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Source: Unquote Private Equity Barometer reports

Market review

Shifts in market sentiment were particularly characteristic of 2011. Signs of increasing confidence during the first half of the year were followed by growing uncertainty during the second half, mainly caused by the Eurozone crisis and financial turmoil. The fundraising environment remained challenging throughout the year.

Continued activity in the Nordic mid-market segment
The Nordic region has established itself as one of the most important private equity markets in Europe over the past decade. Market growth in the region has largely been driven by the strong performance of the Nordic economies and increasing interest among international investors in the region’s opportunities.

A total of 63 buyout transactions were completed in the Nordic region during 2011. Compared to 2010, transaction volumes remained flat. Aggregate deal value increased by approx. 35%, however, reaching €10 billion.* The majority of transactions took place during the first half of the year, reflecting the increasing level of confidence in global markets during the first half. Although the Nordic M&A market slowed during the second half, the decrease in value and volumes compared to previous quarters was not as significant in the Nordic region as in Central Europe.

Financial turmoil also affected the exit market. The value of private equity exits in Europe reached approx. €70 billion during the first half, the highest level seen during the past five years. Activity declined significantly during the second half, however, with the total value of exits amounting to approx. €20 billion.** CapMan successfully exploited the improved market conditions during the latter part of 2010 and the first half of 2011 by completing several exits during this period.

Slower real estate market in Finland, more active market in Sweden
Activity on the Finnish property investment market remained at a low level during 2011. Preliminary statistics from KTI Property Information indicate that total volume reached only approximately €1.7 billion in Finland, down by almost 30% on 2010. The year was an active one in Sweden, in contrast, with total transaction volume there exceeding €9 billion and domestic listed and private property companies the most active buyers.

The letting and investment markets slowed towards the end of the year, as a result of the continued debt crisis in Europe. The scarcity of bank financing began to hold back transaction activity, as the availability of debt financing became an issue for many investors. Despite this, core investors remained active and focused on long-let prime assets in larger cities. Very few investors were interested in assets in secondary locations or those in need of active management.

Softer Nordic equities market mirrored global developments
Stock market performance in the Nordic countries impacts CapMan’s operations in a number of ways. We take the market values of listed peer companies into account when valuing our portfolio companies and we are also directly exposed to the Nordic listed market through investments made by the CapMan Public Market fund.

Stock prices in the Nordic region mirrored global developments and fell significantly during the year. The OMX Nordic Mid-Cap index was down by more than 25% at the end of 2011 and the OMX Nordic Index by approx. 20% year-on-year.

Limited competition on the attractive Russian private equity market
Strong economic performance in Russia boosted private equity investment there during 2011. GDP growth was around 5% and total sovereign debt only 2.5% of GDP. The private equity market in Russia continues to be relatively undeveloped, especially in relation to the number of attractive investment opportunities in the market, and there are still only a handful of high-quality private equity fund managers active in the Russian market.

Challenging fundraising environment expected to continue
Economic uncertainty during the second half of 2011 was also reflected in the fundraising market. Over the short term, investor appetite in private equity has declined, primarily due to lower capital distributions from private equity funds, lower valuations of other investment classes, and upcoming changes in the regulatory environment. European buyout funds raised a total of approx. €16 billion in 2011, which was more than during 2010 (approx. €12 billion), but clearly below the peak levels achieved in 2006-2008.**

The amount of capital raised by real estate funds also increased during 2011. 27 private equity real estate funds raised a total of approx. €6.4 billion in 2011 compared to approx. €4.6 billion raised by 34 funds in 2010, according to statistics from Preqin***.

In general, the private equity market has become more mature and increasingly competitive. The number of private equity fund managers is expected to decrease in the near future, as a result of intense competition and as investors become more selective in their commitments. While the best-performing funds are likely to succeed in their fundraising, the market is expected to be exceptionally tough for poorer-performing funds. Based on recent statistics from Coller Capital***, funds making small buyout investments (< USD 200 million) are currently the most attractive type of private equity fund for investors in Europe. With the ongoing turmoil in the Eurozone, the relative attractiveness of the Nordic region has increased. Russia continues to be a niche market, attracting interest only from a limited number of institutions. The Nordic region continues to be an attractive market for real estate investments, boosting the demand for real estate funds investing in the region.

Despite the current challenges in the market environment, the long-term outlook for private equity remains favourable. Private equity funds have consistently outperformed the listed market and have established themselves as a significant asset class in institutional investors’ portfolios. In addition, recent studies (e.g. Preqin) suggest that the majority of institutional investors are aiming either to increase or to maintain their current allocations in private equity in the long term, which will support the stable development of the industry going forward. Asia is expected to provide major growth opportunities in the future, as local investors become more interested in private equity funds.

New fundraising rounds in 2012
During 2011, CapMan prepared for its next significant fundraising rounds, which will take place during 2012. We succeeded in raising additional capital for the CapMan Mezzanine V fund, which closed at €95 million in December. The fund provides mezzanine financing to Nordic mid-market companies, traditionally alongside equity provided by CapMan Buyout.

CapMan well-positioned to operate in the new regulatory environment
The EU directive on Alternative Investment Fund Managers (AIFMD), the Solvency II directive, and the Basel III framework, together with other legislative initiatives, represent new challenges for the industry. The AIFMD came into force on 21 July 2011 and must be incorporated into national legislation in EU member states by July 2013.

The AIFM directive stipulates an operating license for participants, as well as other significant requirements, including fund investor and authority reporting. Thanks to its organisation and operating model, CapMan is in a good position to operate within the requirements of these new regulations.

The EU’s Solvency II directive and the regulatory process implementing the Basel III framework set stricter capital requirements for European insurance companies and banks. As a general rule, the higher the risk related to an asset or investment, the more capital an insurance company or a bank must set aside to cover this risk. Since private equity is considered, under Solvency II and Basel III, as one the riskiest asset classes, the regulation will limit the ability of European insurance companies and banks to invest in private equity. Solvency II is expected to come into force in EU member states at the beginning of 2014, while Basel III is expected to come into force on a phased basis between 2013 and 2019.

Other regulatory processes affecting CapMan include the U.S. Dodd-Frank Act, which requires certain non-US private equity advisors and managers to register with or report to the Securities and Exchange Commission (SEC). CapMan Group companies that advise or manage funds with US investors will need to be filed with the SEC by the end of March 2012. Filing will not be equivalent to full SEC registration, however, but reporting entities will need to provide some information on their funds, business activities and disciplinary history, at least annually. CapMan is well-prepared to comply with the new requirements.

* Unquote Private Equity Barometer Q4 2011
** Preqin Private Equity Spotlight December 2011
*** Preqin Private Equity Real Estate, statistics for 2011 (9 Feb 2012)
****Coller Capital Global Private Equity Barometer, December 2011