nordic survey 2016analysis

analysis

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Positive outlook despite a mixed year in 2015F ollowing a strong performance in

2014, the Nordic private equity market experienced a somewhat

mixed bag in 2015. On one hand the buoyant public markets fuelled a record year for private-equity-backed IPOs in the upper-mid-market and large-cap brackets. But on the other, the year saw a near-20% drop in buyout market dealflow (down to 79 from 97), though total deal value remained robust at some €15.5bn. While it has been suggested in some quarters that the sharp rise in average deal value is a sign of GPs overpaying, the prevailing sentiment in the industry is that while the higher values may be influenced by the availability of cheap credit, the trend is more about a flight to quality in the region, with investors willing to pay well for higher quality companies with softer risk profiles.

In terms of activity within the region, Denmark was the only Nordic country to see growth in the number of buyouts in 2015, reaching a five-year peak in deal volume (33 buyouts worth a combined

€6.5bn). Sweden – traditionally the main volume market – saw volumes unchanged at 28 worth a sizable €7.7bn. In comparison, deal numbers dropped sharply in both Finland and Norway, meaning that overall, Denmark and Sweden attracted 73% of the total buyout capital invested in the Nordic region.

Confidence, qualifiedBut how have the respondents to this year’s survey reacted to the nuanced conditions in 2015? Broadly speaking there remains optimism, though it is certainly erring on the cautious side. While participants in the latest survey expect dealflow to rebound moderately, they are also expecting more competition for assets compared to last year, with 44% predicting a significant increase and 50% expecting moderate growth. This is consistent with last year’s survey, in which rising asset prices and competition for deals were also among the chief concerns for respondents.

There was also increased caution on the outlook for returns, with over half

of respondents predicting the exits of assets acquired in 2016/17 to generate IRRs in the 11-15% range. Nevertheless, they remain confident of the region’s position versus the rest of Europe: a majority of respondents this year expect Nordic investments made in the period to outperform those elsewhere by a moderate to significant margin.

As it did last year, the main concern for practitioners continues to be uncertainty around LP commitments and fundraising, narrowly ahead of regulatory constraints and reputation concerns. This is to be expected in a region that is likely to see a relatively large number of GPs hitting the fundraising trail in 2016 and 2017.

Exuberance is a rare personality trait in the Nordic region, so perhaps fittingly the overall outlook for Nordic private equity in 2016 remains one of cautious optimism and understated confidence in the industry’s ability to continue to deliver the performance that has made the local industry a European leader. n

David Aversten, partner, head of private equity, Delphi

www.delphi.se

About DelphiDelphi has expertise in all core areas of commercial law. An important part is the corporate desk, with a large number of domestic and cross-border M&A’s and extensive private equity, banking, finance and capital markets practices. Delphi is also well established in high-tech related legal areas such as IT, telecoms and intellectual property.

Delphi has clients mainly in Scandinavia, Europe and North America and further co-operates with law firms all over the world including China and Eastern Europe. Delphi regularly acts for Nordic and international private equity and venture funds on acquisitions and divestments, acquisition finance, management incentives as well as IPOs. Delphi’s private equity practice also includes fund formation and LP advisory.

From our perspective, private equity is primarily about assisting Swedish

and international private equity and venture capital funds and their portfolio

companies with everything from investments through to exit, whether via

divestments or IPOs. Our team of lawyers has extensive experience of creating

structures, assisting on the formation of funds and providing advice to LPs in

connection with fund investments.

For more information about our services, don’t hesitate to give us a call.

Private equity is an important practice area for us.

For more information, visit delphi.se.

David AverstenManaging Partner

+46 709 25 25 19

david.aversten@delphi.se

Clas RomanderPartner

+46 709 25 25 20

clas.romander@delphi.se

160518-Nordic Unquote-extra ad.indd 2 2016-05-11 14:27:02

Nordic survey

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Introduction and methodology

W e are delighted to present the latest in a series of annual surveys aimed at gauging investor confidence in the Nordic venture

capital and private equity markets. In a change to the methodology employed historically, under which the survey was carried out online, participants this year were interviewed by a team of researchers, ensuring a full and detailed set of results. This method also enabled our research team to capture a significant

amount of qualitative background, which provided a valuable insight into the respondents’ answers.

Overall, representatives of 50 Nordic GPs were contacted and interviewed on a fully anonymous basis during the first quarter of 2016. It is also important to note that the survey specifically targeted senior decision makers: the vast majority of respondents were partner level or above in their respective organisations, with a good number of CEOs, Managing Partners and Chief Investment Officers included within the sample.

As far as the content is concerned, a significant number of the questions remain common to previous surveys, allowing for a certain amount of time-lapse analysis in order to track shifting views on the same market drivers. However, this year a number of new thematic questions were added to the questionnaire to tap into practitioners’ views on areas of strong relevance in today’s PE landscape. Specifically, these questions focused on issues surrounding leverage and the co-investment practices of GPs and their limited partners.

The content that follows is a summary of the main statistical findings from the survey, overlaid with elements of the more qualitative intelligence gleaned via the interview process. n

Respondents by country

Denmark

Finland

Norway

Sweden

24%

14%

26%

36%

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Nordic Survey 2016 5

1. What is the most important issue facing Nordic private equity funds?

20152016

Uncertain LP commitments/fundraising

Reputational concerns

Regulatory constraints

Portfolio companies'underperformance

Other

ConcernsRespondents have clearly indicated that the most pressing issues facing the regional industry have substantially changed over the past 12 months. Last year’s survey saw the potential risk of rising asset prices take centre stage, with nearly one out of every four respondents (24%; part of the ‘other’ category) singling it out as the biggest issue faced by the industry. This year’s results reveal such concerns have taken a backseat.

Nearly a third (32%) of the respondents highlighted uncertainties surrounding LP commitments as the biggest issue facing Nordic PE firms. While there have been some impressive fundraises in the post-crash era, our respondents have indicated that recently

2. If you are a GP, do you plan to raise funds focused on the Nordic countries over the next 12-24 months?

Yes, a pan-Nordic one

Yes, one focused on oneNordic country only

No

20152016

LPs are becoming more cautious in their allocations and are undertaking greater scrutiny prior to committing capital. Moreover, many respondents also said that GPs are finding it challenging to cater to LPs’ expectations of higher IRRs.

Regulatory constraints also continue to be a cause for concern. Around 30% of

respondents reported that increasingly stringent tax structures, fee structures, liquidity requirements and other legal issues have reduced their flexibility to operate, compressed their scope of investment, threatened to negatively impact performance and demotivated foreign investors.

FundraisingDespite fears that LPs may be tightening their belts in the region, there are still signs that the fundraising market will be a crowded one looking ahead. With the number of LPs interested in investing in the Nordic markets on the rise, and an abundant availability of credit as well as rich corporate cash reserves, industry practitioners’ outlook on the region’s fundraising environment has changed significantly: nearly all of those questioned (98%) said they plan to raise a vehicle targeting the region in the next 12-24 months, more than double the number recorded in the previous survey (44%).

The proportion of respondents

planning to raise pan-Nordic funds over the next 12-24 months has also increased – 52% of respondents intend to raise such a fund, up from 38% last year.

Country-specific funds also appear to be on the rise; 46% of those surveyed intend to raise such a fund, compared with 6% last year and none the year before.

Nordic survey

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4. Do you expect Nordic investments to outperform those from the rest of Europe this year?

Yes – probably by asigni�cant margin

Yes – but probablynot by much

No – they will probably be on apar with other regions

20152016

3. What would be a realistic expectation for IRRs on acquisitions/investments made during 2016/2017?

21-25%

16-20%

11-15%

6-10%

0-5%

20152016

ReturnsThe sentiment of cautious optimism noted in last year’s survey appears to have crept into respondents’ forecast of expected returns this time around as well. Coming off the back of strong performances in 2014 and 2015, there are high expectations for IRRs and as regional economies continue to improve, it is perhaps rational to expect more.

On the one hand, less than half (44%) of those surveyed expect to see an IRR in excess of 15%, whereas 52% expected similar returns last year and 70% the year before that. On the other hand, those expecting an IRR of less than 11% dropped from 21% in 2015 to 2% this year, and 8% of respondents have predicted returns in the 21-25% bracket in 2016, compared with 6% last year. This shift in the proportion of respondents predicting returns at the extremes of the spectrum hints at a higher average expected IRR this year.

In line with the bullish expectations for returns, it appears the comparative advantage the Nordic region has enjoyed over the past few years has also grown. Compared with the rest of Europe, the Nordic region has demonstrated greater resilience

and has consistently outperformed many European peers. A whopping 92% of respondents to this year’s survey expect Nordic investments to outperform those elsewhere in Europe during 2016, compared

with 55% in 2015. Moreover, 58% of respondents stated they expect Nordic investments to eclipse those from other European regions by a significant margin, compared with just 10% in 2015.

“A whopping 92% of respondents to this year’s survey expect Nordic investments to outperform those elsewhere in Europe during 2016”

Nordic survey

Nordic Survey 2016 7

7. Which sector do you think will be most appealing to private equity funds in the Nordic region over the next 12-24 months?

20152016

Technology

Industrials

Healthcare

Consumer

Business Services

5. Over the next 12 months do you expect the number of new investments made by your organisation in the Nordic region to change compared to the previous 12 months?

0% 10% 20% 30% 40% 50% 60%

Moderate decrease

Stay the same

Moderate increase

Signi�cant increase

6. Over the next 12 months do you expect competition for assets in the Nordic region to change compared to the previous 12 months?

0% 10% 20% 30% 40% 50%

Stay the same

Moderate increase

Signi�cant increase

Investor appetiteIt is amply evident that GPs expect the region to continue to offer an attractive platform with potential opportunities for long-term value creation. Respondents’ optimistic economic outlook for the Nordic PE market is hard to miss – nearly three out of every four respondents (74%) stated they expect the number of new investments made by their organisation in the region to increase, compared with the previous 12 months. On the other hand, only 4% said they expect a decrease.

There has also been strong competition for assets in the Nordic region in recent years – bidding procedures are more competitive as buyers are more confident of generating high IRRs. A significant proportion (94%) of respondents expect this trend to continue in 2016 with more buyers actively participating in the deal-making market.

This year’s survey reveals important shifts in the priorities of GPs in the Nordic region, with the technology segment in particular rapidly gaining favour after a brief drop last year. New innovative business models and start-ups that fit well with the PE investment approach have provided ample opportunities for investing in growth and expansion transactions, making the sector the most preferred ground for investments. Six out of every 10 respondents expect this sector to be the most attractive to private equity players in the next 12-24 months, compared with 25% in 2015.

With the exception of healthcare (which remained stable at 16%), all other sectors declined. One of the most notable shifts was with the industrials sector, which was seen as a promising segment by 19% of respondents last year – but only 4% this year.

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Nordic Survey 2016 9

9b. Do you expect this percentage to be higher or lower over the next 12 months?

0% 10% 20% 30% 40% 50%

Signi�cant decrease

Moderate decrease

Stay the same

Moderate increase

Signi�cant increase

8. Over the next 12 months do you expect the availability of credit for leveraged buyouts in the Nordic region to change compared to the previous 12 months?

0% 10% 20% 30% 40% 50% 60% 70% 80%

Stay the same

Moderate increase

Signi�cant increase

9a. Over the past 12 months what percentage of your portfolio companies broke any of their bank covenants or underwent some form of financial restructuring?

0% 5% 10% 15% 20% 25% 30%

16-20%

11-15%

6-10%

0-5%

LeverageHigh expectations of continuity in the regional industry’s performance coupled with very low defaults rates have boosted confidence in private equity-style investments and the interest of lenders in recent years. Some respondents added that improvements in monetary policies and the regulatory landscape have also improved conditions in the debt market, helping private equity investors acquire finances more easily.

As the market continues to act in accordance with covenants and sustain consistent returns, the overwhelming consensus appears to be that the volume of credit in the Nordic countries will remain free-flowing. Over three quarters (76%) of respondents stated they expect an increase in the availability of credit for leveraged buyouts in the region compared with the previous 12 months.

“Over three quarters of respondents stated they expect an increase in the availability of credit for leveraged buyouts in the region [in 2016]”

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10c. Do you expect this percentage to be higher or lower over the next 12 months?

0% 10% 20% 30% 40% 50% 60%

Stay the same

Moderate increase

n/a

10a. Do you currently offer the opportunity for LPs to make direct/co-investments when you invest in new portfolio companies?

0% 10% 20% 30% 40% 50%

No, and not considering

No, but considering

Yes

10b. Over the past 12 months what percentage of your investments were accompanied by some kind of direct/co-investment?

0% 10% 20% 30% 40% 50% 60%

21-25%

16-20%

11-15%

6-10%

n/a

Special focus: Co-investmentsThe proportion of respondents that currently offer the opportunity for LPs to make co-investments for new deals was split almost evenly with 48% stating they do indeed provide this facility. Half of these respondents said that 6-15% of their investments were accompanied by some kind of co-investment; while the other half estimated the range to be higher at 16-25%. Finally, two-thirds of respondents also stated they expect this percentage to be higher over the next 12 months.

Over half (52%) of respondents stated that offering co-investment opportunities to LPs has three main benefits: first, gaining access to greater capital while investing in new companies; second, tapping into the skills and expertise of LPs in order to refine the overall strategy and structure of portfolio companies; and third, securing better long-term relations with the investor market.

On the other hand, nearly one out of every four respondents reported the biggest disadvantage of co-investments is that they usually bring with them a more complex deal process and more stringent regulatory and reporting requirement, which restricts the flexibility and autonomy many GPs prefer.

Nordic survey

Nordic Survey 2016 11

11. What do you see as the main benefit for GPs in offering direct/co-investment opportunities to LPs? (Select up to two)

Portfolio company bene�ts from LP skills/knowledge

Increase attractiveness of fund when fundraising

Greater access to capital when carrying out deal

Enhance relationships with LPS

12. What do you see as the main disadvantages for GPs in offering direct/co-investment opportunities to LPs? (Select up to two)

Slower/more complicated deal process

Reduction in control of portfolio company/increased interference

Reduced overall earnings

Possibility of damaging relationship with LPs not offered co-investment opportunity

More complicated regulatory and reporting requirements

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Investor league tables

2011 2012 2013 2014 2015 Q1 2016 TOTAL

EQT PARTNERS 6 3 4 6 6 1 26

NORDIC CAPITAL 6 2 6 2 1 17

ACCENT EQUITY PARTNERS 4 4 4 4 1 17

ALTOR EQUITY PARTNERS 5 1 3 2 1 12

FSN CAPITAL 1 2 2 2 5 12

POLARIS PRIVATE EQUITY 2 4 1 2 2 1 12

NORVESTOR EQUITY 1 4 1 3 3 12

CAPMAN GROUP 3 2 6 11

SENTICA PARTNERS 5 1 2 1 2 11

HERKULES CAPITAL 2 1 2 2 3 10

LITORINA KAPITAL 2 3 1 3 1 10

TRITON ADVISERS 2 1 3 2 1 9

SEGULAH 1 2 3 2 1 9

VIA VENTURE PARTNERS 2 1 2 2 1 8

RATOS HOLDING 1 1 2 1 2 1 8

IK INVESTMENT PARTNERS 1 1 4 1 1 8

AXCEL 1 2 4 1 8

ADELIS EQUITY PARTNERS 1 3 2 2 8

MAJ INVEST EQUITY 1 2 1 1 2 1 8

INTERA EQUITY PARTNERS 3 1 3 1 8

PROCURITAS 3 2 1 1 1 8

VALEDO PARTNERS 2 2 2 2 8

BLUE EQUITY 3 3 2 8

BWB PARTNERS 4 1 1 1 7

VAAKA PARTNERS 2 1 1 1 2 7

ERHVERVSINVEST MANAGEMENT 1 2 4 7

HITECVISION 2 1 3 6

VITRUVIAN PARTNERS 1 1 2 1 5

SPONSOR CAPITAL 1 1 2 1 5

CATACAP 1 2 2 5

Buyouts

Source: unquote” data

Nordic survey

Nordic Survey 2016 13

2011 2012 2013 2014 2015 Q1 2016 TOTAL

ALMI INVEST 4 7 8 7 12 3 41

SEED CAPITAL 7 5 14 4 7 37

LIFELINE VENTURES 2 5 4 4 6 21

REAKTOR VENTURES 6 9 4 19

SUNSTONE CAPITAL 3 3 3 6 2 17

INDUSTRIFONDEN 7 3 4 2 1 17

CREANDUM 2 3 3 7 15

FINNISH NATIONAL TECHNOLOGY AGENCY 1 1 2 3 3 2 12

CHALMERS INNOVATION 5 1 1 7

HEALTHCAP PRIVATE EQUITY 1 4 1 6

NOVO NORDISK 4 2 6

FINNVERA 1 1 2 1 1 6

NORTHZONE VENTURES 1 3 1 1 6

VÆKSTFONDEN 1 1 1 2 1 6

KAROLINSKA DEVELOPMENT 2 1 1 1 5

INDEX VENTURES 2 1 2 5

LONDON VENTURE PARTNERS 3 1 1 5

TRUE VENTURES 1 1 1 2 5

SEB VENTURE CAPITAL 2 1 1 4

ATOMICO VENTURES 1 1 1 1 4

WELLINGTON PARTNERS 1 1 1 1 4

BALDERTON CAPITAL 1 1 1 1 4

PROFOUNDERS CAPITAL 1 1 1 1 4

OPEN OCEAN CAPITAL 2 1 1 4

SARSIA SEED MANAGEMENT 1 1 2 4

FINNISH INDUSTRY INVESTMENTS 2 1 3

INVESTINOR 1 1 1 3

MERCK SERONO VENTURES 1 2 3

SEQUOIA CAPITAL 1 1 1 3

CRUNCHFUND 2 1 3

Early-stage

Source: unquote” data

Nordic survey

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Adviser league tables

2011 2012 2013 2014 2015 Q1 2016 TOTAL

ROSCHIER 7 7 8 1 13 36

VINGE 8 11 8 3 3 1 34

DELPHI 9 6 7 2 7 2 33

MANNHEIMER SWARTLING 9 8 4 5 4 30

WIERSHOLM MELLBYE & BECH 5 8 2 2 2 1 20

ACCURA 2 3 3 3 4 3 18

WHITE & CASE 3 5 1 1 2 3 15

HANNES SNELLMAN 5 3 3 1 2 1 15

SCHJODT 3 3 2 2 1 1 12

GERNANDT & DANIELSSON 3 6 1 10

CASTRÉN & SNELLMAN ATTORNEYS 3 3 1 2 1 10

ARNTZEN DEBECHE 6 4 10

STEENSTRUP STORDRANGE DA 8 1 1 10

THOMMESSEN 2 5 1 1 9

KROGERUS 5 3 1 9

BIRD & BIRD 1 4 1 2 1 9

CEDERQUIST 2 3 1 2 8

CLIFFORD CHANCE 2 1 2 1 1 7

ASHURST 1 2 1 3 7

GORRISSEN FEDERSPIEL 1 2 1 1 1 1 7

PLESNER 1 1 5 7

BAKER & MCKENZIE 4 1 1 1 7

KROMANN REUMERT 2 2 1 2 7

BORENIUS 2 1 4 7

SELMER 3 1 1 1 1 7

ERHVERVSINVEST MANAGEMENT 1 2 4 7

HITECVISION 2 1 3 6

VITRUVIAN PARTNERS 1 1 2 1 5

SPONSOR CAPITAL 1 1 2 1 5

CATACAP 1 2 2 5

Legal

Source: unquote” data

Nordic survey

Nordic Survey 2016 15

2011 2012 2013 2014 2015 Q1 2016 TOTAL

SEB ENSKILDA 5 6 1 5 1 18

PwC 3 1 3 1 4 1 13

ABG SUNDAL COLLIER 4 1 4 2 1 12

HANDELSBANKEN CAPITAL MARKETS 4 1 2 5 12

CARNEGIE BANK 2 1 2 3 3 11

NORDEA BANK 2 4 2 8

KPMG 2 1 1 2 6

DELOITTE 4 1 5

ACCESS PARTNERS 1 2 2 5

FIH PARTNERS 1 2 2 5

DEUTSCHE BANK 1 1 2 4

MORGAN STANLEY 2 1 1 4

UBS 2 1 1 4

DANSKE MARKETS 1 3 4

ROTHSCHILD 2 2 4

CLEARWATER INTERNATIONAL 2 2 4

GOLDMAN SACHS LONDON 2 1 3

EY – TRANSACTION ADVISORY SERVICES 1 2 3

DC ADVISORY PARTNERS 2 1 3

DNB NOR 1 1 1 3

2011 2012 2013 2014 2015 Q1 2016 TOTAL

EY – TRANSACTION ADVISORY SERVICES 17 6 5 18 13 3 62

PwC 16 8 4 3 7 38

KPMG 14 2 8 3 2 29

DELOITTE 8 5 4 3 2 22

GRANT THORNTON UK 5 1 6

BANK OF AMERICA 2 2

CITI CAPITAL ADVISORS 1 1 2

SEB ENSKILDA 2 2

JC RATHBONE ASSOCIATES 2 2

ACCURA 2 2

Corporate finance

Financial due diligence

Source: unquote” data

Source: unquote” data

For more information, visit delphi.se.

Proud winner of Law Firm of the Year 2015

Delphi was the winner in Regi’s annual quality and industry survey – Law Firm of the Year,

Sweden’s largest client survey for law firms specialising in commercial law. Delphi was

nominated in two categories, Large Law Firms, being law firms having an annual turnover

of more than SEK 200 million, and the Large Client Award. Delphi won both categories.

Our specialists work in all fields of business law, with our corporate practice involving

numerous private equity transactions and mergers and acquisitions. We believe that both

breadth and depth are required to be able to handle the big picture. And that is what

we have.

160518-Nordic Unquote-US Letter.indd 1 2016-05-09 15:46:43