Nordic GPs find solace in demand for tech deals

The Nordic region saw 106 deals between January and mid-May, with Sweden leading the way with 45 deals, followed by Finland with 30 deals and both Norway and Denmark with 15 deals each, according to Unquote Data.

Compared with the same period last year, this is a decline of 9.4% in overall deal volume. Denmark and Norway have seen particularly sharp declines of 52% and 32% respectively. Sweden, however, has only seen a drop of 2% and Finland has seen a surge of 77% in deal volume.

Unquote Data reveals a significant disparity between the region's venture capital activity and its buyout activity – the latter has plummeted by an average of 39% in the Nordic countries, excluding Iceland, compared with 2019.

There will inevitably be some companies that unfortunately will not make it to the other side, but there will also be some good that comes out of this"
– Ashley Lundström, EQT Ventures

The massive drop reflects the challenges that have arisen due to the coronavirus pandemic and the lockdowns implemented across Europe. Panellists at the Nordic M&A webinar hosted in May by the Swedish Chamber of Commerce for the UK identified pressing issues facing deal makers, notably including difficulties accessing debt financing, liquidity issues, carrying out due diligence, and uncertainty around valuations. According to Unquote sister publication Debtwire, panellists said that, although digital data rooms and virtual presentations worked relatively well, the private market is so relationship driven that a virtual meeting with management cannot replace the confidence and perspectives from a physical meeting and site visit.

VC tonic
The situation could not look more different for venture capital activity, which is up by 9%. Finland and Sweden recorded a higher number of VC-backed deals this year than last year, with deal volume nearly doubling in Finland, and Sweden seeing a 15% increase.

EQT Ventures, which held a final close on its €660m vehicle EQT Ventures II last autumn, has invested in four software companies (its primary sector focus) since the pandemic. Ashley Lundström, deal partner at EQT Ventures, says: "There will inevitably be some companies that unfortunately will not make it to the other side, but there will also be some good that comes out of this when it comes to advancements in technology. A lot of experienced and stronger companies will come out on top at the end of this. Crisis experience can be hugely beneficial for founders."

Another upside, Lundström believes, is that valuations are getting a reality check. "They were relatively high before and now we have seen them come down. There are a lot of founders who have become very transparent now and there are now more great and honest conversations with founders happening."

But VCs are also being cautious, believing that these are the early days. Lundström says all her portfolio companies are taking measures to maintain liquidity. They have cut back on marketing and hiring new staff, and in some cases let go of employees.

Tech advantage
Technology has dominated the Nordic region for a long time, and 2020 has been no different. There have been more deals in the technology sector than any other so far this year, with 64 deals out of 106. This was followed by industrial companies, with 15 deals and healthcare with eight deals.

The region's well-established tech sector might have cushioned it against the coronavirus pandemic, giving it an advantage over other parts of Europe, especially if the current situation ends up driving innovation and agility for the most successful companies. Says Lundström: "Some of the very best tech companies have been built just after crises like these. In the past decade, we have seen a ton of talent develop in the Nordic region, and there is a lot of VC capital to back them as they pursue new ideas now. That is the recipe for some very successful companies."

Not all GPs share this optimism. Says Staffan Morndal, a managing partner at Verdane: "While we have some stuff going for us, we are intertwined with other countries, and even if software companies are looking resilient right now, they will be affected indirectly, especially if their customer base is in countries outside the Nordic region."

Delayed reaction
Furthermore, any enthusiasm should be prefaced with a significant caveat. The deals that have so far materialised in the Nordic region are those for which talks began prior to the Covid-19 pandemic. Transactions, particularly buyouts, launched and finalised entirely online have yet to be seen, and for this reason, some in the industry fear that the real slowdown is yet to come.

Given the volatility of the market, we are cautious, but remain active with many interesting investment opportunities in our shadow portfolio" – Kristoffer Melinder, Nordic Capital

Nordic Capital managing partner Kristoffer Melinder expects the effects of Covid-19 to impact the markets until at least 2021, but says: "We are seeing attractive opportunities to invest in high-quality businesses, even now. Given the volatility of the market, we are cautious, but remain active with many interesting investment opportunities, of varying maturities, in our 'shadow portfolio' currently under evaluation."

Morndal says: "Unemployment will go up significantly, but the short-term effects are limited due to various government programmes. We will see negative effects on the GDP for this year and the next year."

He adds: "People tend to believe things will be better than they actually might be."

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• Topics
• Investments
• Venture
• Nordics
• coronavirus
• EQT Ventures
• Verdane Capital Partners
• Nordic Capital