Sweden: Leading the way out of recession?

Sweden is one of the few economies in Europe to have rebounded strongly from the crisis, with the recovery beginning earlier than most. The majority of 2009's private equity activity took place in Q4, when the first signs of recovery were already evident. With some private equity industry insiders forecasting GDP growth of over 4% for 2010, it is unsurprising that the country has seen a wave of buyout activity during the year as the market kicks back into gear.

This view is backed up by Hans Wikse of Procuritas. Wikse believes that the market has been bolstered by two key factors. "In general we have seen a stronger dealflow in 2010 compared to 2009, with more opportunities presenting themselves as the economic recovery continues," he explains. "This has been helped along by local banks wanting to do business again".

However, the playing field for buyout investors remains dramatically different to the pre-crisis market. Despite their keenness to lend, banks' leverage multiples have not returned to pre-crisis levels, with a range of 3-5x EBITDA being the current norm depending on the quality of the company. This can be compared to the 5-6x levels seen before the credit crunch.

With highly leveraged deals dating from earlier in the decade still haunting banks, it is understandable that they are hesitant to return to high debt multiples. "Some assets have been, and still are, a problem" says Simon Wakefield, global head of acquisition finance at SEB Merchant Banking. "However; portfolios have, in general, been getting stronger," he adds. So it seems that the issue of bad loans is not as problematic in Sweden as in other regions of Europe.

In addition to the low leverage multiples, the market is somewhat limited by the selectiveness of banks and the pricing level of debt, which remain high. For small deals, the range for margins is currently 4-5%, depending on the size of the transaction and its complexity, according to Wakefield. "You could say that the market was effectively closed for one year between September 2008 and September 2009, though of course some transactions got done," he says. "For the right purchaser and the right borrower, we will consider underwriting up to €500m and potentially even more," he adds.

After the hugely difficult 2008 and 2009, it is unsurprising that appetite and confidence has rebounded, but it is also clear that there is little danger of a runaway market. As Göran Barsby at CapMan says: "The mid-size buyout market is surprisingly small, despite the foundations being in place for there to be a lot more activity. We have companies with strong cash flow, a positive leverage market and funds with capital to deploy." According to Barsby, concerns over the world economy are hampering deal flow. "Sweden is a country that is highly dependant on the export market" he adds. Nevertheless, there are still reports of there being many deals in the pipeline and this suggests that the situation could improve. Only time will tell.

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