On the road: Sweden

Real Deals travels to Stockholm to find a Nordic private equity market buoyed by regional stability.

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At the table

1. Henrik Rammer, director at Axcel 

2. Johan Wiström, partner at Avantus Corporate Finance

3. Patrik Rignell, founding partner at Karnell 

4. Peter Möller, partner at FSN Capital 

5. Nigel Van Zyl, partner at Proskauer

6. Harald Mix, managing partner at Altor Equity Partners

7. Göran Barsby, senior partner at CapMan

With its many waterways slicing up the city, cultivating remote yet protected islands, the delta-like landscape that makes up Stockholm reflects Sweden’s – and the Nordic region’s – position in the current macroeconomic turbulence. The city’s strong and stable infrastructure provides a sense of security, although choppy waters caused by regulatory rumblings and the constricted debt markets are gaining force as the winter snow begins to melt.

The Nordics have always been a sweet spot for investor cash, partly because of its wealth of privately owned companies, typically set up after World War II and now facing succession issues. These businesses, often family-run, have always demanded local presence and expertise, causing the proliferation of Nordic private equity players, while staving off competition from outsiders.  

Such companies are typically targets for the lower mid-market and can give rise to the coveted, yet elusive, proprietary deal. According to Henrik Rammer, a director at Axcel: “There is definitely still a large potential for proprietary discussions with sellers, especially for slightly smaller deals.”

“We are also active at that end of the market,” says Johan Wiström, partner at Avantus Corporate Finance, part of the M&A International network. “On the sale side we want to run processes but on the buy side, for both platform acquisitions and add-ons, you can really create a lot of value by searching out the companies and initiating bilateral discussions.”

Peter Möller, partner at FSN Capital, believes it is a firm’s cross-border capability that gets these off-market deals through the door. “When we meet an entrepreneur we position ourselves as an operational partner to aid the business’s international growth. I think it is an advantage to be an international player with a local office – that way you can compete effectively with local firms. Looking at the small to mid-cap market, the majority of entrepreneurs looking to sell haven’t sold before, therefore price and process is less important. The sellers are more concerned with finding a partner they can work with to develop the company. It is also often the case that the personal chemistry achieved when you first meet is key in winning the deal.”

Second coming

However, the age-old belief that off-market deals provide the juiciest returns is starting to fade and, as in much of Europe, the secondary buyout is steadily becoming the most fruitful source of deal flow. Göran Barsby, senior partner of CapMan, questions whether this is a bad thing.

“Secondary deals are probably less risky unless you pay a high price,” agrees Harald Mix, managing partner of Altor Equity Partners. “The difficulty is if the company is well polished as most of the margin improvement opportunity is lost. Then it becomes a game of who is prepared to put the most leverage on it, which will have a significant impact on the exit multiple.”

“Secondary deals can be more stable and perfectly OK – that is the shared understanding within the industry,” adds Patrik Rignell, founding partner of Karnell. “However, in the wider press secondaries are questioned because it is difficult to understand how firms can do deals with each other. They think it is some sort of pyramid scheme!”

Mix, who typically focuses on the larger end of the market, points out that over the last eight or nine years, around 70 per cent of mega deals were completed by non-local firms, and 70 per cent of those were secondaries. “Everyone talks about proprietary deals but I’ve yet to see one, unless you buy something in the public market,” he says.

Barsby suggests proprietary deals are more accurately described as “pro-active – a much better term that gives you a proprietary angle on a deal in terms of finding the right price and value-creation story.”

But there is a genuine third option in the Nordic market – take-private deals are gaining momentum. Nordic Capital took financial technology provider Orc Group private at the end of January. “At the larger end we will see public-to-privates continue,” says Mix. “In fact, as part of our fund we have a carve-out focused on acquiring public minority stakes. We see that the public market doesn’t know how to price operational arbitrage – it only looks at the next quarter or the next year. In a three- to five-year portfolio restructuring, operational improvement is never priced in. This means that many companies today are blown away on valuation price and are simply at base on general sectors.”

Despite favourable pricing, acquiring minority public stakes also has a downside. “If you have a 20 per cent stake you might only have one seat on the board. It can be difficult to implement your value-creation agenda for the company,” points out Möller, adding that there can be difficulties in carrying out standard due diligence on a public company. “But on the other hand, if the company is still public then you don’t have the leverage or the same financial risk – you don’t have to pay a premium or fees.”

When it comes to exiting, however, the public markets are as barren in the Nordics as they are elsewhere in Europe. For Mix, sales to strategics are the preferred route. “There are certain companies that do not have a natural trade buyer, particularly if that company is a leader in its niche. Then, perhaps, being bought by a conglomerate is the only option.” 

Mix also points out that when selling to trade one tends to expect a higher price if certain factors are in the right place: “They should be able to pay more if they are confident, if the stock price is right, if the board likes the chief executive and if the chief executive is confident.” But maintaining this balancing act becomes futile when so many other firms are eager to get cash out of the door and far less concerned with trade buyer requirements. “Larger assets that are well packaged and reliant on international financing are easier for larger international funds to understand, therefore we will continue to see these types of funds dominating the larger end of the market,” Mix adds.