Nordic buyout values soar amid high-liquidity environment

Though some economists and policymakers expressed concerns about the possible negative impact of the Brexit vote on the Nordic economies, any manifestation in major macroeconomic indicators has so far been elusive, and private equity dealflow appears unaffected.

As the Nordic buyout professionals start up again after their usual summer break, a comparison between the June-August period in 2016 compared to previous years shows no substantial change in the amount of deals done. According to unquote" data, 18 deals have been completed so far this summer, with a few weeks left in August to make up the gap to the 23 deals registered in the summers of 2014 and 2015.

Extrapolating the whole year's deal activity, 2016 is on pace to be a slower year than the record buyout activity clocked in the preceding year, but, having passed the half-year mark, deal data indicates average buyout values are up and likely to reach a five-year high.

Nordic buyout firms are generally expected to pay more for their targeted companies than in previous years, as they compete with trade buyers, family offices and listed groups for quality assets in a low-interest, high-liquidity environment

With 57 deals worth an estimated aggregate enterprise value of €6.7bn so far this year, average buyout value in the Nordic market stands at approximately €117m. While average buyout values in 2015 and 2014 registered €190m and €149m respectively, at face value, the two largest deals in each year add more than €5bn to the total annual buyout value.

While a potential mega-cap deal emerged in the summer with Apollo's bid for listed Danish telco TDC (valued at around €3.9bn at the time), at the time of publication only one 2016 deal falls into the mega-buyout category, and barely so: EQT's €1bn LBO of Danish software company Sitecore in April 2016. In contrast, two deals had enterprise values of more than €3bn in 2015, and 2014's three largest private equity investments totalled more than €7bn.

Adjusting for mega-cap deals, 2014's average deal size plummets to €84m per deal and 2015's drops to €119m, in a year with a near-record number of buyouts. The adjusted 2015 average transaction enterprise value is much closer to the €117m EV average of 2016 so far, and could be overtaken by the end of the year if industry sentiment becomes reality.

EV-erest
Given the talk among professionals in the Nordic private equity industry and its adjacent sectors, seeing entry multiples and average deal values surpass the 2015 summit in 2016 is not an unlikely proposition.

Nordic buyout firms are generally expected to pay more for their targeted companies than in previous years, as they compete with trade buyers, family offices and listed groups for quality assets in a low-interest, high-liquidity environment – as is indeed the case in much of Europe.

As a symptom of that environment, local banks are being increasingly competitive about supplying financing for Nordic buyouts and putting their cash to work. While aggressive terms and price points for all-senior packages are pushing some alternative products, such as mid-market mezzanine, to the brink of its ability to compete, some bankers are also seeing leverage creeping up.

Evidence on overall buyout leverage levels are mostly anecdotal, but some sources in the Nordic banking market appear to share the view that entry multiples are growing as buyout firms pay more for their assets, and bank leverage is being used to bridge that gap, increasing deal leverage levels.

Price growth in targets of Nordic buyout firms has been evident in the region's strong exit market, which Altor's Harald Mix called "almost perfect" just a few months ago, as improved exit multiples often have a knock-on effect on entry multiples.

The strong exit market in the Nordic region has created a gap in price expectations between buyers and sellers, but the region's private equity investors appear willing to straddle that gap, propped up by additional leverage. With macroeconomic factors fuelling a low-interest environment and high liquidity looking unlikely to shift substantially any time soon, major question marks remain over whether ever-more distant memories of the over-leveraged pre-crisis buyouts will be enough to stop GPs and banks from repeating the same mistakes.

Further reading

• Investments

Strong valuations in Nordic region driving co-investments

• 22 Mar 2016

• Performance

Flight to quality could be driver for Nordic price hike

• 17 Feb 2016

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