Strong valuations in Nordic region driving co-investments

Mikkel Stern-Peltz
22 March 2016

Tweet
Facebook
LinkedIn
Google plus
Send to

The Nordic private equity market could see a boom in co-investments as GPs are forced to target deals with higher evaluation values because of upward pricing pressure. Mikkel Stern-Peltz reports

Co-investing remains a popular topic in the Nordic private equity industry: the Mergermarket Nordic M&A Forum in Stockholm on 10 March saw SL Capital partner Graeme Gunn, Akina partner Ralf Gleisberg and Herkules Capital managing partner Cato Haug take part in a panel discussion focused on developments in this market.

Asset prices have been growing for Nordic private equity deals in recent years and the debate suggested the upwards pricing pressure could drive an increase in co-investments in the region.

Buyout volume and value figures from unquote" data indicated a surge in prices in the Nordic region last year, with average EV up 22% despite a drop in deal volume by nearly a fifth.

There was a general consensus among conference delegates that valuations in the Nordic market had reached a plateau, but it was also the clear opinion of the industry professionals attending the event that prices have been rising for some time and have reached a very high level.

Supple splits
Panellists at the Mergermarket event suggested one of the key reasons for GPs to engage in co-investments was that it allows for a level of flexibility in transaction size – as well as flexibility for future bolt-ons. Given a market with steep pricing, co-investment allows GPs to acquire targets that have been pushed outside their equity ticket mandate by the inflated prices.

Adding to the pricing driver, the relative maturity of the Nordic LP environment is also a factor in the high demand for co-investments, the panel said. Regional pension funds and insurance companies have shown a high level of sophistication in their private equity allocations and their appetite for the asset class has grown in the past half-decade.

But Nordic co-investments do not only attract local LPs: in addition to SL Capital, French fund-of-funds manager Access Capital Partners has also ventured into the north. April last year saw first-time fund CataCap, a Danish lower-mid-market GP, tap its LPs Access and Danica Pension for a co-investment. The DKK 700-800m EV acquisitions of Pitzner Materiel and GSV Materieludlejning were at the limit of the DKK 1.1bn CataCap I vehicle's remit, so the inclusion of Danica and Access for an estimated 30% stake allowed the GP enough flexibility to pounce on an opportunity that may otherwise have strained its equity ticket allowance.

Danish pension funds including ATP, PKA and PFA are avid co-investors in both private equity and infrastructure projects; Finnish insurance companies are active in the space; and Sweden's AP6 has arguably one of the most advanced private equity operations of any Nordic LP.

As such, given the current environment in Nordic private equity, 2016 could be a bumper year for co-investments in the region.

Danger zone
Though much of the discussion at the Nordic M&A Forum centred on the opportunities presented by co-investing, there were also warnings to heed for GPs looking to partner on deals with their LPs.

The panel pointed out the adverse selection problem in co-investing: GPs are likely to keep the best deals for themselves, which means assets offered to co-investors could be sub-par in some ways – perhaps too big to manage or too risky. As a counterpoint to this, it was pointed out that it would be an unlikely scenario if the co-investor is an existing LP, as it would be unlikely a GP would jeopardise the relationship.

As is the case with Nordic banks, relationships play an extremely important role in Nordic private equity – more so than in other markets, according to the panel's experts. One of the points that was stressed the hardest in the debate was that GPs need to consider how badly they could be putting their LP relationship at risk for a co-investment: it was made clear that there are examples of relationships being terminated as a result of co-investment-related issues.