active ownership and transparency in private equity funds

Danish Venture Capital and Private Equity Association

Active ownership and transparencyin private equity funds– Background report– Guidelines for responsible ownership and good corporate governance

DVCA’s secretariat is housed in the old stock exchangebuilding next to Christiansborg Palace. Christian IV had the Stock Exchange built between 1618 and 1624 with the intention that the building should promoteCopenhagen as a trading centre and metropolis.

01 Danish Venture Capital and Private Equity Association

Foreword: Greater understanding of active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04

I. Background and purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06

II. Private equity – a new kind of active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

III. Private equity funds and their investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

IV. DVCA’s analyses of private equity funds in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . 34

V. Review of ten investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

VI. Private equity funds can make mistakes too . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

VII. Interviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

VIII. Private equity funds in Denmark – an overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

IX. List of buyouts in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Foreword and introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

I. The guidelines’ outlines, target group and stakeholders . . . . . . . . . . . . . . . . . . . . . . 134

II. Guidelines at company level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

III. Guidelines at fund level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

IV. DVCA in the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

I. Capital structure of private equity portfolio companies . . . . . . . . . . . . . . . . . . . . . . . 162

II. Tax implications of private equity buyouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

III. Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188

Most of the photographs in this report are taken from private equity portfolio companies’ own archives. Otherwise see page 192.

Contents

Guidelines

Report

Research report (CEBR)

Danish Venture Capital and Private Equity Association 02

Ole Steen Andersen Christian Frigast

Ole Steen Andersen became chairman of DVCA in March 2008.

Ole Steen Andersen has a long career with the central administration,NKT and Danfoss behind him. Most recently he was Executive Vice President and CFO of Danfoss A/S, where he retired in 2007 on the occasion of the annual meeting.

Ole Steen Andersen is a member of the board of SPEAS and Nordic Industrial Advisor for CVC Capital Partner as well as being a member of the Advisory Board of Dansk Merchant Capital.

Furthermore, Ole Steen Andersen is chairman of the board of theventure company HedgeCorp A/S and member of a large number of boards both in Denmark and abroad.

Christian Frigast is a managing partner in Axcel, which he co-foundedin 1994.

Previously Christian Frigast was Executive Vice President ofIncentive (1993–94) and director of the former Unibank, nowNordea (1973–92).

Christian Frigast is an M.Sc. (Political Science and Economics) andstudied, among other places, at Stanford University in the USA. As well as sitting on the boards of companies owned by Axcel, he isthe deputy chairman of Dampskibsselskabet Torm.

Christian Frigast is deputy chairman of DVCA and chairman ofDVCA’s Private Equity committee.


Since autumn 2007 DVCA has been working on developing a set of guidelines fortransparency in private equity funds; these guidelines form part of this report.DVCA also wishes to supplement and support these guidelines by providing adetailed description of what active ownership means in Denmark, which is whyDVCA has produced this background report.

The report includes a presentation of the players in the industry and the waythey work. This is supplemented with a review of ten investments, each of whichshows in its own way how private equity funds work on building strong andhealthy companies.

The report also contains a number of interesting innovations. For example,DVCA has performed for the very first time an analysis of the return on invest-ment in private equity portfolio companies. This gives us a good idea of why in-terest in private equity has been so strong in recent years. Read more about thisin the report.

One important part of the basis for this report is a major research project carriedout over the past year by researchers at the Centre for Economic and BusinessResearch (CEBR) at Copenhagen Business School. This work, funded by DVCA,has resulted in an independent report that will later be available for downloadfrom DVCA’s website: www.dvca.dk. Although DVCA funded the project, the re-searchers were given complete freedom in the production of their report, withDVCA making as much information available to them as possible. DVCA wouldlike to thank the research team for their hard work and dedication.

The report is supplemented with a number of interviews with members of thereference group who monitored work on the guidelines. We have also spoken toa number of others with views on how private equity funds operate. We wouldlike to take this opportunity to thank all those who have contributed to the pro-duction of this report.

Ole Steen AndersenChairman, DVCA

Christian FrigastChairman of DVCA’s working group and deputy chairman, DVCA

Greater understanding of active ownership

Foreword


This report looks at private equity funds operating in Denmark. It has been pro-duced by DVCA to promote an understanding of how private equity funds workand create value.

An introduction to the background to the report and the associated guidelinescan be found here. Both guidelines and report have been produced under theleadership of a working group made up of representatives of some of the mostimportant private equity funds in Denmark. The work has also been monitoredand commented on by an external reference group.

An introduction to private equity fundsThis section contains a general introduction to private equity funds. What termi-nology is used? Who are their investors? How are the funds organised into man-agement companies and investment vehicles? How do they exercise active own-ership? There is also a look at the tax aspects of private equity funds.

A historical overview of private equity fundsThis section provides an overview of private equity funds’ international originsand of their role in different economic climates from their beginnings in the ear-ly 1980s through to the present day. This is followed by a presentation of theDanish market. Private equity funds first took off in Denmark in the mid-1990sand peaked temporarily in 2005 when the likes of TDC, Falck and ISS werebought out by international private equity funds. There are also active Danishfunds, including Axcel, Polaris and LD Equity, which all have committed capitalin excess of DKK 5bn. The section concludes with a look at private equity funds’investors.

DVCA’s analyses of private equity fundsThis section presents three different analyses commissioned by DVCA in con-nection with this report.

First, Aalund Research conducted a questionnaire survey of employee-electedboard members at current and former private equity portfolio companies inDenmark. The results show that employee-elected board members are generallypleased with the way that private equity funds exercise their ownership. For ex-ample, 70% of those questioned believe that private equity funds show respectfor a company’s corporate culture and invest sufficiently in its fixed capital. Wellover half believe that private equity funds are good at communicating aboutchanges in the company. One point to note is that 28% of those questioned donot feel that sufficient resources are allocated to employee development.

Second, Aalund Research conducted a questionnaire survey of the largest in-vestors in private equity funds. These investors together account for the bulk ofDanish private equity funds’ committed capital. Most plan to increase their in-vestment in private equity funds, and none have plans to reduce their allocationto private equity. Most are also pleased with the information they receive fromthe funds. However, there are also areas where investors feel that private equityfunds need to improve. For example, investors would like private equity funds tobe more open about their investments vis-à-vis the public.

Third, ATP PEP examined the returns on 59 completed private equity fund in-vestments in the period from 1990 to 2006. The analysis reveals an average re-turn on investment of 37% per annum before management fees (administrativeexpenses) and incentive programmes (carried interest). Assuming that thesecosts are equivalent to 3.5 percentage points, this gives a net annual return of

Executive summary

Background and purpose

The report


33.5%. This means that private equity funds significantly outperformed the stockmarket during the period.

Review of ten investmentsThis section reviews ten private equity investments, which also formed the basisfor CEBR’s survey. Together with DVCA, CEBR conducted interviews with thecompanies’ management and the partners in the private equity funds involved.Access was also granted to data that is not normally publicly available.

Robert Spliid analyses investments that went wrongThis is followed by a look at a number of private equity transactions that wereless successful for one reason or another. DVCA asked Robert Spliid, author ofthe book Kapitalfonde – Rå pengemagt eller aktivt ejerskab [Private equity funds– asset strippers or active owners?] to investigate what the industry can learnfrom this. The transactions examined include Fona, ILVA and Partner Electrics.

InterviewsIn connection with the production of its guidelines, DVCA interviewed the exter-nal reference group that monitored work on the guidelines. The group sharetheir views on the guidelines and on private equity funds’ activities in general.These views are supplemented with those of former Novo Nordisk CEO MadsØvlisen and Bain & Company partner Niels Peder Nielsen.

Overview of private equity funds in DenmarkThis overview shows which private equity funds operate in Denmark, how muchcommitted capital they have, and which investments they have been involved in.

List of transactionsThis list provides for the first time a complete picture of all 307 private equityfund transactions carried out in Denmark since 1989. It includes information onexit year, revenue, sector, acquiring fund etc.

DVCA’s guidelines for responsible ownership and good corporate governanceare reproduced as part of this report.

DVCA asked the Centre for Economic and Business Research (CEBR) atCopenhagen Business School to look at a number of issues related to private equity fund ownership. The report reproduces the sections on capital structureand tax matters.

Guidelines

Research report (CEBR)


As private equity funds come to play an ever more important role in industry,they have a growing social responsibility, and this demands transparency.Private equity funds, investors and the rest of society have a mutual interest inthe companies owned by private equity funds being competitive on a sustain-able basis. Responsible ownership in private equity funds means that fundshave an opportunity to develop their companies in close collaboration with eachcompany’s board, management and employees. One important requirement inthis respect is for the wider society to be confident that private equity funds op-erate on a known and transparent basis.

The Danish Private Equity and Venture Capital Association (DVCA) has thereforedeveloped a set of guidelines for how private equity funds and their portfoliocompanies should operate and report. The aim of the guidelines is to create aconcrete and easily understood framework for private equity funds’ activitiesthat can help to build support for these activities among the general public.

DVCA thereby wishes to signal that it is preferable to avoid unnecessary regula-tion. DVCA is of the opinion that self-regulation is the best and most effectiveway of ensuring a healthy and productive business climate, and that legislationis appropriate only where other possibilities have been exhausted.

The guidelines are designed to be applied on a “comply or explain” basis. Thismeans that, in future, members of DVCA will be required either to comply withthe guidelines or to explain their reasons for not doing so if they wish to remainmembers.

Besides these guidelines, DVCA wishes to give the public a better insight intohow private equity funds work and add value to their portfolio companies. DVCAhas therefore commissioned a number of analyses in this area which are pre-sented in this report.

Transparency and guidelines for private equity funds are an international trendRequirements for greater transparency in private equity funds are an interna-tional phenomenon. In London, for example, guidelines for private equity fundsoperating in the UK were published by the Walker Working Group in November2007. These guidelines will impact on all private equity funds, as London is aglobal financial centre. Denmark is a small player by international standards,which would make it hard to produce Danish guidelines without reference to de-velopments on the international stage.

Guidelines for private equity funds are also being developed in Sweden.

A comparison of the content of the Walker guidelines and DVCA’s own can befound in appendix B to the guidelines.

Ten investments illustrating active ownership in private equity fundsDVCA wishes to show in this report how private equity funds work in practice.We have therefore selected ten investments believed by DVCA to paint a repre-sentative picture of private equity funds’ activities over the last six to eight years.

Each investment is described in terms of both the company’s key financial figures and qualitative descriptions based on interviews with key personnel involved.

The 10 investments

Danske TrælastFalckISSKompanLøgstør RørNovasolPost DanmarkRoyal CopenhagenTDCVest-Wood

Background and purpose

Background

I.


Research project looking at Danish private equity fundsTo get an independent take on issues identified when it comes to the wider eco-nomic implications of private equity funds’ activities, DVCA asked a team fromthe Centre for Economic and Business Research (CEBR) at Copenhagen BusinessSchool to carry out a research project based on the ten transactions mentionedabove.

The project fell into four parts:B The importance of active ownership (corporate governance) for portfolio

companiesB Portfolio companies’ capital structureB An economic analysis of changes in tax payments due to private equity

ownershipB The consequences of private equity ownership for the Danish capital market

The sections on tax and capital structure in the resulting report from CEBR are re-produced at the end of this report. The complete report from CEBR will be avail-able for download from DVCA’s website at a later date.

Analyses of returns, board-level involvement and investor attitudesDVCA has also commissioned a number of other analyses to promote under-standing of how private equity funds work:B An analysis of the returns on private equity funds relative to other investments

(conducted by ATP)B A study of employee-elected board members’ attitudes to private equity

ownership (conducted by Aalund Research)B A study of investors’ views of private equity funds (also conducted by Aalund

Research)

These three analyses are presented in detail in section IV of the report.

Private equity funds, investors and the rest of soci-ety have a mutual interest in the companies owned byprivate equity funds beingcompetitive on a sustainablebasis. Responsible ownershipin private equity fundsmeans that funds have anopportunity to develop theircompanies in close collabor -ation with each company’sboard, management andemployees.


A new DVCAOne important part of this project is for DVCA to play a more active role in the de-bate about private equity funds in Denmark.

To create a better understanding of private equity funds, it is important that thesector itself takes responsibility for collecting and consolidating data. Thesedata are to come from both portfolio companies and the funds themselves. DVCAwill ensure that the data are collected by an audit firm, while DVCA itself will beresponsible for the subsequent analysis of the data.

Each year DVCA will publish a report on the basis of a variety of information sub-mitted by private equity funds and their portfolio companies. This report is to in-clude a general account of trends in the industry and a statement from DVCA’scorporate governance committee.

External reference group advising DVCATo ensure that the guidelines satisfy a broad cross-section of relevant stakehold-ers, DVCA has drawn widely on an external reference group comprising:

Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO)Jan Schans Christensen, professor of corporate law, University of CopenhagenJørgen Mads Clausen, chief executive officer, DanfossBjarne Graven Larsen, chief investment officer, ATPPeter Schütze, head of retail banking, NordeaBente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

The members of the reference group have monitored the debate about trans-parency in private equity funds and gathered views and experience from theirrespective networks. DVCA has held individual meetings with all of the mem-bers, and the group held a final meeting where the guidelines were discussed intheir entirety. The group’s views on the guidelines are presented in interviews in-cluded in this report. It should be stressed, however, that responsibility for theguidelines rests solely with DVCA.

One important part of this project is for DVCA to play amore active role in the debateabout private equity funds inDenmark.


DVCA’s committee for good corporate governance in private equity fundsIn autumn 2008 DVCA will appoint a committee to monitor compliance with theguidelines and propose any necessary adjustments. The committee will com-prise DVCA’s chairman, a state-authorised public accountant and an independ-ent industry representative.

The committee will also submit an annual statement concerning members’ com-pliance with the guidelines in connection with DVCA’s yearly report.

DVCA’s working group on transparency and active ownership in private equity funds DVCA’s transparency and active ownership project has been led by a workinggroup comprising a number of representatives of private equity funds that oper-ate in Denmark:

Lars Berg-Nielsen, DeloitteAnders Bruun-Schmidt, Dania CapitalChristian Dyvig1, Nordic CapitalChristian Frigast, Axcel (chairman)Søren Møller, LD EquityViggo Nedergaard Jensen, Polaris Private EquityThomas Schleicher, EQTSøren Vestergaard-Poulsen, CVC Capital Partners

The working group has been assisted by communication consultant JoachimSperling (project manager), state-authorised public accountant Bill HaudalPedersen from Deloitte, senior consultant Gorm Boe Petersen from DVCA, andchief financial officer Lars Thomassen and communications manager Trine JuulWengel from Axcel.

1. Succeeded by Michael Haaning in January 2008.

In autumn 2008 DVCA will appoint a committee to monitor compliance with theguidelines and propose anynecessary adjustments. The committee will compriseDVCA’s chairman, a state-authorised public accountantand an independent industryrepresentative.

“I work on building solid, profitable growth year after year through operational improvements andstrategic investments at the companies in whichwe have invested. I enjoy the close collaborationwith management at the companies in which we have invested, but the process of finding suitable investment candidates is also incrediblyinteresting.”

Søren Vestergaard Poulsen, partner, CVC Capital Partners

Søren Vestergaard Poulsen is a partner in CVC Capital Partners, one ofEurope’s largest private equity funds. He is currently responsible for itsDanish operations and sits on the boards of Post Danmark and Matas.

Søren Vestergaard Poulsen has been with CVC for ten years and was previ-ously a consultant at McKinsey & Co. He holds a Master’s degree in eco-nomics and business administration from Copenhagen Business School.


II.

The term “private equity” ultimately refers to companies in private ownership asopposed to those in public ownership – listed and state-owned companies. At itspurest, private equity is the oldest form of ownership there is. Before the days ofthe stock exchange, companies’ managers and owners were often the same people.

The private equity industry has evolved over many years starting in the 1970s. Ithas its origins partly in pension funds’ growing need to spread the risk in theirinvestment portfolios, which could be achieved by also investing in unlistedshares. In the beginning, pension funds managed these investments them-selves, but it became clear as activity levels increased that a more structured in-vestment approach was needed.

The term “private equity” is now used for a type of investment where an investment vehicle (private equity fund) with capital committed by a number ofinvestors invests directly in portfolio companies, and a management companyhandles day-to-day investment activities. The aim is to generate a larger returnthan investors could have achieved by investing in listed shares. This type of investment is known as private equity ownership and is illustrated in figure II.1below.

Investors in private equity are mainly professional investors such as pensionfunds, funds of funds, banks, insurers and wealthy private individuals/families/foundations. The investors in Danish private equity funds come from bothDenmark and abroad.

These investors’ goal is to achieve the highest possible return for their owners (inmany cases pension savers), and so they are very critical and thorough when in-vesting in a private equity fund. They choose the funds in which they wish to in-vest on the basis of their investment strategy and an assessment of the manage-ment company’s/partners’ past performance.

Private equity – a new kind of active ownership

Background and terminology

Investors1

Pension funds, insurers, wealthy

families etc.Partners

Investors

Investment vehicle (private equity fund)

Portfolio companies Financial institutions

Management company

Advice

Management fee

SalaryReturn Committed capital Return (carried interest)

Sale proceeds/dividends

Equity

Interest and repayments

Debt capital (bank loans)

Partners

1. Investors in private equity funds are also known as limited partners (LPs).

Figure II.1. The structure of a private equity fund.


The investors make a binding commitment to invest a set amount of money inthe investment vehicle. This is not paid in all at once but gradually as the invest-ment vehicle makes investments and incurs costs.

Investors get their return when each individual investment (portfolio company)is sold or listed. Thus the main form of value creation is the development of port-folio companies under the fund’s ownership so that buyers are willing to pay ahigher price for them.

An investment in private equity is therefore a long-term and relatively illiquid in-vestment. This can be illustrated by the J-curve, which is the typical profile formovements in the value of a private equity fund (see figure II.2 below). It is seenprimarily because costs are incurred in establishing and operating the fund, andthe expected increases in the value of the investments made do not arrive untilafter a couple of years of ownership, once value-adding measures and/or invest-ments begin to impact on the portfolio companies.

The private equity fund’s overall return depends on the performance of the indi-vidual companies in which it has invested. The return to investors is typicallymeasured as an annual return – the internal rate of return (IRR) – and a multiplecomparing the total amount paid out once the fund has been wound up with thetotal amount drawn from the fund’s investors.

Danish investors pay standard tax on any capital gains they make. Pensionfunds and insurance companies pay PAL tax2 while other Danish investors typi-cally pay corporation or personal income tax on their returns. Foreign investorswill be taxed primarily in their home countries (just as Danish investors in for-eign private equity funds are typically taxed on their returns in Denmark).

Figure II.2. J-curve showing movements in the value of a private equity fund.

Value

Time

2. PAL tax is a special capital tax with a fixed rate of 15% that life insurers, pension funds and the like are required to pay on their investment returns.

Danish investors pay standard tax on any capital gains they make.


II. Private equity – a new kind of active ownership

The investment vehicle is the legal entity that constitutes the actual private eq-uity fund, in other words the entity in which investors’ money is deposited andfrom which returns are paid out when a given investment is sold.

In Denmark, the corporate form normally used is the limited partnership. This issuitable because it is a flexible corporate form (e.g. when it comes to increas-es/decreases in capital, as happens every time money is drawn from investors)and because it ensures that all investors are taxed in their home countries (seediscussion of tax transparency below). The Danish limited partnership is alsovery similar to the investment vehicles used abroad, with which investors are fa-miliar and therefore feel more comfortable.

Danish limited partnerships are tax-transparent, which means that it is the part-ners/investors who are taxed on the returns generated. This tax transparencymeans that double taxation is avoided, just as with the structures used abroad.

Danish limited partnerships are required to file an annual report in accordancewith the Danish Financial Statements Act and are therefore covered by the sameaudit requirements as limited companies.

The management company, which is normally owned by a group of people withextensive experience of private equity investing, has an agreement with the fundto advise on the investment and management of the fund’s assets. The employ-ees of the management company invest personally in the investment vehicle,which is normally a condition made by many of the general partners in order toensure a sufficient financial incentive and ensure that everyone is acting in thesame financial interests (see box on page 16 on carried interest).

The individuals employed by the management company and the historical re-turns generated by the management company will be the main reasons why in-vestors choose to invest in a particular private equity fund. It is the managementcompany that is the true creator of value in the process, while the fund itself ismerely a vehicle through which capital flows.

Once an investment has been made, the management company will be closelyinvolved in the general management of the portfolio company, typically for a period of 3–7 years, with a view to developing the company and so increasing itsvalue ahead of its subsequent sale or listing. This involvement is known as activeownership and is described in more detail below.

Portfolio companies are the companies in which a private equity fund invests.The fund’s active ownership depends on control of the company so that thestrategic measures needed to ensure value creation can be implemented. Thefund will also ideally have control of the company so that it is not reliant on other shareholders when it comes to an exit (or have concluded agreements withthem on a joint sale).

Investments are financed with a mixture of investors’ money (mainly in the formof equity) and debt finance (bank loans). The level of bank debt varies and de-pends primarily on the company’s cash-flow-generating capacity. A more de-tailed discussion of optimal capital structure can be found later in this section.

The management company

Portfolio companies

The investment vehicle (the private equity fund)


A private equity fund exercises focused and active ownership in order to add val-ue to the company and so generate a return for its investors. This is characterisedin part by the following, which differ from other forms of investment:B A simple governance structure with a well-defined ownerB Inclusion of management as co-owners and incentive programmes reflecting

value addedB Limited period of ownership of each company (sense of urgency)B Optimisation of financing structureB Capital available as and when the company needs it

Private equity funds are fundamentally different to both hedge funds, whichmake speculative short-term investments in market trends, and venture cap-ital funds, which invest in start-up companies in hi-tech industries. In manycontexts – even in academic studies – private equity funds are lumped together with both hedge funds and venture capital, which is probably because the fund structure is fairly similar. When it comes to the investmentmodel and underlying assets, however, there are few points of similarity.

CEBR, Private Equity i Danmark [Private Equity in Denmark], June 2008

Active and focused ownership is crucial to private equity funds’ investment strat-egy. As a rule, therefore, these funds will acquire a majority stake in the compa-nies in which they invest, so gaining absolute control over strategic decisions atthe company. Another feature of these funds’ investment strategy is that the com-pany’s senior managers are co-investors in the company. This partnership withmanagement helps to ensure that management always works from a strategy oflong-term value creation in the company.

The private equity fund exercises active ownership on behalf of its investors anddevelops companies with a view to improving their earnings. Active ownershipmeans that the fund not only makes capital available but also actively collabor -ates with the company’s board and management on its development. The typicalinvestment horizon for investors investing in private equity funds is 10–12 years.During this period, known as the investor commitment period, the fund will ac-quire portfolio companies, develop them and sell them on to new owners.

Active ownership



The investors in a private equity fund are keen for the management of portfolio companies, the employees of the management company and the in-vestors in the fund to have common financial interests. This alignment of interests is ensured by bringing the management of the companies and theemployees of the management company on board as co-investors, and byhaving incentive programmes reflect value added and so the returns gener-ated for investors.

Many listed and other privately held companies also have incentive pro-grammes for their management. However, these are often linked to moreshort-term performance or fluctuations in the stock markets and so not di-rectly to the return to investors.

What is carried interest (carry)?Private equity funds’ investment and incentive programmes are known ascarried interest, or carry.

Carry is a share of the return that the successful private equity fund gener-ates on its investments over and above a basic annual rate of return (hurdlerate), typically 8% of total capital invested after all costs (including manage-ment fees etc.). It is normally 20% of this additional return.

If investments perform well for investors, those covered by the carried inter-est programme will also benefit, but they also run the risk of personally los-ing money.

Carried interest and catch-upCarried interest is normally calculated on the basis of the return on the entirefund, while some funds pay out carried interest from investment to invest-ment, although this is now very unusual in Europe.

Once investors have received an agreed level of return, the managementcompany will often temporarily take an increased share of profits until theagreed level of carried interest is reached. This is known as catch-up.

Carried interest


When a private equity fund takes over a company, often more than half of thepurchase price is financed with loans. This means that the portfolio company of-ten finds itself with more debt than under its previous owners.

The reason why private equity funds normally increase a company’s debt is notto get money out of the company but to optimise its capital structure in terms ofrisk and required rates of return. This debt is therefore very different to the debtthat results from negative operating results.

It may seem a good idea to a company manager to have as much equity as possible to hand (at least if he has not invested his own money in the business), be-cause this provides scope for mistakes without the company’s existence beingjeopardised.

However, it is rare for the company to own this equity. It is not without good rea-son that equity is included as a liability (alongside the company’s debt) in thecompany’s balance sheet, but as an asset in the individual shareholder’s bal-ance sheet. Both debt and equity need to be serviced from the company’s cashflow. The creditors who make debt capital available must be serviced first and sorequire a lower rate of return than shareholders. Shareholders, on the otherhand, only receive their share of the profits when all of the other bills have beenpaid, including interest on the company’s debt, and so require a significantlyhigher return on their investment.

Shareholders naturally also have an interest in the company’s survival, but theyinvest primarily to obtain a higher rate of return than they can get on other in-vestments with a similar risk profile. In other words, shareholders have an inter-est in equity levels being high enough for the company to be able to ride out un-expected fluctuations in earnings. On the other hand, equity levels should notbe so high that dividends are eroded, because this will reduce the expected re-turn (see figure II.3).

Optimal capital structure

0%

Market value

Debt 100%

Optimal structure

Value with 100% equity

Risk premium

Figure II.3. Optimal capital structure.



When a private equity fund acquires a company, it considers how much equity ordebt is most appropriate for that particular company. The ratio of debt to equitygenerally hangs on two factors:1. The volatility of the company’s earnings.2. The likelihood of its owners’ quickly providing additional capital where

necessary.

The latter factor is very relevant to private equity portfolio companies, because,in principle, the fund always has additional capital to hand thanks to the com-mitments from its investors to invest more capital in the fund where necessary –whether to fund large investments or to counter unforeseen negative fluctua-tions in earnings.

Other things being equal, private equity portfolio companies will need less equi-ty than listed companies because it is rather more difficult and expensive to raisecapital on the stock market. Furthermore it is not always possible to raise capitalin the capital markets, especially in cases where a company’s results have notlived up to expectations for a while. This is also one of the key considerations forfinancial institutions when they assess the risk of investing in a listed companyas opposed to a private equity portfolio company.

Debt-financing the activities of a company or private equity fund is not ne -cessarily a problem, rather a natural part of economic reality in modern soci-ety. The debt taken on by companies under private equity ownership hasnevertheless given rise to public debate, and this debate is justified, becauseaggressive leverage makes companies and the economy more vulnerable inthe event of a downturn. However, private equity funds’ debt appears to ac-count for only a tiny share of overall borrowing, and is therefore of only pe-ripheral significance in the ongoing credit crunch, which can be attributedprimarily to mortgage finance and, in the second instance, banks’ generalcredit practices.

CEBR, Private Equity i Danmark, June 2008

As mentioned above, Danish private equity funds are normally organised as alimited partnership, which provides the legal framework for the fund. There areseveral points in favour of this corporate form. The most important from a taxviewpoint is that a limited partnership is tax-transparent. In other words, thepartners/investors are considered to be the owners of the underlying assets.

The partnership itself is not treated as an independent entity for tax purposes,and so it is the investors who are taxed. This ensures at a very fundamental levelthat a portfolio company’s taxed earnings are not taxed further on their way upthrough the legal structure when they come to be transferred to investors.

Investors pay tax in their home countries on the basis of local tax rules.

The use of a limited partnership structure therefore ensures that taxation takesplace at portfolio company level and investor level. Were the partnership also tobe taxed, this would result in double taxation and increase the effective rate oftax on investments. This would distort the effective tax rate relative to investingdirectly in a listed company, for example.


The tax structure of a private equity investment

Optimal capital structure(continued)


As stated above, private equity funds are often organised as a tax-transparententity. Where this entity is physically located varies and typically depends onthe fund’s desired investors. Both Danish and foreign investors want to invest ina familiar environment where there is some degree of assurance that the legisla-tive regime will not change during the ten or so years for which a fund normallyexists.

The Channel Islands and similar jurisdictions have become a kind of marketstandard for funds looking mainly to attract international investors, and aretherefore widely used for the formation of the investment vehicle. The limitedpartnerships available for this purpose correspond closely to the Danish limitedpartnership.

Debt at private equity portfolio companies is, if at all, a problem first andforemost for the banks that have lent the money. So one might ask whetherany debt problems (cf. the current credit crunch) should be put down to thefunds or the banks. Everything suggests that the credit crunch is due to abubble in the housing market and the associated poor-quality (sub-prime)mortgages, whereas private equity funds are only a very small part of theproblem.


Corporate buyouts are a complex discipline and require extensive preparationand thorough consideration of their commercial, financial, legal and fiscal as-pects. Private equity funds therefore invest considerable resources in ensuringthat their investments will generate an attractive return.

Tax aspects are not normally crucial to an investment, but tax must naturally beviewed as a cost like any other. Tax aspects play a role in several parts of theprocess. The first arise in connection with the due diligence process, when thefund investigates the target company to identify any risks that may have finan-cial consequences once it has gained control of the company. The second comewhen choosing the legal structure for the company, which depends on both theprivate equity fund’s structure and the financing structure implemented at thecompany after the buyout.

When a private equity fund structures a buyout, the chosen approach will beclosely linked to the fund’s structure, purpose and required rate of return (IRR).A private equity fund’s job is to acquire companies with its investors’ money andgive them an annual return ideally in excess of 20–25%. This high required re-turn on investment means that private equity funds are careful not to investmore equity than necessary in the companies they acquire.

It is important to strike the right balance between equity and debt when acquir-ing a company, as discussed on the previous pages.

Figure II.4 shows a standardised example of a buyout model.

Private equity fund A, which is organised legally as a tax-transparent limitedpartnership, wishes to acquire target company C, which is a Danish limited com-pany. As mentioned above, private equity funds can also be registered in anoth-er jurisdiction if this is more appropriate for attracting investors.


The tax implications of corporate buyouts


What happens in practice is that fund A forms company B, whose sole purpose isto be a holding company for company C. Company B is capitalised with equityfrom fund A and debt finance. Company B then acquires the shares of company C.

Careful analysis is made of how much equity the investment requires for thebusiness plan to be realised and for the company to function in terms of itseveryday operations. There is also careful analysis of what other credit facilitiesmay be needed (such as special facilities to cover investments, acquisitions andfluctuations in working capital).

The ratio of debt to equity will also depend on local tax rules. In Denmark, localtax rules on thin capitalisation and restrictions on interest deductions play arole. A Danish company can forfeit the right to deduct interest from taxable income if it exceeds a debt-to-equity ratio of 4:1. There is also a ceiling on theamount of interest that can be deducted from taxable income. Thus, if debt levels rise too high, it may not be possible to make tax deductions for all interestcosts.

On 1 June 2007 Denmark introduced new rules limiting interest deductions, withan asset test and an EBIT test to supplement the existing rule on thin capitalisa-tion.

The existing rule on thin capitalisation means that there is no tax deduction for“excess interest” if the ratio of debt to equity at the end of the year exceeds 4:1based on market values (i.e. including goodwill). This is, however, conditionalon “controlled” (related party) debt exceeding DKK 10m.

The asset test means the introduction of an interest ceiling determined by a stan-dard rate of return (7.0% for 2008) on the tax value of certain assets. However,net financing costs up to DKK 20.6m per year will always be allowable. Interestcosts that cannot be deducted as a result of this rule cannot be carried forward.

The EBIT test means that interest deductions may not exceed 80% of EBIT, de-fined as taxable income plus net financing costs, which is different from EBIT foraccounting purposes. As with the asset test, net financing costs up to DKK 20.6m


The new Danish restrictionson interest deductions

Private equity fund(A)

Equity

Bank debtDanish acquisition vehicle

(B)

Danish target company(C)

Danish subsidiary

Management company

Foreign subsidiaryForeign subsidiary

Joint taxation

Figure II.4. Standardised example of a buyout model.


per year will always be allowable. Interest costs that cannot be deducted as a result of this rule can, however, be carried forward and deducted from taxableincome in subsequent years.

Denmark is not the only country to have brought in rules restricting interest de-ductibility. In Germany, a rule has been introduced that limits deductions of netinterest costs in excess of an amount corresponding to 30% of EBITDA for taxpurposes. However, this rule applies only to companies that are part of a groupand incur annual net interest costs in excess of EUR 1m. Nor does the rule applyif the company’s equity/liabilities ratio is the same as, or higher than, that of therest of the group.

Despite these elements of uncertainty, a private equity fund is nothing spe-cial from a tax viewpoint. It is a particular type of financial institution that“makes its living” from buying and selling companies, but the investmentsmade by the funds and the cash flows resulting from these buyouts are cap-tured by the tax system. However, it is also a fact that funds actively testweaknesses in the tax system. For as long as interest on debt is treated differ-ently to returns on equity, for as long as the taxation of international incomeremains inconsistent, for as long as there are problems differentiating be-tween the fruits of labour and the returns on savings in the tax system, andfor as long as different types of capital income are taxed in very differentways, taxpayers will be able to think tax and maximise their income by min-imising their tax liabilities. Where this happens in connection with the activ-ities of private equity funds, it seems to be an expression of a more generalphenomenon.


“The most exciting thing about my work is buildingbetter companies in the long term by strength-ening them both strategically and operationally.And you can see this from the companies we’veowned – they’ve grown very substantially underour ownership.”

Peter Korsholm, partner, EQT Partners

Peter Korsholm was recruited by EQT Partners in 1999 and assumed responsibility for EQT’s Danish operations in 2008.

He worked previously for Morgan Stanley in London in 1996–98.

Peter Korsholm holds an MBA from INSEAD, an MSc in econometrics andmathematical economics from the London School of Economics, and a BScin economics from the University of Copenhagen. He sits on the boards ofISS A/S, BTX Group A/S and Gambro BCT.


Private equity funds are by no means a new phenomenon. The first leveragedbuyout of a listed company took place in the USA back in 1955, when McLeanIndustries took over Waterman Steamship Corporation using mostly debt finance.But it was not until 1964 that the first example of the private equity fund modelsaw the light of day, when investment bank Bear Stearns, led by Jerome Kohlbergand Henry Kravis,2 acquired and subsequently delisted Orkin ExterminatingCompany.

Until 1980 buyout activity remained in its infancy, and players were limited to afew venture capital funds that began to show an interest in buyouts, and groupsorganised around investment banks like Bear Stearns. The first private equityfunds specialising in buyouts were created in the USA in the late 1970s and early1980s. These used the same structure as the venture capital funds had developedin the years before that, partly to allow the use of performance incentives at port-folio companies.

The first phase, 1980–1990: Private equity funds expand in the USAPrivate equity funds really began to take off in the USA in 1980 and the followingyears. A change in the regulation of pension fund investments opened up abrand new market for capital, the taxation of capital income was reduced sub-stantially, and in August 1982 the Federal Reserve decided to ease monetary pol-icy, causing long-term bond yields to fall. All of these factors made it easier forprivate equity funds to attract risk capital.

Things moved fast in the following years. Investors committed capital of USD160m to private equity funds in 1980, but USD 1.6bn in 1983. Four years later, in1987, investors committed USD 14.6bn, of which the fund raised that year bydominant US player Kohlberg, Kravis and Roberts accounted for USD 5.6bn on itsown.

The increase in the amount of money available to the funds led to growing buy-out activity, and it also became possible to increase the degree of leverage, insome cases to as high as 95%. At that rate, the committed capital figure for 1987of USD 14.6bn translates into acquisitions of almost USD 300bn. The impact onbuyout activity was therefore marked (see figure III.1).

Things culminated in 1988 when the total value of private equity transactions hitUSD 185bn. Activity in Europe was still relatively limited at this point, but spe-cialist European private equity funds began to be created towards the end of the1980s. Activity was, however, limited to the UK and a few other countries.

The second phase, 1990–2000: Buyout activity slowsAs can be seen from figure III.1, buyout activity collapsed around 1990 and re-mained in the doldrums for most of the next decade.

Private equity funds and their investors1

III.

The origins of private equity funds

1. This chapter is based largely on the report Private Equity i Danmark [Private Equity in Denmark] published by CEBR in 2008 and Robert Spliid’s book Kapitalfonde: Rå pengemagt eller aktivt ejerskab [Private equity funds: asset strippers or active owners?], Børsens Forlag, 2007.

2. Kohlberg and Kravis would come to play one of the lead roles in the growth of private equity investing. In 1976, together with George Roberts, they set up the firm Kohlberg, Kravis and Roberts (KKR), which was the dominant private equity fund in the USA throughout the 1980s. KKR made waves in Denmark in 2005 when, together with four other private equity funds, it bought out the country’s leading telecommunications company, TDC.


The dramatic decrease in activity had a number of causes, all of which made itharder to raise risk capital. There were two general economic factors that playeda role. First, the market for high-risk corporate bonds in the USA collapsed aftera series of bankruptcies. The market for the riskiest bonds, known as junkbonds, was hit hard by the bankruptcy of the leading investment bank in thismarket, Drexel Burnham Lambert.

Second, the US economy entered recession, which limited investors’ appetite forrisk, and there was a general increase in uncertainty in the financial marketswhen the Gulf War broke out. The result was soaring interest rates and a drasticdecrease in buyout activity that would persist in subsequent years.

Buyout activity began to pick up gradually from the mid-1990s, but it was not un-til after the millennium that private equity fund investments returned to the lev-els seen at their peak in the 1980s.

The third phase, 2000–?: Global expansionPrivate equity fund activity levels increased again after the millennium. The ex-planation for this can be found in changes in the general economic climate. Theglobal economy found itself in what has been called the longest economic up-swing in history, and interest rates were at a record low. Once again there wereopportunities to raise risk capital, and this led to a fresh wave of private equityfund activity. It is worth noting that this third phase in the history of private eq-uity has seen a significant spread of activity to Europe (and Asia).

Private equity investments in Europe have been higher than those in the USAevery year since 2001. By way of comparison, US listed companies account for40–50% of global market capitalisation, and EU listed companies for just 25–30%. One of the reasons for the surge in activity in Europe is probably that the in-tegration of the region’s economies has removed some of the previous obstaclesto the consolidation of industries across national borders. The introduction ofthe euro has also reduced the risk associated with fluctuating exchange rates.

200

180

160

144

120

100

80

60

40

20

0

Figure III.1. Market value of buyout investments in the USA and Europe 1980–2006.

USDbn

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

20

00

20

01

20

02

20

03

20

04

20

05

USA

Europe

Source: Gaughan (2007) and Thomson Financials.


Although it is still too early to conclude that private equity fund activity has stag-nated again, a number of economic indicators are suggesting a new market situ-ation. The economic outlook is uncertain, European interest rates are rising, andthe sub-prime crisis in the USA has increased the general level of uncertainty inthe financial markets. These factors all point towards reduced activity in thecoming years.

The first Danish private equity fund, Nordic Private Equity Partners (NPEP), wasset up in 1990 with committed capital of DKK 165m. The fund itself was regis-tered in the Channel Islands, though, so strictly speaking only its managementand part of its capital were Danish. NPEP’s first transaction was the takeover ofBroen Armatur in 1991. In 1994 NPEP raised a second fund with committed cap -ital of DKK 150m. Compared with later funds, NPEP was relatively small.

This was followed by a series of buyouts by Finnish fund CapMan and Sweden’sIndustri Kapital, as well as a few by other foreign funds. Until 1995, DanskKapitalanlæg’s acquisition of Reson in 1991 and Danfysik in 1993 and NPEP’s ac-tivities were the only Danish buyouts.

It was only with the formation of Axcel IndustriInvestor in 1994 that the localplayers in the Danish private equity market seriously began to approach the in-vestment model, organisation and size developed abroad during the previousdecade. That said, Axcel did differ from the norm by not having a limit on the lifeof the fund, and there was no separation of investment vehicle and managementcompany.3 Axcel managed to attract funding of DKK 200m from four investors,including pension fund manager PKA and bank Nordea (Unibank). Further in-vestors came in later.

One of Axcel’s first investments was Tvilum, a family-owned company produc-ing flat-pack furniture, which was subsequently merged with Scanbirk and soldto US group Masco Corporation. During Axcel IndustriInvestor’s life, its capitalwas extended to DKK 1.1bn. Axcel II was raised in 2000 with committed capital ofDKK 2.5bn, and Axcel III followed in 2005 with capital of DKK 3bn.

Polaris Private Equity was started up in 1998 with capital of DKK 1.6bn from in-vestors such as Danske Bank and pension funds Danica Pension, PFA and ATP.Since the millennium, a number of mainly relatively small private equity fundshave been established, including Dania Capital (2004), Erhvervsinvest Nord(2004), Odin Equity Partners (2004), Nordic Growth and SR Private Brands. Thelisted ITH Industri Invest (now Renewagy) and investment bank FIH also invest-ed in private equity for a long period, although both initiatives have recentlybeen closed.

In 2005 pension fund LD started up LD Equity by transferring its holdings in 23unlisted companies into the first fund. Two further funds have been raised to-gether with other institutional investors, and LD Equity has a total of DKK 7.5bnunder management. However, it should be noted that LD Equity invests in ven-ture capital as well as private equity. The last couple of years have also seen theformation of the private equity funds Capidea, Deltaq, EVO and Executive.

Besides these Danish players, many foreign private equity funds have offices inDenmark. These include some of the biggest players in the European market:

III. Private equity funds and their investors

3. When Axcel II was started up in 2000, a limit was introduced for the duration of investments, and the investment vehicle and management company were separated out.

Private equity funds in Denmark

The origins of private equity funds(continued)


3i (UK), Altor (Sweden), CapMan (Finland), CVC Capital Partners (UK), EQT Partners (Sweden), Industri Kapital (Sweden), Nordic Capital (Sweden) andProcuritas Partners (Sweden).

Finally, a number of funds of funds have been started up. Danske Bank’s initia-tive Danske Private Equity Partners was formed in 1999 and recently opened itsfourth fund. Together the four funds have committed capital of EUR 1.7bn.However, PEP invests in both private equity and venture capital, and its invest-ments are geographically diverse, mainly in Europe and the USA. In 2001 Nordeaembarked on a similar initiative called Nordea Private Equity, whose more re-cent funds focus exclusively on private equity. ATP also established ATP PrivateEquity Partners in 2001, which works like a fund of funds. To date ATP PEP hasraised four funds with a total of EUR 6bn under management. The latest fund of funds, Scandinavian Private Equity Partners, raised capital through an IPO in 2007.

The growing level of activity in Denmark can be seen from figure III.2. Between1998 and 2007, assets under management climbed from DKK 5bn to DKK 39bn.Total committed capital is higher than this, though, as Vækstfonden’s figures donot include all funds. In 2007 its figures were based on 13 funds, whereas DVCA’smembers included 14 private equity funds, seven investors in minority stakes,and five funds of funds.4

On top of this come Denmark’s EVO and Odin Equity Partners, and ProcuritasPartners and other foreign funds focusing on the Nordic countries. The totalnumber of private equity funds in Denmark engaged in buyouts is therefore atleast 17.

Figure III.3 shows the funds’ size and investment focus in terms of the enterprisevalue of prospective portfolio companies. As the size of the funds (in terms of

4. DVCA’s membership includes 14 private equity funds (3i, Altor, Axcel, Capidea, CapMan, CVC, Dania Capital, Deltaq, EQT, Executive, LD Private Equity, Industri Kapital, Nordic Capital and Polaris), nine investors in minority stakes (C.W. Obel, Dansk Kapitalanlæg, Danske Bank – Danske Markets, Erhvervsinvest, Industri Udvikling, Jysk-Fynsk Kapital, Kirkbi, Nordic Growth and SR Private Brands), three funds of funds (ATP Private Equity Partners, Danske Private Equity and Scandinavian Private Equity Partners), and Icelandic bank Glitnir, which also provides debt finance.

50

40

30

20

10

0

Figure III.2. Capital committed to Danish private equity funds 1998–2007.

DKKbn

Source: Vækstfonden (2007).Note: Vækstfonden does not include funds of funds in its figures.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



committed capital) grows, so does the size of prospective portfolio companies.Smaller funds such as Executive and Deltaq concentrate on companies with anenterprise value of DKK 25–250m, while the larger Danish funds like PolarisPrivate Equity and Axcel concentrate on medium-sized businesses typicallywith an enterprise value between DKK 500m and DKK 3bn. Finally, the large for-eign funds like EQT Partners, Nordic Capital and CVC Capital Partners targetcompanies with an enterprise value of at least DKK 2bn.

Activity in the Danish marketAs mentioned above, Nordic Private Equity Partners’ acquisition of BroenArmatur in 1991 was the first investment in a Danish portfolio company. After aquiet start-up period, activity has grown rapidly since the mid-1990s. Figure III.4shows total activity in the Danish market as measured by the number of buyoutsby private equity funds. The chart is based on a list of Danish private equity in-vestments between January 1991 and April 2008 drawn up by DVCA, which con-tains a total of 307 investments in portfolio companies by private equity fundsand includes both minority and majority investments. As the focus here is on ac-tive ownership, figure III.4 does not include investments in minority stakes byDansk Kapitalanlæg, Erhvervsinvest, Industri Udvikling, Jysk-Fynsk Kapital andSR Private Brands,5 but it does include all investments by LD Equity even thougharound half of its investments are in minority stakes.6 Thus a total of 192 portfo-lio companies are included in figure III.4.


Figure III.3. Private equity funds’ size and investment focus.

Size of Investment focus as measured by enterprise value (debt-free basis)fund

DKK 0–500m DKK 0.5–1bn DKK 1–2.5bn DKK 2.5–5bn DKK 5–10bn >DKK 10bn

<DKK 1bn

DKK 1–5bn

DKK 5–10bn

>DKK 10bn

Source: Own illustration based on information from Vækstfonden (2007) and the funds’ websites.

Dania Capital

Capidea

Jysk-FynskKapital

Industriudvikling

Deltaq

Erhvervsinvest Nord

SR Private Brands

Executive Capital

Dansk Kapitalanlæg

Polaris Private Equity

Axcel

LD Equity

Nordic Capital

Industri Kapital

EQT

3i

Altor Equity Partners

CVC Capital Partners

CapMan


From modest beginnings at the start of the period, activity has grown substan-tially. Of the 192 investments made between 1991 and May 2008, 146 (76%) havecome since the millennium. Private equity funds acquired 39 Danish companiesin 2007 alone.

The most active players account for the majority of the 192 investments to date.Thus Axcel’s three funds have been involved in 31 buyouts in Denmark, which is16% of the total. Foreign private equity funds account for just over half of all buy-outs during the period (100 out of 192), and Nordic private equity funds for 41 ofthese. Table III.1 shows the number of buyouts by the nine most active privateequity funds in Denmark.

Table III.1. Number of buyouts by the nine most active private equity funds in Denmark 1991–2008.

Name Founded Country Buyouts

Axcel 1994 Denmark 31

LD Equity 2005 Denmark 23

Polaris 1998 Denmark 17

CapMan 1989 Finland 13

EQT 1994 Sweden 10

Nordic Capital 1990 Sweden 8

CVC 1981 UK 6

3i 1983 UK 6

Industri Kapital 1989 Sweden 6

Source: Based on figures from DVCA. Note that Nordic Private Equity Partners was taken over by CapMan in 2001.Note: Where two (or more) funds worked together on a buyout, both funds are credited with the transaction. See section IX for a more detailed presentation. Figures cover the period until April 2008.

5. Dansk Kapitalanlæg has made a number of investments in minority stakes that have subsequently been supple-mented with further share purchases to obtain a majority stake (e.g. mailbox producer ME-FA and manufacturingcompany M&J Industries). As the focus here is on buyouts, these investments are not included in this overview.

6. Of LD Equity’s 23 investments, 11 are majority stakes and the remainder are minority stakes. However, most of LD Equity’s minority stakes are acquired in close collaboration with the company’s management or another private equity fund, and so they have been included in the list of buyouts.


50

40

30

20

10

0

Figure III.4. Number of buyouts by private equity funds in Denmark 1991–2008.

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Source: Based on figures from DVCA. Note: These figures do not include investments in minority stakes by Dansk Kapitalanlæg, Erhvervsinvest Nord,Industri Udvikling, Jysk-Fynsk Kapital and SR Private Brands, but all investments by LD Equity are included asthe fund is focusing on both buyouts and minority investments going forward. The figure for 2008 covers the period from January to April.


As can be seen from table III.1, besides Axcel, activity in the Danish market isdominated by Denmark’s LD Equity and Polaris, Finland’s CapMan (which tookover NPEP in 2001 and has therefore been behind a total of 13 buyouts) andSweden’s EQT. The three most active funds account for around a third of all buy-outs, while the ten most active account for more than half of total activity. TableIII.2 breaks down the 192 buyouts by industry.

Table III.2. Number of buyouts in Denmark by industry 1991–2008.

Industry Number Percentage

Manufacturing 122 63.4

Service 22 11.5

Wholesale 19 9.9

Retail 12 6.3

IT development 8 4.2

Construction 4 2.1

Transport 4 2.1

Research 1 0.5

Total 192 100

Source: DVCA.

Unsurprisingly, manufacturing companies account for more than half of all buy-outs (122 out of 192), as they generally have stable earnings, enabling relativelyhigh levels of debt finance. Private equity funds have also invested in 22 servicecompanies and 19 wholesalers. The other sectors together account for around 15%of the total number of buyouts.

Investors in private equity funds can be divided into five main groups:1. Institutional investors (banks, insurers and pension funds)2. Companies3. Public bodies4. Funds of funds5. Private investors

Figure III.5 breaks down the sources of capital for private equity funds raised inEurope and Denmark in 2006. The charts include funds of funds, even though, inprinciple, these funds have also raised capital from investors. Funds of funds ac-count for 18% of total committed capital in Europe but just 3% in Denmark. Thisgap shows that funds of funds are a relatively new financial instrument that hasemerged to help investors to invest in private equity.

Both nationally and internationally, institutional investors are the dominantclass of investor in buyouts. Taken together, institutional investors account forabout two thirds of committed capital in Europe. Within this group, pensionfunds are the biggest players, contributing more than half of total capital frominstitutional investors, followed by banks and insurers.


Who invests in private equity funds?

Private equity funds in Denmark(continued)


In Denmark, pension funds account for more than half of capital from institu-tional investors and so more than a third of total committed capital. Banks ac-count for slightly more than half of the remaining institutional capital, and in-surers for the rest.

In Europe, companies account for 4% of total committed capital, while publicbodies and others (individuals) each account for 9%. Companies’ share is muchhigher in Denmark at 10%, while public and other sources account for 21%, di-viding into 9% from public bodies and 12% from other sources.

Overall, institutional investors, led by pension funds, are behind the bulk of thecapital invested in private equity funds. Thus the investors in buyouts do not dif-fer greatly from those that dominate the stock market. In the USA and the UK, do-mestic institutional investors hold more than half of listed companies’ capital,while in Denmark the level is around 30%. If foreign institutional investors areincluded, these figures are much higher. In other words, the investors in privateequity funds are largely the same as the investors in listed companies.


Pension funds 27%

Insurers 10%

Banks 14%

Others 9%

Public bodies 9%

Private investors 9%

Companies 4%

Europe

Pension funds 38%

Insurers 11% Banks 17%

Others 12%

Public bodies 9%

Companies 10%

Funds of funds 3%

Denmark

Figure III.5. Capital committed to private equity funds in Europe and Denmark in 2006 by source.

Source: EVCA Yearbook 2007.

Funds of funds 18%

“Private equity funds are now so good at the finan-cial side that they compete more on industrial insight and an ability to develop companies operationally and strategically. The private equity industry has become more mature, and developingcompanies in close and committed collaborationwith management will be increasingly importantin the future. I find this very exciting.”

Lars Terney, partner, Nordic Capital

Lars Terney has headed Nordic Capital’s Danish activities since spring 2008.

He worked previously for Boston Consulting Group (BCG), first in Chicago in1994–97 and then helping to establish BCG’s office in Copenhagen in 1998.He became a member of BCG’s Nordic management team, and was made a senior partner in 2007.

Lars Terney holds an MBA from the Kellogg School of Management atNorthwestern University in the USA.


This section presents the results of three analyses commissioned by DVCA in con-nection with the preparation of this report. There is a survey of how employee-elected board members view private equity funds, a survey of investors’ views ofprivate equity funds and their communication, and finally a study of returns onprivate equity funds performed by ATP PEP. The section is rounded off with acomparison of returns on private equity funds with returns on the stock market.

The analyses show that private equity funds are viewed positively by employee-elected board members, that investors are happy with both the information andthe returns they get from private equity funds, and that returns on private equityfunds are well above those on the stock market. However, there are also areaswhere private equity funds need to improve, such as communication with theoutside world.

A telephone-based questionnaire survey of employee-elected board members atcurrent and former private equity portfolio companies in Denmark was carriedout for DVCA by Aalund Research in spring 2008.

The survey covers a number of aspects of private equity funds’ day-to-day workwith the companies they own.1 Much of this work is channelled through the com-pany’s board of directors.

Almost 70% of the employee-elected board members surveyed believe that pri-vate equity funds show respect for the corporate culture of the companies theyown (see figure IV.1). At companies previously but no longer owned by a privateequity fund, the picture is even more positive, with 91% believing that the fundshowed respect for the company’s corporate culture.

The employee-elected board members surveyed also believe that private equityfunds are good at providing information on the changes they want to see at aportfolio company. 61% agree or partially agree that private equity funds aregood at providing information on the changes they wish to make, or have made,at the company. At companies previously but no longer owned by a private equi-ty fund, 73% believe that the fund was good at providing this information.2

Figure IV.1. Do the new owners show respect for the company’s corporate culture?

DVCA’s analyses of private equity funds in Denmark

IV.

How do employee-electedboard members view private equity funds?

Background

1. Employee-elected board members were chosen for the survey because they have close daily contact with private equity funds through their board work. The analysis covers a total of 39 respondents, of whom 28 are on the boards of companies currently owned by a private equity fund and 11 are on the boards of companies previously owned by a private equity fund.

2. Chart not shown. All charts are based on underlying data available from DVCA’s website: www.dvca.dk

Plenty 31%

Some 38%

Definitely not 3%

Neither yes nor no 23%

Don’t know 3%

No 3%

On balance, we can concludefrom this analysis that privateequity funds have made a positive impression on employee-elected board members, but also that there is room for improvement in anumber of areas, such as employee development.


Employee-elected board members are also positive about private equity owner-ship when asked whether the funds do much to make the company an attractiveplace to work (see figure IV.2). 41% believe this to be the case, while only 26%disagree. The remaining 33% are either unsure or see no difference. Again thefigure is even more positive if we look only at companies that have experiencedprivate equity ownership but are now under a different form of ownership. Here, 64% agree that the private equity fund did a lot to make their company anattractive place to work.

Figure IV.2. Do the new owners do much to make the company an attractive place to work?

The survey also shows that private equity funds are considered to be good at de-veloping their companies. More than half of the respondents believe that thefunds bring new expertise to the companies and that sufficient funds are ear-marked for investment in production equipment (see figure IV.3).

Thus the picture that emerges is that employee-elected board members are gen-erally positive about private equity ownership. The funds respect the companiesin which they invest, their management style is open, and they do a great deal tomake the company an attractive place to work.

Figure IV.3. Do the new owners put sufficient money into long-term investments in production equipment?

However, one point to note is that employee-elected board members do not believe that sufficient resources are invested in employee development (see figure IV.4). 29% feel that sufficient resources are earmarked, while 28% feel theopposite. Around 43% responded “Don’t know” or “Neither yes nor no” to thisquestion.

Plenty 13%

Some 28%


No 15%

Definitely not 10%

Don’t know 3%

Plenty 54%

Some 0%


No 28%

Definitely not 0%

Don’t know 3%

The picture that emerges isthat employee-elected boardmembers are generally positive about private equityownership.


Figure IV.4. Do the new owners ensure that sufficient funds continue to be invested in employee development?

However, it should be stressed that DVCA has not looked into how this questionabout employee development would be answered at other companies. It is there-fore difficult to gauge whether private equity portfolio companies differ from other companies in this respect.

Having active and well-prepared board members normally ensures that manage-ment receives useful feedback and guidance from the board, and this is verymuch the case at private equity portfolio companies (see figure IV.5). 75% of thosesurveyed believe that the board is a better sounding board for management underprivate equity ownership.

Figure IV.5. Is the board a better sounding board for management than before the companywas in private equity ownership?

On balance, we can conclude from this analysis that private equity funds havemade a positive impression on employee-elected board members, but also thatthere is room for improvement in a number of areas, such as employee develop-ment.

The results of the analysis above paint a different picture to the only previousDanish survey of the impact of private equity ownership on companies, pub-lished by the Danish Confederation of Trade Unions (LO) in its newsletterUgebrevet A4 in late 2007 and early 2008.

Ugebrevet A4 concludes from a survey of 49 shop stewards at private equity port-folio companies that there is higher employee turnover under private equity own-ership, that employees’ workload increases, and that employee care is limited.

IV. DVCA’s analyses of private equity funds in Denmark

Ugebrevet A4’s study of private equity funds

Yes 75%

The same 11%

No 7%

Don’t know 7%

Plenty 8%

Some 21%


No 23%

Definitely not 5%

Don’t know 8%

How do employee-electedboard members view private equity funds?(continued)


The contrasting results of the two surveys may be because employee-electedboard members feel more involved in decision-making processes than shopstewards. This is another point to note for private equity funds and DVCA.

In connection with the development of its guidelines for responsible ownershipand good corporate governance, DVCA also commissioned Aalund Research toconduct a questionnaire survey of the biggest investors in private equity funds. Atotal of 12 investors took part in this survey, which was also performed in thespring of 2008.

According to the survey, these 12 investors have invested a total of around DKK40bn in private equity funds and therefore account for the bulk of the Danishcapital invested in Danish companies through private equity funds. The major ityof these investors are pension funds.3

They are generally satisfied with the information that private equity funds pro-vide to their investors (see figure IV.6).

Figure IV.6. Satisfaction with the flow of information from private equity funds.

Most of these investors believe that private equity funds should pay more atten-tion to the outside world’s expectations of their actions and disclosures. Theyfeel that the funds could usefully be more open about their intentions and the re-sults of their activities (see figure IV.7).

Figure IV.7. Should private equity funds modify their behaviour?

Nine of the 12 investors surveyed plan to increase their allocation to private equi-ty, while three plan to maintain their current level of investment, and none haveplans to reduce their allocation to private equity (see figure IV.8).


3. The respondents in this survey were the chief investment officers of the investors in question rather than the people responsible for private equity. The 12 investors break down into seven pension funds, three insurers and two “others”.

DVCA’s questionnaire surveyof the biggest investors in private equity funds

Very satisfied 50%Quite satisfied 50%

Yes 67%No 25%

Don’t know 8%

Most of these investors believethat private equity fundsshould pay more attention to the outside world’s expectations of their actionsand disclosures.


Of the nine investors who plan to increase their allocation to private equity, sixwere willing to disclose by how much. Together these six investors plan to in-crease their exposure by DKK 26bn.

Figure IV.8. Future investment in private equity funds.

Finally, DVCA’s survey shows that there is generally considerable satisfactionwith private equity funds’ management of their investments, with only one in-vestor being satisfied only “to a degree” (see figure IV.9).

Figure IV.9. Are you satisfied with private equity funds’ management of their investments?

Thus the vast majority of investors have received a return matching or exceedingtheir expectations.

The size of the returns generated by private equity investments in the periodfrom 1990 to 2006 is something DVCA asked ATP PEP to look into. The results arepresented in the next section.


Yes 92%

To a degree 8%

We plan to put a larger share of our investments

in private equity 75%

We plan to put an unchanged share of our investments in private equity 25%

DVCA’s survey of the biggest investors in private equity funds(continued)


Background to the analysisThis analysis was carried out by ATP PEP on the basis of information submittedby the individual private equity members of DVCA, which were asked to submitreturn (cash flow) data for all investments realised since 31 December 1999.

The data set covers 594 investments made by 11 funds in the period 1990–2006and can be assumed to include most, by volume, of the investments in theDanish market realised since 31 December 1999. The data set does not includeventure capital investments. It was up to the individual fund to determine whichtransactions should not be included in the analysis on this basis, but DVCA didhave a dialogue with the individual funds concerning the selection criteria to beapplied.

The investments were made mainly in the period 1995–2003 (see figure IV.10).The investment period varies from about a year to 13 years, with a mean of 6.4and a median of 6.5. It should be noted, however, that in several cases the indi-vidual investments were made in several rounds, and there are also a few caseswhere the investment was partially realised up to a number of years before the final exit. The analysis uses the timings of the initial investment and the finalexit to calculate the average investment period.

Figure IV.10. Number of investments in the period 1990–2008.

The overall return on the 59 investments is a multiple of 3 and an IRR of 29% or37% depending on the method used.

The return multiple is defined as how many times the capital invested has beenreturned. Hence a multiple of 3 means that an investment of 100 increases to avalue of 300 during the time that the fund owns the company.

The IRR can be calculated using two different methods:1. A long-term cash flow that follows the actual timings. The entry year therefore

varies, from 1990 to 2006 (see above). A calculation using this method givesan IRR of 29%.

2. All investments are assumed to be made at the same time, in year 0. Thismethod gives an IRR of 37%.


4. A transaction may be represented more than once if more than one private equity fund was involved in the investment.

Private equity funds’ investments in Denmark – realised returns

Analysis of returns

10

8

6

4

2

19

90

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Acquisitions Divestments


The disadvantage of the first method is that investments made at the beginningof the period have a high weighting in the overall calculation, whereas later investments have a lower weighting, because all payments are discounted backto the time of the first investment.

The second method starts all the individual investments at the same time, and sothe overall IRR is not skewed by differences in the timings of the individual investments.

The table below breaks down the returns by how much the private equity fundhas invested in the individual portfolio company. Healthy returns have beenachieved in all categories, so it is not just the biggest investments that are drivingreturns.

Table IV.1. Returns broken down by invested capital (DKKm).


Returns by size of company

<10 Total

Number 10

Invested capital 58

Realised value 254

Multiple 4.4x

10–25

Number 12

Invested capital 207

Realised value 786

Multiple 3.8x

25–75

Number 11


Realised value 1,155

Multiple 2.1x

75–125

Number 8



Multiple 3.1x

125–250

Number 7

Invested capital 1,307


Multiple 2.7x

>250

Number 11



Multiple 3.2x

Total

Number 59



Multiple 3.0x

Figure IV.11. Cash flows from the individual investments.

Method 2

A B C A B C

Method 1

TimeTime


It should be noted that the breakdown in the table above does not necessarilypresent accurately the total value of the company (debt + equity), as informationon holding size, debt levels and so on were not included in the analysis.However, it can be assumed that there will be a relatively close relationship be-tween invested capital and the company’s total value.

As might be expected, there is some variation between the returns on the differ-ent investments. Thus there are investments where funds have lost all or most ofthe capital invested, while there are others where a multiple of more than 10 hasbeen achieved. The median for the 59 investments is a multiple of 2.1.

It is important to stress that only realised investments are included in the dataset. Were unrealised investments to be included, this would have a negative ef-fect on returns in cases where funds have a relatively large share of as yet unsuc-cessful investments in their current portfolio. On the other hand, unrealised in-vestments will naturally have a positive effect on returns if their valuation givesan overall multiple of more than 3.0 or IRR of more than 37%. It must also bestressed that only investments realised since 31 December 1999 are included inthe analysis.


Closing comments


When comparing returns with, say, listed shares, it must be remembered thatthis analysis does not take account of private equity funds’ management feesand carried interest. As a rule of thumb, these costs will typically reduce the re-turn multiple from 3.0 to 2.5 and the IRR by around 3.5 percentage points.

Table IV.2 provides an overview of the returns on Danish listed shares over thelast 12 years. The table is based on the Copenhagen all-share capped gross index(OMXCCAP, GI), which includes all the companies traded on OMX NordicExchange Copenhagen but has a limit on the weight of any one company and as-sumes that dividends are reinvested.

Even though this is a capped index, the 20 largest Danish listed companies(OMXC20) account for a very large proportion of the index. As the investments inour data set consist largely of small and medium-sized companies, it might bemore appropriate to compare the return on private equity funds with an indexthat omits the largest companies. Unfortunately, though, it has not been pos-sible to obtain index data for small and medium-sized listed companies datingback far enough.

Comparison with returns on listed shares – DVCA’s comments on ATP PEP’s analysis


Table IV.2. Return (IRR) over various time horizons.

Year IRR 1 year IRR 3 years IRR 5 years IRR 7 years

30-12-1996 32% 23% 23% 10%

30-12-1997 44% 20% 13% 10%

30-12-1998 -4% 14% 1% 9%

30-12-1999 26% 10% 7% 15%

29-12-2000 21% -5% 8% 16%

28-12-2001 -13% -2% 12% 14%

30-12-2002 -20% 11% 21%

30-12-2003 35% 36% 29%

30-12-2004 29% 35%

30-12-2005 45% 27%

29-12-2006 31%

30-12-2007 8%

The table should be read as follows: “IRR 1 year” shows the return for each indi-vidual year, while the other columns show the annual return over periods of 3, 5and 7 years. For example, the annual return during the period from 2000 to 2007(2000/IRR 7 years) was 16%.

By way of comparison, the analysis of returns on private equity portfolio compa-nies above gives an annual IRR, using the method where all investments are as-sumed to have been made at the same time (which has to be considered the mostcorrect method), of 37-3.5=33.5%.

“Our role is to develop companies and take them to a new level by making them stronger, more viable and so more valuable. This demands com-mitment, and it is through day-to-day collabor-ation with companies’ management, employees,former owners and founders that we help to generate new energy and growth. It is a privilegeto be part of this process and see ambitious plansbeing realised step by step. That is what we callactive ownership, and that is our raison d’être.”

Christian Frigast, managing partner, Axcel

Christian Frigast is a managing partner in Axcel, which he co-founded in 1994.

Previously Christian Frigast was Executive Vice President of Incentive(1993–94) and director of the former Unibank, now Nordea (1973–92).

Christian Frigast is an M.Sc. (Political Science and Economics) and studied,among other places, at Stanford University in the USA. As well as sitting onthe boards of companies owned by Axcel, he is the deputy chairman ofDampskibsselskabet Torm.

Danish Venture Capital and Private Equity Association 46Danish Venture Capital and Private Equity Association 46

Background

According to Søren Vestergaard Poulsen, partner in CVC, Danske Trælast was atextbook takeover. The ship was prepared for sea, then sold at a profit. But noone had counted on its all happening quite so fast.

Danske Trælast is over one hundred years old and has been listed on the stockexchange since 1933. During the 1990s the company grew to become the largestNordic distributor of building materials.

In 2002 the insurance company Codan owned 32% of the shares in DanskeTrælast, inherited from Hafnia, whose activities Codan took over in 1993.However, Codan’s UK parent company Royal Sun Alliance did not want such alarge holding in a building materials company and wanted to get rid of itsshares. Consequently, Danske Trælast needed new ownership.

A number of industrial buyers and private equity funds were contacted, and in2003 CVC became the new owner of Danske Trælast following a bidding round.

Scenarios should take account of bad times“As a starting point we were interested in Danske Trælast because the buildingsector is an area of high investments and good development potential. We alsosaw a good, strong management that was in full control. The challenge wassensing where the market was heading because the building sector is probablyone of the most market-sensitive industries that there is,” says SørenVestergaard-Poulsen, partner in CVC.

“We therefore drew up two scenarios. One in which the revenue remained rough-ly unchanged, the market didn’t get worse, and we had five years’ ownership.And another in which we envisaged a decline in revenue and earnings if an up-turn proved to be longer in coming and in which we therefore reckoned on sevenyears’ ownership.”

The ship is prepared for seaAt the same time CVC identified that Danske Trælast:B Had a skilled and relatively new managementB Was perceived by the equity market as a company with an “unclear strategy”

but with good potential for continued optimisation and tightening up ofprocesses

B Had made a large number of acquisitions but not yet achieved economies ofscale

B Had too small a central organisation, which needed supplementingB Had the platform for developing all its activities in a Nordic organisationB Was facing challenges in Sweden, which was in a turnaround and had not yet

delivered results

“We quickly set ourselves the target that Danske Trælast should grow by 10% annually – in both revenue and earnings,” says Søren Vestergaard-Poulsen.

The day-to-day work“As a listed company you don’t know exactly what the shareholders are think-ing. But with a private equity fund the ownership becomes more direct becauseyou’re working together in the boardroom – and you have day-to-day contact,”says Steen Weirsøe, President and CEO of DT Group, formerly Danske Trælast.

Building market boom generated high returns

V. Review of ten investments

Data prior to takeover by the private equity fund and upon exit

InvestmentCVC in 2003Exit in 2006

Revenue2002: DKK 14.9bn2006/7: DKK 19.6bn

EBITDA2002: DKK 945m2006: DKK 1.5bn

Number of employees2002: 5,9882006: 6,600

“At CVC we generally prefer tokeep the CEO and don’t likehaving to change mid-process.In fact, before the acquisitionwe had Steen Weirsøe’s poten-tial severance agreement inthe form of a golden parachutecancelled. This meant that we could fire him, but that hecouldn’t go of his own accordand net a big profit. That wasour wish, and all the top management has been withus throughout except for oneperson who wanted to retire.”

Søren Vestergaard-Poulsen, CVC

47 Danish Venture Capital and Private Equity Association47 Danish Venture Capital and Private Equity Association

“We were very close to the management, agreed with its strategy, and the coop-eration was very good. The management was able to decide itself that we wouldbuy such-and-such a company because we liked its strategy and its commitment.And we never discussed which key figures we should focus on, but rather whetherwe could put the squeeze on the key figures,” says Søren Vestergaard-Poulsen.

Checklist/priorities turned on their headThe market turned quicker than expected, and this meant that both scenarioshad been too pessimistic.

At the same time, the results of the intensive tightening up of the company and itsactivities began to emerge, and this meant a change in Steen Weirsøe’s priorities.

“Now I no longer had to spend time and effort on the analysts and on explainingour market situation. It was possible to focus more on sales, costs and key fig-ures, and I was able to get our continuous acquisitions on track and had a lot offreedom to develop the company. For me, the ownership becomes more directwhen a private equity fund joins the board. I can relate to its needs. By contrast,the stock market often has a more diffuse way of responding that doesn’t alwaysmatch up with the company’s long-term interests,” says Steen Weirsøe.

“In short, I think we got the focus on the strategic agenda – or rather weachieved a more focused development of the company under our ownership,”says Søren Vestergaard-Poulsen.

Incentives“The incentive programme covered 25 top managers/heads of division and 225timber sales directors and Silvan DIY store managers. In this way we brought acommitment and team spirit to the whole organisation, and when we visited theindividual DIY stores, we found that the goals were perfectly clear. Everyoneknew the way forward,” says Søren Vestergaard-Poulsen.

Exit“With regard to the exit, we thought it would most likely be a sale to a strategicbuyer or a new listing.”

In 2006 Danske Trælast was sold to Wolseley, the UK group specialising in heat-ing, plumbing and sanitation as well as building markets. The price was aroundDKK 15bn.

“The company had a solidfoundation, and we were making good money, so I wasconfident that it could be done.So in the period 2003 to 2006CVC helped ‘prepare the shipfor sea’.”

Steen Weirsøe, President and CEO,

DT Group, formerly Danske Trælast


Background

Falck has gone from being a low-growth company operating mainly within autoassistance, ambulance services and fire fighting services in Denmark to being aninternational high-growth company with market-leading positions in each ofthe company’s business areas in their respective geographical regions.However, it needed a private equity fund for the company to get the workingcalm to develop and expand the product range within healthcare and assistancein Denmark and to develop its business areas abroad.

In July 2004 Falck was separated from Group 4 Securicor immediately after thefounding of the latter by means of a merger between Group 4 Falck and the UKsecurity company Securicor. Following the merger, security services and cashtransportation were dominant business areas, while rescue services (Falck) andprison services (Global Solutions) were small, unrelated business areas. Group 4Falck therefore decided to spin off the activities from Group 4 and after divestingGlobal Solutions, Falck was listed on the Copenhagen Stock Exchange. The own-ership was established through a share split.

Christian Dyvig from the private equity fund Nordic Capital saw at the time thatit would not be logical to list a company that had acquired a joint ownership andcompany structure as late as 2003 and was difficult for the equity market to un-derstand. Lastly, Nordic Capital was able to contribute to the future develop-ment of Falck thanks to the private equity fund’s previous experiences of owningcompanies focused on healthcare. He therefore contacted Group 4 Securicor’sexecutive management on several occasions and also made specific acquisitionoffers for Falck. But Group 4 Securicor refused to do business.

Focus on earningsIn the meantime Falck was listed. The CEO was Allan Søgaard Larsen, who tookover responsibility for Falck in 2003 and began improving growth and earningsin the foreign affiliates. The financial markets failed to see the potential and putpressure on Falck to focus solely on the home market.

“It had irritated me for a long time that the equity market had not valued the Falckshare based on the potential that I could see the company had. There were someobvious development opportunities that they could not or would not see, eventhough we had done everything to explain them,” says Allan Søgaard Larsen.

New owners with big new plansIt had become necessary to look for a more active ownership than a listing, and abidding process involving a number of private equity funds was instituted in au-tumn 2004, when it was eventually Nordic Capital, together with ATP, that tookover Falck. “Beforehand we had painted a picture of the Falck that we envi-sioned for ourselves in the longer term. With ATP on board as a passive co-investor we had secured in advance a Danish investor with an interest in infra-structure that could bring calm to the new ownership,” says Christian Dyvig,and continues:

“We wanted to concentrate on:B Strongly expanding assistance products in Norway and SwedenB Expanding ambulance services in selected markets in EuropeB Developing healthcare products as a brand-new business areaB Expanding the newly acquired training activities for the offshore sector and

the maritime sector globally.”

New ownership unlocked the potential for growth


Data prior to takeover by the private equity fund and after the takeover (today)

InvestmentNordic Capital in 2004

Revenue2003: DKK 3.8bn2007: DKK 6.3bn

EBITDA2003: DKK 398m2007: DKK 815m


“The share was clearly under-valued. And the investor basewas wrong because, as a resultof the affiliation with Group 4Falck, there were numerous international investors whohad originally bought sharesin a global growth companyand were finding it difficult coming to terms with the factthat they were suddenly share-holders in a Danish companyspecialising in auto assistance,ambulance services and firefighting services. Furthermore,we had commissioned surveysfrom people with industry expertise that clearly indicatedthat there was great potentialfor achieving organic growthrates within healthcare andambulance services.”

Christian Dyvig, partner,

Nordic Capital


ResultsThe results for 2004 were already promising, with an increase in revenue of 12%,nearly half of which was organic growth. 2005, 2006 and 2007 showed goodgrowth of 12%, 14% and 17%. There was decent growth in the profit margin from5.9% in 2004 to 9.1% in 2007. Finally, the net debt for acquisitions in the periodwas reduced by around DKK 500m, equivalent to 18% of the original figure.

As well as the improvements in the financial figures, a number of items on thecompany’s strategic agenda were successfully implemented. Today Falck hasfour business areas, all of which are market-leading in their respective geo-graphical regions:B Emergency: largest private ambulance company in Europe and the largest pri-

vate fire fighting service in the world B Assistance: largest Nordic provider of auto assistance and other assistance

products covering homes and private citizensB Healthcare: Denmark’s largest private-sector provider of health plans and

other health servicesB Training: largest global supplier of rescue and safety courses for the offshore

sector and the maritime sector

Want management to be co-investors“We don’t want the management to become rich overnight because if that hap-pens, it’s our experience that the management doesn’t have the same motiva-tion,” says Christian Dyvig. “We therefore like the management to have a consid-erable proportion of its wealth tied up in the company with the potential forgetting a good investment out of it if things go to plan. So we want the manage-ment and selected key employees to invest in the company. But this is a delicatebalancing act because we don’t want anyone to have to incur debts or run unnec-essary risks. There has to be a balance.”

Today the executive management has a shareholding in Falck of around 9%,while other managerial employees have around 3% and non-managerial em-ployees have around 1% as a result of a free employee share allocation.

“I have complete confidence that the management can take the necessary deci-sions in day-to-day operations, and consequently the work division is that I haveclose dialogue with the executive management concerning our strategic agendaand primary responsibility for how we finance our development, while the exec-utive management handles the operational decisions. If I felt that I could handleoperations better than the executive management, there would be a problem,”says Christian Dyvig.

“Today we have a special committee structure that allows us to act quickly when it comes to acquisitions andoperational and financial decisions. This gives us a lot of freedom to manoeuvre on a day-to-day basis.”

Allan Søgaard Larsen, CEO, Falck


Background

When EQT and Goldman Sachs Capital Partners bought ISS in 2005, ISS wasdelisted from the Copenhagen Stock Exchange. Prior to that, there were a num-ber of years in which ISS had mainly grown through acquisitions, while organicgrowth had been at a level of -2% to 1.5% (2002–2004). Since 2005 organicgrowth has increased significantly, while earnings have also risen.

Since the mid-1990s, when ISS found itself in a financial crisis that later led tothe divestment of its US affiliate and exit from the US market, the group hasmainly concentrated on growing in Europe and Asia. Focus was directed at in-creasing cash flow from operations, then earnings, and finally organic growth,which was supplemented with a large number of acquisitions. But while cashflow and earnings improved appreciably, ISS did not succeed in increasing or-ganic growth at the rate that the equity market wanted. At the same time, the eq-uity analysts cast doubt on whether ISS’ numerous acquisitions created value,or whether the acquisitions were to the detriment of organic growth. This wascontributing to a considerable fall in the ISS share price.

Consequently, EQT got wind of a good deal in 2004 – or as EQT’s then partner OleAndersen put it: “The share was undervalued; ISS had not had organic growth,but we thought there were good reasons for this. In fact, ISS was continuouslyassessing whether its contracts with customers were profitable, and if theyweren’t, they were either renegotiated, restructured or terminated. This is themain reason why there were increasing earnings and zero organic growth. Butthe equity market doesn’t like failing organic growth. And the equity market didn’t believe that ISS could create value with its acquisition model.”1

Against this background EQT went into partnership with Goldmann SachsCapital Partners, which agreed to be a minority shareholder in a syndicate thatwould buy ISS. In late March 2005 EQT and Goldman Sachs finally made an offerfor all outstanding ISS shares. As more than 90% of all shareholders found theoffer attractive, it was accepted at the end of the offer period in May, and the ac-quisition became a reality. As usual, the acquisition was financed by a combina-tion of equity capital from EQT and Goldman Sachs plus a loan from an interna-tional banking syndicate. Additionally, EQT and Goldman Sachs decided to letISS’ bonds remain outstanding, and as these bonds had been issued without atakeover clause, the transaction led to the bonds falling 15–20% in value.

Necessary calm to growThe general strategy for ISS has not changed significantly since the takeover.ISS’ goal is still to transform the company into a leading supplier of IntegratedFacility Services in the markets where the company operates. This will be donethrough profitable organic growth and by accelerating the rate of the numerousacquisitions by ISS around the world.

This is confirmed by Jørgen Lindegaard, CEO, ISS: “The biggest change in ISS’strategy is that corporate growth and size are no longer a goal in themselves,while now there is greater focus on ISS growing in a profitable way and thisgrowth creating value. Consequently, the operational part of ISS’ strategy todayis developed at country level, while company acquisitions are now also prior-itised country by country.”

Calm to grow



InvestmentEQT in 2005

Revenue2004: DKK 40.4bn (for ISS A/S)

2007: DKK 63.9bn(for ISS Holding A/S)

EBITDA2004: DKK 2.9bn2007: DKK 4.7bn

Number of employees2004: 273,500 (for ISS A/S)

2007: 438,100 (for ISS Holding A/S)

1. Spliid; 2007: 300.

“It’s clear that ISS is now a giant. We employ more than400,000 people worldwideand our revenue exceeds DKK 60bn.«

Thomas Schleicher, director, EQT


And the growth has not failed to materialise. The 2007 financial statementshowed organic growth of 6% – a quadrupling in relation to 2004 and an in-crease of 0.5% compared to 2006. And what is more, it has increased withoutprofitability being affected at all. On the contrary, this has also risen and is now6.0% compared to 5.6% in 2004. In spite of the fact that debt in absolute termshas increased since the acquisition (as a direct consequence of the acceleratedrate of acquisitions), the debt-to-equity ratio (gearing) has fallen. On the otherhand, ISS is now so big that the realistic exit options have been reduced to sell-ing on to a group of a few very large service companies and other private equityfunds or reintroduction on the stock market, although EQT director ThomasSchleicher doesn’t see this as a problem but rather a challenge:

“It is clear that ISS is now a giant. We employ more than 400,000 people world-wide and our revenue exceeds DKK 60bn. And realistically this makes a sale toother companies in the industry difficult. ISS is simply too big a mouthful toswallow for most of ISS’ competitors, which are significantly smaller. This leavesthe equity market or sale to another private equity fund. At the present time, nei-ther of these options is attractive for us given the crisis in the financial markets.But when things change, we will be able to offer a really good, solid company.”

Good work division between owners and managementEQT’s business model means that there is no focus on turnarounds, but ratheron the portfolio companies being market leaders and having strong manage-ment that has the courage to invest in partnership with EQT. Furthermore, EQT isfocused on there being a clear separation among the management, the boardand EQT. It is vital that the management of the company undertakes day-to-dayoperations, while the board acts as a sparring partner for the management. Thechairman of the board and several of the board members do not have a back-ground with EQT or Goldman Sachs, but rather an industrial background, andhence great experience of managing large international service companies,from which ISS can benefit. A quick and effective decision-making process is en-sured through close collaboration among the owners, the chairman of the boardand the executive management using the so-called “troika model”.

In the opinion of Thomas Schleicher, this model has proven itself to be reallygood for EQT: “We are in ISS to exercise active ownership, and we don’t want bu-reaucracy to stand in the way of growth. The troika model therefore works par-ticularly well when new business initiatives need to be discussed. We are gener-ally very well informed concerning ISS – including its day-to-day operations. Wedon’t just follow the key figures,” concludes Thomas Schleicher.

“There is generally very gooddiscussion in the boardroom.Our board members have agood understanding of ISS’business model and the markets in which we operate. The discussion at board meetings is therefore primarily centred on strategic and operational topics, while thecontinuous monthly reportinglargely ensures that both theowners and the board are wellinformed concerning financialdevelopments.”

Jørgen Lindegaard, CEO, ISS


Background

There have been considerable changes in the three years that Nordic Capital hasowned KOMPAN. Revenue has grown by almost 50%, production has been opti-mised, and several new companies have been acquired. Today KOMPAN is theEuropean market leader in playgrounds and the world’s biggest company in itsfield.

KOMPAN was in many ways a “rough diamond”. The company had a good mar-ket position, exciting products, a visionary development department and dedi-cated employees. But the company was doing less well financially, and its prod-ucts were often being copied without enough being done to prevent it.

Sought a new ownerAt that time the company was listed, with LEGO as the largest shareholder. In2004 it became increasingly clear that it would be expedient to have new own-ers. The management was finding it difficult to develop the company further be-cause it needed an owner that was willing to invest in further growth and long-term improvements. Which is where Nordic Capital came into the picture.

Christian Dyvig, partner at Nordic Capital, which bought the company for up-wards of DKK 800m in March 2005, explains: “The equity market doesn’t alwaysperform optimally when it has to assess industrial companies that are facingmajor change processes. As a listed company there is intense focus on the resultsfrom quarter to quarter. This can be inappropriate in a period of major invest-ment and restructuring, when you can’t count on showing good results from dayone. Private equity can be a better model for the long, tough haul.”

Common strategyNordic Capital saw an exciting market and a market leader with good prospectsfor growth and development. Together with the executive management, the newstrategy was set and it was decided to focus on:B Tightening up product development by rapidly accelerating the development

of new products and obtaining a broader product range, including productsfor the intermediate market, products with electronic interaction etc.

B Rationalising production by streamlining it and moving from Ringe inDenmark to the Czech Republic

B Developing sales channels by selling via catalogues in addition to the tradi-tional time-intensive and complex selling involving individual projects

B Expanding geographically, both organically and through the acquisition ofselected companies

“I am confident in Nordic Capital’s handling of the general and capital-relatedaspects of KOMPAN’s development. It has turned out that together we have beenable to make the right strategic decisions,” says Carl Henrik Jeppesen, CEO,KOMPAN.

It was also decided to prosecute competitors who copied KOMPAN’s products. Ina single case in France the company was awarded compensation of EUR 1.5m.

Four acquisitions in three yearsWith the help of Nordic Capital, in just three years KOMPAN has acquired theNorwegian company Lek & Sikkerhet, the Swedish company Slottsbro, theGerman company CoroCord, and most recently the Australian company Megatoy.

From rough diamond to market leader



InvestmentNordic Capital in 2005

Revenue2004: DKK 733m2007: DKK 1.1bn


Number of employees2004: 4802007: 704

“The equity market doesn’t always perform optimallywhen it has to assess industrialcompanies that are facing major change processes. As alisted company there is intensefocus on the results from quarter to quarter. This can beinappropriate in a period ofmajor investment and restruc-turing, when you can’t counton showing good results fromday one. Private equity can bea better model for the long,tough haul.”

Christian Dyvig, partner,

Nordic Capital


Through these acquisitions the company has added climbing nets to its range,achieved significant understanding of selling via catalogue, and become the mar-ket leader in Australia.

Carl Henrik Jeppesen is delighted at having a private equity fund involved in thecompany that has the resources to carry out acquisitions as well as the competenceand experience.

Continued expansion“The core of our expansion will continue to be the products. We are focusing ondeveloping the right products and analysing how children use the playgroundequipment in order to make it even better. We are just finishing the developmentof electronic playgrounds that make it possible to engage bigger children inplaying and exercising more. This is extremely relevant at a time when there is somuch talk about increasing problems with obesity among children and youngpeople,” says Carl Henrik Jeppesen.

Nordic Capital invested in KOMPAN in March 2005 and is still working activelyon the company’s development. There is still no plan to sell on the companyeven though there are regular approaches.

After seven years as CEO of the company, Carl Henrik Jeppesen has just decidedthat it is time to hand on the baton. The new CEO will be Connie Astrup-Larsen,who is coming from a position as international director with Royal Unibrew.

The ambition is to penetrate further into the European market – especially east-ern Europe – and also to develop a greater presence in the USA, where KOMPANcurrently has a niche as provider of playgrounds for the high-end segment. Inthe long term the intention here is to also provide playgrounds for the intermedi-ate market.

“When we came to move pro-duction to the Czech Republic,it was definitely an advantagenot to be listed. Nordic Capitalgave us working calm for therestructuring. The problem isthat this sort of restructuringalways costs on the bottomline over a number of quarters.Furthermore, it’s difficult toknow exactly when and towhat extent the effects will befelt until such time as the newfactory is fully operational, and the stock market doesn’tlike that.”

Carl H. Jeppesen, CEO, KOMPAN


Background

From cartel case, crisis and threatened bankruptcy to high-tech company sup-plying the entire European energy industry – the North Jutland company LøgstørRør has been through it all. After seven crisis-hit years with two private equityfunds as joint owners, today there is an international private equity fund behindthe successful company, which now has the more international name of Logstor.But next time it will probably be an industrial owner.

Pre-insulated pipes for district heating are a Danish invention instigated bymaster smith Ege Andersen in 1960. The idea led to the establishment of thecompany Løgstør Rør, which for many years was the leader in district heatingpipes throughout Europe.

However, the competition was stiff and prices were forced right down, so the in-dustry joined forces to come up with a model for ensuring higher prices for itsproducts. This proved to be the wrong solution because it led to a huge cartelcase in which the EU Commission meted out large fines to those involved. In thecase of Løgstør Rør the fine was DKK 67m in 1998. The company was on its kneesand near to bankruptcy, which would have affected the whole of Løgstør townand its surroundings.

Quick rescue action ensures immediate survivalA solution had to be found, and in the course of some hectic days over Christmas1998 a rescue action was established. In January 1999 the two private equityfunds Axcel and Polaris, together with FIH, injected DKK 120m into Løgstør Rørwith Axcel as the largest shareholder.

The plan of the private equity funds was to bring together a number of playerswithin the industry to consolidate it. There were too many players in the market,and the first step was to buy the competitor Tarco Energi.

Although there was good money to be made in 1999–2000, the market was in de-cline. And the cartel case was followed by a new period of fierce price competi-tion, which meant that money poured out of the company.

“We wanted to be a catalyst for consolidation in the industry, but it was more difficult than we imagined. When we established the rescue action, we hadprobably underestimated the market forces because it took a drastic remedy toget the company back on its feet,” says partner Søren Lindberg, Axcel.

Investment in PolandSavings and rationalisations were implemented, which improved operations bymore than DKK 100m. At the same time, the new management decided to build afactory in Poland in 2001. The investment regenerated competitiveness, im-proved earnings, and actually rescued Løgstør Rør from bankruptcy and subse-quent closure.

The private equity funds tried to buy various competitors, but initially in vain.The first success only came in 2005, when Løgstør Rør bought APFS/ALSTOM, atthe same time changing its name to Logstor.

In spring 2005 the two funds brought in Preben Tolstrup as CEO. He decided toinvest in the company himself, and at the same time an incentive programmewas introduced for seven to eight other managers.

Threatened bankruptcy turned into success within clean tech



InvestmentAxcel and Polaris in 1999Exit in 2006




“We wanted to be a catalystfor consolidation in the indus-try, but it was more difficultthan we imagined. When weestablished the rescue action,we had probably under-estimated the market forces because it took a drastic remedy to get the companyback on its feet.”

Søren Lindberg, partner, Axcel


Time for a new ownerAfter seven years of ownership Axcel and Polaris were able to look back on atough but fruitful period in which both the original plans and the market itselfhad changed enormously. The results were good, but the company needed fresheyes that could continue the positive progress.

“I really think we can be proud of the fact that we had the courage to stick by ourinvestment throughout. But now we had achieved a 40% market share in allmarkets and it was only natural to effect a change after some seven years of own-ership,” says partner Viggo Nedergaard Jensen, Polaris. So the time had come forLogstor to get a new owner – and this time it would be an international privateequity fund.

Montagu sees Logstor as a subsupplier for the energy industrySeveral private equity funds registered an interest in the company. But in the endonly two remained. The management of Logstor itself helped make the decisionas to who would be the best owner of the company for the future. It was largely amatter of personal chemistry.

“The UK company Montagu had faith in us. They wanted to help develop us as asubsupplier for the energy industry,” says Preben Tolstrup, CEO, Logstor. “Wewere already well under way with developing a series of new products and estab-lishing a brand-new business unit using robot technology. We also threw in ourlot and reinvested in the new company when we got the new owner in 2006. Thishas obviously convinced Montagu of our commitment.”

A completely different company“Today we have more than 1,300 employees, generally highly qualified special-ists. And we spend a lot of money and time on investing in new technology, espe-cially within oil and gas,” says Preben Tolstrup.

Most recently, Logstor has developed a new technology where you can “coil” thepipes up on a very large drum or wheel instead of transporting them in long as-sembled sections on costly articulated lorries. The initial tests have shown that itis possible to retain the quality, and hence the insulation, in the actual pipe eventhough it is bent considerably. Logstor is thus taking another important step as amodern, successful player in its industry.

“So next time we’re probably ready for an industrial owner – preferably one inthe energy industry,” says Preben Tolstrup.

“Axcel and Polaris draggedLøgstør Rør through a very difficult period from 2002 to2003, and we are delightedthat they remained on boardto help us implement theEuropean consolidation. The funds had a positive influ-ence on our implementing themerger with good results.”

Preben Tolstrup, CEO, Logstor

Danish Venture Capital and Private Equity Association 56Danish Venture Capital and Private Equity Association 56

Background

In just eighteen months Polaris Private Equity succeeded in acquiring Novasol’scompetitor, increasing the market share within summer house rental, taking anactive part in the consolidation of the industry in Europe, and selling on thegroup to the US listed company Cendant.

In many industries you often see a number of very large owner-managed compa-nies, founded at roughly the same time, that are facing a generational change.Here it is logical to amalgamate some of the companies in order to achievestrength and enable further expansion, i.e. internationally. But what do you dowhile they are still competitors and personal issues are very much to the fore?Who will be buying whom, who will be at the head of the table, and how will thecooperation work?

Private equity fund can play an important role as external ownerA good example of this issue is Novasol, which through the 1980s and 1990s developed into one of the leading Nordic companies in the rental of summerhouses. There were three to four other companies of the same type, but no onetook the first step to consolidate the industry.

“As the founder of the company I didn’t feel that I could take things much fur-ther,” says Frederik Heegaard, who founded Novasol in 1968. “I am the typicalentrepreneur, and in 1993 I had already partly withdrawn from day-to-day man-agement by appointing as CEO Erling Holmbjerg, who had got the company run-ning smoothly. The next logical step was to position the company in a wider con-text. I thought that a private equity fund would be the obvious choice to take thecompany forward.”

Niels Worning, partner in Polaris Private Equity, describes summer house rentalas a good example of an industry in which a private equity fund can play an im-portant role simply by coming in from the outside and carrying out an in-depthreview of the possibilities.

“There were three big players in an unconsolidated industry,” says NielsWorning. “This was attractive for us. The company’s actual business concept isclear. Nowhere else in the world has the renting out of houses been so systema-tised as in Denmark. The fact that Denmark generally consists of stretches ofcoastline with a huge number of summer houses – many of which are rented out– makes it possible to establish a niche.”

Good growth potentialIn November 2000 Polaris subjected the company to a financial, legal and com-mercial due diligence process. The investigation showed that Novasol was awell-run company with a strong Nordic platform within holiday house rentalthat had good growth potential both organically and through acquisitions. Andunlike many of its competitors Novasol’s relatively complicated portfolio ofrental houses was well-ordered.

Polaris bought 75% of the shares in Novasol in November 2000 and took over thechief responsibility – together with the management and the board – for imple-menting the strategic developments that would make Novasol the leadingEuropean company within holiday house rental. This would be done by:B Increasing the market share in existing marketsB Taking an active part in the consolidation of the industry in Europe

Consolidation and quick sale broughtgood profit



InvestmentPolaris in 1999Exit in 2002



“There were three big playersin an unconsolidated industry.This was attractive for us. Thecompany’s actual businessconcept is clear. Nowhere elsein the world has the rentingout of houses been so system-atised as in Denmark. The factthat Denmark generally con-sists of stretches of coastlinewith a huge number of sum-mer houses – many of whichare rented out – makes it possible to establish a niche.”

Niels Worning, partner, Polaris

57 Danish Venture Capital and Private Equity Association57 Danish Venture Capital and Private Equity Association

A new board was appointed with industrial competences and experiences thatcould support the future growth plans. As well as Frederik Heegaard and repre-sentatives of Polaris, the board was supplemented with three external memberswith experience of, among other things, the service and travel industries.

Old competitors come togetherPolaris wanted to get started as soon as possible. They contacted the otherDanish holiday house rental companies in the Nordic region, and it emergedthat several were facing a generational change and were willing to sell.

In September 2001 Novasol Holding bought its competitor Dansommer, whichhad a range of luxury summer houses with spa or swimming pool that were par-ticularly in demand with German tourists. At the same time, Polaris could seethat there were a lot of synergies in merging local offices and having shared ad-ministration, IT platform etc.

Early US interestHowever, as early as the summer of 2001 Polaris was contacted by the US listedcompany Cendant. It was discussed whether the companies – which had thesame vision of creating the leading European holiday house rental company –should enter into partnership or simply amalgamate.

“As Polaris had only owned Novasol for just under a year, it was far too early ac-cording to the plans to sell,” says Niels Worning. “But we had already taken thefirst important step in the five-year plan, namely the acquisition of Dansommer,and achieved considerable synergies on the cost and sales side. At the sametime, we had visited the few large holiday house rental companies in southernEurope and received clear feedback that they were not about to change owner-ship. And the price was very attractive, so it was the right decision to sell.”

Polaris sold Novasol/Dansommer to Cendant in April 2002.

“As the founder I am delightedto see that the original strategy has been faithfullycontinued and followed. Nowwe have actually put some distance between ourselvesand the others in the industry.There has been a quantumleap.”

Frederik Heegaard


Background

In 2011 the entire European postal sector will be liberalised. How do we braceourselves for this? By working with like-minded companies or by acquiringpostal companies across national borders? Both. Post Danmark took on the pri-vate equity fund CVC Capital Partners as co-owner and has thereby introducedfresh knowledge and new competences within acquisitions. This has con-tributed positively to the long-term plans that will make Post Danmark an inter-national logistics company.

In 2004/5 the privatisation of Post Danmark entered an important phase. TheDanish state wanted to sell a quarter of Post Danmark. The Danish Ministry ofTransport and Energy launched a series of company presentations and organ-ised a general process for generating bids from potential buyers.

It was expected that there would be bids from some of the big European postalcompanies in Germany, Holland and France, who would see the benefits of co-ownership. But there was also a bid from the private equity fund CVC. Theywere very interested and took part in the bidding round from start to finish.

Only a small part for sale“At CVC we keep a constant watch on all transactions in the market, includingupcoming privatisations. We identified Post Danmark as an exciting company; itwas the right size, was a market leader, and had the potential for further devel-opment,” says Søren Vestergaard-Poulsen, partner in CVC. “But it was only pos-sible to take over about 25% of the shares, and it wasn’t normal for us to ownsuch a small holding. This is a perfectly normal procedure for the Danish statewhen selling shares in its companies because selling only 20–30% at the outsetmakes it possible to carry out a gradual privatisation that everyone will be ableto live with. In the long term we want to buy more, but we have the patience towait until the time comes. In this situation the Danish state acts as a commercialowner. It strives to have fully independent companies and to run them accordingto the right governance principles. This is very positive to experience.”

Working through the board“We found it difficult to see where the synergies might be for the other centralEuropean companies because what do a German postal company and a Danishpostal company really have in common? We entered into the process, and themore we learnt about the company, the more exciting we found Post Danmark tobe. And at the same time we could see a number of areas where we could play animportant role,” says Søren Vestergaard-Poulsen.

“Obviously we can’t have access to the company in the same way that we do in,for example, Danske Trælast. In Post Danmark we would only be able to workthrough the board because we would be a minority shareholder, but we hadsome clear ideas of how our investment could produce a more viable company.”

New co-owner in placeThe negotiations with the Danish Ministry of Transport and Energy fell intoplace, with the result that the private equity fund CVC Capital Partners took over22% of the shares in Post Danmark for DKK 1.27bn, while a further 2.5% was setaside for an employee share scheme for the 22,000 or so employees in PostDanmark. Finally, 0.5% was reserved for an incentive programme for managerialemployees in Post Danmark.

Post Danmark is prepared for a liberalised postal market



InvestmentCVC in 2003




“The fact that CVC has busi-nesses in all the Europeancountries clearly opens doors.It makes it easier for us to present our ideas for the futurepostal service because we have already made two majorpostal investments and know the market.”

Søren Vestergaard-Poulsen,

partner, CVC


CVC also entered into an agreement with the Danish state to the effect that itcould sell its shares back to the state at the market price after five years if, con-trary to expectation, the state failed to sell more shares to CVC.

Belgium also enters the sceneIn parallel with the negotiations to privatise Post Danmark, CVC had been nego-tiating with the Belgian state concerning possible involvement in the Belgianpostal service. The Belgian state was keen to have Post Danmark and CVC as astrategic partner so that it could gain insight into modernising the Belgianpostal service.

“This was an interesting proposition, but it was also a big bite for a company likePost Danmark,” says Helge Israelsen, CEO, Post Danmark. “I thought we couldprobably tackle the manoeuvre better with CVC on board. We made a good team:us with the experience and good head for the business, and CVC with the soundfinancial prerequisites.”

In October 2005 Post Danmark acquired La Poste for DKK 2.2bn.

New professional partner on boardIn response to the question of whether the day-to-day work and the board meet-ings have changed significantly, Helge Israelsen gives the following answer:

“Perhaps our board meetings have changed a bit, but there’s no revolution.We’re still owned by the Danish state, only now we also have a very active boardmember in the form of CVC. I really believe that CVC inspires us to exercise finan-cial discipline. They take an active part in board meetings with a good eye forwhere something could go wrong, and they ask good, relevant questions.”

A tour of other postal companies“Today we have achieved a good position in central Europe and can move for-ward on several fronts. For example, together with CVC we are visiting the otherEuropean postal companies and discussing the possibilities for future cooper-ation,” says Helge Israelsen.

A state-run postal company has to deliver mail six days a week to all addresses atestablished prices. This doesn’t change regardless of the ownership, and theconcession was given as a condition and part of the framework. But an EU liber-alisation will change the conditions for all postal companies from 2011.

“CVC did really well, and grad-ually the others fell away. In March 2005 CVC enteredinto final negotiations with the state. So although we our-selves had probably expectedsomething with one of the big players, we actually endedup with CVC as temporary co-owner. And this has beenstimulating for our business.”

Helge Israelsen, CEO, Post Danmark


Background

Around the turn of the millennium outdated production and innumerable prod-ucts were killing Royal Copenhagen. Major changes were needed if the illustri-ous crafts company, founded in 1775, was to pull through. New factories in theCopenhagen suburb of Glostrup and in Thailand were part of the solution. Andactive ownership with the private equity fund Axcel has been crucial.

In 2001 Axcel invested in Royal Scandinavia, which at the time was a conglomer-ate of mainly Nordic companies with strong brands in the categories of porcelain,silver, glass and ceramics. Royal Scandinavia consisted of the porcelain factoryRoyal Copenhagen, the Swedish glassworks Orrefors Kosta Boda, the Copenhagendepartment store Illums Bolighus, the Swedish ceramics company Boda NovaHöganäs, the Italian glassworks Venini, and a large number of properties.

Upon joining Royal Scandinavia’s ownership circle, Axcel’s team worked withthe company’s management and the new board on reviewing the many units inthe group. Nikolaj Vejlsgaard, partner in Axcel, explains the strategic considera-tions relating to the investment:

Strong brands but no synergies“It was clear to us that Royal Scandinavia was rich in assets but poor in earnings.And there were no obvious synergies. Or at least they hadn’t been realised. At thesame time, there were a number of strong brands that would have a much betterchance of developing and blossoming in their respective markets if only theywere given greater independence.”

Vejlsgaard explains that the desire was therefore to create profitability andadded value for the individual brands, and that this should be achieved by:B Simplifying the business structure – and creating a clear division of responsi-

bilities and greater financial transparencyB Splitting the group into independent companiesB Focusing on the biggest brands – Royal Copenhagen, Georg Jensen, Orrefors

Kosta Boda, Illums Bolighus and HolmegaardB Divesting non-core activities and properties (Italian glass, ceramics etc.)

Royal Copenhagen an independent company againAt the end of 2001 Royal Copenhagen was once again made into an independentcompany, and a huge effort began to focus on costs and both further develop andrenew the brand.

“Royal Copenhagen had cost-intensive, outdated production and innumerableproducts,” says Nikolaj Vejlsgaard. “These were two important issues that hadto be addressed. First and foremost we wanted to carry out a review of the prod-uct range, where we eliminated those products that were selling too little. Wealso put a lot of effort into product development, at the same time aiming for amuch more targeted marketing campaign in key markets. Royal Copenhagen’sproducts should be on gift lists all over the world.”

Development, but not at the expense of the brand“Before Axcel came along we were considering how we could renew productionto reduce lead times,” says Peter Lund, CEO, Royal Copenhagen. “Our historicfactory in Frederiksberg in Copenhagen was outdated with inefficient processesand very long lead times. It took a full 53 days for a product to pass through the

A piece of Danish history for the pleasure of even more people



InvestmentAxcel in 2001

Revenue2002/2003: DKK 386m2007: DKK 489m

EBITDA2004: DKK -87m2007: DKK 63m

Number of employees2004: 5072007: 575

“It was clear to us that Royal Scandinavia was rich in assets but poor in earnings.And there were no obvioussynergies.”

Nikolaj Vejlsgaard, partner, Axcel


production system. This was simply too expensive, and the company was ill-equipped for modern production. At the same time we didn’t dare just move apiece of Danish history from one day to the next. We might have risked wreckingthe brand overnight.”

“We therefore decided to move all our administration and some of our produc-tion to our new factory in Glostrup in 2003, at the same time moving other pro-duction to a newly built factory in Thailand. This means that we still have a con-siderable part of our competences here with us in Denmark. This is the case, forexample, with new developments, design, materials knowledge etc. At the sametime, we have reduced the lead time to three to five days throughout our produc-tion,” says Peter Lund.

Asians crazy about Danish porcelain“Today 65% of our production is at our modern factory in Thailand. Here you cantake a tour and see the craftwork being carried out as has always been possibleat our original porcelain factory in Frederiksberg. And there is great interest inthis because 35% of our revenue is now in Asia,” Peter Lund continues.

Board has cutting-edge expertiseWhen Royal Copenhagen became an independent company, a new board wasappointed. Originally its members were from the executive management ofRoyal Scandinavia, but gradually it acquired more external members with rele-vant cutting-edge expertise and with sector and industry knowledge.

“Obviously we had to be very gentle with the brand,” says Nikolaj Vejlsgaard. “Itwas a huge responsibility to have part of the Danish national heritage in ourhands, but the fact is that the company was threatened with closure and wasn’tmaking any money at all. So the time had come to introduce new competences,for example in relation to branding, logistics, financing and sales.”

The entire management, including CEO Peter Lund, were given the optionthrough warrants to subscribe for shares corresponding to 8% of the capital inRoyal Copenhagen.

Axcel owns 70% of Royal Copenhagen and is working with the management tochange the illustrious old company from a strong production-oriented companyinto a far more market-oriented and market-driven company. More than a thirdof the revenue now comes from brand-new products launched within the lasttwo years.

“We have introduced a number of very strong com-petences to the companythrough the board, which is a valuable sparring partner for the management.”

Peter Lund, CEO, Royal Copenhagen


Background

TDC is the most-discussed transaction in Denmark in recent times, and the inter-est has not diminished since the spectacular deal in 2005 when NTC, a syndicateowned by Permira, Blackstone, APAX, Providence and KKR, took over. Today anew management is in place at TDC, and the debt is quickly evaporating. TheDanish government’s tax intervention was unexpected, but according to KurtBjörklund, NTC’s chairman and a board member of TDC, the developments inthe company are positive.

From divisional structure to integrated solutionsTDC plays a vital role for the Danish teleinfrastructure and is also a major com-pany measured by number of employees and economic importance. Since theprivatisation in 1994 TDC has been through a major change process as a result ofwhich the traditional fixed-line business now constitutes an ever smaller pro-portion of revenue, while mobile telephony and broadband have grown prolif-ically. However, TDC is no longer a growth company. All major telecompanies inEurope are experiencing falling earnings due to increasing competition, andthis has also put TDC under pressure.

“We were aware that TDC was a possible investment in 2004,” says KurtBjörklund. “We could see that a number of opportunistic investments had beenmade in different parts of Europe, but that in the long term it would not be pos -sible to build up a strategic mass outside the Nordic region. We therefore sawTDC as an obvious focus case that would also present an opportunity to carry outoperational improvements,” continues Kurt Björklund.

“Prior to NTC’s takeover TDC was organised into various divisions – fixed-line,broadband, mobile etc. This was reasonable enough at the time when the areaswere being developed, but today many customers, specifically in the businessarea, lump all teleservices together, and this was difficult to deliver. It was there-fore necessary to restructure TDC so that we could offer customers better inte-grated solutions. Furthermore, the costs were far too high in relation to othertelecompanies in Europe, and there was an urgent need to do something aboutit,” says Kurt Björklund.

New management to focus the companyIn 2006 Henning Dyremose replaced Kurt Björklund as chairman of the board,which created a vacancy for a new CEO at TDC. In 2006 the replacement wasfound: Jens Alder in Switzerland. He had extensive international experience ofthe teleindustry and was regarded as the right person to take on the task of fo-cusing and improving TDC’s operations.

“I quickly discovered that, measured by most parameters, TDC had poor key figures compared to the best-run telecompanies in Europe,” says Jens Alder.“However, while operations were far from good enough, there was an extremelysound cash flow, though the respite would be short-lived due to the decline inthe fixed-net business and the increased competition, which every year wouldmake a big inroad into our reserves if we let matters take their course. So it be-came clear to us that we needed to create an ‘internal crisis’ in the company if wewere to succeed in time at making TDC a competitive telecompany. And it wasnecessary to do something radical if TDC was to be profitable in the longer term.”

“Our owners have been criticised, among other things, for taking TDC into fartoo much debt, but this is an unfair criticism,” says Jesper Ovesen, TDC’s CFO,

Essential focusing gives a stronger TDC



InvestmentNTC in 2005



Number of employees2004: 18,565 (TDC A/S)

2007: 17,390 (Nordic Telephone Company Holding ApS)

“I quickly discovered that,measured by most parameters,TDC had poor key figures compared to the best-run telecompanies in Europe.”

Jens Alder, CEO, TDC


who has a background with, among others, LEGO, Novo Nordisk and DanskeBank. “They simply came up with the capital structure that matched the compa-ny’s cash flow, and today you can see there are no problems at all with servicingthe debt as we develop the company. We are making major investments in,among other things, IT systems, but it’s clear that the latest tax intervention hasmade it more difficult to achieve our targets. In 2007 alone the tax interventioncost around 7% of our profits.”

Good investment in spite of tax interventionShortly after NTC took over TDC, the media, politicians and others began focus-ing on what the new owners wanted with the company. This was no great sur-prise given that at the time, in 2005, the TDC deal was one of the biggest privateequity fund acquisitions in Europe, and who owns a company of TDC’s size andimportance is definitely a matter of relevance to the Danish public.

“We can fully appreciate now that we should have been quicker in finding aDanish chairman of the board to front the company and that we should not havespent resources on the legal case against ATP,” says Kurt Björklund.

“But it wasn’t easy because with a deal of this size there are a lot of things to takeinto consideration and not much time to make decisions. Our Danish lawyers alladvised us to push for squeeze-out, and at the time we thought it would be ben-eficial for us to avoid being listed. Today we have a sound cooperation with ATPand no longer regard it as a problem.

However, we are finding it difficult understanding the government’s restrictionson the right to deduct interest. This affects an investment that has been made onthe basis of certain other assumptions, and hence applies retrospectively. In ouropinion, it would have been good policy-making to apply the so-called grand -fathering principle so that the intervention would only have affected later trans-actions. But that aside, we are very satisfied. We are sure that TDC is a good in-vestment for NTC, and that TDC will continue to be a healthy and strongcompany in the future,” concludes Kurt Björklund.

“We can fully appreciate nowthat we should have beenquicker in finding a Danishchairman of the board to front the company and thatwe should not have spent resources on the legal caseagainst ATP.”

Kurt Björklund,

chairman of the board, NTC


Background

In 2002 Vest-Wood, the Nordic manufacturer of inside and outside doors, gaineda new investment and cooperation partner in the form of Axcel and Polaris. Thishelped move the company up into a whole new league, and now the company ispart of the global door manufacturer Jeld-Wen.

The company Vest-Wood had the craftsmanship, the experience, and an import-ant position in the Nordic market for doors. The private equity funds Axcel andPolaris had the visions, the strategy, the inclination and the money.

Even before the acquisition Axcel and Polaris had devoted considerable re-sources to understanding Vest-Wood’s potential. “We spent a long time prior tothe acquisition familiarising ourselves with Vest-Wood, not least in order to un-derstand the internal possibilities for improvement – but also to map the acqui-sition possibilities in Europe,” says Per Christensen, partner in Axcel.

Great potential for growth“From the very outset Vest-Wood was an interesting business case for Axcel andPolaris. We could see a number of expansion opportunities in a highly fragment-ed market with numerous smaller players. And Vest-Wood was facing a neces-sary generational change that should ensure the future growth,” says partnerViggo Nedergaard Jensen from Polaris, which together with Axcel was respons -ible for the ownership and development of Vest-Wood from 2002 to 2005.

Fresh working capital was needed. The stock exchange was at a standstill, andthe board did not want to gamble on more acquisitions. Vest-Wood could nottherefore make essential investments. This was a problem because they hadshown that they were good at integrating the companies they had already ac-quired and achieving good synergies. On the operating side, it was problematicthat the company had traditionally worked with large inventories of both rawmaterials and finished products. This tied up unnecessary resources that couldhave been used to develop the company.

Lacking a team that could take the pressure off the management“We saw a company with good prospects for growth and increased profitability,but where the management needed a shot in the arm to move on,” explains part-ner Per Christensen from Axcel. “We decided to delist Vest-Wood from theCopenhagen Stock Exchange and then launched a 100-day programme in whichwe mapped the areas that could raise the value of the company significantly.”

Three main goals were set:B Greater organic growth – partly by developing the sales sideB Reduced production costs – partly by looking at whether the production had

to be located in the Nordic region, where wages are highB Acquisitions to secure Vest-Wood a leading position in the European market

Vest-Wood’s future strategy was formulated with these three goals in mind. Thiswas done collaboratively by a new industrial board, the company’s manage-ment, Axcel’s and Polaris’ internal people, and a range of consultants.

Getting the necessary working calm“We would undoubtedly have taken a battering on the stock exchange if we hadannounced in a half-year statement that we had spent a lot of money on analysis

Private equity funds created Europe’s biggest door manufacturer



InvestmentAxcel and Polaris in 2002Exit in 2005




“We saw a company with good prospects for growth and increased profitability, butwhere the management needed a shot in the arm tomove on.”

Per Christensen, partner, Axcel


and strategy work to set the company’s future course,” says Asbjørn Berge, whowas the group CEO when Vest-Wood was listed. “It was therefore a welcome andimportant process that Axcel and Polaris took us through when they invested inVest-Wood – in terms of both competences and capital. We gained working calmfrom being delisted, and the private equity funds’ systematic and thoroughprocess showed us a strategic direction that we had not seen ourselves.”

Irritatingly pedantic“The process has been instructive. Axcel and Polaris were irritatingly pedanticwith their close follow-up, but it has produced results,” says Asbjørn Berge. “Itforced us to ensure consistency between the plans that we made and the resultsthat we achieved. Once we had done our homework, they were willing to makethe necessary investments. And last but not least, the incentive schemes that themanagement group were offered were a positive driving force. We all had a com-mon interest in the project succeeding.”

Asbjørn Berge was the CEO under Axcel's and Polaris’ ownership and continuedin the position until November 2005, when Vest-Wood was sold to the US compa-ny Jeld-Wen, one of the world’s leading manufacturers of doors and windows –and also the management’s preferred buyer. Asbjørn Berge is now CEO of BergeInvest.

According to Asbjørn Berge, the results were as follows:B Several years’ negative organic growth was turned into positive organic

growth in just one yearB Production costs were reduced considerably as a result of a well-considered

and well-implemented relocation of selected production tasks from theNordic region to Estonia

B Two important acquisitions were made: the German building materials com-pany Pfleiderer, and Austria’s largest door manufacturer, Dana Türenindustrie.This led to a crucial consolidation through which Vest-Wood clearly becamethe largest European door manufacturer

In response to questions concerning whether moving production was problem-atic and the employees’ response, Asbjørn Berge explains: “The mood in thecompany had already been such for a number of years that the employees knewfull well that the next logical step would be to move parts of the wage-intensiveproduction. At the same time, it would be the only correct course of action in order to ensure the company’s long-term competitiveness. Through Axcel andPolaris we acquired a board that could focus on the company and think in a market-oriented way. And this meant that we could concentrate on product de-velopment and the needs of the market.”

“Vest-Wood would not havedeveloped into Europe’slargest door manufacturerwithout the active ownershipof Axcel and Polaris.”

Asbjørn Berge, former CEO,

Vest-Wood

“A private equity fund brings more than just capitalin the event of an owner-generational change in a company: access to a broad, industrial board network, short decision-making processes, daily sparring on operations and company acquisitions, and access for the previous owner to co-investment. The business plan raises the ambitions of the company – based on experienceand cooperation.”

Viggo Nedergaard Jensen, partner, Polaris Private Equity

Viggo Nedergaard Jensen has been a partner in Polaris Private Equity sinceits establishment in 1998.

Previously he worked as an investment banker with Nordea and ABN AmroAlfred Berg (1986–98) and for the Danish Ministry of External Affairs andthe World Bank (1974–86).

Viggo Nedergaard Jensen has a master’s degree in political science fromthe University of Aarhus, Denmark.


Robert Spliid is an MSc (Political Science and Economics) and has worked for var-ious European banks trading and advising on securities and financial derivativessince 1982. This has taken him from Denmark to Switzerland, Portugal, Germanyand Luxembourg. Robert Spliid is the author of the book Private equity funds – Råpengemagt eller aktivt ownership [“Private equity funds – asset strippers or active owners”], and since 2000 he has been a regular commentator for the Danishdaily business newspaper Dagbladet Børsen, where each week he provides cuttinginsight into developments in the financial markets. Currently Robert Spliid is responsible for Saxo Bank’s German activities.

Denmark’s first industrial development company comes into being in 1967 whenthe Danish bank Privatbanken and the Swedish bank SEB join forces to establishIncentive. The purpose of the company is to further develop small companies ac-cording to the Swedish model with a view to subsequent stock exchange listing.Right up to the end of the 1980s Incentive is the most serious attempt at creatinga Danish platform for the development of small companies.

Unfortunately, Incentive completely fails in its objective, and in 2004 the activ -ities are discontinued after 37 years. The Incentive fiasco is due to the fact thatthe company gradually develops into a conglomerate of companies with no mu-tual synergies and no exit strategies. No milestones are set for the individualcompany to achieve in the further development phase, and the management isnot motivated by being involved in the ownership circle. Furthermore, nothingis done to optimise the financing structure through leverage as we see in modernprivate equity funds.

All the same, Incentive marks the start of a brand-new concept; it is recognisedthat all companies go through different periods of life and that it is not necessar-ily optimal to have the same ownership in all these periods. And the develop-ment companies have a mission to carry out in those periods of the company’slife when there is a need for major changes to take the company forward.

However, it is only with the arrival of private equity funds in Denmark at the startof the 1990s that a broad understanding of time-limited company ownershipevolves. The new players bring not just a new financing concept, but also a con-siderable amount of industrial know-how. Above all, however, they develop abranched network that allows them to seek out potential development candidatesand to find the right place to put them when the objective has been achieved.

It is primarily the Nordic private equity funds that are active in Denmark, andthey take their starting point in existing network structures. Many of the transac-tions carried out in the 1990s involve the acquisition of affiliates by conglomer-ates. As new focused owners, the private equity funds succeed in further devel-oping the portfolio companies to either stand on their own feet or take theirplace in a more meaningful industrial context.

The private equity funds demonstrate their competences on the financial side inparticular, but new players are involved in the industrial area too. Quick improve-ments in cash flow are made by reducing inventories and changing paymentterms. The suppliers’ payment deadlines are put back, while the customers’ aretightened. Production is concentrated at fewer factories or relocated to countrieswith lower costs. The logistics is streamlined to shorten lead times, and the needfor warehousing is minimised.

The goal of the private equity funds is nearly always to increase the acquiredcompany’s growth, either by expanding the sales area or by adding new products

Private equity funds can make mistakes too

Background

Introduction

VI.


to the range. This often requires investment in new distribution structures or theacquisition of new companies. The aim is to move the company up into a leaguethat makes it appealing to an even bigger company, makes it ripe for introduc-tion on the stock market, or at least ensures benefits on the purchasing side.

The private equity funds mainly enjoy success with industrial companies with alow level of technology. Here the improvement potential is generally linked toindustry-independent balance sheet optimisation, and this minimises the riskof wrong decisions. By contrast, the funds fare less well with companies that areactive in markets undergoing rapid change.

The gearing of the acquired companies is only possible because the private equi-ty funds exercise extremely tight control over the liquidity of the portfolio com-panies. But this also means that significantly lower cash flow than budgeted forcan put the financing into such difficulty that the mission fails. So the more un-predictable the future cash flow, the more likely that the private equity fundswill come a cropper.


There can be many reasons why cash flow fails to develop as anticipated. Themarket conditions are obviously crucial, but company-specific factors also playa part. At any rate, if we scrutinise almost 30 years of private equity funds inDenmark, we can adduce four company-specific factors:1. Fundamental change in the sales markets2. Unforeseen technological changes3. Inability to generate new products or synergies4. Weak governance

The private equity funds have occasionally found it difficult spotting changes inthe sales markets. This has affected investments such as Osteometer, Fona, EETNordic, ILVA and Løgstør Rør, to name just a few. In the first four cases the own-ers failed to turn things around and the companies had to be divested at a con-siderable loss. In the last case they succeeded, but not before the company camenear to bankruptcy. Løgstør Rør is discussed earlier in this report, but what wentwrong with the other four acquisitions?

In 1996 the UK private equity fund Doughty Hanson buys Osteometer Meditech,which has developed a scanner for measuring osteoporosis. In 1995 the compa-ny has 15% of the world market, turns over DKK 100m, and has post-tax profits ofDKK 28m. But the new owner visualises a growing market share and a fivefold in-crease in revenue by 1998, when Osteometer will be ripe for listing on theNasdaq stock exchange.

Shortly after the takeover, intensive focus is directed at the Japanese market,which is way ahead in the treatment of osteoporosis. But completely unexpect-edly the Japanese government stops subsidising the treatment. And where thereis no treatment, there is no need for diagnosis. During the 1996/97 financial yearthe company’s losses are so great that shareholders' equity evaporates and theshareholders must now stump up a further DKK 25m in equity. At the same time,the strategy is amended to focus on the large US market. The listing is provision-ally postponed until 2000.

However, the US market offers no success either. During Doughty Hanson’s two-year ownership Osteometer loses DKK 60m, and it is now acknowledged that thecompany cannot grow by its own efforts. In September 1998 Osteometer is soldto the US medical company OSI. The private equity fund’s investment is lost, andDanske Bank, as the financing bank, also has to write off a large sum.

Fona is taken over by Industri Kapital in 1997. From the outset the objective is tocreate a Nordic giant within the retail trade in televisions and radios. In just afew years Fona’s revenue should grow from DKK 1.5bn to DKK 5bn, which is re-garded as the critical amount for achieving a strong negotiating position withthe suppliers.

However, at the end of the 1990s the method of selling televisions and radios en-ters a significant change process of which the private equity fund is oblivious. Inline with technological developments there is a sharp drop in the prices of enter-tainment electronics. And whereas previously televisions and radios were soldas furniture – matched to the living room after great deliberation by the wholefamily – electronic products are now sold as staple goods with an anticipatedshort service life. Customers no longer demand detailed advice, but expect tofind the product on the shelves at the right price if they happen to drop in on aTuesday afternoon.

VI. Private equity funds can make mistakes too

Fundamental change in thesales markets

Osteometer

Fona


By contrast, the competitor Elgiganten, which is owned by the Norwegian com-pany Elkjøp, has been monitoring the market changes. The Norwegians set upone huge business after another using the concept of an extensive productrange, low prices and minimal advice. Consequently, by the end of the 1990s theDanish television and radio market is characterised by stiff competition inwhich the customer can negotiate considerable discounts.

Fona fails to make the necessary adjustments and continues expanding accord-ing to the old model involving detailed advising of the customer. Fona’s estab-lishment of Electric City using the same concept as Elgiganten is certainly a stepin the right direction, but the discount chain accounts for an all too small pro-portion of Fona’s total revenue.

The attempt to expand the product range with computers and mobile phonesalso fails. If individuals aren’t getting their computers given to them by an em-ployer, they are buying them on the Internet directly from the manufacturer.And just a year after Fona enters the market as a teleservice provider, the compa-ny has to concede that the critical mass is not within reach. The teleactivitiestherefore have to be sold to TDC.

In 2001 the company’s equity is negative to the tune of DKK 95m and the capitalbase has to be increased by a further DKK 210m. Fona is a long way from its rev-enue target of DKK 5bn, and in fact revenue has been falling steadily since thetakeover in 1997. At the same time, the chain has not been able to deliver a profit,and the private equity fund now sees only one way out: a merger with its com-petitor Fredgaard. The merger negotiations do not take place from a position ofstrength, and the private equity fund sees its ownership of the joint company fallto 40%. Only in 2005 does the new company show a modest profit, and in 2006the private equity fund sells its ownership to the UK company DixonInternational, Elgiganten/Elkjøp’s owner.

The market changes also affect the IT distributor EET Nordic, which CVC takesover in 1997. On the threshold of the Internet boom it is assumed that there is alot of money to be made in the distribution of IT equipment, so the course is setfor expansion. CVC buys another distributor, taking EET Nordic’s revenue abovethe DKK 1bn mark. A Nordic heavyweight within IT distribution is created.

But in 2001 the IT bubble bursts, as does the market for IT equipment. Revenueand earnings nosedive, and at the end of 2001 ETT Nordic has negative equity ofDKK 200m. However, CVC sticks to its investment and in 2007 manages to sell thecompany after ten long years in the portfolio.

The prominence and fall of Aston IT can probably be linked to the technologicalchanges that are taking place around the turn of the millennium, but the mainreason for the company’s problems has to be sought in market changes that thecompany’s management and owners fail to foresee.

In 1998 CVC turns to the IT entrepreneur Peter Warnøe, who is tasked with bring-ing together large sections of the fragmented Danish IT industry into one effect -ive company. In a short time he succeeds in merging seven companies with 300employees into the new company. But this is just the start. In the next thousanddays Aston is to move up to earnings of DKK 200m and employ 800 to 1,000 em-ployees, who together will sell consultancy services worth DKK 1bn. The plan isto introduce the company on the stock exchange in 2002.

EET Nordic

Aston IT



Initially the core competence is the implementation of ERP systems, but in June2000 it is decided to extend the focus area to developments on the Internet, notleast within e-commerce. The booming market causes the management to crankup expectations even further, and the goal is now a company with 2,000 employ-ees that will be listed as early as 2001. Three months later there is even talk of along-term goal of 4,000 to 5,000 employees.

But almost immediately Aston begins to feel the effects of declining IT markets,and the year ends with a loss of DKK 248m. Nevertheless, the management de-cides to move the company to a brand-new, 12,000-square-metre head office atTeglholmen in Copenhagen.

Revenue continues to plummet in 2001, and the cash flow is now very negative.By April 2001 it is clear that the equity has been lost and that restructuring isneeded. Debt reaches DKK 1.1bn, and a restructured company under the name ofAston Business Solution ends up in Nordea’s ownership. In August 2004 the bankmanages to sell the greatly decimated IT company to the US company Tectura.

In the first instance these events cause Nordea to sharpen up its policy on for-eign private equity funds. The bank duly declares that it does not wish to giveloans to private equity funds that are not Nordic-based.

It can be difficult to distinguish unforeseen technological changes from generalgovernance problems because maybe the changes could have been foreseen afterall. In any case, the teleproducer Partner Electric and the recycling company RGS 90 fail because their respective technologies prove to be uncompetitive.

In 1999 Partner Electric in the southern Jutland town of Vojens is something of asuccessful business. The company produces advanced telephone switching sys-tems, and one of the popular products is the “least cost router”, which automat-ically finds the cheapest operator for a given call. 96% of production goesabroad, and in 1998 the growth company is able to show post-tax profits of DKK58m from revenue of DKK 185m.

In 1999 the company is taken over by the UK private equity fund Bridgepoint.The stated goal for the year is revenue of DKK 250m, and in the following threeyears the DKK 0.5bn mark is to be reached. The company will then be ready forintroduction on the booming Neuer Market stock exchange in Frankfurt.

No one has any doubt about the company’s promising growth prospects. InSeptember 1999 Partner Electric is awarded Børsen’s Gazelle Prize for SouthJutland, in the following month it gets the Confederation of Danish Industry’sInitiative Prize for South Jutland, and in January 2000 it receives the equivalentprize for the whole of Denmark. But from now on things go steadily downhill asthe market is swamped by competitors with superior technologies.

The company attempts to stave off the competition by investing in switching sys-tems for IP telephony but is unable to prevent a freefall in revenue and earnings.And Bridgepoint is not minded to invest more capital in the company. Before 2001is out, Partner Electric has gone bankrupt with debts of more than DKK 500m.


Partner Electric

Unforeseen technological changes


In 2002 the Finnish private equity fund CapMan sees great prospects in Danishenvironmental investments. The private equity fund buys a 42% interest in RGS 90, which specialises in recycling building and construction waste. The pri-vate equity fund’s paid-up capital is to be used to build two recycling plants. Thefirst plant will convert contaminated sludge into carbogrit for use in sandblast-ing, while the second plant will process environmentally hazardous PVC.

The PVC plant soon faces two big problems. It can only process totally pure PVC,which is rarely the case with PVC waste (and in the meantime it has also becomepossible to send PVC for treatment in the Far East for next to nothing). And at thesame time the sludge-processing plant has serious commissioning problems,which causes major delays in the production and sale of carbogrit. In 2005 thevalue of the plants has to be written down by half, and the bottom line for 2005 isa negative DKK 450m. In 2006 the company is sold to DSV Miljø.

Often the core element in the development strategy of private equity funds is tobring several companies together within related areas in order to create syner-gies. In other instances they buy companies with earnings-generating produc-tion within an area that is being phased out. The challenge is then to developnew products to replace the product that is being phased out.

But the strategy certainly doesn’t work every time. Nycomed, which is owned byNordic Capital, is in the process of finding a successor to the company’s onlyblockbuster, Pantoprazole, and it is too early to assess whether it will succeed.Time Systems, though, definitely failed to find a successor to its paper calendar.

When CVC buys the calendar company Time Systems in 1997, the business hasgood cash flow for the price. However, it is clear to CVC that the paper calendar ison the way out in favour of electronic calendars, so-called personal digitalassist ants (PDAs).

Time Systems therefore begins developing tele-interfaces for the two large elec-tronic calendar systems, Outlook and Lotus Notes. The problem is that the mo-bile Internet is still based on the slow WAP technology. When Palm introducesits first PDA, the game is up and Time Systems is finally ousted from the marketfor electronic calendars. This leads the company to attempt a facelift on the pa-per calendar in 2003, but without success. In the same year Time Systems is de-clared bankrupt with negative equity of DKK 411m.

In 1999 the two private equity funds Nordic Capital and Polaris join forces to buyMicrotronic, which manufactures components for hearing aids. The sound in thehearing aids is of high quality, and the two private equity funds anticipate thatusers of mobile phones will demand the same high quality in future. And there isa much bigger market for mobile phones than for hearing aids.

However, Microtronic has neither experience of producing for the mass marketnor access to the mobile phone manufacturers. The solution is therefore to buyKirk Acoustics, which is the leader in the manufacture of microspeakers, and thegoal is to create synergies between the two companies with a view to a listingwithin a few years. The two companies are later amalgamated into the companySonion.

The acquisition of Kirk takes place at a time when the company’s only cus-tomers, Ericsson and Nokia, are enjoying considerable growth. But in 2001 sales

RGS 90

Inability to generate new products/synergies

Time Systems

Sonion



of mobile phones plummet and Ericsson decides to outsource its production toFlextronic. Consequently, Kirk loses its biggest customer, which accounts for70% of its revenue.

The private equity funds now choose to focus more on research and moving tolow-wage countries, but this requires the injection of a further DKK 100m in eq-uity. They start up production in China, but in 2006 it becomes necessary tomove a large part of the production to the even cheaper Vietnam.

However, they never succeed in creating the synergy between hearing aids andmobile phones that the private equity funds had originally counted on. WhenSonion is sold to the US electronics company Technitrol in 2008, it is primarilythe hearing aids that the Americans are interested in.

It is important for private equity funds that the management has the same inter-ests as the shareholders, and this is ensured most easily by involving them in theownership. But common interest is not in itself a guarantee of success. It maywell be that the management simply lacks the competences needed to furtherdevelop the company. This can be due either to a lack of market knowledge or alack of understanding of the company’s financial drivers.

Although Fona’s problems in the first instance are due to the change in the methodof selling televisions and radios, many of the problems could probably have beenavoided with more focused governance. Long after the market has begun to de-cline, the management continues to open new shops in the hope of winning mar-ket shares. The decision to change the accounting system in a period of major mar-ket changes also proves fatal when the implementation process goes wrong,leaving Fona without basic information on developments in sales and earnings.For four years the board accepts a weak management, which is only replacedwhen it is too late to straighten out the company.

The listed company Superfos is taken over in 1999 by the US industrial companyAshland, although Ashland is only interested in the company’s road division.The rest is sold on to the private equity fund Industri Kapital, which mainlywants to further develop the packaging activities. The goal is to reintroduceSuperfos on the stock market as a strong packaging company within five to sixyears.

In the first instance former CFO Per Møller is put at the helm and tasked with di-vesting marginal activities and cutting costs. He is replaced in 2001 by KimAndersen, who previously managed the food packaging division. As an industryman he is deemed to be more competent to further develop the company.

In 2002 the competitor Jotipac is acquired, and at the same time Superfoschanges to a function-based organisation across its factories. Three factories areclosed, while new capacity is established at the other factories. But things don’tgo entirely smoothly. There are delays in the delivery of new production equip-ment, and this results in considerable back order problems. The production hasto be partly outsourced at increased cost for both production and transport. Atthe same time, the IT systems are not geared to the merger, and this results in asignificant increase in faulty deliveries.

However, misfortunes seldom come alone. Immediately prior to the sale toSuperfos, a number of employees at Jotipac’s affiliate have left the company to

Superfos


Fona

Weak governance


set up the competitor Mipac. From the outset the new company works with ahigh degree of automation and low costs. The result is that in subsequent yearsSuperfos loses a whole host of customers to its Swedish competitor.

In 2004 there is gradually more control over capacities, but there is no organicgrowth, while earnings in several markets are directly declining. The company isnow facing a new challenge: rising raw material prices, which can only bepassed on to the customers to a limited extent. In March 2005 major changes aremade in the board, and in autumn of the same year Kim Andersen is fired. He islater replaced by the Swede Hans Petersson, who is given responsibility for put-ting the company back on the growth track. The company is still in IndustriKapital’s portfolio and not ready for sale.

The four years that ILVA spends in private equity fund ownership are also markedby weak governance with a lack of expertise in risk management. In 2003 theDanish furniture chain is bought by the UK private equity fund Advent. The goalis to develop the company into an international furniture house modelled on thesuccessful IKEA. Briton Martin Toogood, who brings experience from the UK fur-niture house Habitat, is given the task of implementing the strategy.

Malmö in Sweden is the first target for a business outside Denmark. The proxim-ity to ILVA’s other businesses in Denmark makes it easy to handle the logistics,thereby ensuring success in advance. But Toogood has ambitions to grow in theUK market, which he knows like the back of his hand. In a short period of time heopens three new furniture houses in England, not sparing the costs, but it soonemerges that revenue is far below expectations. Even the sound cash flow fromthe Danish businesses is not able to compensate for the big losses on the otherside of the North Sea.

The UK has received heavy investment, but Advent now has to concede that theinvestment cannot be salvaged. The private equity fund therefore refuses to in-ject more equity, and in 2007 Kaupthing (as the loan-financing bank) takes overILVA. The company is subsequently sold on to the Icelandic furniture groupRúmfatalagerinn.

The examples show that private equity funds are far from being successful on every occasion. Each investment constitutes a risk (albeit calculated) and successis not guaranteed in advance. Although mistakes can be learnt from, this doesn’tmean that future mistakes can be avoided altogether. There will always be risksassociated with buying a company regardless of whether the buyer is a private equity fund or an industrial investor.

ILVA

Interviews:

Views on private equity

funds andDVCA’s

guidelines

77 Danish Venture Capital and Private Equity Association77 Danish Venture Capital and Private Equity Association77 Danish Venture Capital and Private Equity Association

In order to ensure that the guidelines satisfy a broad cross-section of the interestgroups that can be said to have relevance for private equity funds, DVCA hasdrawn on the services of an external reference group comprising:

Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO)Jan Schans Christensen, professor of corporate law, University of CopenhagenJørgen Mads Clausen, chief executive officer, DanfossBjarne Graven Larsen, chief investment officer, ATPPeter Schütze, head of retail banking, NordeaBente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

The reference group has followed the debate on openness in private equityfunds and gathered opinions and experiences from its respective networks.DVCA has held individual meetings with all the members, and by way of conclu-sion convened a general meeting to discuss the guidelines in their entirety. Theviews of the reference group members on the guidelines are evident from inter-views reproduced in this chapter. However, it must be stressed that the responsi-bility for the guidelines rests solely with DVCA.

In connection with the drawing up of the guidelines, DVCA interviewed all themembers of the external reference group, which has monitored the work. Theseinterviews express the views of the members on the guidelines and on the workof private equity funds in general. Please note, however, that in this report theviews of the Danish Confederation of Trade Unions (LO) are represented by itspresident, Harald Børsting.

The views of the reference group members are supplemented with those of part-ner Niels Peder Nielsen, Bain & Company, and of Mads Øvlisen, Novo Nordisk’sformer CEO.

Background


Harald Børsting has been active in the trade union movement since 1974, when hefirst became a shop steward at the Priess & Co. fish factory in Glyngøre. In 1980 hebecame the section president of the General Workers’ Union (SiD) in Nordsalling,and in 1989 he became the education adviser of SiD. In 1995 he was electedConfederal LO Secretary and member of LO’s Executive Board. Harald Børstinghas devoted himself to labour market issues since the 1980s, and since 1995 he hasplayed a vital role in negotiations on labour market reforms under successive gov-ernments. At LO’s congress in 2007 Harald Børsting was elected to succeed HansJensen as President.

There are both good and bad private equity funds. The good ones contribute toincreased growth and employment through the development of companies andjobs, while the bad ones probably achieve most of their returns by paying lesstax.

Seen through wage-earners’ eyes, it is vital that private equity funds respect andcontribute positively to the Danish model. As owners, private equity fundsshould attach prime importance to cooperation and negotiation with shop stew-ards and employees at the individual workplaces. This is also part of DVCA’sguidelines. I hope that all private equity funds will also work for this in practiceregardless of whether they are Danish or foreign.

Wage-earners, pension savers and the public generally need greater insight intohow private equity funds work. There is no doubt that at the moment private eq-uity funds are too closed. So it is good that DVCA has taken this initiative.

I see the guidelines as a reasonable first step that the industry has taken to makeits members more open to the outside world. In particular I am pleased that theguidelines emphasise cooperation with employees and social responsibility ininvestments. It is also satisfying that all private equity portfolio companies willnow be reporting on developments in employment etc. as part of the manage-ment review in their annual reports.

However, the guidelines could easily have gone further in terms of openness. Forexample, the funds should continuously report on their returns to a greater ex-tent because this is relevant for pension savers who have put money into thefunds through pension institutions. I hope that DVCA will look at this issue inthe coming years.

There are numerous media prophecies concerning the future of private equityfunds. I’ll refrain from making specific predictions myself. However, I will saythat private equity funds are in no way a new phenomenon, but something thatwe have seen for a number of years now. What is new is that the industry hasgrown and begun to act differently. In LO we need to establish our own view ofthe matter, and we have decided to carry out our own review of this area. I anti -cipate that this will be finished by the end of the year.

The guidelines are a reasonable first step

What is your view of private equity funds?

Background

What do you think of DVCA’s guidelines?

What is the future for private equity funds?

VII. Interview: Harald Børsting, president, Danish Confederation of Trade Unions (LO)


“There are both good and bad private equity funds. The good ones con-

tribute to increased growth and employment through the development

of companies and jobs, while the bad ones probably achieve most of

their returns by paying less tax.”


Jan Schans Christensen is a professor of corporate law at the University ofCopenhagen. He has worked in the legal sector for a number of years and been amember of the High Level Group of Company Law Experts appointed by the EU Commission. He has also been a sparring partner for the Nørby Committee.

Self-regulation isn’t always a good idea, but it has to be said that in many cases it can actually make regulation unnecessary. If the concerns or criticisms thatare raised in, for example, public debate can be addressed by the industry itself,there will often be no reason to legislate in the area. I don’t think we should restrict the opportunity for companies to manage their affairs as they see fit unless there really is a need to do so. Self-regulation is based on the expectationthat at least the majority of players will follow the guidelines that the industryagrees on. This can often be done if the players themselves agree on the need forself-regulation and have helped to shape, and hence influence, the content ofthe self-regulation. Many players will do a lot to act in accordance with theadopted self-regulation. On the other hand, there will need to be a certainamount of latitude and voluntariness since the players are not the same and may well have wishes and needs that make departure from the rules reasonableand justified.

I guess it’s always possible to implement legislation aimed at a certain type ofcompany or an industry. But having such legislation can be more or less appro-priate or reasonable. In order to be able to decide whether on the whole thereshould be legislation, you must first ask what the problem or challenge is. Thenyou need to look at whether it’s necessary to legislate or whether the desired out-come can be achieved in another way, for example through self-regulation. If thelatter isn’t possible, for example because the players aren’t satisfactorily follow-ing the rules that the self-regulation lays down, legislation can be an option.However, one issue that must always be taken into consideration when legislat-ing but which can’t always be resolved in practice, is the extent to which the leg-islation has “side effects” or inappropriate consequences. The price of legisla-tion has in some cases proven to be that companies or activities are affected thatweren’t actually causing any problems.

It is characteristic of private equity funds that the owner plays a very active rolein the company, and this means that the board often has a different role to, forexample, the board of a listed company. In this way the board’s role is similar towhat you see in limited companies where the shares are controlled by, say, thefounder or a fund. The close contact between owner and board has the advan-tage, on the one hand, that the owner can easily ensure that the board, andhence the executive management, acts in accordance with the owner’s wishes.This is crucial from the point of view of value creation. Conversely, the structureplaces major requirements on the owner’s ability to manage his or her influencein such a way as to maintain the separation between owner and management.The management doesn’t just look after the owner’s interests, and the owner ob-viously has to respect this.

Another issue is that you often see the boards of private equity portfolio compa-nies gaining new competences because lots of private equity funds have an ex-tensive industrial network to draw on. The professionalisation of the board workthat this implies is positive.

Voluntary guidelines are usually the way forward

Why is self-regulation a good idea?

Background

Is it possible to make special legislation for private equity funds?

What is your view of the typical governance model of private equity funds?

VII. Interview: Jan Schans Christensen, professor of corporate law, University of Copenhagen


You can always discuss how far self-regulation should go. As I see it, the guide-lines reflect the trend we are seeing internationally applied to a Danish context.In my opinion it is reasonable to work with the “comply or explain” principle,and it is also appropriate that the limit for which companies are covered by theguidelines is reporting class C. The experiences that will now be gained willshow whether the guidelines are serving their purpose. And in this regard it isimportant that there is ongoing evaluation and adjustment of the guidelines sothat they continue to be current.

What do you think of DVCA’s guidelines for private equity funds?

“The boards of private equity portfolio companies are gaining new

competences because lots of private equity funds have an extensive

industrial network to draw on. The professionalisation of the board

work that this implies is positive.”


Jørgen Mads Clausen was a member of the board of Struers for four years whenEQT owned the company. He holds a number of honorary positions, includingchairman of the executive committee of the Danish National Advanced TechnologyFoundation.

I think the criticism of private equity funds has been far too severe, and I’mspeaking from personal experience. I was on the board of Struers [Struers devel-ops, manufactures and distributes materialographic solutions] when EQTowned the company, and I can say without hesitation that all the decisions thatwere taken by the board would have been taken in the same way if it had beenthe board of Danfoss. By way of example, during EQT’s ownership some import -ant investments were made in a new IT system that the previous owner had putoff. Furthermore, all the employees were given a bonus of half their monthlysalary when the company celebrated its 125th anniversary. That’s not exactly theimpression you get of private equity funds if you read the newspapers today.

The problem is that in some cases there isn’t sufficient support for the manage-ment from the owner. It takes competent capital to develop a company, and youdon’t get that without owner focus. Here private equity funds are often highlydedicated because for them ownership is a project in itself. Private equity fundscan take the necessary decisions on restructuring and offshoring that formerowners may for various reasons find difficult to implement. In the long term thiscreates stronger business.

Generally speaking private equity funds can also help tackle the big challenge ofthe many generational changes in Danish business. If the next generation can-not or doesn’t want to take over operations, a private equity fund can take thecompany on to the next level and ensure a smooth transition between ownergovernance and a more long-term governance model that is not quite so person-dependent. It’s beneficial for competition that it isn’t always a competitor thattakes over a company when the founder retires.

I’m sure there’s just as big a difference between private equity funds as betweenother companies. But it’s clear that the new guidelines will probably make a dif-ference when it comes to openness and dialogue. I’m certain that we’ll never seethe TDC story repeated. It’s important that you say who you are and what yourlong-term plans for the company are. You owe that to the employees and the sur-rounding community.

All companies regard tax as a cost. Danfoss is no exception, and in this regardyou have to remember that a company’s tax payments depend on a number ofthings such as how much you invest and where your main activities are located.There are therefore a number of countries where Danfoss pays more tax than inDenmark because we are an international company.

It’s clear that you have to observe the law, but I believe that companies providethe greatest benefit by creating lots of good jobs in Denmark, not by overfocus-ing on corporation tax yield, which is hardly the most important thing in theoverall accounts. Having said that, I presume that all private equity portfoliocompanies are paying their taxes as they ought to.

Criticism of private equity funds has been far too severe


Background

How can private equity fundsmake a difference?

How can private equity fundsimprove?

What do you think of private equity funds and tax?

VII. Interview: Jørgen Mads Clausen, CEO, Danfoss


“Private equity funds can make the necessary decisions on restructuring

and offshoring that former owners may for various reasons find difficult to

implement. In the long term this creates stronger business.”


Bjarne Graven Larsen is the chief investment officer at ATP, where he is respon -sible for ATP’s investments, including ATP’s commitment to private equity. ATPhas around DKK 14bn placed in private equity out of a total sum under manage-ment of around DKK 400bn.

At ATP we’re very satisfied that DVCA has drawn up these guidelines. They are athorough piece of work, and we’re pleased that they’ve chosen the “comply or ex-plain” principle because this compels the funds to relate to all sections of theguidelines. We would like to have seen an even greater degree of openness, in-cluding with regard to the individual funds’ returns, but on the other hand wemust also give the guidelines a chance and then see where they’ve taken us whenthey come to be revised at some point.

If we didn’t invest in private equity funds, we would cut ourselves off from halfthe world’s investment opportunities because the value of these non-listed com-panies is as high as the value of listed companies. But it’s important to bear inmind that there are both good and bad private equity funds.

It’s a matter of putting together your investments in the best possible way. That’swhy a large number of investors – especially institutional investors – have de-cided to increase their investments in unlisted shares quite considerably in re-cent years, and there is no reason to believe that this trend will change.

So the question is whether you can imagine the institutional investors beingable to invest in unlisted shares themselves. The answer is that very few are bigenough and competent enough to do so, and if private equity funds are offeringa product where you get professional handling of your investment, the best solu-tion for pension savers is for us to have a division of labour where we sit on thesidelines while the private equity funds take care of handling the companies.

In many cases things are going well because the buying private equity fund hasfocused the companies and introduced growth strategies that the stock marketdidn’t believe in. This has been the case at, for example, Vest-Wood, DanskeTrælast and Falck. These companies have done better than the stock market ex-pected. And the same is true of a number of other companies.

Yes! The term “private” is very apt. But private equity funds could benefit byopening up a little more in terms of information. It isn’t in the interests of the pri-vate equity funds, the companies or the investors for this closed nature to be per-ceived, albeit unfairly, as having something to hide.

However, you have to remember that there must be especially stringent require-ments for listed companies. This is tied in with the fact that a listing is somethingvery special where you have to appeal to everyone to create interest in puttingmoney into the company’s shares. The information that the company gives to themarket must therefore be sufficient for investors to decide to invest in the compa-ny. The same does not apply for non-listed companies, which often only appeal toa few professional investors that have completely different prerequisites.

The requirements that apply with regard to publication of, for example, annual financial statements and articles of association are the same for listed and non-listed companies. Having said that, it is our belief that the private equity funds’lack of openness in a number of situations – especially in connection with the acquisition of listed companies – has damaged private equity funds.

Good that private equity funds are opening up

What do you think of DVCA’s guidelines for private equity funds?

Why do you invest in private equity funds?

Background

Have private equity fundsbeen too closed?

VII. Interview: Bjarne Graven Larsen, chief investment officer, ATP


It is worth noting that Danish private equity funds have been relatively open,which could perhaps serve as an inspiration for foreign private equity funds. Asinvestors we can also help to demystify the subject by reporting on our ownershipof private equity funds. This is a development that should gain momentum in thecoming years.

ATP will certainly consider dropping an investment if it doesn’t meet our re-quirements. For example, we chose to drop investments in the US supermarketchain Wal-Mart because it doesn’t observe ILO conventions, and we are now outof companies that manufacture cluster bombs. In other instances we have optedto stay in order to influence the companies from within, but this is far from theeasiest solution.

What does it take for you todrop an investment?

“If we didn’t invest in private equity funds, we would cut ourselves off from

half the world’s investment opportunities because the value of these

non-listed companies is just as high as the value of listed companies.”


Peter Schütze has a master’s degree in political science and economics and beganhis career with Privatbanken, which is now part of Nordea. As well as his positionswith Nordea Bank Denmark as head of retail banking and member of the group ex-ecutive management, he is chairman of the Danish Bankers Association and hasbeen chairman of Danish Ship Finance for a number of years.

Private equity funds are far from being a new phenomenon, but in my opinionthey take the practical elements from the old conglomerate mindset and linkthem with a modern and efficient financing approach where the funds get thebest out of the capital they have available.

The crucial difference between a traditional conglomerate and a private equityfund is the way in which the ownership is organised and financed. The modelcan seem more aggressive, and this may have been significant in how the publicperceives private equity funds today.

However, from a bank’s perspective there are a lot of good things to be said aboutprivate equity funds. First and foremost they are an important supplement to themore traditional forms of ownership – personal ownership, the cooperative so-ciety, fund-owned and listing. Also, we know – in the same way as with person-ally owned companies – who the owners are. This is very important when newcapital needs to be introduced because normally we have a fixed set of rules forwhen we expect owners to intervene in such a situation. The opposite of this islisted companies, where it can be difficult to get the owners together when thereis a need for fresh capital in a crisis situation.

We can see that in recent years the returns of many private equity funds havebeen high. But I must admit that it can be difficult to make out what the basis forthe results actually is. It may be the effect of active ownership, but it could alsobe due to financial gearing in a market that has generally been on the up. It iscertainly a matter of importance how the value is created, and I also thereforethink there is a big need to have more light shed on this, and DVCA has a lot of re-sponsibility for this. We also therefore welcome DVCA’s new guidelines. There isa need for more openness and transparency.

There are many good reasons for this. Take, for example, the rules for listed com-panies, which have become hugely complex. This makes being listed costly anddifficult. A large number of personally owned companies have to find new own-ers every year, usually due to generational change. And here a private equityfund can be a good solution.

Although a private equity portfolio company is often more geared than a listedcompany, paradoxically we as bankers often find it easier to get the “owners” ofa private equity fund to step in with fresh cash in a crisis than if we compare witha listed company. It can be almost impossible to get owner capital for a listedcompany in a crisis due to the requirements for drawing up a prospectus. Thisalone takes several weeks, and then it can be too late.

Private equity funds must explain how they create value


Background

How do you think private equity funds create value?

Why has private equity fundownership become more widespread in recent years?

VII. Interview: Peter Schütze, head of retail banking, Nordea, and chairman of the Danish Bankers Association


There is a trend in many European countries for governments to want to priva-tise public infrastructure. Often it is a combination of the state wanting revenueand needing to modernise the infrastructure. But unfortunately it’s not alwaysclear what the aim is even though we know things could operate better if the run-ning was taken care of by a private player. The flip-side of the coin is the opposi-tion that can arise if taxpayers can’t see through the financial aspects of the pri-vate equity fund ownership structure.

Are there limits to what typeof company a private equityfund can own?

“A large number of personally owned companies have to find new owners

every year, usually due to generational change. Here a private equity

fund can be a good solution.”


Bente Sorgenfrey is a qualified teacher and chairwoman of the Confederation ofProfessionals in Denmark (FTF), which is the central organisation for a total of450,000 members, including nurses, bank workers and pharmaconomists. She is amember of the Danish Economic Council (DØR) and of the board of directors ofDanmarks Nationalbank, vice-chairwoman of the Employees’ Capital PensionFund (LD), and a member of the board of ATP.

A good owner is able to create the platform for long-term development of theworkplace. This is an enormous responsibility. As an owner you have to remem-ber that the employees don’t just go to work to earn money. The majority of themwant a fun and challenging workplace where they are involved in the decision-making.

It is therefore vital that in its governance concept the individual workplace setsaside resources, including time, for professional development and knowledgesharing. The governance style in the workplace must be adventurous and giveroom for reflection and analysis of the day-to-day work in order to be able to con-tinuously develop the quality of the product or service. The management musthave support for this strategy from the owner.

I’m on the board of both LD and ATP, both of which are involved in private equi-ty funds directly through LD Equity and ATP Private Equity Partners and in di-rectly through extensive investments in various funds. The private equity fundsthat operate in Denmark and in which we have invested are, as far as I can tell,responsible owners, and at the same time we have seen some very good returnsin recent years.

But what we are seeing is that private equity funds often make a lot of changes inthe workplace that have a direct influence on the number of jobs and the specificworking conditions. These may often be necessary changes, but if the employeesare to go along with them, it is important that they are involved and informedabout what is going on.

The problem can be that from time to time it’s difficult to understand whychanges are necessary if things are otherwise going well and the company ismaking lots of money. The employees can’t look into a crystal ball like a skilledmanagement, so we naturally place great emphasis on private equity funds nottrying to produce a financial result that is not sustainable in the long run.

I think they cover what you could reasonably expect. We might have wantedmore in some areas, but let’s see how they work out and then we'll take anotherlook in a few years as planned.

The guidelines will hopefully make it easier to represent employees who also in-vest in private equity funds. It is necessary for private equity funds to open them-selves up more to prevent myths arising.

Need for changes must be easily understandable

What makes a good owner?

Background


What do you think of DVCA’s guidelines?

VII. Interview: Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)


“Private equity funds often make necessary changes, but if the

employees are to go along with them, it is important that they are

involved and informed of what is going on.”


Niels Peder Nielsen is a partner with responsibility for Bain & Company’s Danishactivities. Bain & Company is an international consultancy firm with around 4,000consultants worldwide. Bain has been a consultant on more than half of all majorEuropean LBO transactions in the last ten years and also occupies a prominentposition in the Danish market. Niels Peder Nielsen has 16 years’ consultancy expe-rience, holds an MBA from MIT Sloan School of Management, and has worked ona number of the biggest Nordic LBO transactions in connection with commercialdue diligence, strategic and financial planning, and exits.

My view is that if the private equity industry responds to questions and demandsrelating to openness, information and ethics, this should serve to keep the busi-ness healthy and future-proof. It should make possible a clear answer to how thegreatest possible value is created for investors – and hence for society. Really it’sexactly the same principle that the private equity fund model is based on; it’shealthy for many companies for outsiders to come in, look with fresh eyes at thestrategic direction, and demand better results. This can create a healthier business.

So let me start by saying that I support DVCA’s code and its efforts to create acommon information practice. It’s vital that the management companies andthe funds responsibly provide information on their activities. In relation to theirinvestors, in relation to wider stakeholders, and – not least – in relation to them-selves. Ultimately, the funds have a vested interest in being clear on what valuethey bring. If they are not able to do this, there will be a question mark againsttheir licence to operate.

A whole industry has grown up around private equity funds comprising financ-ing banks, investment banks, property companies, accountants, lawyers andconsultancy firms – like the one I come from: Bain & Company. For many yearswe have been advising a number of the biggest global funds, and we in theNordic region have provided consultancy in connection with a large number oftransactions and subsequently worked with the private equity portfolio compa-nies. We are as such a part of the complex and must, like the other parties, beaware of our own role and how we are performing it.

Thanks to the huge focus on some private equity funds’ impressive returns, therewill undoubtedly be continued growth in the resources that are lodged with pri-vate equity funds.

Fundraising is considerable and ongoing:B In 2007 USD 578bn was raised by PE funds, of which USD 240bn by buyout

fundsB In the first quarter of 2008 USD 166bn was raised, of which USD 80bn by buy-

out fundsB Almost 100% of surveyed international institutional investors will allocate the

same or more to PE in the coming yearsB Overall, the same institutional investors plan to allocate 10.5% of their capital

to PE, compared to 8.2% in 2007B At the end of 2007 there was USD 817bn in non-invested but committed capital

Institutional investors will invest more and more in private equity funds, andmore private investors will want to share in the success. We estimate an increaseof more than 20% from institutional investors in the coming years. Furthermore,we estimate that private investments in alternative asset classes will grow by17% annually in the coming years in the Nordic region. A large proportion of thiswill be in PE funds.

The future of private equity funds – trends and challenges

Why are the guidelines forprivate equity funds useful?

Background

Is the private equity fundmodel here to stay?

VII. Interview: Niels Peder Nielsen, partner, Bain & Company


A high percentage of the funds’ money comes from pension savers, and this hasgenerated a lot of polemic in the last few years concerning the role of private eq-uity funds and management companies. In this regard, it has become clear thatthe funds and their advisers need to paint a clear picture of how the industrycontributes to the creation of social value.

Although it has aroused great attention that some directors, partners etc. havemade big profits, the understandable concerns that have followed in the wake ofthis appear not to be well-founded: the funds are not doing away with jobs anymore than other owners, they are not restricting growth, and they are not killinginnovation. These are prejudices that are discredited in surveys by, among others,the World Economic Forum and also by Bain & Company’s own experiences. Butit may be useful to look at what other dilemmas might crop up as a result of theincreased popularity of private equity funds.

You can get a long way with information, and as I already said this will hopeful-ly benefit the funds themselves and their investors so that the demand for infor-mation on their results and strategies will sharpen their focus on value creation.In other words, they will become more skilled.


In my opinion, the purpose of a private equity fund is to create a return for its in-vestors. And it is through value creation for their investors that the private equi-ty funds gain their social legitimacy. The investors and the management compa-nies are also free to impose requirements or observe moral codes in relation to,for example, corporate social responsibility. Personally I think this will be posi-tive, but it can’t be the starting point.

Although the private equity funds might choose to take on tasks that no one elsewill take on as a risk-bearing investor, or otherwise take on a social responsibil -ity, ultimately it is when their investments actually bear fruit and real value iscreated that they gain their social legitimacy.

In its survey of 59 Danish transactions in the period 1990 to 2006 ATP PEP hasshown that the return on the Danish investments of private equity funds hasbeen high. This is great, but it should probably also be viewed in the light of historically good acquisition opportunities at the start of the period and a subse-quent historically long-lasting boom. Our surveys over longer time periods inter-nationally show decidedly lower figures and a strong correlation with develop-ments in the stock markets. At the same time, the greatly increased competitionfor individual transactions, among other things, means that it is doubtfulwhether things will get better in future.

This is risk capital, and you shouldn’t be lulled into thinking that there is always“easy money” to be made over time. It is therefore paramount for the private equi-ty funds to systematically focus on operating improvements in their companiesin future. This picture represents the private equity funds’ real challenge for thefuture. They need to make their portfolio companies into even better businesses.

The most obvious common feature of the funds that generate high returns is thatthey do so through active involvement. They have a clear strategy of creatinghigher growth through innovation, more satisfied customers, lower costs, clearerstrategy and fewer assets. Our research, which is based on Bain & Company’s investments in private equity funds over the last 35 plus years as well as our con-sultancy work in the sector, shows that the earlier the fund actively intervenesand works on value growth, the better the chances of its delivering a success.

One survey shows that almost 90% of surveyed managers in private equity fundsregard it as crucial to go in and ensure operating improvements in the portfolio

What should give the private equity fund model its legitimacy?

How do the best funds create value?

VII. Interview: Partner Niels Peder Nielsen, Bain & Company

4.0X

3.0X

2.0X

1.0X

0.0X

Figure VII.1. Returns from active ownership.

Average Average – late activism

Average – early activism

Return – X times the investment

Source: Bain survey.

1.3X

1.7X

3.4X


companies. However, the survey also shows that the majority do not consider thatthey spend sufficient resources creating these operating improvements. In otherwords, there is a long way to go before we reach the point where all funds consis-tently pursue and are able to secure real value creation.

If you look at the funds currently operating in Denmark, you have to say that thelarge funds are strong by virtue of their international networks and expertise.They can often bring in highly skilled people both in the day-to-day managementand at board level. At the same time, through their global overview they are ableto embrace international opportunities better than local funds.

The strength of local funds is that they often have a good nose for what is happen-ing locally and can use their local networks to go in and create operating im-provements. Furthermore, we see that they are often more willing to take on amore time-intensive, active role in small companies than the larger funds, and assuch have turned this into an expertise.

The success of the private equity fund model has led to ever bigger funds, andthis is not without its problems.

Table VII.1. The investors’ concerns.

39.5% of international institutional investors think there is too much money in the megafunds

51.0% foresee the megafunds destroying the common interests between investors and the PE companies

34.8% think that PE is a niche market and that there is now too much money in the funds to generate high returns in future

24.5% are frustrated by the fact that access to top funds is impossible without contacts

The fact that slightly more than half of surveyed investors express concern overthe biggest funds is a clear signal to the industry that there is a potential crisis ofconfidence that needs to be addressed. And here information alone cannot helpbecause the parties’ focus and purpose will simply be perceived as potentiallyout of step with the expectations of the outside world. This is because if fundsreach capital levels in the order of DKK 45–50bn, the so-called megafunds, thereis a latent risk that the management companies’ focus will change. When suchlarge proportions of the earnings of the management companies come fromfixed fees that more than meet their needs, it becomes less necessary to focus oncreating high returns.

We must also realise that greater capital means investment in bigger companies,exactly as we have seen in Denmark. This places different and increased require-ments on the private equity funds’ method of working with value creation. Inother words, the interests of the management companies and the investors driftapart, and this can be dangerous for the investors, both large and small.

In my view, there are two key challenges for private equity funds in future.Firstly, they need to get even better at creating real value in their portfolio com-panies. This means they must be more active and get better at implementing re-sult-generating improvements. This is a fundamental challenge for many funds.Secondly, they must continuously act in keeping with their investors’ interests toavoid a crisis of confidence. In my opinion, the increased openness, and with itthe attention from outside parties, is positive: it will help to turn the focus ontothe industry’s own goals, resources and actual results. This is positive for theprivate equity fund model and the industry in the long term.

Dilemmas ahead – the megafunds

VII. Interview: Partner Niels Peder Nielsen, Bain & Company


Mads Øvlisen is now adjunct professor of corporate social responsibility atCopenhagen Business School. Formerly, he was with Novo Nordisk as CEO and,prior to that, chairman of the board. He was LEGO’s chairman of the board from1996 to 2008. Mads Øvlisen has been chairman of the Copenhagen Center forSocial Responsibility and was a founding co-chair of the European Academy ofBusiness in Society (EABIS). From 2000 to 2007 Mads Øvlisen was also chairmanof the board of the Royal Danish Theatre.

I have been perceived as a critic of private equity funds, but that is untrue be-cause I’m sure that a lot of companies would have been badly off without privateequity funds. I have some first-hand experience because the private equity fundBlackstone bought an interest in Legoland in 2005 and made the parks part ofthe Merlin Entertainment Group. There have been some obvious synergies andoperating improvements, which has meant that both parties have since donewell. LEGO is now a co-owner of Merlin, and the shareholding is now worthmuch more to LEGO than the “old” Legoland.

Also, by virtue of their experience of recruiting managers and their financial capacity, private equity funds have in several cases played an important role infar from simple generational change situations.

My main criticism of private equity funds is that many are not good enough at ex-plaining themselves. It has almost become a given that financial companies arebad at non-financial reporting. And the global private equity industry is no ex-ception. It has been sleeping in class, and it is now paying for this in the form oflack of confidence from wide stakeholder groups.

The question should probably be put differently: How should companies workwith CSR? I don’t believe that important companies can omit to take a positionon issues such as social responsibility and global inequality. Goldman Sachshas introduced GS Sustain and has carried out a survey of how the world’s lead-ing companies are faring in this area which speaks for itself. Companies thathave been working according to CSR principles for a long time have done betterthan their competitors in a number of important industries. Sustainability is onthe way to becoming integrated in general business procedure. It is a require-ment that companies today are transparent, and this reinforces the trend forsustainability to become integrated in the business models.

Similarly, McKinsey & Co. has just published a survey showing that CSR will be acrucial strategic competition parameter in future. Climate challenges, whicheveryone now agrees are a fact, look to have found a commercially sustainableplatform, which means that a very large number of companies have gone for greenbusiness models – to the great benefit of shareholders and the rest of society.

The same is now happening in the social area. The challenges that we are facingin the form of a lack of global cohesion can only be overcome through partner-ships involving state, industry and civil society, so new business models willalso be developed to support this development.

Greater transparency is vital if private equity funds are to find appreciation andapproval for their business model, and we should therefore welcome DVCA’s ini-tiative in drawing up guidelines on openness. It is a step in the right direction.Personally I will now look forward to surveys by DVCA that can illustrate howprivate equity funds create value. If the public is going to be able to accept the

Private equity funds also have a social responsibility


Background

Why work with CSR?

What should the private equity funds do now?

VII. Interview: Mads Øvlisen, adjunct professor, Copenhagen Business School


very large capital gains that individual partners and investors can accumulate, itmust be on the basis of a survey of where the value comes from. It would bepreferable if it could be shown that the value is created through active owner-ship and not through fiscal thinking or simply by financial gearing.

As regards the need for implementing the CSR mindset in portfolio companies, itis essential that the owner should always be involved in these types of decision.So the private equity funds obviously also have some thinking to do in this area.

At Novo we took the decision to go down this road in 1979, and it was ten ortwelve years before we got to grips with it to the point where the CSR mindsetwas incorporated in the organisation and in our brand. Today methods havebeen developed that allow this to be done far more effectively. I’m not saying it’seasy, but I don’t believe there’s any way round it.

“I have been perceived as a critic of private equity funds, but that is

untrue because I’m sure that a lot of companies would have been badly

off without private equity funds.”

“There is a great need for capital for use in generational changes and in expanding small and medium-sized companies. Private equity fundssuit these companies well because we combineprivate ownership with close dialogue amongowner, board and management. In my job I findexciting companies and develop them with theirmanagement in order to sell them on under new management when the targets have beenachieved. Companies are like living organisms:vulnerable, but with the potential to develop under the right conditions. This is one of the things that makes my work interesting.”

Søren Møller, executive vice president, partner, LD Equity

Søren Møller joined LD Equity in 2006 from Handelsbanken Capital Markets,Corporate Finance, with responsibility in the Nordic region for the health -care sector and for transactions within services, shipping and the transportsector in Denmark.

Prior to that, Søren Møller headed up the corporate finance and communi-cations departments at Sophus Berendsen (1995–2000), was general manager and group treasurer in the Burmeister & Wain group (1990–95)and responsible for the finance section at DFDS (1985–90).

Søren Møller originally trained in shipping, holds a BSc from CopenhagenBusiness School, and has participated in several management trainingcourses at IMD and Harvard Business School.


Danish Venture Capital and Private Equity Association has a total of 27 privateequity fund members. Several of these are funds of funds (i.e. they allocate re-sources to private equity funds and do not make independent investments ac-cording to the LBO principle) or “family offices” (i.e. they invest family assets).This leaves a total of 22 private equity funds:

3iAltorAxcelC.W. ObelCapideaCapManCVC Capital PartnersDania Capital AdvisorsDansk KapitalanlægDeltaqEQTErhvervsinvest Nord EVOExecutive CapitalIndustri KapitalIndustri UdviklingJysk Fynsk KapitalLD EquityNordic CapitalNordic GrowthPolaris Private EquitySR Private Brands

Private equity funds in Denmark – an overview

VIII.

Introduction


3i was founded in 1945 and is domiciled in London. 3i Buyout buys controllinginterests in medium-sized European companies and works with the manage-ment to create significant additional value. 3i has a total of DKK 88.5bn in assetsunder management and 40 partners. 3i is listed on the London Stock Exchange.

3i’s current investments in Denmark include:Alpharma, pharmaceutical ingredients.

Louis Poulsen Lighting (now Targetti Poulsen), designer lamps.

Rovsing Dynamics, industrial measuring instruments.

Scandlines, passenger and freight ferry services.

Altor was founded in 2003 and is domiciled in Stockholm. Altor invests in medium-sized Nordic companies. Altor’s first fund, Altor 2003, has a capitalcommitment of just under DKK 5bn. Altor’s second fund, Altor Fund II, has acapital commitment of just over DKK 8.7bn. Altor’s investors are leading institu-tional investors from the Nordic region, elsewhere in Europe and the USA. Altorhas eight partners, one of which is located in Copenhagen.

Altor’s investments in Denmark include:Ferrosan, a leading Danish manufacturer of OTC medicines and haemostaticproducts for the health sector.

Aalborg Industries, the world’s leading supplier of marine boilers and inert gassystems.

Dansk Cater, the leading supplier of products and services for the catering in-dustry in Denmark and Sweden.

Wrist Group, the world’s leading provider of bunker oil and general ship supplies.

As yet Altor has no exits from Danish investments.

Assets under managementDKK 88.5bn

Investments in Denmark4

Exits1

Revenue in present companiesDKK 5.7bn

Assets under managementDKK 13.4bn (Altor 2003, Altor Fund II)


Exits0



Axcel was founded in 1994 and is domiciled in Copenhagen. The focus for Axcelis investments in medium-sized and large companies in Denmark and Sweden.Axcel has a total capital commitment in excess of DKK 6bn. From a strictly legalpoint of view, the capital is divided among three companies: Axcel I, Axcel II andAxcel III. Axcel has eight partners, one of which is located in Stockholm. Axcel’sfunds are broadly composed of Danish and internationally oriented investorswho can support the development of Axcel and the companies in which Axcelinvests.

Axcel’s current investments in Denmark include: Pandora Jewelry, a rapidly growing, family-owned jewellery company in whichAxcel invested at the start of 2008. Pandora’s core product is bracelets withmatching charms of precious metal and stones, which were launched in 2000and have since brought a doubling in revenue each year.

EskoArtworks, the market leader in packaging software and solutions for thepackaging industry in Europe, the USA and Asia.

Netcompany, one of Denmark’s leading IT consultancy companies within por-tal solutions and system integration.

Axcel’s previous investments in Denmark include: ICOPAL, Europe’s leading supplier of products for the protection of buildingsand structures, including especially roofing solutions, and the leading Nordiccontractor within roofing and membrane contracts in metal and sheet steel.

Logstor, formerly Løgstør Rør, which manufactures district heating pipes, wasbought in 1999 by a consortium comprising FIH, Polaris Private Equity and Axcelas principal shareholder. At the time of investment the company was the subject ofa large cartel case and close to bankruptcy, but it was developed into the marketleader within its industry under the new, more international name of Logstor.

C.W. Obel is an investment company that invests in medium-sized Danish com-panies with good earnings and competent management. The companies usuallyneed capital to expand, make acquisitions etc. An ownership of 20–100% is typ-ical for the investments.

C.W. Obel is therefore a relevant partner in connection with generational change,in tandem with other investors in a management buyout, or as a co-investor withthe company’s current owner.

VIII. Private equity funds in Denmark – an overview

Assets under management–

Investments in Denmark–

Exits–

Revenue in present companies–

Assets under managementDKK 6.6bn (Axcel I, Axcel II, Axcel III)


Exits18

Revenue in present companiesDKK 10bn


Capidea was founded in November 2006 and is domiciled in Copenhagen. Thefocus of Capidea is competitive small and medium-sized Danish companies withpotential for growth. Sector-wise, the focus is industry, trade, distribution andservice. Capidea has a capital commitment of DKK 750m. Capidea has three part-ners. In addition to institutional investors, Capidea’s fund includes a number ofwell-run companies and skilled business managers who are active in Capidea’snetwork.

Capidea’s current investments in Denmark include:K.P. Komponenter, one of Denmark’s largest and leading subsuppliers withinCNC-controlled machining.

EET Nordic, a European niche distributor of IT components and spare parts.

Jens J. Aagaard and Bræmer-Jensen Guldvarefabrik, which together consti-tute a leading distributor of jewellery mainly for the Danish market.

Inspiration, a leading retail chain within ironmongery, hardware and gift products.

As yet Capidea has no exits from Danish investments.

CapMan was founded in November 1989 and is domiciled in Helsinki. CapManhas three investment areas (CapMan Buyout, CapMan Technology and CapManLife Science). CapMan Buyout’s team has DKK 14bn in assets under managementdivided among 12 funds. CapMan Buyout’s team has 14 partners, one of which islocated in Denmark. CapMan’s B-shares are listed on the Helsinki Stock Exchange.

CapMan’s current investments in Denmark include:Anhydro, which develops and supplies i.a. production technology for the food,brewing, alcohol, chemical, pharmaceutical and paper industries.

CapMan’s previous investments in Denmark include:RGS 90, which converts and recycles waste.

Assets under managementDKK 750m


Exits0


Assets under managementDKK 14bn (all current funds)


Exits6




CVC Capital Partners was founded in 1981 and is domiciled in the UK. The focusof CVC’s investments is large industrial and service companies with stable cashflow and above-average performance. CVC has a capital commitment of DKK158bn divided among eight funds and has 27 partners. CVC’s funds have morethan 250 investors and include pension funds, financial institutions and fundsof funds with focus on long-term returns.

CVC’s current investments in Denmark are:Matas, which through a large number of shops all over Denmark sells personalcare products as well as products that contribute to a healthier lifestyle. TheMatas shops also sell OTC medicines etc.

Post Danmark, which provides a basic postal service for all customers inDenmark – both senders and receivers.

CVC’s previous investments in Denmark include:DT Group, which sells materials and related services for construction sites andhome improvements in the Nordic region.

Dania Capital Advisors was founded in 2003 and is domiciled in Copenhagen.The focus of Dania Capital Advisors is Danish companies operating within in-dustry, trade, distribution and service.

Dania has a capital commitment of DKK 600m and has four partners. DaniaCapital Advisors’ investors are Fonden Realdania and the partners in DaniaCapital Advisors.

Dania Capital Advisors’ current investments in Denmark include: Hammel Møbelfabrik, a leading manufacturer of quality furniture – primarilyflexible storage systems – sold in the north European markets.

BIVA, Denmark’s leading low-price furniture chain.

Novenco, a global supplier of system solutions within ventilation and fire pro-tection for marine, offshore and buildings.

Wiking Gulve, a niche manufacturer of high-quality plank flooring primarilyfor the Danish market.

As yet Dania Capital Advisors has no exits from Danish investments.

Assets under managementDKK 158bn


Exits4




Exits0




Dansk Kapitalanlæg was founded in 1984 and is domiciled in Copenhagen.Dansk Kapitalanlæg invests in and develops medium-sized Danish companieswith revenue of around DKK 100–500m. This is done with a view to long-termvalue creation.

Dansk Kapitalanlæg has a capital commitment of around DKK 900m and hasfour partners. The ownership includes Danske Bank, ATP, PFA, Nordea Liv &Pension, Augustinus, Danica, the Employees’ Capital Pension Fund (LD) as wellas partners and managerial employees.

Dansk Kapitalanlæg’s current investments in Denmark include: C.F. Nielsen, the world’s leading manufacturer of mechanical briquette pressesand briquetting solutions for industry and private customers.

KA Interiør, Denmark’s largest manufacturer of customised sliding door cup-boards and interiors for e.g. bedrooms and nurseries, kitchens, recreation roomsand offices.

Atomistix, which develops and sells software solutions for computer-basednanoscale research and development.

Dansk Kapitalanlæg’s previous investments in Denmark include:ENKOTEC, the world’s leading manufacturer of machines for mass productionof precision nails based on patented technology.

Synkron, Denmark’s first supplier of CM systems.

Deltaq – which is listed on OMX Nordic Exchange Copenhagen – was founded in2007 and is domiciled in Hørsholm north of Copenhagen. Deltaq invests in smalland medium-sized companies, usually with a need for a generational/ownershipchange or for capital and stronger management to ensure development and con-tinued growth.

In addition to many private shareholders, Deltaq’s ownership includes a num-ber of local financial institutes that, together with FinanssektorensPensionskasse and Købstædernes Forsikring, have invested around DKK 325min the company. Deltaq’s management has also invested in the company. Deltaqhas two partners.

Deltaq’s current investments in Denmark include:ElitePlast-Hammar Display, a plastics processing company that manufacturesdisplay solutions for the Nordic market as well as plastic articles for e.g. ma-chine shielding.

As yet Deltaq has no exits from Danish investments.



Exits0

Revenue in present companiesDKK 45m



Exits5



DANSK KAPITALANLÆG


The innovative investment company EVO was founded in 2007 and focuses onthe acquisition of medium-sized, well-run companies, mainly in the Nordic region. The acquisitions are made to further develop and ensure the individualcompanies’ continued success. EVO introduces the necessary competences andimproves the companies’ strategic positions. EVO aims to be the preferred part-ner of medium-sized companies in connection with a change of ownership. Theexisting management will often be retained or become co-owners, or a new man-agement will be identified to invest in the company together with EVO.

EVO has total assets under management of around DKK 900m divided betweentwo private equity companies: EVO Energy A/S and EVO Capital A/S. EVO’s in-vestments are managed by EVO Management A/S.

EVO’s current investments in Denmark comprise:Dencam A/S, which manufactures plugs, moulds and 1:1-models, mainly for thewind turbine industry.

Welcon A/S, which develops and manufactures towers and steel structures forthe wind turbine industry. The company specialises in customised solutions andhas built up solid experience over more than 40 years, which puts it at the cut-ting edge of technology.

Suntex A/S, which occupies a leading position within the sale of sun protectionproducts. Suntex A/S designs and sells standard and made-to-measure sun pro-tection products in the Danish and other Scandinavian markets.

Contrast A/S, which specialises in developing licence-based products within anumber of product categories, including children’s clothing, home textiles andaccessories.

Byggros A/S, which sells industrial products and building textiles to the indus-trial and building trades and the DIY segment.

As yet EVO has no exits from Danish investments.

EQT was founded in 1994 and has its head office in Stockholm. EQT invests pri-marily in market-leading medium-sized and large companies of high quality ingrowth industries. EQT also has funds that specialise in turnarounds and the financing of growth companies. EQT has more than DKK 80bn in assets undermanagement divided among 11 funds. EQT currently has 27 partners.

EQT’s current investments in Denmark include: ISS, one of the world’s leading suppliers of facility services with more than410,000 employees in 50 countries.

Dako, a global leader in cancer diagnostics.

EQT’s previous investments in Denmark include: Sabroe Refrigeration (Johnsons Controls), a world leader among manufactur-ers of industrial refrigeration machines.

IHI, a world leader in travel and health insurance.



Exits0




Exits5




Erhvervsinvest Nord A/S constitutes an independent business area in the SparNord Bank Group. Since 1988 Erhvervsinvest Nord has been investing in smalland medium-sized non-listed companies. The investments have been made on anumber of different occasions and have included both venture and private equi-ty. Erhvervsinvest Nord has always invested as a minority shareholder and oftenin conjunction with other professional investors with the same profile. In thelast few years there has been less investment activity than previously. At presentthere are eight companies in the portfolio.

Erhvervsinvest Nord’s current investments in Denmark include: Brynje, which manufactures and sells safety footwear.

Futarque, a technology company with strong competences within digital TV.

Saxotech, which develops and sells editorial software solutions for newspapersand magazines.

Weiss, which manufactures industrial boiler systems and energy supply solu-tions based on the burning of biomass.

Executive Capital is an investment company founded in December 2007 that pri-marily invests in small and medium-sized Danish companies within industry,trade and services. The company has a partnership circle consisting of 20 expe-rienced business people (called executives) who take an active part in screening,investment and development of the individual companies. The executives in-volved always invest their own funds and actively intervene in the strategy andbusiness development of the portfolio companies.

Executive Capital also works with selected private equity companies in connec-tion with the introduction of industry expertise and with active co-investingboard members in selected cases.

The company’s first investment is expected to be made in the third quarter of2008.



Exits1




Exits–




Industri Kapital was founded in 1989 and is domiciled in London andStockholm. Industri Kapital usually invests between DKK 400m and DKK 1bnper transaction. The companies must have stable cash flow and growth poten-tial. Industri Kapital prefers to have the majority shareholding in the acquiredcompanies and focuses on the Nordic region, the Benelux countries, and Franceand Germany.

Industri Kapital has more than DKK 40bn in assets under management dividedamong six funds and has 13 partners.

Industri Kapital’s current investments in Denmark include: Kwintet, Europe’s leading manufacturer and supplier of work clothes.

Superfos, which develops and manufactures easy-to-use, high-quality packag-ing solutions for consumers.

Industri Kapital’s previous investments in Denmark include:F-group, which comprises the radio/TV chains Fona and Fredgaard.

Hjem-Is Europa, a leading direct distributor of ice cream in the Nordic region.

Crisplant Industries, a leading manufacturer of industrial sorting and gas fill-ing systems.

HTH Køkkener, a leading manufacturer of kitchens in Denmark. HTH Køkkeneris an affiliate of Nobia AB, which was bought by Industri Kapital.

Industri Udvikling was founded in 1994 and is domiciled in Copenhagen.Industri Udvikling invests in small and medium-sized Danish manufacturingcompanies with revenue of DKK 50–200m. Industri Udvikling is always a minor-ity shareholder.

Industri Udvikling has around DKK 700m in assets under management dividedamong two funds and has three partners.

Industri Udvikling’s current investments in Denmark include: Omada, one of Denmark’s leading consultancy houses specialising in projectmanagement, SAP, IT management and process optimisation.

Danelec Electronics, which specialises in the design, development and manu-facture of electronic products for the maritime industry, especially black boxesfor ships.

Industri Udvikling’s previous investments in Denmark include: Fibo Intercon, which is currently a leader in the market for supplying machinesand equipment for manufacturing products in light clinker concrete.

Zealand Care, which provides services, IT and consultancy within the area ofthe disabled and elderly.



Exits46





Exits4



Jysk Fynsk Kapital was founded in 2005 and is domiciled in Copenhagen. Jysk Fynsk Kapital provides capital and professional management to small andmedium-sized Danish companies with the potential for significant valuegrowth.

Jysk Fynsk Kapital has around DKK 350m in assets under management. Jysk FynskKapital is backed by a number of business funds and investment companies.

Jysk Fynsk Kapital’s current investments in Denmark include: SkanDek Tagelementfabrik, which manufactures patented steel roofing ele-ments that are assembled into modules adapted to specific construction contracts.

Dansk Overflade Teknik, southern Scandinavia’s leading company in hot dipgalvanising, shot blasting, metal coating and paint treatment.

As yet Jysk Fynsk Kapital has no exits from Danish investments.

LD Equity was founded in 2005 and is domiciled in Copenhagen. LD Equity in-vests in Danish companies as both minority and majority owner. LD Equity caninvest in all company size categories, but generally focuses on companies withrevenue of DKK 200–1,000m, primarily within traditional industry, trade andservices.

LD Equity administers eight own and external funds and portfolios comprisingmore than 80 companies and a total capital value of DKK 7.5bn. LD Equity’s threeown funds – LD Equity 1, LD Equity 2 and LD Equity 3 – have a total capital com-mitment of DKK 6.7bn.

LD Equity is backed by the Employees’ Capital Pension Fund (LD) and a numberof institutional investors. LD Equity has six partners.

In addition to LD Equity’s own funds, the company also has a number of ex ter-nal investment mandates. These include Dansk Erhvervsinvestering, DanskInnovationsinvestering and PKA.

LD Equity’s current investments in Denmark include: R82, which develops and manufactures technical aids and appliances, general-ly for disabled children.

Gram Commercial, which develops, manufactures and sells refrigerators andfreezers for industrial use.

Da’Core, a leading company in its industry in the Nordic region that developsand manufactures garden cushions, furniture and parasols.

LD Equity’s previous investments in Denmark include: Carl Bro, one of the largest Scandinavian companies in engineering consultan-cy specialising in building, construction, water, environment, energy, industryand IT.

Kirudan, a market leader within the marketing, sale and distribution of medicaldevices for hospitals, doctors and nurses in Denmark.



Exits0



Investments in Denmark21 (LD 2 + LD 3)

Exits2

Revenue in present companiesDKK 5.7bn (LD 2 + LD 3)



Nordic Capital was founded in 1989 and is now domiciled in Stockholm,Copenhagen, Helsinki , London and St Helier, Jersey. Nordic Capital invests primarily in medium-sized companies in northern Europe.

Nordic Capital has a capital commitment of DKK 36bn divided among six funds.Nordic Capital’s investors mainly comprise a number of pension funds. NordicCapital has 17 partners.

Nordic Capital Advisory’s current investments in Denmark include:Kompan, which manufactures outdoor toys for playgrounds.

Falck, which provides rescue services and auto assistance.

Unomedical, which manufactures disposable articles for hospitals and thehealth sector around the world as well as infusion sets primarily used in insulinpump treatment.

Dangaard Telekom, which distributes mobile phones, smart phones and accessories.

Nordic Capital Advisory’s previous investments in Denmark include:Nycomed, which manufactures pharmaceutical products for hospitals and thehealth sector in general.

Sonion, one of the world’s leading suppliers of components for the mobilephone and hearing aid industry.

Nordic Growth was founded in 2005 and is represented in Denmark, Finland andSweden. Nordic Growth administers Nordic Growth I and NG Private fund of funds.

Nordic Growth I is a private equity fund that actively invests in Nordic compa-nies with the potential for significant growth arising from a technology-basedcompetitive advantage or business model. The fund focuses on contributing tothe company’s internationalisation and the financial advantages that can begained by reviewing the company’s strategy. Nordic Growth I invests mainly incompanies that have established a significant position in their market.

NG Private fund of funds invests in selected private equity funds. The investors inNG Private fund of funds have the opportunity to compile their own individualportfolio based on the funds recommended on an ongoing basis. The fund at-taches importance to an underlying fund investing within a sector or geographi-cal area with expected above-average financial growth during the fund’s lifetime,and that the management team in the underlying fund should have a backgroundand experience that are consistent with the proposed strategy for the fund.

As yet Nordic Growth I and NG Private fund of funds have no investments inDenmark.

In Denmark the team behind Nordic Growth currently administers i.a. the com-panies Configit Software and Tpack.

Previously in Denmark the team behind Nordic Growth has administeredZapera.com, which in autumn 2007 was sold to YouGov plc.



Exits–




Exits2




Polaris Private Equity was founded in 1998 and is domiciled in Copenhagen.Polaris invests in majority holdings in well-established Danish and Swedish com-panies with good development potential and revenue of more than DKK 150m.

Polaris has DKK 3.4bn in capital commitment divided among two funds. Polarisis backed by business and institutional investors such as A.P. Møller - Mærsk,ATP Private Equity Partners, Danica Pension, Dansk Kapitalanlæg, Danske Bank,Glitnir, Teachers’ Pension and Life Insurance Company Limited,PensionDanmark, PFA and Topdanmark. Polaris has seven partners.

Polaris Private Equity’s current investments in Denmark include:Skamol, which develops, manufactures and supplies insulating materials forindustry and fireproofing.

Polaris Private Equity’s previous investments in Denmark include:NOVADAN, which manufactures and distributes cleaning agents and chemicalsprimarily in Denmark, but also in the rest of the Nordic region and Poland.

Novasol, Europe’s largest letter of holiday properties with more than 17,000 hol-iday homes.

Sonion, one of the world’s leading suppliers of components for the mobilephone and hearing aid industry.

SR Private Brands was founded in 2005 and is domiciled in Copenhagen. SRPrivate Brands invests long-term in Danish branded goods companies that are inprivate ownership. SR Private Brands buys minority holdings in well-run com-panies where the existing owner and management wish to continue.

SR Private Brands has a capital commitment of DKK 100m. SR Private Brands isbacked by a number of private investors.

SR Private Brands’ current investments in Denmark include:Ticket to Heaven, a Danish manufacturer of quality children’s clothes.

Mammamia, a café chain with almost 30 cafés in shopping centres in Denmark,Norway and Sweden.

Unidrain, a Danish manufacturer of floor drains.

As yet SR Private Brands has no exits from Danish investments.



Exits6




Exits0



“My job is interesting because it gives me the opportunity to invest funds entrusted by investorsin companies set up by skilled and enterprisingpeople and to further develop them to the benefitprimarily of the investors, but also of other stake-holders in the companies.”

Anders Bruun-Schmidt, partner & CFO, Dania Capital

Anders Bruun-Schmidt is a partner and CFO with Dania Capital, where hehas worked since 2004.

Anders Bruun-Schmidt previously worked for Dansk Naturgas (2002–04),ATP (2000–01) and Dansk Olie og Naturgas (1980–99).

Anders Bruun-Schmidt has a master’s degree in political science and economics and an MBA from London Business School, and he has taken several management training courses at INSEAD.


Entry Exit Name Sector Acquiring fundyear year

1989 1993 Kosan Group Conglomerate SDS

1991 – Reson Technology for harbour protection etc. Dansk Kapitalanlæg

1991 1997 Hjem Is Ice cream Industri Kapital

1991 1993 Broen Armatur Ball valves and taps CapMan

1992 2000 Microtronic Components for hearing aids CapMan, Euroventures

1992 1995 Crisplant Sorting systems Industri Kapital

1992 2001 Toftejorg Tank cleaning equipment CapMan

1993 1999 Kosan Teknova Gas valves CapMan, ECI Ventures

1993 – DanFysik Hi-tech equipment for the pharmaceutical industry Dansk Kapitalanlæg

1993 1995 Nordtank Wind turbines UBS

1994 1998 Vestas Wind turbines Gilde, Mees & Pierson

1995 1997 Everton Schmidt Bicycles Axcel

1995 2000 Monarflex Tarpaulins Axcel

1995 – Ferrosan Health products and pharmaceutical preparations Management

1995 – M&J Fibertech Machines for manufacturing fibre yarns German Equity Partners

1995 – Bilwinco Fully automated weighing/dosing solutions Industri Udvikling

1995 – DanTruck-Heden Manufacture and sale of fork-lift trucks Industri Udvikling

1995 – Kirk Telecom Telecoms Dansk Kapitalanlæg

1996 1998 Osteometer Meditech Scanners for measuring osteoporosis Doughty Hanson, CWB

1996 1999 Sabroe Refrigeration Industrial refrigerating installations EQT

1996 2005 Audionord International Hi-fi and speakers (manufacture and retail) CapMan

1996 2000 Tvillum-Scanbirk Furniture Axcel

1996 2007 Lindplast Packaging CapMan

1996 – ME-FA Post boxes Dansk Kapitalanlæg

1996 2006 Carl Bro Consultancy engineers LD Equity

1997 2000 Oxford Biscuits Biscuits Management, Nykredit

1997 – RTO Holding Children’s clothing and sportswear CapMan

1997 2006 VariantSystem Rolling and pallet containers Axcel (now Bekaert Handling Group)

1997 2007 EET Nordic/IOD IT accessories CVC

1997 2003 Dansk Heatset Rotation Printing Axcel (now GraphX)

1997 2006 F Group Radio and TV Industri Kapital

1997 2002 Time System International Calendars CVC

1997 2002 Føvling Furniture Axcel

1997 – JHL (J. Hvidtved Larsen A/S) Sludge extractors Industri Udvikling

1997 – PF Management Manufacture and sale of safety steps, grates, Industri Udvikling scaffold planks and gangways

1997 – VPG (Vital Petfood Group) Pet food and products Industri Udvikling

1998 2006 Laundry Systems Group Textile finishing equipment Axcel (Jensen Gruppen)

1998 2001 Struers (Scientific Product Group) Measuring instruments EQT

1998 2006 Thygesen Textile Group Healthcare and clothing Axcel

1998 – BB Electronics Components for the electronics industry Axcel

1998 2006 Kilroy Travels International Travel agency Axcel

1998 – Daehnfeldt Vegetable seeds Hicks, Muse, Tate & Furst

List of buyouts in Denmark

IX.


Exit to Approx. revenue at time Is the PE fund Commentsof acquisition (DKKm) majority shareholder?

– – –

– – No

Secondary buyout 619 Yes

Secondary buyout 150 –

Trade sale 140 Yes

Stock exchange listing 1185 Yes

Trade sale 60 No

Trade sale – No

– – No

– – –

– – –


Secondary buyout 181 Yes Sold to Icopal, of which Axcel was co-owner.

– – –

– – –

– – No

– – No

– – No


Secondary buyout 2940 Yes Owns 50%.

Secondary buyout 650 No



– – Yes Majority shareholder from October 2005.

Secondary buyout – –

Secondary buyout – – Second buyout.

– – No


Trade sale 720 Yes

– 168 Yes

Secondary buyout 1983 Yes Majority on entry.

Trade sale 400 Yes

Trade sale 425 Yes

– – No

– – No

– – No




– 288 Yes


– 300 –



1998 2004 Rationel Vinduer Windows Axcel

1998 – EM Fiberglas Glass fibre products Industri Udvikling

1998 – K.P. Komponenter Metal components Industri Udvikling

1999 2006 Løgstør Rør (now Logstor) District heating pipes Axcel, Polaris

1999 2007 10Contex Large-format scanners and 3D printers EQT

1999 2005 Kwintet Work clothes Axcel

1999 2002 Nycomed Pharma Pharmaceutical products Nordic Capital

1999 2001 Partner Electric Digital telephone switching systems Bridgepoint

1999 2004 Aston IT Group Software, hardware and consulting CVC

1999 2005 Louis Poulsen El-teknik Wholesale in electrical equipment Polaris

1999 2007 Louis Poulsen Lighting Designer lamps Polaris

1999 2003 Nordic Info Group (RKI) Credit information EQT

1999 2004 Eurogran Holding Drink powders Alpininvest

1999 – Superfos Packaging Industri Kapital, Ratos

1999 – Superfos Plastic packaging Industri Kapital

1999 – Agramkow Fluid Systems Hi-tech processing systems for the appliance Industri Udviklingand auto industry

2000 2004 Novadan Cleaning agents Polaris

2000 2005 Wittenborg Coffee machines Compass

2000 2005 Cybercity Broadband Advent International, Lehman Brothers Communication

2000 2008 Microtronic (now Sonion) Components for hearing aids Nordic Capital, Polaris

2000 – Vital Petfood Group Pet food Axcel

2000 2008 Kirk Acoustics (now Sonion) Components for mobile phones Nordic Capital, Polaris

2000 2005 Aalborg Industries Ship boilers Axcel

2000 2007 Icopal Roofing felt Axcel

2000 2004 Svenska Fönster Window frames Axcel

2000 2002 Novasol Holiday home rental Polaris(now Novasol Dansommer)

2000 – A/S Kurt Hansen Thin sheet processing products Industri Udvikling

2000 – Omada Consultancy contracts in project management, Industri UdviklingSAP, IT management and process optimisation

2002 2005 Glud & Marstrand Metal packaging Axcel

2001 2005 IHI Health insurance EQT

2001 – Royal Scandinavia Porcelain, designware Axcel

2001 – Wolfking Meat processing equipment UBS

2001 – LM Glasfiber Blades for wind turbines Doughty Hanson

2001 – SMEF Group Machines and accessories for the wooden CapManproducts industry

2001 – Lindab Ventilation pipes Ratos

2001 – Jamo Loud speakers FSN Capital

2001 – Martin Gruppen Computer-controlled effects lighting Schouw & Co.

2001 2002 Dansommer Holiday home rental Polaris(now Novasol Dansommer)

2001 – Rovsing Dynamics Industrial measuring instruments 3i

2001 2007 Bison Clothing Dansk Kapitalanlæg

2001 2006 Carl Bro Engineering consultancy Bure

2001 – A2SEA Set-up of marine wind turbines Dansk Kapitalanlæg

IX. List of buyouts in Denmark




– – No

– – No

Trade sale 1046 Yes

Trade sale 233 Yes

Trade sale 1887 Yes

Trade sale 730 Yes

Bankruptcy 200 Yes






– 2616 Yes

– 450 Yes

– – No


Trade sale 320 Yes


Secondary buyout 355 Yes Amalgamated with Kirk Acoustics andrenamed Sonion.

– 453 Yes

Secondary buyout 143 Yes Amalgamated with Microtronics and renamed Sonion.

Trade sale 1000 Yes

Trade sale 5825 Yes


Secondary buyout 560 Yes Combined exit as Novasol Dansommer.

– – No

– – No

Trade sale 1300 Yes


– 2660 Yes

475 Yes

– 1900 Yes

– 450 Yes

– 4200 Yes

– 500 Yes

– 578 Yes

Secondary buyout 300 Yes Combined exit as Novasol Dansommer.

– 100 –

Trade sale 140 No


– – No




2001 – Bladt Industries Manufacture and assembly of onshore Industri Udviklingand offshore steel structures

2001 – Timberman Wooden flooring, indoor staircases and loft stairs Industri Udvikling

2001 – Virklund Sport Facilities for the sports sector and manufacture Industri Udviklingand trade in sports equipment

2002 – Fibertex Fibre yarns Schouw & Co.

2002 2006 Vest-Wood Wooden doors Axcel, Polaris

2002 2006 Dansk Droge Vitamins, dietary supplements Polaris

2002 – Weiss Bioincineration facilities Dansk Kapitalanlæg

2002 2006 RGS 90 Recycling CapMan

2002 2006 Dan-Foam (Tempur World) Pillows and mattresses Friedman, Fleischer & Lowe, TA Associates

2002 2005 Nycomed Medicine CSFP PE, Blackstone, NIB PE

2002 2007 Eco-dan Control systems for agriculture CapMan

2002 2005 Nettest Equipment for testing network security Axcel

2002 – UI (Union Engineering) Carbonic acid and CO2 systems Industri Udvikling

2003 – Maersk Medical (now Unomedical) Disposable pharmaceutical products Nordic Capital

2003 2007 Ilva Furniture Advent

2003 2006 Danske Trælast Sale of building materials for professional CVC(now DT Group) and private use

2003 2005 Illum Department store Merrill Lynch

2003 – Bukkehave Sale of special vehicles and spare parts Industri Udvikling

2003 – PhaseOneTrials Pharmaceutical product clinical trials in phase I and II Industri Udvikling

2004 2007 H+H Fiboment Concrete elements Procuritas(now Expan Holding)

2004 – M&J Industries Waste reducers Dansk Kapitalanlæg

2004 – Anhydro Holding Processing systems for spray-drying, CapManevaporation etc.

2004 – DSV Miljø Soil cleaning, contract transport and gravel supply Triton

2004 – Junckers Industries Wooden floors Axcel

2004 – Norlax Smoked salmon Glitnir Total Capital

2004 2007 3D Pharmaceutical equipment Axcel

2004 2006 FLS Aerospace Technical aircraft servicing 3i, Star Capital(now a part of SR Technics)

2004 2005 Dan Net Calculation of roaming fees for mobile telephones Advent, Providence

2004 – Buksesnedkeren Design and distribution of leisurewear Change Capital Partners

2004 2008 Kosan Crisplant Sorting systems Segulah

2004 – Falck Rescue services and auto assistance Nordic Capital, ATP PEP

2004 – Bramidan Equipment for compressing waste Industri Udvikling

2004 – Green Farm Energy Production of electricity and fertilisers Industri Udviklingin bioenergy plants

2004 – Royal Danish Seafood Group Live eels and hot-smoked fish products Industri Udvikling

2004 – Skandinavisk Køkkengruppe Kitchens Industri Udvikling

2004 – Trip Trap WoodCare Oils, soaps, stains, lacquers and other surface Industri Udviklingtreatments for wooden products

2005 2008 Blücher Manufacture, plumbing and heating, pipes LD Equity, and sanitation Nykredit Realkredit A/S,

Danebroge ApS

2005 – Ferrosan Health products and pharmaceutical preparations Altor

2005 – Glud & Marstrand Metal packaging AAC Capital

2005 – Kompan Playground equipment Nordic Capital

2005 – Nycomed Pharmaceutical products Nordic Capital

2005 – DISA Holding Machines for iron casting Procuritas




– – No

– – No

– – No

– 704 –



– – No


Stock exchange listing 1900–

Trade sale 940 Yes

Secondary buyout – No


– – No

– 1820 Yes

Trade sale 680 Yes Kaupthing Bank has to take over Ilva, which is sold on to an Icelandic furniture group.


Trade sale 600 Yes

– – No

– – No


– – Yes Majority shareholder from April 2007.

– 740 Yes

– 1000 Yes

– 683 Yes

– 197 Yes


Trade sale 2496 – Divested to SR Technics, which was owned by 3i and Star Capital.

Trade sale 380 Yes

– 371 Yes

Trade sale 193 Yes

– 4224 Yes

– – No

– – No

– – No

– – No

– – No

Secondary buyout 240 Yes Sold to Watts Industries Europe BV.

– 910 Yes

– 1546 Yes

– 733 Yes

– 4800 Yes

– 600 Yes




2005 – Hammel Møbelfabrik Furniture Dania Capital

2005 2007 LEO Pharma Animal Health Pharmaceutical products and animal feed Montagu(now VetXX)

2005 – ISS Facility services EQT, Goldman Sachs Capital

2005 – Brandtex (BTX Group) Clothing EQT

2005 2007 Danfoss Marine Systems Valve and tank control systems 3i (now Damcos)

2005 – Chr. Hansen Ingredients PAI

2005 – Gram Commercial Industrial refrigeration systems LD Equity

2005 – Legoland (now a part of Amusement parks BlackstoneMerlin Entertainment Group)

2005 – Post Danmark Postal services CVC

– 2007 7-Technologies Software for controlling water systems Dansk Kapitalanlæg

– 2007 Active Sportswear Trade in sportswear Dansk Kapitalanlæg

– 2007 Easy Film Film producer Dansk Kapitalanlæg

– 2007 Nyscan Servicing for lorries Dansk Kapitalanlæg

2005 2007 Welltec Machines for raw material extraction Management, The Riverside Co.

2005 – Illum Department store Baugur

2005 – Mach Calculation of roaming fees for mobile phones Warburg Pincus

2005 – ESKO-Graphics (now EskoArtwork) Machines and software for card packaging printing Axcel

2005 – Scan Jour Document handling CapMan

2005 – Aalborg Industries Ship boilers Altor

2005 – Københavns Lufthavne Airport Macquarie Airports

2005 – TDC Forlag (now a part of Telephone directories Macquarie Capital Alliance European Directories) Group

2005 – Kwintet Work clothes Industri Kapital

2005 – R82 Technical aids for children LD Equity

2005 – Rahbekfisk Frozen ready-meals Glitnir Total Capital

2005 – Wiking Gulve Wooden floors Dania Capital

2005 – Belika Knitwear for men Industri Udvikling

2005 – Comwir IT hardware, software and infrastructure services Industri Udvikling

2005 – Danelec Electronics Electronic products for shipping Industri Udvikling

2005 – Dan-Iso Insulating products Industri Udvikling

2005 – Meincke Production and installation of machines Industri Udviklingfor the baking industry

2005 – Vitral Integrated, customised glass roofs Industri Udvikling

2006 – Reson Industrial sonar systems LD Equity

2006 – SFK Systems Abattoir machinery LD Equity

2006 – TDC Telecoms Apex, Blackstone, KKR

2006 – York Novenco Group Industrial refrigerating installations Dania Capital(now Novenco Group)

2006 – Green House of Scandinavia Fashionwear Odin Equity Partners

2006 – Nordplan Storage and archive systems Odin Equity Partners

2006 – Haarslev Abattoir machinery Odin Equity Partners

2006 – Logstor District heating pipes Montagu

2006 – Scanvogn Mobile site huts Dansk Generationsskifte

2006 – Medianet Innovations Software development LD Equity

2006 – SkanDek Roofing elements Jysk-Fynsk Kapital

2006 – Ticket to Heaven Children’s clothes SR Private Brands

2006 – Dangaard Telecom Mobile distributor Nordic Capital




– 105 Yes


– 40355 Yes

– 3280 Yes


– 1460 Yes

– 211 Yes

– 395 Yes

– 11255 No

Trade sale – Yes Majority shareholder from June 2005.

Trade sale – No

Trade sale – No

Trade sale – No


– 600 Yes

– 420 Yes

– 820 Yes

– 100 No

– 1650 Yes

– 2527 Yes

– 890 Yes

– 2900 Yes

– 184 No

– 400 Yes

– 50 Yes

– – No

– – No

– – No

– – No

– 223 No

– – No

– 179 Yes

– 525 Yes

– 39941 Yes

– 495 Yes

– 100 Yes

– – Yes

– 492 Yes

– 892 Yes

– – Yes

– 654 No

– 24 Yes

– 35 No

– 11545 Yes Merged with Brightpoint, of which Nordic Capitalcontrols around 37%.




2006 – Jacob Holm and Sons STA Advanced textiles LD Equity(and Tytex)

2006 – Biva Furniture Dania Capital, Odin Equity Partners

2006 – Netcompany Portals, e-commerce, CRM Axcel

2006 – Arovit Petfood Animal feed Gilde

2006 – Color Print Printed advertising material Polaris

2006 – Da’Core Home textiles LD Equity

2006 – Hi-Con Balconies, concrete Jysk-Fynsk Kapital

2006 – J. Hvidtfeldt Larsen Mobile systems for cleaning liquid materials LD Equity

2006 – TCM Group Kitchens Axcel

2006 – Zone Company Denmark Ironmongery Procuritas

2006 – FM-Søkjær Detached houses Axcel

2006 – Alfred Priess Master and transformer stations Dansk Generationsskifte

2006 – Ball Group Fashionwear Axcel

2006 – Bang & Olufsen Medicom Meditech development LD Equity

2006 – Bodilsen Furniture EQT

2006 – Dansk Cater Catering Altor

2006 – Kabooki Children’s clothes Jysk-Fynsk Kapital

2006 – Lilleheden, Palsgaard, Building timber LD EquityHøeg Hagen, Interbuild

2006 – Noa Noa Fashionwear Axcel

2006 – TIA Technology Policy handling software for the insurance industry Dansk Kapitalanlæg

2006 – Carl Vollstedt Eftf. Sausages and delicatessen products Industri Udvikling

2006 – Despec Nordic Distribution of office and IT accessories Industri Udvikling

2006 – E.J. Badekabiner Prefabricated bathrooms Industri Udvikling

2006 – Jönsson Gruppen Building control, turnkey and general contracts Industri Udvikling

2006 – Labofa Munch Office furniture Industri Udvikling

2007 – C.F. Nielsen Briquette presses Dansk Kapitalanlæg

2007 – Mahe Freight Air freight Odin Equity Partners

2007 – ScanAm Transport (now a part of Transport and logistics Odin Equity PartnersScan Global Logistics)

2007 – Stema Engineering Machines for steel production Odin Equity Partners

2007 – Cane-Line and Sika Horsnaes Furniture Langholm Capital

2007 – Matas Cosmetics CVC

2007 – A+ Data and telecommunications LD Equity

2007 – Haslev Møbelsnedkeri Furniture Erhvervsinvest

2007 – Essential Aircraft Maintenance Aircraft maintenance LD EquityServices (EAMS)

2007 – KA Interiør Furniture Dansk Kapitalanlæg

2007 – KE Fibertec Ventilation Jysk-Fynsk Kapital

2007 – Blip Systems Solutions for mobile marketing LD Equity

2007 – DAKO Medical equipment for cancer screening EQT

2007 – EET Nordic IT accessories Capidea

2007 – Hurup Møbelfabrik Furniture Erhvervsinvest

2007 – Hamlet Protein Soya protein for special feed Polaris

2007 – Icopal Roofing felt Investcorp

2007 – Imerco Ironmongery M. Goldschmidt Capital

2007 – Mammamia Danmark Café chain SR Private Brands

2007 – Scandlines Passenger and freight ferry services 3i, Allianz Capital

2007 – SystemTeknik Electric control panels Jysk-Fynsk Kapital




– 500 No

– 360 Yes

– 130 Yes

– 1155 Yes

– 1200 Yes

– 136 No

– 40 Yes

– 160 Yes

– 600 Yes

– 160 Yes

– 379 Yes

– 170 Yes

– 400 Yes

– 126 Yes

– 817 Yes

– 2700 Yes

– 125 Yes

– 850 Yes

– 540 Yes

– 42 Yes

– – No

– – No

– – No

– – No

– – No

– – Yes

950 Yes

– 2000 Yes

– 303 Yes

– 228 Yes

– 2700 Yes

– 93 No

– – –

– – Yes

– – Yes

– 55 Yes

– – Yes

– 1700 Yes

– 750 Yes

– – –

– 210 Yes

– 7000 Yes

– 1300 –

– 90 No

– 4078 Yes The two funds each own 40%.

– 112 Yes




2007 – Unifeeder Container shipping Montagu

2007 – Aagaard-Bræmer Holding Jewellery Capidea

2007 – AH Industries Metal components for wind power and offshore Ratos

2007 – Cimbria Machinery for the food industry EQT

2007 – Contex Scanners and image processing Ratos

2007 – Dansk Overflade Teknik (DOT) Surface treatment Jysk-Fynsk Kapital

2007 – H.P. Værktøj DIY and nonfood products Dansk Generationsskifte

2007 – IT2 Holding Treasury management systems CapMan

2007 – Skamol Hot-insulating materials Polaris

2007 – Winnie Papir Wrapping paper LD Equity

2007 – Wrist Group Ship supply Altor

2007 – Calamus Wholesale in radios, TVs and computers Altaria

2007 – Hansen & Pedersen Men’s clothing Polaris

2007 – Skovbo Wooden houses Polaris

2007 – Bramming Plast-Industri Industrial cellular plastic products LD Equity

2007 – Gatetrade E-commerce Warburg Pincus

2007 – Louis Poulsen Lighting Designer lamps 3i(now Targetti Poulsen)

2007 – Schou Company Ironmongery Dansk Generationsskifte

2007 – Transmedica Temping agency in the health sector Odin Equity Partners

2007 – Unidrain Drainage SR Private Brands

2007 – Barto Holding Customised steel solutions LD Equity

2007 – IDEmøbler Furniture Axcel

2007 – K.P. Komponenter Metal components Capidea

2007 – Unwire Mobile solutions for consumers LD Equity

2007 – ElitePlast-Hammar Display Display solutions Deltaq

2007 – Fan Milk International (Emidan) Dairy products and equipment LD Equity

2007 – Johs. Møllers Maskiner Contracting equipment LD Equity(JMM Group)

2007 – Riegens Lighting Erhvervsinvest

2007 – Bila Automation solutions with robots Industri Udvikling

2007 – Dansk Mink Papir Production and distribution of equipment for Industri Udvikling(DMP Partners) the mink industry

2007 – Dan-Web Manufacture of machines for paper pulp processing Industri Udvikling

2007 – Glenco Heating, plumbing and sanitation, ventilation Industri Udviklingand electricity

2007 – Intego Electrical installation for industry and infrastructure Industri Udvikling

2007 – Interieur Set-up solutions for the retail trade Industri Udvikling

2007 – Stema Bending machines for reinforcing steel Industri Udvikling

2008 – BabySam Retail in baby equipment Polaris, AAC

2008 – Holmris Office Office solutions Industri Udvikling

2008 – Kosan Crisplant Sorting systems United International Bank

2008 – Tøjeksperten Men’s clothing Polaris

2008 – Alpharma API Pharmaceutical ingredients 3i

2008 – Biblioteksmedier Loan materials for libraries LD Equity

2008 – Pandora Jewellery Axcel

2008 – SSG A/S Damage control services LD Equity

2008 – United Textile Group Ladies’ clothing Jysk-Fynsk Kapital

– – A/S Jydsk Aluminium Industri Aluminium cast articles Industri Udvikling




– 2799 Yes

– 185 Yes

– 375 Yes

– 1266 Yes

– 728 Yes

– 500 No

– 550 –

– 60 Yes

– 260 Yes

– 240 Yes

– 25000 Yes

– 200 Yes

– 600 Yes

– 60 Yes Additional investment for Fiskarhedenvillan in Sweden.

– 240 Yes

– – Yes Acquisition investment for Mach.

– 825 No Bought together with Targetti. Transaction structured as share capital expansion by Targetti.

– 450 Yes

– – No

– 48 No

– 108 No

– 1300 Yes

– – Yes

– 100 Yes

– 45 Yes

– 600 No

– 800 No

– 300 –

– – No

– – No

– – No

– – No

– – No Formerly part of Glenco A/S.

– – No

– 303 No

– 500 Yes

– 113 No

– 302 Yes

– 1100 Yes Acquisition investment for Hansen & Pedersen.

– 654 Yes Norwegian headquarters, but majority of production takes place in Denmark.

– 293 Yes

– 1100 Yes

108 No

– 250 Yes

– – –




– – Bilcon Aluminium tankers Industri Udvikling

– – Bilwinco Fully automated weighing/dosing solutions Industri Udvikling

– – BioDan Diarrhoea remedies and dietary supplements Industri Udviklingfor animals

– – Danplate Laminated wood Industri Udvikling

– – Dansk Møbelglas Furniture and façade glass Industri Udvikling

– – Fibo Maskiner Production plant for the light concrete industry Industri Udvikling

– – First Impression Information kiosks Industri Udvikling

– – Gama Dan Equip Solutions for the photographic industry Industri Udvikling

– – GJ Industrilakering Industrial lacquering Industri Udvikling

– – GK Glas Double glazing Industri Udvikling

– – Globe Meat Technology Abattoir start-up and operation Industri Udvikling

– – Green Farm Energy Energy systems based on biogas Industri Udvikling

– – Gråkjær Staldbyg Stabling for pigs and cattle Industri Udvikling

– – HMK Holding Vehicle body building Industri Udvikling

– – Hokodan Machining work on large steel articles Industri Udvikling

– – ICEA Denmark Film and photo packaging products Industri Udvikling

– – I-Data International Printer connectivity products Industri Udvikling

– – Incon Internal transport systems Industri Udvikling

– – J. Zartow Knitwear Industri Udvikling

– – KE Fibertec Ventilation and extraction filters in fibre Industri Udvikling

– – Kjærgaard – El & Industrial automation and electrical installation Industri UdviklingIndustri Automatik

– – Marketing Group Playthings in known brands on licence Industri Udvikling

– – MatchWork World Wide Internet-based job procurement systems Industri Udvikling

– – Mermaid Technology Computers and flat screens Industri Udvikling

– – Metropak Printing on metal and manufacture of metal packaging Industri Udvikling

– – Multifurn Sale of furniture Industri Udvikling

– – Nordjysk EDB-Center IT consultancy Industri Udvikling

– – NTD International Ships and ship equipment Industri Udvikling

– – P.N. Erichsen Holding Machine parts for the wind power industry Industri Udvikling

– – PNE Steel Machining work on large steel articles Industri Udvikling

– – Saint Tropez Holding Wholesale and retail in fashionwear Industri Udvikling

– – ScanView Scanners and imagesetters Industri Udvikling

– – Stema Engineering Bending machines for reinforcing steel Industri Udvikling

– – Sunprojuice Denmark Raw materials for juice manufacturers Industri Udvikling

– – Syntax Gruppen Back-office solutions for the retail industry Industri Udvikling

– – Tinglev Elementfabrik Concrete elements for construction Industri Udvikling

– – Trip Trap Denmark Furniture and gift products Industri Udvikling

– – Tømrer & Snedkergården Manufacture of windows and doors in wood Industri Udvikling

– – Ulmadan Productions Edge processing machinery Industri Udvikling

– – Ulmadan Research & Edge processing machinery Industri UdviklingDevelopment

– – UM Teaching equipment for physics and chemistry Industri Udvikling

– – Vildbjerg Papir Printing and production of paper bags Industri Udvikling

– – Zacho Mørup Knitwear Industri Udvikling

– – Zealand Care Aids for the elderly and disabled Industri Udvikling

– – Åkerbergs Maskiner Mobile cranes Industri Udvikling




– – –

– – –

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

– – No

Source: Robert Spliid and DVCA.


Guidelines


Since autumn 2007 a large number of DVCA’s members have been working oncreating the framework for greater openness and transparency in private equityfunds. With these guidelines DVCA hopes to kick-start a dialogue on active ownership.

The guidelines will set new standards for the communication of private equityfunds with the outside world. DVCA is aware that parts of the outside world havehitherto perceived the industry as being too closed, and naturally we ourselvesmust accept the main responsibility for this. DVCA recognises that dialogue withthe outside world not only brings about greater appreciation of how we work,but may also be valuable for enabling the industry to pick up the signals that theoutside world is sending.

The drawing up of the guidelines is just the beginning. Now they must be putinto operation, and in future this will be reflected in greater openness in privateequity funds and in the companies which the funds own. DVCA will itself leadthe way with a more proactive role which can help to direct more focus on howactive ownership can create sound, strong companies. Among other things,DVCA will in future be publishing a yearly report containing detailed accounts ofprogress in the industry.

During the working process, DVCA has drawn on the services of an external ref-erence group consisting of Ingerlise Buck (head of department, Danish Confed -e ration of Trade Unions, LO), Professor Jan Schans Christensen (University ofCopenhagen), Jørgen Mads Clausen (CEO, Danfoss), Bjarne Graven Larsen (chiefinvestment officer, ATP), Peter Schütze (head of retail banking, Nordea) andBente Sorgenfrey (chairwoman, Confederation of Professionals in Denmark,FTF). We would like to take this opportunity to thank them for the outstandingcommitment of this group to the work on the guidelines. However, it must bestressed that the responsibility for the guidelines rests solely with DVCA.

A special thank you must also go to the working group which, on behalf of the in-dustry, has taken time to draw up the guidelines.

DVCA will now monitor how the guidelines are observed and how importantthey prove to be for our stakeholders. On this basis, in 2010 we will evaluate theneed to revise the guidelines.

Ole Steen AndersenChairman, DVCA

Christian FrigastChairman of DVCA’s working group and deputy chairman, DVCA

Foreword

More openness creates value for private equity funds and their investors

“A private equity fund can be seen as a professional investment vehicle where a number of investors – typicallypension funds, financial institutions and large companies – invest in companies deemed ripe for acquisition.”

A private equity fund is a professional investment vehicle where a number of in-vestors1 – typically pension funds, financial institutions and large companies –invest in companies deemed ripe for acquisition via a management companywhich advises on investments in companies matching the criteria agreed on bythe investors and the fund.

The fund exercises active ownership on behalf of the investors and develops thecompanies with a view to increasing their value. Active ownership means thatthe fund not only makes capital available but also works actively with the com-pany’s board and management on the company’s development.

The typical investment horizon for those investing in private equity funds is10–12 years. During this period, known as the commitment period, the funds usethe time to find the right companies in which to invest and then spend the rest ofthe period developing and subsequently selling these companies.

Characteristic of private equity funds’ investments in companies is for a combin -ation of equity and loan capital to be injected when the acquisition is financed,and for a group of key employees to become co-owners of the company alongwith the private equity fund.

When a private equity fund is set up, it receives a binding commitment on theprovision of capital from its investors. In Denmark, this is typically via a limitedpartnership or similar corporate form familiar to investors from internationalprivate equity funds. The fund’s management company is then free to use thiscapital within the agreed constraints.

The management company exercises its right to draw on committed capital ascompanies are acquired. Investors’ capital therefore remains with the investorsuntil a concrete investment is made, and repayments are made through ongoingdivestments of companies. This results in the best possible use of investors’ capital.

The fund’s overall return depends on the performance of the individual compa-nies in which it has invested. Two different methods can be used to measure thisreturn: the internal rate of return (IRR) or a return multiple, namely the relation-

Introduction

Characteristic of private equity funds’ investments incompanies is for a combin -ation of equity and loan cap-ital to be injected when theacquisition is financed, andfor a group of key employeesto become co-owners of thecompany along with the private equity fund.

1. Investors are also known as limited partners.

What is a private equity fundand how does it work?


2. Source: European Private Equity & Venture Capital Association (EVCA).3. Source: Kapitalfonde i Danmark [Private equity funds in Denmark], Økonomisk Tema,

Danish Ministry of Economic and Business Affairs, November 2006.

Why is there a need for guidelines for private equity funds?

ship between the amount paid when the fund is liquidated and the amount thatthe fund has drawn from its investors.

The average annual return on investment in companies owned by private equityfunds in Europe in 1996–2006 as measured by the IRR method was 13.6%.2 InDenmark the return on divested companies was just above 30% p.a. in the per -iod from 2000 to 2007.

In Denmark, private equity funds and the companies in which they invest arecovered by the same legislation as other businesses. However, private equityfunds have a responsibility for and interest in ensuring that the sector in generalbehaves and is perceived as a credible corporate citizen, and that there is broadunderstanding of private equity funds’ business model. This requires that thefunds exercise responsible ownership.

As a result of the relatively high returns that many funds have generated in re-cent years, more and more money is being invested in private equity funds.Private equity funds therefore own a growing proportion of companies, both inDenmark and abroad. For example, it was estimated in 2006 that approximately4% of employees in the Danish private sector worked for companies owned bysuch funds.3

When a company is taken over by a private equity fund, the main goal is to in-crease the value of the company by developing and strengthening it. This is typ-ically achieved by accelerating its growth and raising its profitability, often com-bined with acquisitions of other companies or activities. The company may alsobe streamlined through the divestment of non-core activities.

After a company has been taken over by a private equity fund, significant strate-gic changes will normally be made so that the company is as well-equipped aspossible to tackle the specific challenges that it faces. These sometimes far-reaching change processes – as well as recent years’ increased activity in the pri-vate equity sector – have resulted in greater public interest in private equityfunds, both in Denmark and abroad. This has led to a growing desire for open-ness about the way in which private equity funds do business. This applies


throughout the cycle from the initial acquisition of a company through its devel-opment and on to its sale to new owners after a number of years.

Private equity funds, investors and the rest of society have a mutual interest inthe companies owned by private equity funds being competitive on a healthy ba-sis. Responsible ownership in private equity funds means that funds have an op-portunity to develop their companies in close collaboration with each compa-ny’s board, management and employees. One important requirement in thisrespect is for the wider society to be confident that private equity funds operateon a known and transparent basis. DVCA wishes to promote this through theseguidelines, which pave the way for openness and dialogue through better re-porting and greater transparency.

Companies owned by private equity funds fall somewhere between companiesowned by individuals or foundations, which are not subject to exacting commu-nication and disclosure requirements, and listed companies, which are subjectto detailed rules on reporting to the outside world. It is therefore important tostress that there are a number of key differences between the communicationfrom a listed company and that from a company owned by a private equity fund.

In listed companies, ownership is typically spread across thousands of differentowners (shareholders) who are constantly trading in the company’s shares,which means that a company must communicate proactively with the public toensure that important information about the company reaches both existingand prospective new shareholders simultaneously. Companies owned by pri-vate equity funds differ significantly from this because they may have as little asone owner. There is also the important difference that the company’s shares arenot constantly changing hands. The company and the fund that owns it have di-rect and more informal access to both the fund’s ultimate investors (limited part-ners) and the company’s employees.

Communication between a fund and its investors also differs significantly fromlisted companies’ communication with their shareholders and the market ingeneral. This is because an investor in a private equity fund commits his invest-ment to a portfolio of companies for a lengthy period of time (corresponding tothe life of the fund), whereas a shareholder in a listed company can, in principle,decide at any time to sell his shareholding, as mentioned in the previous para-graph. The information needs of an investor in a private equity fund are there-fore different and typically of a more long-term/strategic nature than those of ashareholder in a listed company.

Private equity funds, invest -ors and the rest of societyhave a mutual interest in thecompanies owned by privateequity funds being compet -itive on a healthy basis.Responsible ownership in pri-vate equity funds means thatfunds have an oppor tunity todevelop their companies inclose collaboration with eachcompany’s board, manage-ment and employees.


Listed companies are subject to formal requirements for detailed quarterly fi-nancial reporting. This is needed to ensure that all shareholders always have thesame insight into a company’s performance. By way of contrast, a private equityfund’s close relationship with its investors can provide a better opportunity tofocus on the long term, because it is agreed from the outset that the fund willpursue a strategy for each individual company that may stretch over 5–7 years.

This does not necessarily mean that investors receive less information. Theysimply receive it on a more ad hoc basis and are not limited to quarterly reports.Companies owned by private equity funds therefore avoid the administrativeburden associated with preparing formal quarterly reports etc.

However, it has to be recognised that today’s private equity funds own compa-nies that may be of broad interest to society. These may be companies that areimportant for infrastructure or play a major role in the local area. They may alsobe companies that employ large numbers of people. In addition, many investorsin private equity funds are pension funds, whose most important stakeholdersare pension savers – typically ordinary salary earners.

The general public may therefore have an interest in gaining insight into how aprivate equity fund works and creates value. This is the background to why theseguidelines specify a number of areas where private equity funds and their port-folio companies should publish information.

4%In 2006 approximately 4% of employees in the Danishprivate sector worked for companies owned by privateequity funds.


These guidelines apply at both company level and fund level. They also touch onDVCA’s communication at sector level. First there is a brief description of rel -evant stakeholders and the application and scope of the guidelines.

Comments are attached to the guidelines to some extent. These comments arenot part of the guidelines but briefly present the background to them.

DVCA has attempted to make the guidelines sufficiently flexible for them to beapplied in practice in the world in which private equity funds and their compa-nies operate – a world of constant change in both terms and expectations. It istherefore intended that the need to revise the guidelines will be assessed in 2010.

The guidelines make allowance for the diverse nature of private equity fundsand their portfolio companies, which implies that there may be differences ingood corporate governance and the way in which active ownership is exercised.DVCA is of the opinion that it is neither possible nor desirable to have specificand detailed legislation in this area.

The use of these guidelines on a “comply or explain” basis instead of legislationis dependent on the responsibility shown by private equity funds. This self-regulatory approach engenders an expectation that, as a general rule, privateequity funds will comply with these guidelines, and that these guidelines are asuitable instrument for increasing general levels of information. This is first andforemost because such self-regulation is based largely on values accepted by abroad majority of players. However, not all funds and companies are alike, andso there is a need for a degree of flexibility.

Introduction to the guidelines

DVCA’s guidelines for responsible ownership and good corporate governance in private equity funds in Denmark


I. The guidelines’ origins, target group and stakeholders . . . . . . . . . . . . . . . . . . . . . . . . .134

1. Content and application of DVCA’s guidelines for responsible ownership andgood corporate governance in private equity funds in Denmark . . . . . . . . . . . . . .134

2. Who has an interest in these guidelines? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134

3. DVCA’s working group on transparency and active ownership in private equity funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136

4. Entry into force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137

5. Which private equity funds and companies are covered? . . . . . . . . . . . . . . . . . . . . .137

II. Guidelines at company level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138

1. Requirements for reporting and corporate governance . . . . . . . . . . . . . . . . . . . . . .138

2. Submissions to DVCA by private equity portfolio companies . . . . . . . . . . . . . . . . .140

III. Guidelines at fund level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142

1. Communication and reporting by a private equity fund . . . . . . . . . . . . . . . . . . . . .142

2. Submissions to DVCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144

3. Reporting to limited partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144

4. Requirements for communication by private equity portfolio companies . . . . . .145

5. Private equity funds’ relations with their industrial network . . . . . . . . . . . . . . . . . .147

IV. DVCA in the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148

1. Requirements for DVCA’s communication and data resources . . . . . . . . . . . . . . . .148

2. DVCA’s committee for good corporate governance in private equity funds . . . . .148

Appendices

Appendix A: Funds covered by DVCA’s guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149

Introduction to Appendix B: Walker Working Group – the UK guidelines . . . . . . . . . . . .150

Appendix B: Comparison of Danish and UK guidelines for private equity funds . . . . . .152

Contents


These guidelines have been developed under the auspices of DVCA and are theresponsibility of DVCA. To ensure that the guidelines reflect relevant stakehold-ers’ needs for transparency, the process has been linked to an external referencegroup which has monitored and commented on the development of the guide-lines. This reference group, which represents private equity funds’ most import -ant stakeholders, comprised:

Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO) Jan Schans Christensen, professor of corporate law, University of CopenhagenJørgen Mads Clausen, chief executive officer, DanfossBjarne Graven Larsen, chief investment officer, ATPPeter Schütze, head of retail banking, Nordea Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

Jan Schans Christensen not only commented on the content of the guidelinesbut also advised DVCA on their design.

The main target group for these guidelines is private equity funds operating inDenmark and the companies in which they have invested. The guidelines arealso expected to be of interest to investors in these funds and to employees, cred-itors, advisers and public bodies. The wider public may also have an interest ingaining an insight into how private equity funds work.

As members of DVCA, private equity funds and portfolio companies that meetthe criteria set out below are expected to follow these guidelines on a “comply orexplain” basis. This means that, as a general rule, the funds and their compa-nies are expected to comply with these guidelines. Where a fund or companydoes not comply with the guidelines, the reasons for this are to be given.

DVCA wants these guidelines to serve as a practical tool. DVCA will therefore al-ways engage in dialogue with funds and portfolio companies that can be expect-ed to be covered by the guidelines. The definitions below should therefore betaken only as a general guide as to whether funds and companies are covered bythe guidelines.

DVCA also encourages other players that operate as private equity funds but donot immediately fall under these definitions to subscribe to these guidelines.

1. Content and application of DVCA’s guidelines for responsible ownership andgood corporate govern ancein private equity funds in Denmark

2. Who has an interest in these guidelines?

I. The guidelines’ origins, target group and stakeholders



DVCA’s reference group

Jørgen Mads Clausen, chief executive officer, DanfossJan Schans Christensen, professor of corporate law, University of CopenhagenOle Steen Andersen, chairman, DVCA Peter Schütze, head of retail banking, Nordea Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO)

Not pictured:Bjarne Graven Larsen, chief investment officer, ATPBente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

DVCA’s working group

Søren Vestergaard-Poulsen, CVCThomas Schleicher, EQTMichael Haaning, Nordic CapitalChristian Frigast, Axcel (chairman)Søren Møller, LD EquityViggo Nedergaard Jensen, PolarisAnders Bruun-Schmidt , Dania CapitalBill Haudal Pedersen, Deloitte

Not pictured:Christian Dyvig, Nordic CapitalLars Berg-Nielsen, Deloitte

DVCA’s transparency and active ownership project has been led by a workinggroup comprising a number of representatives of private equity funds that oper-ate in Denmark:

Lars Berg-Nielsen, Deloitte, Anders Bruun-Schmidt, Dania CapitalChristian Dyvig4, Nordic CapitalChristian Frigast, Axcel (chairman)Søren Møller, LD EquityViggo Nedergaard Jensen, Polaris Private EquityThomas Schleicher, EQTSøren Vestergaard-Poulsen, CVC

The working group has been assisted by communication consultant JoachimSperling (project manager), state-authorised public accountant Bill HaudalPedersen from Deloitte, senior consultant Gorm Boe Petersen from DVCA, andchief financial officer Lars Thomassen and communications manager Trine JuulWengel from Axcel.


4. Succeeded by Michael Haaning in January 2008.

3. DVCA’s working group on transparency and active ownership in private equity funds

A private equity fund is covered by these guidelines if it is:

B a private equity member of DVCA and

B has committed capital of at least DKK 500 million, calculated as total com-mitted capital for all funds that are managed by a given management com-pany (general partner) and invest directly in companies and

B has a company structure which includes one or more investors (limitedpartners) and

B undertakes the bulk of its activities in Denmark.

Members of DVCA whose ultimate parent company is registered in a countryother than Denmark cannot therefore be required to comply fully withDVCA’s guidelines, as they may be subject to the guidelines that apply wherethe fund is registered.

Those parts of a foreign private equity fund’s activities that can be attributedto Danish investments are nevertheless covered by the guidelines in para-graphs 2–5 of section III in the same way as Danish private equity funds.

A private equity portfolio company covered by these guidelines is aDanish company (group) which

B is controlled5 by one or more Danish or foreign private equity funds (regardless of whether these funds are covered by the guidelines) and

B is, as a minimum, of a size resulting in classification as a class C (large)company under the Danish Financial Statements Act.

The criteria for class C (large) companies as at 1 January 20086 are:

B Revenue in excess of DKK 238 million (EUR 32 million)B Assets in excess of DKK 119 million (EUR 16 million) B More than 250 employees

5. Which private equityfunds and companies are covered?

5. Control means that a private equity fund has a decisive influence over the company in question.6. On 3 June 2008 the Danish Parliament adopted an act amending the Danish Financial Statements Act (L 100) according to which, among other things, the criteria for class C (large) companies have changed with effect from financial years beginning 1 September 2008 or later. Subsequently, the criteria are DKK 286 million for revenue and DKK 143 million for assets.

The part of the guidelines that concerns private equity funds enters into force on1 January 2009. Provisions relating to disqualification apply from today’s date,cf. paragraph 5 of section III on private equity funds’ relations with their indus-trial network.

At company level, the guidelines apply to financial years starting on or after 1 January 2008.

4. Entry into force

I. The guidelines’ origins, target group and stakeholders


II. Guidelines at company level

1. Requirements for reporting and corporate governance


A. Background

Compared to many other countries, such as the UK, relatively rigorous require-ments are made of companies’ annual reports in Denmark. This means that pri-vate equity portfolio companies covered by these guidelines are already obligedunder the Danish Financial Statements Act to include a management report intheir annual reports, which generally entails a high level of information.

However, the Financial Statements Act is relatively unspecific about the level ofdetail that the information in the management report should contain, whichmeans that there may be a need for information that is not covered by the re-quirements of applicable legislation. It has therefore been deemed appropriateto supplement the provisions of the act.

B. Guidelines

Annual report in general Companies are to provide additional detailed information on the following intheir annual reports as a supplement to applicable legislation:B Operational and financial developments B Corporate governanceB Financial and other risksB Employee matters

These extended requirements for the management report in the annual reportbuild on two fundamental principles: substance over form, and materiality overbox-ticking. This means, for example, that companies are to present informationthat is relevant to the company’s specific situation in the light of its being ownedby a private equity fund.

It is recommended that the management report states that the company’s ownerand thereby also the company are covered by DVCA’s guidelines. It is also recom-mended that reference is made to DVCA’s website, where these guidelines can befound.

The audited annual report is to be made available on the company’s website assoon as it is published.

Operational and financial developmentsThe report on financial developments is to include a presentation of revenueand earnings broken down by principal business segment, together with a gen-eral assessment in the light of the established strategy.

The management report is also to include a description of the company’s expect-ed revenue and earnings performance and of any significant changes in the established strategy.

Corporate governanceThe management report is to include information on the company’s ownershipand capital structure. The main aim of this information is to provide an overviewof the management set-up and capital structure established by the company’sowner – the private equity fund.


This information is to include:a. Which private equity fund owns the company and the size of its holdingb. Which partner(s) in the private equity fund represent(s) the fund in the

company c. Who nominated the individual members of the board d. Capital structure (e.g. breakdown into share classes etc.)e. The general meeting (any special provisions in the articles of association con-

cerning the board’s powers/authority to approve distributions etc.)f. Stakeholders (specification of who are the company’s primary stakeholders

and what management is doing to accommodate them)g. The board’s work (number of board meetings, use of committees etc.) h. Current remuneration of the board and managementi. Shares held directly by the board (collectively) and management (collectively)

if they exceed 5% on the balance sheet date

Financial and other risksThe report is to have a particular focus on financial risks associated with thechosen capital structure.

Where relevant to the company, the management report should also contain in-formation on the company’s environmental performance and possible impacton climate change.

Employee mattersThe report is to cover employee turnover (terminations, recruitment, number ofemployees at beginning and end of year, broken down by Denmark and rest ofworld) and any other special matters of significance to employees.

Companies delisted in connection with a transactionTo ensure that the flow of information – in the form of interim and annual reports in accordance with OMX Nordic Exchange Copenhagen’s rules – to thecompany’s shareholders while it was listed does not deteriorate as a direct con-sequence of the private equity fund’s takeover and delisting of the company, thecompany’s initial half-year and annual reports are to provide the same level ofinformation as when the company was listed.

After this period, the company is to prepare a half-year report (without detailedfinancial information) that describes whether the company is pursuing the gen-eral aims published in the annual report for the previous year. This report is tobe made available on the company’s website within three months of the end ofthe period.

2. Submissions to DVCA by private equity portfolio companies

A. Background

In order to provide the data needed to assess private equity funds’ activities, pri-vate equity portfolio companies covered by these guidelines are to submit a var -iety of information to DVCA (or a company designated by DVCA). See also thecomments on DVCA’s duties in section IV.

B. Guidelines

Companies covered by these guidelines are to submit data relating to the follow-ing to DVCA or the company designated by DVCA:B Revenue and earningsB Organic growthB Capital structureB Employee turnover (terminations, recruitment, number of employees at be-

ginning and end of year, broken down by Denmark and rest of world) B Investment in human capital (employee development), investment in fixed

capital, expenditure on research and developmentB Cash flows

DVCA will send a guideline and a reporting form to the companies concerned.


A. Background

The aim of these guidelines is to bring about the necessary transparency and in-formation from private equity funds and the companies they own. Beyond this,the guidelines do not themselves make recommendations as to how ownershipof portfolio companies is to be administered. However, DVCA advises its membercompanies to formulate guidelines for social responsibility in their investmentpolicy. Because the investors behind private equity funds have very often al-ready formulated such guidelines themselves, the development of guidelines forsocial responsibility can usefully be performed in collaboration with investors.

B. Guidelines

Information on the private equity fund’s websiteA private equity fund covered by these guidelines is to include on its website:

1. Confirmation that the fund follows the “comply or explain” principle with regard to these guidelines.

2. Information on the extent to which the fund departs from these guidelines,with an explanation for any such departures.

3. A description of the fund’s history and origins.

4. A description of the fund’s management and organisation, including generalpartners and individual board members, showing significant directorshipsand other posts held by each member.

5. Possibility of downloading the management company’s accounts.

6. Where the carried interest programme for general partners departs signifi-cantly from the market standard, a general description of the programme is tobe given.

7. General strategy for the fund, including a description of the fund’s workingmethods and strategy for developing companies (streamlining, restructuring,expansion etc.).

8. Policy on corporate social responsibility – a description of the fund’s prin -ciples for social responsibility in its investment policy.

9. Investment criteriaa. The fund’s geographical focus b. The fund’s sector focus

III. Guidelines at fund level

1. Communication and reporting by a private equity fund

The market standard is currently for general partners to receive carried inter-est (additional return) on their investment in a fund if they generate an an-nual return in excess of a basic rate of return (normally 8%) on committedcapital after all costs (such as management fees). The size of this carried in-terest varies, but is typically 20% of any return generated over and above the8% basic return. This basic return is also known as the “hurdle rate”.Management fees and administrative expenses etc. are to be reimbursed be-fore carried interest can be paid out.


10. Investors by type and country. The breakdown by type is to show the propor-tions of pension funds, insurance companies, banks, funds of funds7, indus-trial investors, SWFs8, private investors etc. The breakdown by country is tobe divided into Denmark, other Nordic, other Europe, USA, rest of world.

11. Information on assets under management.

12. A description of the fund’s companies statinga. Geographical location (Denmark, other Nordic, other Europe, USA,

rest of world)b. Industrial sector (agriculture, food, textiles, chemicals etc. – cf. Statistics

Denmark’s classifications)c. Contact names or references to the companies’ websites, key figures for

the companiesd. Examples of how the fund has created value in relation to its investments

13. General information on developments in portfolio companies and any significant changes in portfolio companies each year.

14. An overview of divestments by sector, fund and exit year with a descriptionof the buyer of each company.

15. Possibility of downloading annual reports from portfolio companies (pos -sibly in the form of a link to the portfolio company’s website).

16. Press contact.

7. A fund of funds is an undertaking whose primary activity is investing in private equity funds.8. SWF is an abbreviation for sovereign wealth fund (a state-owned fund).


A. Background

It is appropriate for private equity funds covered by these guidelines to submit avariety of information to DVCA (or a company designated by DVCA) in order toprovide the data needed to assess private equity funds’ activities. See also thecomments on DVCA’s duties in section IV.

B. Guidelines

A private equity fund is to submit the following information to DVCA:B The amount raised per fund and the upper limit for the size of the equity in-

vestments that the private equity fund may then makeB Purchases and sales of companies and their enterprise value broken down by

company

A. Background

Limited partners are a private equity fund’s investors. Communication with lim-ited partners is extensive and follows EVCA’s guidelines, which provide a stan-dardised framework for communication.

As a result of the extensive and often business-critical communication betweenlimited and general partners, it is not possible to share the content of this com-munication with the public. DVCA nevertheless recommends that, taking dueaccount of their business model, funds impose as few restrictions as possible ontheir investors’ disclosures concerning their involvement in a particular fund.

B. Guidelines

Private equity funds covered by these guidelines are to:

1. Follow established guidelines for communication with limited partners/ investors, which will normally be EVCA’s guidelines, which can be found atwww.evca.org. This information is to include a short description of each indi-vidual investment in the fund, an overview of the individual limited partner’sinvolvement in the fund, and details of fees to general partners.

2. Value portfolio companies in accordance with the valuation guidelines pub-lished by the International Private Equity and Venture Capital Board (IPEV) orthe Private Equity Industry Guidelines Group (PEIGG) or such other standard-ised guidelines as may be published in the future.

3. Reporting to limited partners


2. Submissions to DVCA


A. Background

Besides the general need for increased transparency in relation to private equityfunds and the companies they own, there may be situations where there is a par-ticular need for communication.

B. Guidelines

GeneralA private equity fund has a duty to communicate effectively with employees andother important stakeholders, either directly or through its portfolio company,throughout the period of ownership. This is to happen wherever relevant andpossible, but taking due account of the legitimate interests of the private equityfund and the company in confidentiality, which may pose an obstacle to com-munication.

Private equity funds are to prioritise good and open ongoing collaboration withthe company’s employees through information, consultation and negotiationwith union representatives and other employee representatives.

The private equity fund and/or company must keep union representatives orother employee representatives updated through the company’s works council,employee-elected board members etc. concerning any plans the fund may havefor the company that may be of material significance to employees. Informationmust also always be provided in accordance with applicable legislative require-ments and stock exchange rules.

Communication in connection with a private equity fund’s acquisition of companiesRegardless of whether investment is being made in a listed company or anothertype of company, planned investments are not normally communicated beforethey are made. However, this does not apply if disclosure is required by applica-ble legislation or stock exchange rules.

The following applies when a private equity fund takes over a company:

In connection with the acquisition, the outside world is to be informed about thenew owner’s plans for the company.

External communication, including press releases, is to contain, as a minimum,information on the following:B The new owner’s identityB The commercial rationale for the investmentB Development plans for the company (general strategy)B Expectations for the company’s developmentB Expected ownership horizonB Effect on stakeholders

The private equity fund and/or company is to hold meetings with union repre-sentatives or other employee representatives under the auspices of the company’sworks council etc. to organise information for employees and develop a plan forinternal communication.

4. Requirements for communication by private equity portfolio companies



Internal communication in connection with a private equity fund’s acquisition of companies In connection with the acquisition of a company, the company’s employees areto be informed of the new owner’s plans for the company and of the opportun -ities and consequences that the change of ownership will have for employees.This is to happen as early as possible and in accordance with relevant legislativerequirements and stock exchange rules.

Communication materials, messages etc. should be formulated in collaborationwith representatives of the company to ensure relevance and backing within theorganisation.

A plan for internal communication in connection with the acquisition of a com-pany is expected to contain the following:B Description of what is to be communicated to whom and whenB Timetable for employee meeting(s) to present the new owners B Plan for following up on employee meetings, including follow-up on topics

that employees can reasonably be expected to want answers toB Internal releases (elaboration of press release, possibly including the owners’

reasons for deciding to sell to the new owners)B Q&A list that as far as possible answers the questions that can be expected

from employees and other stakeholders B Relevant internal communication, which is to be made as widely available as

possible, either by using existing channels or by establishing new ones (in-tranet, newsletter etc.)

The private equity fund and/or company must also ensure that the company canfulfil its obligations under applicable labour agreements and legislation to ensurethat union representatives or other employee representatives are kept informedand involved in matters of material significance to employees’ terms of employ-ment as early as possible.

Communication in connection with a private equity fund’s sale of a companyA plan for internal and external communication in connection with divestmentis to be an integral part of the divestment strategy, and is to be developed in con-junction with the buyer of the company.

In principle, the buyer assumes responsibility for communication concerningthe takeover of the company once the agreement is entered into. The private eq-uity fund is as far as possible to ensure that DVCA’s guidelines for communica-tion are observed during the sale process, regardless of whether the company’snew owner is a member of DVCA.



4. Requirements for communication by private equity portfolio companies (continued)

A. Background

Private equity funds’ particular strength is active ownership in the form of thecap acity to offer companies strategic advice, industrial expertise, suitable cap -ital resources and a network based on the specific circumstances of the individ-ual company.

Private equity funds’ industrial network (in other words, the people who eitheradvise the management company or are included directly on companies’boards) normally consists of people who are or have been active players in theindustry. This group of people can advise at fund level on the acquisition andsale of companies, and contribute at portfolio company level to developing thecompany in question. This collaboration can take many different forms, includ-ing advising on a consultancy basis.

B. Guidelines

There must be no doubt about whose interests the individuals involved in atransaction are acting in. This applies particularly if a person is actively involvedin the management of a company and has a decisive influence over possibletransactions.

Particular problems can arise when one or more private equity funds show an in-terest in a company in a purchase or sale situation. In such a situation, execu-tives, directors and financial advisers of a candidate company who have a signif-icant financial or commercial interest in the bidding private equity fund have aduty to inform the chairman of the company in question of this in accordancewith standard disqualification principles. This applies regardless of whetherthis person is part of the private equity fund’s formal advisory network as pub-lished on the fund’s website.

The above applies from today’s date.

5. Private equity funds’ relations with their industrial network



To create a better understanding of private equity funds, it is important that thesector itself takes responsibility for collecting and consolidating data. Thesedata are to come from both portfolio companies and the funds.

DVCA is to publish a yearly report on the basis of a variety of information submit-ted by private equity funds and portfolio companies. This report is to include ageneral account of trends in the industry and a statement from DVCA’s corp-orate governance committee.

The idea is for DVCA’s yearly report to include general information on:B Total assets under managementB Capital structure and financial gearing B Total return relative to benchmarkB Number of employees in portfolio companiesB Total number of acquisitions and transaction sizesB Key figures for portfolio companies, such as revenue and earningsB Estimates of changes in number of employees due to terminations and recruit-

mentB Estimates of investment in fixed capital, R&D etc.

To support the preparation of an aggregated analysis at sector level of the mainsources of value creation, the following are to be included: B Capital structure and financial restructuringB Growth in market multiplesB Growth generated by strategic restructuring and operational improvements

To ensure consistency from country to country, this analysis will be developed inclose collaboration with Walker Working Group and the British Private Equityand Venture Capital Association (BVCA).

A committee will be appointed to monitor compliance with these guidelines andpropose any necessary adjustments. This committee will comprise DVCA’s chair-man, a state-authorised public accountant and an independent industry repre-sentative.

These guidelines are to be seen as a first step in creating a set of general rules forfunds’ activities, and the idea is for the guidelines to evolve in line with practicein the sector.

In addition, the committee will issue an annual statement in connection withDVCA’s yearly report concerning the extent to which DVCA’s members have com-plied with the guidelines.

IV. DVCA in the future

1. Requirements for DVCA’s communicationand data resources

2. DVCA’s committee for good corporate governance in private equity funds


Fully covered by the guidelinesAxcelCapideaDania CapitalDansk KapitalanlægEVOLD EquityPolaris Private Equity

Partially covered by the guidelines (see paragraphs 2–5 of section III)3iAltorCapManCVC Capital PartnersEQTIndustri KapitalNordic CapitalNordic GrowthNordic Telephone Company (Apax, KKR, Permira, Blackstone, Providence)

Not as yet covered by the guidelinesATP PEPC.W. ObelDanske Bank – Danske MarketsDanske Private EquityDeltaq Erhvervsinvest NordExecutive CapitalIndustri Udvikling9

Jysk Fynsk KapitalKIRKBISPEASSR Private Brands

Funds covered by DVCA’s guidelines

List of private equity fundsthat are members of DVCAand covered by the guidelines as at 1 June 2008


Appendix A

9. Has acceded to the guidelines.


Walker Working Group was established in 2007 by a number of international pri-vate equity funds with a view to developing a voluntary set of guidelines onopenness and transparency in private equity funds operating in the UnitedKingdom. A consultation document setting out the foundation principles for theguidelines was published on 17 July 2007, and following a consulting process thefinal guidelines were published on 20 November 2007.

The guidelines follow the so-called comply or explain principle. This means thatfunds must either comply with the guidelines or explain why they are not com-plying.

Who is covered by the guidelines from Walker Working Group?B Private equity funds authorised by the FSA that are managing or advising

funds that either own or control one or more UK companies or have a designat-ed capability to engage in such activity in the future

B Companies which are acquired by one or more private equity funds in a sec-ondary or other private transaction where enterprise value at the time of thetransaction was in excess of GBP 500 million, more than 50% of revenue wasgenerated in the UK, and there were more than 1,000 full-time employees

Portfolio companies must provide the following in their audited annual reportsin addition to the legislative requirements:

A business review conforming to the provisions of § 417 of the Companies Act,incl. sub-section 5, which normally only applies to listed companies. This sub-section lays down requirements pertaining to general trends and factors affect-ing the company’s future development, performance and market position, andalso requires that information must be provided on environmental matters, em-ployee matters and CSR.

The UK industry organisation for private equity funds – BVCA – will in futurecommunicate more proactively with the outside world. Among other things, thismeans that an aggregated analysis will be carried out at industry level of themain sources of value creation in companies owned by private equity funds.This concerns the effects of:B Gearing and financial restructuringB Growth in market multiples and earnings in the industryB Growth generated by strategic restructuring and operational improvements in

the business

Background

Greater requirements for communication by portfolio companies

New requirements for industry communication

Walker Working Group – the UK guidelines

Introduction to Appendix B


The responsibility for the work on the UK guidelines lay with Sir David Walker,former chairman of the board of Morgan Stanley. The working group establishedto advise him – Walker Working Group – consisted of representatives of a num-ber of important UK and international funds:

Sir Michael Rake, Chairman, British TelecomAdrian Beecroft, Deputy Chairman, Apax Partners David Blitzer, Senior Managing Director, Blackstone Group International Ltd. Anne Glover, Chief Executive, Amadeus Capital Partners Ltd. Robin Hall, Managing Partner, Cinven Baroness Hogg, Chairman, 3i Lord Hollick, Partner, KKR & Co Ltd. William Jackson, Managing Partner, Bridgepoint Dwight Poler, European Managing Director, Bain Capital Ltd. Rod Selkirk, Chief Executive, Hermes Private Equity

A detailed summary of the differences and similarities between DVCA’s guide-lines and the UK guidelines is given in the following pages.

About Walker Working Group

DVCA’s guidelines

1. Who is covered by the guidelines?

Private equity funds All private equity funds which are members of DVCA and exceed:– Total commitment > DKK 500 million

Portfolio companies Companies (class C size under the Danish FinancialStatements Act) which exceed:– Revenue > DKK 238 million (EUR 32 million)– Assets > DKK 119 million (EUR 16 million)– Number of employees > 250

2. Basic principles of the guidelines

“Comply or explain” Yes. Noncompliance must be published on the privateequity fund’s or portfolio company’s website.

Substance over form Yes

Materiality over box-ticking Yes

3. Guidelines for portfolio companies’ reporting

3.1. Requirements for the annual report

Deadline for publication 5 months from end of financial year (in accordance with therequirements of the Danish Financial Statements Act).

Requirement for a verbal statement on the current and Yes. Management report (cf. requirements of the Danishexpected financial activity Financial Statements Act).

The management report/business review must cover the following operational areas:

The company’s main activities Yes

A statement on the progress of the company’s activities Yesand financial affairs

The company’s expected progress, including special conditions and Yesuncertain factors on which the management has based the description

Environmental issues Yes

Employee matters, including knowledge resources of major Yesimportance for the company

A statement on employee turnover, including terminations, Yesrecruitment etc.

Social and societal issues Yes, via other issues

Policies relating to the environment, personnel, and social issues Yes, via other issuesand their effectiveness

Research and development activities Yes

Significant events occurring after the end of the financial year Yes

Comparison of Danish and UK guidelines for private equity funds


Appendix B

Walker Working Group’s guidelines Comments

A company authorised by FSA which owns a portfolio The UK works with a definition based on FSA authorisation,company covered by the guidelines. whereas Denmark works with a definition based on typical

characteristics for private equity funds.

Companies which exceed: The Danish guidelines cover almost all companies owned– Enterprise value > GBP 500 million by private equity funds, while the UK guidelines affect– Revenue > 50% in the UK roughly only the 100 largest companies. Lower threshold – Number of employees > 1,000 in Denmark and no Danish requirement concerning

distribution of revenue in Denmark.

Yes. Noncompliance must be published on the privateequity fund’s or portfolio company’s website.

Yes

Yes

6 months

Yes. Business review + financial review.

The information in the business review is in line with listedcompanies in the UK. This must be seen in light of the factthat it is only the really big companies that are covered bythe UK guidelines.

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

No

Yes


DVCA’s guidelines

The management report/financial review must cover the following The management report must include information on the areas relating to financial risks/corporate governance: special risks as well as ordinarily occurring risks within the

company’s sector, including business and financial risksthat may affect the company. This description must focusin particular on the financial risks that are associated withthe chosen capital structure.

Which private equity funds own the company and the size of their holdings Yes

Which partner(s) in the private equity fund represent(s) the Yesfund(s) at the given company

Who the individual members of the board represent Yes

Capital structure (e.g. breakdown into share classes etc.) Yes

The general meeting (any special provisions in the articles of association Yesconcerning the board’s powers/authority to approve distributions etc.)

Stakeholders (who are the company’s primary stakeholders Yesand what is the management doing to accommodate them)

The board’s tasks and responsibilities (employee representatives, Yesnumber of board meetings etc.)

Current remuneration of the management and board Yes

Shares held directly by the board (collectively) and management Yes(collectively) if they exceed 5% on the balance sheet date

3.2. Requirements for reporting/communication

Publication of annual report on the website Yes

Requirement for a half-year update (verbal statement) Yes, but only for delisted companies.

3.3. Key figures covered by reporting to the industry association

Revenue and earnings Yes

Employees Yes

Capital structure Yes

Investment in fixed capital Yes

Investment in research and development Yes

Cash flows Yes

Responsibility for data handling Audit firm/DVCA

Annual report prepared by DVCA

4. Guidelines for private equity funds’ reporting and openness

4.1. Information on private equity funds’ websites

Confirmation that the guidelines are being followed Yes

Description of the fund’s history, origin, management and organisation Yes

General strategy for the fund, including investment criteria Yes(geography/sector)

Investors by type and country as well as investor policy Yes

Description of carried interest programme Yes, if it departs significantly from the market standard.

Description of policy for social responsibility Yes

Statement of types of asset under management Yes

Description of the fund's companies (geography, sector etc.) Yes

Annual statement on general progress of portfolio companies Yes

Statement on divestments Yes

Possibility of downloading annual reports from portfolio companies Yes

Press contact Yes

Appendix B: Comparison of Danish and UK guidelines for private equity funds



The financial review must include information on goals andpolicies for risk management in relation to the company’sprimary financial risks and uncertainties, including gearing(with references to relevant balance sheet items, cash flowsand notes).

Yes

Yes

Yes

No

No

No

No

No

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Audit firm

BVCA

Yes

Yes

Yes

Yes

No

No

No

No

Yes

No

No

No



The Danish guidelines lay down requirements for informa-tion on corporate governance that are more extensive thanthose in the UK. The extended requirements are in accord -ance with the recommendations relevant for private equityfunds that are laid down for listed companies in Denmark, cf. the Recommendations for good corporate governance.

DVCA’s guidelines

4.2. Reporting of data to the industry association

The raised capital per fund in the previous year and the upper limit for Yesthe size of transactions that may then be carried out on this basis

Listing of purchases and sales of portfolio companies and the values Yesthereof for the previous year

Estimate of the overall fees paid to external consultants and Nofinancial institutions in the previous year

Responsibility for data handling Audit firm

Annual report prepared by DVCA

4.3. Reporting to limited partners (the investors)

The communication with limited partners/investors must comply with YesEVCA’s guidelines, and the continuous fund reporting must include:– Summary of each individual investment in the fund – Detailed overview of the individual limited partner’s investment and

return in the fund– Details of management and other fees paid to general partners

Valuation of companies must follow the valuation guidelines published Yesby the International Private Equity and Venture Capital Board (IPEV) or the Private Equity Industry Guidelines Group (PEIGG) or such otherstandardised guidelines as may be published in the future

Recommendation that, taking due account of their business model, Yesfunds impose as few restrictions as possible on their investors’ disclosuresconcerning their involvement in a particular fund

4.4. Private equity funds’ reporting of strategic changes in the portfolio companies

Requirement that the private equity fund communicates effectively Yes. Also includes detailed guidelines for external andwith employees and other important stakeholders either directly or internal communication in connection with the privatethrough the portfolio company in connection with strategic changes. equity fund’s purchases and sales of companies as well asThis is to happen as early as possible and taking due account of the the continuous dialogue with employees via employee-confidentiality aspects which may be a natural obstacle to elected board members and the works council. Effectivecommunication communication must be carried out with employees

throughout the ownership period.

If a company experiences problems in relation to its operations such No. Danish legislation, including the Danish Bankruptcythat its financial situation is critical and it is not deemed possible to Act, adequately ensures that the board must respond tointroduce further capital, the private equity fund’s board representatives financial difficulties.must undertake not only to inform the investors but also to bring aboutthe necessary initiatives to the extent that is practically possible

5. Other matters

General guidelines for private equity funds’ relations and Yesuse of industrial and other consultants

6. Continuous updating and observance of the guidelines

A committee will be appointed for good corporate governance Yesin private equity funds with the following tasks:

Assess the need for updating of the guidelines Yes

Monitor that the existing guidelines are being observed by Yesthe private equity funds and their portfolio companies

Publish an annual report on the committee’s work, including Yesstatistical material on the private equity fund industry




Yes

Yes

Yes

Audit firm

BVCA

Yes

Yes

No

Yes. No further details.

Yes

No

Yes

Yes

Yes

Yes



CEBR research report:

Private Equityin Denmark


The Centre for Economic and Business Research (CEBR) at Copenhagen BusinessSchool has produced a report on private equity in Denmark on behalf of DVCA.The full text of the report (in Danish) can be downloaded from DVCA’s website:www.dvca.dk.

The report is the result of an independent project carried out on the basis of amandate agreed upon jointly by DVCA and CEBR. This mandate can also befound on DVCA’s website.

The researchers were granted access to study ten transactions in depth and hadaccess to information that is not normally publicly available. The researcherswere also given an opportunity to meet the companies’ management and the pri-vate equity funds’ partners.

DVCA believes that the report’s sections on capital structure and tax are of par-ticular interest to the public, and so these sections are reproduced in lightly edit-ed form below, together with the relevant parts of the report’s executive summa-ry and a list of references.

Introduction


Section I provides an overview of the capital structure of private equity portfoliocompanies. Perhaps the most important characteristic of private equity funds isthat they undertake leveraged (debt-financed) buyouts, where the capital struc-ture of the companies acquired is shifted towards more debt and less equity. Thisincrease in debt has given rise to concerns about the financial vulnerability ofthe companies acquired. However, debt-financing the activities of a company orprivate equity fund is not necessarily a problem, rather a natural part of econom-ic reality in modern society. The debt is matched by a risk assumed by profes-sional lenders that must be assumed capable of looking after their own interests.

Through a survey of Danish companies, we have found that debt levels at privateequity portfolio companies typically rise following the buyout, in some casesquite considerably, but are brought down again over time. We have not foundreason to criticise the capital structure of private equity portfolio companies.However, the complexity of private equity structures, including borrowingthrough holding companies and complex loan contracts, means that we cannotclaim to have a complete picture. This can therefore be said to be another areawhere greater transparency is needed to clarify private equity funds’ impact onthe wider economy.

Section II reviews the tax implications of private equity buyouts. There is goodreason to expect that, in most cases where a private equity fund takes over acompany, the company will pay less corporation tax than if it had remained withits original owners. Private equity funds aim – and have unique opportunities –to increase the ratio of debt to equity at their portfolio companies. This leads tolarger interest deductions, which erodes taxable income and translates into low-er tax payments, at least in the short term.

The actual buyout generally leads to payments of tax by the previous owners onthe capital gains they make on the sale of the company. Similarly, investors inthe private equity fund will pay tax on their capital gains when they, in turn, sellon the company. However, these capital gains taxes are not unique to a privateequity situation. The original owners could also sell the company later to another player, realise a capital gain and pay tax on this. It is therefore difficult tosay whether, on balance, a period of private equity ownership leads to higher orlower payments of capital gains taxes.

In any case, corporation and capital gains taxes account for only part of the over-all tax implications of a private equity fund’s ownership of a company. A com-plete picture requires information on where the previous owners invest theirmoney after they have been bought out; where the banks supplying loan capitalto the portfolio company obtained their funds; how the investors in the privateequity fund finance their investments in the fund; and so on. It is particularly im-portant to ascertain whether the increased deductions of interest on loan capitalin the company (or holding company) are offset by increased taxation of capitalincome for those supplying funds to the banks furnishing the company with theadditional loan capital.

There are a number of uncertainties when it comes to the tax treatment of privateequity funds’ activities. The ongoing official review of (private equity funds and)acquired companies can be assumed to raise numerous issues requiring clarifi-cation. Nor can we rule out further changes in tax law, which may have an impact on the activities of private equity funds. However, this situation is by nomeans unique to Denmark. Equivalent uncertainties and points of contentionconcerning private equity funds’ tax position can also be found in other compa-rable countries.

Executive summary

Tax implications of private equity ownership

Capital structure of private equity portfolio companies


Despite these elements of uncertainty, a private equity fund is nothing specialfrom a tax viewpoint. It is a particular type of financial institution that “makesits living” from buying and selling companies, but the investments made by thefunds and the cash flows resulting from these buyouts are captured by the taxsystem. However, it is also a fact that funds accentuate and test weaknesses inthe tax system. For as long as interest on debt is treated differently to returns onequity, for as long as the taxation of international income remains inconsistent,for as long as there are problems differentiating between the fruits of labour andthe returns on savings in the tax system, and for as long as different types of cap-ital income are taxed in very different ways, taxpayers will be able to “think tax”and maximise their income by minimising their tax liabilities. Where this hap-pens in connection with the activities of private equity funds, it seems to be anexpression of a more general phenomenon.

Morten Bennedsen, PhD, professor, Department of Economics and CEBR, Copenhagen Business SchoolThomas Poulsen, PhD, senior analyst, CEBR, Copenhagen Business SchoolSteen Thomsen, PhD, professor, Department of International Economics and Management, Copenhagen Business School Søren Bo Nielsen, PhD, professor, Department of Economics, Copenhagen Business School

Not pictured:Jakob Bundgaard, PhD, associate professor, Law Department, Copenhagen Business School

The research team behind the CEBR report


Capital structure refers in the first instance to the relationship between debt andequity, and in the second to the relationship between long-term and short-termdebt. The level of debt finance – leverage – can be measured relative to either eq-uity or earnings.

Characteristic of private equity funds is heavy debt-financing of both buyoutsand subsequent investments in the companies acquired, which has given rise tocriticism and concern about how the high debt burden will impact on the com-panies’ competitiveness.

However, it is worth noting that listed companies also make extensive use of debtfinance when making acquisitions. Many listed companies have also adjustedtheir capital structure in favour of more debt and less equity, for example by buy-ing back shares or paying high dividends. Debt finance is also used by private in-dividuals, most notably for house purchases, which are mainly debt-financed inthe form of mortgage loans (and in many cases the deposit too is financed with abank loan). Thus almost anyone who has bought a home in recent decades hasmade a highly leveraged investment and reaped the rewards of this in a risingmarket, where a relatively small deposit can grow into a large amount of homeequity. Most of us will also be familiar with the risks associated with falling houseprices. So there is nothing unusual or suspect about debt-financing an investment.

So debt and leverage are not necessarily a problem. But there can be situationswhere debt may be problematic. For example, leverage played a significant rolein the stock market crash of 1929 and the lengthy depression that ensued, andleverage has definitely exacerbated the ongoing sub-prime crisis. If equity levelsat Danish companies fall to critical levels due to private equity ownership, thesecompanies’ vulnerability to economic downturns and strategic room to ma-noeuvre will be drastically reduced. As bankruptcies and other financial prob-lems at some companies can also impact on other companies, this can become apolitical issue, and so it is reasonable to consider whether there are any specialproblems associated with the capital structure of private equity funds and theirportfolio companies.

An assessment of the capital structure of private equity portfolio companies re-quires a general understanding of the way private equity funds work.

Figure I.1. Capital structure of a private equity portfolio company.

Capital structure of private equity portfolio companies

I.

Capital structure of private equity funds

Investors (committed capital)

Fund

Acquisition vehicle/holding company

Injection of (equity) capital

Injection of (equity) capital

Portfolio company

Management company

Lenders

Lenders


A private equity fund’s equity consists of capital committed by pension fundsand other investors that might otherwise have invested directly in equities andbonds. For a set period, the fund’s managers – the management company – areentitled to call capital from investors up to a pre-agreed level. The fund can sup-plement this capital with loans of, say, twice this amount, enabling it to acquirethe target company from its previous shareholders (and, where necessary, settleits debts). The fund’s capital is transferred to an acquisition vehicle, which takesout the necessary loans from banks and other creditors and acquires the compa-ny. Following the takeover, it is not uncommon for the fund to have the companypay out a large dividend to the holding company, enabling it to pay off the loanstaken out in connection with the buyout. This dividend is funded by reducingthe equity of the acquired company and/or having it raise its own debt. Thisprocess is known as a debt push-down.

The acquisition vehicle/holding company can have several functions, and inlarge transactions there may be several holding companies one above the other.It may be appropriate to differentiate between creditors, as debt further downthe line (such as that taken out by the company itself) ranks higher and thereforeentails less risk (and lower interest costs), while debt further up the line (in theholding company) is more risky (and expensive) because debt at the company it-self is repaid first. There may also be tax incentives or other motives for holdingcompany structures (see discussion of tax below).

A complete assessment of the capital structure of a private equity portfolio com-pany demands a general understanding of the whole of this structure. For exam-ple, it is possible for the management company to call further investments frominvestors if this is deemed necessary. It is also possible that the holding compa-ny will take out further loans and invest in the company. On the other hand,there may be great pressure on the company to generate sufficient earnings forthe holding company to be able to pay its borrowing costs out of dividends.

Legally speaking, there are watertight bulkheads between fund, holding compa-ny and portfolio company. Thus the fund is not legally obliged to help out a com-pany in need. In practice, though, things are less clear-cut. The bankruptcy of aportfolio company will damage the management company’s reputation andmake it difficult to borrow money or attract new investment in the future. In ad-dition, there may be agreements with banks and other creditors that commit thefund beyond the company’s equity.

The possibility of calling additional capital from the fund’s investors gives anadded level of security that makes it possible for portfolio companies and theirholding companies to increase their leverage and secure better credit terms thana stand-alone company.

However, it is not always possible for a fund to avoid bankruptcies in its portfo-lio. While there have been hardly any examples of this in Denmark, there havebeen abroad. A downturn in the economic climate, rising borrowing costs and atighter credit market can put companies with low equity levels under pressure.Besides the risk of bankruptcy, there are costs due to companies losing theirfreedom to manoeuvre – for example, they might be unable to make attractiveacquisitions in a troubled market.

Lenders are mainly banks, which often choose to share the risk with other banksthrough syndicated loans or other mechanisms. Buyouts of Danish companiesare typically financed by Danish or Nordic banks, as they are assumed to knowthe business better and so be in a better position to assess the risk. This meansthat the company’s interest costs are typically matched by interest income at a


Danish or Nordic bank. When it comes to large transactions, though, it is morecommon for the private equity funds to borrow from large foreign banks that aremore willing to take on the risk. Very large companies may also issue bonds thatare bought by institutional investors and others who find it attractive to acceptthis risk.

A key factor in this context is that banks are professional investors that must beassumed capable of assessing the risk they are taking on by lending to privateequity portfolio companies. They can decide not to lend their money. They candemand a higher interest margin if they consider the risk to be greater than forother exposures. And they can impose special covenants on the borrower, suchas monthly audited reporting of debt multiples to the bank, limits on debt/EBITDA, loan credit quality, loan interest as a function of borrowing, charges onthe company’s assets, rights to veto specific decisions and repayment in theevent of sale.

Debt at private equity portfolio companies is, if at all, a problem first and fore-most for the banks that have lent the money. So one might ask whether any debtproblems (cf. the current credit crunch) should be put down to the funds or tothe banks. Everything suggests that the credit crunch is due to a bubble in thehousing market and the associated poor-quality (sub-prime) mortgages, where-as private equity funds are only a very small part of the problem.

In theory, debt has both costs and benefits. Researchers have not been able topinpoint the best of all possible capital structures, and there seem to be differ-ences in capital structure even between companies that are similar in other respects.

Other things being equal, debt finance has major benefits. Because shareholdersare rewarded after creditors and accept more risk, they require a risk premiumover and above the lending rate, which makes equity more expensive. In addi-tion, interest costs are generally deductible for corporation tax purposes.Finally, debt and interest costs serve as a constant reminder to management thatcapital is not free, and may therefore help to prevent unprofitable investments.

However, high debt levels increase the risk of a company not being able to meetits financial commitments, resulting in losses for creditors in the event of bank-ruptcy or financial problems. This is reflected not least in a higher rate of intereston the company’s debt, as banks and other creditors apply a risk premium. Ontop of this comes perhaps the most important issue, namely a loss of freedom tomanoeuvre due to high interest costs and restrictive covenants, which may meanthat profitable investments are not realised.

Where the line should be drawn – the mix of debt and equity that serves the com-pany best – varies from company to company. During periods of low borrowingrates and economic growth, it will probably be advantageous to have higher lev-els of debt finance, while the benefits of a solid equity base only really emergeduring more difficult times.

The following looks at a hypothetical example of a leveraged investment. A pri-vate equity fund finances a DKK 3bn buyout by investing DKK 1bn in an acquisi-tion vehicle and borrowing DKK 2bn from the bank (giving a debt-to-equity ratioof 2, which is not unusual). The investment proves a success, as the value of thecompany increases by 100% over a period of time to DKK 6bn (roughly corre-

I. Capital structure of private equity portfolio companies

The costs and benefits ofdebt (leverage)

Capital structure of private equity funds(continued)


sponding to the rise in the stock market from 2003 to 2006). Assuming un-changed debt, this means that the company’s equity has grown to DKK 4bn, giv-ing a return on investment of 300% for the period.

Table I.1. Example of leverage.

DKKbn Start Finish Return

Equity 1 4 300%

Debt 2 2

Value of company 3 6 100%

A leveraged investment is therefore advantageous when asset prices are rising,and many private equity funds with leveraged investments have undoubtedlybenefited from rising share (asset) prices in recent years. On the other hand,though, it is not hard to see that a 33% decrease in the value of the company fromDKK 3bn to DKK 2bn would completely wipe out its equity and give a return of -100%. In other words, debt (increased leverage) is not a fail-safe solution forlower capital costs.

On the face of it, reducing a company’s capital costs by taking out debt seemsunproblematic. Imagine a company financed with 30% debt and 70% equity.Borrowing costs are 6% (just above the bond rate), and the cost of equity is 9%(6% plus a 3% risk premium for a lower-ranking and riskier investment). Thecost of capital is then 30%*6% + 70%*9% = 8.1%. If the capital structure ischanged to 70% debt and 30% equity, the cost of capital is immediately reducedto 70%*6% + 30%*9% = 6.9%.

But to some extent this simple calculation is misleading. The underlying risk as-sociated with the company’s earnings has not changed, and so, in theory, thechange amounts only to a redistribution of risk between shareholders andlenders. Shareholders’ risk of not receiving dividends on their investments hasincreased (which should lead to a higher required rate of return), and the sameapplies to the banks’ credit risk (which should lead to a higher lending rate).However, it is undeniable that it has often been possible to ignore this risk inpractice, and that neither equity investors nor lenders have fully discounted thefinancial risk in their required rates of return.

Since the cost of debt can be deducted from a company’s taxable income, debtalso has some rather more tangible tax benefits.

The following looks at a hypothetical example of the change in a company’s costof capital due to increased borrowing. Imagine that the company has assets ofDKK 5bn and that its debt is increased in connection with the buyout by DKK2bn, which is used to buy back shares. Before the buyout, the company had debtof DKK 2bn and equity of DKK 3.5bn. As can be seen from table I.2, the increase indebt leads to a substantial reduction in the cost of capital from 7.4% to 6.0% if weignore other taxes and the higher required rates of return on both equity anddebt due to the increase in leverage. The effect of the increase in leverage on thevalue of the company corresponds to the increase in interest deductions, in thiscase DKK 500m.

Debt and capital costs in the company

Tax benefits of debt



Table I.2. Example of reduction in cost of capital.

DKKbn Start Finish Required rate of return (r)

Equity (E) 3.5 2 9%

Debt (D) 2 4 6%

Value of company (V) 5.5 6

Cost of capital 7.4% 6.0%

Note: tC is the percentage rate of corporation tax, which has been set at 25% in this example.

What this example again fails to take into account is that higher leverage increas-es the risk associated with both equity and debt, and thereby the required rate ofreturn on both equity and debt. On the other hand, higher leverage has a neutral-ising effect, as the company is now making more use of the cheaper form of capital. In a perfect capital market, these two effects will precisely cancel each otherout. The only effect, therefore, is a reallocation of risk among the providers ofcapital; the overall level of risk is unchanged.

This section analyses leverage at a number of Danish private equity portfoliocompanies before and after acquisition. The data for the analysis are a combina-tion of data from Vinten (2008) on 73 Danish companies bought out by one ormore private equity funds, and data from Experian on these companies’ finan-cial disclosures to the Danish Ministry of Economic and Business Affairs. LikeVinten (2008), we have used data for the parent companies, as these are general-ly the surviving entities. However, the figures are naturally sensitive to structur-al changes in capital structure over time (such as the phasing out of shareholderloans due to a change in the law) and differences between the companies interms of holding companies and where the debt is located. They must thereforebe taken only as a rough guide to the companies’ development.

Table I.3 analyses developments at the 73 companies before and after acquisi-tion by private equity funds. The average company has assets of DKK 2bn (whichis naturally related to a small number of very large transactions). The companiesare growing rapidly pre-buyout in terms of assets, whereas the typical compa-ny’s assets fall post-buyout due to disposals and the optimisation of workingcapital. Debt is also growing pre-buyout, but not at the same rate as assets, andso the debt-to-assets ratio is in decline, which can be seen as unused debt capac-ity. Debt rises dramatically in the first year post-buyout, but is then broughtdown again. However, as assets are being reduced even more quickly, the debt-to-assets ratio continues to climb.

— · rE + — rD (1- tC)EV

DV

Empirical study

Table I.3. Leverage at private equity portfolio companies.

DKKm t-3 t-2 t-1 0 t+1 t+2 t+3

Debt*/assets 0.59 0.57 0.53 0.54 0.59 0.62 0.65

Debt*/equity 5.39 3.52 2.21 2.66 3.60 3.61 1.96

Assets 440,634 865,772 2,305,414 1,948,507 1,902,527 812,874 667,442

Debt 218,548 530,899 1,151,673 907,437 1,499,279 530,577 414,408

Equity 40,562 150,735 521,042 340,762 416,920 147,104 211,959

The table covers the period from three years prior to the year of acquisition until three years after the year of acquisition. 0 is the year of acquisition, t-1 the year before the year ofacquisition, t+1 the year after the year of acquisition, and so on.

*: Debt is the sum of current and non-current interest-bearing debt.

Note that this is a highly heterogeneous sample, resulting in substantial variations around the averages presented in the table.


Tax benefits of debt(continued)


Equity is also reduced, but surprisingly not until years 2 and 3 post-buyout.Nevertheless, equity in year t+3 seems to be markedly better than in year t-3 pre-buyout. The overall picture is thus that financial leverage (debt/equity) falls inthe years before the buyout, rises somewhat thereafter, and is then broughtdown again (and ends up lower than a couple of years before the buyout).

Movements in the debt-to-assets ratio are illustrated in figure I.2.

It can be seen that, on average, debt falls relative to assets in all three years lead-ing up to the buyout. There is a shift in the buyout year, and leverage increases(by just under 10 percentage points). In other words, the typical private equitybuyout focuses on companies that have seen growth in their equity levels and sohave unused debt capacity. It can also be seen that there is indeed an increase indebt post-buyout, but this does not seem dramatic (less than 10 percentagepoints). Leverage does nevertheless remain high during the three years post-buyout, and there are no signs of the debt-to-assets ratio coming down.

As could be seen earlier, though, there is a sharp drop in both assets and debt inthe post-buyout years. As average debt is brought down, just less far than assets,the figures cannot be considered alarming.

0.70

0.60

0.50

0.40

0.30

0.20

0.10

t-3

Figure I.2. Debt-to-assets ratio.

t-2 t-1 0 t+1 t+2 t+3

7.00

6.00

5.00

4.00

3.00

2.00

1.00

t-3

Figure I.3. Debt-to-equity ratio.

t-2 t-1 0 t+1 t+2 t+3



Figure I.3 shows the companies’ leverage in terms of the relationship betweendebt and equity. It can be seen that the debt-to-equity ratio falls during the threeyears leading up to the buyout, and again this is a result of a relative decrease indebt. This supports the hypothesis of unused debt capacity as a (partial) expla-nation for the buyouts. It can also be seen that the debt-to-equity ratio increasesin the buyout year and continues to rise in the following two years before fallingback in the final year to the level of the year before the buyout.

All in all, these figures do not give cause for concern. Debt rises after the privateequity buyout, but not beyond levels that the acquired companies were able tocope with a couple of years before the buyout. Debt is reduced in absolute termsafter the buyout, and there is a substantial decrease after the initial raising ofdebt relative to both revenue and earnings – the measures considered most rele-vant by both lenders and private equity funds.

However, we must stress the uncertainty associated with these figures. Debt takenout by holding companies is not included in these figures, and we know that a sub-stantial share of private equity funds’ debt is raised through these vehicles. A moredetailed picture of private equity funds’ effects on capital structure will there-fore require a more far-reaching study that also takes account of these factors.

Debt-financing the activities of a company or private equity fund is not necessar-ily a problem, rather a natural part of economic reality in modern society. The in-creased debt taken on by companies under private equity ownership has never-theless given rise to public debate, and this debate is justified, becauseaggressive leverage makes companies and the economy more vulnerable in theevent of a downturn. However, private equity funds’ debt appears to account foronly a tiny share of overall borrowing, and is therefore of only peripheral signifi-cance in the ongoing credit crunch, which can be attributed primarily to mort-gage finance and, in the second instance, banks’ general credit practices. Itseems likely that, like other borrowers, private equity funds were favoured upuntil 2007 by an ample supply of credit and favourable lending standards, whichhelped to create what is now considered to be a bubble in the prices of housesand other properties, equities and other assets. There is reason to assume thatbanks will be more cautious in their lending practices in the future – includingwhen it comes to lending to private equity funds.

Conclusion


Private equity portfolio companies’ debt typically increases after the buyout,sometimes dramatically, but this debt is matched by a risk assumed by profes-sional lenders that must be assumed capable of looking after their own interests(after all, they do not have to lend the money). In the case of Danish portfoliocompanies, the majority of lenders are well-known Danish (Nordic) banks likeDanske Bank and Nordea. The increase in debt also steps up the pressure onearnings at portfolio companies, which is viewed as a conscious part of the in-vestment philosophy. This is not suitable for all companies, but is particularlywell-suited to mature companies with a stable cash flow.

Thus we have not found reason to criticise the capital structure of private equityportfolio companies. However, the complexity of private equity structures, in-cluding borrowing through holding companies and complex loan contracts,means that we cannot claim to have a complete picture. This can therefore besaid to be another area where greater transparency is needed to clarify privateequity funds’ impact on the wider economy.


This section looks at areas of Danish tax law relevant to an analysis of how pri-vate equity ownership impacts on overall tax payments to Denmark.

The starting point in Danish law is that there are no special tax rules for privateequity funds. This means that these funds’ activities are subject to the same taxrules as other businesses.

The extent of Danish taxation of the actual private equity funds depends onwhether they are registered in Denmark or abroad. A Danish fund may be fully liable to tax in Denmark if it is organised as a limited company (as managementcompanies may be). If, on the other hand, a Danish fund is organised as a part-nership, taxation is at investor level. Foreign private equity funds will, in prin-ciple, have only a limited tax liability to Denmark on their earnings from Denmark.Thus it may be the case that foreign funds and their investors have a limited lia-bility to pay Danish tax on dividend or interest payments out of Denmark.

The vendor of a target company will normally realise a capital gain when sellingthe company’s shares. The tax treatment of this gain affects an overall assess-ment of the impact of private equity buyouts and ownership on tax payments.

In this respect, the outcome may be affected by the vendor’s identity and nation-ality. No tax liability to Denmark will be triggered if the vendor is a foreign phys-ical or legal person. In this situation, taxation will depend on the rules in thevendor’s homeland. In the case of a Danish vendor, however, the tax treatmentdepends on whether the vendor is a physical or legal person. Gains made byphysical persons are taxed as share income at a rate of 28/43/45%, but may betax-free for some small shareholders due to transitional rules from the previousregime for listed shares. Legal persons pay no tax on gains on the sale of sharesheld for more than three years.

If the vendor is a Danish physical person and planned the sale of the target com-pany, ownership will therefore typically be through a holding company that hasheld the target company for more than three years. When the net sale proceedseventually reach the vendor personally in the form of dividends from the hold-ing company, they will again be taxed as share income at a rate of 28/43/45%.

Buyout structureWhen it comes to the actual buyout structures, these too will be taxed under thestandard tax rules. One commonly seen structure involves the formation of aDanish holding company that takes out large amounts of debt to finance the buy-out, leading to substantial financing costs and so losses at the holding company.Under the current rules on compulsory joint taxation of Danish groups of com-panies, this loss is offset against the operating profit of the target company.

This structure is not a consequence of special rules for private equity funds butof existing standard tax rules that apply to Danish companies in general.

Debt financeThe key criticism to date has concerned the often very high levels of debt financeused and the substantial interest costs and losses that result. Under section 6,paragraph 1, letter e of the Danish State Tax Act, these interest costs are de-ductible from Danish companies’ taxable income. The same applies to losses ondebt under section 6 of the Danish Gains on Securities and Foreign Currency Act.

Tax implications of private equity buyouts

II.

1.Background


Thus the key feature of private equity funds from a tax perspective seems to betheir extensive use of debt finance. It is also in this light that the legislativechanges made to date need to be considered. On several occasions, thesechanges have been made as a direct result of private equity funds’ buyout activ -ities, and in particular the financing thereof.

It has been estimated that the Danish government is losing out on billions ofDKK in tax revenue as a result of these activities. More specifically, it was statedin the notes to Bill L 213 amending the Danish Corporation Tax Act that privateequity buyouts of seven large groups of companies led to a DKK 2bn decrease incorporation tax revenue relative to the year before the buyout.

The following discusses a number of issues relating to private equity structuresand buyouts, as well as other issues that have either attracted a great deal of at-tention or can be expected to do so in the future. The Danish tax authorities –SKAT – have embarked on a special review of private equity buyouts of sevenDanish groups of companies. The main aim of this review is to identify all of thecash flows involved and assess them in the light of Danish tax law. Although thereview is not yet complete, SKAT’s status report of 20 March 2007 provides an in-dication of the issues on which it is focusing. As a starting point, the status re-port says that all cash flows are to be examined with a view to producing a taxevaluation of all income and expenses.

For now, it has to be expected that the following issues will be raised at somepoint as a result of the ongoing review:B Identification of the “beneficial owner” of interest and dividends paid out of

Denmark. This issue is crucial, as it determines whether Denmark is entitled tolevy Danish withholding tax on interest and dividend payments. In principle,this is not the case for payments to companies registered in the EU or countrieswith which Denmark has a double taxation agreement (DTA). In several cases,though, it has been seen that intermediate holding companies registered inEU/DTA countries have been inserted between private equity funds registeredoutside these countries and the Danish target companies. The question in thiscontext is whether the Danish tax authorities are entitled to disregard theseintermediate holding companies as the beneficial owners of interest and div-idends. The tax minister has claimed on several occasions that withholding taxcan be levied in cases of a “flow-through entity”. There have yet to be any legaltest cases in this area in Denmark, but the topic is also high up the agenda in-ternationally, with several important court rulings pending. SKAT is lookingfor information that can document the absolute last link in the chain, andwhether this is in a non-DTA country. It is also looking to document whetherthe intermediate entities between Denmark and the ultimate recipients of div-idends or interest/capital gains can be viewed as flow-through entities. Thetax literature includes a detailed analysis of this issue and concludes that,with certain reservations, there must be fairly narrow limits on the tax author-ities’ right to disregard flow-through entities as the beneficial owners of income (see Bundgaard and Winther-Sørensen in SR-Skat 2007/5&6).

B There also seems to be a focus on the terms of loans from group companies(shareholder loans), and in particular whether interest payments comply withthe arm’s length principle.

2.Concrete tax issues


B There have also been cases of very high rates of interest that are not paid butinstead added to the principal, with the loan perhaps subsequently being con-verted into share capital. In this context, SKAT is looking at whether there willbe a limited tax liability on such interest payments.

B Although it is not mentioned explicitly, it has to be expected that SKAT willlook into whether existing financing instruments meet the criteria for beingconsidered debt under Danish rules, and whether the return on them can beconsidered debt for tax purposes. As an extension of this, it must also be ex-pected that the recently introduced section 2 B of the Danish Corporation TaxAct will be applied in certain cases where a hybrid financial instrument in thehomeland of the private equity fund or an intermediate holding company istreated as equity. The Danish companies issuing such instruments would thenlose the right to make interest deductions.

B SKAT is also expected to focus on payment flows in connection with the buy-outs. Straight after a buyout, dividends may be paid to the shareholders, whoimmediately lend the same amount of money back to the Danish group, re-sulting in substantial interest costs. SKAT has called this very aggressive taxplanning and noted that “from a normal financial perspective” it would benatural to let the money work in the Danish group without the extra cost of anintermediate entity with additional interest costs and a relatively high interestrate. In this context, SKAT has hinted that it will look into whether in all suchcases there are actual payment flows behind dividends and loans that areclosely related in terms of volume and time. This aspect of the review is ex-pected to highlight the issue of whether dividend payouts and subsequentloans that are valid under civil law can be set aside as if they had never takenplace.

B Another area expected to attract attention is the costs associated with buyoutsand the ensuing transactions. This includes the tax treatment of commitmentfees and other establishment costs when raising debt. “Stay-on bonuses” tosenior employees are another relevant issue. In several cases, such bonuseshave been treated as a deductible operating cost. However, in a case involvingLM Glasfiber, the courts have ruled that these are not a deductible operatingcost, because the senior employees in question were effectively performingwork for the shareholders in the form of sales promotion activities for the em-ployer company.

The problems highlighted correspond largely to the issues being raised in manyother countries where private equity funds have given rise to tax policy debate.

However, it should be noted that commenting on the tax implications of privateequity ownership is no straightforward matter, because it requires a broad as-sessment of the overall effects. An attempt to do just this will be made below.

II. Tax implications of private equity buyouts

2.Concrete tax issues(continued)


This section presents a highly simplified example of a private equity buyout andits immediate tax implications.

Scenario1. First comes the formation of the actual private equity fund (referred to as PEF

in the following). The investors behind PEF are assumed to consist of threegroups. The first two groups are “passive” investors: institutional investorsand private investors. The third group consists of “active” investors: the part-ners in the fund’s management company (referred to as MAN in the follow-ing). Besides working for MAN, they also invest personally in PEF. PEF is setup as a limited partnership.

2. PEF’s investments are governed by an extensive limited partnership agree-ment between the passive investors on the one hand and the active investorson the other. Among other things, the agreement specifies the managementfee that MAN is to receive for managing the capital committed (and subse-quently actually invested) by the passive (and active) investors.

3. One of the companies considered by PEF to be a buyout candidate is the com-pany TARGET. (This could be listed or privately held and is perhaps most like-ly to be family-owned.) PEF makes an offer to the existing owners of TARGET,and this is accepted.

4. The buyout now takes place in the following steps:a. PEF sets up the holding company HOLD, a limited company, and injects

some of its capital into HOLD.b. HOLD arranges loans from one or more banks to finance the acquisition of

TARGET.c. TARGET’s management are invited to become part of the new ownership

group and invest their own money in HOLD.d. The previous owners of TARGET are bought out with money from HOLD, and

TARGET’s previous borrowings are repaid.

5. The first tax implication of the buyout is the capital gain made by the previousowners of TARGET on the sale of their shares in the company. Whether or notthis gain is taxable depends on the identity of the previous owners. Tax willnot be payable if the previous owners are foreign physical or legal persons(companies). If the previous owners are Danish, the tax treatment depends onwhether a vendor is a physical or a legal person. Legal persons do not pay taxon gains made on the sale of shares held for more than three years, whilephysical persons are taxed at a rate of between 28% and 43% (see section II.2above).

6. TARGET continues to operate under its new ownership and files its first set ofaccounts. Taxable earnings will be calculated for the whole “group”, i.e.HOLD and TARGET taken together. These earnings will reflect two elements ofchange from before:– Changes in operating conditions (changes in economic and market climate,

internal restructuring etc.)– Changes in the level of debt capital

While the first element may not necessarily have anything to do with privateequity ownership per se, the second is a typical consequence of a private equity buyout.

3.A standardised example of aprivate equity buyout



As a rule, a private equity buyout will result in a substantial increase in thelevel of debt in the company (group). Other things being equal, this meanslarger interest payments – due partly to the increase in the amount of debt andpartly to the lowest-ranking debt (such as mezzanine finance) being more ex-pensive to service than higher-ranking debt. These higher interest paymentserode earnings and so bring down taxable income. It is therefore typical forprivate equity portfolio companies to pay less corporation tax, at least for thefirst few years after the buyout. This is the second tax implication of a privateequity buyout.

7. Private equity ownership is generally associated with more active ownershipthan other forms of ownership. There are many examples of companies’ earn-ings capacity gradually improving after a buyout. If this is the case, the com-pany’s earnings before interest deductions will be higher, and so, other thingsbeing equal, will its taxable income. This is the third potential tax implication.

8. Private equity funds are known for offering their portfolio companies’ man-agement relatively strong performance incentives (stock options, bonusesetc.), and these alternative forms of remuneration have special tax implica-tions. However, many other companies besides private equity portfolio com-panies have remuneration systems with strong performance incentives, andso the tax implications of this are not considered further here.

9. Having owned TARGET for a period, PEF decides to sell the company to a newgroup of investors. TARGET could be floated on the stock exchange, sold to atrade buyer, or sold to another private equity fund. The exit strategy dependson the circumstances.

In any case, HOLD will receive the sale proceeds. After repayment of the debttaken out for the original acquisition of TARGET, these become income (orcapital gains) that can be paid back to the investors. HOLD is liquidated, andits assets are returned to its owners – TARGET’s management and PEF’s threeinvestor groups.

For TARGET’s management, this translates into a capital gain on their sharesin HOLD, which will be taxed in the usual way (see section II.2). Institutionalinvestors will pay tax in line with the Danish Pension Returns Tax Act (PALtax) at a rate of 15%. Other investors and the partners in MAN will typicallypay tax at a rate of between 28% and 45% (see section II.2).

10. Once PEF has sold not only TARGET but also its other portfolio companies,PEF is wound up.

How tax payments change – an exampleThe scenario above is based on the buyout structure illustrated in figure II.1 be-low. To gain an idea of the potential extent of the tax implications of private eq-uity ownership, figures have been attached (see figure II.1).

Immediately before the buyout, TARGET has debt of DKK 1.0bn (with an interestrate of 8%) and equity (for accounting purposes) of DKK 0.7bn. Over the pastyear the company has generated revenue of DKK 1.9bn and EBIT of DKK 190m.After interest costs of DKK 86m, this translates into taxable earnings of DKK104m. With a tax rate of 25%, the company pays corporation tax of DKK 26m. Itsremaining earnings are used to reduce its debt from DKK 1,078m to DKK 1.0bn.

3.A standardised example of aprivate equity buyout (continued)



PEF and other interested parties work out that the company’s true value is some-what higher than DKK 1.7bn (the sum of debt and equity) and offer a higher price.PEF wins with a bid of DKK 2.0bn.

PEF injects DKK 680m into HOLD. Of this, DKK 18m comes from MAN’s partners,DKK 350m from institutional investors, and DKK 312m from PEF’s other in-vestors. TARGET’s management is also invited to invest DKK 20m in HOLD, tak-ing its equity up to DKK 700m.

HOLD takes out standard loans of DKK 1.1bn with an interest rate of 8% and anadditional DKK 0.2bn in mezzanine finance with an interest rate of 15%.

Thus HOLD has put together the capital needed to acquire TARGET for DKK 2.0bn. Of this DKK 2.0bn, DKK 1.0bn is used to repay the company’s debtand the remaining DKK 1.0bn is used to buy out the previous owners. (In prac-tice, HOLD must also obtain financing for the transaction costs associated withthe buyout, but these are ignored in the following for the sake of simplicity.)

The previous owners are the founders of the business, and their combined cap-ital gain on the sale of their shares is therefore the full DKK 1.0bn. The taxation ofthis is described above: they will either pay capital gains tax at a rate of between28% and 45% or, if the gains are “parked” in a holding company, eventually paytax on dividends from the holding company at the equivalent rates.

There is a modest improvement in TARGET’s operating results in the first year.Revenue and EBIT are DKK 100m and DKK 10m higher than the year before. Fromthe resulting EBIT of DKK 200m, interest costs of (1,100*0.08)+(200*0.15) = DKK118m must now be deducted, leaving taxable income of DKK 82m (see table II.1below). With a tax rate of 25%, the company pays corporation tax of DKK 20.5m,leaving net earnings of DKK 61.5m, which are used to repay bank debt, bringingit down to DKK 1,038.5m.1

Figure II.1. Private equity ownership of TARGET.(All figures in DKKbn)

Passive investors

PEF

HOLD

0.68

Management

TARGET

Banks

Partners in MAN

0.662

1. It is assumed in this example that no dividend payments are made whether the company comes under privateequity ownership or remains with its original owners as in the alternative scenario presented in table II.2.

0.018

0.02

2.0

1.3



Table II.1. Earnings and tax under private equity ownership.

Variable/year 0 1 2 3 4

EBIT 190.0 200.0 210.0 220.0 230.0

Interest -86.0 -118.0 -113.1 -107.3 -100.5

EBT 104.0 82.0 96.9 112.7 129.5

Tax -26.0 -20.5 -24.2 -28.2 -32.4

EAT 78.0 61.5 72.7 84.5 97.1

Opening debt 1078.0 1300.0 1238.5 1165.8 1081.3

EAT -78.0 -61.5 -72.7 -84.5 -97.1

Closing debt 1000.0 1238.5 1165.8 1081.3 984.2

All figures in DKKm.

In subsequent years, the group’s revenue and EBIT continue to grow by DKK100m and DKK 10m each year. In year 2, the accounts read as follows: EBIT ofDKK 210m less interest of 83.1+30 = DKK 113.1m leaves EBT of DKK 96.9m, result-ing in tax at 25% of DKK 24.2m and EAT of DKK 72.7m.

Earnings and tax are calculated in the same way for years 3 and 4, after whichTARGET is sold (see table II.1). The selling price for TARGET at the end of year 4 isassumed to be DKK 2.4bn. Less debt, which now totals DKK 0.98bn, this resultsin a payment to the owners of HOLD of DKK 1.42bn. Relative to their original in-vestment of DKK 0.7bn, this represents a considerable increase in value of DKK0.72bn and corresponds to an IRR on PEF’s investment of around 19%.

This sum is distributed between the investors on the basis of the size of their in-vestments and the terms of the partnership agreement behind PEF. Institutionalinvestors pay PAL tax of 15% on their returns, while other investors pay capitalgains or dividend tax depending on their circumstances.

Alternative scenario without private equity ownershipTo gain a better insight into the tax payments associated with a period of privateequity ownership, the scenario above is now compared with an alternative sce-nario. To make the two as comparable as possible, it is assumed in the alterna-tive scenario that there is no private equity buyout at the end of year 0, but TAR-GET is still sold in year 4 to the same group of investors that acquires thecompany in the private equity scenario, and for the same price. This alternativescenario is presented in table II.2 below.

It is also assumed that the original owners and the original management to-gether manage to improve the company’s operating results in the same way asthe private equity fund above. In other words, we are ignoring for now the addi-tional earnings in which private equity ownership may result.

3.A standardised example of aprivate equity buyout (continued)



Table II.2. Earnings and tax in the alternative scenario.


EBIT 190.0 200.0 210.0 220.0 230.0

Interest -86.0 -80.0 -72.8 -64.6 -55.2

EBT 104.0 120.0 137.4 155.4 174.8

Tax -26.0 -30.0 -34.3 -38.8 -43.7

EAT 78.0 900.0 102.9 116.6 131.1

Opening debt 1078.0 1000.0 910.0 807.1 690.5

EAT -78.0 -90.0 -102.9 -116.6 -131.1

Closing debt 1000.0 910.0 807.1 690.5 559.4


Interest costs in year 1 amount to 1,000*0.08 = DKK 80m, giving EBT of DKK120m. The tax on this is DKK 30m, leaving EAT of DKK 90m, which is used to re-pay debt, bringing it down to DKK 910m. Equivalent tax payments and use ofEAT to reduce debt are assumed in the following years. Thus corporation tax ofDKK 34.3m, DKK 38.8m and DKK 43.7m is paid in years 2–4 respectively.

In this alternative scenario, there is naturally no capital gain for the owners to betaxed on in year 0. However, there is a higher capital gain at the end of year 4when TARGET is sold. The sale proceeds less debt come to DKK 1.84bn in this ex-ample (selling price of DKK 2.4bn less closing debt of DKK 0.56bn). The tax pay-ments in this alternative scenario are therefore the company’s annual paymentsof corporation tax and the final taxation of the capital gain made by the originalowners.

Differences in corporation taxIt is now possible to compare the immediate tax implications of (a) private equi-ty ownership and (b) continuation of original ownership. In scenario (a), corp -oration tax payments of 20.5+24.2+28.2+32.4 = DKK 105.3m are made during thefour-year period. If these payments are compounded at an interest rate of 8% tothe end of year 4, they come to DKK 116.9m. In scenario (b), corporation tax pay-ments of 30+34.3+38.8+43.7m = DKK 146.8m are made. Compounded to the endof year 4 at an interest rate of 8%, they come to DKK 163.0m.

As expected, private equity ownership is, on the face of it, associated with lowercorporation tax revenue. In this example, the amount of tax paid falls to lessthan three quarters of what it would have been.

Tax on capital gainsBesides the company’s/group’s annual taxable earnings, there are also otheramounts in this example that may have tax implications. In scenario (a), thereare the sale proceeds of DKK 1.0bn falling to the original owners at the end ofyear 0 and the capital gain corresponding to the difference between the sale pro-ceeds (net of debt) of DKK 1.42bn for HOLD’s owners at the end of year 4 and theiroriginal investment of DKK 0.7bn at the end of year 0. Whether, and to what ex-tent, these capital gains (or parts of them) lead to tax payments depends on thespecific circumstances discussed in section II.2 above.



Additional benefits of private equity ownershipIt is often claimed that private equity ownership, where this equates to more ac-tive ownership, can improve the performance of the company acquired. This canbe illustrated by making a simple change to the previous example. If we assumethat the company’s EBIT increases by DKK 15m each year rather than by DKK 10m, table II.1 turns out like this:

Table II.3. Earnings and tax under particularly active ownership.


EBIT 190.0 205.0 220.0 235.0 250.0

Interest -86.0 -118.0 -112.8 -106.4 -98.6

EBT 104.0 87.0 107.2 128.6 151.4

Tax -26.0 -21.8 -26.8 -32.2 -37.9

EAT 78.0 65.2 80.4 96.4 113.5

Opening debt 1000.0 1300.0 1234.8 1154.4 1058.0

EAT -78.0 -65.2 -80.4 -96.4 -113.5

Closing debt 922.0 1234.8 1154.4 1058.0 944.5


As a result of this stronger earnings growth, it is assumed that PEF can be sold inthis scenario for an increased price of DKK 2.6bn. This leads to an increased cap-ital gain of 2.6-0.94 = DKK 1.66bn. Along the way, corporation tax payments of21.8+26.8+32.2+37.9 = DKK 118.7m are made. Compounded at an interest rate of8% to the end of year 4, they come to DKK 131.5m.

The increase in earnings results in both a higher selling price and lower debt atthe end of the period, together leading to a considerably higher capital gain. Thecapital gain now corresponds to an IRR of around 24%. The increase in earningsis also reflected in larger corporation tax payments.

Restrictions on interest deductionsThe private equity ownership scenario above needs, in principle, to be tested tosee whether interest deductions will be subject to any restrictions. There arethree steps in this process:

1. As the debt capital raised by TARGET is not from within the group but external,there are no grounds to limit interest deductions under the thin capitalisationrules (see section II.2).

2. However, the latest change in the law (Bill L 213, see section II.2) could resultin reduced interest deductions in the example above. The new rules mean thatDanish companies may only deduct the year’s net financing costs to the extentthat these do not exceed the tax value of the company’s assets times a stan-dard rate of return.

To illustrate the possible effects of this ceiling on interest deductions, it is as-sumed that the tax value of the company’s (group’s) assets is DKK 0.5bnthroughout the period. (For the sake of simplicity, no depreciation is chargedon existing capital stock, and no new investments are made.) The standardrate of return is assumed to be 7%. This means that the maximum interest de-duction allowable each year is 500*0.07 = DKK 35m. (With these assumptions,

4.Expansion of the example



the company will actually be affected by this interest deduction ceiling bothbefore and in the absence of private equity ownership; we will ignore this inthe following.)

3. Finally, the company needs to be tested for the EBIT rule (see section II.2). Thismeans that net financing costs (after any reduction due to the asset test inpoint 2 above) are deductible only up to a maximum of 80% of taxable incomebefore net financing costs. This last rule is not relevant in this example.

Once the ceiling on interest deductions in point 2 above is applied, we end upwith table II.4 below, which is a modified version of table II.1.

The ceiling on interest deductions affects all four periods (cf. table II.1). Thismeans that allowable interest costs are well below actual interest costs, and sotaxable income and corporation tax payments are higher than in table II.1. Thereis a corresponding decrease in EAT, which means that debt is brought downmore slowly.

At the end of year 4, debt has been reduced to DKK 1.07bn. The new owner mayvery well also be a private equity fund and may also find that the interest deduc-tion restrictions kick in. We nevertheless assume that the selling price will be un-changed at DKK 2.4bn. After the repayment of existing debt and costs, the pri-vate equity fund receives DKK 1.33bn, which is approximately DKK 85m less thanhad the restrictions on interest deductions not been introduced.

Table II.4. Effect of restrictions on interest deductions.


Calculation of corporation tax:

EBIT 190.0 200.0 210.0 220.0 230.0

Allowable interest -86.0 -35.0 -35.0 -35.0 -35.0

Taxable income 104.0 165.0 175.0 185.0 195.0

Tax 26.0 41.3 43.8 46.3 48.8

Calculation of EAT:

EBIT 190.0 200.0 210.0 220.0 230.0

Actual interest -86.0 -118.0 -114.7 -110.6 -105.6

Tax -26.0 -41.3 -43.8 -46.3 -48.8

EAT 78.0 40.7 51.5 63.1 75.6

Opening debt 1000.0 1300.0 1259.3 1207.8 1144.7

EAT -78.0 -40.7 -51.5 -63.1 -75.6

Closing debt 1000.0 1259.3 1207.8 1144.7 1069.1


Given the prospect of these limited interest deductions and the prospect of theeventual buyer of the company possibly also being hit by the restrictions, it isnatural to assume that PEF will not be able to bid quite as much for the companyat the end of year 0 – say DKK 1.8bn rather than DKK 2.0bn – and will have to sellthe company for less – say DKK 2.16bn rather than DKK 2.4bn.



These considerations raise the issue of the incidence of the interest tax deduc-tion restrictions – in other words, the question of who will really bear the burdenof these new rules capping interest deductions. To some degree, the burden canreasonably be assumed to be spread across the previous owners of companies towhich private equity funds are attracted, investors in these funds, and theprospective buyers of portfolio companies following private equity ownership.In a way, the interest deduction restrictions will probably act as a (marginal)supplementary tax on private equity funds’ earnings, which could lead to a(marginal) reduction in their activity.

Corporation tax with capped interest deductionsThe example with capped interest deductions naturally leads to higher pay-ments of corporation tax during the period. These rise from 20.5+24.2+28.2+32.4= DKK 105.3m in table II.1 to 41.3+43.8+46.3+48.8 = DKK 180m in table II.4.

Further complicationsThe scenario presented above for the sequence of events and tax payments withand without private equity ownership is in many ways a stylised example. Someof the additional factors that a more realistic scenario would include are:B Extraordinary dividend and debt push-downB TARGET being a large multinational group of companies rather than a single

company

In several buyouts, one of the first things to happen in the new group is for thetarget company to pay an extraordinary dividend to the holding company. At thesame time, the target company takes out loans, and the holding company repaysits loans. This is, in effect, a debt push-down – the debt previously with the hold-ing company is effectively transferred to the target company. This means that theloans pushed down are closer to the assets serving as collateral for the loans.(And if the target company has unnecessarily large amounts of cash, this mayform part of the extraordinary dividend to the holding company.)

In the context of this analysis, this debt push-down is mainly a technicality withno real tax implications.

If the target company is not a stand-alone company as in the example but a largemultinational group of companies, its tax position will be much more complex.However, this is not because it has been taken over by a private equity fund, butbecause the tax affairs of multinationals are always vastly more complex thanthose of purely domestic operators.

On the other hand, there are other factors that are essential for a complete pic-ture of the tax implications of a period of private equity ownership. We will lookat these in the following section.

Additional tax issuesIn the simple standardised example in section II.3, where the private equity fundPEF acquires the target company TARGET through the holding company HOLD(which also involves the management of TARGET), the focus was on the follow-ing tax implications of the buyout:B Corporation tax (from both TARGET and the group comprising TARGET and

HOLD) B Capital gains tax (from the previous owners’ sale of TARGET in year 0 and ei-

ther PEF’s subsequent exit in year 4 or, in the alternative scenario, the originalowners’ sale at the end of year 4)

4.Expansion of the example(continued)

5.A broader perspective on the tax implications



However, this paints only a very partial picture of the overall tax implications ofthe private equity buyout. To make the picture more complete, we need to ask anumber of additional questions:

1. If institutional and other passive investors did not invest in HOLD/TARGET viaPEF, where would they have put their money? And with what tax implications?

2. If PEF’s active investors/partners did not invest in HOLD/TARGET, wherewould they have put their money? And with what tax implications?

3. If TARGET’s management did not invest in HOLD/TARGET, where would theyhave put their money? And with what tax implications? (Or, if they debt-finance their investment in HOLD, what are the tax implications of this?)

4. What happens to the money that the original owners receive through the saleof TARGET at the end of year 0? And with what tax implications?

5. What do the banks that have their loans repaid in connection with the buyoutof TARGET do with this money? And with what tax implications?

6. Where do the banks that provide the loan capital for the new groupHOLD/TARGET get this money from? And with what tax implications?

These questions also make it clear that a private equity fund’s formation and ac-quisition of a portfolio company will generally impact on a variety of financialmarkets – supply and/or demand will be affected, possibly resulting in (albeitmarginal) price reactions. And these price reactions can also, in principle, im-pact on the tax implications of private equity ownership.

An extended exampleThe following hypothetical scenario makes the wider tax implications somewhateasier to appreciate. Assume that:

i. Institutional and other passive investors, the partners in MAN and TARGET’smanagement would instead have put their money (DKK 0.7bn) in the stockmarket.

ii. The financial institutions that have their loans repaid (DKK 1.0bn) use thatsame money to extend loans to HOLD.

iii. The previous owners of TARGET, who receive DKK 1.0bn on the sale of the com-pany, put DKK 0.7bn of this in the stock market and DKK 0.3bn in the bank.

iv. The banks in question then lend this DKK 0.3bn to HOLD.

This scenario is illustrated in figure II.2 below.

If these assumptions are met precisely, we see that neither the stock market northe credit market is directly affected by the private equity buyout. In the stockmarket, DKK 0.7bn disappears on the demand side, but new investors bring inexactly the same amount. In the credit market, loans of DKK 1.0bn are repaidand an additional DKK 0.3bn is deposited, and the sum of these two flows is ex-actly the right amount to fund the flow of loan capital to HOLD. In other words,the changes on the supply and demand sides cancel each other out. On the faceof it, therefore, there will not be any great need for price reactions in either thestock market or the credit market. (However, the rate of interest on the lowest-



ranking loans to HOLD will reflect the greater uncertainty, and it is naturally farfrom certain that the investment patterns of the investors withdrawing moneyfrom and injecting money into the stock market will be the same.)

However, if assumptions i–iv are met, supplementary tax accounts to take account of questions 1-6 above can be produced relatively easily. We get the fol-lowing outcome:

a. The tax implications of changes in investments in the stock market (questions1–3 and part of question 4) are limited to those caused by possible differencesbetween the tax position of investors exiting the stock market (passive in-vestors, active investors and management) and that of those entering the mar-ket (previous owners of TARGET).

b. As banks’ lending to HOLD/TARGET increases, they will earn a higher averagerate of interest than before, which may push up their tax payments.

c. The previous owners deposit DKK 0.3bn in the banking system and will be li-able for tax on the returns on this, either personally or through holding com-panies etc.

It is particularly this last effect that will be noticed. The investment of additionalloan capital in HOLD is offset by additional deposits with the banks that fund theincrease in debt, and the return on these will be taxed. Assuming an interest rateof 4% and a personal capital income tax rate of 59%, deposits of DKK 0.3bn willresult in a tax payment of DKK 7.08m. This almost matches the difference in cor-poration tax payments between the alternative scenario (b) and the private equi-ty ownership scenario (a) in section II.3 above.

Of course, it is highly unlikely that assumptions i–iv will actually hold true. Butthis does not mean that it is not worth considering the wider tax implications ofprivate equity ownership, or that these will probably be significantly affected bythe additional tax payments resulting from savers making money available tothe banks, which then supply the private equity portfolio company with addi-tional loan capital.

Figure II.2. Extended example.

(All figures in DKKbn)

Stock market

Management

TARGET

1.0

Previous owners

0.02

PEF

HOLD

Banks

WithdrawalInvestment

1.3

0.3

1.02.0

0.02

0.68

0.68

0.7


5.A broader perspective on the tax implications (continued)


The partners’ tax positionSo far we have paid little attention to the tax aspects associated with paymentsfrom the private equity fund PEF to the management company MAN that man-ages the fund’s assets and exercises the active ownership. The partners em-ployed by the management company will be paid a regular salary for looking af-ter the fund’s investments, and will also be rewarded with a share of PEF’scapital gains – including a disproportionate share of returns over and above theagreed hurdle rate.

To shed light on this last element of the partners’ remuneration, let us assumefor a moment that the target company TARGET represents the average for all ofthe fund’s portfolio companies. Let us assume that PEF’s hurdle rate is 8% andthat any capital gain in excess of this is distributed at a ratio of 20:80, wherebythe partners receive 20% and the passive investors (and TARGET’s management)receive 80%. Based on table II.4, the total capital gain for PEF is DKK 630.9m.The part of this that corresponds to the 8% hurdle rate works out at DKK 252.3m.

This means that the excess return is DKK 378.6m, and 20% of this is DKK 75.7m.Next, 18/700 of the normal (gross) return is DKK 24.5m (i.e. including the part-ners’ own investment of DKK 18m). Net of the management fee of 2% of the capital invested in the fund, or DKK 13.6m, the partners’ gross proceeds from thesale of TARGET come to 75.7+24.5-13.6 = DKK 86.6m (including their investmentof DKK 18m). However, the partners’ return on investment is not actually calcu-lated individually for each investment as done here, but for all of the fund’s investments as a whole, which means that investments with a lower return willreduce this figure.

The total invested by the other investors (including TARGET’s management) wasDKK 682m. These investors’ gross proceeds from the sale of TARGET come to302.9+927.8 = DKK 1,230.7m, which gives a multiple of around 1.8 and an IRR ofabout 16% for the passive investors.

Note that these calculations ignore the not insignificant transaction costs asso-ciated with the acquisition and sale of TARGET, which will reduce the return forall investors, both passive and active.

Foreign playersIn the above, all players were treated as though they were Danish, so there waslittle doubt that the payment flows resulting from the private equity fund’s ac-quisition and subsequent sale of the portfolio company would be taxed underdomestic tax rules.

Frequently, however, foreign players come into the picture. The fund itself may beregistered abroad, and so the management company, its partners and the passiveinvestors in the fund may also be foreign. The taxation of the fund’s capital gainsfrom a period of ownership of the portfolio company will therefore depend onthe degree to which these gains can be subjected to domestic taxation (in otherwords, the degree to which the players concerned have a limited tax liability toDenmark). Are there double taxation agreements in place? Are there grounds fortaxing the fund’s gains at source?

Of course, the previous owners of the portfolio company may also (in part) beforeign taxpayers. Again the issue is whether a limited tax liability to Denmarkon the capital gains made on the sale of the company can be enforced.



There has been some debate about cases where foreign private equity funds haveinvested in Danish companies. There has also been debate about instances ofprivate equity funds using foreign financial institutions when raising money forthe acquisition. The concern has been that, if the portfolio company is heavilydebt-financed and the associated interest is deducted from taxable income, theDanish tax authorities will ultimately miss out on tax revenue.

However, it is worth pondering this for a moment. Assume that the portfoliocompany’s financing before the buyout was a mixture of equity from domesticshareholders and loans from domestic banks, and that its debt capital after thebuyout consists entirely of loans from foreign banks. Before the buyout, the taxauthorities could count on corporation tax from the company, taxes from thelending banks, and taxes on the people depositing money in the banks. After thebuyout, not only do payments of corporation tax from the company decrease dueto a higher debt-to-equity ratio, but there will be no tax from the foreign banks.Tax revenue seems to be evaporating on every front.

But this would be an overly hasty conclusion. When a private equity fund fi-nances its activities with foreign loans to the portfolio company (holding com-pany), this cannot in itself change the overall balance of payments betweenhome and abroad. Domestic and foreign net saving are unchanged, and thesame therefore applies to Denmark’s net external claims. In the first instance,the foreign lending to the holding company causes a decrease in Denmark’s netexternal claims, but this tendency is offset by at least one opposite transaction.The previous owners and the previous creditors of the portfolio company havereceived money that needs to be invested, and if they do not themselves investabroad, they will set in motion a chain of events that results in other Danes in-vesting abroad or repaying foreign loans. When Danes acquire external claims inthis way, the return on these claims will boost aggregate tax revenue and so off-set the loss of tax revenue from the private equity fund’s borrowing abroad.

This example underlines once again the necessity of “closing the circle” if wewant to gain a complete picture of the tax implications of a private equity fund’sformation and acquisition of a domestic company. Both the tying up of fundsand the release of funds impact on tax revenue.

The following conclusions can be drawn from the discussion of tax implicationsabove:

1. There is good reason to expect that, in most cases where a private equity fundtakes over a company, the company will pay less corporation tax than if it hadremained with its original owners. Private equity funds aim – and haveunique opportunities – to increase the ratio of debt to equity at their portfoliocompanies. This leads to larger interest deductions, which erodes taxable in-come and translates into lower tax payments, at least in the short term.

2. The actual buyout generally leads to payments of tax by the previous ownerson the capital gains they make on the sale of the company. Similarly, investorsin the private equity fund will pay tax on their capital gains when they, inturn, sell on the company. However, these capital gains taxes are not uniqueto a private equity situation. The original owners could also sell the companylater to another player, realise a capital gain and pay tax on this. It is thereforedifficult to say whether, on balance, a period of private equity ownershipleads to higher or lower payments of capital gains taxes.

6.Conclusions about tax andprivate equity funds


5.A broader perspective on the tax implications (continued)


3. In any case, corporation and capital gains taxes account for only part of theoverall tax implications of a private equity fund’s ownership of a company. Acomplete picture requires information on where the previous owners investtheir money after they have been bought out; where the banks supplying loancapital to the portfolio company obtained their funds; how the investors in theprivate equity fund finance their investments in the fund; and so on. It is par-ticularly important to ascertain whether the increased deductions of intereston loan capital in the company (or holding company) are offset by increasedtaxation of capital income for those supplying funds to the banks furnishingthe company with the additional loan capital.

4. The tax implications of a private equity fund’s acquisition and ownership of acompany are particularly complex when the fund, its investors or its lendersare foreign. If, for example, the target company (holding company) is financedwith loans from foreign banks, it will, on the face of it, be impossible to recoupthe drop in tax revenue due to the increase in the debt-to-equity ratio.However, for the economy as a whole to have unchanged net external claims,there must be a net acquisition of external claims elsewhere in the economy.The return on these claims will be taxable in Denmark and will therefore (atleast partially) offset the decrease in corporation tax revenue.

5. As discussed in detail in section II.2, there are a number of uncertainties whenit comes to the tax treatment of private equity funds’ activities. The ongoingofficial review of (private equity funds and) acquired companies can be as-sumed to raise numerous issues requiring clarification. Nor can we rule outfurther changes in tax law, which may have an impact on the activities of pri-vate equity funds. However, this situation is by no means unique to Denmark.Equivalent uncertainties and points of contention concerning private equityfunds’ tax position can also be found in other comparable countries.

6. Despite these elements of uncertainty, a private equity fund is nothing specialfrom a tax viewpoint. It is a particular type of financial institution that “makesits living” from buying and selling companies, but the investments made bythe funds and the cash flows resulting from these buyouts are captured by thetax system. However, it is also a fact that funds accentuate and test weakness-es in the tax system. These weaknesses include:– The treatment of debt vs. equity for corporation tax purposes– The treatment of foreign vs. domestic capital income and, more generally,

the right to tax international capital income– The distinction between income from employment and income from capital

for the purposes of personal taxation– The taxation of different types of capital income

For as long as interest on debt is treated differently to returns on equity, for aslong as the taxation of international income remains inconsistent, for as long asthere are problems differentiating between the fruits of labour and the returnson savings in the tax system, and for as long as different types of capital incomeare taxed in very different ways, private equity funds – just like other taxpayers –will be able to “think tax” and maximise their earnings by minimising their tax liabilities.



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This glossary includes both terms used in the report and a number of other termscommonly encountered in private equity.

Company formed exclusively to acquire another company (target company).Debt finance is raised by the acquisition vehicle, but subsequently transferred tothe target company through a debt push-down.

The true owner of an investment and ultimate recipient of returns on that invest-ment, even though the asset may be held in another’s name.

Active organic growth strategy.

British Private Equity and Venture Capital Association, www.bvca.co.uk.

The general partners’ share of the return on the fund. Normally 20% of the returnin excess of the hurdle rate.

A portfolio of loans, such as senior or mezzanine loans, packaged together into apool that is then structured into rated tranches. The lowest-rated tranches takethe first losses, but also offer the highest coupon. The highest-rated trancheshave the lowest coupon, but only absorb losses when all of the other trancheshave been lost.

The capital that the limited partners agree to make available to a private equityfund.

Interest.

An undertaking to do, or not to do, something. When a loan is taken out for an in-vestment, the target company undertakes to meet limits for various financial keyfigures (financial covenants) and to perform, or not to perform, a number of spe-cific actions. As a rule, banks demand three covenants: leverage (maximum limit),cash flow coverage ratio (minimum limit) and capital expenditure (maximumlimit).

A loan with only one or two financial covenants.

A target company is normally acquired through an acquisition vehicle, whichinitially takes out a loan secured against the target company’s shares. To give thebanks more security, this debt is then transferred to the target (operating) com-pany by having the target company take out a loan and pay out the proceeds ofthe loan as a dividend to the acquisition vehicle, which then uses this dividendto repay its loan.

An investigative process performed before a private equity fund acquires a com-pany. There are various different types, including financial, legal and commer-cial. These provide a basis for assessing the value of the target company.

Earnings after tax.

Earnings before interest and tax.

Earnings before interest, tax and amortisation.

Glossary

Acquisition vehicle

Beneficial owner

Buy-and-build strategy

BVCA

Carried interest (carry)

Collateralised loan obligation(CLO)

Committed capital

Coupon

Covenant

Covenant-light

Debt push-down

Due diligence

EAT

EBIT

EBITA


Earnings before interest, tax, depreciation and amortisation.

Earnings before tax.

EV/EBITDA.

Value of the whole business. Measured as the market value of all claims on thebusiness, i.e. the sum of debt and equity.

Earnings per share.

European Private Equity and Venture Capital Association, www.evca.com.

Sale of a portfolio company.

Tax-transparent entity whose income is taxed to its owners.

UK Financial Services Authority.

Private equity fund that invests in other private equity funds.

Getting investors to invest in a company with the help of a private equity fund.The private equity fund’s fund-raising involves getting new and existing in-vestors to commit to invest (up to) a certain amount once the fund finds suitableinvestment objects.

Another word for leverage.

The general partners in a private equity fund are responsible for the manage-ment of the fund’s investments. The general partners have unlimited liability,but normally invest through a limited company so that liability is limited to thatcompany’s capital.

That part of a company’s value that cannot be attributed to its book assets. Whena company changes hands, goodwill is the difference between the price paid andthe book value of the company’s assets. The difference should be an expressionof the part of its future earnings that cannot be attributed to its book assets.

An investment vehicle that invests in different sectors or countries or on the ba-sis of other parameters, typically with a relatively short time horizon.

The percentage return on investors’ capital required before any return accrues tothe general partners. Normally 8%.

International Financial Reporting Standards. All European listed companiesmust prepare financial statements in accordance with IFRS.

The initial sale of shares to the public when a company is listed on the stock ex-change.

EBITDA/interest expense. Measure of a company’s ability to pay its interest costsout of operating earnings.

The annual return on an investment.

EBITDA

EBT

Enterprise multiple

Enterprise value (EV)

EPS

EVCA

Exit

Flow-through entity

FSA

Fund of funds

Fund-raising

Gearing

General partner (GP)

Goodwill

Hedge fund

Hurdle rate

IFRS

Initial public offering (IPO)

Interest coverage ratio

Internal rate of return (IRR)


A J-curve is the typical profile for movements in the value of a private equityfund. The curve shows that a fund’s return on investment will normally be verylimited in the first two or three years, as its strategic initiatives have yet to resultin higher earnings. The J-curve is seen primarily because costs are incurred in es-tablishing and operating the fund, and the expected increases in the value of theinvestments made do not arrive until after a couple of years of ownership, oncevalue-adding measures and/or investments begin to impact on the portfoliocompanies.

The bank or other organisation that heads a syndicate.

The use of debt to finance a transaction. Also known as gearing.

Debt/EBITDA.

Acquisition of a company using a high proportion of debt finance.

External investor in a private equity fund. The limited partners assign the man-agement of their investments to the general partners. Their liability is limited tothe capital they have invested or committed to invest.

A limited partnership has two types of investor: limited partners, whose liabilityis limited to a predetermined amount, and general partners, who have unlimitedliability. However, a general partner may be a company, in which case liability islimited to that company’s capital. A limited partnership is a tax-transparent en-tity: its income is taxed directly to the general and limited partners.

Mergers and acquisitions.

Leveraged buyout where the company’s management takes control of the company.

The company that buys, sells and monitors a private equity fund’s portfolio companies.

Debt finance that ranks below bank debt but above equity.

Non-disclosure agreement.

Company owned by a private equity fund.

Investment in mature companies, as opposed to venture capital, which is invest-ed in start-ups.

Acquisition of a listed company that is then delisted.

In the context of a leveraged buyout, this denotes an increase in debt that makesit possible for the private equity fund to withdraw equity from the company. If aportfolio company reduces its debt more quickly than expected, the fund canuse this technique to realise some of the gain.

The sale of a company from one private equity fund to another.

Debt that ranks above all other debt. In a leveraged buyout, this means bankdebt.

Glossary

J-curve

Lead manager

Leverage

Leverage multiple

Leveraged buyout (LBO)

Limited partner (LP)

Limited partnership

M&A

Management buyout (MBO)

Management company

Mezzanine

NDA

Portfolio company

Private equity (PE)

Public-to-private

Recapitalisation

Secondary buyout

Senior debt


Debt that ranks below other debt, such as senior debt. Mezzanine finance is always subordinated to senior debt.

A number of banks that together make a loan available or underwrite an issue ofsecurities. A syndicate is usually led by one or two banks known as the leadmanagers.

Company that a private equity fund wishes to acquire.

A company is thinly capitalised when it has a high level of debt relative to equity.In Danish tax law, this means a ratio of more than 4 to 1 (80% debt, 20% equity).

Sale of a portfolio company to another company.

Portion of a loan with particular characteristics in terms of coupon and repay-ment.

Investment in new companies (start-ups).

The year in which a private equity fund makes its first investment.

Right to purchase shares. The shares are not issued until this right is exercised,and so the exercise of warrants leads to an increase in share capital.

Glossary

Subordinated debt

Syndicate

Target company

Thin capitalisation

Trade sale

Tranche

Venture capital

Vintage year

Warrant

Source: Robert Spliid, DVCA and translator.


Editor and project management: Joachim Sperling Forretningsudvikling og Kommunikation ApSPhotos: Pernille Ringsing, POLFOTO, iStockphoto and courtesy of the companiesDesign and production: Branded Design ApSTranslation and proofreading: Borella projectsPrinted in Denmark by Bording A/S (DS/EN ISO14001:1996)

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www.dvca.dk

active ownership and transparency in private equity funds

Documents

christian iv

deputy chairman of dvca

guidelines form

guidelines outlines

cvc capital partner

responsible ownership

boards of companies

executive summary160i