Nordic buyout market off to slow start in 2017

In the first three months of 2017, unquote" data recorded 16 Nordic buyouts worth a combined EV of around €1.6bn, compared to 25 deals worth a total of €1.78bn in Q1 2016. In terms of volume, the first quarter of 2017 marks the Nordic private equity market's slowest start to a year since 2013 when 14 deals worth a combined €2.4bn were announced.

It also marks the worst quarter for Nordic private equity activity since the fourth quarter of 2013, when just 13 deals took place.

The Nordic private equity landscape does not appear particularly bright on the exit front either, where Q1 2017 saw a continuation of the lull in volume seen in three of four quarters last year. Dealmakers in the region will hope this is not a sign of things to come, as Nordic exits hit a five-year volume low in 2016, despite a buoyant seller's market registering an increase in total exit value of around €8bn on 2015 numbers.

Multiple Nordic dealmakers tell stories of aborted sales processes last year, with one corporate financier noting that he had seen more failed sales processes than usual in 2016

Both the slowdown in buyouts and exits can be explained to some degree by the gap in price expectation between buyers and sellers that has been developing in the Nordic M&A market in recent years, and which has become an increasingly prominent feature of the market.

At the Mergermarket Nordic M&A and Private Equity Forum held in Stockholm at the end of March, several panellists and delegates expressed the view that the strong public markets have driven up asset prices across the region. One of the side-effects of the increasing asset prices is an expectation gap between buyers and sellers, where buyers are increasingly wary of overpaying for companies – particularly in the upper mid- and large-cap segments – and sellers are willing to hold onto their assets for longer in the hopes of eking out another turn on their exit multiple.

Multiple Nordic dealmakers tell stories of aborted sales processes last year, with one corporate financier noting that he had seen more failed sales processes than usual in 2016.

Cooling down
The most noticeable feature of the Nordic private equity market in 2016 was the drop in average deal value.

According to unquote" data, average deal value fell by around 30% compared to the year before, marking the first time in the past half-decade where Nordic deal values have contracted. The average value of a Nordic buyout was €124m last year, down from €181m in 2015.

The drop in average deal value continued in the first quarter of 2017, falling to around €104m. Nordic dealmakers also increasingly sought out the lower end of the market in 2016 as the hunt for value in the larger market segments has become increasingly difficult for GPs. While the holding periods may be longer in the lower-mid to small-cap segment, the growth potential is higher and buyout firms are often able to enter at multiples two to four turns lower than in the mid-to-large-cap segment.

While some firms' move downmarket was made less explicit, others acknowledged the potential of smaller deals in a more formal manner: IK Investment Partners launched its debut small-cap vehicle, hitting the €277m hard-cap for the fund in March 2016 after a year on the road.

The search for value in the market's shallower end seems to continue unabated this year. Half of the 16 buyouts announced in the first three months of 2017 were €50m or less, similar to the trend in 2016 where 51 of 98 deals were for companies with an EV smaller than €50m.

Whether the next three quarters will see the Nordic market pick up the deal pace and deal values re-inflate remains to be seen, but the mood in the market would suggest dealmakers will continue to proceed with more caution than previously in the hunt for better value assets.

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