The Finance Princes - The Story of the Swedish Venture Capitalists

“There was only one problem: few understood what Savén was talking about, neither potential investors, bankers, nor the owners of the companies he wanted to buy. The first venture capital firms had to educate the market and explain the model. It would take over twenty years before they realized they needed to do the same with the general public and politicians. On August 11, 1989, Savén had nevertheless raised just under 800 million for his first fund. – My name and Enskilda’s brand made investors feel there was credibility in the project, he says.”

“One evening, the founders sat together with a couple of brand consultants to brainstorm over a few beers about a name for the company. Thomas von Koch noticed that the new radio channel “Energy” is spelled NRJ, so it was apparent that “equity,” which is what they were involved in, would become EQT. The first fund raised 3.2 billion, with Investor and AEA each contributing 15 percent, and the rest of the capital coming from, among others, the AP funds. “We envisioned developing an industrial model of private equity, and that we could leverage the Wallenberg network. We didn’t have any more long-term plan than that,” says Conni Jonsson.”

“This marked the beginning of a twenty-year period of deregulation in traditionally protected industries such as telecom, TV, energy, rail traffic, education, healthcare, elder care, and pharmacies. No other country was as aggressive as Sweden in breaking up monopolies, and this unexpectedly created lucrative opportunities for private equity firms. Here, operations with dominant market positions and stable revenues were sold; it was like a dream. Thus, a gigantic transfer of wealth occurred, as profits quickly multiplied in the companies once they were privately owned. In many state-owned companies at that time, there were no incentives at all to influence revenues and costs, which meant the potential was great.”

“The high interest costs incurred are paid by the acquired company. This can happen, for example, by the private equity firm creating a company that takes out a loan to buy a target, and once the purchase is completed, the acquired and acquiring companies are merged. Then the debt ends up with the acquired company, and its profits go to pay interest. In practice, the new company is paid for with its own money, since only a small part of the purchase price comes from the fund that investors have contributed to.”

“In the beginning, he had no fund, so financing had to be arranged for each individual deal, which took a lot of energy. It was still forbidden for foreigners to invest in Swedish companies without government permission. Therefore, Ahlström rented a small office in Copenhagen, where the rules were more liberal because Denmark was in the EU.”

“In 2013, after just over twenty years of operations, Swedish venture capital companies, according to SCB, controlled 14 percent of the large and medium-sized companies in Sweden. They had revenues equivalent to 8 percent of GDP. Together, through their funds, they controlled a capital totaling almost 800 billion SEK, of which 470 were in Sweden. The money was invested in 850 companies with 850,000 employees, 180,000 of whom worked in Sweden. In other words, they were a significant power factor.”

“But who were they, and where did they come from? The first founders were all high achievers and at the same time headstrong, stubborn individuals who went their own way. Here they differ from many who have made traditional big company careers, where the individual is subordinate to a historical culture and power structure. The venture capitalists were not constrained by any conventions and they wanted to make money, a lot of money. That is one reason why they buy mature, established companies where the risk of large losses is lower than in start-ups. They are engaged in “buyouts,” as opposed to their relatives in “venture capital” who invest in very young companies with high risk. It creates some confusion that both are included under the term venture capitalists, as they work with very different conditions and “venture” is the poor cousin.”

“Historically, engineers have held the power in Swedish industrial companies, focusing on product development and staying at the forefront technologically. That’s how companies like Ericsson, SKF, and Alfa Laval conquered the world. When financial markets became more international in the 1980s and 1990s, demands on listed companies’ profitability increased, and the status of economists was gradually strengthened. The spotlight shifted instead to sales, marketing, and how best to utilize company capital. It was in this environment that the Swedish venture capital market emerged, with role models such as Permira in the UK and KKR and Blackstone in the USA.”

“Families and individuals have, of course, built fortunes before in Sweden. A few contemporary entrepreneurs, like Skype founder Niklas Zennström, have sold their innovative companies for astronomical sums. But rarely has a group earned so much in such a short time as the venture capitalists, without having made any revolutionary discovery.”

“These new capitalists, of course, differ from Rockefeller in many ways. He made his money primarily within one sector, the oil industry; he built a dynasty; he became infinitely richer—and more hated. But there are similarities as well. Both became rich by being first in an immature market where they could initially grow without much competition and charge very well for their services.”

“In retrospect, it has become important to determine who was first. Who wrote the first chapter in the unlikely story that began in Sweden during the second half of the 1980s? One of the first to see the potential in trading unlisted companies was Skandia’s then CFO Björn Hall, when he founded Skandia Investment – but the one who handled the company acquisitions was Christer Dahlström. The first to start his own business and make acquisitions according to the American model was Mikael Ahlström. But Björn Savén started the first fund. One of Nordic Capital’s founders, Robert Andreen, is annoyed at Hall for taking credit for starting Nordic, when Andreen claims that Skandia was just a part-owner in the beginning. Hall then responds with a smile: “But you, who hired whom?””

“From there, he moved on to the investment bank Bear Stearns’ “corporate finance” department, dealing with corporate transactions, where his cousin George Roberts worked. The head of the department was Jerome Kohlberg, and as the eldest of the three, he would become the first K in KKR. While they were still at Bear Stearns, they developed a form of business that was named “leveraged buyout,” or purchase with financial leverage. The leverage was the loan, which made it possible to buy a larger company and thereby generate greater profit. Leveraged company purchases had been done before in various ways, but never in this structured way or with such a high proportion of debt. The reason why it is more effective to use borrowed money than your own capital is that interest on debt is tax-deductible.”

“A variable portion, perhaps 5–20 percent depending on the size of the company, can be bought by the management to increase their commitment, so that the results are felt directly in their wallets. This is how they create the loyalty that is a prerequisite for the arrangement: the new owners must have the management on board.”

“George Roberts and Jerome Kohlberg were significantly less extroverted, and they went home to their families when the day’s work was over. Kravis was also the most aggressive in business. He pushed forward when KKR in 1988 entered the legendary battle for RJR Nabisco, a large publicly listed corporate group that, among other things, sold cookies and cigarettes. At that time, KKR was the largest of the buyout firms and paid a record price of 25 billion dollars, a sum that would take ten years before anyone surpassed it.”

“Procuritas, as he named his company, made deals worth several billion kronor between 1986 and 1990. The biggest—and worst—was the purchase of the match and tobacco company Swedish Match from the forestry company Stora. Together with a couple of other financial players, they bought the company out from the stock exchange in 1989. – We made all the classic mistakes; we paid too much, we borrowed too much, and we assumed we could quickly sell several of the subsidiaries—lighters, matches, and razor blades—to get money and pay off part of the debt. The forecasts were derailed by the Gulf Crisis, when Iraq invaded Kuwait. Business came to an abrupt halt, nothing could be sold, interest costs accumulated. The other owners wanted out and “we were too small to decide, so we were forced to sell too early; otherwise, it could have turned out well,” Mikael recalls. After that, he was more cautious about leveraging the companies. In this way, he differed from his successors.”

“Over the years, he gained experience to point to when visiting potential investors for the first fund. By starting a fund, they could invest in several companies in parallel, reducing risk—you weren’t betting everything on a single card. It was also more efficient to raise money once for a fund than five times for five companies. But it was a new concept and difficult to attract money at first. – We made many “cold calls” to investors, had tremendous energy, and it finally paid off.”

“ver the years, he gained experience to point to when visiting potential investors for the first fund. By starting a fund, they could invest in several companies in parallel, reducing risk—you weren’t betting everything on a single card. It was also more efficient to raise money once for a fund than five times for five companies. But it was a new concept and difficult to attract money at first. – We made many “cold calls” to investors, had tremendous energy, and it finally paid off.”

“In the 1980s and early 1990s, Skandia was the kingdom of CEO Björn Wolrath. The company was listed on the stock exchange but had no main owner. Wolrath made it his mission to defend Skandia at any cost against intruders, not least SEB, which made several attempts to take over the entire insurance company. Even then, long before Lars-Eric Petersson’s arrival, Skandia was the very epitome of management control in the absence of strong owners.”

“But Peter “Pirre” Wallenberg, who sat on Skandia’s board, did not think that at the board level, in one of Sweden’s larger companies, they should discuss what he considered individual small deals. The solution was to start the subsidiary Skandia Investment, with its own management and board, and place the unlisted holdings there.”

“Dahlström focused on family businesses, and that was how Nefab, Nordgren’s packaging factory in Hälsingland, came his way. It was one of Skandia’s insurance salespeople who mentioned that the Nordgren family was going through a generational shift.”

“They needed an advisor but were in no hurry. It took Nordgren over a year to decide which suitor to choose. In the end, it was Christer Dahlström and Skandia Investment who, through newly issued shares, were able to buy 15 percent of the company for 10 million kronor. At that time, Skandia Investment made all purchases with their own money, no borrowed funds. Therefore, they only entered as minority owners, so that the money would suffice for several different businesses. Nefab, which had sales of 120 million when Skandia bought in, then experienced rapid growth—they started production in China, South America, Malaysia. In 1996, the company was listed on the stock exchange, with sales by then of 560 million. The family remained as major owners. Thus, they shared in the increased value of the company as it grew, while maintaining control. In 2007, Nordgren, together with another private equity firm, Nordic Capital, bought the company off the stock exchange again. The family felt that Nefab was undervalued, and Nordic, as one of Sweden’s largest private equity firms, had the resources to take the company to the next growth phase. By then, the value had risen to 2.7 billion. Nordgren sold some shares again, but kept 40 percent of the company. Nordic had to settle for buying 60 percent; they would have preferred a larger majority, but had to give in. Ingmarie and Jockum Nordgren-Pihl, who now live in Luxembourg, were not willing to negotiate.”

“The change in strategy at Skandia in 1998 gave Christer Dahlström and his three colleagues the opportunity to buy the business, which they named Priveq (a play on “private equity,” which is the English equivalent of risk capital firms). Skandia invested 600 million in the first fund, and Norwegian Orkla, ICA, Handelsbanken Liv and the Fourth Swedish National Pension Fund each invested 100 million. With a billion in their pockets, they moved out from Skandia on Sveavägen to their own office, hired four people and got started.”

“Now they could finally start financing the deals with loans, which led to bigger deals and higher profits in terms of kronor. The reasoning that one must always try to extract the highest possible profit is based on the theory that capital, investors, seek out where their money grows best. Therefore, as a manager of capital, you must give the highest return in order to be competitive among investors. As purchase prices increased and the industry grew, contracts with both investors and companies also became more complicated. More lawyers and auditors were brought in to make assessments. Nothing was allowed to go wrong. Over time, the venture capitalists spent many millions just on consultants who go through the accounts. “Due diligence” is carried out in a potential company acquisition to decide whether to make a bid or abstain.”

“Family businesses of various sizes have always been an important source of deals for the venture capital industry. But there was another at least as important source, which for a period became a livelihood for the slightly larger companies.”

“Volvo’s then-CEO PG Gyllenhammar, who for many years was considered Sweden’s most powerful person, was one of those who bought into this reasoning. Among other things, he added the food company Procordia and the pharmaceutical company Pharmacia to his automobile business. A group like the forestry company Stora owned Swedish Match, which in turn not only produced matches, but also building materials, flooring, cardboard, and machines for fish gutting. Nokia manufactured such diverse products as televisions and rubber boots.”

“When Björn Savén was 26 years old, his father died of a heart attack, which hit him hard. That was one of the reasons why he and his future wife Inger returned to Sweden after his graduation from Harvard. They wanted to be close to family, his mother, and sister. Here, he sought out Esselte, a growing international multibillion company that sold office supplies. Sven Wallgren was the boss there. He belonged, together with business leaders like Hans Werthén at Electrolux, to the generation that started a wave of international corporate acquisitions in the 1970s and 1980s. Sweden was on the offensive, even though currency regulations still restricted freedom.”

“Savén took the largest share, two-thirds, arguing that he was the initiator. He also had the most money. Harald Mix and Kim Wahl shared the rest; throughout the journey, they had equally large stakes. Both Mix and Wahl took out loans to become co-owners of Industri Kapital (later IK Investment Partners, here called IK), as the company was named. It would turn out to be a brilliant investment.”

“When IK got its name, Savén had already made one of his most important deals, the purchase of the publishing house Liber together with, among others, the competitor Nordic Capital. “We couldn’t afford to buy it ourselves.” They also bought Esselte Publishing, with Norstedts Förlag, from Savén’s old domains and merged it with Liber. Three years later, the new publishing house was sold to Holland. “We signed at half past six in the morning at Procordia’s old office. There was always someone who needed to go somewhere, sometimes you just had to take the time you could find,” Björn recalls.”

“Lindex and Ellos were prime examples of so-called “corporate orphans,” companies whose owners—in these two cases, grocery giant ICA—had abandoned them to their fate. It was rewarding. Under IK, the strategy was developed, among other things, for Lindex to focus on children’s clothing, which became highly successful. Lindex was eventually listed on the stock exchange, and in 2007 was bought up again by the Finnish clothing chain Stockmann.”

“In 1993, IK opened its Swedish office on Birger Jarlsgatan in Stockholm, above the restaurant Riche. That same year, the firm made its first deal in Finland, the purchase of Kone Cranes, which almost fell through at the last moment.”

“The deal was to be completed no later than Thursday, April 15. On Wednesday, the Finnish lawyers called and said: “You can’t use mezzanine loans; there is no legal wording for them in Finland.” Mezzanine loans, which constituted 15 percent of the purchase price, have lower priority in bankruptcies than regular bank loans and therefore have higher interest rates. But they did not exist in Finland and were therefore not approved as part of the financing. — Suddenly, 50 million were missing, so we started calling all the investors and asked if they could consider putting in a bit more, but we only managed to raise 40 million. Finally, I called Christer Dahlström at Skandia Investment, who had invested with us before, and asked if he could take the last 10 million. He said no, and I was about to hang up, but before I could do so, he said in the next breath: “I’ll take 20.””

“Once a fund is in place and capital commitments have been secured, the daily life of venture capitalists is about searching for potential acquisitions. The goal is for the majority of the capital to be invested within three to five years.”

“The search requires patience, and it’s an adjustment for those who have previously worked in the banking world bringing together deals for clients. During good times, an adrenaline-fueled banker may close one acquisition per month; as a partner in a venture capital company, it’s more like one purchase per year on average. The more funds that are out looking, the tougher the competition becomes to find good companies at an attractive price. The old owners might not even want to sell.”

“When Kim Wahl called Electrolux and asked to buy one of their subsidiaries, the old sewing machine manufacturer Huskvarna, he was turned down several times. “We don’t want to sell, Huskvarna is part of our core business,” was the response.”

“It often takes months to reach an agreement on price and conditions; that’s the case in any business deal. Problems especially arise when conditions change during negotiations. One such thing can be that the buying party lowers its bid during the process. “Bait and switch” is the industry’s term for attracting the seller and then changing the offer. Then polite, suit-clad negotiators can quickly transform and end up screaming at each other. Another problem is if the buying party completely withdraws its bid. That is taboo, absolutely forbidden if you want market participants to have confidence, but that is what IK did in the autumn of 2000.”

“In the years after the financial crisis, private equity firms hardly made any sales through the stock market at all. Some equity analysts argued that they had acquired a bad reputation – they could not be trusted to list good companies on the stock exchange – and thus investors’ interest waned. The private equity firms were considered too greedy. Just as important, however, was that the stock market performed weakly for several years, with fewer new company listings overall. When investor interest was low and the sellers did not get the price they wanted, they preferred to abstain. Worse still was that soon it would become more difficult for the private equity firms to find buyers even outside the stock market.”

“IK’s headquarters differ from EQT’s, Nordic’s and Altor’s not only because the interior design and architecture are older and more grandiose, but also because there are more “tombstones” in the meeting rooms than at any of the competitors. These “tombstones,” which is a strange name, are a kind of glass trophy that are made after a deal. They stand as monuments to historical successes. But most of those who made the deals at IK are no longer there. Of those who were present during the early days, in 2013 there was only one person left besides the founder Björn Savén. And Savén has moved back to London.”

“Com Hem was founded in 1983 under the name “Televerket kabel-tv.” In 1999 the company got its current name, and in 2003 the loss-making operation was sold to EQT. When they took over, profits increased by 100 million kronor in just a few weeks simply because the new owners made sure the company contacted a group of suppliers and renegotiated the prices of the services they bought. No one had done that before. Things cost what they cost. But what especially increased the value was that EQT built and launched “triple play”: cable, broadband, and telephony in one service.”

“Stjärn-TV was founded in 1985 by three forward-thinking municipal housing companies in Stockholm. Eventually, they realized that they did not need to run the cable company themselves for tenants to watch cable TV and sold the business in 1994 to Singapore Telecom. The then-chief, General Lee Hsien Yang, was the son of Singapore’s first Prime Minister and the brother of his successor, Lee Hsien Loong. The general won the bidding over a Swedish businessman named Jan Hugo Stenbeck, which made Stenbeck furious.”

“But EQT’s best deal so far, one of the best ever made in Europe according to Conni Jonsson, was German Tognum. It yielded a profit equivalent to more than forty times the invested capital. Tognum built diesel engines, but the previous owner, Daimler-Chrysler, had let the subsidiary idle for a while. EQT made sure to use the expertise available in Tognum to broaden sales. They invested in a new generation of engines, targeted new markets, for example engines for large boats and ships, and thus increased both profit and sales. So how did EQT, a rather young and unknown company, manage to get to the negotiating table? The seller, the newly merged automotive group Daimler-Chrysler, mainly wanted to avoid the business ending up with their worst competitor, the truck manufacturer MAN. The bidder Carlyle was not a suitable buyer either, since Tognum had business with Cuba, a red flag for American companies. Instead, it became the little EQT. But they weren’t completely unknown, after all, Investor was a major shareholder in Daimler’s competitor Scania. It became an important deal not only because it was profitable, but because it marked an entry into the German market. Now, people there knew who the EQT people were when they called and wanted to do business.”