Mid-market M&A activity in Nordics picks up and 2018 outlook is bright

Jacob Sand, a Partner in the Corporate Finance arm of global accounting and consulting firm BDO, reflects on the state of the mergers & acquisitions (M&A) market for the mid-market segment in the Nordics, covering Denmark, Finland, Norway and Sweden.

The talk on the Nordic streets over the past quarter or so has been all about the falling house prices in Norway and Sweden. Consequently, Nordic equity markets overall have been declining because of the insecurity and investors remorsefully remembering the last time there was a decline in house prices. However, this time the market correction is more a question of excess supply and the new 1% saving rule in Sweden, as opposed to previous cases of solvency and high interest rates, which is probably the reason why equity markets gained pace again towards the end of the fourth quarter of 2018, when investors came to this realisation. During Q4 2017, only the Danish c20 index and the Finish Helsinki 25 index kept their heads above waters.

Despite the uncertainty in the housing and equity markets, there were no repercussions for the region’s M&A market. Overall activity in the Nordic region has increased by around 8% from Q3 to Q4, reaching 234 deals in the mid-market segment in Q4. Compared to the previous year, Q4 2017 was 3% above Q4 2016. In addition, the average deal value was slightly above the 2016 level at around $71 million. Private equity activity did fall back, decreasing 5% from the previous quarter and 6% from the previous year, but this does not affect the overall positive picture of the quarter.

The continued 2% and 3% growth rates and growth forecasts for the Danish and Finnish economies respectively, the turnaround in Norway’s oil industry and the termination of planned new Quantitative Easing purchases by the Swedish Risksbank have all indisputably fueled the positive development in the M&A activity and by doing so have offset some of the negative effects from the equity and housing markets.

Nordic interest rates, which are stable at historically low levels, are a trend that is expected to continue in the short and medium run and this adds further positive fuel to both the equity markets and the M&A industry. As are new positive fiscal policy incentives – especially in Denmark, where a total of $800 million will enter the economy in early 2018, due to new laws that allow refunds of early retirement contributions, as well as extraordinary pay-outs in early 2019 of past excess property taxes totaling just north of $1.3 billion.

However, low unemployment rates in all Nordic countries – in Denmark in particular will be facing some challenges with regards to labour shortages. The political debates are currently somewhat antagonistic towards foreigners, especially those in low income jobs – resulting in the firm enforcement of repatriation laws of foreigners without work permits. Can Denmark overcome this? The country’s economic growth could easily rise above the current 2% forecast and add to the positive overall economic outlook of the Nordic region in the short and medium run. All this adds to the optimism among investors and companies and their inclination to engage in acquisitions.

Outlook for 2018

Recently, a large bulk of Nordic funds have closed, thereby adding dry powder to the market in near future. Moreover, several new funds were set up in late 2017, among these are the Nordeas fintech fund, the Inventure new tech fund and Secure Alternative Investments’ recently opened mid-market tech and medtech fund. In addition, the general tendency among investors has been to move down in market cap over the recent year or so and as a result more investors are now looking at mid-market investments, adding further liquidity into the market.

Add to this the positive economic outlook in the Nordic region and at BDO we are confident that M&A activity will continue to deliver strong numbers and overall growth in 2018. Private equity activity is expected to co-fuel general M&A activity by reaching previous levels of investment, particularly in light of the newly raised funds and the increasing interest in mid-market investments.