Nordic Roundtable: Pride of the North?

It’s a pleasant sunny afternoon when PEI arrives in Stockholm in late September. Office workers have stepped out to grab some lunch, while groups of tourists – armed with large rucksacks and city maps – are ambling around, taking in some of the city’s stunning sights. And the mood is similarly relaxed in the upstairs meeting room at Hotel Stureplan, where PEI’s annual roundtable is taking place.

There are of course many reasons for GPs in the Nordic region to be optimistic. The region has long been hugely popular with LPs, and it’s easy to see why: stable economies, a well-educated workforce, and lots of well-performing, attractive companies.

What’s more, deal flow is stronger than ever, according to the GPs present. “Nordic Capital has signed six new platform deals this year, compared to three deals last year; so for us, it is a huge pick-up in activity,” says Joakim Karlsson, Nordic’s managing partner.

“Segulah has had the strongest deal flow ever over the last 12 months – approximately 50 percent higher than what we would typically have,” agrees Gabriel Urwitz, founder and managing partner at Segulah. “We have done four deals in the last eight months and five in the last 20 months, which was a lot for us.”

And it’s not like dealflow has only been strong in certain sectors. There’s been activity across the board, according to Urwitz. “There is a lot of oil and gas related deals in Norway. But otherwise I think it’s not [a specific] sector. It seems that now the economy is picking up, companies that could not be sold in recent years are coming to market. We mostly look at carve-outs and non-core assets from larger groups, but there are also of course family businesses that we buy from. We [also] see a strong industrial interest.”

M&A activity among non-private equity buyers has definitely gathered pace, the participants agree. Trade buyers are so active that they’re pipping GPs to deals, according to Richard Burton, Nordic private equity leader at PwC. “In the last two or three weeks, private equity buyers have been disappointed by the outcome of some of the big auctions, where trade buyers have been very strong and won the deal in the end. Corporates worldwide have been holding back from investing for a while; it now seems more confidence has entered the equation globally, so you are seeing US corporations wanting to invest here again. I think that’s probably an issue for private equity, in particular for the larger auction processes.”

These sale processes are indeed increasingly competitive, according to Karlsson. “We actually dropped out from or lost out in the competitive auction processes that we’ve participated in during the last year. It’s very competitive [there], in our view.”
And it’s not just domestic firms and trade buyers that are looking to invest in the Nordics; international investors are increasingly sniffing around, according to Burton.

“There is more demand internationally to invest in the Nordics than can be actually realised in practice, mainly because some of the people trying to do that don’t really have the reach or the local presence or the insights or the network. But has a client ever said to us: “No, we’d absolutely not invest in the Nordics, we are focused on other countries?” No – I’ve never heard that. So I think that there are some frustrated potential investors out there who would like to do more here because they see it as a safe haven – or an innovation paradise – but actually lack the ability to do a deal on the ground.”

EDGING UP

This increased competition is inevitably leading to an increase in valuations and prices, although the flipside is of course that the exit market is very strong – with the IPO market in particular creating more opportunities for divestments, according to the participants. “When a company starts to consider [floating], word leaks out that they’re thinking about an exit, and potential buyers start coming out of the woodwork,” says Karlsson.

Due to the strong exit climate, there has been a return of cyclical companies to the market. “We are seeing some of the more cyclical companies coming up for sale again,” Karlsson suggests. “Since the crisis, there have been very few cyclical companies for sale, for instance in the construction sector. Now, they are back on the table. A lot of these companies have been boosted by the ability to IPO because the stock market has had a strong belief in a macro turn – at least up until around this summer.”

Nordic is however “wary” about this cyclical upside, he adds. “I think the industry did that to its detriment in 2010, because everybody thought things were back to normal and it wasn’t the case. When you look around in Europe, most countries are still on some sort of ‘monetary crutches’.”

The deal environment is also getting more active due to the level of debt that is available, the participants say. “We are almost back at the 2008 levels of leverage,” Jonas Nyquist, head of buyouts at Skandia Life.

“If you see situations where there is an opportunity to finance something in the US market, terms are not comparable between Europe and the US,” adds Karlsson. “In the US, you can get covenant-lite structures. Following the financial crisis, people said that we will never see them again; but now we are seeing them being offered.”

Many GPs have been quick to take advantage of the booming debt market, using it to return capital to LPs through dividend recaps. But GPs need to be cautious, Karlsson points out. “Nordic Capital’s portfolio companies have done dividend recaps only once or twice in the past. If you borrow and take the money out and then the company later gets into problems, you are in a very awkward situation that no one really wants to be in: you have distributed the funds back to your LPs and you cannot get it back to support the company in question.”

This view is echoed by Skandia’s Nyquist. “At Skandia, we of course look at leverage, but ultimately it is the manager who decides the appropriate level. It’s a case by case situation: some companies can carry more leverage than others depending on cash flows, et cetera.”

Dividend recaps always carry reputation risk, Karlsson adds. “It’s not good for our asset class when you get into these very, very buoyant dividend recaps and then the company falters after that, which we have seen recently in Northern Europe. It’s really hard to explain to the public how you ended up in that type of mess.”