REGIONAL REPORT: NORDIC

Looking at the volume and velocity of private equity fundraising in the Nordic region so far this year, you could be forgiven for thinking we were in the midst of a credit bubble rather than a credit crunch. In defiance of the tough global fundraising conditions, 2008 has so far seen a raft of Nordic players meeting and beating fund targets with seemingly little difficulty.

For example, mid-market GP Altor Equity Partners whipped round investors in two months to close its €2 billion third fund in August, while Danish lower mid-market buyout group Odin Equity Partners has already surpassed its €200 million target for its second fund. Other notable fundraising efforts include Nordic Capital, which is reportedly on course to close a €4.3 billion fund by the end of this year, and Norvestor, which closed its fifth fund in August ahead of a €225 million target.

Danske Private Equity, HitecVision Private Equity, Capman, Herkules Capital: all have been on the fundraising road since January and will expect to bolster already impressive fundraising numbers for the region. At the time of going to press, Nordic firms had raised around €7.3 billion since the start of the year, ahead of the €6.7 billion raised throughout the whole of 2007, according to data provider Preqin.

NICE CLIMATE
Reasons given for the apparently unwavering LP confidence in the region vary, but one factor noted is the regulatory environment. “In many ways, it is simply an easier environment in which to operate a private equity fund,” says Christian Dalum, director of investor relations at Danish firm Odin Equity Partners.

Attractive regulations might be viewed as an extension of the general attitude of the Nordic region towards private equity investment. In other parts of Europe, approaches from private equity to target companies are often viewed with suspicion or outright fear. But in Sweden in particular, where the private equity industry is mature and most deals take place in the mid-market, the asset class is seen as part of the business fabric rather than some kind of breeding ground for parasitic locusts.

“You could say that businesses in the Nordic region have a very good appreciation of what private equity can do in terms of building and developing businesses; in this way it is quite similar to the UK,” says Jan Amethier, head of the Nordic region for international private equity house Doughty Hanson.

Dalum points out that, as in Sweden, Danish “businesses are used to the way private equity works, and so family owners are happy to sell to them”.

That entrepreneurs and family owners play such an important role as sellers to Nordic private equity firms is another reason why the region seems to be so resilient. In a market less reliant on secondary buyouts, the supply of deals has not suffered the same sort of squeeze seen elsewhere.

OPEN FOR BUSINESS
Another factor which ensures that a good portion of the Nordic private equity market stays open for business is the strength of the local banking market.

“Generally the local operators have a higher appetite for take-andhold deals than the large international banks. They're not as driven by the syndicate-and-sell strategy. If they like the credit, they are more likely to take it on these terms and hold it,” Amethier points out.

Simon Wakefield, global head of acquisition finance at Swedish banking group SEB, points out that the Nordic banks are relationshipdriven and have historically been willing to provide higher leverage at lower prices than the larger international players. “During the two- to three-year credit bubble, this position was reversed with the international communi ty providing highe r leverage,” he says.

Now that the credit bubble has burst, and international banks have reined in their lending, the local banks are still putting capital to work, albeit at slightly lower multiples and somewhat higher cost, leaving mid-market activity almost fully intact.

As a result of this, the general feeling is that the lower down the deal size spectrum you go, the more the phrase “business as usual” applies. As in the rest of the private equity universe, large buyouts in the Nordic region are off the agenda. “I am not holding my breath for any sizeable deals right now,” reflects Amethier.

“For financing below the €500 million mark, the local market can handle it. At the €1 billion mark it is possible, but gets more challenging,” says Altor managing partner Harald Mix.

At the lower end of the market, activity is ploughing ahead.

Palamon Capital Partners, a pan-European mid-market investor, already holds two Nordic investments – pan-Nordic consumer finance provider Nordax Finans and Swedish coffee bar chain Espresso House. It is currently actively looking at two more.

“We are still seeing a strong deal flow, both in terms of standard midmarket deals and off-market opportunities,” says Palamon principal Daniel Mytnik.

At this point in time we are upping our investment pace. Many of our potential vendors would have sought funding from the stock markets and now these are all but closed, we are seeing more opportunities

Magnus Hardmeier

Priveq, formerly the captive private equity arm of Swedish insurance giant Skandia, is also upbeat about opportunities.

Having already executed two deals in 2008, it is intending to complete at least one more before the year is out.

“At this point in time we are upping our investment pace. Many of our potential vendors would have sought funding from the stock markets and now these are all but closed, we are seeing more opportunities,” says Priveq chief executive Magnus Hardmeier.

Another mid-market player, Swedish firm Segulah, has seen no sign of a slowdown. In the last 12 months it has completed no less than four exits, three new investments, two bolt-on acquisitions and one major recapitalisation.

As in other regions, falling equity prices have caused a lot of private equity firms to run the rule over undervalued public companies. Palamon's Mytnik is not the only professional to note “a lot of buzz around the public-to-private play in the Nordic region”.

Segulah's latest deal was the €250 million take-private of Stockholmlisted industrials group Gunnebo in August. Segulah managing partner Christian Sievert points out that even including a premium, many public companies are valued below their private counterparts. “Normally we would spend 95 percent of our time focusing on private companies. This year perhaps it is more like 50/50,” he says.

ANYONE FOR SECONDS?
And while the mid-market appears to be holding its own in the Nordics, another section of the industry seems set to positively flourish. Demand for liquidity in the private equity market as more investors face the need to realise or restructure their investments looks set to play into the hands of firms with cash to deploy in the secondaries market.

This is likely to be exacerbated by the fact that, as public equities suffer continued devaluation while private equity interests hold a little firmer – or at least do not decline as quickly – some LPs may find themselves over-allocated to private equity and forced to consider divestments.

Regional firms such as Verdane Capital, NorgesInvestor and Cubera Private Equity have a headstart in this relatively underserviced market.

“Secondary investing has been very slow to take hold in the Nordic region which is suprising given the high quality of GPs and the level of sophistication of the LPs investing in the region. There is a decent case to suggest that secondary investment will begin to take off,” says Cubera partner Niklas Ekestubbe.

With the number of Nordic funds reaching the end of their ten-year life-spans projected to be 58 next year and 98 in 2010 according to data from Thomson Financial, it is hard to disagree with this assessment.