Study: Nordic Private Equity portfolio companies

Improving operating profit through international expansion?

After years from doing business and living in developing and emerging markets, we asked ourselves; “Do the portfolio companies really get leverage of their internal expansion and why is the presence of Nordic SME’s relatively low on developing/emerging markets?”

Considering the size of the business opportunities on many developing and emerging markets, the attention and presence should be much higher. At the same time we noticed an increasing interest from foreign companies in potential mergers and partnership with Nordic SME’s. We also noticed that many young, talented and progressive professionals in various industries are very keen to work for Nordic companies because of the “Nordic business values”!

Were these only “field observations” or could these observations be backed up with facts? We had to find out! We therefore initiated a study that had the following objectives:

  • Evaluate the importance of growth in the Private Equity value creating model
  • Map the international presence of Nordic Private Equity portfolio companies
  • Identify if there is a correlation between operating profit (EBITDA) leverage and the level of internationalization.

The study was conducted by analyzing 140 portfolio companies invested in by 8 leading Nordic Private Equity companies. In total, these companies are managing 31 billion Euro in 22 funds and the “Managed Turnover” of the portfolio companies is 54 billion Euro.

The study was complemented by conducting informal dialogues and interviews with 12 experts within the Private Equity field from the Nordic region and experts from developing and emerging markets.

Please contact us for a more detailed presentation of our study.

High level conclusions of the study:

  • Sales growth is key - generating sales growth is most important value generating factor in the Private Equity Value Creating Model. Approximately 45% of the value that is created during the investment period of a portfolio company is directly related to sales growth improvements.

The study stresses the importance of sales growth in order to secure return on investments. Therefore, the key challenge is not only to identify growth segments and markets for the portfolio companies, but also to actually realize profitable growth during the investment cycle.

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  • “Let’s follow each other” – when growing a business through internationalization, Nordic Private Equity portfolio companies applies similar internationalization model; “the circles on the water expansion strategy”. This means that you initially start to expand your business to “well known and near markets”.

The following figures are an overall summary of the international presence of the portfolio companies in the study:

  • 38% were only present on their Nordic/local market
  • 60% were also present on one or more European market(s)
  • 4% skipped an initial international expansion to Europe, but only 5% were present in all the BRIC countries.

Note: The sum of the above figures exceeds 100% since some of the portfolio companies have their local market as a European market and they are not present in the Nordic region.

The study highlights a key challenge if expansion is initially limited to “well known and near markets”, instead of expanding the business to markets where optimal return on investments, resources, capabilities, services and products can be secured in a long term perspective.

  • Positive return on international expansion is not obvious – according to our study, it seems to be a correlation between the “level of internationalization” and operating profit (EBITDA). An internationalization that is conducted properly can be very profitable! At the same time, the study indicates that an international expansion can also lead to quite large negative effects on the businesses operating profit.

The study emphasis the importance to prioritize and select markets that will optimize profitability and growth in a global perspective. We also need to consider all the challenges and different constraints to actually realize growth on different markets.

 

The response of our study has been so positive, so we are now extending the study to also include Nordic Venture portfolio companies. A study that is analyzing the internationalization of Nordic Venture Capital portfolio companies.

Please contact us for more information!

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