2010 preview: industry predictions

The legal perspective on private equity in 2010 - Peter Helle, partner and Magnus Forsman, associate, Wistrand

The Nordic market is slowly showing signs of increased activity, particularly in the small- to mid-market, as the scarcity in lending prevents any mega-deals being completed. The lack of cheap and readily available debt will continue, which is likely to bring about more innovation in the way deals are structured. Deals fully financed by equity, convertible loans and deferred earn-outs are examples of arrangements we are already seeing.

Over the next six to 12 months, we expect the number of completed deals to increase, albeit at a lower pace than during the heyday as more time and resources will be allocated to due diligence, and shell-shocked investors remain cautious. We predict the sector focus will be on ICT, energy, finance and retail. Energy will mainly be driven by consolidation in the wind energy space, while activity in retail could be triggered by a surge in insolvencies.

Finally, the crisis has strengthened LPs' positions in negotiations on fund terms and conditions. The 20/80 rule will probably remain - though transaction fees and the likes will be up for debate. We also believe that there will be an increase in the number of private equity funds located in Sweden, due to more favourable tax-treatment in Sweden for LLPs, and the increasing costs for funds on the Channel Islands and in Luxembourg. We are already in discussions with GPs who are preparing to set up new structures in Sweden.

Corporate finance suggests best deals will be hard to do

Per Olav Langaker, director, corporate finance, RS Platou Markets

The last two to three years before the financial crisis struck, private equity had quite a few advantages over trade buyers when competing for the most attractive targets. They could move faster, enjoyed very available and affordable financing, and appeared as "easier" owners, bringing less changes to daily business to the entrepreneur or management team selling. Today, the tables have turned. With limited and expensive financing available, private equity firms struggle to compete on price. As financial buyers, they can't enjoy the same synergies as a trade buyer, nor are they likely to have the same in-depth industry knowledge as an industry player working in the sector every day. With limited visibility in earnings and forecasts, this knowledge can be crucial.

As corporate finance advisers, we are now more than ever on a mission for the buyers, hunting down the best targets, (and there are some) aiming to secure exclusive processes. The challenge is, of course, that the market is flooded with advisers, so nearly every company, selling, buying or holding, has been contacted by a number of investors and advisers over the past 18 months. For vendors, this could actually be a good thing; while some sales processes suggest mutual trust and careful progress (typical trade acquisitions), other companies in certain sectors (e.g. offshore technology companies) are now in a strong position to auction their shares to improve their negotiation power. Advisers could help vendors in reading the market and choose the optimal approach.

Over the past eight years, Nordic private equity activity and the number of fund managers and teams have steadily increased. Interestingly, as the number of transactions plummeted, the number of people stayed the same. As a result, there are a lot of teams and capital-strong funds ready and eager to invest and take advantage of the deal flow accumulated over the past year. But the best deals will be hard to do.

The vendors will set their price levels based on historic results and optimistic views on market recovery, while the buyers will assess earnings forecasts and cashflow development with a more anxious market view in mind. Needless to say, in today's market, these two views simply don't match. We have seen and will continue to see multiple discrepancies of 1-2x EBITDA.

The placement agent expects Nordic GPs to be back in force - Mounir Guen, founder and CEO, MVision

For many years, Nordic general partners and their portfolios - particularly in buyouts - outperformed their peers in private equity, generating some of the best realised returns in the asset class, accompanied by few losses.

Their popularity grew with investors globally, resulting in a large number of oversubscribed funds. Many investors have three, four or more GP relationships in the region.

When investors were asked why this was the case, they would point to excellent performance, very hands-on control-oriented ownership, strong governance, lower debt exposures, excellent and thoughtful management, and very high calibre global portfolio companies.

The series of events that unfolded from September 2008 led to the now familiar economic and market turmoil. Coupled with new valuation policies that closely correlated the unrealised portfolio to public markets, this began a chain reaction that created duress in the portfolio of these out-performers. They experienced - many for the first time - losses, write-offs and instability. Portfolio companies would go critical overnight.

At first they were reactive - putting out fires - but true to their tradition of control and thoughtful hard work, they soon consolidated their resources, rolled up their sleeves, said good-bye to their families and began fixing things and sorting out problems one at a time.

Like all GPs, they had to be cautious and they made few investments in 2009. They did, however, all focus on stabilising their portfolios. New business plans were developed and executed, loans were restructured, processes and evaluations were strengthened, and management and boards were fine-tuned to fit current plans.

So for 2010, expect them to be back in force. They will have emerged both wiser and fitter. Get ready for the return of that high-performance and for the best GPs to find their groove again.

A lender's perspective - why mid-cap may prove toughest - Simon Wakefield, global head of acquisition finance, SEB

Given the government-initiated cheap credit environment, we have seen rapid and dramatic changes in the investment grade market, and it is possible that confidence may return surprisingly quickly to the LBO debt investors. The outlook for senior debt seems good, with leverage levels halved (say 3-3.5x for senior and 4-4.5x for total debt) and yields doubled (say 4-5% for tranche-A senior debt and front-end fees at the same level). The main issue to watch will be how quickly these leverage levels rise and yields fall.

Many expected the large-cap market (

In the mid-cap segment, the role of the lending banks will be watched closely. Will regional banks regain their role as core providers of debt for mid-cap? Or will bulge bracket banks succeed in creating enough institutional supply to capture the market? For small-cap, (less than EUR100m of debt) the situation seems more predictable, with local banks being open to existing borrowers.

Finally, banks are recovering their strength. Capital has been replenished with rights issues, the inter-bank funding market has eased, and longer funding maturities are available. Importantly, profitability has shot up to help banks earn their way out of credit problems.

The existing LBO loan portfolio will continue to need plenty of attention, with further restructurings and provisions likely to keep everyone busy over the next two or three years. Nonetheless, concerns about future revenue growth will drive lending activity, and as confidence is returning to the market space, we expect new business to be the centre of attention.

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