When KKR acquired a stake in Nordic software business Visma in 2010, the firm knew bold measures would be needed to keep pace in the rapidly evolving technology sector.

Anders Borg, head of the Nordic region for New York-headquartered KKR, tells Private Equity International how more than 100 add-ons saw the company not only keep step, but ultimately race to the top of Europe’s software market.

At the time of its acquisition in 2010, KKR had already followed Visma for four years. Owners HgCapital had been considering an initial public offering but KKR – led by director Henrik Kraft – convinced the firm to run a small auction process in parallel, Borg says.

KKR was successful in acquiring 76 percent of the company at NKr11 billion ($1.4 billion; €1.1 billion), or around 12x EBITDA, using capital from European Fund III, PEI reported in June 2017. Montagu Private Equity also bought in and HgCapital retained 17.7 percent.

In 2014, KKR sold down part of its stake to Cinven and HgCapital; the three firms owned Visma with equal governance alongside its management. Borg was appointed KKR’s board director for the company the same year.

What was KKR’s initial plan for Visma?

The Nordics are a complex environment. You have four countries, currencies, languages and tax regimes across a relatively small population in practice.

It takes a meaningful investment and local expertise to make tailored software that works well in that environment, and the question was always whether Microsoft or one of the large international software companies would ultimately make this leap.

Once customers have decided to go with your software, it’s a very sticky business, especially cloud- and subscription-based software. It was a race to build scale quickly enough to lock in customers to your specific software solution.

When KKR invested in Visma in 2010, it was a predominantly Norwegian and Swedish company providing mission-critical software to small businesses at a low cost. It also included an outsourcing and consultancy services business that made up around 30 percent of revenues, so it was not a pure software company at that point. There were significant risks and transformation needed to make the company successful in the long-term.

Firstly, the board needed to manage a complicated shift from on-premises software to cloud-based solutions. This change was coming one way or another in the market. Our second goal was to scale the business enough to deter the larger multinational software firms entering this region.

How did you implement this strategy?

During our ownership we were supporting and driving Visma’s transformation, helping the company become a broad suite software provider that wasn’t just focusing on enterprise resource planning software, but going beyond that with human resources, active risk management systems, business intelligence systems and more niche offerings, like the Vigo school software suite.

This was a product of organic, in-house growth, but also the fact that Visma acquired 100 companies during our ownership, including some relatively large ones, such as E-conomic, Speedledger, and Aditro in 2015, and Bluegarden two years later.

We helped build a very effective internal M&A team at Visma headed by Mikael Mannik, and when they acquired software they could include it onto the Visma platform very quickly and realise synergies.

KKR was very active in the Nordic M&A market as well, so we obviously supported the M&A team and we were constantly in very close discussions with the company. The majority of the smaller acquisitions were driven and led by Visma, but for the big acquisitions we were deeply involved as a deal team.

Were all of these M&A deals?

As the platform became broader and all-encompassing, Visma could also in some instances buy pure code rather than just companies. For instance, Visma acquired a school-scheduling AI algorithm from an Irish company to include in its school software suite. At that point you become almost an asset acquirer rather than a company acquirer.

As the outsourcing business grew, Visma started competing more directly with its core customers: accounting firms. The company made the assessment that it was more valuable as a pure software business, so we exited the outsourcing division in 2016 through a competitive sales process.

Since the streamlining of the business and the shift of software provision model and the transformation journey was then more or less secured, we concluded different owners would be better suited for the next phase of the company’s growth.

Why did you sell down in 2014?

The company had already grown at that point and we sold down at a much higher multiple than we’d gone in at, returning 1.5x cost to our investors while retaining a significant stake. It was an assessment we made at the time; that from a risk balance perspective it was a good time to sell down and de-risk the investment.

How did you know when to fully exit the business?

In 2017, the strategic repositioning was complete; Visma had a stable leadership position in the Nordics and was the largest software-as-a-service provider in Europe. This was also a time when multiples for SaaS businesses were at an all-time high. Peers were trading at high multiples, which obviously helped.

There will be a time when the cloud will be the standard provision model and the vast majority of software contracts will be SaaS. A lot of the growth rate in SaaS businesses today comes from the shift from on-premises to cloud-based provision. Once that transition is done you won’t have the tailwind from the shift.

How did the sale process come about?

There was significant interest for our minority stake; today you have situations where you potentially get paid more for a minority as you attract lower-cost capital providers who sometimes prefer that to a control situation. We were preparing for a full auction but got an interesting bid on the table early on from a buyer consortium of four institutions at more than 22x last 12 months’ EBITDA.

It can also be complicated selling a minority stake when there are shareholder agreements that need to be sorted out within the ownership structure; you need to have some dialogue with the remaining shareholders about an arrangement with the new shareholders.

There were tough negotiations, of course, and all sides can feel good about the result. We made 3.2x on the whole investment, and on the remaining equity from 2014 it was well over 5x.

Norway has relatively very few technology companies, so there has also been a lot more focus on that aspect of the whole transaction and build-up of Visma, and private equity’s role in supporting this transformation to help build a leading software business based in Norway. It’s been extremely good news for the PE industry as a whole in the region.