Life in a colder climate

Nordic private equity firms have gained an enviable reputation over the years for their ability to deliver stellar returns. Take Procuritas Partners for example, the mid-market investor with offices in Stockholm and Copenhagen, which claims a 70 per cent net IRR for the period from 1990 to 1999. Nordic Capital, one of Scandinavia's leading large-cap buyout specialists, has had similar success, as have other houses. But are the high flyers in the region about to be brought down to earth?

Despite having the kind of track record that many industry practitioners would argue should make a fundraising campaign a reasonably straightforward campaign, Procuritas closed its third fund over €70m below target at €227m in June this year. To question the appetite of investors for Nordic offerings on that basis would be premature – the fund was, after all, 2.5 times larger than its predecessor.

But the question becomes more urgent when one takes into account Industri Kapital's first close at €500m in October. IK, one of the region's ‘big three’ alongside EQT and Nordic Capital, has its work cut out to achieve its original €2.5bn final target next year. Meanwhile in the midmarket Accent Equity Partners, the group formed from this year's merger of Euroventures and Nordico, has set a final fundraising target of €200m for its debut fund – at the bottom end of the original range of €200m to €300m.

You have to ask whether there is sufficient quality deal flow

Of course, one could argue that the Nordic region is simply suffering from the fundraising malaise that has afflicted private equity firms around the globe. The fall in value of institutional investors' funds due to the collapse in equity markets has meant they have a lower net total to invest in private equity – does one really need to look any further?

An examination of Scandinavia's competitive environment today would suggest one does. The successful fundraisings of the 1990s meant that the ‘big three’ were forced to look increasingly beyond the Nordic region for sources of deal flow. This seemed great news for those targeting what might be described as the ‘upper end’ of the mid-market, as they contemplated the possibility of deals being left behind for them to sweep up. What they were forced to consider instead was the prospect of something of a foreign invasion as UK-based funds went increasingly pan-European. London-based houses Bridgepoint Capital, CVC Capital Partners and Apax Partners have all set up offices in Stockholm recently.

Andrew Barrett, a director at Apax Partners, has no doubts about the region's ability to deliver. He is currently the firm's only representative in Stockholm, with a number of Nordic nationals assisting him from London and Munich, but he expects to build a Stockholm-based team of up to eight professionals within the next three years. “We back entrepreneurs in growth-oriented situations. That's why we are increasing our presence and deal flow because we are seeing substantial opportunities in both buyouts and venture,” he says.

Permira is another UK-based fund to have established a presence, having launched a Stockholm office in March under the leadership of partner Kurt Björklund. The firm has not specified geographic allocations for its new €5.1bn European fund, but even a small percentage of the fund's total invested in Scandinavia would be enough to make the firm a significant regional player. “We are looking at opportunities across the sectors where Permira has strong sector skills, with a focus on international businesses,” said Björklund.

In addition to the influx of foreign funds, there is more competition on the home front. Altor Equity Partners, the firm set up last year by former Industri Kapital co-founder Harald Mix (whose departure is widely thought to have affected the appeal of IK's current fundraising to investors) bucked the prevailing fundraising trend by securing €650m in less than six months and surpassing its target by 30 per cent. Procuritas, despite falling short of a tough target, has a notably bigger fund than previously; Helsinki-based CapMan has recently expanded its teams in Sweden and Denmark; and Accent Equity Partners is heading for its €200m final close.

Once it was easy for the majority to raise funds, but now it is only the best

Some argue that this merely acts as a counter-balance to the disappearance over the last five years of other participants such as UBS Capital, which was one of the more prolific international investors in the Nordic region. The argument of Conni Jonsson, managing partner at EQT, is not uncommon: “Many funds have been active over the last 20 years and I would say that the level of competition has remained pretty steady. People who say otherwise are only demonstrating that they don't know the market very well.”

Altor's Mix insists he is operating in the vacuum vacated by the ‘big three’ by targeting deals worth between €25m and €75m, and says it is investors' apathy towards large LBO funds – with the exception of industry leaders such as Permira – that led to Altor's success. He acknowledges there is competition from UK-based firms such as 3i and Bridgepoint Capital, but clearly has confidence that a combination of target deal size, geographic focus on the Nordic region only and the track record of his team means that Altor is well placed among home-grown operators.

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Others are more sceptical about the market's ability to provide enough space to those trawling it. Ray Maxwell, managing director of private equity at Invesco Asset Management, is an institutional investor who baulks at the current level of competition – even though he recognises some attractive characteristics in the region, including a high level of integrity (meaning deals are easier to do than in other parts of Europe), a good advisory network and a plentiful supply of debt finance: “The Nordic region had a lot of interesting assets in play in the late 1980s and early 1990s, but it is now looking so over-fished that it reminds me of the Icelandic cod wars. You have to ask whether there is sufficient quality deal flow.”

Deal drought
Maxwell's fear is borne out by figures from the Centre for Management Buyout Research at the UK's University of Nottingham. To take the example of Sweden, CMBOR registered a fall in the total value of deals to €970m in 2002, from €3bn the previous year. Over the same period, the number of transactions declined from 47 to 25 and the average deal size from €64m to €39m – an insufficient supply bearing in mind the number of hungry mouths to feed. Significant falls in value were also recorded elsewhere in the region, with the exception of Denmark, where the €1.4bn total amount was skewed by CSFB Private Equity's €962m buyout of Nycomed Pharmaceuticals from Nordic Capital.

There are hopes that activity will recover in part as a result of an increase in public-to-private transactions, and there is some evidence of this occurring. For example, in April of this year CVC acquired Danske Traelast, the retailer and distributor of building materials in a de-listing from the Copenhagen Stock Exchange for €762m. In October Nordic Capital agreed to buy Hackman, the home and kitchen equipment manufacturer listed on the Helsinki Stock Exchange, for €159m. Recently Lehman Brothers Real Estate and Swedish equity provider Ratos joined forces to bid for listed Swedish property company Tornet for €543m.

Despite these developments, the prospects for public-toprivate transactions in Sweden have been somewhat hampered by repercussions stemming from Industri Kapital's takeover of Stockholm-quoted chemicals company Perstorp in 2001. Although this transaction eventually went through, Industri Kapital withdrew its original offer when bankers supporting the deal walked away after due diligence revealed that the target company was in worse shape than anticipated. “The deal led to much debate regarding the conditions under which bids are made and what the bidder's obligations should be,” said Wilhelm Luning, a partner at Swedish law firm Cederquist. These discussions are said to have contributed to subsequent amendments to the country's Takeover Code, which came into force on March 1 2003.

NBK, the Swedish stock exchange's self-regulatory body, recently recommended that the conditions relating to bids should be more transparent. In the fourth edition of its recommendations, NBK stated: “…The preparations made must indicate that the bidder has the capacity to implement the offer. In the case of an offer wholly or partly in cash, this means for example that the bidder must ascertain that there are sufficient financial resources to complete the offer.”

Practitioners do not seem unduly worried by the recommendations. The views of Jan Ohlsson, chief executive of Accent Equity Partners, are fairly typical: “Some offers have been made and then fallen through because of a lack of financing, but I think they were special situations that won't create a long-term problem. After all, if you have everything else in place for a bid, you should have the financing in place as well.

Exit prospects are improving, after an increase in the number of secondary buyouts and trade sales

It is a view shared by Arne Karlsson, CEO of Ratos, who led the firm's participation in the bid for Tornet (at the time of this article going to print, the transaction had yet to close). “The demand for greater transparency has definitely made the pre-launch preparations more tedious than before,” he said. “On the other hand, if you assume your offer should be accepted, that work will have to be done anyway. In that aspect one could say that the new regulations have not changed the demand on the transaction itself.”

Exit door opens
One bright point for Nordic investors is the recovery seen in the region's stock markets. Although there have been no IPOs in Sweden this year, there is hope of a strong recovery in 2004. The Swedish blue-chip OMX Index was up 22 per cent in the first nine months of 2003 – outperforming the FTSE Eurotop 300 Index by 14.6 per cent over the same period –, according to figures produced by the Swedish Private Equity and Venture Capital Association.

“Exit prospects are improving,” observes Vesa Suurmunne, chief executive of mezzanine provider Nordic Mezzanine. “As well as confidence in the future of IPOs, there has been an increase in the number of secondary buyouts and trade sales in recent months.” Examples of the former, such as Nordic Capital's sale of pharmaceuticals company Nycomed to CSFB Private Equity and Industri Kapital's divestment of animal health firm CEVA to PAI, may indicate that the Nordic region's private equity firms are coming to terms with selling to financial buyers more readily than those in other parts of Europe.

Although private equity firms around Europe have suffered from a lack of trade buyers, Accent Equity Partners chief executive Jan Ohlsson feels this is a situation that may improve in the Swedish mid-market as investee companies grow their operations for the first time outside Sweden and into neighbouring countries. “A US buyer wouldn't bother looking at a firm that has activities only in one Nordic country but if it's in three or four countries then that's another matter,” he says.

An improving exit environment would certainly come as a relief to GPs and LPs alike as they ponder the future. But until it becomes more evident, it may do little to persuade institutional investors to increase, or even maintain, their commitment to the region. What is almost certain is a continued flight to quality. “The fundraising environment will remain tough but for the right firm with a top quartile track record in buyouts, no worse than before,” said Christian Sievert, managing partner at mid-market Nordic investment firm Segulah, which is currently investing its second fund. “Once it was easy for the majority to raise funds, but now it is only the best.”

With reports from sources close to Industri Kapital that their fundraising, following the first closing in October, is gathering fresh momentum, it may be that the Nordic private equity market has suffered only a brief reminder of its limitations and that short-term difficulties can be overcome. But if investors would seem justified in expecting future returns to be falling short of those generated in the 1990s, especially if deal flow remains subdued and entry multiples are forced up as a result.