In recent years, private equity in Sweden has been at the receiving end of a great deal of public criticism. And although the debate appears to have started to subside of late, the five practitioners at the Private Equity International roundtable agree that their industry isn’t out of the woods yet. The consensus is that persuading local critics of its merits, and safeguarding its licence to operate, remain priorities for everyone.
Employing approximately 8 percent of Sweden’s workforce, private equity plays a meaningful part in the economy. In 2014, according to Invest Europe, the amount of private equity capital invested equated to 0.37 percent of Swedish GDP – behind the UK (0.72 percent) and France (0.42 percent), but comfortably ahead of larger economies such as the Netherlands (0.29 percent), Germany (0.2 percent), Spain (0.09 percent) and Italy (0.05 percent).
With this much weight and economic influence comes a heightened public profile, scrutiny and often skepticism. In 2011, allegations against Carema, a retirement home operator owned by Triton and KKR, of providing inadequate care and employing questionable tax and remuneration practices, provoked such a furious public outcry that private equity professionals in the region to this day continue to describe the episode as a public relations disaster with lasting impact.
The sponsors involved were seen as being slow to challenge the media’s reporting of the story and to correct some of the misapprehensions it created. Calls for greater regulatory oversight of private equity followed, and left-wing politicians proposed rules to prevent the industry from investing in public services.
Since then much has been done to try to stem the tide. In February this year the Swedish Venture Capital and Private Equity Association (SVCA), in a bid to boost public confidence in the industry’s commitment to acting responsibly and professionally, introduced a code of conduct as a self-regulatory framework that is binding for its members.
It is early days yet to assess the code’s effectiveness, but according to Fredrik Näslund, above, at Nordic Capital, its setting the bar high is welcome because it “makes it harder for any gold diggers to invest in the region with no team on the ground, no website, no system in place to ensure responsible investment and ownership”.
Bjarne Lie at Verdane Capital, who follows developments in Sweden mainly from his personal base in Oslo (Verdane has offices in Stockholm and Helsinki too), says his impression is that the SVCA-led push to better promote the industry in Sweden is “clearly communicated, very well executed and benefitting everyone, including ourselves”.
However, cautions Per Olofsson at AP 7, there are also those industry players that continue to opt out. “Some GPs are still refusing to realise that they’re acting in the political arena and need to engage with the media much more actively, and they’re risking the public’s view of private equity staying negative. As an LP, we too have to convince our savers of the merits of the asset class, but if GPs duck and refuse to make the case for private equity persuasively, others will make the case against it.
“The fact is, private equity still needs demystifying, the public still think there’s too many secrets about it and an unwillingness to be more open. More GPs need to go out there and push.” Ola Nordquist at Permira agrees, and insists that the key is to give transparency wherever transparency can be given: “Obviously many private equity firms are private partnerships, so there are some limitations, but it is crucial that we openly communicate and explain to our investors, the companies we invest in and other stakeholders in society who we are and how we operate. There are still pockets in our industry where people take a different approach.”
Näslund says there are signs that public mistrust of private equity is beginning to soften.
In June, Nordic Capital together with Apax Partners floated Capio, the only privately-owned operator of a hospital offering emergency services in Sweden. Näslund believes the transaction has resonated positively: “I think the IPO has brought some transparency on the company and on Nordic Capital as private equity owners. You could read headlines about a competing hospital that isn’t privately-owned and where people are refusing to work because staff are so stressed out; whereas less than one-and-a-half kilometres away we have [Capio’s] well-functioning hospital, operating on prices that are 25-30 percent lower and still making money.”
State pension plan AP Fonden 4 buying into the IPO as one of the largest investors was a public seal of recognition of the quality the company has developed and maintained under private equity ownership, he adds.
Even so, for the industry as a whole the project to win more hearts and minds among the people of Sweden requires further effort. Stephan Révay at PwC believes that firms with dedicated responsible investment capabilities are better positioned to support it than those without.
Sponsor demand for his firm conducting ESG-related due diligence on prospective portfolio companies is increasing, he adds: “We look at supply chain management and responsible sourcing. We conduct background checks on key personnel, and we’ve also seen private equity firms increasingly asking for social media-related due diligence.”
Another hot button topic for private equity in the region is how firms, funds and the practitioners who work for them get taxed.
In November 2014, in a widely noted landmark ruling, the Swedish Supreme Administrative Court refused to allow the tax authorities to reclassify capital gains generated by Nordic Capital as income rather than carried interest. It also ordered the agency to pay Nordic’s legal costs, which the firm has committed to charity.
For the time being, the verdict has made it less likely that the tax authorities will elect to look into the tax arrangement of other private equity groups. However, the debate around carried interest taxation has not gone away for good, neither in Sweden nor in the other Nordic countries. In Norway, a similar test case involving Herkules Private Equity is pending, again with the tax man aiming to impose a higher levy on carried interest retrospectively.
For those employed by Norwegian private equity firms, the implications would be dramatic, says Verdane’s Lie. “This situation is very similar to where Sweden was a year ago,” he adds. “In all four countries, the authorities are trying to figure out what the appropriate tax structure for private equity should be. Ultimately, it’s a political issue: governments want the industry to stay here, but at the same time we’re an easy populist target. What’s required is a balanced approach.”
WHO'S WHO ON THE ROUNDTABLE
BJARNE K. LIE
Lie is the managing partner of Verdane. Based in Oslo, Lie has worked with the firm since 2001 and currently serves as CIO. A former entrepreneur and McKinsey alumnus, he has led several of the firm’s trademark direct portfolio acquisitions.
Näslund is a partner and member of the investment review committee at NC Advisory, advisor to the Nordic Capital Funds. He joined in 2001 and his investment experience includes for example Point, Permobil and Capio, a healthcare business which listed this year.
Nordquist joined Permira in 2005, became a principal in 2009 and heads the firm’s Nordic office in Stockholm. His track record includes work on TDC and Pharmaq. Prior to Permira, Nordquist worked for Apax Partners in London.
Having been with the firm since 1999, Révay is head of transaction services and a partner in PwC’s advisory practice. Based in Stockholm, he leads the private equity services platform for the Nordic region and has worked on several landmark transactions.
AP FONDEN 7
At the beginning of this year, the 7th Swedish National Pension Fund had SKr254 billion ($33 billion; €27 billion) of assets, of which 3 percent is invested in private equity allocation. Olofsson is head of alternative investments and has been with AP 7 since 2002.