Punching above its weight

Nordic financial institutions have already made significant contributions to the private equity asset class. According to EVCA, in 2001 Swedish, Finnish, Danish and Norwegian investors between them accounted for some five per cent of capital committed by global investors to European private equity funds, no mean feat considering that the four countries' combined population is a mere 24m.

This part of the buyside is a distinctive one and as a result Nordic investors are sought-after clients of domestic and international private equity funds. This is partly because of the large amounts of capital that they can bring to the table, partly because of the interest many have in the mechanics of the class. Says a London-based fund of funds manager: ?Most Nordic investors approach the asset class in a very thoughtful and analytical manner. And they like to do their own work: you won't see many advisors involved in the investment process.?

Pension funds from all four countries are already prominent participants in international private equity, as are the large insurance companies in the regions including Alecta, LF Insurance Group and Skandia in Sweden and Storebrand and Gjensidige in Norway. In Denmark, Danske Private Equity, Nordea and ATP, the labour market pension fund, all manage multi billion Euro fund of funds programmes. Among the Nordic banks, SEB is the most involved, running a series of discretionary private equity funds.

Attracted to the promise of high absolute returns and keen to diversify their asset base, Scandinavian institutions are widely expected to raise the stakes and expand their private equity allocations going forward. As a result, the region is a popular destination for fundraisers at this point in time, even though few are under any illusions as to how little real business they are likely to get done in the short-term.

Nordic investors in private equity, like their peers in other parts of the world, are busy working through problems stemming from the current market turmoil that has seen elements of their fund portfolio struggle. This review stands in the way of making new investments in the short term. Problems in their public equity and fixed income portfolios are a significant distraction, leaving investors with overallocation problems, insufficient liability cover and solvency issues. Recent disappointments particularly with venture capital are also still fresh in their minds, adding to a general mood of caution.

Plenty of conversations are nevertheless ongoing now, as general partners and funds of funds are keen to get into positions where they can place limited partnership interests once investment activity resumes. ?This is a very relationship driven marketplace, and the sales cycle is long-term. You can't expect to just fly by and do deals when it suits you,? says the same UK fund of funds manager.

New prospects
What both domestic and international fundraisers naturally find most intriguing is the prospect of winning business from investors in the region that are new to private equity. ?There are a several concentrated pockets of capital in the region that are looking to make an impression in the asset class.? says Staffan Elmgren, an independent investment consultant in Stockholm.

The most obvious institutions to inject fresh capital into partnerships are Sweden's AP Funds, the country's national pension funds that operate as buffer funds in the Swedish pension system which was restructured in 2000. AP funds 1 to 4 are multi-asset class funds managing SEK52bn between them, and all it seems have an appetite to put a significant portion of their capital into private equity and hedge fund investments. AP3 is most advanced in its efforts to get its money working amongst private equity firms. AP3 is aiming for a five per cent commitment to private equity, with 30 per cent in Nordic funds, another 30 per cent in other parts of Europe and 40 per cent in the US.

The other multi-asset funds are at an earlier stage of their planning. AP2 launched their programme in August of this year with a couple of small allocations to Nordic buyout manager EQT and earlier stage investor Swedestart, whereas AP4 and AP1 are yet to enter the fray. Also, and unlike AP3, all of them are expected to invest the vast majority of their allocation to the class via fund of funds. Further down the line is AP6, another buffer fund with a mandate to exclusively invest in unquoted securities. The fund, which has SEK11bn (€1.2bn) allocated to the asset class, started building a mixed portfolio of direct and indirect investments in 1997, but in 2000 decided to change direction and solely concentrate on indirect and co-investments instead.

Sweden is thought to be home to the largest number of potential new entries to private equity, but fundraisers are also watching (and keeping very quiet about) a number of dark horses in Finland and Denmark. Norway is considered least promising in terms of new institutions moving into the class, but it does have by far the biggest trump card of all up its sleeve. It is home to the giant Government Petroleum Fund, which derives its income from taxes on offshore oil and gas producers and is managed by Norges Bank Investment Management. The fund currently has some €70bn in assets, which are expected to grow to €200bn by 2010. Should it decide to move into the asset class with a meaningful allocation, it would certainly make an impact, although it is very early days: the market expects the Norwegians to take at least another two years before they make their move. But when they do, the Nordic buyside will have gained further heft amongst the world's private equity community.