Competition, pricing remain top concerns for Nordic private equity

The Nordic region had its best year for buyout activity in five years in 2014, with both deal volume and value up around 30% compared to 2013, according to unquote" data*.

Whether the upward trend in the region will continue in 2015 is difficult to predict at this point, but there are some indications the coming months could be more of a struggle.

Nordic GPs appear by and large confident that deals still abound and growth can be created. But some are privately voicing concerns that there are fewer deals to be made and less value to eke out due to increasing valuations in the region.

As the increasingly difficult search for value in Europe intensifies, more of the large
pan-European and global players will be eyeing the Nordic markets. Buyout firms are likely to see even more competition for the big deals in particular – a trend that began to increase towards the end of 2014.

Nordic GPs were reported to be in competition with large international buyout houses on several assets, as illustrated by CVC landing a €700m deal for Finnish insulation group Paroc against competing bids from Nordic Capital, TPG, BC Partners and Cinven.

Competition from corporates is also increasing, as such players began to spend large cash piles sitting on balance sheets in 2014 and will continue to do so. EQT felt this in its bid for Danish pesticide maker Cheminova, which FMC Corp swiped ahead of the Nordic firm and CVC.

Private equity is also likely to see competition from family offices in Denmark, where the search for returns in a poor bond market may see private investment vehicles – such as the Lego family's Kirkbi and Kirk Kapital – move into private equity, as was the case with the latter's acquisition of PNO at the beginning of January.

Price pressures
The increased competition will put further pressure on prices, which continued to edge upwards throughout 2014, so Nordic firms will have to highlight and play on their knowledge of the region, as well as their network of contacts in the Nordic industries.

Though some regional GPs with an international remit may be able to compete with the non-Nordic players on pure capital muscle, the latter's presence will make it increasingly difficult to find value in the region, which the industry rumour mill indicates is already a concern.

Last year showed that Nordic GPs' relationships with their regional banks remain strong and the bank clubs continue to provide good access to senior financing packages in major deals.

However, sources say an ongoing trend of increasing valuations and leverage, while covenants are being weakened, is creating cause for concern with acquisition financiers. Some have raised concerns that the banks will be unwilling or unable to finance deals if this tendency pushes leverage and lack of controls too far.

As such, ongoing growth of alternative debt classes in the Nordic market may be dependent whether or not the banks can live with the increasing valuations, leverage and weakening covenants.

While the high-yield bond market is poised to mature and become a more standardised instrument, unitranche and mezzanine providers may also play a more substantial role in the Nordic market this year, giving GPs more options and possibly forcing the traditional debt providers into uncomfortable territory.

If the banks decide private equity players are over-paying and over-leveraging investments to a degree that will not pass muster with the credit committees, it may pave the way for more risky debt structures in 2015.

*For a complete statistical overview of the Nordic private equity market in 2014, look out for the latest edition of the unquote" Annual Review, out soon.

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