Time for change, say Nordic PE Forum speakers

Panellists speaking at the 10th annual unquote" Nordic Private Equity Forum held yesterday in Stockholm agreed it is crucial for the region's asset class to lead positive changes if it is to retain its leading status in Europe.

Keynote speaker Mirja Lehmler-Brown, principal at Scottish Widow Investment Partnership (SWIP), highlighted four key changes currently felt by Nordic private equity. First, the region has experienced tremendous growth over the last 10 years, with today's GPs sitting on four times more capital under management compared with a decade ago.

Second, Lehmler-Brown noted structural shifts in the Nordic asset class towards larger funds; there is now dry powder worth $10bn sitting in large-cap funds. And, despite this gradual movement towards bigger funds and bigger deals, there have only been a handful of successful new entrants that have begun filling up the gap left in the lower mid-market.

Nordic private equity firms must evolve to survive

On broader terms, the strong capital markets enjoyed in the Nordic region have caused an uptick in company valuations. Steadily increasing prices have been further spurred on by the open corporate bond market and new forms of institutional funds seeking deals in the region, causing vendors to raise their price expectations.

A more recent development in the region, but perhaps the most pressing one, is the changing social attitude towards Nordic private equity, currently threatened by increasing social and political criticism. Lehmler-Brown believes social media has been a catalyst for blurring public and private opinion of private equity, meaning stronger and wholly embedded environmental, social and governance (ESG) platforms are crucial for the region's investors to deliver impressive returns in the future.

When discussing SWIP's manager selection process, Lehmler-Brown told delegates that houses divided into sector-focused teams presents a dangerous strategy. "Of course, sector knowledge is valuable, but we have seen big teams built up around particular sector focuses, which can create negative internal political situations. Instead, it should be about linking deals to match the team's DNA." Lehmler-Brown believes managers must share knowledge. As the world becomes increasingly interconnected, private equity firms must instil more interconnectivity between teams.

Broader tool kit
Portfolio management is another area in need of change. Lehmler-Brown encouraged attendants to focus on a much wider range of business activities in order to facilitate growth. This included business development; debt, tax and compliance management; IT systems; ESG; harnessing HR talent; maintaining a macro view and, perhaps most importantly, investor relations and social media engagement as a means of better communicating the industry's activities and changing public opinion.

"The Nordic market will remain an attractive destination for private equity but GPs must evolve; they must know their deals, find growth through value creation and build businesses fit for the 21st century by incorporating a broader tool kit when managing portfolio companies," said Lehmler-Brown.

This need for change was also a key discussion point during the Leader's Debate. According to Heikki Westerlund, CEO of CapMan, the opening up of the IPO market has already created structural changes in the Nordic market, which will bring about more change as it encourages corporates to increasingly buy and sell.

Per Franzén, partner at EQT, believes the highly liquid credit and public equity markets are making new deal sourcing more challenging: "We need to be more proactive and more entrepreneurial in sourcing deals."

However, Stefan Linder, partner at Altor warned of the dangers of changing too quickly: "Every time we look to raise a new fund we review our focus and strategy and make sure it is best suited to our team. There is a dilemma between building structure and best practice while retaining that entrepreneurial spirit and nimbleness unique to private equity. We need to be careful on how to improve but it is crucial we adapt to how we work best."

Under attack
Despite continued negative media reports attacking private equity in the Nordic region for its involvement in the welfare market, the panellists were optimistic that public opinion is gradually changing. "The majority of our stakeholders are very supportive of the work we do," said Franzén. "This gives reason to hope we can change the political and media perception of Nordic private equity; I think it will improve. We faced similar issues in Germany and Denmark in the past. To change this negative view we need to be responsible owners and demonstrate our ability to develop companies and make them stronger."

While the Nordic region enjoys a strong economic and fiscal environment, private equity houses must evolve all sides of their business, from team composition to deal sourcing and portfolio management, as well as justifying its ability to build better businesses in order to retain its attractiveness in Europe.

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