Outlook 2014: Nordic perception problems

The Nordic region has had relatively little to complain about in 2013. The region’s economies continued to perform well, as did its banking system. LPs seemingly couldn't get enough of Scandinavia, as a number of funds including IK Investment Partners, Adelis Equity Partners, Triton, FSN and Nordic Capital all successfully raised capital for the Nordics.

Christian Sinding, head of equity at EQT Partners, believes next year will also be a good one.“2014 will continue to be stable if not a slight improvement from 2013 in terms of deal flow and exits,” he says. “There hasn’t been a huge amount of activity in recent years, but it seems to be picking up. I am carefully optimistic.”

Pricing is a concern, however, according to Sinding. “Leverage is readily available both from the public and the private markets in the Nordic region. Combined with the amount of dry powder in the region and the number of strategic buyers, [that] means there’s a lot of competition. A lot of the private equity firms are going after the same type of assets,” he says.

There are two sides to this coin, he points out. “If you have those assets in the portfolio, it's great – because you can sell them at a premium. But if you are only looking to buy, then you have to pay very high prices.” The solution is to be “extremely disciplined” and “only to go after the deals where you have a real angle, an understanding of the business and a plan to add value to the company,” he says.

There have been suggestions that the Nordic region has become a bit overheated lately. But Sinding disagrees. “I don’t really see there’s a difference in competition for quality assets within Europe; the competition is high everywhere. Since I joined EQT in 1998, people have been talking about international competitors coming into this region. There have always been a lot of international players with offices in Scandinavia doing deals every once in a while, so for us there’s nothing unique about that.”

EQT has certainly enjoyed steady deal flow in 2013; it secured six exits, made three investments, created a new structure for its management company and announced a change in leadership, with managing partner Conni Jonsson becoming chairman next year and founding team members Thomas von Koch taking over as managing partner.

Will these changes mean a change of approach for EQT in 2014? Sinding insists not.

“It is actually quite a natural development. Conni has been the managing partner since 1994, when we were founded. He will continue to be very active in all of our investment decisions, but he will be less active in running EQT as a firm. I have been working with both Von Koch and Jonsson since 1998. I think this is a proactive move, in order to make EQT stronger as an organisation over time, and less dependent on any single person.”

One ongoing concern, however, is the public perception of the industry – particularly since Sweden will elect a new parliament next year. “The industry hasn’t done a good job in explaining how it adds value to the general economy; we have recognised this and want to become a leader in this space,” says Sinding. “We have moved all of our funds onshore, we have created a holding company based in Sweden, we have a very open dialogue with all the stakeholders in society. We would like general partners in the industry to think less like investors and much more like owners.”

By being good company owners, private equity can create a win-win situation for its companies and society more broadly, according to Sinding. “That will drive top returns, because our companies are going to be more attractive to other investors, to good quality management teams and to board members,” he says.

Sinding’s other main concern is the performance of the European economy – particularly in Southern Europe. “While we don’t operate in Southern Europe, a lot of the companies we back are selling throughout Europe, so we are impacted by it,” he says. “There’s still a high level of debt in those countries, [with] a very low level of growth and high levels of unemployment. GDP is looking like it’s improving in Europe generally, [including] Southern Europe, but is that really sustainable? And will there really be true economic growth coming in the future? Time will tell.”