The comparison seems improbable at first, but a look at the numbers confirms that over the course of the past ten years Nordic buyout funds achieved a tremendous track record, with IRRs similar to those generated by early stage investors at the height of the boom market. Staffan Elmgren, a former senior investment manager at SPP/Trygg-Hansa, the life insurance and pension fund group, who now works as an independent investment consultant, estimates that between 1992 and 2000 Swedish buyout funds alone averaged an annual IRR of more than 40 per cent, far above the 18 per cent of their European peers, and even in excess of the highly presentable 32 per cent that US venture capitalists generated over the period. Procuritas Partners, a mid-market buyout firm set up in 1986 and operating out of Stockholm and Copenhagen, claims a 70 per cent net IRR over the period from 1990 to 1999, for instance.
Sharing this best-in-class kind of history also means that the two highflying groups are facing similar challenges going forward. It perhaps goes without saying that both will find maintaining past performance levels difficult, if not impossible, since both benefited from windows of opportunity that have since shut and are almost certain not to reopen again.
What the technology sector boom did for US venture managers was given to Skandinavian private equity houses by a market environment that went from offering highly attractive investment opportunities in the first half of the 1990s to providing excellent exit routes thereafter. A small number of local funds set up in the late 1980s, which had their home markets entirely to themselves as international competitors had not yet moved in, were able to acquire well-run, outward-looking businesses with an appetite to expand internationally. In Sweden, the banking crisis of 1990 meant investors who had an appetite for risk, were financially savvy and had money to spend were able to buy good businesses at depressed prices. Years later, when stock markets were rising and the M&A market booming, exiting these businesses proved relatively straightforward and immensely profitable.
A different market environment
Today the environment has changed. The market is maturing. Buying at low multiples has become harder, and exits have become more difficult to achieve, particularly over the past two years. The good news, according to local practitioners, is that unlike the Nordic region's venture capital industry, which has ground to a virtual standstill in recent months, the buyout market is holding up well despite the current downturn. Hans Karlander, managing director of Procuritas, says the region still is Europe's most attractive market for buyout operators: ?It's ahead of continental Europe without being overexploited like the UK. There's a good level of competition, sophisticated investors, professional banks and advisors and a fairly high awareness among vendors of the possibility to sell to financial buyers.?
Arguably the most competitive part of the market is the large leveraged buyout segment, where international firms including Doughty Hanson, BC Partners, Apax Partners and Texas Pacific Group have long established themselves to take on the three dominant local LBO players: Industri Kapital, EQT and Nordic Capital. They in turn are in no doubt as to how to respond to the challenge: ?The market has become highly developed, which makes it more important to be able to articulate a strategy clearly,? says Christian Salamon, a senior partner at Industri Kapital. The point is echoed by Conni Jonsson, managing director at EQT: ?Each player will have to think about what they're good at quite carefully,? he comments.
Although the foreign competition should not be underestimated, the home trio still enjoys a formidable advantage, derived from their being part of a closely-knit network across Scandinavia's financial and industrial establishment. ?If a deal comes on the market via the banks without us knowing about it, we have failed,? declares Jonsson. Here the grapevine is relatively short and hence all the more effective in disseminating information, and the local buyout firms can readily position themselves at the centre of what still is a relatively small market community. Salamon estimates that over the past five years, some 75 per cent of the large deals in Sweden have been done by the three big local rivals.
Both Jonsson and Salamon agree that there is still a lot of good business to be done across the region. Salamon notes that although there are currently fewer deals in the market than a year ago, the outlook is encouraging: ?There are still fragmented industries to be consolidated, and there are also opportunities for local public-to-privates as well as turnarounds.?
Public-to-privates is a theme that many in the market expect to account for a significant part of future deal flow, particularly in Sweden and Finland where stock market valuations have been harder hit than in most other economies. An illustration of the extent of the difficulties came when Investor AB, the influential holding company controlled by the Wallenberg family that is heavily invested in Swedish blue chip equities, said net asset value had dropped by more than 40 per cent in the nine months since year end 2001. In addition to delistings, financial sponsors should be able to tap an ample supply of investments from medium to largesized companies looking to restructure and focus on core activities as part of an effort to compete more effectively outside their domestic markets.
Private equity investors know that now is a good time to invest. As Jonsson observes: ?It's a good time for financial buyers, because trade buyers are lying low.? His firm is arguably best placed to take advantage of the opportunities that will present themselves over the coming months. While both Industri Kapital and Nordic are currently fundraising, EQT has over €1bn from the €2bn equity fund it raised in 2001 still to invest. Its own fundraising efforts are focused on a mezzanine product that the firm intends to add to its existing product line.
However, the big question facing all three houses is to what extent the local markets can indeed provide a sufficient flow of deals large enough to be worth their while. None of the mid market transactions but the very largest can accommodate the kind of big equity tickets that firms with billions of Euros under management require to operate economically. Of the big three houses, only Nordic Capital retains an active interest in smaller deals.
Unsurprisingly therefore, both Industri Kapital and EQT have long had other parts of Europe on their radar screens. The former already has offices in London and Hamburg, while EQT is developing its Munich-based German investment arm, which recently completed its debut investment, the acquisition and subsequent merger of two fragrance manufacturers. Says Jonsson: ?We're happy to grow slowly, as long as we keep moving in the right direction. Germany should be a big enough market to keep us busy for some time.? One of the firm's senior executives, Bjørn Høi Jensen, is in the process of relocating to the Munich office in order to aid the expansion process.
Big in the midmarket
As the big buyout houses move upward and onward, the smaller firms, whose focus remains firmly on the Nordic midmarket, are happy to compete among themselves. Karlander at Procuritas describes the target zone for these players: ?We see around 3,500 relevant businesses across the region. If we assume that 10 per cent of these aresubject to ownership amendments every year, there is an annual potential of about 300 to 350 deals. Between 15 and 30 of those are buyouts with an enterprise value exceeding €25m, which is a good indicator of the opportunity that exists in the mid segment today.?
Procuritas is currently raising its third fund, a €300m vehicle which recently held a second closing on €185m. Karlander says the fundraising is progressing well despite the difficult market conditions.
?Nordic is ahead of continental Europe without being over exploited like the UK?
Once raised, Procuritas' latest investment vehicle will be competing with a number of Swedish firms including quoted investors Ratos and Bure Equity as well as Segulah, a medium-sized investment house that focuses on the service, trade, retail and light manufacturing sectors. Other contenders include Danish houses Polaris Private Equity and Axcel Industri Investor as well as UK-based midmarket specialists Bridgepoint and 3i, which in 2001 acquired Atle, Sweden's oldest venture capital firm.
Both Atle's sale and the more recent purchase of Swedestart, a venture capital provider, by CapMan, the largest private equity manager in Finland, are early signs of what many believe will be a significant consolidation period that will change the face of the industry, both at the early stage investment end as well as in the midmarket.
Another agent of change in the industry is the prospect of new players arriving. One project which is subject to considerable market speculation at present is a €600m midmarket buyout fund launched by Harald Mix, a former key member of the team at Industri Kapital who left the firm last year. If Mix was to succeed with a fund this size, he'd be well-placed to help shake up the Nordic middle market going forward.
One aspect of the current period of transition which is certain to affect both incumbent funds and newcomers is the normalisation of return expectations among limited partners. Investors who have had exposure to the region for a long time might still be experiencing a sense of disappointment now that the Nordic buyout market's golden age has come to a close. But they do know that the performance of the 1990s can't be the benchmark for funds that are being invested today, which is important for the industry. Nordic GPs still believe that they can outperform their European peers, but what they don't want to do is start chasing venture style returns. These seasoned practitioners know that the market has moved on ? and they have too.