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Northern lights nordic region

The Nordic private equity market is something of an enigma. To some limited partners it is an opportunity not to be missed, while others appear cautious. Recent fundraisings suggest GPs have little to worry about – access to Nordic funds see no reason in the short term at least. Andy Thomson reports why the region’s impressive progress should not continue. “There is a feeling that the larger funds created great track records in the mid-market before growing, but that there is still good Question: what does a private equity (“positive discrimination” as the same money to be made in the space they firm do when it finds itself the recip- source describes it). originated from.” ient of investor adulation? Answer: The main reason for the collective exactly what it likes. Just ask the top clamor is Segulah’s position in a sweet fill your boots performing venture funds in the US, spot that is particularly honey-scented where fundraising success is measured for US institutions following advice There has also been a sense of urgency by the amount of capital you are able from their consultants to increase their surrounding Nordic fundraising: to turn away. In such cases, access for European exposure. Not only does the investors feel the need to jump on the limited partners is a privilege rather a firm comply with the current vogue for bandwagon now, before it disappears right. mid-market and region-specific strate- over the horizon. Whereas many GPs Such belligerence may not be the gies, it has a steady track record going in the rest of Europe have tended to preserve of a small US venture elite for back about ten years and is acknowl- delay distributing their private place- much longer. Although it may offend edged to be handling generational issues ment memoranda until 2005, the the region’s egalitarian ideals, the within the management team capably. Nordic region has well and truly sated wielding of GP muscle can now be But there’s more to it than that. For its appetite for capital in the last couple detected in Scandinavia as well. one thing, US investors stretching their of years. Although Stockholm’s Segulah has not investment horizons into what may be In the last two months alone, LBO yet officially fired the starting pistol on unfamiliar territory want the comfort specialist EQT raised Û2.5 billion in just its third fund (understood to be capped of a relatively transparent and proven six months for its fourth fund while at around Û250 million), it is a badly market. In this respect, the Nordic Stockholm neighbor Accent Equity kept secret that the firm has been busy region (and particularly ) scores Partners, a mid-market firm, beat its corralling LP commitments and may higher than most other parts of Û200 million target with a Û250 even announce a first and final closing Europe. Emerging southern European million debut fund. Accent partner and as early as this month. markets like Spain might offer more investment manager Niklas Sloutski If Segulah really has joined the ranks exciting possibilities if you pick the right endorses Davidsson’s sentiments of elite funds that can pick and choose fund. But select poorly and you may regarding the perceived opportunity: their investors, it is institutions from suffer less of a battering at the “During the years we have seen a the US that appear to be in favor. A Pamplona bull-run. In Sweden, the number of funds migrating from small source close to the fundraising says the track records of many fund managers and mid cap transactions to mega fund is heavily oversubscribed and that stretch back around 20 years, and some funds, moving away from us not only a couple of European investors have have delivered stellar returns. in terms of transaction size but even been taken a back to find their planned Christoffer Davidsson, a principal at geography.” commitments being scaled down to London-based fund placement agent Add to these recent successes some accommodate demand from the US Campbell Lutyens, says those seeking of last year’s headline acts such as Altor

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Equity Partners’ closing of a debut Û650 gaps remain million mid-market fund in just four months and EQT rival Nordic Capital’s Local practitioners say a number of mid- garnering of Û1.5 billion for its market niches could be exploited if only “substantially oversubscribed” fifth those who have identified them could fund and you begin to appreciate the elicit sufficient interest in their propo- scale of Nordic activity in a generally sitions. One area inviting further exam- subdued fundraising environment. ination is business turnarounds, a US But after Segulah and a number of import that has been latched onto in other recent launches such as ’s Europe by a small number of special- Reiten & Co and ’s Polaris ists including Alchemy Partners and Private Equity, the only other major Rutland in the UK, as well as Nordwind Nordic fund manager with a declared Capital and Orlando Management in short-term fundraising ambition Germany. Norway’s Credo Partners, appears to be Helsinki-based CapMan. which was established last year, claims Sloutski: fund migration A spokesman for the firm confirmed to be the Nordic region’s first focused that it would be raising a mid-market turnaround player, though Danish equity fund in 2005, having recently quoted conglomerate VT Holding has announced the first closing of a mezza- also evolved into a turnaround specialist nine fund on Û105 million. after having enjoyed some success on Some observers will cite the old adage an opportunistic basis. about too much money chasing too few Explaining the rationale for launching deals and conclude that an already the firm, Managing director Wilhelm mature market could see competition Mohn says: “Credo Partners targets reach unhealthy levels. But in the same underperforming companies for imple- way “overheating” is a word that rarely menting strategic, operational and finan- falls from the lips of Nordic meteo- cial changes for restoring profitablity to rologists, so too is it absent from conver- create a platform for further growth or sations with the region’s private equity a route to exit. Turnaround focused pros – many of whom say the market investments remain a largely untapped could comfortably sustain an even niche in the Nordic region and Credo greater population of investors. You Partners represents a first mover insti- even hear this opinion voiced by resi- tutional turnaround firm in the Nordic dent GPs, in spite of what one assumes market.” Do investors buy that story? would be negative implications for their Marete Hanetho says thus far Credo has own firms should a more competitive provided equity when needed from environment take shape. “internal resources” but is “discussing It is a view that carries some weight. the option of raising a fund.” The region’s private equity market was In addition to firms keen to pursue considered “mature” long before Altor unfamiliar strategies, others are seeking came along and blew the assumption to differentiate themselves from a away. Yes, much of the fund’s support predominance of generalist investors was based on founder Harald Mix’s by focusing on just one sector. For outstanding track record at Industri example, Copenhagen’s Dania Capital Kapital, but it also reflected his raised DK600 million (Û81 million; $98 perceived shrewdness in identifying an million) last year from one cornerstone upper mid-market niche under-served investor, Fonden Realdania, which is by local investors. Ironically, Altor may a charitable investment association. The find the competition in its space about charity, for which improved housing to hot up as Industri Kapital, following and the preservation of historic build- the limited success of its latest ings are two core aims, was keen to back fundraising, may be moving somewhat Dania’s focus on the construction and closer to its original mid-market roots. building sector.

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Dania, which has yet to complete a Unsurprisingly, opinions differ and deal, had hoped that by this time it this view is not universally shared. It would have raised an additional Û80 is thus quite instructive to consider what million from other backers, but partner the data gatherers say. A report Jørgen Jensen says the priority is now commissioned in December 2003 by on doing deals, establishing a track The Alternative Investment record and only then seeking to invite Management Association (AIMA) in in new investors. The absence of both London and Swedish investment deals and local institutional support so manager IPM Informed Portfolio far is not worrying Jensen. He says the Management presents a mixed picture firm is looking to close “one or two” of Nordic institutional attitudes to investments by the end of the year, and private equity. points out that Fonden Realdania has Although over 60 percent of 84 pledged to back subsequent funds so Nordic institutions canvassed had long as the firm meets return expecta- made allocations to hedge funds and/or tions. private equity (compared with a European average of around 48 will they, won’t they? percent), it also revealed that the average allocation was low at just two But, while Jensen appears stoic, other percent – ranging from six percent for fund managers express frustration at Finnish institutions to one percent for what they see as a somewhat unpre- those from Norway. The survey also dictable approach to the asset class from discovered that these institutions potential investors based in the Nordic expected to increase their hedge fund region. Says one: “The Nordic insti- allocation at a faster rate than private tutions have had a tendency to stay out; equity, though anecdotally hedge funds then get in and over-allocate; then pull appear to be viewed less favorably now out again; and then go international,” than when the survey was commis- he says. sioned.

selected Nordic fundraisings 2003/04

Name of fund Name of firm Type of fund Geographic focus 1st/2nd/ Target final Amount closed, final close total date

Accent Equity Partners I Accent Equity Partners Private equity Nordic region Final e200m e250m, Aug 04

Altor 2003 Altor Equity Partners Private equity Nordic region Final e500m e650m, Jun 03

CapMan Mezzanine IV CapMan Mezzanine Nordic region 1st Unknown e105m, Jul 04

Dania Capital Fond I Dania Capital Private equity Denmark 1st e160m e80m, Oct 03

Danske PEP II Danske Private Equity Private equity N America & Final e600m e527m, Oct 03 Western Europe

EQT IV EQT Private equity Northern Europe Final e2bn e2.5bn, Aug 04

IK 2003 Industri Kapital Private equity Europe 1st e1.6bn* e500m, Oct 03

Nordic Capital V Nordic Capital Private equity Nordic region Final e1.5bn e1.5bn, Apr 03

Procuritas Capital Procuritas Private equity Nordic region Final e300m e230m, Jun 03 Investors III

Source: Private Equity International *revised

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Figure 2: Percentage of Nordic Iinstitutions with external managers It is important to emphasise that and procurements within 2 years many Nordic institutions appear keen either to increase their private equity 60 External Managers Currently allocations or implement programmes Procurement within 2 Years for the first time. But such plans do not 50 necessarily imply a bias to local funds. 40 Danish manager ATP Private Equity Partners is currently 30 undertaking a recruitment drive to assist 20 the delivery of a substantial private equity programme in 2005. But many 10 of ATP PEP’s recent commitments have 0 been in US and Continental European Hedge Funds Private Equity Overlay Strategies* funds, though it has also taken posi-

tions in the latest Nordic Capital and * Tactical Asset Allocation (TAA) and Currency Overlay EQT funds. Meanwhile, AP Fonden 2, the Second Source: Alternative Investment Management Association / IPM Informed Portfolio Management Swedish National Pension Fund, recently awarded a $150 million fund of funds mandate to California’s Pathway Capital “There is a little bit the potential formation of a bubble. Management to invest on its behalf in of hype around and On the other hand, one should not funds outside the Nordic region. Until jump to negative conclusions too now, the fund has invested mostly in we do see some signs readily. Some trepidation expressed by Sweden and exclusively in Europe. “It’s of too much capital certain investors about particular a convenient way for us to diversify and funds does not add up to a picture of to be part of funds we wouldn’t other- being invested in the region’s LP and GP communities wise have a chance to be a part of,” says certain funds” ignoring each other. Take a look at the AP Fonden 2’s head of communications venture space and you find state-backed Carl Rosén. organisations such as the AP Funds in Danske Private Equity’s managing Sweden and Vaekstfonden in Denmark partner John Danielsen says the firm’s that they too should be looking outside stepping in to administer first aid to latest PEP II fund has made just one out the region for opportunities to diversify.” survivors from the tech crash wreckage. of eight fund commitments so far in a And a number of the region’s pension Nordic fund, Nordic Capital. Managing hype and life insurance companies have director Lauge Sletting says that of the demonstrated loyalty to the once 23 commitments made by Nordea Few GPs argue that local investor fledgling buyout firms that have Private Equity’s 2001-vintage vehicle – support for the industry was lacking become the high-profile hitters of today which is now fully invested – only two when it was in its infancy – quite the – accepting those firm’s strategic evolu- went into Nordic funds (commitments contrary in fact. But is it just the drive tions along the way. of Û10 million each into EQT and Altor). towards diversification that is keeping The bottom line is that for today’s In a sense, there is nothing surprising local LPs away from home-grown mid-market Nordic funds the attitude about this. After all, diversification is managers, or can they, from their close- of local investors matters little when the name of the game for funds of funds up view, see things that are making them their international counterparts are in particular, and it could be argued that cautious? When pressed on the point, beating a path to their door. When it Nordic GPs and LPs lessening their Bisgaard-Frantzen concedes that some- comes to investing the money, their dependence on each other is a healthy thing of a herd instinct can be detected challenge is to prove that the reputa- development. ATP managing partner in Nordic fundraisings at present. tion of the Nordic region as a profitable Jens Bisgaard-Frantzen insists: “If I was “There is a little bit of hype around hunting ground for private equity a Nordic GP, I would be wanting to and we do see some signs of too much investors applies equally well to the diversify my investor base. And from a capital being invested in certain funds.” future as the past. If so, they can rest Nordic LP point of view, I think it’s fair This is a measured assessment: in assured that their new friends in the to say a lot of money has been invested private, some investors express rather LP community are not of the fair- in Nordic funds and now it’s appropriate blunter views about what they see as weather variety. I