NORDIC ROUNDTABLE: PART 1 Tales of four markets in the Nordic It’s a high-powered conver- rather than seeking to sell to private equity. region is plentiful, but the sation on a late-September afternoon in “The IPO market has been providing Stockholm, and the first order of business such a buoyant exit environment that what forces shaping it differ is to assess the current deal environment otherwise might have been an opportunity starkly in each of the four in the Nordics. Unsurprisingly, given the for funds to invest has largely gone to the countries. In two articles world’s ever-deepening pool of uninvested very aggressive public market, or else to Philip Borel talks to five local capital, those present are united in their strategics,” agrees Ola Nordquist, head of experts about the current view that finding deals at sensible valuations the Nordics at . can be challenging. Stephan Révay, head of transaction ser- investment scene and The reasons why this is so vary mark- vices at PwC, has noted that because of the pressures placed on edly across the four markets of , the intensely competitive market dynamic, them by a sceptical public , and Finland that make auctions for mid- to large-cap companies up the region, more of which later. But the are often being shunned by all but the keen- universal theme playing out in all of Scan- est of suitors: “The key change we’ve seen dinavia is that wherever there is an attrac- relative to a year ago is that there are often SPONSORED BY tive asset available for investment, the list only a few parties getting into a process. Nordic Capital of would-be acquirers can get quite long This is partly because of the IPO market Permira PwC quite quickly. valuing assets so highly, but also because Verdane Capital “Deal flow is strong,” confirms Fredrik sponsors have become more cautious about Näslund of NC Advisory AB, advisor to the process risk and tend not to be particularly Nordic Capital funds, about the Swedish aggressive when there are many bidders market – “but so is competition.” involved, unless they have a clear edge. They A rising stock market in particular has really are being selective when it comes to been making it challenging for private deciding where to spend their money and equity funds to invest in recent times. Prior concentrate their efforts.” to a correction in May, the Stockholm Stock Even so, the focus on selectivity doesn’t

Stockholm: deal flow is Exchange was “on fire”, as Näslund puts it, mean sponsors aren’t pounding the pave- strong in the Swedish capital prompting vendors to list their businesses ment hard in search for investments. Each

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of the three GPs at the table have their STRONG DEMAND own distinct way of trawling the region for opportunities. And each is adamant that, Not for the first time in the industry’s history, Nordic funds are proving despite the crowded field, they continue popular with LPs $bn Total capital raised Number of funds closed to successfully source transactions that fit 15 20 their investment criteria and can be under- 15 16 12 written at sensible valuations. 14 15 Verdane is a direct secondaries inves- 9 11 tor specialising in small to medium-sized 8 10 6 businesses in the energy, IT and advanced 5 industrial sectors. Managing partner Bjarne 3 4

Lie says the strategy works well: “We’re 4.59 12.34 2.00 10.62 10.84 9.53 0 0 pure-play growth, and the average com- 2010 2011 2012 2013 2014 2015 YTD* pany we’ve exited has grown the top line by Source: PEI Research & Analytics *As of 16 September 2015 there is an additional $4.52 billion raised from interim closes more than 20 percent per year during our ON FIRE holding period. We try to avoid auctions, and of the 23 deals we’ve done to date, 21 Prior to a correction in spring, the rapidly rising Stockholm stock exchange have been proprietary, by which we mean was the exit route of choice for vendors there was no sell-side advisor involved in the transaction. To find these opportunities, we do more than 1,000 outbound sourcing meetings a year, which typically results in three or four completed deals.” Nordic Capital, one of the largest and longest-established regional houses, maintains full-service offices staffed with Oct Nov Dec Jan Feb March April May June July Aug Sept at least five investment professionals in all 2014 2014 2014 2015 2015 2015 2015 2015 2015 2015 2015 2015 of the four countries, and is also active ›› Source: Bloomberg

november 2015 private equity international 39 NORDIC ROUNDTABLE: PART 1

MEET THE ROUNDTABLE

BJARNE K. LIE VERDANE CAPITAL Lie is the managing partner of Verdane. Based in Oslo, Lie has worked with the firm since 2001 and currently serves as CIO. A former entrepreneur and McKinsey alumnus, he has led several of the firm’s trademark direct portfolio acquisitions.

FREDRIK NÄSLUND NORDIC CAPITAL Näslund is a partner and member of the investment review committee at NC Advisory, advisor to the Nordic Capital Funds. He joined in 2001 and his investment experience includes for example Point, Permobil and Capio, a healthcare business which listed this year.

OLA NORDQUIST ›› in . Healthcare is the most You can’t let PERMIRA important sector for the firm, accounting Nordquist joined Permira yourself be in 2005, became a for 30-40 percent of the investment port- principal in 2009 and folio historically. fooled by the heads the firm’s Nordic “Nordic Capital has largely kept away office in Stockholm. His extraordinarily high from auctions over the last four to five track record includes work on TDC and valuations we are seeing; Pharmaq. Prior to Permira, Nordquist years, which is probably one of the ben- worked for in London. efits of having a large team and being able you have to take a view

STEPHAN RÉVAY to direct resources from one market to on what the assets PWC another, depending on where the most you’re buying are worth Having been with the firm attractive targets are,” says Näslund. “As a since 1999, Révay is head generalist investor and a market leader, we fundamentally in light of of transaction services and a partner in PwC’s can go slightly smaller for instance, and go their growth profile advisory practice. Based in in earlier.” Ola Nordquist Stockholm, he leads the private equity Permira, which over the past 10 years services platform for the Nordic region and has worked on several landmark has evolved from a primarily European transactions. investor into a global operator, covers the international network in other parts of region from Stockholm. Nordquist says Europe, Asia and North America to help PER OLOFSSON AP FONDEN 7 the Permira model is necessarily different them grow.” At the beginning of this from that of the large indigenous players: Technology, Nordquist adds, is one year, the 7th Swedish “As an international house concentrating sector where the formula is currently yield- National on growth and consolidation potential, we ing results: “We look for opportunities to had SKr254 billion ($33 billion; €27 billion) cannot try to replicate what Nordic and invest behind fundamental growth trends of assets, of which 3 percent is invested EQT do up here. We have to be clear about across sectors which allows us to grow in private equity allocation. Olofsson is the specific sectoral themes we believe in, into the valuation. Technology is particu- head of alternative investments and has been with AP 7 since 2002. and how we can partner with multinational larly attractive because it is going through businesses in ways that let us utilise our a major transition towards internet-based

40 private equity international november 2015 NORDIC ROUNDTABLE: PART 1

services at the moment, and we continue to we together with our advisors work on each of the four markets. Energy-dependent find good assets, including in the Nordics.” fund selection, the Nordic GPs tend to Norway, heavily industrialised Sweden and Unsurprisingly, all three managers rank highly. The region accounts for about Finland, plus Denmark with a strong pres- employ Scandinavian natives with strong 10 percent of our total private equity ence in pharmaceuticals – each country fol- local connections. As Révay points out, portfolio, and in hindsight we probably lows its own macro-cycle, and right now anyone lacking these attributes will strug- should have had more, even though we the differences are stark. gle to get close to an off-market deal: “If also had some very good returns coming Verdane’s Lie highlights the fundamen- you don’t have enough firepower on the out of the US as well, which is by far the tal shift of sentiment that has occurred in ground, you will be more dependent on largest piece of the portfolio.” Sweden and Norway over the past two ›› the wider processes. If you want to be suc- To continue along this trajectory, cessful over the long-term, especially when managers will need to tread carefully. If he In Sweden you’re hoping to buy from local entrepre- were to give other LPs a piece of advice on neurs outside the main cities, you need to how to shape their exposure to the region, people are have local presences through established Olofsson says he would urge them to stay underpricing offices.” disciplined: “You don’t want to get too con- risk and overestimating Which is why, according to Näslund, the centrated on certain vintages. For instance, number of private equity firms maintaining our overall portfolio has performed so access to liquidity, dedicated platforms in the region has actu- strongly in recent years that in the last six whereas in Norway what ally slightly shrunk in recent years, as fewer months I could easily have gone back to you get is ‘I-don’t-want- groups are willing to invest in the requi- our investment committee and asked for site local infrastructure: whereas 10 years another couple of billion SEK to commit to-be-the-guy-who-sold- ago “everyone and their mothers decided – but I chose not to. Over the long term, at-the-bottom-of-the- to open an office here, today people have keeping your discipline really pays out.” cycle’, combined with learned that it isn’t so easy to invest here The same principle applies to the GPs poor visibility on future after all. Having a presence is expensive, of course, but, in addition, for managers it’s four countries rather than one region, aiming to invest across Scandinavia, it is revenues and earnings and the local firms are pretty well set up. essential to understand the idiosyncrasies of Bjarne Lie At the same time you have more sector expertise coming in. So competition has shifted from ‘everybody should be here and bidding on everything’ to a more selective, better differentiated and ultimately smarter approach based on sector expertise, local market knowledge or both.” For investors allocating capital to the region, this move away from the feeding frenzy of the past is obviously good news. Limited partners have long been fond of the Nordic region and, on the whole, achieved high returns on their investments here. And according to Per Olofsson, who heads the group at Swedish state pension fund AP7, the same attrac- tiveness still prevails. Olofsson says: “One thing we con- tinue to see is that most Nordic funds are showing good performance, and when november 2015 private equity international 41 NORDIC ROUNDTABLE: PART 1

context, says Näslund, Nordic discount retailers have proven a “very good invest- ment” for Nordic Capital.) According to Révay, Finland’s recovery will take more time to gain momentum. How might an increase in the cost of debt financing affect the picture going forward? Permira’s Nordquist gives a cau- tious answer: “Only one thing is certain: the new normal of negative interest rates is not going to last, but what we don’t know is when the environment is going to change. Crucially, you can’t let yourself be fooled by the extraordinarily high valuations we are seeing, you have to take a view on what the assets you’re buying are worth funda- mentally in light of their growth profile. In addition, you need to take advantage of the highly attractive financing opportuni- ties that are out there to build flexibility ›› years. “In 2013, we couldn’t do anything Sponsors have in the capital structures, as well as of the in Norway. The currency was way up, sala- become more opportunity to exit the historic portfolio.” ries were way up, everyone thought oil and Verdane, says Lie, has done just that: gas prices were going to go through the cautious about “Since Christmas, we’ve returned proceeds roof. Whereas in Sweden you still had this process risk and tend to our LPs equal to more than three-quar- post-financial crisis sense of worry. Now not to be particularly ters of our beginning of the year NAV across it’s almost the reverse. In Oslo it’s all fear all our funds. So we basically called the top and paranoia, there are headlines about aggressive when there of the market and sold a third of our com- headcount reductions every day, and there are many bidders panies in the last nine months.” is plenty of deal flow, but the question is involved, unless they Nordic Capital has also been a “net will people dare do anything about it. In seller” this year, adds Näslund, who recently Sweden, it is dotcom 2.0. Everybody is talk- have a clear edge helped orchestrate a high-profile IPO for ing about the next unicorn, new venture Stephan Révay Capio on the Stockholm market (see next firms are popping up, and there is a very story). different, frothy feeling compared to 2013.” This is private equity responding to These contrasting sentiments make as highly as they are in Sweden. At the same macro-driven cyclicality by making use of it tough to convert deal flow into actual time, as Révay observes, Denmark’s bank- the strategic optionality that is hard-wired transactions in both markets. Lie again: “In ing system, which is fairly large relative to into its long-term investment model. With Sweden people are underpricing risk and the rest of the economy, was hit hard by all the capital inflow and ever greater vola- overestimating access to liquidity, whereas the crisis and is still working through the tility affecting industries and markets eve- in Norway what you get is ‘I-don’t-want- recovery. rywhere, maneuvering through the coming to-be-the-guy-who-sold-at-the-bottom-of- In Finland, meanwhile, the story is years will not be straightforward. But sea- the-cycle’, combined with poor visibility on altogether bleaker. Following the demise soned managers, such as the ones at our future revenues and earnings.” of erstwhile technology champion Nokia, roundtable, should have the right tools at Denmark is somewhere in between the next generation of Finnish tech com- their disposal to be able to navigate, even its two neighbours. Näslund says Danish panies has not grown sufficiently to boost if the going should get a good bit tougher growth businesses are being valued almost employment and stimulate growth. (In this still. n

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RESPONSIBLE INVESTING Näslund at Nordic Capital, its setting the Public image overhaul bar high is welcome because it “makes it harder for any gold diggers to invest in Nordic firms are working hard to improve what politicians, journalists, the region with no team on the ground, taxpayers and tax collectors think of them. Progress is being made, no website, no system in place to ensure finds Philip Borel responsible investment and ownership”. Bjarne Lie at Verdane Capital, who In recent years, private equity in Sweden has this day continue to describe the episode as a follows developments in Sweden mainly been at the receiving end of a great deal of public relations disaster with lasting impact. from his personal base in Oslo (Verdane public criticism. And although the debate The sponsors involved were seen as has offices in Stockholm and Helsinki too), appears to have started to subside of late, the being slow to challenge the media’s report- says his impression is that the SVCA-led five practitioners at the Private Equity Inter- ing of the story and to correct some of push to better promote the industry in national roundtable agree that their industry the misapprehensions it created. Calls for Sweden is “clearly communicated, very isn’t out of the woods yet. The consensus is greater regulatory oversight of private well executed and benefitting everyone, that persuading local critics of its merits, and equity followed, and left-wing politicians including ourselves”. safeguarding its licence to operate, remain proposed rules to prevent the industry from However, cautions Per Olofsson at AP 7, priorities for everyone. investing in public services. there are also those industry players that Employing approximately 8 percent of Since then much has been done to try continue to opt out. “Some GPs are still Sweden’s workforce, private equity plays a to stem the tide. In February this year the refusing to realise that they’re acting in the meaningful part in the economy. In 2014, Swedish and Private Equity political arena and need to engage with the according to , the amount of Association (SVCA), in a bid to boost public media much more actively, and they’re risk- private equity capital invested equated to confidence in the industry’s commitment to ing the public’s view of private equity stay- 0.37 percent of Swedish GDP – behind acting responsibly and professionally, intro- ing negative. As an LP, we too have to con- the UK (0.72 percent) and (0.42 duced a code of conduct as a self-regulatory vince our savers of the merits of the asset percent), but comfortably ahead of larger framework that is binding for its members. class, but if GPs duck and refuse to make the economies such as the Netherlands (0.29 It is early days yet to assess the code’s case for private equity persuasively, others percent), Germany (0.2 percent), Spain effectiveness, but according to Fredrik will make the case against it. ›› (0.09 percent) and Italy (0.05 percent). With this much weight and economic influence comes a heightened public pro- file, scrutiny and often skepticism. In 2011, allegations against Carema, a retirement home operator owned by Triton and KKR, of providing inadequate care and employing questionable tax and remuneration practices, provoked such a furious public outcry that private equity professionals in the region to

The code of conduct makes it harder for any gold diggers to invest in the region Fredrik Näslund november 2015 private equity international 43 NORDIC ROUNDTABLE: PART 2

Private equity still needs demystifying, the public still think there’s too many secrets. More GPs need to go out there and push Per Olofsson

Another hot button topic for private equity in the region is how firms, funds and the practitioners who work for them get taxed. In November 2014, in a widely noted landmark ruling, the Swedish Supreme Administrative Court refused to allow the tax authorities to reclassify capital gains ›› “The fact is, private equity still needs that isn’t privately-owned and where people generated by Nordic Capital as income demystifying, the public still think there’s too are refusing to work because staff are so rather than carried interest. It also ordered many secrets about it and an unwillingness stressed out; whereas less than one-and- the agency to pay Nordic’s legal costs, which to be more open. More GPs need to go out a-half kilometres away we have [Capio’s] the firm has committed to charity. there and push.” Ola Nordquist at Permira well-functioning , operating on For the time being, the verdict has made agrees, and insists that the key is to give prices that are 25-30 percent lower and it less likely that the tax authorities will transparency wherever transparency can be still making money.” elect to look into the tax arrangement given: “Obviously many private equity firms State pension plan AP Fonden 4 buying of other private equity groups. However, are private partnerships, so there are some into the IPO as one of the largest investors the debate around carried interest taxa- limitations, but it is crucial that we openly was a public seal of recognition of the quality tion has not gone away for good, neither communicate and explain to our investors, the company has developed and maintained in Sweden nor in the other Nordic coun- the companies we invest in and other stake- under private equity ownership, he adds. tries. In Norway, a similar test case involving holders in society who we are and how we Even so, for the industry as a whole Herkules Private Equity is pending, again operate. There are still pockets in our indus- the project to win more hearts and minds with the tax man aiming to impose a higher try where people take a different approach.” among the people of Sweden requires fur- levy on carried interest retrospectively. Näslund says there are signs that public ther effort. Stephan Révay at PwC believes For those employed by Norwegian pri- mistrust of private equity is beginning to that firms with dedicated responsible vate equity firms, the implications would soften. investment capabilities are better posi- be dramatic, says Verdane’s Lie. “This situ- In June, Nordic Capital together with tioned to support it than those without. ation is very similar to where Sweden was Apax Partners floated Capio, the only pri- Sponsor demand for his firm conducting a year ago,” he adds. “In all four countries, vately-owned operator of a hospital offer- ESG-related due diligence on prospective the authorities are trying to figure out what ing emergency services in Sweden. Näslund portfolio companies is increasing, he adds: the appropriate tax structure for private believes the transaction has resonated posi- “We look at supply chain management and equity should be. Ultimately, it’s a political tively: “I think the IPO has brought some responsible sourcing. We conduct back- issue: governments want the industry to transparency on the company and on Nordic ground checks on key personnel, and we’ve stay here, but at the same time we’re an Capital as private equity owners. You could also seen private equity firms increasingly easy populist target. What’s required is a read headlines about a competing hospital asking for social media-related due diligence.” balanced approach.” n

44 private equity international november 2015