A haven for mid-market players, the buyout market in the Nordic region is well developed and one of the most sophisticated in Europe, controlled to a certain extent by its local players. It is an attractive place to do business thanks to a strong business culture, well developed economies and the cross border nature of many Nordic businesses contributing to growth in the already strong mid-market. But concerns centre around the dormant Nordic IPO market with many firms in the midst of fund raising also craving exit opportunities. And Ericsson’s SEK30 billion rights issue is a further threat to liquidity in the market, reports Angela Sormani.
Combined, the four Nordic countries: Denmark, Finland, Norway and Sweden have a population of 25 million and an aggregate gross domestic product of over $500 billion. According to Finnish law firm, Roshier Holmberg Finland’s GDP rose by around 1.8 per cent in 2001 and is forecast to grow by 2.5 per cent in 2002. This is line with the general boom in prosperity in the rest of the Nordic region, which has been developing one coherent market area, sometimes referred to as the Nordic home market. Nordic-based companies are taking advantage of this consolidation and this has enabled many to successfully meet challenges brought along by heightened international competition. The integration of Nordic companies leading to the formation of larger entities to compete on the European and international market as well as the increased focus on core business areas are strong trends, that have contributed to the growth in the buyout sector.
The Nordic region is by nature outward-facing, says Jens Hansson, a partner at mid-market player Euroventures. “One of the main strategies in the Nordic mid-market is to invest in a pan-Nordic player or a Swedish market leader that you can expand into an international market.” Conni Jonsson, managing partner with Nordic buyout specialist EQT, agrees: “Local presence is a major feature in buyouts, but it is not enough just being local. You need to have an outward focus.” He adds: “It is a small market – if you know 20 to 30 key decision makers, you know what is going on.”
Players on the ground in the buyout space can be split into two categories. There are the big ticket indigenous players, EQT, Industri Kapital and Nordic Capital dominating the larger deal end of the spectrum. And there are the mid-market players, which include the pan-European players 3i, Bridgepoint and CVC and also the Nordic firms such as Accel, Capman, Euroventures, Litorina Capital, Polaris and Procuritas.
A strong set of four different cultures makes for an interesting investing environment for these players. Sweden and Finland have a long tradition as global players in mobile technology, but when it comes to more traditional industries the market is pretty fragmented. Denmark is advanced in alternative energy systems, while Sweden and Finland are more traditionally hydro power. Norway’s industrial structure is very simple: primarily oil, gas and fish. Strictly, the Nordic area doesn’t include Iceland, but then Iceland does not have a large private equity community. According to Graham Oldroyd, head of Bridgepoint Capital’s Nordic team, in the whole of the firm’s time in the Nordic region where it has been investing since 1995, Bridgepoint has only received one invitation to do a deal in Iceland. “There is not much opportunity and it only has a population of around a quarter of a million,” he says.
In seven years Bridgepoint has completed eight transactions in the region. A local presence is invaluable, something that Bridgepoint has noticed since it opened its Stockholm office, its first in the Nordic region, last August. It has since strengthened the three-strong Nordic team with the appointment of Håkan Johansson as an investment director. With the Stockholm office, the firm wanted to re-emphasise its long-term commitment to the region. “Having a local office reinforces you as part of the local business community – small things that make a difference like having the phone answered in Swedish,” says Oldroyd. “Key to success in the Nordic market is to be part of the community,” he says.
There are occasionally large transactions such as Industri Kapital’s acquisition of Alfa Laval from packaging company Tetra Laval, but in general there is a good steady flow of traditional mid-market companies which suits Bridgepoint’s deal profile well. Bridgepoint looks at the opportunity of buying a local business to take it either pan-Nordic or uses Bridgepoint’s experience to make it a pan-European player.
A recent deal in the region for Bridgepoint is the buyout of Nordisk Parkering, the largest privately-owned car park operator in the region. The firm completed the SEK800 million buyout in July 2001, followed in March this year with the acquisition by NP of Scanpark, the fourth largest car park operator in Norway. Last August, the firm also celebrated its third Nordic realisation. Bridgepoint sold Capella, the Swedish data services outsourcing business it backed in 1998, to Finland Post for an undisclosed sum.
Oldroyd says each nation operates in very different ways. For example, Norway is not in the EC, but is in the European Free Trade Area; Sweden and Denmark are in the EC, but do not have the euro and Finland is in the EC and has the euro. “Those distinctions alone have all sorts of knock-on effects from a regulatory point of view,” he says.
A topical issue at the moment according to the Swedish Venture Capital Association is the Swedish tax system, which normally creates a higher tax for investments in unlisted companies than investments in companies quoted on the stock exchange. For firms in the private equity industry a change in the tax provisions would be beneficial so that realised means from a sale can be invested in new companies without tax having to be paid every time a portfolio company is sold at profit. The Parliamentary Committee for Certain Company Taxation Issues and Certain International Company Taxation Issues has issued a report (SOU 2001:11) addressing this issue and suggesting that capital gains on business shares will become tax free and that capital losses will not be deductible. The new rules are proposed to become effective by July 1, 2003.
Christian Motzfeldt of the Danish Growth Fund says: “In the Nordic region, savings are primarily in the form of pension funds. Therefore there should be a lot of potential in the fund raising sector, but as they have lost capital following September 11, pension funds are hesitating to invest in high risk areas.”
However, this is not putting the domestic players off. Hot on the heels of EQT’s mega €2 billion fund raising for its fifth fund last year, Nordic giants Industri Kapital and Nordic Capital are both raising new funds, as are a handful of mid-market players including Euroventures, which launched a €150 million fund last month and anticipates a first close of €60 million to €80 million in late summer. Christian Drougge, a Euroventures partner, says of the fund raising climate: “It’s tough, but we have had a lot of interest from investors. The fund is a bit small for international institutions. We have to have quite a solid Nordic base. We are optimistic we are going to close this fund, but it is not a walk in the park.”
Litorina Capital’s SEK1 billion fund is due to close in the summer and has exceeded the size of its predecessor, a SEK500 million fund. The fund has secured commitments from both Nordic and European investors including Swedbank, which invested SEK100 million in the first fund, the European Investment Bank, also a repeat investor, and the Third National Swedish Pension Fund.
Finnish buyout specialist, MB Funds has announced a first closing of its third fund, MB Equity Fund III at €96.1 million. Investors in the fund include 20 Finnish institutional investors, mainly insurance companies and pension funds. The closing coincides with the firm’s own buyout. MB Funds is now wholly-owned by its managers. Sampo, a previous partner in the management company, will continue to be among the fund’s main investors. This transaction represents a natural step in the development process of the Nordic private equity industry, says Juhani Suomela, managing partner of MB Funds. “Many of the private equity firms were originally established in cooperation with a bank, and later they were spun off as independent companies. For us, this is a logical step forward. The change of the ownership concerns solely the fund management whereas the fund’s investment activities remain as they are,” he said.
Another Finnish buyout player, Ari Tolppanen, CEO of Capman, is pleased with the progress of CapMan Equity VII, Capman’s seventh private equity fund, which has reached its first close at €166 million. CapMan anticipates a final close by the end of June. A final target for the fund has not been disclosed. “The new fund will strengthen CapMan’s position as a significant Nordic private equity investor,” says Tolppanen.
In spite of the growing number of funds investing in the Nordic mid-market, Tolpannen does not consider the region to be over-crowded. He describes Capman’s philosophy: “What we try to do is to see which industries are undervalued and under consolidation and identify them before the other players do.” He adds that most of the buyout players, if not all, in the Nordic region are generalist, so there is a healthy level of competition.
The exception here is Nordic Capital, which boasts a strong focus on healthcare. The firm is aiming at an autumn close for its €1.5 billion fund. Toni Weitzberg of Nordic Capital, who spent almost 20 years in the pharmaceutical industry as head of Europe for Pharmacia, the global pharmaceutical giant, says: “We are the only [Nordic] buyout fund with a healthcare twist – the others are more generalist.” He adds: “It is almost mandatory to have strong experience in the field if you want to make acquisitions in healthcare. You have to be aware of all the regulatory issues and if you haven’t worked in that environment, you’re probably not going to do a very good job as an investor.”
While many players are struggling with fund raising, it goes without saying that others are struggling to exit investments from their portfolios. Not helping matters is the slow recovery of the IPO market, especially in the Nordic region, which has suffered several setbacks. A significant blow to the market came from Danish wind turbine blade manufacturer, LM Glasfiber, which cancelled its planned $500 million listing in Copenhagen last month, due to poor market conditions. This is a set back its shareholder Doughty Hanson, which acquired the group last year for an undisclosed sum, and is currently in fund raising mode.
But there are signs of recovery. Industri Kapital has finally managed a partial exit from its investment in Swedish heating equipment manufacturer, Alfa Laval when the business was floated on the Stockholm bourse last month. Trading opened at SEK94, up 3.3 per cent from its IPO price of SEK91 per share. This was the lower end of the reduced price range of SEK90 to SEK95. Alfa Laval originally set a price range of SEK108 to SEK140 for the IPO, which many investors viewed too high especially in light of Ericsson’s SEK30 billion rights issue, which is posing a threat to liquidity in the market.
For firms in fund raising mode, the current climate promises a great vintage year. Whether the second half of the year will prove any better for exits remains to be seen. Ari Tolppanen of Capman, which has just celebrated a successful exit from its investment in Finnish restaurant chain, Royal-Rest OY, is optimistic about the future: “The present market situation offers excellent opportunities for private equity investors to make new investments. Traditional industries will continue to consolidate and companies will divest their non-core assets.”