Packed powder: Investors are keen to put their money into the Scandinavian private equity market
No wonder then, that everyone wants a piece of the action – local private equity firms, pan-European private equity houses and international corporates are piling in, as well as sovereign wealth funds and other direct investors.
Private equity dealflow has increased in the past year: in 2016 to June 13 there were 58 sponsor-led investments worth a combined €1.97 billion in Scandinavia, significantly more than the 38 deals worth €991 million in the same period in 2015, according to data provider Dealogic.
Investors are keen to get their money into Scandinavian funds and it shows – the best-known brands have been able to raise capital fast. When EQT Partners, one of the biggest Nordic private equity houses, closed its seventh fund on €6.75 billion in August 2015, it was the biggest pool of capital it had ever raised. Initially, EQT had aimed for €5.25 billion, but increased its target when it became clear it could have raised twice as much.
Norvestor Equity, a lower mid-market-focused buyout firm in Norway, started marketing its 1 billion Norwegian kroner (€110 million) seventh fund just before the summer of 2015 and it was fully allocated by December. Valedo, which started raising its latest 2 billion Swedish kronor (€210 million) fund in October 2015, was also oversubscribed, according to a person familiar with the matter.
It is hard for investors – “limited partners” – to get into the best performing funds, so they have to be quick, market participants say. Graeme Gunn, a partner at Edinburgh-based SL Capital Partners, said: “There is quite a lot of LP capital out there looking to back smart guys. It is very hard for a new LP to get access into the best funds.”
If you do not have existing relationships with the best fund managers, it can be very hard, agrees Benjamin Alt, an executive director at fund of funds manager Adveq. He said: “It is a very established market. If you are not in those funds already, it’s a tough game. You need to start three years in advance.”
With investors so eager, some popular fund managers have been able to skew some of the fund terms in their favour. Valedo has increased carried interest, a private equity firm’s slice of a fund’s profit, from the normal 20% to 25% in its latest fund. EQT’s latest fund uses “deal-by-deal carried interest”, a fee structure that is common in the US but is not standard in Europe. The structure means that private equity executives get their share of profit from deals as they come in, rather than waiting for all the profits on the entire fund to materialise.
Alt said: “There’s a clear correlation between the funds with the great performance to see some terms changed. But it is really a small group.”
These are, however, the funds with the best records, which are most attractive to investors.
Investors unable to get into the best-known funds seek other managers in the Nordic market. In recent years, a number of new managers have sprung up. One investor said that because it is hard to get into the well-performing funds, “there’s a lot of willingness to back new players”.
New kids on the block
Often these new firms are spinouts from existing teams in Scandinavia. In 2015, a team of senior partners from Nordic private equity house CapMan established Longship, seeking investments in the Norwegian lower mid-market. The firm is attempting to raise €150 million for its debut fund. It held a first close on €110 million in December 2015.
Summa Equity, founded by senior executives from Altor and Nordic Capital, is aiming to raise €300 million for its maiden fund. Ceder Capital is another new entrant in the Scandinavian market. Founded by David Holm-Ovrén, a former partner at AAC Capital Partners, and Thomas Ramsay, a former partner at EQT and IK Investment Partners, it targets investments in Sweden and Finland. It raised Skr350 million in 2015 for its maiden fund, according to data provider Preqin.
While new firms may create welcome opportunities to invest in the Nordics, they need to be good at sourcing new deals, participants say.
Gunn said: “We are really focused on how people generate their dealflow. If they just do secondary deals and participate in auctions, that’s a short-term game in this region. There’s a lot of capital and competition and so you should only really back the people with unique origination efforts.”
Alt agreed: “Investor demand is there but the market must be careful. Firms have to be able to create their own dealflow. When there are simply two more groups participating in auctions, that is just going to drive up prices.”
The market is already quite crowded, according to investors. “Competition has always been high. It’s a small market, and there’s not a huge amount of dealflow and there’s a lot of competition,” one said.
The Nordic market is most competitive in large caps, according to Alireza Etemad, a partner at IK Investment Partners. “That’s also the area where international buyers are coming in. The mid-market is not too bad competition-wise.”
But Etemad added that it was impossible to look at all deals. “You have to pick your battles,” he said.
Some people point out that while some new firms have emerged, many more have tried and failed to raise debut funds. Proton Equity Partners, a CapMan spinout, hoped to raise its first fund in 2013, but abandoned it after failing to get traction in the market. AAC Nordic also planned to raise a fund after splitting from its UK and Dutch colleagues at AAC Capital Partners, but opted for a deal-by-deal model in 2014.
One person said that it was not strange to see new contenders in such an attractive market, but that “the bar is extremely high to establish new players”, adding that most of the successful new players were spinouts.
What is more, as new players come in, other firms move up to the larger end of the market, or even broaden their horizon outside the Nordic region. Kai Jordahl, managing partner at Longship, said: “You see successful players in the Nordics taking in more capital. They are increasing their fund size and they have to look outside of the Nordics. We are also seeing traditional mid-market players like FSN [Capital] and Norvestor become more pan-Nordic players.”
Investors also pointed out that IK Investment Partners, Triton Partners and EQT had all scaled up and also invest outside Scandinavia.
All told, there are still good deals to be done, despite the competition, according to dealmakers. As IK’s Etemad put it, “there is quite a lot of dry powder, yes, but at the same time there are a lot of opportunities”.