Nordic Roundtable: Magnetic North

The Nordic region is largely free of the macroeconomic issues afflicting the rest of Europe, so it’s attracting an ever greater share of the region’s private equity capital. But these small, export-driven economies are still exposed to the problems further south, which is constraining dealflow. And in Sweden, the threat of swingeing tax hikes – not helped by an ongoing image problem – is putting the entire future of the local industry under real threat. James Taylor went to Stockholm in October to ask five leading players how they’re adapting to the changing world


Håkan is a Partner, member of the Healthcare sector team and Bridgepoint’s Operating Committee. He joined Bridgepoint’s Stockholm office in 2002. He currently sits on the Boards of Diaverum and Terveystalo; other investment experience includes Attendo and Tunstall.

Caspar joined EQT Partners in 1996 after his studies at the Stockholm School of Economics. He was appointed Head of EQT Partners Equity in Stockholm in October 2007.

Helena is a partner and head of the Swedish & Finnish team. She joined the firm in 1998, prior to which she worked as a management consultant for Bain & Company. She holds an MSc. in Economics and Business Administration from the Stockholm School of Economics.

Joakim is a partner in Nordic’s Stockholm office. He joined the firm in 1998, having previously worked in the advisory group at JP Morgan in London. He holds an MSc. in Economics from the Stockholm School of Economics.

Richard is an experienced Transaction Services partner who has worked extensively with private equity clients since 1993, including some of the landmark transactions undertaken in Continental Europe. He moved to Sweden in July to head up PwC’s private equity team.


PEI: The Nordic region is currently one of the most popular private equity regions in the world. Why is that?
: The Nordic region is a bit different from most other developed economies at this point in time. We have a budget surplus in aggregate. We have clearly manageable debt levels. We run a current account surplus, to the tune of 7 or 8 percent. And we have relatively low unemployment rates. That gives the politicians a lot more leeway; here the finance minister is all about reducing taxes, adding spending and supporting employment. So it’s a very different picture from a macro perspective, which is underpinning the forecasts of faster growth in the Nordic region compared to the rest of Europe.  

Håkan: There is a difference between the Nordic countries, though: Finland for example, which is the only Nordic country with the euro, has had a tough time compared to Norway, Sweden and perhaps even Denmark.
Caspar: From an economic perspective, we are typically small and open economies. So far we have been supported by good growth in Asia and to some extent South America. But I think in recent months, things have started to get a little bit tougher in the portfolio.

Helena: I am a bit concerned that the politicians here in Sweden are becoming complacent. For the time being our companies are doing well, but we’re an export-driven economy that depends on the development of other markets. So yes, we are in a favourable position at the moment; but if we don’t keep pace, that could be erased.

Richard: I think there is a bit of nervousness around. There is a wider dependence on countries such as Germany for exports, and clearly there are some major issues there. It’s going to be an interesting time; I think it might be tougher than a lot of people think at the moment.

Caspar: The further you go from the Nordics, the less people understand it; they bunch Europe into one group. If you talk to an Asian investor, they don’t necessarily see a big difference from Nordic versus Southern Europe. You have to put a lot of effort in explaining how and why it’s different, and half of them don’t buy it anyway. But you can do great deals in today’s market, despite the sluggish outlook.  
Helena: When you speak to investors outside of Europe, they say: “Why invest in Europe? Look at the macro picture, look at the currency situation, look at the political situation.” But the key is to find the specific situations or segments – to translate the big macro picture into the real investment opportunities.

Joakim: I don’t think anyone would subscribe to going wholeheartedly into, say, retail from a macro perspective at the moment. But if you can find the right micro strategy – where you can do things to the business and improve it one way or another – that’s a different story.


What has prompted the row in Sweden about interest deductibility?

Joakim: There’s been a debate for some time around private equity and the use or misuse of tax deductibility – when in fact I think the original intention was to look at this issue in an economy-wide context.  If you look at some of the really large blue-chip Swedish companies on the stock exchange, they use these rules to their advantage quite significantly.

Helena: Given the current proposal for legislation on interest deductibility, I am hesitant as to whether we will use the shareholder loan structures going forward. Since the tax authority will be the one to decide whether it’s correct or not, you could sit in the process for the next five years. Is it worth spending that time when the potential benefit is so small? 

Håkan: It feels politically motivated to make this decision now rather than look at what other countries have been doing, like Finland for example. I think they want to show that they don’t accept this as portrayed in the papers – and the suggestion was, almost, that this was the only way private equity could make profits, which is clearly not the case.

Joakim: The only thing the industry objects to is that the tax authority has been given a wide discretionary mandate on how to treat this – and the industry doesn’t have huge comfort in the tax authority’s impartiality in applying this.
The way I understand it, they will have to make up their mind whether or not these deductions and structures have been put in place for business or tax avoidance reasons – and there is no one in the world that can give a clear answer as to what that means. So the ability to foresee the tax consequence of a particular action is almost impossible right now.

Caspar: It’s not an objective criterion. And the first judge of that criterion will be the tax authorities. Five years down the road, we might have a few examples that have gone to the highest court. But until then, we won’t really know.
It’s worth pointing out that we as an industry group have said all along that we’re fine with the whole idea of having limitations – as long as they apply to everyone and are objective.

Richard: It makes things really difficult if a tax authority’s approach has no basis in current legislation or past practice. If it’s simply unclear and subjective, then to me that’s not acceptable – and unique, because that doesn’t really happen in other places. Surely the way forward is to change the legislation if there’s a problem, not to change the interpretation of the past.

Does private equity have a bad public image here?

Joakim: Over the last five years, Sweden has the highest private equity activity level compared to GDP in Europe. When we talk to politicians in private, we get the sense that they are very supportive of the industry. However, in the public arena, particularly in the wake of some of the scandals that we’ve had in Sweden over the last two years, the rhetoric is a little bit different.

Richard: It’s a real problem once a big issue is out in the political arena. You lose control of it intellectually because you can have a sensible conversation behind closed doors, but nothing will happen based on those conversations. It’s all about political impact and what the journalists are saying in the press, and that is not the way to debate a serious issue.

Helena: But what’s probably not different in Sweden or Nordics compared to anywhere else in Europe is that you’ve got regulators and authorities looking into the industry. This has been one of the most successful private equity regions in the world. Given the time we are in, perhaps we as an industry could have been clearer in terms of what we actually contribute as active owners.

Caspar: The mistake the industry made was seven or eight years back, in not trying to explain more broadly what it actually does and contribute. I think behind closed doors, everybody who is a decision maker in the community actually understands this very well, but they are not willing to take decisions based on those facts. And that’s not going to be fixed quickly; it will take some time.

So has the industry been treated unfairly by the local press?

Joakim: For the media, I guess this is a perfect storm: it’s deals, it’s excitement, it’s boom and bust, plus there are individuals who you can tie it back to. And I very much concur with Casper: we’ve been poor in explaining what we do. So when something happens and it has very appealing media logic, we shouldn’t blame the journalists for the way it’s portrayed. 

Helena: That said, quite a few of us that are around this table have worked a lot with journalists over the last three or four years, and you get a bit frustrated because it’s very difficult to get positive messages across. Say that you have a good case to present: you have done a lot of good things to a company and it has doubled in size, then you sell it for a good profit. And what do they write about? How much money the private individuals make in the management team or at the PE house. So it’s not easy.

How is the debate about the tax treatment of carried interest playing out?

Joakim: The jury is still out, literally. The tax authority has one opinion, which in our view isn’t based on any legal precedents or texts or arguments that we can find. And now we will see what the courts make of it.  We interpret this very much as tax agency-driven, and therefore there is no political ill-will toward the industry in the background here. 

Caspar:  You also have to draw a distinction here between Sweden and any other country that I know of: the debate about new taxation has been forward-looking, but certain companies and individuals have cases with the tax authority looking back. So, in effect, what the tax authority has been trying to do is to change the interpretation of the legislation retroactively. That’s the main issue.

Joakim:  The politicians actually did propose legislation that would increase taxation of the industry. But this retroactive process is putting obstacles in the way, because if the tax authority were to be proved correct – and I think we as an industry are absolutely convinced that they will be proved wrong – in that context the legislation would look like a benefit to the industry. And that made it politically impossible.  

Richard: I saw that in Germany over a number of years – reasoned debate behind closed doors and then in the public domain – no way. That just leads to a situation of uncertainty, and a logjam in what they’re trying to achieve.

Joakim: At the moment, depending on structure, you pay between 25 and 30 percent, which already puts it at the higher end of the European spectrum. But if the tax authority’s view were to be correct, I think the all-in taxation would be something like 67 percent – plus social charges. That’s not a marginal issue for the industry.

Helena: I think what really damages us is the uncertainty. If you’re setting up a fund today or employing more people in Sweden, you risk having to pay social charges and being taxed heavily … If you have an international group, this prompts the question: how much resource should you put in Sweden as opposed to other countries?

Caspar: This is obviously a sensitive issue in terms of the press. EQT is not saying that if you don’t get this right, EQT will move. But if the tax authorities are ruled to be right in their assessment – and then apply that retrospectively – then you will see private equity based in Sweden disappear over time, for sure. We will not be able to recruit the best guys, because who is going to pay 67 percent taxation when you can pay 20 percent?


PEI: Dealflow is holding up better than elsewhere in Europe. Are there plenty of good primary deals around?

Joakim: There’s been a lack of auction processes; that means you need to look for unique or proprietary or exclusive situations, which really requires you to have some sort of local presence. So you can do deals, but you need to work a little bit harder at the moment to find them.

Håkan: Again, this is very similar across Europe: you have very few formal processes being launched. But I think there is still a number of primary carve-outs or families with generation shifts available here – more so than we see in Southern Europe, certainly.

Caspar: Looking at exits in the past 18 months, they have generally turned into more or less bilateral discussions or very narrow processes. That’s hard work. And it’s more risky. But the outcome is not necessarily worse. 

Håkan: Given the macro volatility and uncertainty, we believe that in many situations it’s better to run a small, tight process than a full auction – because although you may have a great business with a great management team, a macro event could unnecessarily hold up the whole process. So it’s a big risk to run a full auction.

Joakim: The Nordic region, and in particular Sweden and Finland, has the highest proportion of multinational corporations in the world, together with Switzerland. Some of these large groups were reluctant to do anything at the height of the financial crisis because they thought it would look defensive – but now they’re starting to review their portfolio. That will be good for the market. 

Caspar: And again, that goes both ways: on the sell side, we see corporate interest being pretty high. They’re rethinking their strategies; some divisions will fit in and some will not. So we will see more corporate M&A going forward, I am pretty convinced.

Joakim: You can see the underlying logic: changes in the surrounding environment create rifts in these industry groups, and a necessity to change. I would argue that we’ve seen the largest global shake-up of business logic over the last five years that has ever been seen – but hardly any corporate divestitures. So my money would be on the fact that we actually have a bit of up-pent demand in the system at the moment.

Caspar: The new strategies were done maybe two years ago, but no one really wanted to execute on them because they didn’t want to be perceived as selling at the trough. Now the common macro view, of course, is that we are going to have a very low growth environment for the next five years. And waiting for five years is not an option.

Richard: There’s too much ‘wait and see’. But there is more corporate appetite: even in a limited process, it’s possible to create good competitive tension between two corporates. We’ve seen that on various deals.  

Are you seeing more people flying in?

Joakim: In certain situations, particularly big secondary transactions with clearly structured auction processes, you see external interest. 

Håkan: It also depends on size. Below enterprise values of, say, €400 million, 90 per cent of deals are done by local firms or firms with an established presence. Above €500 million, and certainly €1 billion, it is much broader. But the small to mid-market opportunities lean towards the local players.

Helena: In the mid-market, we seldom see it – perhaps on the largest ones, and in certain industries like healthcare. But generally, no.

How realistic are sellers’ price expectations, generally?

Joakim: The deals we have done this year have been at the lowest entry multiples since Fund I, back in the early 1990s.

Håkan: I think that 2012 is very similar to 2002/3 – back then we were still coming out of a pretty good time, and price expectations differed between vendors and buyers. It took about 18 months before it adjusted. I think that now, in 2012, it is being adjusted, but there may be further shake out.  

Casper: In general there is a bigger discrepancy between multiples: for a good, stable, market-leading company, you would still have to pay a lot to buy it. Whereas for the more challenging industries, there you see multiples coming down – and that’s also where you typically see the biggest gaps in expectations.

Helena: A year ago, people explained the low level of deals done with the difficulty in getting financing. And yet we haven’t seen a single transaction where we couldn’t get the financing. It’s more to do with price expectations not being aligned. Sellers might target valuation multiples that maybe stem from a couple of years back – whereas on the buy side, of course, you don’t want to pay for all stars being aligned when the macro picture is so uncertain.  

So is financing readily available?

Joakim: If you look at the last 10 years or so,  the Nordic region has been 14-15 percent of total buyout activity in Europe; in the first half of this year, I think it’s about 25 percent. And one of the reasons for that is that that we have sound banks. They’re well capitalised and well accustomed to the private equity model; they’ve had very low losses in a very difficult period for the industry. So it is certainly possible to do deals up here if you have access to the Nordic banks.  

Håkan: I think as a result there is a fair bit of competition both from the local firms as well as from international firms coming here. But against that, you have a very consistent high quality deal flow, which we’ve seen for over a decade now. But the health of the local banks is such that it’s very difficult for non-Nordic banks to compete in the really interesting situations. 

Helena: I think you can also see that if you are Nordic based – not necessarily Nordic, but Nordic-based – you still have very good access to the local banks here. But I think they are more restrictive towards some of the non-Nordic firms.

Joakim: The flipside of having strong banks is that the Nordic governments are moving ahead with introducing Basel III-type restrictions – which means the capital that needs to be allocated against private equity loans is going up. So loans are getting more expensive. And banks have almost unanimously decided if not to shrink their lending, then at least stay at their current level and focus on their core relationships. 

Håkan: I think there is also a fundamental difference in models: the local banks here are net credit-hold, whereas London-based banks are typically net credit-distribution. So the banks are looking to see which sponsors they want to concentrate on. 

Richard: In lots of other regions of Europe, the market capacity for leveraged finance just fell away – a lot of the banks just weren’t taking part any more. It has clearly been much more stable here, which is a great advantage for the region.