Nordic Buy Out Forum 2018

For the eighth consecutive year, Wiersholm organised Nordic Buy Out Forum in collaboration with the Norwegian Venture Capital & Private Equity Association (NVCA).

Partner in Wiersholm and conference initiator Jarle Kvam welcomed a packed conference hall at Radisson Blu Scandinavia in Oslo and began with a short review of the current market trends. Kvam showed that the key acquisition multiple, EV/EBITDA, has risen somewhat in the past year, while cheap debt has been readily available. In addition, there are signs of more elaborate EBITDA adjustments in financial reporting, weakening in loan documentation and some unusual contractual structures in which, among other things, pension funds appear together with private equity (PE).

Jim Strang of Hamilton Lane supported Kvam's message. Strang promised many slides, and a wealth of information, and delivered on his promise. He noted, among other things, that although the PE industry has yielded good profits and growth in the past ten years, it has not had much success compared to listed securities, which have experienced a decade-long bull run. In addition, the level of debt in the system will soon be the same as before the financial crisis and, according to Strang, no one knows exactly what consequences this will have when the downturn comes.

Like Jarle Kvam, Strang showed that EV/EBITDA-levels are higher than before. It means flying higher and higher, with ever less air beneath the wings, which leads to increased risk. However, Strang does not think it is time to pull the emergency brake just yet, but that it is important to think about how capital is employed and not go too far. Nor does he think that the market is "over the top" yet, but that we are beginning to see the outline of a peak on the horizon, something he supported with a reference to the U.S. yield curve, which recently inverted.

Start-ups and venture capital in development

The first part of this year's conference covered the ever-changing world of start-ups and venture capital. Kristin Aamodt of Equinor was the first speaker. She manages Statoil Technology Investment (STI), which acquires minority interests in start-up companies with the investment mandates to create value for the business and yield a good profit for Equinor. STI was established in 1991 in order to reduce costs, improve safety and respond to environmental challenges. Aamodt explained that STI recently invested in Corvus, a company that develops battery solutions for electrified maritime vessels.

Next up was Audun Abelsnes of Techstars and Jens Festervoll of Equinor. The former organisation is a global accelerator company that manages various programmes to assist and develop start-up companies. One programme is in collaboration with Equinor, Kongsberg Group and McKinsey, where ten companies have been selected to participate in a 13-week fast track process at Equinor's premises at Fornbu to develop ideas and products. According to Festervoll, the rationale behind the collaboration with Techstars was to gain unique insight into the leading start-up companies, which could provide colleague Aamodt of STI with potential investment cases, as well as contributing to learning for Equinor as an organisation.

Head of the industry organisation Norwegian Venture Capital & Private Equity Association (NVCA), Rikke Høvdning, rounded off the first part of the conference by talking about members' views on the Nordic market. She pointed out that a majority of the members are more optimistic about the future now than last year, with two out of three indicating the many attractive opportunities as the reason for the optimism. According to Høvding, the foremost growth barriers to upscale of Norwegian start-up companies are access to talent, the company's internal capacity, competition in the market and access to capital and counselling.

Tough competition for private equity investments

The second part of the conference covered PE investments in a time of strong competition, and was appropriately opened with a talk on Amazon's anticipated imminent entry into the Nordic market by Bjarne Lie of Verdane Capital. According to Lie, it is not a matter of whether Amazon will establish themselves in the Nordic countries, but when and how. This means that prices and margins will be under pressure, which requires a proactive approach for online retailers, who must have a clear strategy for how to deal with Amazon competition. According to Lie, this may be focus on own brands, a combination of physical shops and online sales, or simply collaboration with Amazon and distribution via their platform.

Then Lubna Qunash and Karthie Jayaraman of Carlyle Group explained how the investment fund has a long time horizon for investments, which is becoming increasingly common in PE. Among other things, they referred to statistics that indicate a structural change in the time it takes before companies are listed on the stock exchange. According to the duo, this may be attributed to the new knowledge-based economy, in which companies want to hold on to patents and intellectual property longer.

Halvor Meyer Horten of Bain Capital then picked up the thread regarding the market situation and talked about how the fund invests in anticipation of a downturn. Horten mentioned volatility in emerging markets, rising interest rates, the Italian debt level and Brexit as worrying factors. Bain Capital, which manages nearly USD 100 billion, has already sold heavily in the market pending the downturn. He pointed out, however, that the exact time of a downturn is difficult to predict and emphasised that growth in the global economy is still good and consumer confidence still high.

Partner in Wiersholm Kristian Martin Lind was the last speaker of the second part and discussed the various ways in which a company's management may provide incentives for their employees and what this actually costs. Lind's two principal messages were that a flexible incentive scheme often is more important than one might think, and that the key is what the net cost of the incentive scheme is for employers and employees.

Sustainable investments and other hot topics

The third part of the conference covered various topics such as sustainable investments, IFRS16 and the PE industry and politics. First out was Maria Tallaksen of the PE fund Altor, who talked about the criteria used for the fund's investments in Nordic companies. Altor has invested in the fish farming company Cermaq and the seismic company Sprectrum, among others. In the former case, the fund saw large values in Cermaq's feed business and divorced it from the rest of the group just before the entire Cermaq group was sold. With Spectrum, Altor had a counter-cyclical strategy and made attractive investments in seismic libraries in connection with the oil price downturn a few years ago.

Hanna Jacobsen of Summa Equity then explained how the fund came into being on the basis of whether you are part of the problem or part of the solution. Jacobsen stated that the fund bases its investments on the mega trends caused by global warming, stagnant growth, increasing social inequalities and political polarisation. An example is resource shortage and urbanisation, where Jacobsen highlighted investments in Norsk Gjenvinning and Sortera Group .

The focus then shifted to financial reporting and the challenges the new accounting standard IFRS16 entail for different companies. Heidi Willumsen of DNB explained that increased debt balances are among the most important changes when listed companies and companies with listed bonds apply the new reporting standard on 1 January 2019. In addition, according to Willumsen, the companies' reported EBITD will increase, as leasing costs now have to be booked as financial expenses and excluded from the key figures.

The last speaker of the day was Sigbjørn Aanes of First House, who rounded off the conference by explaining how politicians perceive the PE industry and finance in general. Aanes, who for years was Prime Minister Erna Solberg's closest adviser, pointed out that one of the challenges for the PE industry is that it has few friends in politics. When it comes to the national budget, the politicians would rather generate funds by imposing increased tax on less popular industries, such as the aquaculture industry, than by removing VAT exemptions and other subsidies for electric cars.

We look forward to welcoming you to a new Nordic Buy Out Forum on 5 December 2019.

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Christine Liæker Lindberg

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