INDUSTRI KAPITAL IS one of a small group of successful, large non-UK and non-US private-equity houses operating in Europe. With e3.5 billion in funds under management and specializing in mid-cap investments in northern Europe, the Stockholm-based firm has been impressing investors and rivals with a standard 20% internal rate of return on deals since its foundation in 1988 by former Esselte Group finance director Björn Savén.
It's not the kind of firm that one would expect to struggle to raise new funds from outside investors at a time of flat returns in conventional asset classes.
Industri Kapital's difficulties in closing its most recent fund provide crucial lessons even for private equity managers of long standing with good track records. Investors are becoming increasingly wary over key-man issues, fees and changes to previously successful investment strategies.
Savén raised IK's first fund of e108 million in 1989 and has since established the firm as one of the leading names in private equity in Europe. "We create a higher earnings growth than most of our rivals," says Savén. "In terms of the firm's size and what we have done with the deals, my expectations have been exceeded."
Investing in the medium to large mid-cap sector in northern Europe, targeting the Nordic and Benelux regions, Germany and France, IK mainly invests in manufacturing, retailing and service sector companies. Notable investment successes include kitchen maker Nobia (of Magnet and upmarket Poggenpoll brand fame), cosmetics company Oriflame, mail order firm Ellos and engineering group KCI Konecranes.
Although IK is a well-known and established fixture on Europe's private equity scene, it has tended to avoid the highest-profile e1.5 billion plus large-cap deals.
In recent years, though, the group has harboured ambitions to compete for these large deals. But it's investing clients have not been so keen to fund them and now IK is relearning the virtues of smaller acquisitions.
If IK's investments have been less headline grabbing than those of larger groups such as BC Partners and Permira, its returns stack up with the best.
"Some of our deals may seem less glamorous compared with the high-profile, household names that the large-cap firms buy. But our niche areas can be more profitable – as our six-fold return on the IPO of cosmetics firm Oriflame in March illustrates. Plus, there is less competition in the mid-cap market, so there is less opportunity for price inflation," explains Savén.
Despite its achievements, the firm's fifth fund, IK2003, which was launched in early 2002 with a target of e2.5 billion, has limped towards the finish line. The fund's first close, in late 2003, raised only e500 million, prompting IK to reduce the e2.5 billion target size to e1.6 billion earlier this year. Eventually, however, it didn't even manage this. The fund's final closing, on October 1, was at just over e800 million.
Humbling experience
This is deemed by market specialists to be the most disappointing fund-raising performance for a large, established firm yet seen in Europe. And while rivals have picked over the firm's experience with IK2003 with an almost macabre delight, ultimately, it has proved a sobering experience for the entire market.
IK will now have to curtail its larger deal ambitions of the late 1990s and early 2000s and return to the lower deal-size arena it started life in.
"We will not be doing the larger mid-cap deals, such as Perstorp, where we invested e400 million of equity. e150m equity is our ceiling. But really this has been our strategy anyway for the past three years, and during the nineties. So it will not mean a cultural change for us – rather, we are going back to our roots," claims Mads Ryum Larsen, head of investor relations at Industri Kapital.
Although clearly humbled by its experience, IK remains bullish about its future. Not only can its niche area be highly profitable, but there is less competition for assets.
"As long as we continue to produce good returns, we don't see this as a reputational issue. The small to medium mid-cap sector can be extremely lucrative, and it is in this segment we have historically done our best deals. We have got a large and professional organization for the segment we are targeting and our investors will profit from our extensive research and network capabilities," says Ryum Larsen.
With a smaller fund, IK will receive significantly less fee income, however. In time, this could have a bearing on its business operations, despite the considerable revenue streams it still receives from the e2.1 billion IK 2000 fund. Even so, Industri Kapital says it will not be reducing its personnel in the short term – although it does not rule out scaling down its team in the next three or four years.
This fund-raising humiliation must have come as a shock to a firm that has enjoyed dazzling fund-raising success in the past – particularly with its fourth fund. That IK2000 fund raised e2.1billion – at the time one of the largest sums ever raised by a private-equity firm in Europe and an extraordinary achievement for a non-UK, non-US firm.
So do IK's recent fund raising struggles reflect the problems of the whole private-equity industry or concerns more particular to IK itself?
Certainly, IK's fifth fund-raising experience stands in contrast with the recently closed funds of some of its peers.
Permira raised e5.1 billion in just six months in 2003 – the largest fund ever raised for Europe. Compounding the pain, last year fellow Scandinavian firm Nordic Capital – which focuses purely on Nordic investments – closed a e1.5 billion fund in just six months, while in early August, Nordic rival EQT closed a e2.5 billion fund, despite only having launched in January.
Too close to home
Perhaps the most galling achievement of a rival for IK was the e650 million that start-up firm Altor Equity Partners, led by another IK co-founder, Harald Mix, raised in under six months last year. Mix left IK in 2001, just before the launch of IK's fifth fund. He attributes Altor's success to its average target equity investment of e50 million.