We met Nordic Capital Advisory’s lead partner in financial services, Christian Frick, to talk about some of the most exciting recent financial services investments in the Nordics.
PA: European private equity investments in financial services increased from four to 20 per cent between 2004 and 2015 (European financial services transactions accounted for €15.5 billion in 2015), and the trend is continuing. Why do you think this is happening now?
Christian: From a Nordic Capital perspective, the financial services industry has been very static and rigid for a long time. In the aftermath of the global financial crisis, a new type of bank has grown up - niche banks. They’re well-suited for private equity investments for two reasons.
The most obvious is their size. To buy a major bank listed on the Stockholm Stock Exchange, you would have to gather quite a few firms together. They’re out of reach for private equity. Niche banks aren’t. They’re actually pretty ideally sized.
Secondly, the financial services industry is changing so much - and that's when private equity gets really interested. Our governance model is very applicable to changing environments, and we're pretty good at supporting companies in handling and driving change.
PA: Recent major deals in the Scandinavian financial services market, such as Nordnet, Intrum, Bambora and Nordax, all have one thing in common - Nordic Capital. But it wasn't until the 2012 acquisition of Resurs that you really invested in financial services, so what drove this?
Christian: We’d looked at financial services earlier but didn't really see the entry points because banks were off the grid for us, too big to start with.
And when Nordic Capital first started investing in the banking and payments area, we probably overestimated the level of sophistication and performance in the companies. Of course, that meant we underestimated what we could bring to them.
You could say the investment in Resurs was Nordic Capital’s third real push to try and break into financial services. We had gathered experience and become good experts in financial services over time, and quickly learned to make new and different kind of assumptions.
The way we work - the way of approaching governance, companies, and their challenges and opportunities - it was exactly the same as in any other industry. We got more confident after that, and felt there was actually a role for us to play.
PA: Why do you think you’re leading the private equity charge into financial services in Sweden?
Christian: Others are doing it as well. We're not completely alone. But we were early on the ball, as in healthcare, which is fairly similar in many respects - highly regulated, and complex. In those segments it’s important to be knowledgeable.
We’re fairly entrepreneurial. It's in our DNA to look for opportunities everywhere. That's why we kept coming back to financial services and said, "There has to be something here for Nordic Capital."
When it comes to competitors, it’s a sector where knowledge and experience matters. We've gained lots of experience, climbed that knowledge ladder, and looked at the whole industry long enough to focus. That lets us see opportunities where others might be scared off, and only see challenges.
Our ambition is to follow the sector closely and get to know the different companies well, sometimes over many years. Mutual Funds Exchange is a great example, where we learned about the company through the work with Nordnet and Itiviti who are part of the same value chain and we identified a great opportunity early.
A lot of people called to say, "Congratulations. Fantastic. Good news" when Nordic Capital acquired MFEX but I would say more than half of them said, "What's MFEX?" People had never heard of the company. There's the benefit of being focused.
PA: What are your predictions for the future of financial services?
Christian: You have to look at it from the perspectives of the different stakeholders in the market.
Customers like you and I would be relatively better off with more transparency and an improved product offering. Incumbents will face a lot of threats and the challengers will have tailwinds.
I don't see the latter overthrowing the industry completely, but I definitely see them taking their fair share of the market.
PA: You're not tempted to go in the venture capital direction, investing in fintech?
Christian: It’s always tempting. I'm not sure we would be the best investors in early stages because here it is a different mind-set, a different way of working.
But in Nordnet, we’ve reinvigorated Nordnet Ventures. It may not come up with all the best ideas in the world but it can partner up and say, "Dear Mr. and Mrs. fintech, we have close to 700,000 customers in all four Nordic countries. If we invest in you, you get the capital and access to our customers. We can let you offer your products or ideas to our customer base, and if it's a success, you work with us in the Nordics.”
It’s like the healthcare industry I mentioned before, where innovation just faded out of pharmaceuticals at some point and grew up in biotechs instead. Then you saw what happened with pharmas buying biotechs. They bought the innovation.
“We’re fairly entrepreneurial. It's in our DNA to look for opportunities everywhere. That's why we kept coming back to financial services and said: - There has to be something here for Nordic Capital.”
PA: You sold Bambora to Ingenico Group, one of the world's largest payment companies, for €1.5bn. But if you look at your current portfolio, which investment excites you the most, and why?
Christian: What child do you love the most? I'll pick the ones I’m involved in but there’s something that excites us with every company.
If you take Nordnet, for instance, that's the vision of building the best online savings customer experience in the world. My hope, and right now it feels very good, is that people will look back and say, "Wow." In the Nordic countries, in Sweden specifically, they’ll talk about Nordnet as an excellent example of what a modern online savings platform should look like. That's the best in class.
When it comes to MFEX, it’s super-exciting to take a relatively small, and in Sweden fairly unknown, entrepreneur- driven company on a journey together with its founders. Being at the heart of the omni-channel retailing that’s happening as we speak, and how that interplays with financial services, is fantastic, and only doable when combining experience with sincere research.
PA: How much research do you do before you put an investment plan together, and what are the most important inputs to that research?
Christian: We do tons of analysis for every single investment. There’s market analysis, financial analysis, customer services, legal, ESG, IT etc. It's really a very complete picture.
If you take the last three investments, Nordnet, Nordax and MFEX made by Nordic Capital, they’ve taken three years on average, from hatching the idea to getting the deal done. That tells you something about the amount of time spent on opportunities, and how much we research them.
If there's one thing to point out in these changing times, what you want to be clear about is a company's offering and customer value proposition. We call it a customer friendly and transparent offering. It has to withstand our tests. We've turned down quite a few investments on that basis. Really, a clean and true customer value proposition is very, very important to us.
PA: Quite often you tend to change the senior management of the companies you buy. How important is the management of your portfolio companies?
Christian: For us, having a world-class management team running a business is absolutely key. It's critical to achieving what we want to achieve.
If you look back at private equity, it was relatively easy creating returns 15-20 years ago. These days, the market is much more transparent, competition has increased in our business, so we have to be very active owners. We need a very clear strategy and plan for value creation, and the importance of having the right team to execute such plans can’t be under-valued.
“The Nordic insurance market is probably a nice place to be. It's a disciplined market, good profitability, and also very hard to enter.”
PA: There’s a lot of talk about insurtechs and the changes we can expect in the insurance industry. With the exception of Solid Försäkringar, which is part of the Resurs Group, you haven't invested much in this market. Why is that and what’s your view on the industry going forward?
Christian: In banking, there’s an abundance of challenges to invest in. We don't really see the same pattern in insurance. It's a consolidated market, so it's difficult for us to find an entry point.
We have looked at it, not extensively because we quickly found it’s difficult to find that way in, where to invest.
The Nordic insurance market is probably a nice place to be. It's a disciplined market, good profitability, and also very hard to enter.
Insurance is typically linked to another product, say your car, so there will be changes that affect the products you insure and that will impact the insurance industry. We’re already seeing telematics, driverless cars and cost sharing etc.
We're still at that point where we don't really see the true opportunities for a mature private equity to invest, but I'm sure there will be a lot of people investing in insurtech.
PA: How optimistic are you about the future of financial services and what trends are you expecting in 2019?
Christian: It’s part of my job to be optimistic. You have to find pockets of the market you can be optimistic about. Nordic Capital has chosen to focus on a few sub-sectors of financial services, because we have a positive view on those for the long term.
There will, of course, be bumps in the road. This is a cyclical industry, and you can't get away. We try to have a longer perspective, and that needs to be balanced with the fact that Nordic Capital doesn’t own companies forever.
One area we look at is capital to SMEs from banks. It's something that needs to be better handled, as banks treat their capital more carefully than they've done historically.
I’d also come back to my point that financial services have been static and constant in many ways. We'll look back at the industry in 10 years and say now is where we saw things happening, maybe we were even the first in some cases. There's a lot going on in cybersecurity, consumer protection and blockchain that’s hitting the financial services industry first.
I don't think financial services companies have been at the forefront of change historically, but they will be.