Macro challenges make manager selection crucial

Though the Nordics stood out in 2011 as one of Europe's safer havens, the IMF has recently revised growth forecasts to just 1% for this year, down from 2.4% last year. Brakes on global growth include fiscal consolidation, bank deleveraging (expected to significantly decrease output) and household deleveraging, according to Rodolphe Blavy, senior economist at the IMF and keynote speaker at today's Nordic unquote" Private Equity Congress.

This is because the region is not as insulated as previously believed, and is in fact directly exposed to oil supply shocks, deemed one of the largest downside risks to the economy.

Private equity will suffer on the whole as a result. "Prices did not really fall in the last three years and leverage is much more difficult to get. There is also no backwind from growth, so we must be prudent and expect returns to go down," points out Jesper Knutsson, senior investment manager at Danske Private Equity. "It is very hard nowadays to turn things round. Some will manage to do it, but average returns will go down and median returns will be very low. This will shock many LPs."

And so it is in these tough times that investors often flock to "brand-name" GPs – usually the largest ones. Indeed, in March unquote" recorded €14bn raised for European buyouts by just three GPs, despite it being an extraordinarily difficult backdrop.

"Expectations of portfolio valuations are more subdued because of marking to a down market. However actual exits have delivered, so far, the same returns as in the past," says Tom Berggren, partner at Optimized Portfolio Management.

"By and large, we pushed small and mid-market managers to our clients. Frustratingly many clients prioritised larger players," says Michael Russell, former head of Europe for gatekeeper Altius Associates.

Some of this made sense: "The more the macroeconomic environment is strained, the more opportunities there are for large deals, as corporates spin off assets," Russell explains. "I am surprised, but large buyout houses have produced higher returns than we had expected," Knutsson adds.

However they are not all deserving of investment. "A lot of the closes show the strength of relationships and marketing," Russell warns. "There will be a shake-out. Investors should employ some scepticism rather than waiting to see how the fallout materialises."

Again, it boils down to manager selection. Says Russell: "The broad, pooled collective of investors will not do as well as in the past. So it is about selecting a few strong players. Capital is used productively by some GPs and they produce surprisingly high returns in tough conditions. It is what they are paid to do. Now your work as LPs is to figure out who can navigate their way to the best transactions nowadays."

Unquote's 8th annual Nordic Private Equity Congress is sponsored by Delphi, Coller Capital, Jersey Finance, PricewaterhouseCoopers, SJ Berwin and Burson-Marsteller.

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