applies equally well to the future as the past. If so, they can rest assured that their new friends in the LP community are not of the fairweather variety.