Economic Monitor June 2021

Economic Monitor Importance of ESG considerations in investment decisions

Deloitte Economics: Q2-2021 Financial Advisory Overview from Deloitte Economics

Deloitte Economics is ready with a new The second section sheds light on the M&A monitor that provides an overview over the environment of the Nordic countries. A recent economic development and outlook. The historical overview of the market valuation new monitor will replace our coronavirus multiples and market risk premiums provides impact monitor and will be updated quarterly. insights into investors’ risk appetite and Post-pandemic recovery of Uplift in equity markets, high M&A activity GDP growth rates and historical high valuations The monitor consists of two fixed sections and a behaviour during and after the outbreak of special economic theme from the past quarter. COVID-19. It shows that the pandemic has led to a significant drop in market valuations The first section provides benchmark analyses of followed by an even larger increase, resulting in a number of economic metrics such as GDP historical high valuations. Market risk premiums growth, equity markets, interest rates and have likewise dropped, indicating an overall inflation rates. It furthermore assesses the Increase in overall property prices, Increasing ESG importance for increase in investors’ risk appetite. Additionally, development of consumer and business especially in the capital investment decisions the Nordic M&A activity is continuously high confidence, Danish export, consumer spending with the TMT sector outperforming other and property prices before, under and after sectors based on deal count in Q1 2021. COVID-19. The numbers show that the interest rate and economic cycle have been highly The last section, and the special theme of this Majbritt Skov Peter Lildholdt correlated with consumer behaviour and issue, is how ESG considerations are of high Partner, Chief Economist Vice President confidence. It further shows that the property importance when investing. Analyses show that +45 30 93 54 71 +45 40 35 25 36 price index has been continuously increasing significant value creation from ESG impacts can [email protected] [email protected] throughout the period, with no significant be seen in both the operating and COVID-19 impacts. The same goes for financial aspects of an investment target. ESG bankruptcies and unemployment rates in factors are found to consistently have a positive Dylan Price Ida Steinbring Jørgensen Denmark. However, consequences of phasing impact on returns in capital markets compared Senior Associate Associate

out corona related support schemes are still not to traditional factors, making ESG +45 60 57 79 17 +45 28 15 78 61 fully reflected in the figures. considerations essential in investment relations. [email protected] [email protected]

Economic trends ……………………. 4-12

M&A environment …….…………… 14-18

ESG & sustainable investing ……. 20-22

Deloitte insights .…………………….. 24-25 Economic trends | Gross Domestic Product (GDP) After the rebound of the economy in Q3 2020, the real growth rate has returned to either a modest or a negative level following the second waves of the pandemic in many countries

Real GDP growth from same quarter of previous year1

Negative growth rates of GDP were seen globally when the 4% pandemic struck in Q1 2020 but have somewhat recovered in Q3 2020. This is a sign of resilience in modern economies compared 2% to the previous GFC recession recovery and the Greek debt 0% crisis. (2%) DK (4%) EU (6%) FI In Q1 2021, all Nordic countries realised negative growth. The (8%) Danish GDP declined by 1.7%, mainly driven by declines in the NO (10%) transport-, services-, and manufacturing and construction SE sectors. The decline should be seen in the light of the second (12%) US wave of the pandemic, and the outlook in general is positive. (14%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Danish GDP by sector2 The real GDP growth of the 27 European countries (excluding the United Kingdom) experienced negative GDP growth of 4.5% 200.000 in Q4 2020, which improved to a GDP decline of 1.7% in Q1 2021 Fishery, agriculture and mining Services sector Real estate on the back of strong fiscal initiatives and loosening of Manufacturing and construction Transport Public administration restrictions. 150.000

100.000

The US economy displays a similar pattern to the Nordic countries and produced a recovery in Q3 2020. However, the 50.000 United States managed to realise a real growth rate of positive 0.4% in Q1 2021. 0 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Note: 1) GDP measured using the expenditure approach; 2) Gross value added, seasonally adjusted (DKKm) Source: OECD, Statistics Denmark Page 4 Deloitte Economics © 2021 Economic trends | Equity markets The European equity market is displaying a positive development, especially within the Technology and Transportation sectors, while government yields are increasing

Equity markets: Sectoral indices in Europe1 200 European equity markets continue to show some sector Transportation Technology divergence, but have an overall total improvement, signalling Healthcare Energy that the COVID-19 crisis has discriminated in the negative effects 150 to certain sectors. Financial services

100 Since the beginning of January, European Transport, Technology, and Financial indices are up by 23%, 23% and 7.3%, respectively. Energy shares are up by 9.3% since January 2021, while 50 Healthcare stocks have only increased by 2.3%. This may be a result of the high expectations for the Healthcare sector due to 0 COVID-19. Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

In Q1 and Q2 2021, the 10-year government bond yield has Yield on 10-year government bonds increased significantly, although it remains negative in the EU 4% EU NO and Denmark. As the demand for treasury bonds increases, it is US SE expected that an increase in inflation is projected to correspond 3% with these fears. UK FI 2% DK

The 10-year government bond yield is now at a level that is close 1% to where it was when the pandemic started hitting the economy last year. The 10-year yield is expected to realise further 0% moderate increases, as inflation picks up, but is not expected to harpoon the stock market. (1%) Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Note: 1) Index – January 2020 = 100 Source: Capital IQ Page 5 Deloitte Economics © 2021 Economic trends | Interest rate & inflation Central banks have increased the interest rates, and an intensified rise in the inflation rate is observed overall

Central bank interest rate There was an overall increase in central bank interest rates in Q1 4% 2021. The Danish and the Finnish interest rates have remained DK FI SE EU NO US negative in 2021, although there has been a small increase in 3% both rates. This change illustrates a tightening of the monetary policy and reversal of recovery strategies. 2%

Equivalent to the central bank interest rates, inflation rates increased in Q1 2021. Norway and the United States took the 0% lead in having the highest interest rates and inflation rates. (1%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Inflation rate The Danish interest and inflation rate are currently the lowest 4% DK FI SE among the peers being a result of an extremely loose monetary policy. It remains to be seen how hard the correction will need EU NO US 3% to be if there are inflationary concerns.

1% It is expected that interest rates and inflation continue to increase concurrently with the economy recovering from the 0% pandemic. (1%) Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Source: OECD Page 6 Deloitte Economics © 2021 Economic trends | Consumer & business confidence Danish consumers and businesses have regained confidence in the future, as the vaccine is being rolled out and as the ending of pandemic is within sight

Consumer confidence in Denmark The consumer confidence in Denmark dropped significantly in 15 April 2020, but quickly managed to bounce back. Thus, the index remained negative throughout the remainder of 2020. 10 Consumers have gained higher confidence in 2021, with a steep increase in March. In April, consumer confidence turned positive 5 for the first time since the COVID-19 outbreak. 0

Similar to consumers, business confidence decreased as the (5) pandemic struck. However, confidence was regained fast due to the rapid fiscal response, enabling the index to approach 100 by (10) the end of 2020. (15) Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Business confidence in Denmark1 After gaining momentum in the second half of 2020, business confidence has slightly recovered in Q1 and Q2 2021 as a result 120 of an easing of the restrictions incurred in December 2020. In 110 March 2021 the index was at 101.2, reaching over 100 for the first time since the pandemic and has only been increasing since. 100

80 The increase in consumer and business confidence is resulting from a stronger recovery than expected and has resulted in high 70 returns on capital markets. The increased confidence signals a 60 positive outlook for the Danish economy. 50 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Note: 1) Index: mean of 1990-2018 = 100 Source: Statistics Denmark Page 7 Deloitte Economics © 2021 Economic trends | Consumer spending Consumer spending has been closely related with the restrictions. As the possibilities of offline spending have been limited following the restrictions, online spending have correspondingly been amplified

Requirement of Increase in number of Denmark goes infected leads to Denmark secures 3.9m facemasks in public Reintroduction of restrictions into initial additional restrictions vaccination doses from A partial reopening transportation is in restaurants and to the lockdown and a full lockdown of BioNTech and Pfizer of Denmark is introduced nightlife Denmark initiated 60 % change from same period the 50 year before 40

0 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 (10)

(20)

(30)

(40) Extension of the facemask requirements A gradual reopening is An extended reopening and a decrease of the The first vaccine is The Danish government presented to commence is initiated due a low gathering limit from approved by EMA and is agrees on final post Easter number of infected 100 to 50 people given in Denmark six days reopening, including out- after phasing of all restrictions

Total spending Total offline spending Total online spending

Source: Statistics Denmark, thinkeuropa.dk Page 8 Deloitte Economics © 2021 Economic trends | Bankruptcies & unemployment The number of monthly bankruptcies has remained relatively unaffected by the pandemic, and the increase in the unemployment rate in Denmark has been modest compared to for instance the United States

Bankruptcies in Denmark

-5% The monthly number of bankruptcies has seen an overall 300 reduction from the beginning of January 2018 to present day. In the first months of 2021, the number decreased from 212 in 250 January to 150 in May.

200

The number of bankruptcies seems to have been relatively 150 unaffected by the pandemic, as we see a constant level of monthly bankruptcies with random fluctuations. This can be 100 attributed to the robust support from the Danish government, meaning that the number of bankruptcies may increase when 50 this support stops. Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Unemployment rate1 The Danish rate of unemployment has been steadily increasing 14% since Q2 2020, with a general lower level than the fellow EU DK NO countries. This may be due to the acute fiscal response by the 12% EU SE Danish government during COVID-19. 10% FI US

6% An equivalent rise in unemployment rate is found in Europe, while the US unemployment rate rose significantly in Q2 2020 4% and peaked at 13%, with a subsequent decline to 9% in Q1 2021 – the volatility indicating more frictional unemployment in the 2% United States than in cyclical Europe. 0% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Note: 1) % of labour force Source: OECD, Federal Reserve Bank of St. Louis Page 9 Deloitte Economics © 2021 Economic trends | Danish export Total Danish exports have increased moderately, with export of goods offsetting a slight decrease in export of services

Danish export of goods and services 200,000 Danish exports of goods and services increased by 7.8% from Q1 190,000 2018 to Q1 2021. On average, export of goods was 37.6% higher 180,000 than export of service. Export of goods increased by 14.1%, while export of services decreased by 0.9% in the period. 170,000 160,000 150,000 Goods 140,000 Services 130,000 Export of goods was somewhat stable throughout the period, 120,000 with a slight drop as a result of COVID-19 in Q2 2020, followed 110,000 by a steep increase of 13.8% from Q2 2020 to Q1 2021. 100,000 90,000 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Export of services experienced a similar drop in Q2 2020, but Danish export of goods and services by region Europe China subsequently only realised an increase of 6.1% towards Q1 280,000 2021. Export income from air transport and tourism has more US RoW 260,000 than halved as a result of the tight travel restrictions. As these restrictions fade out, the outlook for the export of services 240,000 becomes positive. 220,000 200,000 180,000 Europe accounts for the majority of Danish exports (57%), which 160,000 were somewhat stable throughout the period, with an increase 40,000 of 3%. Export to China accounts for a minority of total exports, but realised an increase of 70% throughout the period. 20,000 0 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Indexed property prices in Denmark1 160 The price index increased across all regions and property types 150 from Q1 2018 to Q1 2021, with prices on summer houses having the highest relative increase in the period, following supressed 140 Family houses Vacation houses Apartments borrowing costs and high demand for certain geographies. 130 120 110 100 Price indices across all regions were relatively stable in the 90 period but with an increase outpacing inflation and real wage/ earnings, increasing the relative housing costs. 80 70 Q1-18 Q4-18 Q1-19 Q3-18 Q2-18 Q4-19 Q3-19 Q2-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Indexed property prices in the capital1 Prices on properties in the capital region had the highest growth 150 rate in the period, outperforming the rest of the regions – evidenced by the large growth of residential block apartments 140 across Copenhagen. 130

120

110 Apartments in the capital had the highest relative price index, while summer houses had the highest relative growth rate in the 100 period, despite realising a drop in Q1 2019 and in Q2 2020. It is expected that property prices decrease relatively as interest 90 rates increase. 80 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21

Note: 1) Index - 2006 = 100 & Not adjusted for seasonality Source: Statistics Denmark Page 11 Deloitte Economics © 2021 Economic trends | Economic outlook The outlook for the Danish economy is positive, with high expected GDP growth and low expected public debt ratio. The outlook or the global economy is positive, driven by roll-out of vaccination programmes in primarily advanced economies.

1 The Danish government has managed to minimise the effects of Expected GDP growth in Denmark 5% COVID-19, coming through with robust state finances, and 4,2 expected gross public debt to maintain at 41.5% of GDP in 4% 3,5 3,6 2 3,0 2,9 3,0 2022 . Denmark had the lowest public sector debt among all EU 3% 2,4 countries in 2020 and the highly expansionary fiscal policy the 2% 1,6 past year has ensured a labour market that is well-equipped for 1% renewed future growth. 0% (1%) Danish exporters are well-positioned to tap in on global (2%) economic growth, as the closest export countries are expected Nordea European Commission (3%) (2,7) (2,7) (2,7) to lift restrictions soon, paving the way for a momentum in (4%) Denmark’s Nationalbank Danish Ministry of Finance export of services. (4,1) (5%) 2020 2021E 2022E

The global upswing is expected to be driven by an efficient roll- Expected global GDPgrowth1 out of vaccination programmes, led by the advanced economies. 8% 6.9 Therefore, some countries may recover faster than others, 5.8 6.2 6% 4.9 making it likely to create significantly wider gaps in living 4.3 4.4 4.4 standards between developing countries and others, compared 4% 3.6 to expectations before COVID-19. 2%

(2%) The differences in the strengths of the economic recovery across (2.3) (4%) nations are highly dependent on the amount of government (3.5) (3.5) support to vulnerable sectors. (6%) World Euro area US Non-OECD (8%) (6.7) 2020 2021E 2022E

Economic trends ……………………. 4-12

M&A environment …….…………… 14-18

ESG & sustainable investing ……. 20-22

Deloitte insights .…………………….. 24-25 M&A environment | Overview of M&A environment Economic environment for M&A and investments

The Danish economy post COVID-19 is set to grow by 3% in 2021 and by 3.8% in 2022, but has also most been severely affected by COVID. Further we can see that COVID has not affected all industries within the economy evenly, evidencing that there will be outsized contributions to the Nordic economies from industries like Health Care, Technology, and Tech-enabled services. Financial services has been one of the most troubled industries during COVID, as it has had to balance the risks across all other affected industries, including consumer mortgages and debt facilities. However, we should expect an increasing reliance on financial services for the Nordic economy.

Improved macroeconomic factors Lower information & deal costs Nordic GDP1

• The development level of Nordic countries continues • The current digitalisation of work processes has also to improve the stability within M&A. Additional affected M&A, with an increasing importance on deal growth in Baltic countries will see higher cross- probity and data sensitivity. 2019 2020 2021 2022 border add-ons and investments. • The efforts of several firms to migrate towards more • Political stability post-Brexit will inform those intelligent and data-driven investments have seen an Norway 0.9 -1.3 3.4 2.8 businesses which are more heavily dependent on increasing competitive edge for those firms. Going Denmark 2.9 -4 2.1 3.8 exports to the United Kingdom across the Nordics forward, we may see improvements in growth such as agriculture and industrial goods. forecasting for firms and industries, which will Sweden 2 -1.7 3.4 3.6 • The EU and Nordic zones will see positive economic decrease speculation. growth at less volatile levels following the COVID-19 • Current game theory and microeconomic models crisis. The abatement of goods transportation should have improved results from the increasing amounts also continue to ease input costs across sensitive of information, enhancing transaction outcomes. sectors.

Note: 1) YoY changes % Source: Statistics Denmark, FRED, SCB, Thompson (2020), https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/solutions/mergers-and-acquisitions-data-analytics-ideal.html Page 14 Deloitte Economics © 2021 M&A environment | EBITDA multiples & MRP The pandemic led to a significant drop in market valuations followed by an even larger increase, resulting in historical high valuations

EV/ EBITDA multiple in Danish and Nordic indices 19x The EV/EBITDA multiple dropped significantly in both Denmark 18x OMXC20 OMXN40 and in the Nordic market as a result of the pandemic outburst 17x due to a high degree of uncertainty. 16x 15x 14x 13x 12x Equivalent to the economies, there was bounce-back in the 11x valuations in Q2 and Q3 2020. In July 2020, the valuations 10x reached a level above the one prior to the pandemic. 9x 8x May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Equity Market Risk Premium The drop in valuations can also be shown in the change in the 8% required return of the equity market, which increased in April MRP Damodaran 2020 and has since then dropped to a lower level than before 7% COVID-19. 6%

5% The valuation of publicly traded companies and the expected return on equity markets is important since it influences the 4% acquirors maximum price as well as the sellers minimum price. 3% Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

Source: Capital IQ, Deloitte Analysis, Damodaran Source: S&P Capital IQ 15 Page 15 Deloitte Economics © 2021 M&A environment | Nordic target deals High M&A activity in Northern Europe with highest deal count within the TMT sector

Total number of Nordic target deals in Q1 20211

TMT 122 The M&A activity in the Nordic countries has been increasing 78 across all sectors, with a deal count of 416 in Q1 2021 compared Consumer 82 to 247 in Q1 2020. 52 Industrials 81 48 Real estate 47 25 Energy/Infrastructure 35 The highest deal flow has been within the TMT sector, counting 19 122 announced deals (compared to 78 in Q1 2020) – a reflection LS/HC 25 of the COVID-19 response to emphasise more technological 14 importance across all other industries. FSA 22 10 Q1 2021 Other 2 1 Q1 2020

The majority of buyers of Nordic target companies (71%) are Nationality of Nordic target buyers from the Nordic countries, indicating a strong preference, and Rest of Europe geographical expertise is key to sourcing and closing Nordic deals. 16% Asia-Pacific 2%

The Americas 11% 16% of the Nordic target buyers are from the rest of Europe, 11% are from the Americas and 2% are from the Asia Pacific region. It remains to be seen whether the flow of capital will 71% continue to be restricted to the Nordics themselves. Nordic

Note: 1) Announced deals, excluding lapsed/withdrawn bids in Denmark, Norway, Sweden and Finland Source: Mergermarket Page 16 Deloitte Economics © 2021 M&A environment | M&A competition model Increasing competition for productive assets from interest rate and consumer pressures has meant more sellers are reckoning with improved floor prices, term sheets, and number of bidders1

Seller’s improved minimum case Seller’s desired price Due to the current macroeconomic dynamics, the bargaining power has moved to be predominantly in favour for the sellers in current M&A negotiations. Best Alternative To a Negotiated Agreement

(BATNA)

Current sellers have more potential buyers due to Seller settlement range internationalization of P/E scope and the low cost of capital. Zone of Old possible zone agreement (ZOPA)

Buyers have a harder time walking away from investments due Buyer settlement range to inflexible investing horizons and investor expectations, increasing competition and putting a pressure on prices. Best Alternative To a Negotiated Agreement

(BATNA) This results in a slight lurch of the zone of possible agreement (ZOPA) to the right, as the seller's minimum price increases simultaneously with expansion of buyer's upper price range. Buyer’s desired case Buyer’s highest price

Note: 1) Game theory & competition models can predict more accurate negotiation & information zones for M&A transactions

Page 17 Deloitte Economics © 2021 M&A environment | Nordic M&A valuations Nordic valuations are uplifted by global M&A valuations and trends, whilst maintaining a Nordic level of investment theses. This may lead to overwrought assumptions on prices and growth

Interest rates & productivity Nordic buyout fund entry multiples and P/E-ratios

Price/Earning Entry multiples ratios 6,0% 80 12 5,0% 70 10 4,0% 60 3,0% 8 50 2,0% 40 6 1,0% 30 0,0% 4 (1,0%) 20 2 (2,0%) 10 (3,0%) 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Productivity % Interest rates P/E ratios BO entry multiples

• The graph shows the development of interest rates against productivity in Denmark. • The graph shows how the price/earning (P/E) ratios (left axis) and the buy out (BO) entry • The increase in productivity can partially be explained by increases in capital spending on multiples (right axis) have developed in the Nordic countries over time. It can be derived, resources due to higher capital access for many business (low interest rates). that a historically high gap has projected as COVID-19 struck in the beginning of 2020. • We should see most productivity uplift occur from technology rather than education and • Current peer comparisons may be historically misleading, due to the macroeconomic labour intensity, signalling the returns for the businesses requiring these inputs to be lower. environment of historically low interest rates, inflating market prices. • The historically low interest rate is expected to engender increased CAPEX investments, • Private market participants continue to take discounts compared to public peers but are also thereby increasing overall productivity. more resilient to economic shocks. • This increase in technology as a competitive advantage means that businesses will need to • Some industries require more comprehensive econometric models to determine fair orientate towards faster adapting technology cycles and development costs (particularly in value peers and broader evaluation metrics. R&D). • Currently, the S&P 500 has an average P/E ratio of 42.57, which is up from the 38.63 at the beginning of 2021.

Economic trends ……………………. 4-12

M&A environment …….…………… 14-18

ESG & sustainable investing ……. 20-22

Deloitte insights .…………………….. 24-25 ESG & sustainable investing | ESG investing at a glance ESG investing at a glance

Environment: Actions to conserve the natural world by considering ESG stands for Environmental, Social and Governance. Investors are increasingly E climate changes, water pollution, biodiversity, energy efficiency, etc. looking into these factors as part of their company analysis to identify potential risks and opportunities in investment targets. There is no standardised approach to calculate the performance of ESG metrics and no exhaustive list of ESG initiatives, Social: Considerations evolving people and relationships such as making ESG advantages difficult to measure and evaluate. S human rights, labour standards, diversity and privacy.

Governance: Complying with certain standards for running a potential EBITDA improvements for firms which embrace G company by limiting corruption, lobbying, bribery, etc. v7% ESG-related costs and growth levers (depending on firm size and industry). Value creation from ESG impacts can be seen in both the operating and financial aspects of a target, resulting in direct EBITDA impacts. Minimising externalities and their costs may improve the margin by up to 3% in some cases, and growth strategies may improve revenue growth by 1%-5% in certain of LPs are planning to increase ESG investment – either industries. v73% significantly or moderately by the end of 2021.

There will be a need to compete for the strong ESG targets to boost ESG-related portfolio of PE firms took environmental, social and governance diversification % to satisfy investor demands. This may lead to an increase in the multiples for ESG v24% matters seriously and had a mature process in place to companies, ceteris paribus. Further, demand may see inclusions of ESG strategies in post-acquisition evaluate these factors before acquiring a company. growth and cost plans.

DKK In the Nordics, PE firms are maintaining strong efforts towards environmental impacts such as CO2 in ESG aligned PE AUM worldwide by 2025. emissions, renewable energy use and responsible investing principles. However, these efforts and 50.6tn costs can be optimised to improve the decision-making process of investments prior to buy-outs and equity injections.

Source: Deloitte analysis, Bain & company, MSCI Investor survey Page 20 Deloitte Economics © 2021 ESG & sustainable investing | ESG as investment decision factor Investments are at record highs, but capital needs to be intelligently placed and growth strategies should respond to broader economic trends

The ESG factor is a leading source of value Capital asset return factors

• Minimum The table shows that ESG has high positive impact on market asset returns after ESG factor Value Size Momentum Quality Dividends controlling for the traditional risk factors. volatility

• It further shows that even in months of negative growth the influence of ESG on returns Overall returns 2.20% (3.5)% 1.3% 1.9% 2.8% 0.1% (2.1)% is positive, meaning that it has high resilience to market volatility.

Returns during months of • The advantages of ESG oriented investments in both the public and private markets have 2.70% (3.6)% 0.8% 2.4% 2.4% 1.4% (1.7)% been verified empirically over the last decade. positive growth

• Improved consumer needs and regulatory compliance are essential elements for Returns during months of 0.40% (5.5)% (0.3)% 0.9% 7.0% (3.6%) (3.7)% outsized firm returns. negative growth

Top trends impacting investments in the next 3-5 years LP and pension fund development Asset allocation priorities Changing investor demands Passive investing options • ESG investment considerations have increased in influence due to the pandemic, Climate risk transitioning from a niche fund to a main fund issue. ESG sophistication Increasing complexity of investment options • The biggest subjects are climate risk, market uncertainty and regulatory burdens. Market uncertainty Disruptive technologies • 72% of investors indicate that they believe companies with high ESG ratings had good Increasing regulations continuity planning during the pandemic, resulting in more investors putting greater 0% 10% 20% 30% 40% 50% 60% 70% 80% emphasis on the “S” (social) in ESG. Fund size $Bn >200 100-200 25-100 <25

Source: MSCI Investor survey Page 21 Deloitte Economics © 2021 ESG & sustainable investing | Importance of ESG Three dynamics related to ESG investing are of increasing importance across the Nordics in 2021-2030

R&D and diversification Labour productivity Investor focus

• The degree of diversification moderates the • Labour productivity in Europe, and particularly • Culture and language of the acquiring firm and relationship between R&D intensity and Scandinavia, is exceptionally high globally. target influence both acquisition success and market returns. returns on an asset. • There is a corresponding adjustment in the • This is unaffected by growth strategy and value and cost of wages to this. • The proximity of the PE or ownership group of industry. a target to its HQ is positively correlated with • Talent remains high, with a continual focus on returns. • There is a negative relationship between R&D education, supported by governmental intensity and performance for firms that investments. • This signals that interaction and physical diversify beyond their core business. oversight should be strong management • Smart solutions for tech-reliant businesses factors. mean that fewer staff with higher skills within Scandinavia can be more cost effective than • There has been growth in non-buy-out-related outsourcing. capital being invested in private equity.

• This indicates a preference for alternative assets like SPACs, growth equity and situational investments (including ESG).

Economic trends ……………………. 4-12

M&A environment …….…………… 14-18

ESG & sustainable investing ……. 20-22

Deloitte insights .…………………….. 24-25 Deloitte insights Deloitte Economics

Majbritt Skov • Economic due diligence: We can analyse market dynamics

Partner, Chief Economist (including monopolies/oligopolies), forecast growth factors using econometric models, and provide pricing optimisation models. +45 30 93 54 71 [email protected] • ESG due diligence: We help support better deal decisions by providing in-depth scoping of ESG impacts and costs, which help determine the operating and financial costs Peter Lildholdt associated with a transaction. Vice President +45 40 35 25 36 • Value & growth analysis: Our ability to forecast and analyse data allows us to provide [email protected] transaction and post-acquisition support in terms of metrics, KPIs, and value identification in the market.

Dylan Price • Impact assessments: We provide models which can cost for all economic factors which Senior Associate influence investments. +45 60 57 79 17 [email protected] • Provides a basis for comparing alternative investments, comparing the total expected cost of each option with its total expected benefits.

Ida Steinbring Jørgensen • Makes it possible to calculate the return on investment of both the economic, Associate social and environmental impacts of an investment decision in both the public +45 28 15 78 61 and private sectors. [email protected]

All industries Life Science & Health Care Consumer Valuation Services

Sigurd Ersted Jensen Peter Sandfeld Olesen Mads Damborg Tinus Bang Christensen Managing Partner Managing Partner Equity Partner Equity Partner

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