Nordic Capital’s Melinder: Slower exits, longer hold periods expected in 2023

'The most successful funds will be those that take a specialist approach,' Melinder told told PE Hub Europe.

PE Hub Europe’s ongoing Q&A series with private equity leaders reflecting on highlights from 2022 and sharing their outlooks for 2023 continues now with Kristoffer Melinder, managing partner at Nordic Capital Advisors.

The Stockholm-based firm’s recent deals include the acquisition of Autocirc, a provider of reused and recycled automotive original spare parts, and the exit from The Binding Site, a supplier of diagnostic products to clinicians and laboratory professionals.

What were the highlights of your dealmaking in 2022?

2022 was a record year for Nordic Capital. We raised our largest ever fund at €9 billion, one of the largest and fastest in Europe in 2022, closing in nine months with a c. 100 percent re-up rate. We also achieved one of Nordic Capital’s most successful exits with the sale of The Binding Site to Thermo Fisher Scientific in a transaction valued at £2.25 billion.

Despite the challenging economic conditions, we have continued to see a strong deal pipeline over the last twelve months. Nordic Capital has completed eight platform acquisitions and four full exits of portfolio companies, as well as partial sell downs in publicly listed companies.

It is all the more rewarding to have made these achievements in challenging economic conditions when the quality of a GP’s strategy is put to the absolute test.

What was the biggest challenge to completing deals in 2022?

Uncertain macro-economic conditions brought challenges to dealmaking in 2022, and no area of private equity was unaffected. Dislocations in the market impacted valuations and widened the gap between buyer and seller expectations. Despite this, we continued to see a high level of investment opportunities, but I would say that the bar for dealmaking was set higher. It has been critical to have the right investment strategy in place, both to mitigate against external pressures and select investment opportunities confidently. For Nordic Capital, this meant continuing our deep and disciplined sector approach, investing in segments that we have closely followed for many years.

How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months of dealmaking in 2022?

Most investors expect the current economic uncertainty and market volatility to continue for some time, and so I don’t foresee any particular changes in the first half of 2023. The most successful funds will be those that take a specialist approach, understanding specific segments within their selected sectors and applying genuine operational expertise.

What will be the most important trends affecting your dealmaking in 2023?

There has been a great deal of focus on the rerating of valuations and its impact on investment and exit activity. However, the rerating of valuations is not entirely a bad thing. We see it as a positive that some of the worst hype has gone out of the market, providing a better basis for fundamental analysis and valuation. In our view, the next 12 months – and the two to three years after that – will offer up exciting investment opportunities that favour those investors with a strong capital base and deep sector knowledge.

We continue to see strong interest in fast-growing profitable companies with the ability to scale. However, with the public markets virtually closed, and buyers and sellers needing more time to find common ground, it is safe to say that the industry is likely to see slower exit activity in the year ahead.

We also expect to see longer holding periods as a result of the tougher exit market and the additional time taken to help businesses work through challenging market conditions.

What are you looking forward to most in 2023?

In addition to the continued growth of our current portfolio companies, we look forward to deploying our new fund, Nordic Capital Fund XI. In tandem with our mid-market Evolution Fund, it will continue to identify and invest in the best mid to large companies within our core sectors.

As a firm, we are also deeply committed to ESG, and this will continue to be an important element of our investment strategy and ownership model in the year ahead.

Editor’s note: PE Hub Europe’s Q&As with private equity industry leaders will continue to appear throughout January. Check out our interview with Core Equity Holdings’ Thomas De Waen here.