Nordic PE market attracts foreign GPs despite high pricing

Private equity firms headquartered outside the Nordic countries completed 25% of the region's private-equity-backed buyouts in 2018, according to Norwegian fund-of-funds Argentum's annual report The State of Nordic Private Equity.

These findings were mirrored in Unquote Data, which showed that the largest group of these investors were headquartered in the UK, including Apax Partners, Cinven, HgCapital and Terra Firma. North American buyout firms were the next most active, with Abry Partners, OpenGate Capital and TA Associates among the GPs completing deals.

This development is somewhat unexpected given that private equity is already quite mature in the region, and competition and therefore asset prices are very high. However, Argentum's Joachim Høegh-Krohn says: "The Nordic market has been quite deeply penetrated by private equity for a long time now. But nonetheless we have seen more international PE funds doing deals in the past year. It has mostly been in the larger deal brackets, where barriers to entry are lower."

EQT's Per Franzen agrees with this observation, but emphasises the advantages of a local history, even in the larger brackets: "Yes, as a natural consequence of the quality of assets in the Nordic countries, we have seen an increasing number of international investment firms participating in sales processes. However, EQT's heritage in the region, network of industrial advisers, and track record of growing Nordic champions into international leaders helps to give us an edge."

A local shop
Says Franzen: "EQT operates a 'locals with locals' approach in each of its core regions, as we believe that having expert teams across the globe is a real competitive advantage. Ultimately all business is local, so when our on-the-ground infrastructure is combined with EQT's sector expertise, it gives us a real edge in sourcing unique and attractive investment opportunities."

However, Franzen does acknowledge that the trend is driven partly by the bifurcation of the European fundraising market: "International investment in regions such as the Nordic countries is in part driven by the increasing amount of capital being placed with fewer managers, which are typically the larger international PE firms."

Increased pressure to deploy has bolstered dealflow across Europe, especially in the larger brackets. However, the Nordic region has benefited from other macro factors, most notably Brexit. "The context of Brexit is probably part of the explanation as well," says Argentum's Høegh-Krohn. "There is some indication that investors have held back from investing in the UK, and the Nordic region is one of the areas that has benefited from that."

London's calling
Despite this, the region has not seen the increase in boots on the ground that the DACH region has over the same period, a development also linked to Brexit. "We don't really see a lot of international PE firms opening new offices in the Nordic region. It's not really necessary here because there's a very well-developed infrastructure that communicates with the UK, and investing in the Nordic region from London is not a problem," says Høegh-Krohn.

EQT's Franzen takes a different view. "Yes, the world is a more global place now," he says. "EQT expects competition for high-quality companies to continue across the globe and in particular the Nordic region, because it is seen as an attractive market with well-managed assets. However, we strongly believe that in order to really understand a market and capture the best deals, private equity firms must invest in local infrastructure."

If this is true, and more PE firms expand into the region with satellite offices, Høegh-Krohn believes Denmark is likely to be the preferred location: "Denmark is the exception to that rule [of a local office not being necessary]. It is quite an idiosyncratic and less mature market, which relies more on personal relationships and having physical presence on the ground." There is some evidence of this already as IK Investment Partners, Pemberton Asset Management and corporate finance house CataCap have all opened new offices in Copenhagen in 2019 so far.

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