Intouch Spring/Summer 2008
Nordic companies expand internationally
The Nordic region’s small domestic markets are a virtue because ambitious companies have to expand. This has made the region a natural home for private equity.
Lekolar, the Nordic reseller and distributor of learning equipment for children, is a classic example of a Nordic private equity-backed growth story.
With a strong position already in its Swedish home market, and a brand that is well-known in other countries, the company’s management is seeking to develop its Nordic business and expand throughout Europe.
3i has considerable experience of similar businesses – it invested in the UK’s Early Learning Centre and Spain’s Imaginarium – and backed Lekolar’s buyout in early 2007, leveraging its sector knowledge and geographical network to help management achieve its goals.
“Our strategy is to take a business that is strong in one country and take it across the Nordic region and beyond,” explains Gustav Bard, Managing Director of 3i Nordic.
The 2007 acquisition is part of the brisk deal activity that has taken place across Sweden, Norway, Finland and Denmark as private equity firms back companies with potential to expand beyond their domestic markets.
Last year, there were 58 mid-market buyouts totalling €11.1bn across the four countries, ranking the region fourth in Europe by number of mid-market buyouts after the UK, Germany and France, according to research group Unquote. Growth capital investment2 tells a similar story, with nine deals totalling €339m also placing the Nordic region fourth in Europe (see graphs).
Sweden first in Europe for private equity investment
Such investment is remarkable given the size of the region, which has a total population of just 25m. Denmark, for example, claims Europe’s second largest buyout to date, the €10.1bn take-private of telecoms business TDC in 2006. And as a proportion of gross domestic product (GDP), Sweden enjoys more private equity investment than any other European country, according to the European Venture Capital Association, which puts the figure at 1.4%.
What makes the region so appealing? Crucially, there are many companies like Lekolar that are poised to achieve rapid growth by expanding abroad in partnership with private equity. “Our domestic markets are small, so promising businesses are quick to seek external input to expand internationally,” explains Bard.
The Nordic region – home to Finland’s Nokia and Sweden’s Ericsson – has huge expertise in communications technology. Many of these companies are eyeing markets around the globe. For example, in 2007, 3i backed Finnish electricity and telecoms network services outsourcing business Eltel Networks. The company, which already operates across the Nordic region, plans to grow market share in its home markets and to expand in central and eastern Europe as the outsourcing market there opens up.
Eltel is one of several outsourcing companies in 3i’s Nordic portfolio. Last year it acquired Inspecta, which provides inspection, testing and certification services to construction and manufacturing firms. “Outsourcing tends to do well in tough times,” observes Bard.
Record oil prices and global demand for energy are encouraging investment in Norway’s exploration and production businesses. And a pledge by Sweden’s liberal government to privatise hospitals and schools, as well as state-owned companies such as Absolut Vodka’s owner Vin & Sprit, is expected to lead to publicprivate investment opportunities. 3i is already using its infrastructure experience to strengthen and develop operations at Scandlines, the Danish-German ferry group it acquired in 2007 in partnership with two other private equity firms.
Bard also believes the region’s growth companies offer some excellent investment opportunities. Last year, for example, 3i put €140m into mobile telecoms operator Finnet.
“The region is a relatively easy place for Anglo-Saxon investors to do business as we are familiar with English, we have a reputation for transparency and there is a general understanding of the economic benefits that private equity delivers,” Bard says. As a result, corporates, family-owned businesses and public companies are all prepared to embrace buyout investors.
Backing mid-market deals for tougher times
These strong fundamentals have encouraged the global giants of the private equity industry, armed with cheap debt, to also target the region. But international debt funding for large buyouts has become harder to secure so it is the mid-market that appears set to perform best in the coming years. Nordic banks have limited exposure to the US sub-prime market so finance packages for mid-market deals are still available (see page 3 ‘Ambea: attracting debt in difficult markets’).
“Competition for deals in the €400m- €1.5bn range may increase, although we have not seen it happening yet,” says Bard. “But everyone is more cautious. No market is unaffected by the credit turmoil.” However, excellent exits are still being achieved despite the global credit crunch. Secondary buyouts have become more common as the local private equity industry has matured and a number of IPOs, such as 3i’s €241m IPO of Gant on the Swedish Stock Exchange, have been completed.
“People are still paying good prices for quality businesses,” Bard observes. For example, last November 3i sold Swedish outsourcing business Coor Service Management for €550m in a deal that reflected a six-times money multiple over a three-year investment (see pages 18-19 ‘Nurturing the Nordic Giants’).
“The deals we create in tougher times tend to be more profitable,” Bard says. “We are well placed to weather less favourable conditions and to take advantage of the new market realities.”