The Nordic coming-of-age

"Nordic funds have achieved great returns, which naturally has driven international interest," explains Benedicte Schilbred Fasmer, head of business development and capital markets at Norwegian private equity-focused asset manager Argentum, suggesting there are a number of reasons for the increased foreign appetite for the region.

"Furthermore," she continues, "LPs with no previous exposure to Nordic private equity have recently picked up interest in the region. International financial market instability has prompted many investors to look to the Nordic countries as a stable region from a macroeconomic perspective."

There may, however, be more to it than just economics. One idea points to the increased confidence in the region as a consequence of a maturing industry, where GPs are stepping up their game in the face of higher competition.

"There has been great development in the Nordic private equity industry over a number of years," Schilbred Fasmer says, adding that GPs have grown more professional and internationally oriented. Thus, she argues, funds have become more attractive to international investors.

The last couple of years have indeed seen some world-class exits taking place in the region. Most notably, Nordic Capital exited pharmaceutical company Nycomed to Japanese trade player Takeda in 2011. While the deal was valued at some €9.6bn, it did not include Nycomed's US branch, which was recently sold for a further $1.5bn to Swiss pharmaceutical company Novartis.

Over the last two years, unquote" data has registered a total of 12 Nordic exits above the €1bn mark, which surpasses the traditional giants UK and France combined. No doubt, Nordic GPs are getting more advanced.

Mega funds in the region and growing international interest highlight the Nordic success story

In fact, Nordic competition was a hot topic at the recent SVCA conference in Stockholm. The question – directed at regional veterans EQT, Nordic Capital, and Procuritas – was how to recreate the success of 1997.

That year's aggregate deal value of €2.4bn might seem modest by today's standards, but it corresponded to a 47% increase on 1996, with average deal value steady at €40-41m for both years, according to unquote" data (see graph). Perhaps more importantly, the year surpassed the value of 1992-1995 inclusive. It may well have been the first time Nordic GPs were able to flex their muscles following the 1992-1994 banking crisis.

Coming of age
The Nordic buyout industry of the 1990s was still in its infancy; hence, significantly less competitive and with a slightly cruder modus operandi than we have in place today.

"The currently robust performance of Nordic private equity, which makes it appear to be a safe haven in Europe, is not the mere result of investors fleeing other European markets affected by financial turmoil. It is the fruition of 20 years of experience and maturing practices," says Christian Sinding, head of equity and partner at EQT.

"LPs are more sophisticated nowadays. There is a stronger focus on management, and it is essential to pick a value-creating team," Mikael Ahlström, founding partner of Procuritas said at the SVCA event.

Nordic Capital partner Joakim Karlsson agreed: "We are looking at more active involvement in portfolio companies. Recruitment can be achieved through industrial networks or in-house, but we focus on a clear feedback loop to improve management."

Management consultants AT Kearney, also present at the event, noted that portfolio holding times had almost doubled in the last decade. Holding periods increasing from between two and three years to five would potentially affect IRR and thus put more demanding LPs at unease.

But the partners were careful to point out that value creation is taking place. "Real value creation derives from operational profit enhancement, and not from the margins of buying low and selling high," Ahlström said, and added that the Nordic industry was good at balancing more levers than purely financial ones, such as debt.

Accentuating the importance of developing management teams, the partners revealed that recruitment strategies have changed. "A number of talented applicants want to work with us, but we are trying to broaden the team," said Karlsson, suggesting that the firm looks to recruit from more diverse backgrounds than a, perhaps more usual, Goldman Sachs or McKinsey pedigree.

Blood, sweat and tears
Nordic Capital, which started out as a €55m fund in 1990 (and only broke the €1bn barrier in 2003), divested some €12bn worth of holdings during 2011. No wonder LPs are impressed. EQT, originally founded by Investor AB, AEA and SEB, invested from a €334m fund in 1995. In recent years, it has not only gained independence, but also raised the largest Nordic fund to date, with €4.75bn closed last year.

"It is all down to experience and hard work," says Mounir Guen, chief executive of placement agent MVision, which has worked with a number of veteran Nordic funds. "GPs, bankers, consultants – they have all grown more experienced with private equity over the years, and we are looking at the effects now." Moreover, he is careful to point out that local LPs have played a key role in contributing to this development, particularly prior to the influx of international capital.

However, Guen also points to a strong industrious culture in the region. "They are hard-working, lead by example, and they do not over-promise but over-deliver!" he declares with unconcealed enthusiasm. "A key part of the success is that these guys are performers; they work hard to deliver alpha naturally, and they are never arrogant about it."

He also points to the region as being happily overweight in terms of GPs. "Looking at the sizes of these countries, there are more players here than anywhere else," he explains, and praises the region for its strong industrial heritage coupled with great healthcare and education.

Nonetheless, Argentum reckons €15.3bn sits in the Nordic buyout pipeline. The question remains whether the experienced Nordic GPs will be able to effectively deploy and return that amount of capital.

Ahlström seemed to think that deal flow would not be an immediate concern for a generalist investor. "The Nordics is a big pond – one would be able to fish for some time without looking at Germany and beyond," he said.

But Caspar Callerström, partner at EQT, raised a word of warning, suggesting that the current odds are in favour of either global specialists or local players. GPs that are neither might have a difficult time ahead, he argued. Regardless of the accuracy of that prediction, it stands clear that competition in the Nordics is on the rise.

Argentum's Schilbred Fasmer sees a risk of larger regional fund sizes leading to increasing pressure on returns, valuations, and GPs themselves. "A clear-cut strategy will be an important criterion for success in the future as well. But it will also be important for GPs to deliver, now that they are taking in more capital."

More importantly, in light of the recent international courtship, Fasmer highlights the need to stay in touch with local LPs. "The international capital may well disappear at the next crossroad, which makes it important to maintain a loyal investor base in the Nordic region as well."

Without inferring causality, funds are growing larger and fund managers are getting more experienced. Moreover, Guen points out, a number of talented professionals have historically spun out from veteran buyout houses to create even more players on the local market.

With these developments, the relatively small region runs the risk of becoming too crowded. Hence, the quality of future returns will likely depend on how the specific GPs respond to the challenge.

The above is an extract from the unquote" Nordic Report 2012, sponsored by EQT and SEB.

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• Topics
• Nordics
• Fundraising
• Funds
• EQT
• SEB
• MVision Private Equity Advisers
• Argentum
• Nordic Capital
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