For the ninth consecutive year, Wiersholm organised Nordic Buy Out Forum in collaboration with Norwegian Venture Capital & Private Equity Association (NVCA). The conference is the largest of its kind in the Nordic countries, with almost 600 registered participants this year.
Wiersholm partner and Nordic Buy Out Forum initiator Jarle Kvam welcomed a packed conference hall at Radisson Blu Scandinavia in Oslo and started by referring to some trends currently affecting the M&A market, with special focus on Private Equity (PE) and Venture Capital (VC). Among these trends are the enormous social and environmental challenges the world is facing, and how these make investors put “impact investments” on the top of their agenda. Impact investments are investments in companies, organisations or funds with the intention to generate a measurable, beneficial social or environmental impact alongside a traditional financial return.
The next speaker, Rikke Eckhoff Høvding, CEO of NVCA, presented a fresh report on how the Norwegian PE and VC industry is contributing to wealth creation and employment. Ms. Høvding told the conference that the Norwegian market players have a record NOK 29 million in “dry powder” that must be placed in the market.
How to change the world and make money at the same time?
The first part of the conference was opened by Erik Engellau-Nilsson and Tove Rådelius of Norrsken Foundation. Norrsken is a Swedish foundation working to solve global challenges by facilitating for and investing in startups with a positive social contribution. The foundation was formed by Klarna co-founder Niklas Adalberth and does according to Erik Engellau-Nilsson focus on solving many of the challenges that Klarna experienced in its first years. Norrsken established a startup hub in Stockholm three years ago and has recently launched its plans for a further two “Norrsken Houses” in Kigali and London, respectively.
Trond Lund of the company N2 Applied then entered the stage. Mr. Lund started by explaining how nitrogen emissions from stored manure to air and water lead to considerable environmental challenges in addition to the fact that farmers are losing important nutrients in today’s production cycle for manure. To put it briefly, the loss of nitrogen seeping from the manure is replaced by adding nitrogen fertiliser based on fossilised carbon and natural gas. By using N2 Applied’s method, farmers can produce eco-friendly fertiliser directly on their farms by means of a plasma reactor running on renewable energy and creating a process that adds nitrogen oxide from air to manure.
Next up were Marina Ergatoude and Peter Witte from EY’s Private Equity team in London. They started by challenging Milton Friedman’s well known statement that the only social responsibility of a business is to maximise its own profits, arguing that a strategy related to impact investments can actually be a competitive advantage. The PE industry has thus been a driving force for change – from a somewhat passive mentality based on ESG principles to a more active role where the purpose is to incite changes directly.
Martin Schütt and Linn Nærup Børke of the Norwegian PE company Askeladden & Co were next on stage. Dressed in grey college sweaters, they told the conference how Askeladden starts up and scales companies in sectors with an untapped potential. The drew an important distinction between inventions and innovations. According to Mr. Schütt, entrepreneurs’ aspiration for the first is one of the most important reasons why many startup companies do not succeed, because there is no market for their inventions. The good ideas do not necessarily need an enormous market potential, Linn Nærum Børke said, referring to the hairdressing chain Cutters as an example of how Askeladden started up a company in a sector with limited market potential but with less professionalised participants.
Dry powder and high multiples
The topic of the second part of the conference was how PE companies work to find good acquisition candidates. As already mentioned, the available capital in the sector is reaching record-high levels, leading to high company valuations and increasingly more specialised owners’ funds.
First up was Roland Pezzutto of Marlin Equity Partners. Marlin Equity Partners is a global investment firm with over USD 6.7 billion of capital under management. Their main advantage, however, is their knowledge, enabling them to create values in the companies they acquire. They are therefore looking for e.g. technology companies in fragmented sectors with a possibility of consolidation and delivering critical solutions for their customers’ operation and with a constant flow of income. Following the acquisition, Marlin Equity Partners can assist the management of the company with strategic choices, sales channels, product development and “bolt-on” purchases for further growth, Pezutto said, and added that the company since 2005 has acquired more than 100 software and technology companies worldwide.
The next speaker was Magnus Tornling of EQT Partners. He presented an exciting case regarding the company Autostore, which turned out to be EQT’s best investment in more than ten years. Autostore has developed a robotic storage system, selling to distributors and trading companies all over the world. EQT acquired Autostore in 2016 after an extensive bidding round where “every man and his dog” took part, according to Mr. Tornling. In spite of the fact that they ended up paying a high price, EQT Partners had been analysing trends in industrial technology for a long time and had particularly noted storage automation as a result of the growth in e-commerce, robotisation development, urbanisation and demand for faster delivery of commodities. Their choice therefore fell on a company from Nedre Vats in the county of Rogaland. Through improvement of the distribution and plans for the way to the market, sales and marketing processes and focus on R&D and patent applications, EQT, among other things, contributed to increasing the turnover by 60% each year during their ownership, until they sold Autostore in 2019.
Rolf Torsøe of Nordic Capital then explained how sector-specific owners’ funds year after year beat the more general funds in terms of return. Nordic Capital focuses particularly on acquisitions within technology, healthcare and financial solutions. They mainly apply four criteria when looking for good acquisition candidates: growth potential, entry barriers, controlled risk and exit possibilities.
A new perspective on PE, the lawyers’ role and economic developments
The third part of the conference covered various topics. Ulrik Smith of FSN Capital started by sharing a somewhat different perspective on what the PE sector is really about. First of all, it ought to be called People Equity instead of Private Equity, Mr. Smith argued. Figures and analyses are not enough, interpersonal skills are just as important if not more so, and are often estimated, the FSN partner said. Ulrik Smith had learned this the hard way by almost losing a transaction because he did not realise that to the seller, the possibility to still be allowed to borrow the company car after the company was sold was more important than the actual price he received for the company.
Wiersholm’s own Ingjerd Røynås followed up with an interesting insight into how lawyers can contribute to value creation in an acquisition process. When signing a letter of intent, the seller often binds itself to exclusive negotiations with one single purchaser over a period of time. Ms. Røynås’s message was that as much as possible should be on the table before a letter of intent is entered into because such exclusivity drastically shifts the negotiation balance between purchaser and seller in favour of the latter. As a result, negative surprises revealed in a due diligence process may, at worst, contribute to a lower sales price than what has been expressed in a previous indicative offer.
The two last topics on the agenda concerned economic perspectives on the market and the further macroeconomic development. First up were Jo Isaksen and Magnus Bernin of DNB Markets. According to Mr. Isaksen and Mr. Bernin, the record-high levels of capital within PE are due to continuously low interest rates and cheap debt. As a consequence, the frequently used valuation multiple ev/ebitda has increased considerably from the average level of the last ten years. DNB Markets also finds that more and more M&A processes do not lead to successful sales, which may be due to, among other things, the market situation. Their conclusion was therefore that it is important to structure and adapt the agreements to the market situation.
The last speaker of the day was Øystein Dørum, chief economist of the Confederation of Norwegian Enterprise (NHO). He presented an overview showing how the US and China have gone from a situation with relatively low import tariffs on each others’ goods to introducing tariffs of approximately 25% today, which clearly curbs global trade. Like Mr. Isaksen and Mr. Bernin, Mr. Dørum referred to the fact that we are now probably at a late stage in the economic cycle, but he also pointed out that central banks will have limited freedom to act in a period of recession due to an expansive monetary policy which seems to continue and low base rates. Luckily for Norway, our situation is still “surprisingly good” in comparison to the world economy, said Mr. Dørum, who expected a moderate growth in GNP in the coming years, combined with low unemployment.
We would like to thank all participants of this year’s conference and look forward to welcoming you to the tenth Nordic Buy Out Forum on 3 December 2020.
All photos: Sigmund Sagberg Andersen