Negative rates expected to result in Nordic private equity bubble

According to unquote" data, there were 32 buyouts in Q1 last year, while the count for Q1 2015 was nine at the time of writing. Discounting the €2.7bn mega-deal for Nets in March, however, the 31 remaining transactions in 2014 totalled €1.69bn compared to a total deal value of €1bn for the same period so far this year.

The figures suggest GPs are being more selective, yet spending more when they do deploy capital. One interpretation of this emerging trend is that private equity firms are having to look harder and deeper to find potential for value generation in targets, while entry multiples float towards pre-crisis levels.

Competition in the large and mid-cap brackets is on the up, and we may see more large-cap players searching for value downmarket as a result. EQT is among those taking steps in that direction by appointing three high-profile former tech entrepreneurs in January, reportedly with an eye to raising a fund aimed at small tech companies this year.

While leverage ratios have so far remained at reasonable levels in the region, there seems to be a general feeling across the Nordic industry that there is a real danger of bubbles developing across asset classes, as was expressed by EQT's Thomas Von Koch in a recent interview.

Negative Nancy
There is plenty of fuel for the fire, with the Danish and Swedish central banks making history in February by lowering deposit rates into negative territory for the first time ever. The immediate impact for private equity will be lower rates for acquisition finance. The more liquid the debt market, however, the more competitive deal processes become and the more asset prices increase – particularly as swathes of pan-European and global firms continue to scour the Nordic region for deals as asset prices creep up throughout Europe.

The Nordic central banks have kept rates low for years now, but there is a difference between getting little to no return on deposits and losing money on them. With Danish banks already charging clients with large holdings for their deposits, investors are expected to increase their allocation to the alternative asset classes in the search for yield.

Already, a handful of Danish pension funds – including Danica, ATP and PensionDanmark – have weighed the consequence of the rate cuts and committed to a DKK 1bn fund for collateral-free, high-interest lending to Danish SMEs.

With the usual suspects of Nordic private equity funds not in fundraising mode, and with institutional investors expecting the negative interest rate to linger for the next five years or so, the secondaries market is a likely home for new investments.

There has already been an uptick in secondary activity, with a number of institutional investors clearly rebalancing their portfolios, according to several sources. Private equity is still an attractive asset class in the region, but a strong increase in the liquidity of the Nordic secondaries market seems likely.

The market saw three big deals towards the end of last year, with Pantheon selling two stakes in IK Investment Partners funds, as well as ATP and PFA selling their commitments to Altor IV as a result of the OW Bunker debacle. All four deals were arranged quickly and netted the sellers a pretty premium, according to unquote" sources.

Despite rising prices, Nordic private equity retains its strong reputation among international investors, and there is still a clear sense of confidence in the industry that Nordic funds will continue to outperform other asset classes and their European competitors. But bubbles rarely deflate gently, and an explosive decompression of assets could quickly change the outlook for Nordic funds' performance.

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• Unq2015Apr