In from the cold

“There's a void in the mid-market and that's what we're trying to fill,” says Ferd Private Equity partner Tore Rynning-Nielsen, explaining the rationale for the firm's debut fund, which achieved a first closing in August on NOK1.25 billion (€151 million; $186 million). You might not think it – and Ferd might not be pleased to hear it – but a number of other private equity firms are suddenly saying similar things about Norway.

Ferd managed to garner support from 15 Norwegian institutional investors such as industrial conglomerate Orkla and life insurer Storebrand Livforsikring as well as parent company Ferd AS, the industrial and alternative asset investor. When you also factor in potential interest from the “several foreign investors” that Rynning-Nielsen points to, even though the fund's overall cap at NOK1.5 billion won't leave much room for contributions from abroad, you start to wonder whether the ice may be melting in a buyout market that to outsiders appeared frozen in time.

Take a quick glance at other recent fundraising announcements and the evidence appears irrefutable. Also in August, FSN Capital launched a NOK1 billion target fund with a commitment of NOK200 million from Argentum, a fund of funds owned by the Norwegian government, plus undisclosed commitments from Nordea, DNB Nor, Storebrand and Höegh Capital Partners, a London-based family office.

Meanwhile, the country's two longest established private equity firms – Reiten & Co and Norsk Vekst – are both embarking on the fundraising trail as well. Reiten has hired Merrill Lynch as placement agent for a fundraising effort that well placed sources say is targeting €150 million, while Oslo Stock Exchangelisted Norsk Vekst is understood to be short-listing placement agents for a proposed launch in the near future.

CAPITAL INFLOW
Christoffer Davidsson, a principal at fund placement agent Campbell Lutyens, says fundraising is being helped by the view of domestic investors that some GPs have now been around long enough to boast track records worth taking seriously. Reiten commenced its private equity activities in 1996 for example.

There is also more domestic capital to put to work, says Wilhelm Mohn of Norwegian turnaround specialist Credo Partners. “Institutional investors, wealthy individuals and government agencies are the key drivers behind the recent wave of private equity fund raising in Norway. As the private equity market in Norway is maturing and becoming more sophisticated, investors in search of diversification and higher returns, increasingly view private equity as an attractive investment component.”

The government is also seeking to stimulate the buyout market. Bergenheadquartered Argentum, the only private equity fund of funds based in Norway, was established in 2001 by the Norwegian Ministry of Trade and Industry to be “a driving force in the development of an internationally competitive private equity environment in Norway”. Initially it invested solely in venture funds such as Teknoinvest VIII and Energy Ventures, but is now targeting the buyout market too – as witnessed by its investment in FSN Capital.

The inflow of capital may in due course be boosted further by Oslo Pensjonsforsikring (OPF), Norway's largest municipal pension plan with €3.6 billion in funds under management, which has a stated aim of diversifying its current allocation and is tipped to allocate to private equity soon.

By contrast, hopes that the enormous €100 billion Petroleum Fund will make a similar move are expressed infrequently. Whilst the fund – which was established in 1990 to invest the huge trade surplus generated by Norway's oil reserves – has gradually increased its risk profile over the years, there appears no immediate prospect that it will embrace the asset class. Even if it did, its aim of reducing Norway's dependence on domestically generated sources of revenue would make it an unlikely supporter of Norwegian-based funds.

The Petroleum Fund's existence is testimony to Norway's reliance on oil production, with oil and gas accounting for around 35 percent of the country's exports, making it the world's third-largest oil exporter after Saudi Arabia and Russia. The economy is dominated by large stateowned oil enterprises, which is part of the reason why private equity has struggled to take root – in that sector at least, there are few opportunities for private investors to get a look in.

HOME'S WHERE THE HEART IS
In other sectors though, it's a different story. “Norway is less export oriented than other Nordic countries, partly because it is not a member of the European Union,” says Kai Jordahl, senior partner at CapMan, which established an Oslo office earlier this year. “This means that the economy is more sheltered from competition, providing good opportunities in some sectors serving domestic markets.”

Jordahl adds that one such example is retail – a view endorsed by Industri Kapital, the Stockholm-based equity house that also has a presence in Oslo. The firm recently completed its fourth deal in Norway when leading the €300 million buyout of wholesaler Terje Høili and discount retail chains Europris and Max 20 to form newco Ekstrem Lavpris.

Industri Kapital deputy director Trygve Grindheim says there is strong demand in Norway for discount offerings at present. He also feels that by targeting deals of this size, the firm is keeping out of the reach of potential competition. “Private equity firms are realising that the mid-market sweet-spot is not very well covered, but now it might get overcrowded if everyone piles in at the same time. That doesn't matter to us because they are operating below our deal size threshold.”

The danger of potential overcrowding is perhaps not one that the Norwegian private equity market ever expected to contemplate, and some observers remain unconvinced that there is a pot of gold awaiting the new generation of domestic funds. Says one leading London-based placement agent: “Most of the funds are unproven by European standards and it's a very small economy from a buyout standpoint. Investors may already be getting enough exposure to the market from non-Norwegian funds that invest there on an occasional basis.”

Such thoughts, should they prevail, will do little to entice international investors to Norwegian fundraisings. According to the Norwegian Venture Capital Association's most recent available figures, in 2002 domestic investors accounted for 95 percent of total funds raised, compared with four percent from other European investors and just one percent from outside Europe. But things may be changing, due to a growing perception of Norway as an emerging private equity market in one of the world's most thriving economies. Such a desirable combination could well find something of an international following.