SL Capital's Gunn wants to see Nordic turnaround funds

Mikkel Stern-Peltz: The Nordic private equity market had a strong 2014, will this continue throughout 2015?

Graeme Gunn: It's such a mature market that there's relatively little that could disrupt it. There are local quirks: the Finnish economy is not in a great place at the moment but, interestingly, it's turning up a lot of private equity opportunities – owners thinking of selling are realising it's not going to get much better soon so if they want to exit, they might as well get out now.

There's an interesting dynamic in Norway and how the energy and currency markets shape up – what implications that will have for the whole region, given Norway has largely been outperforming the overall Nordic economy. If you go to a coffee house in Oslo, for example, the employees are young Swedes, earning more than they can at home, so we might see that economic boom retrenching and the Norwegian story may struggle over the next couple of years.

Denmark is on a bit of a growth curve in terms of private equity and Sweden continues to be an attractive market for transactions for both local and international players. I can't pinpoint anything specific in terms of risks. There can always be surprises in a market – as we have seen with energy – but overall, the Nordics are a large and well-established private equity market.

MSP: What will the fundraising market look like in 2015?

GG: There was significant capital raised a couple of years ago, and last year was reasonably quiet – excluding Altor. I think this year we will see a few of the mid-market groups out in the market.

We certainly believe that investors continue to have an appetite for the Nordics. The long-term track record for most funds in the region is pretty good. You wouldn't have gone far wrong over the last 10 years investing in almost any fund you could find.

The question is: long-term, is that performance sustainable given the amount of capital? I suspect you'll see the returns falling, but I think there will still be a differential because it continues to be a good place to invest. It's an attractive place for private equity: the model is well-understood, management teams see the attraction, the funds themselves have created a positive environment and trade buyers understand they can sell to private equity without losing face – so there are a lot of positive dynamics.

MSP: Are there any specific criteria SL Capital will be looking at when investing in the Nordics this year?

GG: I think there is an interesting inflection point around oil & gas in Norway. Whenever the energy industry goes into a slowdown, there will be opportunities to acquire assets at a more attractive price in what has been an overheated market. If you can find someone willing to sell and you take a three- to five-year view, there will be returns to be made. The challenge in Norway is that it is generally an insiders' market, so you need to have the access.

The other thing we'd really like to find in the region, which has been hard for us to find, is turnaround managers. We're looking for smaller funds, €50-100m, that are actively targeting distressed situations or turnaround structuring. There is a cultural, legal and banking conservatism that means there is a reluctance to restructure companies through a private equity structure. Investors and banks would rather manage the situation out below the radar.

MSP: Co-investment is becoming increasingly popular, how is this impacting the region's deal environment?

GG: Certainly the local pension funds have always been active in working with the local private equity funds by either investing in the funds themselves or co-investing. If you look at a market such as Finland, the local insurers invest in funds, co-invest and have also provided debt for transactions.

They've been investing alongside the leading managers in companies. Intuitively it tends to be at the bigger end as, if you're a big pension fund in the Nordics, you want to deploy €100m+ to make it worth your while.

Similar to the smaller institutions in the region, we are targeting a different co-investment angle, which is in buyout equity. It's more mid-market, with cheques of €5–50m. We continue to see a steady dealflow in that segment alongside the managers we back.

Across Europe, investors such as pension funds have more appetite to be closer to assets these days. But the question you have to ask is: do they have the expertise to make that significant investment decision or is there a ‘local agenda'? For us, it's simple – our only objective is to make a positive return.

MSP: There was a very strong IPO market in the Nordics last year – will this continue throughout 2015?

GG: From what I hear, the local investment institutions would like to see more products coming through to the listed markets as many of the exchanges have a limited number of high-quality businesses. Notwithstanding some of the recent issues that have been out there, I think institutions will still be keen to buy from local Nordic private equity.

 

Graeme Gunn of SL Capital will be speaking on the Co-investment panel at the Nordic Private Equity Forum on May 5th in Stockholm. To find out more about the event or to book your place, click here. 

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