Nordic direct secondaries heating up

The direct secondaries market in the Nordic countries is heating up as exits, particularly in the tech sector, continue to occupy a disproportionately large segment of the European market, creating attractive opportunities for direct secondaries buyers.

“We’re seeing regular Scandinavian deals,” said Nick Habgood, managing partner at direct secondaries firm Azini Capital in London. “With Nokia and Ericsson leading the way, it has created an ecosystem for innovation and entrepreneurialism. The region is great in terms of new investments and early stage investments, and five years later these turn into really good secondaries opportunities.”

Tech start-ups including music service Spotify, open source database MySQL, online takeaway site JustEat and Skype all either started in the Nordic region, have Nordic founders, or moved there. Sweden in particular accounts for about half of the Nordic exit value, according to Creandum.

“In many ways, the Nordics are the best-kept secret of venture capital in Europe,” Alan Feld, managing partner at private equity firm Vintage Investment Partners, said in a post on the company’s website in August. The firm’s investments include venture secondaries in Israel, Europe and North America.

The strong ecosystem in hardware and communications development, new technologies derived from the oil, gas and fishing sectors, as well as the innovative and creative culture have made the area an attractive investment market, Feld said.

In June, London private equity firm Vision Capital exited a portion of its stake in Swedish niche bank Nordax Group thanks to a SEK 5 billion IPO ($605 million; €535 million). Vision had held a €105 million majority stake in Nordax since 2010 through its Vision Capital Partners VII fund. Azini currently holds portfolio companies in Scandinavia including Amino, an online television provider.

But there are also some hurdles to the direct secondaries market in the region. One of them is that unicorns have been flourishing there, boosting valuations and making it too expensive in some cases for direct secondaries buyers to acquire companies.

Over half of the European companies achieving billion-dollar exits between 2005 and 2014 were from the region, despite it attracting only around 10 percent of European venture capital, according to a report by venture capital firm Creandum. In 2014 alone, Nordic companies generated more than $13 billion in exit value, the highest on record, including three unicorns, which are venture capital-backed companies valued at $1 billion or more.

The tax regime is also not particularly friendly to start-ups, as Feld wrote in his blog post, noting, for example, that employee options in Sweden are treated as ordinary income. “While other governments around the world have recognised the importance of the small business sector to a flourishing economy, Sweden’s is actually penalising employees who are creating innovation,” he said. And Feld also thinks that there is “a screaming absence of data about the private technology market,” mainly due to the fact that the venture capital associations there are controlled by buyout firms that have no interest in publishing data.

Still, Feld and Habgood both believe the Nordic region will continue to provide good deal flow for direct secondaries. “Northwest Europe is a really interesting place at the moment,” Habgood said. “It’s all good hunting ground.”