Could mega fundraisings cause Nordic dry powder problem?

Following a relatively busy 2011, Norway and Sweden saw the closing of their two largest ever buyout funds; HitecVision VI, at $1.5bn, and EQT VI, at €4.75bn. Moreover, Nordic Capital, Triton, and IK Investment Partners are all expected to close funds in 2012. Many of these have an explicit strategy to invest in the Nordic or North-European region.

Norwegian fund-of-funds Argentum, which specialises in Nordic private equity, estimates that there is a further €16.3bn in the fundraising pipeline: €15.3bn in buyout funds and €1bn venture capital funds. It is notable that the four largest buyout funds made up 60% of the estimated total.

Commenting on the data, Benedicte Schilbred Fasmer, Head of Business Development & Investor Relations at Argentum, noted that "some of it comes from funds that were expected to close in 2011, but 2012 was already bound to be a strong fundraising year."

According to Fasmer, international LPs have made a significant contribution to recent Nordic fundraising. She noted that over 80% of the committed capital in HitecVision VI came from abroad. Similarly, 72% of the committed capital in EQT VI came from outside the Nordics, and 50% from non-European investors. "There is definitely an increased international interest in the Nordics" Fasmer said.

The question is whether a substantial amount of equity can be deployed in the region in the next five or so years. Fasmer sees a slight danger of capital overhang. "The Nordic buyout industry has grown over a number of years, and it has potential to develop further in the future." She added that 2012 will be an exciting year, and highlighted the possibility of fierce competition over attractive companies.

A complicating matter, given the circumstances, is growing concern over the European sovereign-debt crisis spreading to the region. A recent report from The Swedish National Institute of Economic Research anticipates Swedish GDP will fall from 4.5% in 2011 to 0.6% in 2012, and unemployment will rise over the same period. It credits the effects to growing uncertainty and weak exports from a global slow-down, and concludes that "there will be lasting negative effects on the Swedish economy."

Needless to say, such stagnation would have an adverse effect on domestic aggregate demand, and thus local businesses. To what extent this will affect deal flow remains to be seen, but struggling companies would certainly not boost banks' appetite to leverage deals. Nordic banks are generally thought to be well-capitalised in light of the crisis, but, according to Fasmer, the price of debt has gone up.

The coming year may be defining for Nordic private equity. The question is whether GPs are able to meet LP expectations by sustaining the activity hitherto seen. If not, they may find themselves with the same capital overhang that has haunted buyout firms in the rest of Europe.

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