Outlook 2016: Nordics continue to deliver

SL Capital’s Graeme Gunn explains why the Nordic region will remain at the top of the firm’s wish-list next year.

The Nordic region has long been hugely popular with LPs, and Graeme Gunn, a partner at SL Capital, doesn’t see that changing in 2016.

“We like the Nordic market for a number of reasons: it’s a very stable fiscal environment; private equity’s well-liked by management teams and corporates so transactions happen fairly smoothly; [and] it’s a relatively broad industrial landscape with a good service sector, so whatever strategy you deploy you can generally find high quality businesses across the piece.”

Gunn points out that a purely Nordic investment strategy would have done well for investors over the last 20 years, adding that SL Capital is looking to increase its exposure to the region.

“If you look at our listed investment trust, for example, we’ve been trying to skew that vehicle more into the Nordics over the last couple of years,” he said. “As a house we are buyers of that Nordic exposure. We have a high allocation, however, we wish we’d bought more a bit earlier.”

The Nordic market is a competitive one for GPs, but Gunn sees room for more players to take advantage of the opportunities on offer.

“We would like to see more groups establishing in the region,” Gunn said. “It is quite competitive, but a lot of the funds aren’t really interested in growing in size that much, which is positive for returns, however, it can be quite problematic to increase your exposure in the region.”

Gunn expects to see three or four new funds come onto the scene next year. However, in order to succeed they must have something to differentiate themselves.

“We want to try and find managers in the region who are originating on a more proprietary basis, and it’s a market where you can still do that to a certain [extent],” Gunn said.

“People will work one-on-one with a trusted local partner, and it is a market where locals work together. There is a much more open field for the pan-Europeans in the larger deals, however, we would definitely still perceive it as an insiders’ market.”
Deal flow in the region has been robust in the last 12 months, Gunn said, although the market forces at work in each of the four economies vastly differ.

Norway is in the grips of an economic slow-down in the wake of plummeting oil prices; Sweden is enjoying a boost in consumer confidence on the back of strong economic growth; Finland is suffering from a lack of economic flexibility through its ties to the euro; and Denmark finds itself somewhere in the middle of them all, with an economy in recovery.

“We’ve seen some of the more distressed-focused private equity funds having a look at troubled energy assets in Norway,” Gunn noted as an example. “We note that some of the Norway-focused banks are being a lot firmer on refinancing oil and gas businesses, so you may see more restructurings around that.”

A key competitor for private equity funds operating in the region this year has been the IPO market, Gunn said.

“The pension funds have been active in trying to stimulate investment in listed companies locally, so certainly in Helsinki [and] Stockholm management who would have notionally sold to private equity, are looking to IPO and finance growth in this way as the stock markets are willing to take smaller businesses.”

Gunn also anticipates local pension funds playing a greater role in co-investments in the region next year.

“The local pension funds themselves are becoming more attracted to co-investment, so they’re partnering with some of the bigger funds on local deals,” he said. “I think that’s a recognition by the pan-European groups that if you’re doing a deal in the Nordics you need a local partner to help the political and regional variances that you have there. I think it’s good business to have local partners.”