The green trend was a topic that permeated conversations at the Nordic M&A Forum last week in London, organised by the Swedish Chamber of Commerce for the UK. The importance of environmental, social and government (ESG) issues and impact investing has been a topic for many years, but LPs have become vocal on the subject, and lenders and private equity houses are listening and putting it at the forefront of their investment strategy.
When discussing the future for the region and scale of opportunities, the panellists were optimistic, saying the strong fundamentals and low interest rates in the region, and the amount of dry powder amongst private equity players, should guarantee good opportunities ahead. But investors across Europe are avoiding cyclical businesses.
“I think the markets are sound and healthy, but cyclical businesses are having a hard time, it’s a tough space with very few transactions. Stable consumer companies that are not cyclical benefit from this, which means that everyone is looking at those,” said a private equity panellist.
In terms of triggers that can slowdown the Nordic M&A pipeline, the panellists agreed that the development of the coronavirus could have an impact but that it is too early to know the scale of it. Geopolitical changes are seen as more important for Nordic market players, but none of the panellist saw a real threat for the next 12 months.
“I think Brexit is a bigger issue for the UK than for us in the EU. We don’t see Brexit as a risk in our portfolio companies now. Of course, it can be a bit uneasy this year because we don’t know how the negotiations end, but I am sure the politicians want to solve it in a good way,” said the same private equity panellist.
“The definition of surprise is that we don’t know about it before, and of course there can be a surprise in the markets. But I think the elephant in the room is climate change. It has such an unclear pace and I think it’s difficult to price it and find assets as a part of that theme,” said a second private equity panellist.
Panellists warned climate change is the one to watch when it comes to market impact. The positive outcome is new services and products that will come when consumers are changing their demands, but for some companies, climate change will have a negative impact on earnings and sellers could be forced to lower price expectations.
“Climate change will lead to new services and products, but it will come at a cost. Sellers that are expecting to sell an asset at around 14x-15x EBITDA might soon have to sell at 7x-8x EBITDA instead due to concerns about climate impact,” said the first private equity panellist.
Some panellists were more bullish and argued that there are many angles that can be used to sell an asset.
“The M&A market has always changed its definitions because of trends. Fifteen or 20 years ago we had a very strict definition of an infrastructure asset for example, and that has changed. I am sure we will change the definition of deals as well to be sure it plays well with ESG,” said a banker panellist.
Sustainability due diligence a common feature to come
Impact investing in the Nordics was another topic that gained interest among the attendees at the forum. The panellists agreed that ESG and impact investing do not have clear definitions for investors. They are also difficult to measure, but the lack of specific ESG and impact investing ratings should not stop investors from supporting consumers' demand for sustainability among companies.
“Impact investing is a fashion word. For me, it’s firstly an internal control of the company. Like, what’s the footprint from our operations? Nordic companies were very early to start tracking that. Now we need an external change of focus. It’s more about what I call Instagram impact, which means it is important to show customers and clients that you are helping to save the world. And the key here is sustainable tech. When big companies need to further leverage sustainable work, they need to do it with tech,” said a third private equity panellist.
The panel also discussed the social challenges that will come when climate change forces whole industries to reorganize to meet climate change demands. They also stressed the importance of trusting consumers, which is a stronger driver for businesses than political regulations to be more sustainable and better track their impact on environmental levels. The third private equity panellist argued that sustainability due diligence will be a common part of a transaction in three to five years.
“I see it that there is a need for consumers to play a part in how to solve the problem of climate change. We are at a point in the Nordics where we have a lot of regulatory support to also handle it. I see it as a great opportunity for the Nordics that we are so ahead, while there are other political leaders around the world that are climate change deniers,” said a fourth private equity panellist.
by Carl-Johan Kullving