Aided by independent central banks and ‘minor’ domestic currencies, deals were still being done throughout the global financial crisis (GFC) in one region that was relatively unaffected: the Nordics.

“Even after the GFC, banks were lending more in this part of Europe than in other parts of Europe,” says Mikkel Sckerl, portfolio manager at Copenhagen-based credit asset management boutique Capital Four.

But following increases in energy prices, inflation and interest rates in the last two years, the northern European region – which is comprised of Denmark, Finland, Iceland, Norway and Sweden – is now feeling the bite. With banks lowering their exposure, large-cap investments have been the first to go. Exotic and turnaround deals are receiving less attention too.

Touching on the macro conditions, David Samuelson, a Stockholm-based managing director at Nordic Capital, says: “In the Nordics, but especially in Sweden, we are fully interlinked with the global business community and many Nordic-based companies are global at scale and export-led. Our financial services institutions, for instance, are integrated into the global financing market. So, of course those types of businesses are affected to some extent.”

“However, Nordic Capital has always deliberately selected companies whose growth is not reliant on macro-economic factors,” Samuelson adds.

Sten Tärnbro, who is head of public affairs and research at the Swedish Private Equity & Venture Capital Association, says about 80-90% of Nordic PE firms’ LP base is made up of international institutional investors, further increasing GPs’ exposure to the volatility of global markets.

“There is less capital in the international market overall, so fundraising is going to take a longer time. It’s especially more difficult for VC funds, particularly on the smaller side,” he remarks.

Data from PitchBook’s Nordic Private Capital Breakdown 2023 shows that only 10 funds closed in the Nordics in 2022, marking the region’s lowest count since 2015. Of the €15.6bn total raised across those funds, most came from Europe’s largest fundraise of last year – Nordic Capital’s €9bn Fund XI.

The GP’s mammoth effort shows that, while LPs have reduced their allocation to private equity and venture capital, some are feeling the pinch less than others. “GPs that have been around for a long time and can demonstrate a track record have gained more love from the LPs. So, I think it's difficult for first-time funds, or even new firms that are raising their second or third fund, rather than the more established GPs,” notes Tero Mennander, general partner at Paris-based VC firm Ventech, who cites Finnish early-stage investor Lifeline Ventures’ new €150m fund as an example.

“We’re still exercising a bit more caution in the current market, like the rest of the GPs in Europe. It’s a reality that there is a downturn when it comes to company valuations,” continues Mennander, who leads investments for the VC in the Nordic and Baltic regions from his Helsinki office. “We’ve always believed in sustainable business models and also scalable vision from the founding team. For example, before our portfolios shout about growing at all cost, we’ll first remind them to be careful of the cash burn and double-check their profitability.”

That valuation downturn is not uniform across sectors, however. Many healthcare businesses, for instance, still fetch valuations seen at the heights of 2021.

“Our experience is that even in a lower valuation or more volatile environment, good stable assets will fetch attractive prices from the right buyers. A prime example of this is The Binding Site, which was sold last year to Thermo Fisher. It is one of Nordic Capital’s strongest exit,” Samuelson points out.

Deal count

According to figures from Real Deals' Data Hub, annual activity levels are strong in the region, with the number of deals recorded rising by 23% (all deals, including VC) and 8.5% (just later-stage private equity) in 2022. Sckerl says Capital Four’s direct lending and private debt strategies are close to being as “busy as ever”.

He adds: “There are somewhat fewer transactions that are new LBO financings or buyouts, so the composition has shifted more towards refinancings and add-on financings. But there is still a meaningful amount of new buyouts taking place in the middle-market where sponsors need new financing, and certainly to a much larger degree than in the large-cap universe.”

The portfolio manager’s observation mirrors PitchBook’s Nordic Private Capital Breakdown 2023, which reveals that Nordic PE deals worth €1bn or more hit an 11-year low in 2022.

The high yield liquid large-cap space, as well as leveraged loans in the upper mid-market and syndicated credit space, are a lot slower than they were, the credit manager observes. Where banks may have previously provided a €50m ticket, now it is a smaller size of about €25m.

“There is higher pricing and lower leverage for deals that are taking place right now, as it should be. As a result, you can say that debt providers, whether it's banks or direct lenders, have been more cautious in their lending approach,” says Sckerl.

Of the estimated 1,103 Nordic deals last year, 16 were completed by Finnish GP Intera Partners, which invests in Finnish and Swedish companies with sales of €10-200m. According to PitchBook’s data, this was the ninth-highest number of deals completed by a single organisation, with Norway’s Norvestor coming in first with 46.

Juhana Kallio, managing partner at the Finnish buyout firm, says the figure of 16 includes bolt-on acquisitions, which he believes is a strategy that works “very well” in the current environment, where debt is expensive and enterprise multiples are flat at best, but likely to decline slightly.

Indeed, 2022 was a strong year for bolt-on acquisitions, which represented 53.4% of all buyouts in the Nordic region in terms of deal value, the highest percentage on record, as per PitchBook.

And what of exits? Mennander says it is “clearly” a more difficult period to sell businesses right now, particularly as IPOs have been a rarity in the past year. This is clearly highlighted by evidence from Real Deals' Data Hub, which shows the volume and value of Nordic exits declining by 40% and 65% respectively in 2022.

“If you have companies in your portfolio that have a true disruptive and defensible innovation, then trade sales happen all the time. There are also private equity players that have many reserves that they raised over the past five years, so that's an exit route which is still open,” says Mennander.

Deep PE roots

The region’s resilience during tougher times can be charged to an overall transformation observed in the past decade. Valu8’s transaction data, where the acquired company is in the Nordics, shows a strong upward trend, rising from 955 deals in 2012 to 2,788 in 2022.

Timo Hara, founder and partner at Certior Capital, a Helsinki-based fund-of-funds investing in first-time managers, says: “For the last 10 years, everybody has wanted to invest in the Nordics. The big funds have grown in size; the number of lower mid-market and mid-market managers has grown multiples in numbers.”

But the foundation for success was laid far earlier. The largest PE houses from the region were early adopters, alongside some UK and global funds, born in the late 1980s, with Nordic Capital and IK Partners established in 1989. The influential Swedish Wallenberg family founded EQT in 1993, further spearheading the industry.

As competencies grew in these giant firms, talents later spun out to set up their own operations. For instance, Summa Equity is an offspring of Altor, which itself is an offspring of IK.

Further travelling back in time provides another explanation for the region’s overall success. Due to its small domestic markets, the region has for centuries had to look beyond its borders and trade with outside nations. To be competitive in the global arena, the Nordics had to send people out into the world and adapt to local cultures, leading to the formation of successful international export companies like Ericsson, Electrolux, SKF and ABB, which have established subsidiaries elsewhere.

Such an economic setup is an ideal hunting ground for PE firms of all sizes, which can nicely slot in to continue internationalisation for many of these businesses.

“Many of our success stories have been internationally focused export or service companies. First, you start off as pan-Nordic, then pan-European, and then global. This willingness to grow beyond our own borders is great for private equity; it’s a great setup for the next financing round or for the next owner to take the business one step further. There are several steps in the value chain for different sizes of private equity investors to consider Nordic companies,” Hara contextualises.

Samuelson adds on the matter: “The Nordic region’s track record in creating export company successes gives LPs positive exposure to companies that are well placed to expand into Europe or globally. At the end of the day, this creates the upside return that everyone's looking for.”

Strong and stable

When talking with the market, ‘stable’ was the word repeatedly used to describe the region, from its governments to the availability and pricing of finance through a concentrated banking sector.

In recent history, the region’s AAA-rated countries have had low levels of unemployment, a social welfare safety net, business-friendly regulatory environments and low national debt – factors that all raise certainty and eliminate risk, allowing GPs to focus on creating value according to the PE playbook. LPs are attracted by lower loss ratios for investments that stem from the region’s predictability.

Consequently, the Nordics have fostered a collaborative and efficient ecosystem of PE houses, VCs, financiers, advisers and other stakeholders. The local LP base, which is plentiful, is particularly supportive of funds in the region.

“Today, private equity is a well-established industry in the Nordic region and Stockholm is considered as one of the private equity capitals of the world. This means we are in a strong position to attract talent to the region, as well to our own organisation, portfolio companies and advisory network,” says Samuelson.

In turn, the perception of private equity in the region has been given a boost, with the possible exception of Norway where the depiction of PE as barbarians at the gate has continued. Speaking on the increasing acceptance of the asset class, Hara says: “In Germany, there have been a lot of questions around the private equity model, with many family owners not willing to sell to private equity. Like the UK, the Nordics have always been more openminded about the concept of selling businesses.”

Much of this excellence is captured through the region’s high degree of innovation, which is strong relative to its size; for example, Skype, Spotify and Klarna are all Swedish. Many attribute this to the region’s highly educated workforce, most of whom speak fluent English. Some cite people’s fearlessness in taking chances due to the “non-hierarchical nature” of the Nordics.

Kallio notes the impact of this: “Nordic tech companies, as well as many other Nordic businesses, are advanced in their ability to use technology in a smart way, which gives them an advantage in international expansion beyond our home regions.”

Mennander furthers the point: “The number of patents that are issued in the Nordics is one of the highest in the world. There is a very high number of engineers per capita in the Nordics, and especially in Finland.

We've been forerunners when it comes to the digitalisation of economies; besides California, the Nordics has had the highest adoption of mobile internet historically, largely due to our two big tech giants in Ericsson and Nokia that were European flagship companies in the mobile and ICT industry throughout the 1990s. A lot of people left those companies and began new tech startups.

“All of this creates a culture of entrepreneurialism and a breeding ground for tech startups, and that is why the Nordic countries have more tech startups being founded than anywhere else in Europe. Even though the Nordic countries represent just 11% of the European population, more than half of the unicorns come from here. Meanwhile, Finland has been number one when it comes to the amount of venture capital investments per capita for four years in a row, with Sweden closely following.”

VCs tend to have their finger on the pulse when it comes to emerging sectors. When asked about the hottest in the region at the moment, Mennander lists quantum computing in Finland, battery technologies in Sweden and anything to do with electrification. Companies in the IoT space are considered “very interesting”, particularly in Finland. “Everybody talks about AI today; well, we talk about AI here as well,” he notes wryly.

Taxing environment

All eyes being on the Nordics may prove to be a double-edged sword. Hara says that one of the key risks for PE outperformance in the region is the availability of deals: “There are only so many right-sized companies in the Nordics. The number of GPs has grown and the amount of capital raised in the region has grown. But the number of right-sized companies has not grown proportionately, so there is much more capital chasing those deals and investors competing against each other.”

Another issue raised among canvassed GPs was taxation, which is in large part what contributes to the stability that makes the region so attractive. Accounting for differences in tax rates between the five countries, key concerns largely stem from generally high rates on carried interest and marginal tax across the Nordic countries, an issue that GPs say is not helped by a climate in which populist ideas on higher taxation pick up steam.

Because of this, Samuelson says that a lot of companies, particularly tech companies like Spotify, claim to have issues in attracting top global talent to the region: “It is fair to say high taxation has an impact. The region as a whole competes on a global scale. A combination of lower salaries relative to the US alongside high taxation levels presents a challenge to the fast-growing tech sector in the Nordic region.”

There is also high taxation on equity incentives, such as option programmes for tech companies. “The options taxation in Finland, Sweden and Denmark is not very favourable indeed. In France and Germany, you have all kinds of schemes when a business angel exits a company and makes a nice return, such as if you reinvest that money within three years into another startup, you get tax exemptions,” comments Mennander.

Regarding carried interest, the recurring issue has been the lack of predictability around how it should be taxed. For Tärnbro, the system needs to be “foreseeable”, because PE has long-term investors and structures.

“Right now, Sweden has special rules for closely held companies called the ‘3:12 rules’, and the industry's understanding is that carried interest should be taxed using these rules. The 3:12 rules mix capital gains and income tax; it’s the appropriate way to tax carried interest in the Swedish system,” he says. “Above all, it’s important that this is a shared view and something that we can rely on. It just needs to be stabilised so that it is clear that is how you are supposed to pay.

“Private equity is an important investor in the Swedish economy, so you need to have a suitable and internationally competitive tax environment that enables PE to work here and that is attractive enough to get investments into Sweden. It's important that PE firms can be based here, because often you will have more local investments if you have local investors,” Tärnbro concludes on the matter.

Sunny outlook

Regulation in the region is not all doom and gloom, however. In Sweden, an improvement in LP regulations in the last five years has made it easier for government pension funds to invest in private equity, thereby increasing their allocations to the asset class and other illiquid investments, Tärnbro notes.

According to a report from Pensions & Investments, acting CIO of Swedish pension fund AP7 Per Olofsson says the fund will target an increase in its exposure to private equity from 4% to between 8% and 9% of its assets.

In additional welcome news for the industry, Sckerl says he is seeing inflation peaking and starting to come down. Deal activity is due to pick up again, he believes, after enduring “low” levels for more than a year, volumes of which are not typically seen for multiple years in a row.

“Sponsors may want to defer the sale of their businesses for six or 12 months, but they are not going to keep deferring the sale forever because you have funds coming to the end of their life. Also, you have an investment period for the new capital you have to deploy, so you have to deploy some of that capital and that dry powder while you still can,” he explains.

Tärnbro corroborates: “There is still a lot of dry powder across the European market to be invested. Private equity will backstop the market when businesses properly get going again later this year or next year.

“Advisers are telling us that they are seeing more processes getting started and moving forward, so the market does seem to be increasing in activity. We’re going to see more in the latter half of the year or 2024.”

Kallio is positive about the region’s outlook. “Clearly, there is inflation and other factors, but even in this environment, I would expect the Nordic markets to continue being more stable relative to many other European markets,” he says. “Private equity is still a very strong model for ownership and creating value, and I believe that will continue positively even if the economy and markets are slightly weaker than in the past.”