Nordic Fundraising Report: digging down into the data

Click here to read the rest of the 2017 Nordic Fundraising Report, published in association with Aztec Group

As with Europe as a whole, the Nordic region’s economies are in the tail-end of a rebuilding phase after the financial crisis of 2008-2009, and the sovereign debt crisis in Europe during the early part of this decade. Eurozone GDP growth is forecasted by the European commission to be 1.8% in 2016, where growth in the wider EU is projected at 1.9%.

Sweden
The Nordic region’s largest economy, was also the region’s strongest performer in 2016, posting an estimated 3.3% real GDP growth for the year. The main drivers of this growth, according to the European commission, were investment, which grew 6.6% year-on-year, and private consumption, up 2.3% from 2015. Swedish exporters, benefiting from a weaker krona and improving external economic environment, saw a 2.8% increase in exports, making a net contribution of around SEK 200bn to the country’s economy.

With a steady increase in real disposable income, a strengthening labour market, and consumer confidence building, private consumption in Sweden is forecast to grow to 2.6% in 2017.

Norway
The region’s second largest economy posted a steady growth rate of 1% in 2016, down from 1.6% in 2015. As an economy that relies heavily on the oil industry, the price shock in mid-2014 that saw a drop in the price of Brent Crude of more than 50% has been a considerable drag on growth. According to a report by financial services firm Nordea, domestic demand in Norway was up 2.7% in 2016 year-on-year, but removing the negative impact of oil investments makes this figure 4%. Final GDP figures were, according to the same report, weakened by mainland exports which suffered from a wider lack of demand for oil-related goods and services.

With the drag from the oil sector diminishing, the strong domestic demand in Norway should see positive economic growth in the years to come. Nordea forecast a 1.7% growth rate for 2017.

Denmark
Denmark’s GDP growth of 1% for 2016 was underpinned by domestic demand resulting from strong employment growth, rising disposable incomes and low interest rates. Investments were also a strong driver of growth, up 3.7% on the year, bolstered by increasing private investment. Looking ahead, the future looks rosy for the Danish economy, with unemployment forecast to fall, business investment to grow and private consumption to continue to be strong. This is reflected in the European commission’s GDP forecasts for 2017 and 2018 of 1.5% and 1.8% respectively.

Finland
Of the Nordic countries, Finland was hit hardest by the financial crisis, posting negative GDP growth for 2012, 2013, and 2014. The economy has since returned to growth, with the European commission projecting 1.5% expansion in 2016, up from 0.3% in 2015. Drivers of 2016 growth were strengthening private consumption and an increase in construction investment. Austerity measures brought in by a new government resulted in the signing of the Competitiveness Pact, a tripartite labour market agreement, in June 2016. This agreement includes a mandatory wage freeze for 2017, a pay reduction for public sector employees, and employees taking on the liability for social security contributions, which were previously paid by employers. These measures are anticipated to result in a boost in growth for 2017 and 2018, with lower unit labour costs and projected improvement in exports as a result of competitiveness contributing positively. The commission forecast 1.2% GDP growth in 2017, and 1.5% in 2018.

Interest rates
Across the Nordic region, central bank interest rates remain near zero, with Norway’s Norges Bank maintaining its key policy rate at a record low of 50 basis points, and Sweden’s Riksbank and the Danish Nationalbanken maintaining negative rates at -0.5% and -0.65% respectively. As a member of the eurozone, Finland’s interest rate is set by the ECB, where the benchmark rate is set at 0%.

This low yield environment has driven investors into riskier assets, and has also had the effect of stretching pension funds, many of which face record deficits between their income from investments and their obligations to pensioners. The effect of this on private equity fundraising is pension funds in particular are increasing their allocation to the asset class, and alternative assets in general, in an effort to generate returns.

Sweden and Norway have quite mature private equity markets, and they are similar in terms of language and culture, so lots of cross-border deals get done” - Rebecca Scahu, Norvestor

Maturity
In comparison with the rest of Europe, the private equity industry in the Nordic countries is a mature one, with many fund managers in the region boasting a track record stretching back to the early 1990s. These managers are supported by a network of large institutions, including state-backed investors and national pension funds. Economic stability in the region during a period in which Europe as a whole struggled has boosted returns for funds investing in the region, and these returns, combined with continued economic expansion in the Nordic countries, has attracted international LPs to invest in the region.

A glance at a list of Nordic funds holding final closes in 2016 shows the prevalence of established managers in the region. Verdane Capital closed their ninth fund after a four-month fundraise, Northzone their eighth, and Norvestor their seventh. Rebecca Schau, head of investor relations at Norvestor, says: “Sweden and Norway have quite mature private equity markets, and they are similar in terms of language and culture, so lots of cross-border deals get done.” For deal-doers active in these markets early on, access to opportunities resulting from these similarities effectively doubled their pool of potential portfolio companies, and also provided ready-made opportunities to expand into new markets. It is not a coincidence that some of the GPs active in these markets for a long period of time have developed into large pan-European players. According to Ulf Lundqvist, head of communications at AP6: “The success and growth of EQT, Nordic Capital, among others, is in part due to a strong domestic market that they were early into, and also rapidly increasing their size, which necessitated having to look for opportunities abroad.”

LP base
While stable local markets have undoubtedly aided the development of the Nordic private equity industry, another factor that has fuelled this growth has been the presence of local LPs, including large pension systems in the region, and also state-backed investment funds.

Scandinavia has been a leader in using public money to promote private enterprise through institutions such as Finnish Industry Investment, which was set up in 1995 to accelerate the growth of Finnish companies through fund investments and minority direct investments; and the Danish Growth Fund, established in 1992, which makes fund and direct investments in early-stage Danish companies. Both of these entities are relatively large, with around €1bn under management each. Industrifonden in Sweden was established in 1979 as an evergreen investor in early-stage industrial businesses, and having invested in more than 1,000 companies since it was founded, currently holds in excess of SEK 4bn in assets.

For private equity houses operating in the region, the presence of this type of investor is a boon for a number of reasons. Firstly, they help to develop an active ecosystem of SMEs within economies, broadening the pool of potential portfolio companies available to buyout firms. Secondly, they are an additional source of capital for GPs that are fundraising, and, given their mandate, may be less reluctant to back managers in the early stage of their careers. Lastly, these institutions contribute towards fostering a culture of entrepreneurialism, and an acceptance and awareness of the importance of enterprise within society.

Says Norvestor’s Schau: “A good economic environment and a strong base of innovative businesses has made the Nordic region a good place to be a GP. With private equity becoming more established, it is increasingly being seen as a legitimate exit route for business owners.”

National pension funds
Across the Nordic countries, state pension systems are complemented by mandatory buffer capital funds, which are allocated across asset classes to generate returns should contributions to the basic state pension fall short of pension disbursements annually. In Sweden, the six AP funds constitute around 14% of the national pension system, which is invested across a variety of asset classes.

AP6 is dedicated to private equity investments – “We’re focused purely on PE, mandated to invest 100% in the asset class,” says Lundqvist. The pension fund has been investing since 1998, and was originally focused entirely on making buyout and venture capital fund investments in the Nordic region. Over time, AP6 began to increase its international focus and develop its in-house capability to make co-investments and direct investments. It currently has a roughly 50-50 split between direct and co-investments, and primary fund investments.

In Denmark, ATP looks after the pensions of 80% of the Danish population, with all employees undertaking nine or more hours of paid work a week making contributions to ATP to complement the national pension scheme. In 2001, ATP established ATP-PEP, an in-house private equity team, with the intention of operating differently to other large public pension funds. ATP wanted a specialised team that was incentivised and aligned with its sponsor, and so ATP-PEP was set up, structured as a fund-of-funds, with fee and carry arrangements similar to an independent private equity house. For ATP-PEP’s first two funds, the chief investment officer of ATP sat on the board and had oversight on investment decisions – but, since the third fund, ATP-PEP has operated entirely independently of its sponsor, free from any bureaucratic hindrance and with full discretion to make investment decisions. Although ATP-PEP has never had a specific geographical mandate, it is an active investor in the Nordic region, in part due to the quality of fund managers operating in the region, and also because continued activity is important for sourcing co-investment opportunities.

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• Topics
• Nordics
• Fundraising
• Sweden
• Norway
• Denmark
• Finland
• Sixth AP Fund