Nordic software sector lures private equity investors

The Nordic software sector saw a particularly active month in September as a number of private equity investors sought out growth opportunities.

Nordic buyout house Verdane Capital was one of a number of fund managers to have invested in the space, acquiring two Norwegian IT firms, Zisson and Penetrace, from early-stage technology investor Skagerak Maturo. The GP acquired Skagerak's 58% and 42% stakes in the two businesses respectively, in addition to further shareholdings that resulted in an equity holding of around 70% in each firm. The investment, which gave the companies a combined valuation of around NOK 150m, was made from Verdane's latest vehicle, Verdane Capital IX.

"Across the Nordics, salary structures are quite flat, and there are less differences in salary levels between unskilled and highly qualified labour than in other parts of the world. This means that it - relatively speaking - is cheap to develop technology, and the benefits of using technology to enhance efficiency of unskilled labour are significant." says Verdane managing partner Bjarne Lie, when asked about the success of the Nordic software space. "Combine this with a relatively well educated unskilled workforce and an advanced technology infrastructure, and you get a really interesting hotbed of technology innovation."

There were seven software transactions in the Nordic region throughout September, according to Unquote Data, compared with an average of four deals per month in the eight preceding months in 2018, four per month across 2017 as a whole, and five per month in 2016.

Investors pay for quality. Therefore, it is important that even though assets are expensive, it is still worth it for the investor" – Bjarne Lie, Verdane Capital

Finland, which has one of the smaller tech ecosystems in the Nordic region, also saw some much-welcomed activity in September, with CapMan Growth Equity Fund investing alongside other existing investors in a €3m funding round for its portfolio company, robotic process automation (RPA) business Digital Workforce. Currently operating in Finland, Sweden, Norway, Denmark and Poland, the business said it planned to use the funding to investigate growth opportunities in new markets. In addition, the funds will be used to further develop the company's digital worker cloud platform and to develop cognitive technologies.

Says Juha Mikkola, managing partner at CapMan Growth Equity: "In Finland, a small local market makes it necessary for all relevant investee companies to internationalise their operations very early. In some sense, we take more initial risk in Finland with very early internationalisation due to small domestic opportunities."

CapMan targeted €80m for its Growth Equity Fund and reached its hard-cap of €86m in December 2017. The vehicle is the GP's first growth fund and is being built on Norvestia's growth business model. CapMan acquired the Finnish investment firm in a €118m deal in late 2016.

Each region in the Nordic area features well-defined software sub-sectors that have drawn investor attention. In Sweden, e-commerce has historically had a strong base, while Denmark has a history of producing business-to-business software across a range of applications. In contrast, Finnish software is often centred around networks and telecommunications management, while Norway is known for niche vertical software applications predominantly designed for use in the maritime and offshore industries.

Software remains a firm choice
Sponsors have historically seen software companies as longer-term plays, with the Nordic region having a reputation for producing businesses with well-built infrastructure technology. This track record has paved the way for deals backed by some of the region's private equity heavyweights.

Partly as a result of this competition for assets, the vibrant technology ecosystem has inevitably been characterised by high valuations, with a notable increase being reported in the Nordic region over the course of recent years. "Investors pay for quality," says Bjarne Lie at Verdane. "Therefore, it is important that even though assets are expensive, it is still worth it for the investor."

For CapMan's Mikkola, the market has been somewhat distorted due to high-valued micro-cap IPOs in the Nasdaq First North. "The outlook will hopefully get a bit healthier in the future," he says. "Some of the most recent IPOs did not get much demand from investors due to high pricing of the offerings. Some offerings have even been cancelled. I believe there will be more balanced valuations starting H2 2019 which would provide more opportunities for VC investors."

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