Private equity targets Nordic enterprise software sector

Across the size spectrum, from venture deals to mega-buyouts, Nordic companies that focus on enterprise software (ES) services such as human resources, payroll, enterprise resource planning (ERP) and accounting, are receiving plenty of attention from private equity – with both local and international GPs investing in the sector.

In April last year, Cinven joined the fray by becoming the third private equity backer of Norwegian enterprise software company Visma, investing alongside existing investors KKR and HgCapital, in a deal valuing the company at €2.5bn. At the other end of the spectrum, Mangrove Capital Partners led a $2m funding round for ChurchDesk in August this year, a Copenhagen-based provider of church-focused enterprise software services.

"It is definitely an attractive sector," says Christian Bamberger Bro, partner at Axcel. In October, the Danish GP merged two of its portfolio companies, enterprise software and IT services company EG, and Silkeborg Data, a payroll and personnel administration business.

To boldly go
Bamberger Bro says that while companies are growing at different speeds, with some expanding at explosive rates, the overall trend in the Nordic region is sectoral growth for enterprise software and IT. "In EG we have a client base of 12,000, and a large untapped client base. The combination of stability and growth is something private equity likes. 12,000 clients in the mid-market don't just fall off a cliff one day, so it's a stable market to be in."

The strong dealflow seen in the sector recently has been overwhelmingly focused on companies targeting mid-market and lower-end large-cap clients, as well as the substantial Nordic public sector – from local to national government. These markets are dominated by local players because large international ES companies focus more on large-cap businesses with international and cross-border operations.

However, there is a substantial uptake of enterprise software services in the Nordic countries in general. The region's high penetration of high-speed internet connectivity, and eagerness to adopt technology translates into a high overall focus on developing businesses through digitalisation, which in turn underpins demand for services such as enterprise software.

A history of local software developers in the Nordic region building up companies to become big international players has also had an effect, Bamberger Bro says, using the example of Navision, a Danish ERP business that was bought by Microsoft in 2002 for $1.3bn. "When you have companies like Navision, it results in a lot of businesses becoming early adopters because they can buy software locally," he says.

Roll-up, roll-up
The local focus of mid-market-focused ES companies is also evidenced by the sector's high level of fragmentation. With private equity's fondness for buy-and-build returning as a means to mitigate rising valuations, the fragmented Nordic ES market could provide fertile hunting ground.

Already, a roll-up of the market is being targeted by several private-equity-backed companies. Nearing a decade of private equity ownership, HgCapital, KKR and Cinven's Visma are among the aggressive acquirers.

"We've had an extremely strong growth-by-acquisition strategy that began even before PE investment, but has been strengthened and supported by our private equity owners," says Visma's director of mergers and acquisitions, Mikael Männik. "They've been very positive towards having a systematic and somewhat aggressive acquisitive growth strategy.

"For most software companies in general, and particularly if you work in the admin software sector as we do, it's difficult to have particularly exciting organic growth when you grow to a certain size," he says. "Once you get big enough you basically have a ‘GDP-plus' growth potential."

In early 2015, Männik and his team led the estimated DKK 1.5bn acquisition of Danish accounting software providers E-conomic and SpeedLedger, from Visma co-owner HgCapital.

Given the composition of the Nordic ES market, consolidation-driven growth is an attractive and straightforward route. The market is characterised by competition between many local mid-sized companies, with a few larger groups such as Visma, KMD and Evry.

On the other hand, organic growth and international expansion is complicated by the fact enterprise software services often deal with HR, accounting and ERP. These areas are often heavily regulated with country-specific variations, meaning a Danish ES company cannot necessarily export its offering to Norway or Sweden based on success in its local market.

"Surprisingly there are a lot of assets to be acquired," says Männik. Visma has around €900m in turnover, of which 95% is in the Nordic countries, and he says there is scope for the company to be twice as big in that region. "The market is still pretty fragmented, and that presents a good opportunity for us and others to consolidate it."

Consolidation continuation
Private equity and VC firms looking to break into the sector are likely to face increasing competition for quality assets in the coming years. Indeed, international GPs Vitruvian Partners and Marlin Equity entered the Nordic ES market this year through their acquisitions of Accountor and Bluegarden, while Swedish GP Procuritas bought Norwegian SME enterprise software provider Daldata from Via Venture Partners.

"Competition these days comes mainly from private equity," says Männik. "There's so much competition from small and medium-sized private equity firms, and we often find they're the ones we compete against the most."

Visma has also benefited from its aggressive buy-and-build strategy, which positions it for further acquisitions. Having grown into one of the largest software companies in the Nordic region, many owners looking to sell their company will be aware of Visma as a potential buyer, thus reducing competition, Männik says.

Looking into the future of the sector, consolidation is likely to continue – both in the mid-market and at the larger end of the market. Given private equity's typical investment horizon, a stream of assets will likely begin coming to market in two-to-five years.

Visma is entering its 10th year of private equity ownership, and though Cinven joined the investor group last year, an exit in the coming years could be on the table. Axcel acquired EG in 2013, and Bamberger Bro says he expects "EG to have landed somewhere else" in three to four years.

Männik's view is similar: "I think we'll see more consolidation across the board, which [Visma] will try and contribute to. There are a lot of private equity groups we compete with, and they see buy-and-build as a good strategy for the sector."

Generation game
Two key drivers of that consolidation, according to Männik, are generational change and the transition to cloud software and software-as-a-service (SaaS): "There are a lot of software companies that were established in the 80s/90s, where owners are basically wanting to cash out ... and there are going to be some good new companies coming out of [the transition to cloud and SaaS]. Over half of our R&D is on SaaS and cloud products, and at the same time we'll see some of these businesses facing challenges in transforming themselves. Some companies may have a tougher time surviving, but it may also give them an incentive to sell (to Visma) as well."

Following a successful roll-up of the fragmented market, the Nordic ES sector could become dominated by a handful of sizable companies, which will in turn influence which exit routes GPs consider.

"It could either be that the stock market gets a few new listings, or new owners could come in and consolidate further among the Nordic players," says Bamberger Bro. "I would think the large international IT services companies are looking at the Nordic countries for potential future acquisition targets as well.

"When we reach the point where there is a company that is a substantial player in three or four of the Nordic countries, then it becomes an attractive proposition for the large international trade buyers."

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