High returns attract record volumes
2000 was the most buoyant year so far for private equity markets in the Nordic countries. The region attained an important position in the European private equity arena. Fund raising in the past 12–15 months hit record highs estimated at E6bn (for funds operating in the region), with some of the big players (EQT Partners, Industri Kapital and Nordic Capital) moving into the large fund class. Investor appetite rose considerably, with many institutions now declaring substantial interest in the asset class by setting allocations of up to 5% of total assets. Undoubtedly, the growth was fuelled in part by the high returns generated by some Nordic buyout houses in the late 1990s, which sharpened investors’ attention. Increasing recognition of the attractive risk/return characteristics of the asset class in a portfolio context is also playing a significant role.
The market development has been mirrored by a rise in deal size, although not in the number of deals completed. According to the journal Private Equity Europe, preliminary figures for the 12 months ending November 2000 showed that 30 private equity-backed deals worth an estimated E6bn by transaction value were completed in the Nordic market. As the journal points out, even though the average value of the deals had risen from approximately E125m to over E200m, this increase was primarily caused by a small number of larger deals. These included the two largest transactions ever seen in the Nordic region, namely: Industri Kapital’s acquisition of Alfa Laval from its Swedish parent Tetra Laval at well over E1.5bn; and the public-to-private acquisition of the Norwegian explosives and speciality group Dyno, worth almost E1.2bn. Nevertheless, the mid-cap area still remains a very strong segment of the market, together with bio-tech and IT venture capital, both of which traditionally have held a strong position in the well-educated Nordic countries.
The level of consolidation among the financial institutions of the region and the sophistication of their services has continued to grow, thereby helping to provide the necessary financial infrastructure to facilitate private equity deals. A number of public-to-private transactions have been closed during the past year and more are expected due to lower valuations in the small and mid-cap public market segments caused by reduced investor interest.
Interestingly, last year also saw an increase in cross-border private equity activity and a more international approach. Private equity funds expanded their geographical investment scope and broadened their investor base, attracting more foreign investors. An example was Swedish mid-market specialist Segulah, which closed its e103m fund with more than two thirds of commitments coming from investors outside the Nordic region. In 2000, the first locally financed fund of funds in Denmark was established by Danske Bank, which closed Danske Private Equity Partners with impressive commitments of E575m. This fund of funds will invest in Nordic as well as international private equity funds.
On a more intra-Nordic scale, the Finnish BioFund announced the opening of its branch office in Copenhagen in 2001. In January 2001, Denmark’s 2M Invest (listed on the Copenhagen Stock Exchange) bought the Finnish Menire Advisors. Michael Mathiesen, CEO of 2M Invest, suggested that there was still a need for further consolidation among Nordic and European venture capitalists. In addition, some of the major European players such as CVC Capital Partners, APAX and 3i already have or are planning to open Nordic offices.
As Nordic institutional investors increase their holdings of international private equity funds, one would expect an improvement in the terms and conditions for Nordic funds seeking investor backing, aligning them with international standards. For instance, the popularity of limited investment companies as vehicles for smaller funds, rarely tax-efficient, will decrease. Tax-transparent limited partnership vehicles defined by lives of typically 10 years will replace them.
Overall conditions for private equity have therefore improved in the region, with an increasing number of fund managers and increased competition. On the fiscal side, for example, Denmark’s recent change in tax legislation for life insurance companies and pension funds has equalised taxation on all investment returns with a flat rate of 15%. This replaced a complex system that made investments in tax-transparent limited partnerships cumbersome from an administrative point of view and often limited the ability of the institutions to commit to attractive offshore private equity funds. Furthermore, the maximum limit for risk-oriented investments (primarily equities) by Danish institutions has been raised from 50% to 70%.
An obvious question to ask is whether this surge in private equity activity, witnessed by the volume growth in the Nordic private equity markets, could lead to overcrowding. Some evidence of this may be seen in that some of the larger Nordic funds have already started to pursue pan-European strategies. Our view is that structural changes, a more favourable regulatory environment and cultural changes in favour of entrepreneurial business and venture activity will pave the way for a broadening and deepening of the private equity markets in the Nordic region, which will result in a continuation of attractive returns for investors.
Steen Villemoes is Nordic representative of Altius Associates, a private equity adviser and consultant