Nordics investors remain active but cautious

The Nordic region enjoyed another active first half of the year in 2018 that saw continued high valuations, healthy buyout volume and a handful of significant exits. While market observers remain as optimistic as last year – a uniquely successful year in the books of most GPs – they are sharing a more cautious outlook for the second half of 2018.

Says Nordic Capital managing partner Kristoffer Melinder: "Even though the Nordic economy is strong, it would be foolish not to expect a downturn in the next five years and there is a natural cautiousness around businesses with a high degree of cyclicality." 

The economy has in part been driving an active Nordic M&A market over several years now, so the number of transactions remains high across most sectors. In particular, corporate activity has picked up as companies use M&A to drive their growth and transformation agenda.

"From history, we know that the corporate transactions in themselves will drive a wave of future divestments as they consolidate and refine their structures," says Triton's Thomas Hofvenstam.

We've seen record levels of leverage offered to us, with perhaps slightly more aggressive terms in H1 this year than the year before" – Per Franzen, EQT

Unquote Data broadly reflects this market sentiment, showing 65 deals in H1 compared to an albeit more impressive 75 in H1 2017, but above the 60 recorded in H1 2016. The first half-year was also marked by GPs snapping up corporate divestments. Notably, IK Investment Partners carved out PwC Sweden's business services division, which provides accounting, payroll and related advisory services, in February. This was followed by IK's acquisition of KPMG Sweden's business services division in June 2018. Since then, Triton has signed an agreement to acquire the business unit SKF Motion Technologies from Sweden's SKF Group in July.

Even though the global economy remains strong, the level of alertness is increasing, and the question of where a sector is in the cycle is frequent, most market observers agree. As private equity investments usually span 4-7 years, GPs use probabilities of different scenarios that could affect earnings, financial covenants and holding times.

This means that high-quality assets in certain sectors such as healthcare and payments fetch high valuations, while assets in more cyclical sectors are looking less attractive this year: construction, retail and industrial businesses are not commanding the same entry multiples.

As for the high-value assets, the acquisition is usually a calculated move. "One needs an ambitious value creation plan to justify high multiples," says EQT partner Per Franzen. "Investors and GPs have become more selective in terms of where to put money to work."

Dry powder remains at a record high in the private equity community, so GPs remain active in the Nordic market. In addition, financing rates are still strong with high leverage multiples, low interest rates and a willingness from banks to provide lenient terms to borrowers.

Franzen adds: "We've seen record levels of leverage offered to us, with perhaps slightly more aggressive terms in H1 this year than the year before."

Exit flurry
The first half of this year saw a noteworthy volume of exits, with 61 sales recorded by Unquote Data. This compared to 54 exits in H1 2017, and 79 exits in each of the first halves of 2016 and 2015. The most active players were Nordic Capital with 11 exits and six acquisitions, EQT with four exits and 14 acquisitions and Triton with three investments and two divestments in the first half of the year.

"The last couple of years have offered a strong exit environment for PE, with all the major exit routes - trade, financial and IPO - being highly available," says Triton's Hofvenstam. Triton exited Ovako, a Sweden-based producer of engineering steel, to Nippon Steel and, alongside KKR, closed the sale of Finnish healthcare services provider Mehiläinen to CVC.

The exit landscape has been driven largely by more aggressive corporate buyers and competitive private equity houses. "Over the past two years, strategic buyers have become more aggressive," says EQT's Franzen. "As a result of the strong economic environment, confidence in the boardroom of corporate acquirers has strengthened further."

The public market in the Nordics is still open but is less attractive to PE than in previous years as valuation levels on stock exchanges have plateaued for higher-value assets.

The market does not expect valuations to climb above current levels and, if anything, is preparing for a softening of the global market. While the macro side is looking good heading into the second half of the year for private equity, the public market is likely to see more nervousness.

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