Active ownership and transparency in private equity funds

Danish Venture Capital and Private Equity Association

Active ownership and transparency in private equity funds – Background report – Guidelines for responsible ownership and good corporate governance

DVCA’s secretariat is housed in the old stock exchange building next to Christiansborg Palace. Christian IV had the Stock Exchange built between 1618 and 1624 with the intention that the building should promote Copenhagen as a trading centre and metropolis.

Contents Report

Foreword: Greater understanding of active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03 Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04 I.

Background and purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06

II.

Private equity – a new kind of active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

III. Private equity funds and their investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 IV. DVCA’s analyses of private equity funds in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . 34 V.

Review of ten investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

VI. Private equity funds can make mistakes too . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 VII. Interviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 VIII. Private equity funds in Denmark – an overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 IX. List of buyouts in Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Guidelines

Foreword and introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 I.

The guidelines’ outlines, target group and stakeholders . . . . . . . . . . . . . . . . . . . . . . 134

II.

Guidelines at company level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

III. Guidelines at fund level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 IV. DVCA in the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Research report (CEBR)

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 I.

Capital structure of private equity portfolio companies . . . . . . . . . . . . . . . . . . . . . . . 162

II.

Tax implications of private equity buyouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

III. Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188

Most of the photographs in this report are taken from private equity portfolio companies’ own archives.

Otherwise see page 192.

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Danish Venture Capital and Private Equity Association

Ole Steen Andersen

Christian Frigast

Ole Steen Andersen became chairman of DVCA in March 2008.

Christian Frigast is a managing partner in Axcel, which he co-founded in 1994.

Ole Steen Andersen has a long career with the central administration, NKT and Danfoss behind him. Most recently he was Executive Vice President and CFO of Danfoss A/S, where he retired in 2007 on the occasion of the annual meeting.

Ole Steen Andersen is a member of the board of SPEAS and Nordic Industrial Advisor for CVC Capital Partner as well as being a member of the Advisory Board of Dansk Merchant Capital.

Furthermore, Ole Steen Andersen is chairman of the board of the venture company HedgeCorp A/S and member of a large number of boards both in Denmark and abroad.

Previously Christian Frigast was Executive Vice President of Incentive (1993–94) and director of the former Unibank, now Nordea (1973–92).

Christian Frigast is an M.Sc. (Political Science and Economics) and studied, among other places, at Stanford University in the USA. As well as sitting on the boards of companies owned by Axcel, he is the deputy chairman of Dampskibsselskabet Torm.

Christian Frigast is deputy chairman of DVCA and chairman of DVCA’s Private Equity committee.

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Greater understanding of active ownership Foreword

Since autumn 2007 DVCA has been working on developing a set of guidelines for transparency in private equity funds; these guidelines form part of this report.

DVCA also wishes to supplement and support these guidelines by providing a detailed description of what active ownership means in Denmark, which is why DVCA has produced this background report.

The report includes a presentation of the players in the industry and the way they work. This is supplemented with a review of ten investments, each of which shows in its own way how private equity funds work on building strong and healthy companies.

The report also contains a number of interesting innovations. For example, DVCA has performed for the very first time an analysis of the return on investment in private equity portfolio companies. This gives us a good idea of why interest in private equity has been so strong in recent years. Read more about this in the report.

One important part of the basis for this report is a major research project carried out over the past year by researchers at the Centre for Economic and Business Research (CEBR) at Copenhagen Business School. This work, funded by DVCA, has resulted in an independent report that will later be available for download from DVCA’s website: www.dvca.dk. Although DVCA funded the project, the researchers were given complete freedom in the production of their report, with DVCA making as much information available to them as possible. DVCA would like to thank the research team for their hard work and dedication.

The report is supplemented with a number of interviews with members of the reference group who monitored work on the guidelines. We have also spoken to a number of others with views on how private equity funds operate. We would like to take this opportunity to thank all those who have contributed to the production of this report.

Ole Steen Andersen Chairman, DVCA Christian Frigast Chairman of DVCA’s working group and deputy chairman, DVCA

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Danish Venture Capital and Private Equity Association

Executive summary Background and purpose

This report looks at private equity funds operating in Denmark. It has been produced by DVCA to promote an understanding of how private equity funds work and create value.

The report

An introduction to the background to the report and the associated guidelines can be found here. Both guidelines and report have been produced under the leadership of a working group made up of representatives of some of the most important private equity funds in Denmark. The work has also been monitored and commented on by an external reference group.

An introduction to private equity funds This section contains a general introduction to private equity funds. What terminology is used? Who are their investors? How are the funds organised into management companies and investment vehicles? How do they exercise active ownership? There is also a look at the tax aspects of private equity funds.

A historical overview of private equity funds This section provides an overview of private equity funds’ international origins and of their role in different economic climates from their beginnings in the early 1980s through to the present day. This is followed by a presentation of the Danish market. Private equity funds first took off in Denmark in the mid-1990s and peaked temporarily in 2005 when the likes of TDC, Falck and ISS were bought out by international private equity funds. There are also active Danish funds, including Axcel, Polaris and LD Equity, which all have committed capital in excess of DKK 5bn. The section concludes with a look at private equity funds’ investors.

DVCA’s analyses of private equity funds This section presents three different analyses commissioned by DVCA in connection with this report.

First, Aalund Research conducted a questionnaire survey of employee-elected board members at current and former private equity portfolio companies in Denmark. The results show that employee-elected board members are generally pleased with the way that private equity funds exercise their ownership. For example, 70% of those questioned believe that private equity funds show respect for a company’s corporate culture and invest sufficiently in its fixed capital. Well over half believe that private equity funds are good at communicating about changes in the company. One point to note is that 28% of those questioned do not feel that sufficient resources are allocated to employee development.

Second, Aalund Research conducted a questionnaire survey of the largest investors in private equity funds. These investors together account for the bulk of Danish private equity funds’ committed capital. Most plan to increase their investment in private equity funds, and none have plans to reduce their allocation to private equity. Most are also pleased with the information they receive from the funds. However, there are also areas where investors feel that private equity funds need to improve. For example, investors would like private equity funds to be more open about their investments vis-à-vis the public.

Third, ATP PEP examined the returns on 59 completed private equity fund investments in the period from 1990 to 2006. The analysis reveals an average return on investment of 37% per annum before management fees (administrative expenses) and incentive programmes (carried interest). Assuming that these costs are equivalent to 3.5 percentage points, this gives a net annual return of

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33.5%. This means that private equity funds significantly outperformed the stock market during the period.

Review of ten investments This section reviews ten private equity investments, which also formed the basis for CEBR’s survey. Together with DVCA, CEBR conducted interviews with the companies’ management and the partners in the private equity funds involved.

Access was also granted to data that is not normally publicly available.

Robert Spliid analyses investments that went wrong This is followed by a look at a number of private equity transactions that were less successful for one reason or another. DVCA asked Robert Spliid, author of the book Kapitalfonde – Rå pengemagt eller aktivt ejerskab [Private equity funds – asset strippers or active owners?] to investigate what the industry can learn from this. The transactions examined include Fona, ILVA and Partner Electrics.

Interviews In connection with the production of its guidelines, DVCA interviewed the external reference group that monitored work on the guidelines. The group share their views on the guidelines and on private equity funds’ activities in general.

These views are supplemented with those of former Novo Nordisk CEO Mads Øvlisen and Bain & Company partner Niels Peder Nielsen.

Overview of private equity funds in Denmark This overview shows which private equity funds operate in Denmark, how much committed capital they have, and which investments they have been involved in.

List of transactions This list provides for the first time a complete picture of all 307 private equity fund transactions carried out in Denmark since 1989. It includes information on exit year, revenue, sector, acquiring fund etc.

Guidelines

DVCA’s guidelines for responsible ownership and good corporate governance are reproduced as part of this report.

Research report (CEBR)

DVCA asked the Centre for Economic and Business Research (CEBR) at Copenhagen Business School to look at a number of issues related to private equity fund ownership. The report reproduces the sections on capital structure and tax matters.

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Danish Venture Capital and Private Equity Association

I.

Background and purpose Background

As private equity funds come to play an ever more important role in industry, they have a growing social responsibility, and this demands transparency.

Private equity funds, investors and the rest of society have a mutual interest in the companies owned by private equity funds being competitive on a sustainable basis. Responsible ownership in private equity funds means that funds have an opportunity to develop their companies in close collaboration with each company’s board, management and employees. One important requirement in this respect is for the wider society to be confident that private equity funds operate on a known and transparent basis.

The Danish Private Equity and Venture Capital Association (DVCA) has therefore developed a set of guidelines for how private equity funds and their portfolio companies should operate and report. The aim of the guidelines is to create a concrete and easily understood framework for private equity funds’ activities that can help to build support for these activities among the general public.

DVCA thereby wishes to signal that it is preferable to avoid unnecessary regulation. DVCA is of the opinion that self-regulation is the best and most effective way of ensuring a healthy and productive business climate, and that legislation is appropriate only where other possibilities have been exhausted.

The guidelines are designed to be applied on a “comply or explain” basis. This means that, in future, members of DVCA will be required either to comply with the guidelines or to explain their reasons for not doing so if they wish to remain members.

Besides these guidelines, DVCA wishes to give the public a better insight into how private equity funds work and add value to their portfolio companies. DVCA has therefore commissioned a number of analyses in this area which are presented in this report.

Transparency and guidelines for private equity funds are an international trend

The 10 investments Danske Trælast Falck ISS Kompan Løgstør Rør Novasol Post Danmark Royal Copenhagen TDC Vest-Wood

Requirements for greater transparency in private equity funds are an international phenomenon. In London, for example, guidelines for private equity funds operating in the UK were published by the Walker Working Group in November 2007. These guidelines will impact on all private equity funds, as London is a global financial centre. Denmark is a small player by international standards, which would make it hard to produce Danish guidelines without reference to developments on the international stage.

Guidelines for private equity funds are also being developed in Sweden.

A comparison of the content of the Walker guidelines and DVCA’s own can be found in appendix B to the guidelines.

Ten investments illustrating active ownership in private equity funds DVCA wishes to show in this report how private equity funds work in practice.

We have therefore selected ten investments believed by DVCA to paint a representative picture of private equity funds’ activities over the last six to eight years.

Each investment is described in terms of both the company’s key financial figures and qualitative descriptions based on interviews with key personnel involved.

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Research project looking at Danish private equity funds To get an independent take on issues identified when it comes to the wider economic implications of private equity funds’ activities, DVCA asked a team from the Centre for Economic and Business Research (CEBR) at Copenhagen Business School to carry out a research project based on the ten transactions mentioned above.

The project fell into four parts: B The importance of active ownership (corporate governance) for portfolio companies B Portfolio companies’ capital structure B An economic analysis of changes in tax payments due to private equity ownership B The consequences of private equity ownership for the Danish capital market The sections on tax and capital structure in the resulting report from CEBR are reproduced at the end of this report. The complete report from CEBR will be available for download from DVCA’s website at a later date.

Analyses of returns, board-level involvement and investor attitudes DVCA has also commissioned a number of other analyses to promote understanding of how private equity funds work: B An analysis of the returns on private equity funds relative to other investments (conducted by ATP) B A study of employee-elected board members’ attitudes to private equity ownership (conducted by Aalund Research) B A study of investors’ views of private equity funds (also conducted by Aalund Research) These three analyses are presented in detail in section IV of the report.

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Danish Venture Capital and Private Equity Association

Private equity funds, investors and the rest of society have a mutual interest in the companies owned by private equity funds being competitive on a sustainable basis. Responsible ownership in private equity funds means that funds have an opportunity to develop their companies in close collaboration with each company’s board, management and employees.

A new DVCA One important part of this project is for DVCA to play a more active role in the debate about private equity funds in Denmark.

One important part of this project is for DVCA to play a more active role in the debate about private equity funds in Denmark.

To create a better understanding of private equity funds, it is important that the sector itself takes responsibility for collecting and consolidating data. These data are to come from both portfolio companies and the funds themselves. DVCA will ensure that the data are collected by an audit firm, while DVCA itself will be responsible for the subsequent analysis of the data.

Each year DVCA will publish a report on the basis of a variety of information submitted by private equity funds and their portfolio companies. This report is to include a general account of trends in the industry and a statement from DVCA’s corporate governance committee.

External reference group advising DVCA To ensure that the guidelines satisfy a broad cross-section of relevant stakeholders, DVCA has drawn widely on an external reference group comprising: Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO) Jan Schans Christensen, professor of corporate law, University of Copenhagen Jørgen Mads Clausen, chief executive officer, Danfoss Bjarne Graven Larsen, chief investment officer, ATP Peter Schütze, head of retail banking, Nordea Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF) The members of the reference group have monitored the debate about transparency in private equity funds and gathered views and experience from their respective networks. DVCA has held individual meetings with all of the members, and the group held a final meeting where the guidelines were discussed in their entirety. The group’s views on the guidelines are presented in interviews included in this report. It should be stressed, however, that responsibility for the guidelines rests solely with DVCA.

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DVCA’s committee for good corporate governance in private equity funds In autumn 2008 DVCA will appoint a committee to monitor compliance with the guidelines and propose any necessary adjustments. The committee will comprise DVCA’s chairman, a state-authorised public accountant and an independent industry representative.

The committee will also submit an annual statement concerning members’ compliance with the guidelines in connection with DVCA’s yearly report.

DVCA’s working group on transparency and active ownership in private equity funds DVCA’s transparency and active ownership project has been led by a working group comprising a number of representatives of private equity funds that operate in Denmark: Lars Berg-Nielsen, Deloitte Anders Bruun-Schmidt, Dania Capital Christian Dyvig 1, Nordic Capital Christian Frigast, Axcel (chairman) Søren Møller, LD Equity Viggo Nedergaard Jensen, Polaris Private Equity Thomas Schleicher, EQT Søren Vestergaard-Poulsen, CVC Capital Partners The working group has been assisted by communication consultant Joachim Sperling (project manager), state-authorised public accountant Bill Haudal Pedersen from Deloitte, senior consultant Gorm Boe Petersen from DVCA, and chief financial officer Lars Thomassen and communications manager Trine Juul Wengel from Axcel.

1. Succeeded by Michael Haaning in January 2008.

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Danish Venture Capital and Private Equity Association

In autumn 2008 DVCA will appoint a committee to monitor compliance with the guidelines and propose any necessary adjustments.

The committee will comprise DVCA’s chairman, a stateauthorised public accountant and an independent industry representative.

“I work on building solid, profitable growth year after year through operational improvements and strategic investments at the companies in which we have invested. I enjoy the close collaboration with management at the companies in which we have invested, but the process of finding suitable investment candidates is also incredibly interesting.”

Søren Vestergaard Poulsen, partner, CVC Capital Partners

Søren Vestergaard Poulsen is a partner in CVC Capital Partners, one of Europe’s largest private equity funds. He is currently responsible for its Danish operations and sits on the boards of Post Danmark and Matas.

Søren Vestergaard Poulsen has been with CVC for ten years and was previously a consultant at McKinsey & Co. He holds a Master’s degree in economics and business administration from Copenhagen Business School.

II.

Private equity – a new kind of active ownership Background and terminology

The term “private equity” ultimately refers to companies in private ownership as opposed to those in public ownership – listed and state-owned companies. At its purest, private equity is the oldest form of ownership there is. Before the days of the stock exchange, companies’ managers and owners were often the same people.

The private equity industry has evolved over many years starting in the 1970s. It has its origins partly in pension funds’ growing need to spread the risk in their investment portfolios, which could be achieved by also investing in unlisted shares. In the beginning, pension funds managed these investments themselves, but it became clear as activity levels increased that a more structured investment approach was needed.

The term “private equity” is now used for a type of investment where an investment vehicle (private equity fund) with capital committed by a number of investors invests directly in portfolio companies, and a management company handles day-to-day investment activities. The aim is to generate a larger return than investors could have achieved by investing in listed shares. This type of investment is known as private equity ownership and is illustrated in figure II.1 below.

Investors 1 Investors in private equity are mainly professional investors such as pension funds, funds of funds, banks, insurers and wealthy private individuals/families/ foundations. The investors in Danish private equity funds come from both Denmark and abroad.

These investors’ goal is to achieve the highest possible return for their owners (in many cases pension savers), and so they are very critical and thorough when investing in a private equity fund. They choose the funds in which they wish to invest on the basis of their investment strategy and an assessment of the management company’s/partners’ past performance.

Figure II.1. The structure of a private equity fund.

Pension funds, insurers, wealthy families etc.

Partners

Partners

Investors

Return

Committed capital

Return (carried interest)

Salary Advice

Investment vehicle (private equity fund)

Management company Management fee

Sale proceeds/ dividends

Equity Interest and repayments

Portfolio companies

Financial institutions Debt capital (bank loans)

1. Investors in private equity funds are also known as limited partners (LPs).

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The investors make a binding commitment to invest a set amount of money in the investment vehicle. This is not paid in all at once but gradually as the investment vehicle makes investments and incurs costs.

Investors get their return when each individual investment (portfolio company) is sold or listed. Thus the main form of value creation is the development of portfolio companies under the fund’s ownership so that buyers are willing to pay a higher price for them.

An investment in private equity is therefore a long-term and relatively illiquid investment. This can be illustrated by the J-curve, which is the typical profile for movements in the value of a private equity fund (see figure II.2 below). It is seen primarily because costs are incurred in establishing and operating the fund, and the expected increases in the value of the investments made do not arrive until after a couple of years of ownership, once value-adding measures and/or investments begin to impact on the portfolio companies.

Danish investors pay standard tax on any capital gains they make.

The private equity fund’s overall return depends on the performance of the individual companies in which it has invested. The return to investors is typically measured as an annual return – the internal rate of return (IRR) – and a multiple comparing the total amount paid out once the fund has been wound up with the total amount drawn from the fund’s investors.

Danish investors pay standard tax on any capital gains they make. Pension funds and insurance companies pay PAL tax2 while other Danish investors typically pay corporation or personal income tax on their returns. Foreign investors will be taxed primarily in their home countries (just as Danish investors in foreign private equity funds are typically taxed on their returns in Denmark).

Figure II.2. J-curve showing movements in the value of a private equity fund.

Value

Time

2. PAL tax is a special capital tax with a fixed rate of 15% that life insurers, pension funds and the like are required to pay on their investment returns.

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Danish Venture Capital and Private Equity Association

II. Private equity – a new kind of active ownership

The investment vehicle (the private equity fund)

The investment vehicle is the legal entity that constitutes the actual private equity fund, in other words the entity in which investors’ money is deposited and from which returns are paid out when a given investment is sold.

In Denmark, the corporate form normally used is the limited partnership. This is suitable because it is a flexible corporate form (e.g. when it comes to increases/decreases in capital, as happens every time money is drawn from investors) and because it ensures that all investors are taxed in their home countries (see discussion of tax transparency below). The Danish limited partnership is also very similar to the investment vehicles used abroad, with which investors are familiar and therefore feel more comfortable.

Danish limited partnerships are tax-transparent, which means that it is the partners/investors who are taxed on the returns generated. This tax transparency means that double taxation is avoided, just as with the structures used abroad.

Danish limited partnerships are required to file an annual report in accordance with the Danish Financial Statements Act and are therefore covered by the same audit requirements as limited companies.

The management company

The management company, which is normally owned by a group of people with extensive experience of private equity investing, has an agreement with the fund to advise on the investment and management of the fund’s assets. The employees of the management company invest personally in the investment vehicle, which is normally a condition made by many of the general partners in order to ensure a sufficient financial incentive and ensure that everyone is acting in the same financial interests (see box on page 16 on carried interest).

The individuals employed by the management company and the historical returns generated by the management company will be the main reasons why investors choose to invest in a particular private equity fund. It is the management company that is the true creator of value in the process, while the fund itself is merely a vehicle through which capital flows.

Once an investment has been made, the management company will be closely involved in the general management of the portfolio company, typically for a period of 3–7 years, with a view to developing the company and so increasing its value ahead of its subsequent sale or listing. This involvement is known as active ownership and is described in more detail below.

Portfolio companies

Portfolio companies are the companies in which a private equity fund invests.

The fund’s active ownership depends on control of the company so that the strategic measures needed to ensure value creation can be implemented. The fund will also ideally have control of the company so that it is not reliant on other shareholders when it comes to an exit (or have concluded agreements with them on a joint sale).

Investments are financed with a mixture of investors’ money (mainly in the form of equity) and debt finance (bank loans). The level of bank debt varies and depends primarily on the company’s cash-flow-generating capacity. A more detailed discussion of optimal capital structure can be found later in this section.

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Active ownership

A private equity fund exercises focused and active ownership in order to add value to the company and so generate a return for its investors. This is characterised in part by the following, which differ from other forms of investment: B A simple governance structure with a well-defined owner B Inclusion of management as co-owners and incentive programmes reflecting value added B Limited period of ownership of each company (sense of urgency) B Optimisation of financing structure B Capital available as and when the company needs it

Private equity funds are fundamentally different to both hedge funds, which make speculative short-term investments in market trends, and venture capital funds, which invest in start-up companies in hi-tech industries. In many contexts – even in academic studies – private equity funds are lumped together with both hedge funds and venture capital, which is probably because the fund structure is fairly similar. When it comes to the investment model and underlying assets, however, there are few points of similarity.

CEBR, Private Equity i Danmark [Private Equity in Denmark], June 2008

Active and focused ownership is crucial to private equity funds’ investment strategy. As a rule, therefore, these funds will acquire a majority stake in the companies in which they invest, so gaining absolute control over strategic decisions at the company. Another feature of these funds’ investment strategy is that the company’s senior managers are co-investors in the company. This partnership with management helps to ensure that management always works from a strategy of long-term value creation in the company.

The private equity fund exercises active ownership on behalf of its investors and develops companies with a view to improving their earnings. Active ownership means that the fund not only makes capital available but also actively collaborates with the company’s board and management on its development. The typical investment horizon for investors investing in private equity funds is 10–12 years.

During this period, known as the investor commitment period, the fund will acquire portfolio companies, develop them and sell them on to new owners.

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II. Private equity – a new kind of active ownership

Carried interest

The investors in a private equity fund are keen for the management of portfolio companies, the employees of the management company and the investors in the fund to have common financial interests. This alignment of interests is ensured by bringing the management of the companies and the employees of the management company on board as co-investors, and by having incentive programmes reflect value added and so the returns generated for investors.

Many listed and other privately held companies also have incentive programmes for their management. However, these are often linked to more short-term performance or fluctuations in the stock markets and so not directly to the return to investors.

What is carried interest (carry)?

Private equity funds’ investment and incentive programmes are known as carried interest, or carry.

Carry is a share of the return that the successful private equity fund generates on its investments over and above a basic annual rate of return (hurdle rate), typically 8% of total capital invested after all costs (including management fees etc.). It is normally 20% of this additional return.

If investments perform well for investors, those covered by the carried interest programme will also benefit, but they also run the risk of personally losing money.

Carried interest and catch-up Carried interest is normally calculated on the basis of the return on the entire fund, while some funds pay out carried interest from investment to investment, although this is now very unusual in Europe.

Once investors have received an agreed level of return, the management company will often temporarily take an increased share of profits until the agreed level of carried interest is reached. This is known as catch-up.

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II. Private equity – a new kind of active ownership

Optimal capital structure

When a private equity fund takes over a company, often more than half of the purchase price is financed with loans. This means that the portfolio company often finds itself with more debt than under its previous owners.

The reason why private equity funds normally increase a company’s debt is not to get money out of the company but to optimise its capital structure in terms of risk and required rates of return. This debt is therefore very different to the debt that results from negative operating results.

It may seem a good idea to a company manager to have as much equity as possible to hand (at least if he has not invested his own money in the business), because this provides scope for mistakes without the company’s existence being jeopardised.

However, it is rare for the company to own this equity. It is not without good reason that equity is included as a liability (alongside the company’s debt) in the company’s balance sheet, but as an asset in the individual shareholder’s balance sheet. Both debt and equity need to be serviced from the company’s cash flow. The creditors who make debt capital available must be serviced first and so require a lower rate of return than shareholders. Shareholders, on the other hand, only receive their share of the profits when all of the other bills have been paid, including interest on the company’s debt, and so require a significantly higher return on their investment.

Shareholders naturally also have an interest in the company’s survival, but they invest primarily to obtain a higher rate of return than they can get on other investments with a similar risk profile. In other words, shareholders have an interest in equity levels being high enough for the company to be able to ride out unexpected fluctuations in earnings. On the other hand, equity levels should not be so high that dividends are eroded, because this will reduce the expected return (see figure II.3).

Figure II.3. Optimal capital structure.

Market value Optimal structure

Risk premium

Value with 100% equity

0%

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Danish Venture Capital and Private Equity Association

Debt

100%

II. Private equity – a new kind of active ownership

Optimal capital structure (continued)

When a private equity fund acquires a company, it considers how much equity or debt is most appropriate for that particular company. The ratio of debt to equity generally hangs on two factors: 1. The volatility of the company’s earnings.

2. The likelihood of its owners’ quickly providing additional capital where necessary.

The latter factor is very relevant to private equity portfolio companies, because, in principle, the fund always has additional capital to hand thanks to the commitments from its investors to invest more capital in the fund where necessary – whether to fund large investments or to counter unforeseen negative fluctuations in earnings.

Other things being equal, private equity portfolio companies will need less equity than listed companies because it is rather more difficult and expensive to raise capital on the stock market. Furthermore it is not always possible to raise capital in the capital markets, especially in cases where a company’s results have not lived up to expectations for a while. This is also one of the key considerations for financial institutions when they assess the risk of investing in a listed company as opposed to a private equity portfolio company.

Debt-financing the activities of a company or private equity fund is not ne cessarily a problem, rather a natural part of economic reality in modern society. The debt taken on by companies under private equity ownership has nevertheless given rise to public debate, and this debate is justified, because aggressive leverage makes companies and the economy more vulnerable in the event of a downturn. However, private equity funds’ debt appears to account for only a tiny share of overall borrowing, and is therefore of only peripheral significance in the ongoing credit crunch, which can be attributed primarily to mortgage finance and, in the second instance, banks’ general credit practices.

CEBR, Private Equity i Danmark, June 2008

The tax structure of a private equity investment

As mentioned above, Danish private equity funds are normally organised as a limited partnership, which provides the legal framework for the fund. There are several points in favour of this corporate form. The most important from a tax viewpoint is that a limited partnership is tax-transparent. In other words, the partners/investors are considered to be the owners of the underlying assets.

The partnership itself is not treated as an independent entity for tax purposes, and so it is the investors who are taxed. This ensures at a very fundamental level that a portfolio company’s taxed earnings are not taxed further on their way up through the legal structure when they come to be transferred to investors.

Investors pay tax in their home countries on the basis of local tax rules.

The use of a limited partnership structure therefore ensures that taxation takes place at portfolio company level and investor level. Were the partnership also to be taxed, this would result in double taxation and increase the effective rate of tax on investments. This would distort the effective tax rate relative to investing directly in a listed company, for example.

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II. Private equity – a new kind of active ownership

As stated above, private equity funds are often organised as a tax-transparent entity. Where this entity is physically located varies and typically depends on the fund’s desired investors. Both Danish and foreign investors want to invest in a familiar environment where there is some degree of assurance that the legislative regime will not change during the ten or so years for which a fund normally exists.

The Channel Islands and similar jurisdictions have become a kind of market standard for funds looking mainly to attract international investors, and are therefore widely used for the formation of the investment vehicle. The limited partnerships available for this purpose correspond closely to the Danish limited partnership.

Debt at private equity portfolio companies is, if at all, a problem first and foremost for the banks that have lent the money. So one might ask whether any debt problems (cf. the current credit crunch) should be put down to the funds or the banks. Everything suggests that the credit crunch is due to a bubble in the housing market and the associated poor-quality (sub-prime) mortgages, whereas private equity funds are only a very small part of the problem.

CEBR, Private Equity i Danmark, June 2008

The tax implications of corporate buyouts

Corporate buyouts are a complex discipline and require extensive preparation and thorough consideration of their commercial, financial, legal and fiscal aspects. Private equity funds therefore invest considerable resources in ensuring that their investments will generate an attractive return.

Tax aspects are not normally crucial to an investment, but tax must naturally be viewed as a cost like any other. Tax aspects play a role in several parts of the process. The first arise in connection with the due diligence process, when the fund investigates the target company to identify any risks that may have financial consequences once it has gained control of the company. The second come when choosing the legal structure for the company, which depends on both the private equity fund’s structure and the financing structure implemented at the company after the buyout.

When a private equity fund structures a buyout, the chosen approach will be closely linked to the fund’s structure, purpose and required rate of return (IRR).

A private equity fund’s job is to acquire companies with its investors’ money and give them an annual return ideally in excess of 20–25%. This high required return on investment means that private equity funds are careful not to invest more equity than necessary in the companies they acquire.

It is important to strike the right balance between equity and debt when acquiring a company, as discussed on the previous pages.

Figure II.4 shows a standardised example of a buyout model.

Private equity fund A, which is organised legally as a tax-transparent limited partnership, wishes to acquire target company C, which is a Danish limited company. As mentioned above, private equity funds can also be registered in another jurisdiction if this is more appropriate for attracting investors.

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Figure II.4.

Standardised example of a buyout model.

Private equity fund (A)

Management company

Equity

Bank debt

Danish acquisition vehicle (B) Joint taxation

Danish target company (C)

Foreign subsidiary

Danish subsidiary

Foreign subsidiary

What happens in practice is that fund A forms company B, whose sole purpose is to be a holding company for company C. Company B is capitalised with equity from fund A and debt finance. Company B then acquires the shares of company C. Careful analysis is made of how much equity the investment requires for the business plan to be realised and for the company to function in terms of its everyday operations. There is also careful analysis of what other credit facilities may be needed (such as special facilities to cover investments, acquisitions and fluctuations in working capital).

The ratio of debt to equity will also depend on local tax rules. In Denmark, local tax rules on thin capitalisation and restrictions on interest deductions play a role. A Danish company can forfeit the right to deduct interest from taxable income if it exceeds a debt-to-equity ratio of 4:1. There is also a ceiling on the amount of interest that can be deducted from taxable income. Thus, if debt levels rise too high, it may not be possible to make tax deductions for all interest costs.

The new Danish restrictions on interest deductions

On 1 June 2007 Denmark introduced new rules limiting interest deductions, with an asset test and an EBIT test to supplement the existing rule on thin capitalisation.

The existing rule on thin capitalisation means that there is no tax deduction for “excess interest” if the ratio of debt to equity at the end of the year exceeds 4:1 based on market values (i.e. including goodwill). This is, however, conditional on “controlled” (related party) debt exceeding DKK 10m.

The asset test means the introduction of an interest ceiling determined by a standard rate of return (7.0% for 2008) on the tax value of certain assets. However, net financing costs up to DKK 20.6m per year will always be allowable. Interest costs that cannot be deducted as a result of this rule cannot be carried forward.

The EBIT test means that interest deductions may not exceed 80% of EBIT, defined as taxable income plus net financing costs, which is different from EBIT for accounting purposes. As with the asset test, net financing costs up to DKK 20.6m

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per year will always be allowable. Interest costs that cannot be deducted as a result of this rule can, however, be carried forward and deducted from taxable income in subsequent years.

Denmark is not the only country to have brought in rules restricting interest deductibility. In Germany, a rule has been introduced that limits deductions of net interest costs in excess of an amount corresponding to 30% of EBITDA for tax purposes. However, this rule applies only to companies that are part of a group and incur annual net interest costs in excess of EUR 1m. Nor does the rule apply if the company’s equity/liabilities ratio is the same as, or higher than, that of the rest of the group.

Despite these elements of uncertainty, a private equity fund is nothing special from a tax viewpoint. It is a particular type of financial institution that “makes its living” from buying and selling companies, but the investments made by the funds and the cash flows resulting from these buyouts are captured by the tax system. However, it is also a fact that funds actively test weaknesses in the tax system. For as long as interest on debt is treated differently to returns on equity, for as long as the taxation of international income remains inconsistent, for as long as there are problems differentiating between the fruits of labour and the returns on savings in the tax system, and for as long as different types of capital income are taxed in very different ways, taxpayers will be able to think tax and maximise their income by minimising their tax liabilities. Where this happens in connection with the activities of private equity funds, it seems to be an expression of a more general phenomenon.

CEBR, Private Equity i Danmark, June 2008

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“The most exciting thing about my work is building better companies in the long term by strengthening them both strategically and operationally.

And you can see this from the companies we’ve owned – they’ve grown very substantially under our ownership.”

Peter Korsholm, partner, EQT Partners

Peter Korsholm was recruited by EQT Partners in 1999 and assumed responsibility for EQT’s Danish operations in 2008.

He worked previously for Morgan Stanley in London in 1996–98.

Peter Korsholm holds an MBA from INSEAD, an MSc in econometrics and mathematical economics from the London School of Economics, and a BSc in economics from the University of Copenhagen. He sits on the boards of ISS A/S, BTX Group A/S and Gambro BCT.

III.

Private equity funds and their investors The origins of private equity funds

1

Private equity funds are by no means a new phenomenon. The first leveraged buyout of a listed company took place in the USA back in 1955, when McLean Industries took over Waterman Steamship Corporation using mostly debt finance.

But it was not until 1964 that the first example of the private equity fund model saw the light of day, when investment bank Bear Stearns, led by Jerome Kohlberg and Henry Kravis,2 acquired and subsequently delisted Orkin Exterminating Company.

Until 1980 buyout activity remained in its infancy, and players were limited to a few venture capital funds that began to show an interest in buyouts, and groups organised around investment banks like Bear Stearns. The first private equity funds specialising in buyouts were created in the USA in the late 1970s and early 1980s. These used the same structure as the venture capital funds had developed in the years before that, partly to allow the use of performance incentives at portfolio companies.

The first phase, 1980–1990: Private equity funds expand in the USA Private equity funds really began to take off in the USA in 1980 and the following years. A change in the regulation of pension fund investments opened up a brand new market for capital, the taxation of capital income was reduced substantially, and in August 1982 the Federal Reserve decided to ease monetary policy, causing long-term bond yields to fall. All of these factors made it easier for private equity funds to attract risk capital.

Things moved fast in the following years. Investors committed capital of USD 160m to private equity funds in 1980, but USD 1.6bn in 1983. Four years later, in 1987, investors committed USD 14.6bn, of which the fund raised that year by dominant US player Kohlberg, Kravis and Roberts accounted for USD 5.6bn on its own.

The increase in the amount of money available to the funds led to growing buyout activity, and it also became possible to increase the degree of leverage, in some cases to as high as 95%. At that rate, the committed capital figure for 1987 of USD 14.6bn translates into acquisitions of almost USD 300bn. The impact on buyout activity was therefore marked (see figure III.1).

Things culminated in 1988 when the total value of private equity transactions hit USD 185bn. Activity in Europe was still relatively limited at this point, but specialist European private equity funds began to be created towards the end of the 1980s. Activity was, however, limited to the UK and a few other countries.

The second phase, 1990–2000: Buyout activity slows As can be seen from figure III.1, buyout activity collapsed around 1990 and remained in the doldrums for most of the next decade.

1. This chapter is based largely on the report Private Equity i Danmark [Private Equity in Denmark] published by CEBR in 2008 and Robert Spliid’s book Kapitalfonde: Rå pengemagt eller aktivt ejerskab [Private equity funds: asset strippers or active owners?], Børsens Forlag, 2007.

2. Kohlberg and Kravis would come to play one of the lead roles in the growth of private equity investing.

In 1976, together with George Roberts, they set up the firm Kohlberg, Kravis and Roberts (KKR), which was the dominant private equity fund in the USA throughout the 1980s. KKR made waves in Denmark in 2005 when, together with four other private equity funds, it bought out the country’s leading telecommunications company, TDC.

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Figure III.1. Market value of buyout investments in the USA and Europe 1980–2006.

USDbn

200 180 160 USA

144

Europe 120 100 80 60 40 20

2005

2004

2003

2002

2001

1999

2000

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0

Source: Gaughan (2007) and Thomson Financials.

The dramatic decrease in activity had a number of causes, all of which made it harder to raise risk capital. There were two general economic factors that played a role. First, the market for high-risk corporate bonds in the USA collapsed after a series of bankruptcies. The market for the riskiest bonds, known as junk bonds, was hit hard by the bankruptcy of the leading investment bank in this market, Drexel Burnham Lambert.

Second, the US economy entered recession, which limited investors’ appetite for risk, and there was a general increase in uncertainty in the financial markets when the Gulf War broke out. The result was soaring interest rates and a drastic decrease in buyout activity that would persist in subsequent years.

Buyout activity began to pick up gradually from the mid-1990s, but it was not until after the millennium that private equity fund investments returned to the levels seen at their peak in the 1980s.

The third phase, 2000–?: Global expansion Private equity fund activity levels increased again after the millennium. The explanation for this can be found in changes in the general economic climate. The global economy found itself in what has been called the longest economic upswing in history, and interest rates were at a record low. Once again there were opportunities to raise risk capital, and this led to a fresh wave of private equity fund activity. It is worth noting that this third phase in the history of private equity has seen a significant spread of activity to Europe (and Asia).

Private equity investments in Europe have been higher than those in the USA every year since 2001. By way of comparison, US listed companies account for 40–50% of global market capitalisation, and EU listed companies for just 25– 30%. One of the reasons for the surge in activity in Europe is probably that the integration of the region’s economies has removed some of the previous obstacles to the consolidation of industries across national borders. The introduction of the euro has also reduced the risk associated with fluctuating exchange rates.

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III. Private equity funds and their investors

The origins of private equity funds (continued)

Although it is still too early to conclude that private equity fund activity has stagnated again, a number of economic indicators are suggesting a new market situation. The economic outlook is uncertain, European interest rates are rising, and the sub-prime crisis in the USA has increased the general level of uncertainty in the financial markets. These factors all point towards reduced activity in the coming years.

Private equity funds in Denmark

The first Danish private equity fund, Nordic Private Equity Partners (NPEP), was set up in 1990 with committed capital of DKK 165m. The fund itself was registered in the Channel Islands, though, so strictly speaking only its management and part of its capital were Danish. NPEP’s first transaction was the takeover of Broen Armatur in 1991. In 1994 NPEP raised a second fund with committed capital of DKK 150m. Compared with later funds, NPEP was relatively small.

This was followed by a series of buyouts by Finnish fund CapMan and Sweden’s Industri Kapital, as well as a few by other foreign funds. Until 1995, Dansk Kapitalanlæg’s acquisition of Reson in 1991 and Danfysik in 1993 and NPEP’s activities were the only Danish buyouts.

It was only with the formation of Axcel IndustriInvestor in 1994 that the local players in the Danish private equity market seriously began to approach the investment model, organisation and size developed abroad during the previous decade. That said, Axcel did differ from the norm by not having a limit on the life of the fund, and there was no separation of investment vehicle and management company.3 Axcel managed to attract funding of DKK 200m from four investors, including pension fund manager PKA and bank Nordea (Unibank). Further investors came in later.

One of Axcel’s first investments was Tvilum, a family-owned company producing flat-pack furniture, which was subsequently merged with Scanbirk and sold to US group Masco Corporation. During Axcel IndustriInvestor’s life, its capital was extended to DKK 1.1bn. Axcel II was raised in 2000 with committed capital of DKK 2.5bn, and Axcel III followed in 2005 with capital of DKK 3bn.

Polaris Private Equity was started up in 1998 with capital of DKK 1.6bn from investors such as Danske Bank and pension funds Danica Pension, PFA and ATP. Since the millennium, a number of mainly relatively small private equity funds have been established, including Dania Capital (2004), Erhvervsinvest Nord (2004), Odin Equity Partners (2004), Nordic Growth and SR Private Brands. The listed ITH Industri Invest (now Renewagy) and investment bank FIH also invested in private equity for a long period, although both initiatives have recently been closed.

In 2005 pension fund LD started up LD Equity by transferring its holdings in 23 unlisted companies into the first fund. Two further funds have been raised together with other institutional investors, and LD Equity has a total of DKK 7.5bn under management. However, it should be noted that LD Equity invests in venture capital as well as private equity. The last couple of years have also seen the formation of the private equity funds Capidea, Deltaq, EVO and Executive.

Besides these Danish players, many foreign private equity funds have offices in Denmark. These include some of the biggest players in the European market:

3. When Axcel II was started up in 2000, a limit was introduced for the duration of investments, and the investment vehicle and management company were separated out.

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III. Private equity funds and their investors

Figure III.2. Capital committed to Danish private equity funds 1998–2007.

DKKbn

50

40

30

20

10

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: Vækstfonden (2007).

Note: Vækstfonden does not include funds of funds in its figures.

3i (UK), Altor (Sweden), CapMan (Finland), CVC Capital Partners (UK), EQT Partners (Sweden), Industri Kapital (Sweden), Nordic Capital (Sweden) and Procuritas Partners (Sweden).

Finally, a number of funds of funds have been started up. Danske Bank’s initiative Danske Private Equity Partners was formed in 1999 and recently opened its fourth fund. Together the four funds have committed capital of EUR 1.7bn.

However, PEP invests in both private equity and venture capital, and its investments are geographically diverse, mainly in Europe and the USA. In 2001 Nordea embarked on a similar initiative called Nordea Private Equity, whose more recent funds focus exclusively on private equity. ATP also established ATP Private Equity Partners in 2001, which works like a fund of funds. To date ATP PEP has raised four funds with a total of EUR 6bn under management. The latest fund of funds, Scandinavian Private Equity Partners, raised capital through an IPO in 2007.

The growing level of activity in Denmark can be seen from figure III.2. Between 1998 and 2007, assets under management climbed from DKK 5bn to DKK 39bn.

Total committed capital is higher than this, though, as Vækstfonden’s figures do not include all funds. In 2007 its figures were based on 13 funds, whereas DVCA’s members included 14 private equity funds, seven investors in minority stakes, and five funds of funds.4 On top of this come Denmark’s EVO and Odin Equity Partners, and Procuritas Partners and other foreign funds focusing on the Nordic countries. The total number of private equity funds in Denmark engaged in buyouts is therefore at least 17.

Figure III.3 shows the funds’ size and investment focus in terms of the enterprise value of prospective portfolio companies. As the size of the funds (in terms of

4. DVCA’s membership includes 14 private equity funds (3i, Altor, Axcel, Capidea, CapMan, CVC, Dania Capital, Deltaq, EQT, Executive, LD Private Equity, Industri Kapital, Nordic Capital and Polaris), nine investors in minority stakes (C.W. Obel, Dansk Kapitalanlæg, Danske Bank – Danske Markets, Erhvervsinvest, Industri Udvikling, Jysk-Fynsk Kapital, Kirkbi, Nordic Growth and SR Private Brands), three funds of funds (ATP Private Equity Partners, Danske Private Equity and Scandinavian Private Equity Partners), and Icelandic bank Glitnir, which also provides debt finance.

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Figure III.3. Private equity funds’ size and investment focus.

Size of fund

Investment focus as measured by enterprise value (debt-free basis) DKK 0–500m

DKK 0.5–1bn

DKK 1–2.5bn

DKK 2.5–5bn

DKK 5–10bn

>DKK 10bn

Deltaq SR Private Brands Executive Capital Capidea

<DKK 1bn

Jysk-Fynsk Kapital

Industriudvikling Erhvervsinvest Nord Dansk Kapitalanlæg Dania Capital

DKK 1–5bn

Polaris Private Equity Axcel

DKK 5–10bn

LD Equity CapMan Altor Equity Partners Nordic Capital

>DKK 10bn

Industri Kapital EQT 3i CVC Capital Partners

Source: Own illustration based on information from Vækstfonden (2007) and the funds’ websites.

committed capital) grows, so does the size of prospective portfolio companies.

Smaller funds such as Executive and Deltaq concentrate on companies with an enterprise value of DKK 25–250m, while the larger Danish funds like Polaris Private Equity and Axcel concentrate on medium-sized businesses typically with an enterprise value between DKK 500m and DKK 3bn. Finally, the large foreign funds like EQT Partners, Nordic Capital and CVC Capital Partners target companies with an enterprise value of at least DKK 2bn.

Activity in the Danish market As mentioned above, Nordic Private Equity Partners’ acquisition of Broen Armatur in 1991 was the first investment in a Danish portfolio company. After a quiet start-up period, activity has grown rapidly since the mid-1990s. Figure III.4 shows total activity in the Danish market as measured by the number of buyouts by private equity funds. The chart is based on a list of Danish private equity investments between January 1991 and April 2008 drawn up by DVCA, which contains a total of 307 investments in portfolio companies by private equity funds and includes both minority and majority investments. As the focus here is on active ownership, figure III.4 does not include investments in minority stakes by Dansk Kapitalanlæg, Erhvervsinvest, Industri Udvikling, Jysk-Fynsk Kapital and SR Private Brands,5 but it does include all investments by LD Equity even though around half of its investments are in minority stakes.6 Thus a total of 192 portfolio companies are included in figure III.4.

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Figure III.4. Number of buyouts by private equity funds in Denmark 1991–2008.

50

40

30

20

10

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

Source: Based on figures from DVCA. Note: These figures do not include investments in minority stakes by Dansk Kapitalanlæg, Erhvervsinvest Nord, Industri Udvikling, Jysk-Fynsk Kapital and SR Private Brands, but all investments by LD Equity are included as the fund is focusing on both buyouts and minority investments going forward. The figure for 2008 covers the period from January to April.

From modest beginnings at the start of the period, activity has grown substantially. Of the 192 investments made between 1991 and May 2008, 146 (76%) have come since the millennium. Private equity funds acquired 39 Danish companies in 2007 alone.

The most active players account for the majority of the 192 investments to date.

Thus Axcel’s three funds have been involved in 31 buyouts in Denmark, which is 16% of the total. Foreign private equity funds account for just over half of all buyouts during the period (100 out of 192), and Nordic private equity funds for 41 of these. Table III.1 shows the number of buyouts by the nine most active private equity funds in Denmark.

Table III.1.

Number of buyouts by the nine most active private equity funds in Denmark 1991–2008.

Name

Founded

Country

Buyouts

Axcel

1994

Denmark

31

LD Equity

2005

Denmark

23

Polaris

1998

Denmark

17

CapMan

1989

Finland

13

EQT

1994

Sweden

10

Nordic Capital

1990

Sweden

8

CVC

1981

UK

6

3i

1983

UK

6

Industri Kapital

1989

Sweden

6

Source: Based on figures from DVCA. Note that Nordic Private Equity Partners was taken over by CapMan in 2001.

Note: Where two (or more) funds worked together on a buyout, both funds are credited with the transaction.

See section IX for a more detailed presentation. Figures cover the period until April 2008.

5. Dansk Kapitalanlæg has made a number of investments in minority stakes that have subsequently been supplemented with further share purchases to obtain a majority stake (e.g. mailbox producer ME-FA and manufacturing company M&J Industries). As the focus here is on buyouts, these investments are not included in this overview.

6. Of LD Equity’s 23 investments, 11 are majority stakes and the remainder are minority stakes. However, most of LD Equity’s minority stakes are acquired in close collaboration with the company’s management or another private equity fund, and so they have been included in the list of buyouts.

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Private equity funds in Denmark (continued)

As can be seen from table III.1, besides Axcel, activity in the Danish market is dominated by Denmark’s LD Equity and Polaris, Finland’s CapMan (which took over NPEP in 2001 and has therefore been behind a total of 13 buyouts) and Sweden’s EQT. The three most active funds account for around a third of all buyouts, while the ten most active account for more than half of total activity. Table III.2 breaks down the 192 buyouts by industry.

Table III.2. Number of buyouts in Denmark by industry 1991–2008.

Industry

Number

Percentage

122

63.4

Service

22

11.5

Wholesale

19

9.9

Retail

12

6.3

IT development

8

4.2

Construction

4

2.1

Transport

4

2.1

Research

1

0.5

192

100

Manufacturing

Total Source: DVCA.

Unsurprisingly, manufacturing companies account for more than half of all buyouts (122 out of 192), as they generally have stable earnings, enabling relatively high levels of debt finance. Private equity funds have also invested in 22 service companies and 19 wholesalers. The other sectors together account for around 15% of the total number of buyouts.

Who invests in private equity funds?

Investors in private equity funds can be divided into five main groups: 1. Institutional investors (banks, insurers and pension funds) 2. Companies 3. Public bodies 4. Funds of funds 5. Private investors Figure III.5 breaks down the sources of capital for private equity funds raised in Europe and Denmark in 2006. The charts include funds of funds, even though, in principle, these funds have also raised capital from investors. Funds of funds account for 18% of total committed capital in Europe but just 3% in Denmark. This gap shows that funds of funds are a relatively new financial instrument that has emerged to help investors to invest in private equity.

Both nationally and internationally, institutional investors are the dominant class of investor in buyouts. Taken together, institutional investors account for about two thirds of committed capital in Europe. Within this group, pension funds are the biggest players, contributing more than half of total capital from institutional investors, followed by banks and insurers.

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III. Private equity funds and their investors

Figure III.5. Capital committed to private equity funds in Europe and Denmark in 2006 by source.

Europe Others 9% Public bodies 9%

Pension funds 27%

Private investors 9% Companies 4% Banks 14% Funds of funds 18%

Insurers 10%

Denmark Others 12% Public bodies 9%

Pension funds 38%

Companies 10% Funds of funds 3% Insurers 11%

Banks 17%

Source: EVCA Yearbook 2007.

In Denmark, pension funds account for more than half of capital from institutional investors and so more than a third of total committed capital. Banks account for slightly more than half of the remaining institutional capital, and insurers for the rest.

In Europe, companies account for 4% of total committed capital, while public bodies and others (individuals) each account for 9%. Companiesâ&#x20AC;&#x2122; share is much higher in Denmark at 10%, while public and other sources account for 21%, dividing into 9% from public bodies and 12% from other sources.

Overall, institutional investors, led by pension funds, are behind the bulk of the capital invested in private equity funds. Thus the investors in buyouts do not differ greatly from those that dominate the stock market. In the USA and the UK, domestic institutional investors hold more than half of listed companiesâ&#x20AC;&#x2122; capital, while in Denmark the level is around 30%. If foreign institutional investors are included, these ďŹ gures are much higher. In other words, the investors in private equity funds are largely the same as the investors in listed companies.

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“Private equity funds are now so good at the financial side that they compete more on industrial insight and an ability to develop companies operationally and strategically. The private equity industry has become more mature, and developing companies in close and committed collaboration with management will be increasingly important in the future. I find this very exciting.”

Lars Terney, partner, Nordic Capital

Lars Terney has headed Nordic Capital’s Danish activities since spring 2008.

He worked previously for Boston Consulting Group (BCG), first in Chicago in 1994–97 and then helping to establish BCG’s office in Copenhagen in 1998.

He became a member of BCG’s Nordic management team, and was made a senior partner in 2007.

Lars Terney holds an MBA from the Kellogg School of Management at Northwestern University in the USA.

IV.

DVCA’s analyses of private equity funds in Denmark Background

This section presents the results of three analyses commissioned by DVCA in connection with the preparation of this report. There is a survey of how employeeelected board members view private equity funds, a survey of investors’ views of private equity funds and their communication, and finally a study of returns on private equity funds performed by ATP PEP. The section is rounded off with a comparison of returns on private equity funds with returns on the stock market.

The analyses show that private equity funds are viewed positively by employeeelected board members, that investors are happy with both the information and the returns they get from private equity funds, and that returns on private equity funds are well above those on the stock market. However, there are also areas where private equity funds need to improve, such as communication with the outside world.

How do employee-elected board members view private equity funds?

A telephone-based questionnaire survey of employee-elected board members at current and former private equity portfolio companies in Denmark was carried out for DVCA by Aalund Research in spring 2008.

The survey covers a number of aspects of private equity funds’ day-to-day work with the companies they own.1 Much of this work is channelled through the company’s board of directors.

Almost 70% of the employee-elected board members surveyed believe that private equity funds show respect for the corporate culture of the companies they own (see figure IV.1). At companies previously but no longer owned by a private equity fund, the picture is even more positive, with 91% believing that the fund showed respect for the company’s corporate culture.

The employee-elected board members surveyed also believe that private equity funds are good at providing information on the changes they want to see at a portfolio company. 61% agree or partially agree that private equity funds are good at providing information on the changes they wish to make, or have made, at the company. At companies previously but no longer owned by a private equity fund, 73% believe that the fund was good at providing this information.2

On balance, we can conclude from this analysis that private equity funds have made a positive impression on employee-elected board members, but also that there is room for improvement in a number of areas, such as employee development.

Figure IV.1. Do the new owners show respect for the company’s corporate culture?

Definitely not 3%

Don’t know 3%

No 3% Plenty 31% Neither yes nor no 23%

Some 38%

1. Employee-elected board members were chosen for the survey because they have close daily contact with private equity funds through their board work. The analysis covers a total of 39 respondents, of whom 28 are on the boards of companies currently owned by a private equity fund and 11 are on the boards of companies previously owned by a private equity fund.

2. Chart not shown. All charts are based on underlying data available from DVCA’s website: www.dvca.dk

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The picture that emerges is that employee-elected board members are generally positive about private equity ownership.

Employee-elected board members are also positive about private equity ownership when asked whether the funds do much to make the company an attractive place to work (see figure IV.2). 41% believe this to be the case, while only 26% disagree. The remaining 33% are either unsure or see no difference. Again the figure is even more positive if we look only at companies that have experienced private equity ownership but are now under a different form of ownership.

Here, 64% agree that the private equity fund did a lot to make their company an attractive place to work.

Figure IV.2. Do the new owners do much to make the company an attractive place to work?

Don’t know 3% Definitely not 10%

Plenty 13%

No 15% Some 28%

Neither yes nor no 31%

The survey also shows that private equity funds are considered to be good at developing their companies. More than half of the respondents believe that the funds bring new expertise to the companies and that sufficient funds are earmarked for investment in production equipment (see figure IV.3).

Thus the picture that emerges is that employee-elected board members are generally positive about private equity ownership. The funds respect the companies in which they invest, their management style is open, and they do a great deal to make the company an attractive place to work.

Figure IV.3.

Do the new owners put sufficient money into long-term investments in production equipment?

Don’t know 3% Definitely not 0% No 28% Plenty 54% Some 0% Neither yes nor no 15%

However, one point to note is that employee-elected board members do not believe that sufficient resources are invested in employee development (see figure IV.4). 29% feel that sufficient resources are earmarked, while 28% feel the opposite. Around 43% responded “Don’t know” or “Neither yes nor no” to this question.

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IV. DVCA’s analyses of private equity funds in Denmark

How do employee-elected board members view private equity funds? (continued)

Figure IV.4. Do the new owners ensure that sufficient funds continue to be invested in employee development?

Don’t know 8% Plenty 8% Definitely not 5%

No 23%

Some 21%

Neither yes nor no 36%

However, it should be stressed that DVCA has not looked into how this question about employee development would be answered at other companies. It is therefore difficult to gauge whether private equity portfolio companies differ from other companies in this respect.

Having active and well-prepared board members normally ensures that management receives useful feedback and guidance from the board, and this is very much the case at private equity portfolio companies (see figure IV.5). 75% of those surveyed believe that the board is a better sounding board for management under private equity ownership.

Figure IV.5. Is the board a better sounding board for management than before the company was in private equity ownership?

Don’t know 7% No 7% The same 11% Yes 75%

On balance, we can conclude from this analysis that private equity funds have made a positive impression on employee-elected board members, but also that there is room for improvement in a number of areas, such as employee development.

Ugebrevet A4’s study of private equity funds

The results of the analysis above paint a different picture to the only previous Danish survey of the impact of private equity ownership on companies, published by the Danish Confederation of Trade Unions (LO) in its newsletter Ugebrevet A4 in late 2007 and early 2008.

Ugebrevet A4 concludes from a survey of 49 shop stewards at private equity portfolio companies that there is higher employee turnover under private equity ownership, that employees’ workload increases, and that employee care is limited.

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IV. DVCA’s analyses of private equity funds in Denmark

The contrasting results of the two surveys may be because employee-elected board members feel more involved in decision-making processes than shop stewards. This is another point to note for private equity funds and DVCA.

DVCA’s questionnaire survey of the biggest investors in private equity funds

In connection with the development of its guidelines for responsible ownership and good corporate governance, DVCA also commissioned Aalund Research to conduct a questionnaire survey of the biggest investors in private equity funds. A total of 12 investors took part in this survey, which was also performed in the spring of 2008.

According to the survey, these 12 investors have invested a total of around DKK 40bn in private equity funds and therefore account for the bulk of the Danish capital invested in Danish companies through private equity funds. The majority of these investors are pension funds.3 They are generally satisfied with the information that private equity funds provide to their investors (see figure IV.6).

Figure IV.6. Satisfaction with the flow of information from private equity funds.

Quite satisfied 50%

Most of these investors believe that private equity funds should pay more attention to the outside world’s expectations of their actions and disclosures.

Very satisfied 50%

Most of these investors believe that private equity funds should pay more attention to the outside world’s expectations of their actions and disclosures. They feel that the funds could usefully be more open about their intentions and the results of their activities (see figure IV.7).

Figure IV.7. Should private equity funds modify their behaviour?

Don’t know 8%

No 25%

Yes 67%

Nine of the 12 investors surveyed plan to increase their allocation to private equity, while three plan to maintain their current level of investment, and none have plans to reduce their allocation to private equity (see figure IV.8).

3. The respondents in this survey were the chief investment officers of the investors in question rather than the people responsible for private equity. The 12 investors break down into seven pension funds, three insurers and two “others”.

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IV. DVCA’s analyses of private equity funds in Denmark

DVCA’s survey of the biggest investors in private equity funds (continued)

Of the nine investors who plan to increase their allocation to private equity, six were willing to disclose by how much. Together these six investors plan to increase their exposure by DKK 26bn.

Figure IV.8. Future investment in private equity funds.

We plan to put an unchanged share of our investments in private equity 25% We plan to put a larger share of our investments in private equity 75%

Finally, DVCA’s survey shows that there is generally considerable satisfaction with private equity funds’ management of their investments, with only one investor being satisfied only “to a degree” (see figure IV.9).

Figure IV.9. Are you satisfied with private equity funds’ management of their investments?

To a degree 8% Yes 92%

Thus the vast majority of investors have received a return matching or exceeding their expectations.

The size of the returns generated by private equity investments in the period from 1990 to 2006 is something DVCA asked ATP PEP to look into. The results are presented in the next section.

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IV. DVCA’s analyses of private equity funds in Denmark

Background to the analysis

Private equity funds’ investments in Denmark – realised returns

This analysis was carried out by ATP PEP on the basis of information submitted by the individual private equity members of DVCA, which were asked to submit return (cash flow) data for all investments realised since 31 December 1999.

The data set covers 59 4 investments made by 11 funds in the period 1990–2006 and can be assumed to include most, by volume, of the investments in the Danish market realised since 31 December 1999. The data set does not include venture capital investments. It was up to the individual fund to determine which transactions should not be included in the analysis on this basis, but DVCA did have a dialogue with the individual funds concerning the selection criteria to be applied.

The investments were made mainly in the period 1995–2003 (see figure IV.10).

The investment period varies from about a year to 13 years, with a mean of 6.4 and a median of 6.5. It should be noted, however, that in several cases the individual investments were made in several rounds, and there are also a few cases where the investment was partially realised up to a number of years before the final exit. The analysis uses the timings of the initial investment and the final exit to calculate the average investment period.

Figure IV.10. Number of investments in the period 1990–2008.

10

Acquisitions

Divestments

8

6

4

Analysis of returns

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

2

The overall return on the 59 investments is a multiple of 3 and an IRR of 29% or 37% depending on the method used.

The return multiple is defined as how many times the capital invested has been returned. Hence a multiple of 3 means that an investment of 100 increases to a value of 300 during the time that the fund owns the company.

The IRR can be calculated using two different methods: 1. A long-term cash flow that follows the actual timings. The entry year therefore varies, from 1990 to 2006 (see above). A calculation using this method gives an IRR of 29%.

2. All investments are assumed to be made at the same time, in year 0. This method gives an IRR of 37%.

4. A transaction may be represented more than once if more than one private equity fund was involved in the investment.

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IV. DVCA’s analyses of private equity funds in Denmark

Figure IV.11. Cash flows from the individual investments.

Method 1

Method 2

Time

Time

A

B

C

A

B

C

The disadvantage of the first method is that investments made at the beginning of the period have a high weighting in the overall calculation, whereas later investments have a lower weighting, because all payments are discounted back to the time of the first investment.

The second method starts all the individual investments at the same time, and so the overall IRR is not skewed by differences in the timings of the individual investments.

Returns by size of company

The table below breaks down the returns by how much the private equity fund has invested in the individual portfolio company. Healthy returns have been achieved in all categories, so it is not just the biggest investments that are driving returns.

Table IV.1. Returns broken down by invested capital (DKKm). <10

Total

125–250

Number

10

Number

Invested capital

58

Invested capital

1,307

Realised value

254

Realised value

3,516

Multiple

4.4x

10–25 Number

7

Multiple

2.7x

>250 12

Number

11

Invested capital

207

Invested capital

4,927

Realised value

786

Realised value

15,649

Multiple

3.8x

25–75 Number Invested capital Realised value Multiple

Multiple

3.2x

Total 11 539 1,155 2.1x

Number

59

Invested capital

7,832

Realised value

23,788

Multiple

3.0x

75–125 Number Invested capital Realised value Multiple

8 794 2,430 3.1x

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IV. DVCAâ&#x20AC;&#x2122;s analyses of private equity funds in Denmark

Closing comments

It should be noted that the breakdown in the table above does not necessarily present accurately the total value of the company (debt + equity), as information on holding size, debt levels and so on were not included in the analysis.

However, it can be assumed that there will be a relatively close relationship between invested capital and the companyâ&#x20AC;&#x2122;s total value.

As might be expected, there is some variation between the returns on the different investments. Thus there are investments where funds have lost all or most of the capital invested, while there are others where a multiple of more than 10 has been achieved. The median for the 59 investments is a multiple of 2.1.

It is important to stress that only realised investments are included in the data set. Were unrealised investments to be included, this would have a negative effect on returns in cases where funds have a relatively large share of as yet unsuccessful investments in their current portfolio. On the other hand, unrealised investments will naturally have a positive effect on returns if their valuation gives an overall multiple of more than 3.0 or IRR of more than 37%. It must also be stressed that only investments realised since 31 December 1999 are included in the analysis.

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Comparison with returns on listed shares – DVCA’s comments on ATP PEP’s analysis

When comparing returns with, say, listed shares, it must be remembered that this analysis does not take account of private equity funds’ management fees and carried interest. As a rule of thumb, these costs will typically reduce the return multiple from 3.0 to 2.5 and the IRR by around 3.5 percentage points.

Table IV.2 provides an overview of the returns on Danish listed shares over the last 12 years. The table is based on the Copenhagen all-share capped gross index (OMXCCAP, GI), which includes all the companies traded on OMX Nordic Exchange Copenhagen but has a limit on the weight of any one company and assumes that dividends are reinvested.

Even though this is a capped index, the 20 largest Danish listed companies (OMXC20) account for a very large proportion of the index. As the investments in our data set consist largely of small and medium-sized companies, it might be more appropriate to compare the return on private equity funds with an index that omits the largest companies. Unfortunately, though, it has not been possible to obtain index data for small and medium-sized listed companies dating back far enough.

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Table IV.2. Return (IRR) over various time horizons.

Year

IRR 1 year

IRR 3 years

IRR 5 years

IRR 7 years

30-12-1996

32%

23%

23%

10%

30-12-1997

44%

20%

13%

10%

30-12-1998

-4%

14%

1%

9%

30-12-1999

26%

10%

7%

15%

29-12-2000

21%

-5%

8%

16%

28-12-2001

-13%

-2%

12%

14%

30-12-2002

-20%

11%

21%

30-12-2003

35%

36%

29%

30-12-2004

29%

35%

30-12-2005

45%

27%

29-12-2006

31%

30-12-2007

8%

The table should be read as follows: â&#x20AC;&#x153;IRR 1 yearâ&#x20AC;? shows the return for each individual year, while the other columns show the annual return over periods of 3, 5 and 7 years. For example, the annual return during the period from 2000 to 2007 (2000/IRR 7 years) was 16%.

By way of comparison, the analysis of returns on private equity portfolio companies above gives an annual IRR, using the method where all investments are assumed to have been made at the same time (which has to be considered the most correct method), of 37-3.5=33.5%.

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“Our role is to develop companies and take them to a new level by making them stronger, more viable and so more valuable. This demands commitment, and it is through day-to-day collaboration with companies’ management, employees, former owners and founders that we help to generate new energy and growth. It is a privilege to be part of this process and see ambitious plans being realised step by step. That is what we call active ownership, and that is our raison d’être.”

Christian Frigast, managing partner, Axcel

Christian Frigast is a managing partner in Axcel, which he co-founded in 1994.

Previously Christian Frigast was Executive Vice President of Incentive (1993–94) and director of the former Unibank, now Nordea (1973–92).

Christian Frigast is an M.Sc. (Political Science and Economics) and studied, among other places, at Stanford University in the USA. As well as sitting on the boards of companies owned by Axcel, he is the deputy chairman of Dampskibsselskabet Torm.

V. Review of ten investments

Building market boom generated high returns Background According to Søren Vestergaard Poulsen, partner in CVC, Danske Trælast was a textbook takeover. The ship was prepared for sea, then sold at a profit. But no one had counted on its all happening quite so fast.

Data prior to takeover by the private equity fund and upon exit

Investment CVC in 2003 Exit in 2006 Revenue 2002: DKK 14.9bn 2006/7: DKK 19.6bn EBITDA 2002: DKK 945m 2006: DKK 1.5bn Number of employees 2002: 5,988 2006: 6,600

Danske Trælast is over one hundred years old and has been listed on the stock exchange since 1933. During the 1990s the company grew to become the largest Nordic distributor of building materials.

In 2002 the insurance company Codan owned 32% of the shares in Danske Trælast, inherited from Hafnia, whose activities Codan took over in 1993.

However, Codan’s UK parent company Royal Sun Alliance did not want such a large holding in a building materials company and wanted to get rid of its shares. Consequently, Danske Trælast needed new ownership.

A number of industrial buyers and private equity funds were contacted, and in 2003 CVC became the new owner of Danske Trælast following a bidding round.

Scenarios should take account of bad times “As a starting point we were interested in Danske Trælast because the building sector is an area of high investments and good development potential. We also saw a good, strong management that was in full control. The challenge was sensing where the market was heading because the building sector is probably one of the most market-sensitive industries that there is,” says Søren Vestergaard-Poulsen, partner in CVC. “We therefore drew up two scenarios. One in which the revenue remained roughly unchanged, the market didn’t get worse, and we had five years’ ownership.

And another in which we envisaged a decline in revenue and earnings if an upturn proved to be longer in coming and in which we therefore reckoned on seven years’ ownership.”

“At CVC we generally prefer to keep the CEO and don’t like having to change mid-process.

In fact, before the acquisition we had Steen Weirsøe’s potential severance agreement in the form of a golden parachute cancelled. This meant that we could fire him, but that he couldn’t go of his own accord and net a big profit. That was our wish, and all the top management has been with us throughout except for one person who wanted to retire.”

The ship is prepared for sea At the same time CVC identified that Danske Trælast: B Had a skilled and relatively new management B Was perceived by the equity market as a company with an “unclear strategy” but with good potential for continued optimisation and tightening up of processes B Had made a large number of acquisitions but not yet achieved economies of scale B Had too small a central organisation, which needed supplementing B Had the platform for developing all its activities in a Nordic organisation B Was facing challenges in Sweden, which was in a turnaround and had not yet delivered results “We quickly set ourselves the target that Danske Trælast should grow by 10% annually – in both revenue and earnings,” says Søren Vestergaard-Poulsen.

Søren Vestergaard-Poulsen, CVC

The day-to-day work “As a listed company you don’t know exactly what the shareholders are thinking. But with a private equity fund the ownership becomes more direct because you’re working together in the boardroom – and you have day-to-day contact,” says Steen Weirsøe, President and CEO of DT Group, formerly Danske Trælast.

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“We were very close to the management, agreed with its strategy, and the cooperation was very good. The management was able to decide itself that we would buy such-and-such a company because we liked its strategy and its commitment.

And we never discussed which key figures we should focus on, but rather whether we could put the squeeze on the key figures,” says Søren Vestergaard-Poulsen.

Checklist/priorities turned on their head The market turned quicker than expected, and this meant that both scenarios had been too pessimistic.

At the same time, the results of the intensive tightening up of the company and its activities began to emerge, and this meant a change in Steen Weirsøe’s priorities.

“Now I no longer had to spend time and effort on the analysts and on explaining our market situation. It was possible to focus more on sales, costs and key figures, and I was able to get our continuous acquisitions on track and had a lot of freedom to develop the company. For me, the ownership becomes more direct when a private equity fund joins the board. I can relate to its needs. By contrast, the stock market often has a more diffuse way of responding that doesn’t always match up with the company’s long-term interests,” says Steen Weirsøe.

“In short, I think we got the focus on the strategic agenda – or rather we achieved a more focused development of the company under our ownership,” says Søren Vestergaard-Poulsen.

Incentives “The incentive programme covered 25 top managers/heads of division and 225 timber sales directors and Silvan DIY store managers. In this way we brought a commitment and team spirit to the whole organisation, and when we visited the individual DIY stores, we found that the goals were perfectly clear. Everyone knew the way forward,” says Søren Vestergaard-Poulsen.

Exit “With regard to the exit, we thought it would most likely be a sale to a strategic buyer or a new listing.”

In 2006 Danske Trælast was sold to Wolseley, the UK group specialising in heating, plumbing and sanitation as well as building markets. The price was around DKK 15bn.

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“The company had a solid foundation, and we were making good money, so I was confident that it could be done.

So in the period 2003 to 2006 CVC helped ‘prepare the ship for sea’.”

Steen Weirsøe, President and CEO, DT Group, formerly Danske Trælast

V. Review of ten investments

New ownership unlocked the potential for growth Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment Nordic Capital in 2004 Revenue 2003: DKK 3.8bn 2007: DKK 6.3bn EBITDA 2003: DKK 398m 2007: DKK 815m Number of employees 2003: 10,241 2007: 15,083

“The share was clearly undervalued. And the investor base was wrong because, as a result of the affiliation with Group 4 Falck, there were numerous international investors who had originally bought shares in a global growth company and were finding it difficult coming to terms with the fact that they were suddenly shareholders in a Danish company specialising in auto assistance, ambulance services and fire fighting services. Furthermore, we had commissioned surveys from people with industry expertise that clearly indicated that there was great potential for achieving organic growth rates within healthcare and ambulance services.”

Christian Dyvig, partner, Nordic Capital

Falck has gone from being a low-growth company operating mainly within auto assistance, ambulance services and fire fighting services in Denmark to being an international high-growth company with market-leading positions in each of the company’s business areas in their respective geographical regions.

However, it needed a private equity fund for the company to get the working calm to develop and expand the product range within healthcare and assistance in Denmark and to develop its business areas abroad.

In July 2004 Falck was separated from Group 4 Securicor immediately after the founding of the latter by means of a merger between Group 4 Falck and the UK security company Securicor. Following the merger, security services and cash transportation were dominant business areas, while rescue services (Falck) and prison services (Global Solutions) were small, unrelated business areas. Group 4 Falck therefore decided to spin off the activities from Group 4 and after divesting Global Solutions, Falck was listed on the Copenhagen Stock Exchange. The ownership was established through a share split.

Christian Dyvig from the private equity fund Nordic Capital saw at the time that it would not be logical to list a company that had acquired a joint ownership and company structure as late as 2003 and was difficult for the equity market to understand. Lastly, Nordic Capital was able to contribute to the future development of Falck thanks to the private equity fund’s previous experiences of owning companies focused on healthcare. He therefore contacted Group 4 Securicor’s executive management on several occasions and also made specific acquisition offers for Falck. But Group 4 Securicor refused to do business.

Focus on earnings In the meantime Falck was listed. The CEO was Allan Søgaard Larsen, who took over responsibility for Falck in 2003 and began improving growth and earnings in the foreign affiliates. The financial markets failed to see the potential and put pressure on Falck to focus solely on the home market.

“It had irritated me for a long time that the equity market had not valued the Falck share based on the potential that I could see the company had. There were some obvious development opportunities that they could not or would not see, even though we had done everything to explain them,” says Allan Søgaard Larsen.

New owners with big new plans It had become necessary to look for a more active ownership than a listing, and a bidding process involving a number of private equity funds was instituted in autumn 2004, when it was eventually Nordic Capital, together with ATP, that took over Falck. “Beforehand we had painted a picture of the Falck that we envisioned for ourselves in the longer term. With ATP on board as a passive coinvestor we had secured in advance a Danish investor with an interest in infrastructure that could bring calm to the new ownership,” says Christian Dyvig, and continues: “We wanted to concentrate on: B Strongly expanding assistance products in Norway and Sweden B Expanding ambulance services in selected markets in Europe B Developing healthcare products as a brand-new business area B Expanding the newly acquired training activities for the offshore sector and the maritime sector globally.”

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Results The results for 2004 were already promising, with an increase in revenue of 12%, nearly half of which was organic growth. 2005, 2006 and 2007 showed good growth of 12%, 14% and 17%. There was decent growth in the profit margin from 5.9% in 2004 to 9.1% in 2007. Finally, the net debt for acquisitions in the period was reduced by around DKK 500m, equivalent to 18% of the original figure.

As well as the improvements in the financial figures, a number of items on the company’s strategic agenda were successfully implemented. Today Falck has four business areas, all of which are market-leading in their respective geographical regions: B Emergency: largest private ambulance company in Europe and the largest private fire fighting service in the world B Assistance: largest Nordic provider of auto assistance and other assistance products covering homes and private citizens B Healthcare: Denmark’s largest private-sector provider of health plans and other health services B Training: largest global supplier of rescue and safety courses for the offshore sector and the maritime sector

Want management to be co-investors “We don’t want the management to become rich overnight because if that happens, it’s our experience that the management doesn’t have the same motivation,” says Christian Dyvig. “We therefore like the management to have a considerable proportion of its wealth tied up in the company with the potential for getting a good investment out of it if things go to plan. So we want the management and selected key employees to invest in the company. But this is a delicate balancing act because we don’t want anyone to have to incur debts or run unnecessary risks. There has to be a balance.”

Today the executive management has a shareholding in Falck of around 9%, while other managerial employees have around 3% and non-managerial employees have around 1% as a result of a free employee share allocation.

“I have complete confidence that the management can take the necessary decisions in day-to-day operations, and consequently the work division is that I have close dialogue with the executive management concerning our strategic agenda and primary responsibility for how we finance our development, while the executive management handles the operational decisions. If I felt that I could handle operations better than the executive management, there would be a problem,” says Christian Dyvig.

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“Today we have a special committee structure that allows us to act quickly when it comes to acquisitions and operational and financial decisions. This gives us a lot of freedom to manoeuvre on a day-to-day basis.”

Allan Søgaard Larsen, CEO, Falck

V. Review of ten investments

Calm to grow Background When EQT and Goldman Sachs Capital Partners bought ISS in 2005, ISS was delisted from the Copenhagen Stock Exchange. Prior to that, there were a number of years in which ISS had mainly grown through acquisitions, while organic growth had been at a level of -2% to 1.5% (2002–2004). Since 2005 organic growth has increased significantly, while earnings have also risen.

Data prior to takeover by the private equity fund and after the takeover (today)

Investment EQT in 2005 Revenue 2004: DKK 40.4bn (for ISS A/S)

2007: DKK 63.9bn (for ISS Holding A/S)

EBITDA 2004: DKK 2.9bn 2007: DKK 4.7bn Number of employees 2004: 273,500 (for ISS A/S)

2007: 438,100

Since the mid-1990s, when ISS found itself in a financial crisis that later led to the divestment of its US affiliate and exit from the US market, the group has mainly concentrated on growing in Europe and Asia. Focus was directed at increasing cash flow from operations, then earnings, and finally organic growth, which was supplemented with a large number of acquisitions. But while cash flow and earnings improved appreciably, ISS did not succeed in increasing organic growth at the rate that the equity market wanted. At the same time, the equity analysts cast doubt on whether ISS’ numerous acquisitions created value, or whether the acquisitions were to the detriment of organic growth. This was contributing to a considerable fall in the ISS share price.

Consequently, EQT got wind of a good deal in 2004 – or as EQT’s then partner Ole Andersen put it: “The share was undervalued; ISS had not had organic growth, but we thought there were good reasons for this. In fact, ISS was continuously assessing whether its contracts with customers were profitable, and if they weren’t, they were either renegotiated, restructured or terminated. This is the main reason why there were increasing earnings and zero organic growth. But the equity market doesn’t like failing organic growth. And the equity market didn’t believe that ISS could create value with its acquisition model.”1

(for ISS Holding A/S)

Against this background EQT went into partnership with Goldmann Sachs Capital Partners, which agreed to be a minority shareholder in a syndicate that would buy ISS. In late March 2005 EQT and Goldman Sachs finally made an offer for all outstanding ISS shares. As more than 90% of all shareholders found the offer attractive, it was accepted at the end of the offer period in May, and the acquisition became a reality. As usual, the acquisition was financed by a combination of equity capital from EQT and Goldman Sachs plus a loan from an international banking syndicate. Additionally, EQT and Goldman Sachs decided to let ISS’ bonds remain outstanding, and as these bonds had been issued without a takeover clause, the transaction led to the bonds falling 15–20% in value.

Necessary calm to grow

“It’s clear that ISS is now a giant. We employ more than 400,000 people worldwide and our revenue exceeds DKK 60bn.«

The general strategy for ISS has not changed significantly since the takeover.

ISS’ goal is still to transform the company into a leading supplier of Integrated Facility Services in the markets where the company operates. This will be done through profitable organic growth and by accelerating the rate of the numerous acquisitions by ISS around the world.

Thomas Schleicher, director, EQT

This is confirmed by Jørgen Lindegaard, CEO, ISS: “The biggest change in ISS’ strategy is that corporate growth and size are no longer a goal in themselves, while now there is greater focus on ISS growing in a profitable way and this growth creating value. Consequently, the operational part of ISS’ strategy today is developed at country level, while company acquisitions are now also prioritised country by country.”

1. Spliid; 2007: 300.

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And the growth has not failed to materialise. The 2007 financial statement showed organic growth of 6% – a quadrupling in relation to 2004 and an increase of 0.5% compared to 2006. And what is more, it has increased without profitability being affected at all. On the contrary, this has also risen and is now 6.0% compared to 5.6% in 2004. In spite of the fact that debt in absolute terms has increased since the acquisition (as a direct consequence of the accelerated rate of acquisitions), the debt-to-equity ratio (gearing) has fallen. On the other hand, ISS is now so big that the realistic exit options have been reduced to selling on to a group of a few very large service companies and other private equity funds or reintroduction on the stock market, although EQT director Thomas Schleicher doesn’t see this as a problem but rather a challenge: “It is clear that ISS is now a giant. We employ more than 400,000 people worldwide and our revenue exceeds DKK 60bn. And realistically this makes a sale to other companies in the industry difficult. ISS is simply too big a mouthful to swallow for most of ISS’ competitors, which are significantly smaller. This leaves the equity market or sale to another private equity fund. At the present time, neither of these options is attractive for us given the crisis in the financial markets.

But when things change, we will be able to offer a really good, solid company.”

Good work division between owners and management EQT’s business model means that there is no focus on turnarounds, but rather on the portfolio companies being market leaders and having strong management that has the courage to invest in partnership with EQT. Furthermore, EQT is focused on there being a clear separation among the management, the board and EQT. It is vital that the management of the company undertakes day-to-day operations, while the board acts as a sparring partner for the management. The chairman of the board and several of the board members do not have a background with EQT or Goldman Sachs, but rather an industrial background, and hence great experience of managing large international service companies, from which ISS can benefit. A quick and effective decision-making process is ensured through close collaboration among the owners, the chairman of the board and the executive management using the so-called “troika model”.

In the opinion of Thomas Schleicher, this model has proven itself to be really good for EQT: “We are in ISS to exercise active ownership, and we don’t want bureaucracy to stand in the way of growth. The troika model therefore works particularly well when new business initiatives need to be discussed. We are generally very well informed concerning ISS – including its day-to-day operations. We don’t just follow the key figures,” concludes Thomas Schleicher.

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“There is generally very good discussion in the boardroom.

Our board members have a good understanding of ISS’ business model and the markets in which we operate.

The discussion at board meetings is therefore primarily centred on strategic and operational topics, while the continuous monthly reporting largely ensures that both the owners and the board are well informed concerning financial developments.”

Jørgen Lindegaard, CEO, ISS

V. Review of ten investments

From rough diamond to market leader Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment Nordic Capital in 2005 Revenue 2004: DKK 733m 2007: DKK 1.1bn EBITDA 2004: DKK 94m 2007: DKK 164m Number of employees 2004: 480 2007: 704

There have been considerable changes in the three years that Nordic Capital has owned KOMPAN. Revenue has grown by almost 50%, production has been optimised, and several new companies have been acquired. Today KOMPAN is the European market leader in playgrounds and the world’s biggest company in its field.

KOMPAN was in many ways a “rough diamond”. The company had a good market position, exciting products, a visionary development department and dedicated employees. But the company was doing less well financially, and its products were often being copied without enough being done to prevent it.

Sought a new owner At that time the company was listed, with LEGO as the largest shareholder. In 2004 it became increasingly clear that it would be expedient to have new owners. The management was finding it difficult to develop the company further because it needed an owner that was willing to invest in further growth and longterm improvements. Which is where Nordic Capital came into the picture.

Christian Dyvig, partner at Nordic Capital, which bought the company for upwards of DKK 800m in March 2005, explains: “The equity market doesn’t always perform optimally when it has to assess industrial companies that are facing major change processes. As a listed company there is intense focus on the results from quarter to quarter. This can be inappropriate in a period of major investment and restructuring, when you can’t count on showing good results from day one. Private equity can be a better model for the long, tough haul.”

Common strategy

“The equity market doesn’t always perform optimally when it has to assess industrial companies that are facing major change processes. As a listed company there is intense focus on the results from quarter to quarter. This can be inappropriate in a period of major investment and restructuring, when you can’t count on showing good results from day one. Private equity can be a better model for the long, tough haul.”

Christian Dyvig, partner, Nordic Capital

Nordic Capital saw an exciting market and a market leader with good prospects for growth and development. Together with the executive management, the new strategy was set and it was decided to focus on: B Tightening up product development by rapidly accelerating the development of new products and obtaining a broader product range, including products for the intermediate market, products with electronic interaction etc.

B Rationalising production by streamlining it and moving from Ringe in Denmark to the Czech Republic B Developing sales channels by selling via catalogues in addition to the traditional time-intensive and complex selling involving individual projects B Expanding geographically, both organically and through the acquisition of selected companies “I am confident in Nordic Capital’s handling of the general and capital-related aspects of KOMPAN’s development. It has turned out that together we have been able to make the right strategic decisions,” says Carl Henrik Jeppesen, CEO, KOMPAN. It was also decided to prosecute competitors who copied KOMPAN’s products. In a single case in France the company was awarded compensation of EUR 1.5m.

Four acquisitions in three years With the help of Nordic Capital, in just three years KOMPAN has acquired the Norwegian company Lek & Sikkerhet, the Swedish company Slottsbro, the German company CoroCord, and most recently the Australian company Megatoy.

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Through these acquisitions the company has added climbing nets to its range, achieved significant understanding of selling via catalogue, and become the market leader in Australia.

Carl Henrik Jeppesen is delighted at having a private equity fund involved in the company that has the resources to carry out acquisitions as well as the competence and experience.

Continued expansion “The core of our expansion will continue to be the products. We are focusing on developing the right products and analysing how children use the playground equipment in order to make it even better. We are just finishing the development of electronic playgrounds that make it possible to engage bigger children in playing and exercising more. This is extremely relevant at a time when there is so much talk about increasing problems with obesity among children and young people,” says Carl Henrik Jeppesen.

Nordic Capital invested in KOMPAN in March 2005 and is still working actively on the company’s development. There is still no plan to sell on the company even though there are regular approaches.

After seven years as CEO of the company, Carl Henrik Jeppesen has just decided that it is time to hand on the baton. The new CEO will be Connie Astrup-Larsen, who is coming from a position as international director with Royal Unibrew.

The ambition is to penetrate further into the European market – especially eastern Europe – and also to develop a greater presence in the USA, where KOMPAN currently has a niche as provider of playgrounds for the high-end segment. In the long term the intention here is to also provide playgrounds for the intermediate market.

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“When we came to move production to the Czech Republic, it was definitely an advantage not to be listed. Nordic Capital gave us working calm for the restructuring. The problem is that this sort of restructuring always costs on the bottom line over a number of quarters.

Furthermore, it’s difficult to know exactly when and to what extent the effects will be felt until such time as the new factory is fully operational, and the stock market doesn’t like that.”

Carl H. Jeppesen, CEO, KOMPAN

V. Review of ten investments

Threatened bankruptcy turned into success within clean tech Background

Data prior to takeover by the private equity fund and upon exit

Investment Axcel and Polaris in 1999 Exit in 2006 Revenue 1998: DKK 938m 2006: DKK 1.8bn EBITDA 1998: DKK 15m 2006: DKK 235m Number of employees 1998: 1,020 2006: 1,262

From cartel case, crisis and threatened bankruptcy to high-tech company supplying the entire European energy industry – the North Jutland company Løgstør Rør has been through it all. After seven crisis-hit years with two private equity funds as joint owners, today there is an international private equity fund behind the successful company, which now has the more international name of Logstor.

But next time it will probably be an industrial owner.

Pre-insulated pipes for district heating are a Danish invention instigated by master smith Ege Andersen in 1960. The idea led to the establishment of the company Løgstør Rør, which for many years was the leader in district heating pipes throughout Europe.

However, the competition was stiff and prices were forced right down, so the industry joined forces to come up with a model for ensuring higher prices for its products. This proved to be the wrong solution because it led to a huge cartel case in which the EU Commission meted out large fines to those involved. In the case of Løgstør Rør the fine was DKK 67m in 1998. The company was on its knees and near to bankruptcy, which would have affected the whole of Løgstør town and its surroundings.

Quick rescue action ensures immediate survival A solution had to be found, and in the course of some hectic days over Christmas 1998 a rescue action was established. In January 1999 the two private equity funds Axcel and Polaris, together with FIH, injected DKK 120m into Løgstør Rør with Axcel as the largest shareholder.

The plan of the private equity funds was to bring together a number of players within the industry to consolidate it. There were too many players in the market, and the first step was to buy the competitor Tarco Energi.

“We wanted to be a catalyst for consolidation in the industry, but it was more difficult than we imagined. When we established the rescue action, we had probably underestimated the market forces because it took a drastic remedy to get the company back on its feet.”

Søren Lindberg, partner, Axcel

Although there was good money to be made in 1999–2000, the market was in decline. And the cartel case was followed by a new period of fierce price competition, which meant that money poured out of the company.

“We wanted to be a catalyst for consolidation in the industry, but it was more difficult than we imagined. When we established the rescue action, we had probably underestimated the market forces because it took a drastic remedy to get the company back on its feet,” says partner Søren Lindberg, Axcel.

Investment in Poland Savings and rationalisations were implemented, which improved operations by more than DKK 100m. At the same time, the new management decided to build a factory in Poland in 2001. The investment regenerated competitiveness, improved earnings, and actually rescued Løgstør Rør from bankruptcy and subsequent closure.

The private equity funds tried to buy various competitors, but initially in vain.

The first success only came in 2005, when Løgstør Rør bought APFS/ALSTOM, at the same time changing its name to Logstor.

In spring 2005 the two funds brought in Preben Tolstrup as CEO. He decided to invest in the company himself, and at the same time an incentive programme was introduced for seven to eight other managers.

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Time for a new owner After seven years of ownership Axcel and Polaris were able to look back on a tough but fruitful period in which both the original plans and the market itself had changed enormously. The results were good, but the company needed fresh eyes that could continue the positive progress.

“I really think we can be proud of the fact that we had the courage to stick by our investment throughout. But now we had achieved a 40% market share in all markets and it was only natural to effect a change after some seven years of ownership,” says partner Viggo Nedergaard Jensen, Polaris. So the time had come for Logstor to get a new owner – and this time it would be an international private equity fund.

Montagu sees Logstor as a subsupplier for the energy industry Several private equity funds registered an interest in the company. But in the end only two remained. The management of Logstor itself helped make the decision as to who would be the best owner of the company for the future. It was largely a matter of personal chemistry.

“The UK company Montagu had faith in us. They wanted to help develop us as a subsupplier for the energy industry,” says Preben Tolstrup, CEO, Logstor. “We were already well under way with developing a series of new products and establishing a brand-new business unit using robot technology. We also threw in our lot and reinvested in the new company when we got the new owner in 2006. This has obviously convinced Montagu of our commitment.”

A completely different company “Today we have more than 1,300 employees, generally highly qualified specialists. And we spend a lot of money and time on investing in new technology, especially within oil and gas,” says Preben Tolstrup.

Most recently, Logstor has developed a new technology where you can “coil” the pipes up on a very large drum or wheel instead of transporting them in long assembled sections on costly articulated lorries. The initial tests have shown that it is possible to retain the quality, and hence the insulation, in the actual pipe even though it is bent considerably. Logstor is thus taking another important step as a modern, successful player in its industry.

“So next time we’re probably ready for an industrial owner – preferably one in the energy industry,” says Preben Tolstrup.

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“Axcel and Polaris dragged Løgstør Rør through a very difficult period from 2002 to 2003, and we are delighted that they remained on board to help us implement the European consolidation.

The funds had a positive influence on our implementing the merger with good results.”

Preben Tolstrup, CEO, Logstor

V. Review of ten investments

Consolidation and quick sale brought good profit Background In just eighteen months Polaris Private Equity succeeded in acquiring Novasol’s competitor, increasing the market share within summer house rental, taking an active part in the consolidation of the industry in Europe, and selling on the group to the US listed company Cendant.

Data prior to takeover by the private equity fund and upon exit

Investment Polaris in 1999 Exit in 2002 Revenue 2000: DKK 603m 2002: DKK 1.1bn EBITDA 2000: DKK 38m 2002: DKK 79m

In many industries you often see a number of very large owner-managed companies, founded at roughly the same time, that are facing a generational change.

Here it is logical to amalgamate some of the companies in order to achieve strength and enable further expansion, i.e. internationally. But what do you do while they are still competitors and personal issues are very much to the fore?

Who will be buying whom, who will be at the head of the table, and how will the cooperation work?

Private equity fund can play an important role as external owner A good example of this issue is Novasol, which through the 1980s and 1990s developed into one of the leading Nordic companies in the rental of summer houses. There were three to four other companies of the same type, but no one took the first step to consolidate the industry.

“As the founder of the company I didn’t feel that I could take things much further,” says Frederik Heegaard, who founded Novasol in 1968. “I am the typical entrepreneur, and in 1993 I had already partly withdrawn from day-to-day management by appointing as CEO Erling Holmbjerg, who had got the company running smoothly. The next logical step was to position the company in a wider context. I thought that a private equity fund would be the obvious choice to take the company forward.”

Niels Worning, partner in Polaris Private Equity, describes summer house rental as a good example of an industry in which a private equity fund can play an important role simply by coming in from the outside and carrying out an in-depth review of the possibilities.

“There were three big players in an unconsolidated industry.

This was attractive for us. The company’s actual business concept is clear. Nowhere else in the world has the renting out of houses been so systematised as in Denmark. The fact that Denmark generally consists of stretches of coastline with a huge number of summer houses – many of which are rented out – makes it possible to establish a niche.”

Niels Worning, partner, Polaris

“There were three big players in an unconsolidated industry,” says Niels Worning. “This was attractive for us. The company’s actual business concept is clear. Nowhere else in the world has the renting out of houses been so systematised as in Denmark. The fact that Denmark generally consists of stretches of coastline with a huge number of summer houses – many of which are rented out – makes it possible to establish a niche.”

Good growth potential In November 2000 Polaris subjected the company to a financial, legal and commercial due diligence process. The investigation showed that Novasol was a well-run company with a strong Nordic platform within holiday house rental that had good growth potential both organically and through acquisitions. And unlike many of its competitors Novasol’s relatively complicated portfolio of rental houses was well-ordered.

Polaris bought 75% of the shares in Novasol in November 2000 and took over the chief responsibility – together with the management and the board – for implementing the strategic developments that would make Novasol the leading European company within holiday house rental. This would be done by: B Increasing the market share in existing markets B Taking an active part in the consolidation of the industry in Europe

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A new board was appointed with industrial competences and experiences that could support the future growth plans. As well as Frederik Heegaard and representatives of Polaris, the board was supplemented with three external members with experience of, among other things, the service and travel industries.

Old competitors come together Polaris wanted to get started as soon as possible. They contacted the other Danish holiday house rental companies in the Nordic region, and it emerged that several were facing a generational change and were willing to sell.

In September 2001 Novasol Holding bought its competitor Dansommer, which had a range of luxury summer houses with spa or swimming pool that were particularly in demand with German tourists. At the same time, Polaris could see that there were a lot of synergies in merging local offices and having shared administration, IT platform etc.

Early US interest However, as early as the summer of 2001 Polaris was contacted by the US listed company Cendant. It was discussed whether the companies – which had the same vision of creating the leading European holiday house rental company – should enter into partnership or simply amalgamate.

“As Polaris had only owned Novasol for just under a year, it was far too early according to the plans to sell,” says Niels Worning. “But we had already taken the first important step in the five-year plan, namely the acquisition of Dansommer, and achieved considerable synergies on the cost and sales side. At the same time, we had visited the few large holiday house rental companies in southern Europe and received clear feedback that they were not about to change ownership. And the price was very attractive, so it was the right decision to sell.”

Polaris sold Novasol/Dansommer to Cendant in April 2002.

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“As the founder I am delighted to see that the original strategy has been faithfully continued and followed. Now we have actually put some distance between ourselves and the others in the industry.

There has been a quantum leap.”

Frederik Heegaard

V. Review of ten investments

Post Danmark is prepared for a liberalised postal market Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment CVC in 2003 Revenue 2004: DKK 11.3bn 2007: DKK 12.1bn EBITDA 2004: DKK 1.8bn 2007: DKK 1.4bn Number of employees 2004: 21,838 2007: 21,112

In 2011 the entire European postal sector will be liberalised. How do we brace ourselves for this? By working with like-minded companies or by acquiring postal companies across national borders? Both. Post Danmark took on the private equity fund CVC Capital Partners as co-owner and has thereby introduced fresh knowledge and new competences within acquisitions. This has contributed positively to the long-term plans that will make Post Danmark an international logistics company.

In 2004/5 the privatisation of Post Danmark entered an important phase. The Danish state wanted to sell a quarter of Post Danmark. The Danish Ministry of Transport and Energy launched a series of company presentations and organised a general process for generating bids from potential buyers.

It was expected that there would be bids from some of the big European postal companies in Germany, Holland and France, who would see the benefits of co-ownership. But there was also a bid from the private equity fund CVC. They were very interested and took part in the bidding round from start to finish.

Only a small part for sale “At CVC we keep a constant watch on all transactions in the market, including upcoming privatisations. We identified Post Danmark as an exciting company; it was the right size, was a market leader, and had the potential for further development,” says Søren Vestergaard-Poulsen, partner in CVC. “But it was only possible to take over about 25% of the shares, and it wasn’t normal for us to own such a small holding. This is a perfectly normal procedure for the Danish state when selling shares in its companies because selling only 20–30% at the outset makes it possible to carry out a gradual privatisation that everyone will be able to live with. In the long term we want to buy more, but we have the patience to wait until the time comes. In this situation the Danish state acts as a commercial owner. It strives to have fully independent companies and to run them according to the right governance principles. This is very positive to experience.”

Working through the board

“The fact that CVC has businesses in all the European countries clearly opens doors.

It makes it easier for us to present our ideas for the future postal service because we have already made two major postal investments and know the market.”

“We found it difficult to see where the synergies might be for the other central European companies because what do a German postal company and a Danish postal company really have in common? We entered into the process, and the more we learnt about the company, the more exciting we found Post Danmark to be. And at the same time we could see a number of areas where we could play an important role,” says Søren Vestergaard-Poulsen.

“Obviously we can’t have access to the company in the same way that we do in, for example, Danske Trælast. In Post Danmark we would only be able to work through the board because we would be a minority shareholder, but we had some clear ideas of how our investment could produce a more viable company.”

Søren Vestergaard-Poulsen, partner, CVC

New co-owner in place The negotiations with the Danish Ministry of Transport and Energy fell into place, with the result that the private equity fund CVC Capital Partners took over 22% of the shares in Post Danmark for DKK 1.27bn, while a further 2.5% was set aside for an employee share scheme for the 22,000 or so employees in Post Danmark. Finally, 0.5% was reserved for an incentive programme for managerial employees in Post Danmark.

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CVC also entered into an agreement with the Danish state to the effect that it could sell its shares back to the state at the market price after five years if, contrary to expectation, the state failed to sell more shares to CVC.

Belgium also enters the scene In parallel with the negotiations to privatise Post Danmark, CVC had been negotiating with the Belgian state concerning possible involvement in the Belgian postal service. The Belgian state was keen to have Post Danmark and CVC as a strategic partner so that it could gain insight into modernising the Belgian postal service.

“This was an interesting proposition, but it was also a big bite for a company like Post Danmark,” says Helge Israelsen, CEO, Post Danmark. “I thought we could probably tackle the manoeuvre better with CVC on board. We made a good team: us with the experience and good head for the business, and CVC with the sound financial prerequisites.”

In October 2005 Post Danmark acquired La Poste for DKK 2.2bn.

New professional partner on board In response to the question of whether the day-to-day work and the board meetings have changed significantly, Helge Israelsen gives the following answer:

“CVC did really well, and gradually the others fell away.

In March 2005 CVC entered into final negotiations with the state. So although we ourselves had probably expected something with one of the big players, we actually ended up with CVC as temporary co-owner. And this has been stimulating for our business.”

Helge Israelsen, CEO, Post Danmark

“Perhaps our board meetings have changed a bit, but there’s no revolution.

We’re still owned by the Danish state, only now we also have a very active board member in the form of CVC. I really believe that CVC inspires us to exercise financial discipline. They take an active part in board meetings with a good eye for where something could go wrong, and they ask good, relevant questions.”

A tour of other postal companies “Today we have achieved a good position in central Europe and can move forward on several fronts. For example, together with CVC we are visiting the other European postal companies and discussing the possibilities for future cooperation,” says Helge Israelsen.

A state-run postal company has to deliver mail six days a week to all addresses at established prices. This doesn’t change regardless of the ownership, and the concession was given as a condition and part of the framework. But an EU liberalisation will change the conditions for all postal companies from 2011.

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V. Review of ten investments

A piece of Danish history for the pleasure of even more people Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment Axcel in 2001 Revenue 2002/2003: DKK 386m 2007: DKK 489m EBITDA 2004: DKK -87m 2007: DKK 63m Number of employees 2004: 507 2007: 575

Around the turn of the millennium outdated production and innumerable products were killing Royal Copenhagen. Major changes were needed if the illustrious crafts company, founded in 1775, was to pull through. New factories in the Copenhagen suburb of Glostrup and in Thailand were part of the solution. And active ownership with the private equity fund Axcel has been crucial.

In 2001 Axcel invested in Royal Scandinavia, which at the time was a conglomerate of mainly Nordic companies with strong brands in the categories of porcelain, silver, glass and ceramics. Royal Scandinavia consisted of the porcelain factory Royal Copenhagen, the Swedish glassworks Orrefors Kosta Boda, the Copenhagen department store Illums Bolighus, the Swedish ceramics company Boda Nova Höganäs, the Italian glassworks Venini, and a large number of properties.

Upon joining Royal Scandinavia’s ownership circle, Axcel’s team worked with the company’s management and the new board on reviewing the many units in the group. Nikolaj Vejlsgaard, partner in Axcel, explains the strategic considerations relating to the investment:

Strong brands but no synergies “It was clear to us that Royal Scandinavia was rich in assets but poor in earnings.

And there were no obvious synergies. Or at least they hadn’t been realised. At the same time, there were a number of strong brands that would have a much better chance of developing and blossoming in their respective markets if only they were given greater independence.”

Vejlsgaard explains that the desire was therefore to create profitability and added value for the individual brands, and that this should be achieved by: B Simplifying the business structure – and creating a clear division of responsibilities and greater financial transparency B Splitting the group into independent companies B Focusing on the biggest brands – Royal Copenhagen, Georg Jensen, Orrefors Kosta Boda, Illums Bolighus and Holmegaard B Divesting non-core activities and properties (Italian glass, ceramics etc.)

Royal Copenhagen an independent company again

“It was clear to us that Royal Scandinavia was rich in assets but poor in earnings.

And there were no obvious synergies.”

Nikolaj Vejlsgaard, partner, Axcel

At the end of 2001 Royal Copenhagen was once again made into an independent company, and a huge effort began to focus on costs and both further develop and renew the brand.

“Royal Copenhagen had cost-intensive, outdated production and innumerable products,” says Nikolaj Vejlsgaard. “These were two important issues that had to be addressed. First and foremost we wanted to carry out a review of the product range, where we eliminated those products that were selling too little. We also put a lot of effort into product development, at the same time aiming for a much more targeted marketing campaign in key markets. Royal Copenhagen’s products should be on gift lists all over the world.”

Development, but not at the expense of the brand “Before Axcel came along we were considering how we could renew production to reduce lead times,” says Peter Lund, CEO, Royal Copenhagen. “Our historic factory in Frederiksberg in Copenhagen was outdated with inefficient processes and very long lead times. It took a full 53 days for a product to pass through the

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production system. This was simply too expensive, and the company was illequipped for modern production. At the same time we didn’t dare just move a piece of Danish history from one day to the next. We might have risked wrecking the brand overnight.”

“We therefore decided to move all our administration and some of our production to our new factory in Glostrup in 2003, at the same time moving other production to a newly built factory in Thailand. This means that we still have a considerable part of our competences here with us in Denmark. This is the case, for example, with new developments, design, materials knowledge etc. At the same time, we have reduced the lead time to three to five days throughout our production,” says Peter Lund.

Asians crazy about Danish porcelain “Today 65% of our production is at our modern factory in Thailand. Here you can take a tour and see the craftwork being carried out as has always been possible at our original porcelain factory in Frederiksberg. And there is great interest in this because 35% of our revenue is now in Asia,” Peter Lund continues.

“We have introduced a number of very strong competences to the company through the board, which is a valuable sparring partner for the management.”

Peter Lund, CEO, Royal Copenhagen

Board has cutting-edge expertise When Royal Copenhagen became an independent company, a new board was appointed. Originally its members were from the executive management of Royal Scandinavia, but gradually it acquired more external members with relevant cutting-edge expertise and with sector and industry knowledge.

“Obviously we had to be very gentle with the brand,” says Nikolaj Vejlsgaard. “It was a huge responsibility to have part of the Danish national heritage in our hands, but the fact is that the company was threatened with closure and wasn’t making any money at all. So the time had come to introduce new competences, for example in relation to branding, logistics, financing and sales.”

The entire management, including CEO Peter Lund, were given the option through warrants to subscribe for shares corresponding to 8% of the capital in Royal Copenhagen.

Axcel owns 70% of Royal Copenhagen and is working with the management to change the illustrious old company from a strong production-oriented company into a far more market-oriented and market-driven company. More than a third of the revenue now comes from brand-new products launched within the last two years.

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V. Review of ten investments

Essential focusing gives a stronger TDC Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment NTC in 2005 Revenue 2004: DKK 34.7bn 2007: DKK 39.3bn EBITDA 2004: DKK 11.5bn 2007: DKK 12.5bn Number of employees 2004: 18,565 (TDC A/S)

2007: 17,390 (Nordic Telephone Company Holding ApS)

TDC is the most-discussed transaction in Denmark in recent times, and the interest has not diminished since the spectacular deal in 2005 when NTC, a syndicate owned by Permira, Blackstone, APAX, Providence and KKR, took over. Today a new management is in place at TDC, and the debt is quickly evaporating. The Danish government’s tax intervention was unexpected, but according to Kurt Björklund, NTC’s chairman and a board member of TDC, the developments in the company are positive.

From divisional structure to integrated solutions TDC plays a vital role for the Danish teleinfrastructure and is also a major company measured by number of employees and economic importance. Since the privatisation in 1994 TDC has been through a major change process as a result of which the traditional fixed-line business now constitutes an ever smaller proportion of revenue, while mobile telephony and broadband have grown prolifically. However, TDC is no longer a growth company. All major telecompanies in Europe are experiencing falling earnings due to increasing competition, and this has also put TDC under pressure.

“We were aware that TDC was a possible investment in 2004,” says Kurt Björklund. “We could see that a number of opportunistic investments had been made in different parts of Europe, but that in the long term it would not be possible to build up a strategic mass outside the Nordic region. We therefore saw TDC as an obvious focus case that would also present an opportunity to carry out operational improvements,” continues Kurt Björklund.

“Prior to NTC’s takeover TDC was organised into various divisions – fixed-line, broadband, mobile etc. This was reasonable enough at the time when the areas were being developed, but today many customers, specifically in the business area, lump all teleservices together, and this was difficult to deliver. It was therefore necessary to restructure TDC so that we could offer customers better integrated solutions. Furthermore, the costs were far too high in relation to other telecompanies in Europe, and there was an urgent need to do something about it,” says Kurt Björklund.

“I quickly discovered that, measured by most parameters, TDC had poor key figures compared to the best-run telecompanies in Europe.”

New management to focus the company In 2006 Henning Dyremose replaced Kurt Björklund as chairman of the board, which created a vacancy for a new CEO at TDC. In 2006 the replacement was found: Jens Alder in Switzerland. He had extensive international experience of the teleindustry and was regarded as the right person to take on the task of focusing and improving TDC’s operations.

Jens Alder, CEO, TDC

“I quickly discovered that, measured by most parameters, TDC had poor key figures compared to the best-run telecompanies in Europe,” says Jens Alder.

“However, while operations were far from good enough, there was an extremely sound cash flow, though the respite would be short-lived due to the decline in the fixed-net business and the increased competition, which every year would make a big inroad into our reserves if we let matters take their course. So it became clear to us that we needed to create an ‘internal crisis’ in the company if we were to succeed in time at making TDC a competitive telecompany. And it was necessary to do something radical if TDC was to be profitable in the longer term.”

“Our owners have been criticised, among other things, for taking TDC into far too much debt, but this is an unfair criticism,” says Jesper Ovesen, TDC’s CFO,

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who has a background with, among others, LEGO, Novo Nordisk and Danske Bank. “They simply came up with the capital structure that matched the company’s cash flow, and today you can see there are no problems at all with servicing the debt as we develop the company. We are making major investments in, among other things, IT systems, but it’s clear that the latest tax intervention has made it more difficult to achieve our targets. In 2007 alone the tax intervention cost around 7% of our profits.”

Good investment in spite of tax intervention Shortly after NTC took over TDC, the media, politicians and others began focusing on what the new owners wanted with the company. This was no great surprise given that at the time, in 2005, the TDC deal was one of the biggest private equity fund acquisitions in Europe, and who owns a company of TDC’s size and importance is definitely a matter of relevance to the Danish public.

“We can fully appreciate now that we should have been quicker in finding a Danish chairman of the board to front the company and that we should not have spent resources on the legal case against ATP,” says Kurt Björklund.

“But it wasn’t easy because with a deal of this size there are a lot of things to take into consideration and not much time to make decisions. Our Danish lawyers all advised us to push for squeeze-out, and at the time we thought it would be beneficial for us to avoid being listed. Today we have a sound cooperation with ATP and no longer regard it as a problem.

However, we are finding it difficult understanding the government’s restrictions on the right to deduct interest. This affects an investment that has been made on the basis of certain other assumptions, and hence applies retrospectively. In our opinion, it would have been good policy-making to apply the so-called grandfathering principle so that the intervention would only have affected later transactions. But that aside, we are very satisfied. We are sure that TDC is a good investment for NTC, and that TDC will continue to be a healthy and strong company in the future,” concludes Kurt Björklund.

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“We can fully appreciate now that we should have been quicker in finding a Danish chairman of the board to front the company and that we should not have spent resources on the legal case against ATP.” Kurt Björklund, chairman of the board, NTC

V. Review of ten investments

Private equity funds created Europe’s biggest door manufacturer Background

Data prior to takeover by the private equity fund and after the takeover (today)

Investment Axcel and Polaris in 2002 Exit in 2005 Revenue 2001: DKK 1.9bn 2005: DKK 3.7bn EBITDA 2001: DKK 311m 2005: DKK 447m Number of employees 2001: 2,398 2005: 4,300

In 2002 Vest-Wood, the Nordic manufacturer of inside and outside doors, gained a new investment and cooperation partner in the form of Axcel and Polaris. This helped move the company up into a whole new league, and now the company is part of the global door manufacturer Jeld-Wen. The company Vest-Wood had the craftsmanship, the experience, and an important position in the Nordic market for doors. The private equity funds Axcel and Polaris had the visions, the strategy, the inclination and the money.

Even before the acquisition Axcel and Polaris had devoted considerable resources to understanding Vest-Wood’s potential. “We spent a long time prior to the acquisition familiarising ourselves with Vest-Wood, not least in order to understand the internal possibilities for improvement – but also to map the acquisition possibilities in Europe,” says Per Christensen, partner in Axcel.

Great potential for growth “From the very outset Vest-Wood was an interesting business case for Axcel and Polaris. We could see a number of expansion opportunities in a highly fragmented market with numerous smaller players. And Vest-Wood was facing a necessary generational change that should ensure the future growth,” says partner Viggo Nedergaard Jensen from Polaris, which together with Axcel was responsible for the ownership and development of Vest-Wood from 2002 to 2005.

Fresh working capital was needed. The stock exchange was at a standstill, and the board did not want to gamble on more acquisitions. Vest-Wood could not therefore make essential investments. This was a problem because they had shown that they were good at integrating the companies they had already acquired and achieving good synergies. On the operating side, it was problematic that the company had traditionally worked with large inventories of both raw materials and finished products. This tied up unnecessary resources that could have been used to develop the company.

“We saw a company with good prospects for growth and increased profitability, but where the management needed a shot in the arm to move on.”

Lacking a team that could take the pressure off the management “We saw a company with good prospects for growth and increased profitability, but where the management needed a shot in the arm to move on,” explains partner Per Christensen from Axcel. “We decided to delist Vest-Wood from the Copenhagen Stock Exchange and then launched a 100-day programme in which we mapped the areas that could raise the value of the company significantly.”

Per Christensen, partner, Axcel

Three main goals were set: B Greater organic growth – partly by developing the sales side B Reduced production costs – partly by looking at whether the production had to be located in the Nordic region, where wages are high B Acquisitions to secure Vest-Wood a leading position in the European market Vest-Wood’s future strategy was formulated with these three goals in mind. This was done collaboratively by a new industrial board, the company’s management, Axcel’s and Polaris’ internal people, and a range of consultants.

Getting the necessary working calm “We would undoubtedly have taken a battering on the stock exchange if we had announced in a half-year statement that we had spent a lot of money on analysis

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and strategy work to set the company’s future course,” says Asbjørn Berge, who was the group CEO when Vest-Wood was listed. “It was therefore a welcome and important process that Axcel and Polaris took us through when they invested in Vest-Wood – in terms of both competences and capital. We gained working calm from being delisted, and the private equity funds’ systematic and thorough process showed us a strategic direction that we had not seen ourselves.”

Irritatingly pedantic “The process has been instructive. Axcel and Polaris were irritatingly pedantic with their close follow-up, but it has produced results,” says Asbjørn Berge. “It forced us to ensure consistency between the plans that we made and the results that we achieved. Once we had done our homework, they were willing to make the necessary investments. And last but not least, the incentive schemes that the management group were offered were a positive driving force. We all had a common interest in the project succeeding.”

Asbjørn Berge was the CEO under Axcel's and Polaris’ ownership and continued in the position until November 2005, when Vest-Wood was sold to the US company Jeld-Wen, one of the world’s leading manufacturers of doors and windows – and also the management’s preferred buyer. Asbjørn Berge is now CEO of Berge Invest.

According to Asbjørn Berge, the results were as follows: B Several years’ negative organic growth was turned into positive organic growth in just one year B Production costs were reduced considerably as a result of a well-considered and well-implemented relocation of selected production tasks from the Nordic region to Estonia B Two important acquisitions were made: the German building materials company Pfleiderer, and Austria’s largest door manufacturer, Dana Türenindustrie.

This led to a crucial consolidation through which Vest-Wood clearly became the largest European door manufacturer In response to questions concerning whether moving production was problematic and the employees’ response, Asbjørn Berge explains: “The mood in the company had already been such for a number of years that the employees knew full well that the next logical step would be to move parts of the wage-intensive production. At the same time, it would be the only correct course of action in order to ensure the company’s long-term competitiveness. Through Axcel and Polaris we acquired a board that could focus on the company and think in a market-oriented way. And this meant that we could concentrate on product development and the needs of the market.”

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“Vest-Wood would not have developed into Europe’s largest door manufacturer without the active ownership of Axcel and Polaris.”

Asbjørn Berge, former CEO, Vest-Wood

“A private equity fund brings more than just capital in the event of an owner-generational change in a company: access to a broad, industrial board network, short decision-making processes, daily sparring on operations and company acquisitions, and access for the previous owner to co-investment. The business plan raises the ambitions of the company – based on experience and cooperation.”

Viggo Nedergaard Jensen, partner, Polaris Private Equity

Viggo Nedergaard Jensen has been a partner in Polaris Private Equity since its establishment in 1998.

Previously he worked as an investment banker with Nordea and ABN Amro Alfred Berg (1986–98) and for the Danish Ministry of External Affairs and the World Bank (1974–86).

Viggo Nedergaard Jensen has a master’s degree in political science from the University of Aarhus, Denmark.

VI.

Private equity funds can make mistakes too Background

Robert Spliid is an MSc (Political Science and Economics) and has worked for various European banks trading and advising on securities and financial derivatives since 1982. This has taken him from Denmark to Switzerland, Portugal, Germany and Luxembourg. Robert Spliid is the author of the book Private equity funds – Rå pengemagt eller aktivt ownership [“Private equity funds – asset strippers or active owners”], and since 2000 he has been a regular commentator for the Danish daily business newspaper Dagbladet Børsen, where each week he provides cutting insight into developments in the financial markets. Currently Robert Spliid is responsible for Saxo Bank’s German activities.

Introduction

Denmark’s first industrial development company comes into being in 1967 when the Danish bank Privatbanken and the Swedish bank SEB join forces to establish Incentive. The purpose of the company is to further develop small companies according to the Swedish model with a view to subsequent stock exchange listing.

Right up to the end of the 1980s Incentive is the most serious attempt at creating a Danish platform for the development of small companies.

Unfortunately, Incentive completely fails in its objective, and in 2004 the activities are discontinued after 37 years. The Incentive fiasco is due to the fact that the company gradually develops into a conglomerate of companies with no mutual synergies and no exit strategies. No milestones are set for the individual company to achieve in the further development phase, and the management is not motivated by being involved in the ownership circle. Furthermore, nothing is done to optimise the financing structure through leverage as we see in modern private equity funds.

All the same, Incentive marks the start of a brand-new concept; it is recognised that all companies go through different periods of life and that it is not necessarily optimal to have the same ownership in all these periods. And the development companies have a mission to carry out in those periods of the company’s life when there is a need for major changes to take the company forward.

However, it is only with the arrival of private equity funds in Denmark at the start of the 1990s that a broad understanding of time-limited company ownership evolves. The new players bring not just a new financing concept, but also a considerable amount of industrial know-how. Above all, however, they develop a branched network that allows them to seek out potential development candidates and to find the right place to put them when the objective has been achieved.

It is primarily the Nordic private equity funds that are active in Denmark, and they take their starting point in existing network structures. Many of the transactions carried out in the 1990s involve the acquisition of affiliates by conglomerates. As new focused owners, the private equity funds succeed in further developing the portfolio companies to either stand on their own feet or take their place in a more meaningful industrial context.

The private equity funds demonstrate their competences on the financial side in particular, but new players are involved in the industrial area too. Quick improvements in cash flow are made by reducing inventories and changing payment terms. The suppliers’ payment deadlines are put back, while the customers’ are tightened. Production is concentrated at fewer factories or relocated to countries with lower costs. The logistics is streamlined to shorten lead times, and the need for warehousing is minimised.

The goal of the private equity funds is nearly always to increase the acquired company’s growth, either by expanding the sales area or by adding new products

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to the range. This often requires investment in new distribution structures or the acquisition of new companies. The aim is to move the company up into a league that makes it appealing to an even bigger company, makes it ripe for introduction on the stock market, or at least ensures benefits on the purchasing side.

The private equity funds mainly enjoy success with industrial companies with a low level of technology. Here the improvement potential is generally linked to industry-independent balance sheet optimisation, and this minimises the risk of wrong decisions. By contrast, the funds fare less well with companies that are active in markets undergoing rapid change.

The gearing of the acquired companies is only possible because the private equity funds exercise extremely tight control over the liquidity of the portfolio companies. But this also means that significantly lower cash flow than budgeted for can put the financing into such difficulty that the mission fails. So the more unpredictable the future cash flow, the more likely that the private equity funds will come a cropper.

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There can be many reasons why cash flow fails to develop as anticipated. The market conditions are obviously crucial, but company-specific factors also play a part. At any rate, if we scrutinise almost 30 years of private equity funds in Denmark, we can adduce four company-specific factors: 1. Fundamental change in the sales markets 2. Unforeseen technological changes 3. Inability to generate new products or synergies 4. Weak governance

Fundamental change in the sales markets

The private equity funds have occasionally found it difficult spotting changes in the sales markets. This has affected investments such as Osteometer, Fona, EET Nordic, ILVA and Løgstør Rør, to name just a few. In the first four cases the owners failed to turn things around and the companies had to be divested at a considerable loss. In the last case they succeeded, but not before the company came near to bankruptcy. Løgstør Rør is discussed earlier in this report, but what went wrong with the other four acquisitions?

Osteometer

In 1996 the UK private equity fund Doughty Hanson buys Osteometer Meditech, which has developed a scanner for measuring osteoporosis. In 1995 the company has 15% of the world market, turns over DKK 100m, and has post-tax profits of DKK 28m. But the new owner visualises a growing market share and a fivefold increase in revenue by 1998, when Osteometer will be ripe for listing on the Nasdaq stock exchange.

Shortly after the takeover, intensive focus is directed at the Japanese market, which is way ahead in the treatment of osteoporosis. But completely unexpectedly the Japanese government stops subsidising the treatment. And where there is no treatment, there is no need for diagnosis. During the 1996/97 financial year the company’s losses are so great that shareholders' equity evaporates and the shareholders must now stump up a further DKK 25m in equity. At the same time, the strategy is amended to focus on the large US market. The listing is provisionally postponed until 2000.

However, the US market offers no success either. During Doughty Hanson’s twoyear ownership Osteometer loses DKK 60m, and it is now acknowledged that the company cannot grow by its own efforts. In September 1998 Osteometer is sold to the US medical company OSI. The private equity fund’s investment is lost, and Danske Bank, as the financing bank, also has to write off a large sum.

Fona

Fona is taken over by Industri Kapital in 1997. From the outset the objective is to create a Nordic giant within the retail trade in televisions and radios. In just a few years Fona’s revenue should grow from DKK 1.5bn to DKK 5bn, which is regarded as the critical amount for achieving a strong negotiating position with the suppliers.

However, at the end of the 1990s the method of selling televisions and radios enters a significant change process of which the private equity fund is oblivious. In line with technological developments there is a sharp drop in the prices of entertainment electronics. And whereas previously televisions and radios were sold as furniture – matched to the living room after great deliberation by the whole family – electronic products are now sold as staple goods with an anticipated short service life. Customers no longer demand detailed advice, but expect to find the product on the shelves at the right price if they happen to drop in on a Tuesday afternoon.

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VI. Private equity funds can make mistakes too

By contrast, the competitor Elgiganten, which is owned by the Norwegian company Elkjøp, has been monitoring the market changes. The Norwegians set up one huge business after another using the concept of an extensive product range, low prices and minimal advice. Consequently, by the end of the 1990s the Danish television and radio market is characterised by stiff competition in which the customer can negotiate considerable discounts.

Fona fails to make the necessary adjustments and continues expanding according to the old model involving detailed advising of the customer. Fona’s establishment of Electric City using the same concept as Elgiganten is certainly a step in the right direction, but the discount chain accounts for an all too small proportion of Fona’s total revenue.

The attempt to expand the product range with computers and mobile phones also fails. If individuals aren’t getting their computers given to them by an employer, they are buying them on the Internet directly from the manufacturer.

And just a year after Fona enters the market as a teleservice provider, the company has to concede that the critical mass is not within reach. The teleactivities therefore have to be sold to TDC. In 2001 the company’s equity is negative to the tune of DKK 95m and the capital base has to be increased by a further DKK 210m. Fona is a long way from its revenue target of DKK 5bn, and in fact revenue has been falling steadily since the takeover in 1997. At the same time, the chain has not been able to deliver a profit, and the private equity fund now sees only one way out: a merger with its competitor Fredgaard. The merger negotiations do not take place from a position of strength, and the private equity fund sees its ownership of the joint company fall to 40%. Only in 2005 does the new company show a modest profit, and in 2006 the private equity fund sells its ownership to the UK company Dixon International, Elgiganten/Elkjøp’s owner.

EET Nordic

The market changes also affect the IT distributor EET Nordic, which CVC takes over in 1997. On the threshold of the Internet boom it is assumed that there is a lot of money to be made in the distribution of IT equipment, so the course is set for expansion. CVC buys another distributor, taking EET Nordic’s revenue above the DKK 1bn mark. A Nordic heavyweight within IT distribution is created.

But in 2001 the IT bubble bursts, as does the market for IT equipment. Revenue and earnings nosedive, and at the end of 2001 ETT Nordic has negative equity of DKK 200m. However, CVC sticks to its investment and in 2007 manages to sell the company after ten long years in the portfolio.

Aston IT

The prominence and fall of Aston IT can probably be linked to the technological changes that are taking place around the turn of the millennium, but the main reason for the company’s problems has to be sought in market changes that the company’s management and owners fail to foresee.

In 1998 CVC turns to the IT entrepreneur Peter Warnøe, who is tasked with bringing together large sections of the fragmented Danish IT industry into one effective company. In a short time he succeeds in merging seven companies with 300 employees into the new company. But this is just the start. In the next thousand days Aston is to move up to earnings of DKK 200m and employ 800 to 1,000 employees, who together will sell consultancy services worth DKK 1bn. The plan is to introduce the company on the stock exchange in 2002.

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Initially the core competence is the implementation of ERP systems, but in June 2000 it is decided to extend the focus area to developments on the Internet, not least within e-commerce. The booming market causes the management to crank up expectations even further, and the goal is now a company with 2,000 employees that will be listed as early as 2001. Three months later there is even talk of a long-term goal of 4,000 to 5,000 employees.

But almost immediately Aston begins to feel the effects of declining IT markets, and the year ends with a loss of DKK 248m. Nevertheless, the management decides to move the company to a brand-new, 12,000-square-metre head office at Teglholmen in Copenhagen.

Revenue continues to plummet in 2001, and the cash flow is now very negative.

By April 2001 it is clear that the equity has been lost and that restructuring is needed. Debt reaches DKK 1.1bn, and a restructured company under the name of Aston Business Solution ends up in Nordea’s ownership. In August 2004 the bank manages to sell the greatly decimated IT company to the US company Tectura.

In the first instance these events cause Nordea to sharpen up its policy on foreign private equity funds. The bank duly declares that it does not wish to give loans to private equity funds that are not Nordic-based.

Unforeseen technological changes

It can be difficult to distinguish unforeseen technological changes from general governance problems because maybe the changes could have been foreseen after all. In any case, the teleproducer Partner Electric and the recycling company RGS 90 fail because their respective technologies prove to be uncompetitive.

Partner Electric

In 1999 Partner Electric in the southern Jutland town of Vojens is something of a successful business. The company produces advanced telephone switching systems, and one of the popular products is the “least cost router”, which automatically finds the cheapest operator for a given call. 96% of production goes abroad, and in 1998 the growth company is able to show post-tax profits of DKK 58m from revenue of DKK 185m.

In 1999 the company is taken over by the UK private equity fund Bridgepoint.

The stated goal for the year is revenue of DKK 250m, and in the following three years the DKK 0.5bn mark is to be reached. The company will then be ready for introduction on the booming Neuer Market stock exchange in Frankfurt.

No one has any doubt about the company’s promising growth prospects. In September 1999 Partner Electric is awarded Børsen’s Gazelle Prize for South Jutland, in the following month it gets the Confederation of Danish Industry’s Initiative Prize for South Jutland, and in January 2000 it receives the equivalent prize for the whole of Denmark. But from now on things go steadily downhill as the market is swamped by competitors with superior technologies.

The company attempts to stave off the competition by investing in switching systems for IP telephony but is unable to prevent a freefall in revenue and earnings.

And Bridgepoint is not minded to invest more capital in the company. Before 2001 is out, Partner Electric has gone bankrupt with debts of more than DKK 500m.

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VI. Private equity funds can make mistakes too

RGS 90

In 2002 the Finnish private equity fund CapMan sees great prospects in Danish environmental investments. The private equity fund buys a 42% interest in RGS 90, which specialises in recycling building and construction waste. The private equity fund’s paid-up capital is to be used to build two recycling plants. The first plant will convert contaminated sludge into carbogrit for use in sandblasting, while the second plant will process environmentally hazardous PVC.

Inability to generate new products/synergies

The PVC plant soon faces two big problems. It can only process totally pure PVC, which is rarely the case with PVC waste (and in the meantime it has also become possible to send PVC for treatment in the Far East for next to nothing). And at the same time the sludge-processing plant has serious commissioning problems, which causes major delays in the production and sale of carbogrit. In 2005 the value of the plants has to be written down by half, and the bottom line for 2005 is a negative DKK 450m. In 2006 the company is sold to DSV Miljø.

Often the core element in the development strategy of private equity funds is to bring several companies together within related areas in order to create synergies. In other instances they buy companies with earnings-generating production within an area that is being phased out. The challenge is then to develop new products to replace the product that is being phased out.

But the strategy certainly doesn’t work every time. Nycomed, which is owned by Nordic Capital, is in the process of finding a successor to the company’s only blockbuster, Pantoprazole, and it is too early to assess whether it will succeed.

Time Systems, though, definitely failed to find a successor to its paper calendar.

Time Systems

When CVC buys the calendar company Time Systems in 1997, the business has good cash flow for the price. However, it is clear to CVC that the paper calendar is on the way out in favour of electronic calendars, so-called personal digital assistants (PDAs).

Time Systems therefore begins developing tele-interfaces for the two large electronic calendar systems, Outlook and Lotus Notes. The problem is that the mobile Internet is still based on the slow WAP technology. When Palm introduces its first PDA, the game is up and Time Systems is finally ousted from the market for electronic calendars. This leads the company to attempt a facelift on the paper calendar in 2003, but without success. In the same year Time Systems is declared bankrupt with negative equity of DKK 411m.

Sonion

In 1999 the two private equity funds Nordic Capital and Polaris join forces to buy Microtronic, which manufactures components for hearing aids. The sound in the hearing aids is of high quality, and the two private equity funds anticipate that users of mobile phones will demand the same high quality in future. And there is a much bigger market for mobile phones than for hearing aids.

However, Microtronic has neither experience of producing for the mass market nor access to the mobile phone manufacturers. The solution is therefore to buy Kirk Acoustics, which is the leader in the manufacture of microspeakers, and the goal is to create synergies between the two companies with a view to a listing within a few years. The two companies are later amalgamated into the company Sonion.

The acquisition of Kirk takes place at a time when the company’s only customers, Ericsson and Nokia, are enjoying considerable growth. But in 2001 sales

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of mobile phones plummet and Ericsson decides to outsource its production to Flextronic. Consequently, Kirk loses its biggest customer, which accounts for 70% of its revenue.

The private equity funds now choose to focus more on research and moving to low-wage countries, but this requires the injection of a further DKK 100m in equity. They start up production in China, but in 2006 it becomes necessary to move a large part of the production to the even cheaper Vietnam.

However, they never succeed in creating the synergy between hearing aids and mobile phones that the private equity funds had originally counted on. When Sonion is sold to the US electronics company Technitrol in 2008, it is primarily the hearing aids that the Americans are interested in.

Weak governance

It is important for private equity funds that the management has the same interests as the shareholders, and this is ensured most easily by involving them in the ownership. But common interest is not in itself a guarantee of success. It may well be that the management simply lacks the competences needed to further develop the company. This can be due either to a lack of market knowledge or a lack of understanding of the company’s financial drivers.

Fona

Although Fona’s problems in the first instance are due to the change in the method of selling televisions and radios, many of the problems could probably have been avoided with more focused governance. Long after the market has begun to decline, the management continues to open new shops in the hope of winning market shares. The decision to change the accounting system in a period of major market changes also proves fatal when the implementation process goes wrong, leaving Fona without basic information on developments in sales and earnings.

For four years the board accepts a weak management, which is only replaced when it is too late to straighten out the company.

Superfos

The listed company Superfos is taken over in 1999 by the US industrial company Ashland, although Ashland is only interested in the company’s road division.

The rest is sold on to the private equity fund Industri Kapital, which mainly wants to further develop the packaging activities. The goal is to reintroduce Superfos on the stock market as a strong packaging company within five to six years.

In the first instance former CFO Per Møller is put at the helm and tasked with divesting marginal activities and cutting costs. He is replaced in 2001 by Kim Andersen, who previously managed the food packaging division. As an industry man he is deemed to be more competent to further develop the company.

In 2002 the competitor Jotipac is acquired, and at the same time Superfos changes to a function-based organisation across its factories. Three factories are closed, while new capacity is established at the other factories. But things don’t go entirely smoothly. There are delays in the delivery of new production equipment, and this results in considerable back order problems. The production has to be partly outsourced at increased cost for both production and transport. At the same time, the IT systems are not geared to the merger, and this results in a significant increase in faulty deliveries.

However, misfortunes seldom come alone. Immediately prior to the sale to Superfos, a number of employees at Jotipac’s affiliate have left the company to

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set up the competitor Mipac. From the outset the new company works with a high degree of automation and low costs. The result is that in subsequent years Superfos loses a whole host of customers to its Swedish competitor.

In 2004 there is gradually more control over capacities, but there is no organic growth, while earnings in several markets are directly declining. The company is now facing a new challenge: rising raw material prices, which can only be passed on to the customers to a limited extent. In March 2005 major changes are made in the board, and in autumn of the same year Kim Andersen is fired. He is later replaced by the Swede Hans Petersson, who is given responsibility for putting the company back on the growth track. The company is still in Industri Kapital’s portfolio and not ready for sale.

ILVA

The four years that ILVA spends in private equity fund ownership are also marked by weak governance with a lack of expertise in risk management. In 2003 the Danish furniture chain is bought by the UK private equity fund Advent. The goal is to develop the company into an international furniture house modelled on the successful IKEA. Briton Martin Toogood, who brings experience from the UK furniture house Habitat, is given the task of implementing the strategy.

Malmö in Sweden is the first target for a business outside Denmark. The proximity to ILVA’s other businesses in Denmark makes it easy to handle the logistics, thereby ensuring success in advance. But Toogood has ambitions to grow in the UK market, which he knows like the back of his hand. In a short period of time he opens three new furniture houses in England, not sparing the costs, but it soon emerges that revenue is far below expectations. Even the sound cash flow from the Danish businesses is not able to compensate for the big losses on the other side of the North Sea. The UK has received heavy investment, but Advent now has to concede that the investment cannot be salvaged. The private equity fund therefore refuses to inject more equity, and in 2007 Kaupthing (as the loan-financing bank) takes over ILVA. The company is subsequently sold on to the Icelandic furniture group Rúmfatalagerinn.

The examples show that private equity funds are far from being successful on every occasion. Each investment constitutes a risk (albeit calculated) and success is not guaranteed in advance. Although mistakes can be learnt from, this doesn’t mean that future mistakes can be avoided altogether. There will always be risks associated with buying a company regardless of whether the buyer is a private equity fund or an industrial investor.

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Interviews:

Views on private equity funds and DVCAâ&#x20AC;&#x2122;s guidelines

Background

In order to ensure that the guidelines satisfy a broad cross-section of the interest groups that can be said to have relevance for private equity funds, DVCA has drawn on the services of an external reference group comprising: Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO) Jan Schans Christensen, professor of corporate law, University of Copenhagen Jørgen Mads Clausen, chief executive officer, Danfoss Bjarne Graven Larsen, chief investment officer, ATP Peter Schütze, head of retail banking, Nordea Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF) The reference group has followed the debate on openness in private equity funds and gathered opinions and experiences from its respective networks.

DVCA has held individual meetings with all the members, and by way of conclusion convened a general meeting to discuss the guidelines in their entirety. The views of the reference group members on the guidelines are evident from interviews reproduced in this chapter. However, it must be stressed that the responsibility for the guidelines rests solely with DVCA. In connection with the drawing up of the guidelines, DVCA interviewed all the members of the external reference group, which has monitored the work. These interviews express the views of the members on the guidelines and on the work of private equity funds in general. Please note, however, that in this report the views of the Danish Confederation of Trade Unions (LO) are represented by its president, Harald Børsting.

The views of the reference group members are supplemented with those of partner Niels Peder Nielsen, Bain & Company, and of Mads Øvlisen, Novo Nordisk’s former CEO.

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VII. Interview: Harald Børsting, president, Danish Confederation of Trade Unions (LO)

The guidelines are a reasonable first step Background

Harald Børsting has been active in the trade union movement since 1974, when he first became a shop steward at the Priess & Co. fish factory in Glyngøre. In 1980 he became the section president of the General Workers’ Union (SiD) in Nordsalling, and in 1989 he became the education adviser of SiD. In 1995 he was elected Confederal LO Secretary and member of LO’s Executive Board. Harald Børsting has devoted himself to labour market issues since the 1980s, and since 1995 he has played a vital role in negotiations on labour market reforms under successive governments. At LO’s congress in 2007 Harald Børsting was elected to succeed Hans Jensen as President.

What is your view of private equity funds?

There are both good and bad private equity funds. The good ones contribute to increased growth and employment through the development of companies and jobs, while the bad ones probably achieve most of their returns by paying less tax.

Seen through wage-earners’ eyes, it is vital that private equity funds respect and contribute positively to the Danish model. As owners, private equity funds should attach prime importance to cooperation and negotiation with shop stewards and employees at the individual workplaces. This is also part of DVCA’s guidelines. I hope that all private equity funds will also work for this in practice regardless of whether they are Danish or foreign.

What do you think of DVCA’s guidelines?

Wage-earners, pension savers and the public generally need greater insight into how private equity funds work. There is no doubt that at the moment private equity funds are too closed. So it is good that DVCA has taken this initiative.

I see the guidelines as a reasonable first step that the industry has taken to make its members more open to the outside world. In particular I am pleased that the guidelines emphasise cooperation with employees and social responsibility in investments. It is also satisfying that all private equity portfolio companies will now be reporting on developments in employment etc. as part of the management review in their annual reports.

However, the guidelines could easily have gone further in terms of openness. For example, the funds should continuously report on their returns to a greater extent because this is relevant for pension savers who have put money into the funds through pension institutions. I hope that DVCA will look at this issue in the coming years.

What is the future for private equity funds?

There are numerous media prophecies concerning the future of private equity funds. I’ll refrain from making specific predictions myself. However, I will say that private equity funds are in no way a new phenomenon, but something that we have seen for a number of years now. What is new is that the industry has grown and begun to act differently. In LO we need to establish our own view of the matter, and we have decided to carry out our own review of this area. I anticipate that this will be finished by the end of the year.

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VII. Interview: Jan Schans Christensen, professor of corporate law, University of Copenhagen

Voluntary guidelines are usually the way forward Background

Jan Schans Christensen is a professor of corporate law at the University of Copenhagen. He has worked in the legal sector for a number of years and been a member of the High Level Group of Company Law Experts appointed by the EU Commission. He has also been a sparring partner for the Nørby Committee.

Why is self-regulation a good idea?

Self-regulation isn’t always a good idea, but it has to be said that in many cases it can actually make regulation unnecessary. If the concerns or criticisms that are raised in, for example, public debate can be addressed by the industry itself, there will often be no reason to legislate in the area. I don’t think we should restrict the opportunity for companies to manage their affairs as they see fit unless there really is a need to do so. Self-regulation is based on the expectation that at least the majority of players will follow the guidelines that the industry agrees on. This can often be done if the players themselves agree on the need for self-regulation and have helped to shape, and hence influence, the content of the self-regulation. Many players will do a lot to act in accordance with the adopted self-regulation. On the other hand, there will need to be a certain amount of latitude and voluntariness since the players are not the same and may well have wishes and needs that make departure from the rules reasonable and justified.

Is it possible to make special legislation for private equity funds?

I guess it’s always possible to implement legislation aimed at a certain type of company or an industry. But having such legislation can be more or less appropriate or reasonable. In order to be able to decide whether on the whole there should be legislation, you must first ask what the problem or challenge is. Then you need to look at whether it’s necessary to legislate or whether the desired outcome can be achieved in another way, for example through self-regulation. If the latter isn’t possible, for example because the players aren’t satisfactorily following the rules that the self-regulation lays down, legislation can be an option.

However, one issue that must always be taken into consideration when legislating but which can’t always be resolved in practice, is the extent to which the legislation has “side effects” or inappropriate consequences. The price of legislation has in some cases proven to be that companies or activities are affected that weren’t actually causing any problems.

What is your view of the typical governance model of private equity funds?

It is characteristic of private equity funds that the owner plays a very active role in the company, and this means that the board often has a different role to, for example, the board of a listed company. In this way the board’s role is similar to what you see in limited companies where the shares are controlled by, say, the founder or a fund. The close contact between owner and board has the advantage, on the one hand, that the owner can easily ensure that the board, and hence the executive management, acts in accordance with the owner’s wishes.

This is crucial from the point of view of value creation. Conversely, the structure places major requirements on the owner’s ability to manage his or her influence in such a way as to maintain the separation between owner and management.

The management doesn’t just look after the owner’s interests, and the owner obviously has to respect this.

Another issue is that you often see the boards of private equity portfolio companies gaining new competences because lots of private equity funds have an extensive industrial network to draw on. The professionalisation of the board work that this implies is positive.

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“The boards of private equity portfolio companies are gaining new competences because lots of private equity funds have an extensive industrial network to draw on. The professionalisation of the board work that this implies is positive.”

What do you think of DVCA’s guidelines for private equity funds?

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You can always discuss how far self-regulation should go. As I see it, the guidelines reflect the trend we are seeing internationally applied to a Danish context.

In my opinion it is reasonable to work with the “comply or explain” principle, and it is also appropriate that the limit for which companies are covered by the guidelines is reporting class C. The experiences that will now be gained will show whether the guidelines are serving their purpose. And in this regard it is important that there is ongoing evaluation and adjustment of the guidelines so that they continue to be current.

Danish Venture Capital and Private Equity Association

VII. Interview: Jørgen Mads Clausen, CEO, Danfoss

Criticism of private equity funds has been far too severe Background

Jørgen Mads Clausen was a member of the board of Struers for four years when EQT owned the company. He holds a number of honorary positions, including chairman of the executive committee of the Danish National Advanced Technology Foundation.

What is your view of private equity funds?

I think the criticism of private equity funds has been far too severe, and I’m speaking from personal experience. I was on the board of Struers [Struers develops, manufactures and distributes materialographic solutions] when EQT owned the company, and I can say without hesitation that all the decisions that were taken by the board would have been taken in the same way if it had been the board of Danfoss. By way of example, during EQT’s ownership some important investments were made in a new IT system that the previous owner had put off. Furthermore, all the employees were given a bonus of half their monthly salary when the company celebrated its 125th anniversary. That’s not exactly the impression you get of private equity funds if you read the newspapers today.

How can private equity funds make a difference?

The problem is that in some cases there isn’t sufficient support for the management from the owner. It takes competent capital to develop a company, and you don’t get that without owner focus. Here private equity funds are often highly dedicated because for them ownership is a project in itself. Private equity funds can take the necessary decisions on restructuring and offshoring that former owners may for various reasons find difficult to implement. In the long term this creates stronger business.

Generally speaking private equity funds can also help tackle the big challenge of the many generational changes in Danish business. If the next generation cannot or doesn’t want to take over operations, a private equity fund can take the company on to the next level and ensure a smooth transition between owner governance and a more long-term governance model that is not quite so persondependent. It’s beneficial for competition that it isn’t always a competitor that takes over a company when the founder retires.

How can private equity funds improve?

I’m sure there’s just as big a difference between private equity funds as between other companies. But it’s clear that the new guidelines will probably make a difference when it comes to openness and dialogue. I’m certain that we’ll never see the TDC story repeated. It’s important that you say who you are and what your long-term plans for the company are. You owe that to the employees and the surrounding community.

What do you think of private equity funds and tax?

All companies regard tax as a cost. Danfoss is no exception, and in this regard you have to remember that a company’s tax payments depend on a number of things such as how much you invest and where your main activities are located.

There are therefore a number of countries where Danfoss pays more tax than in Denmark because we are an international company.

It’s clear that you have to observe the law, but I believe that companies provide the greatest benefit by creating lots of good jobs in Denmark, not by overfocusing on corporation tax yield, which is hardly the most important thing in the overall accounts. Having said that, I presume that all private equity portfolio companies are paying their taxes as they ought to.

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VII. Interview: Bjarne Graven Larsen, chief investment officer, ATP

Good that private equity funds are opening up Background

Bjarne Graven Larsen is the chief investment officer at ATP, where he is responsible for ATP’s investments, including ATP’s commitment to private equity. ATP has around DKK 14bn placed in private equity out of a total sum under management of around DKK 400bn.

What do you think of DVCA’s guidelines for private equity funds?

At ATP we’re very satisfied that DVCA has drawn up these guidelines. They are a thorough piece of work, and we’re pleased that they’ve chosen the “comply or explain” principle because this compels the funds to relate to all sections of the guidelines. We would like to have seen an even greater degree of openness, including with regard to the individual funds’ returns, but on the other hand we must also give the guidelines a chance and then see where they’ve taken us when they come to be revised at some point.

Why do you invest in private equity funds?

If we didn’t invest in private equity funds, we would cut ourselves off from half the world’s investment opportunities because the value of these non-listed companies is as high as the value of listed companies. But it’s important to bear in mind that there are both good and bad private equity funds.

It’s a matter of putting together your investments in the best possible way. That’s why a large number of investors – especially institutional investors – have decided to increase their investments in unlisted shares quite considerably in recent years, and there is no reason to believe that this trend will change.

So the question is whether you can imagine the institutional investors being able to invest in unlisted shares themselves. The answer is that very few are big enough and competent enough to do so, and if private equity funds are offering a product where you get professional handling of your investment, the best solution for pension savers is for us to have a division of labour where we sit on the sidelines while the private equity funds take care of handling the companies.

In many cases things are going well because the buying private equity fund has focused the companies and introduced growth strategies that the stock market didn’t believe in. This has been the case at, for example, Vest-Wood, Danske Trælast and Falck. These companies have done better than the stock market expected. And the same is true of a number of other companies.

Have private equity funds been too closed?

Yes! The term “private” is very apt. But private equity funds could benefit by opening up a little more in terms of information. It isn’t in the interests of the private equity funds, the companies or the investors for this closed nature to be perceived, albeit unfairly, as having something to hide.

However, you have to remember that there must be especially stringent requirements for listed companies. This is tied in with the fact that a listing is something very special where you have to appeal to everyone to create interest in putting money into the company’s shares. The information that the company gives to the market must therefore be sufficient for investors to decide to invest in the company. The same does not apply for non-listed companies, which often only appeal to a few professional investors that have completely different prerequisites.

The requirements that apply with regard to publication of, for example, annual financial statements and articles of association are the same for listed and nonlisted companies. Having said that, it is our belief that the private equity funds’ lack of openness in a number of situations – especially in connection with the acquisition of listed companies – has damaged private equity funds.

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“If we didn’t invest in private equity funds, we would cut ourselves off from half the world’s investment opportunities because the value of these non-listed companies is just as high as the value of listed companies.”

It is worth noting that Danish private equity funds have been relatively open, which could perhaps serve as an inspiration for foreign private equity funds. As investors we can also help to demystify the subject by reporting on our ownership of private equity funds. This is a development that should gain momentum in the coming years.

What does it take for you to drop an investment?

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ATP will certainly consider dropping an investment if it doesn’t meet our requirements. For example, we chose to drop investments in the US supermarket chain Wal-Mart because it doesn’t observe ILO conventions, and we are now out of companies that manufacture cluster bombs. In other instances we have opted to stay in order to influence the companies from within, but this is far from the easiest solution.

Danish Venture Capital and Private Equity Association

VII. Interview: Peter Schütze, head of retail banking, Nordea, and chairman of the Danish Bankers Association

Private equity funds must explain how they create value Background

Peter Schütze has a master’s degree in political science and economics and began his career with Privatbanken, which is now part of Nordea. As well as his positions with Nordea Bank Denmark as head of retail banking and member of the group executive management, he is chairman of the Danish Bankers Association and has been chairman of Danish Ship Finance for a number of years.

What is your view of private equity funds?

Private equity funds are far from being a new phenomenon, but in my opinion they take the practical elements from the old conglomerate mindset and link them with a modern and efficient financing approach where the funds get the best out of the capital they have available.

The crucial difference between a traditional conglomerate and a private equity fund is the way in which the ownership is organised and financed. The model can seem more aggressive, and this may have been significant in how the public perceives private equity funds today.

However, from a bank’s perspective there are a lot of good things to be said about private equity funds. First and foremost they are an important supplement to the more traditional forms of ownership – personal ownership, the cooperative society, fund-owned and listing. Also, we know – in the same way as with personally owned companies – who the owners are. This is very important when new capital needs to be introduced because normally we have a fixed set of rules for when we expect owners to intervene in such a situation. The opposite of this is listed companies, where it can be difficult to get the owners together when there is a need for fresh capital in a crisis situation.

How do you think private equity funds create value?

We can see that in recent years the returns of many private equity funds have been high. But I must admit that it can be difficult to make out what the basis for the results actually is. It may be the effect of active ownership, but it could also be due to financial gearing in a market that has generally been on the up. It is certainly a matter of importance how the value is created, and I also therefore think there is a big need to have more light shed on this, and DVCA has a lot of responsibility for this. We also therefore welcome DVCA’s new guidelines. There is a need for more openness and transparency.

Why has private equity fund ownership become more widespread in recent years?

There are many good reasons for this. Take, for example, the rules for listed companies, which have become hugely complex. This makes being listed costly and difficult. A large number of personally owned companies have to find new owners every year, usually due to generational change. And here a private equity fund can be a good solution.

Although a private equity portfolio company is often more geared than a listed company, paradoxically we as bankers often find it easier to get the “owners” of a private equity fund to step in with fresh cash in a crisis than if we compare with a listed company. It can be almost impossible to get owner capital for a listed company in a crisis due to the requirements for drawing up a prospectus. This alone takes several weeks, and then it can be too late.

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“A large number of personally owned companies have to find new owners every year, usually due to generational change. Here a private equity fund can be a good solution.”

Are there limits to what type of company a private equity fund can own?

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There is a trend in many European countries for governments to want to privatise public infrastructure. Often it is a combination of the state wanting revenue and needing to modernise the infrastructure. But unfortunately it’s not always clear what the aim is even though we know things could operate better if the running was taken care of by a private player. The flip-side of the coin is the opposition that can arise if taxpayers can’t see through the financial aspects of the private equity fund ownership structure.

Danish Venture Capital and Private Equity Association

VII. Interview: Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

Need for changes must be easily understandable Background

Bente Sorgenfrey is a qualified teacher and chairwoman of the Confederation of Professionals in Denmark (FTF), which is the central organisation for a total of 450,000 members, including nurses, bank workers and pharmaconomists. She is a member of the Danish Economic Council (DØR) and of the board of directors of Danmarks Nationalbank, vice-chairwoman of the Employees’ Capital Pension Fund (LD), and a member of the board of ATP.

What makes a good owner?

A good owner is able to create the platform for long-term development of the workplace. This is an enormous responsibility. As an owner you have to remember that the employees don’t just go to work to earn money. The majority of them want a fun and challenging workplace where they are involved in the decisionmaking.

It is therefore vital that in its governance concept the individual workplace sets aside resources, including time, for professional development and knowledge sharing. The governance style in the workplace must be adventurous and give room for reflection and analysis of the day-to-day work in order to be able to continuously develop the quality of the product or service. The management must have support for this strategy from the owner.

What is your view of private equity funds?

I’m on the board of both LD and ATP, both of which are involved in private equity funds directly through LD Equity and ATP Private Equity Partners and indirectly through extensive investments in various funds. The private equity funds that operate in Denmark and in which we have invested are, as far as I can tell, responsible owners, and at the same time we have seen some very good returns in recent years.

But what we are seeing is that private equity funds often make a lot of changes in the workplace that have a direct influence on the number of jobs and the specific working conditions. These may often be necessary changes, but if the employees are to go along with them, it is important that they are involved and informed about what is going on.

The problem can be that from time to time it’s difficult to understand why changes are necessary if things are otherwise going well and the company is making lots of money. The employees can’t look into a crystal ball like a skilled management, so we naturally place great emphasis on private equity funds not trying to produce a financial result that is not sustainable in the long run.

What do you think of DVCA’s guidelines?

I think they cover what you could reasonably expect. We might have wanted more in some areas, but let’s see how they work out and then we'll take another look in a few years as planned.

The guidelines will hopefully make it easier to represent employees who also invest in private equity funds. It is necessary for private equity funds to open themselves up more to prevent myths arising.

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VII. Interview: Niels Peder Nielsen, partner, Bain & Company

The future of private equity funds – trends and challenges Background

Niels Peder Nielsen is a partner with responsibility for Bain & Company’s Danish activities. Bain & Company is an international consultancy firm with around 4,000 consultants worldwide. Bain has been a consultant on more than half of all major European LBO transactions in the last ten years and also occupies a prominent position in the Danish market. Niels Peder Nielsen has 16 years’ consultancy experience, holds an MBA from MIT Sloan School of Management, and has worked on a number of the biggest Nordic LBO transactions in connection with commercial due diligence, strategic and financial planning, and exits.

Why are the guidelines for private equity funds useful?

My view is that if the private equity industry responds to questions and demands relating to openness, information and ethics, this should serve to keep the business healthy and future-proof. It should make possible a clear answer to how the greatest possible value is created for investors – and hence for society. Really it’s exactly the same principle that the private equity fund model is based on; it’s healthy for many companies for outsiders to come in, look with fresh eyes at the strategic direction, and demand better results. This can create a healthier business.

So let me start by saying that I support DVCA’s code and its efforts to create a common information practice. It’s vital that the management companies and the funds responsibly provide information on their activities. In relation to their investors, in relation to wider stakeholders, and – not least – in relation to themselves. Ultimately, the funds have a vested interest in being clear on what value they bring. If they are not able to do this, there will be a question mark against their licence to operate.

A whole industry has grown up around private equity funds comprising financing banks, investment banks, property companies, accountants, lawyers and consultancy firms – like the one I come from: Bain & Company. For many years we have been advising a number of the biggest global funds, and we in the Nordic region have provided consultancy in connection with a large number of transactions and subsequently worked with the private equity portfolio companies. We are as such a part of the complex and must, like the other parties, be aware of our own role and how we are performing it.

Is the private equity fund model here to stay?

Thanks to the huge focus on some private equity funds’ impressive returns, there will undoubtedly be continued growth in the resources that are lodged with private equity funds.

Fundraising is considerable and ongoing: B In 2007 USD 578bn was raised by PE funds, of which USD 240bn by buyout funds B In the first quarter of 2008 USD 166bn was raised, of which USD 80bn by buyout funds B Almost 100% of surveyed international institutional investors will allocate the same or more to PE in the coming years B Overall, the same institutional investors plan to allocate 10.5% of their capital to PE, compared to 8.2% in 2007 B At the end of 2007 there was USD 817bn in non-invested but committed capital Institutional investors will invest more and more in private equity funds, and more private investors will want to share in the success. We estimate an increase of more than 20% from institutional investors in the coming years. Furthermore, we estimate that private investments in alternative asset classes will grow by 17% annually in the coming years in the Nordic region. A large proportion of this will be in PE funds.

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A high percentage of the funds’ money comes from pension savers, and this has generated a lot of polemic in the last few years concerning the role of private equity funds and management companies. In this regard, it has become clear that the funds and their advisers need to paint a clear picture of how the industry contributes to the creation of social value.

Although it has aroused great attention that some directors, partners etc. have made big profits, the understandable concerns that have followed in the wake of this appear not to be well-founded: the funds are not doing away with jobs any more than other owners, they are not restricting growth, and they are not killing innovation. These are prejudices that are discredited in surveys by, among others, the World Economic Forum and also by Bain & Company’s own experiences. But it may be useful to look at what other dilemmas might crop up as a result of the increased popularity of private equity funds.

You can get a long way with information, and as I already said this will hopefully benefit the funds themselves and their investors so that the demand for information on their results and strategies will sharpen their focus on value creation.

In other words, they will become more skilled.

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VII. Interview: Partner Niels Peder Nielsen, Bain & Company

What should give the private equity fund model its legitimacy?

In my opinion, the purpose of a private equity fund is to create a return for its investors. And it is through value creation for their investors that the private equity funds gain their social legitimacy. The investors and the management companies are also free to impose requirements or observe moral codes in relation to, for example, corporate social responsibility. Personally I think this will be positive, but it can’t be the starting point.

Although the private equity funds might choose to take on tasks that no one else will take on as a risk-bearing investor, or otherwise take on a social responsibility, ultimately it is when their investments actually bear fruit and real value is created that they gain their social legitimacy.

In its survey of 59 Danish transactions in the period 1990 to 2006 ATP PEP has shown that the return on the Danish investments of private equity funds has been high. This is great, but it should probably also be viewed in the light of historically good acquisition opportunities at the start of the period and a subsequent historically long-lasting boom. Our surveys over longer time periods internationally show decidedly lower figures and a strong correlation with developments in the stock markets. At the same time, the greatly increased competition for individual transactions, among other things, means that it is doubtful whether things will get better in future.

This is risk capital, and you shouldn’t be lulled into thinking that there is always “easy money” to be made over time. It is therefore paramount for the private equity funds to systematically focus on operating improvements in their companies in future. This picture represents the private equity funds’ real challenge for the future. They need to make their portfolio companies into even better businesses.

How do the best funds create value?

The most obvious common feature of the funds that generate high returns is that they do so through active involvement. They have a clear strategy of creating higher growth through innovation, more satisfied customers, lower costs, clearer strategy and fewer assets. Our research, which is based on Bain & Company’s investments in private equity funds over the last 35 plus years as well as our consultancy work in the sector, shows that the earlier the fund actively intervenes and works on value growth, the better the chances of its delivering a success.

One survey shows that almost 90% of surveyed managers in private equity funds regard it as crucial to go in and ensure operating improvements in the portfolio Figure VII.1. Returns from active ownership.

Return – X times the investment

4.0X 3.4X 3.0X

2.0X

1.7X 1.3X

1.0X

0.0X Average Source: Bain survey.

Average – late activism

Average – early activism

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companies. However, the survey also shows that the majority do not consider that they spend sufficient resources creating these operating improvements. In other words, there is a long way to go before we reach the point where all funds consistently pursue and are able to secure real value creation.

If you look at the funds currently operating in Denmark, you have to say that the large funds are strong by virtue of their international networks and expertise.

They can often bring in highly skilled people both in the day-to-day management and at board level. At the same time, through their global overview they are able to embrace international opportunities better than local funds.

The strength of local funds is that they often have a good nose for what is happening locally and can use their local networks to go in and create operating improvements. Furthermore, we see that they are often more willing to take on a more time-intensive, active role in small companies than the larger funds, and as such have turned this into an expertise.

Dilemmas ahead – the megafunds

The success of the private equity fund model has led to ever bigger funds, and this is not without its problems.

Table VII.1. The investors’ concerns.

39.5%

of international institutional investors think there is too much money in the megafunds

51.0%

foresee the megafunds destroying the common interests between investors and the PE companies

34.8%

think that PE is a niche market and that there is now too much money in the funds to generate high returns in future

24.5%

are frustrated by the fact that access to top funds is impossible without contacts

The fact that slightly more than half of surveyed investors express concern over the biggest funds is a clear signal to the industry that there is a potential crisis of confidence that needs to be addressed. And here information alone cannot help because the parties’ focus and purpose will simply be perceived as potentially out of step with the expectations of the outside world. This is because if funds reach capital levels in the order of DKK 45–50bn, the so-called megafunds, there is a latent risk that the management companies’ focus will change. When such large proportions of the earnings of the management companies come from fixed fees that more than meet their needs, it becomes less necessary to focus on creating high returns.

We must also realise that greater capital means investment in bigger companies, exactly as we have seen in Denmark. This places different and increased requirements on the private equity funds’ method of working with value creation. In other words, the interests of the management companies and the investors drift apart, and this can be dangerous for the investors, both large and small.

In my view, there are two key challenges for private equity funds in future.

Firstly, they need to get even better at creating real value in their portfolio companies. This means they must be more active and get better at implementing result-generating improvements. This is a fundamental challenge for many funds.

Secondly, they must continuously act in keeping with their investors’ interests to avoid a crisis of confidence. In my opinion, the increased openness, and with it the attention from outside parties, is positive: it will help to turn the focus onto the industry’s own goals, resources and actual results. This is positive for the private equity fund model and the industry in the long term.

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VII. Interview: Mads Øvlisen, adjunct professor, Copenhagen Business School

Private equity funds also have a social responsibility Background

Mads Øvlisen is now adjunct professor of corporate social responsibility at Copenhagen Business School. Formerly, he was with Novo Nordisk as CEO and, prior to that, chairman of the board. He was LEGO’s chairman of the board from 1996 to 2008. Mads Øvlisen has been chairman of the Copenhagen Center for Social Responsibility and was a founding co-chair of the European Academy of Business in Society (EABIS). From 2000 to 2007 Mads Øvlisen was also chairman of the board of the Royal Danish Theatre.

What is your view of private equity funds?

I have been perceived as a critic of private equity funds, but that is untrue because I’m sure that a lot of companies would have been badly off without private equity funds. I have some first-hand experience because the private equity fund Blackstone bought an interest in Legoland in 2005 and made the parks part of the Merlin Entertainment Group. There have been some obvious synergies and operating improvements, which has meant that both parties have since done well. LEGO is now a co-owner of Merlin, and the shareholding is now worth much more to LEGO than the “old” Legoland.

Also, by virtue of their experience of recruiting managers and their financial capacity, private equity funds have in several cases played an important role in far from simple generational change situations.

My main criticism of private equity funds is that many are not good enough at explaining themselves. It has almost become a given that financial companies are bad at non-financial reporting. And the global private equity industry is no exception. It has been sleeping in class, and it is now paying for this in the form of lack of confidence from wide stakeholder groups.

Why work with CSR?

The question should probably be put differently: How should companies work with CSR? I don’t believe that important companies can omit to take a position on issues such as social responsibility and global inequality. Goldman Sachs has introduced GS Sustain and has carried out a survey of how the world’s leading companies are faring in this area which speaks for itself. Companies that have been working according to CSR principles for a long time have done better than their competitors in a number of important industries. Sustainability is on the way to becoming integrated in general business procedure. It is a requirement that companies today are transparent, and this reinforces the trend for sustainability to become integrated in the business models.

Similarly, McKinsey & Co. has just published a survey showing that CSR will be a crucial strategic competition parameter in future. Climate challenges, which everyone now agrees are a fact, look to have found a commercially sustainable platform, which means that a very large number of companies have gone for green business models – to the great benefit of shareholders and the rest of society.

The same is now happening in the social area. The challenges that we are facing in the form of a lack of global cohesion can only be overcome through partnerships involving state, industry and civil society, so new business models will also be developed to support this development.

What should the private equity funds do now?

Greater transparency is vital if private equity funds are to find appreciation and approval for their business model, and we should therefore welcome DVCA’s initiative in drawing up guidelines on openness. It is a step in the right direction.

Personally I will now look forward to surveys by DVCA that can illustrate how private equity funds create value. If the public is going to be able to accept the

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“I have been perceived as a critic of private equity funds, but that is untrue because I’m sure that a lot of companies would have been badly off without private equity funds.” very large capital gains that individual partners and investors can accumulate, it must be on the basis of a survey of where the value comes from. It would be preferable if it could be shown that the value is created through active ownership and not through fiscal thinking or simply by financial gearing.

As regards the need for implementing the CSR mindset in portfolio companies, it is essential that the owner should always be involved in these types of decision.

So the private equity funds obviously also have some thinking to do in this area.

At Novo we took the decision to go down this road in 1979, and it was ten or twelve years before we got to grips with it to the point where the CSR mindset was incorporated in the organisation and in our brand. Today methods have been developed that allow this to be done far more effectively. I’m not saying it’s easy, but I don’t believe there’s any way round it.

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“There is a great need for capital for use in generational changes and in expanding small and medium-sized companies. Private equity funds suit these companies well because we combine private ownership with close dialogue among owner, board and management. In my job I find exciting companies and develop them with their management in order to sell them on under new management when the targets have been achieved. Companies are like living organisms: vulnerable, but with the potential to develop under the right conditions. This is one of the things that makes my work interesting.”

Søren Møller, executive vice president, partner, LD Equity

Søren Møller joined LD Equity in 2006 from Handelsbanken Capital Markets, Corporate Finance, with responsibility in the Nordic region for the healthcare sector and for transactions within services, shipping and the transport sector in Denmark.

Prior to that, Søren Møller headed up the corporate finance and communications departments at Sophus Berendsen (1995–2000), was general manager and group treasurer in the Burmeister & Wain group (1990–95) and responsible for the finance section at DFDS (1985–90).

Søren Møller originally trained in shipping, holds a BSc from Copenhagen Business School, and has participated in several management training courses at IMD and Harvard Business School.

VIII.

Private equity funds in Denmark – an overview Introduction

Danish Venture Capital and Private Equity Association has a total of 27 private equity fund members. Several of these are funds of funds (i.e. they allocate resources to private equity funds and do not make independent investments according to the LBO principle) or “family offices” (i.e. they invest family assets).

This leaves a total of 22 private equity funds: 3i Altor Axcel C.W. Obel Capidea CapMan CVC Capital Partners Dania Capital Advisors Dansk Kapitalanlæg Deltaq EQT Erhvervsinvest Nord EVO Executive Capital Industri Kapital Industri Udvikling Jysk Fynsk Kapital LD Equity Nordic Capital Nordic Growth Polaris Private Equity SR Private Brands

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3i was founded in 1945 and is domiciled in London. 3i Buyout buys controlling interests in medium-sized European companies and works with the management to create significant additional value. 3i has a total of DKK 88.5bn in assets under management and 40 partners. 3i is listed on the London Stock Exchange.

Assets under management DKK 88.5bn

3i’s current investments in Denmark include: Alpharma, pharmaceutical ingredients.

Louis Poulsen Lighting (now Targetti Poulsen), designer lamps.

Investments in Denmark 4 Exits 1

Rovsing Dynamics, industrial measuring instruments.

Scandlines, passenger and freight ferry services.

Revenue in present companies DKK 5.7bn

Altor was founded in 2003 and is domiciled in Stockholm. Altor invests in medium-sized Nordic companies. Altor’s first fund, Altor 2003, has a capital commitment of just under DKK 5bn. Altor’s second fund, Altor Fund II, has a capital commitment of just over DKK 8.7bn. Altor’s investors are leading institutional investors from the Nordic region, elsewhere in Europe and the USA. Altor has eight partners, one of which is located in Copenhagen.

Assets under management DKK 13.4bn (Altor 2003, Altor Fund II)

Altor’s investments in Denmark include: Ferrosan, a leading Danish manufacturer of OTC medicines and haemostatic products for the health sector.

Investments in Denmark 4

Aalborg Industries, the world’s leading supplier of marine boilers and inert gas systems.

Exits 0

Dansk Cater, the leading supplier of products and services for the catering industry in Denmark and Sweden.

Revenue in present companies DKK 34.1bn

Wrist Group, the world’s leading provider of bunker oil and general ship supplies.

As yet Altor has no exits from Danish investments.

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VIII. Private equity funds in Denmark – an overview

Assets under management DKK 6.6bn (Axcel I, Axcel II, Axcel III) Investments in Denmark 15 Exits 18 Revenue in present companies DKK 10bn

Axcel was founded in 1994 and is domiciled in Copenhagen. The focus for Axcel is investments in medium-sized and large companies in Denmark and Sweden.

Axcel has a total capital commitment in excess of DKK 6bn. From a strictly legal point of view, the capital is divided among three companies: Axcel I, Axcel II and Axcel III. Axcel has eight partners, one of which is located in Stockholm. Axcel’s funds are broadly composed of Danish and internationally oriented investors who can support the development of Axcel and the companies in which Axcel invests.

Axcel’s current investments in Denmark include: Pandora Jewelry, a rapidly growing, family-owned jewellery company in which Axcel invested at the start of 2008. Pandora’s core product is bracelets with matching charms of precious metal and stones, which were launched in 2000 and have since brought a doubling in revenue each year.

EskoArtworks, the market leader in packaging software and solutions for the packaging industry in Europe, the USA and Asia.

Netcompany, one of Denmark’s leading IT consultancy companies within portal solutions and system integration.

Axcel’s previous investments in Denmark include: ICOPAL, Europe’s leading supplier of products for the protection of buildings and structures, including especially roofing solutions, and the leading Nordic contractor within roofing and membrane contracts in metal and sheet steel.

Logstor, formerly Løgstør Rør, which manufactures district heating pipes, was bought in 1999 by a consortium comprising FIH, Polaris Private Equity and Axcel as principal shareholder. At the time of investment the company was the subject of a large cartel case and close to bankruptcy, but it was developed into the market leader within its industry under the new, more international name of Logstor.

C.W. Obel is an investment company that invests in medium-sized Danish companies with good earnings and competent management. The companies usually need capital to expand, make acquisitions etc. An ownership of 20–100% is typical for the investments.

Assets under management –

C.W. Obel is therefore a relevant partner in connection with generational change, in tandem with other investors in a management buyout, or as a co-investor with the company’s current owner.

Investments in Denmark – Exits – Revenue in present companies –

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Assets under management DKK 750m Investments in Denmark 4 Exits 0

Capidea was founded in November 2006 and is domiciled in Copenhagen. The focus of Capidea is competitive small and medium-sized Danish companies with potential for growth. Sector-wise, the focus is industry, trade, distribution and service. Capidea has a capital commitment of DKK 750m. Capidea has three partners. In addition to institutional investors, Capidea’s fund includes a number of well-run companies and skilled business managers who are active in Capidea’s network.

Capidea’s current investments in Denmark include: K.P. Komponenter, one of Denmark’s largest and leading subsuppliers within CNC-controlled machining.

EET Nordic, a European niche distributor of IT components and spare parts.

Revenue in present companies DKK 1.7bn

Jens J. Aagaard and Bræmer-Jensen Guldvarefabrik, which together constitute a leading distributor of jewellery mainly for the Danish market.

Inspiration, a leading retail chain within ironmongery, hardware and gift products.

As yet Capidea has no exits from Danish investments.

Assets under management DKK 14bn (all current funds) Investments in Denmark 5

CapMan was founded in November 1989 and is domiciled in Helsinki. CapMan has three investment areas (CapMan Buyout, CapMan Technology and CapMan Life Science). CapMan Buyout’s team has DKK 14bn in assets under management divided among 12 funds. CapMan Buyout’s team has 14 partners, one of which is located in Denmark. CapMan’s B-shares are listed on the Helsinki Stock Exchange.

CapMan’s current investments in Denmark include: Anhydro, which develops and supplies i.a. production technology for the food, brewing, alcohol, chemical, pharmaceutical and paper industries.

CapMan’s previous investments in Denmark include: RGS 90, which converts and recycles waste.

Exits 6 Revenue in present companies DKK 2.3bn

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Assets under management DKK 158bn Investments in Denmark 2 Exits 4 Revenue in present companies DKK 14bn

CVC Capital Partners was founded in 1981 and is domiciled in the UK. The focus of CVC’s investments is large industrial and service companies with stable cash flow and above-average performance. CVC has a capital commitment of DKK 158bn divided among eight funds and has 27 partners. CVC’s funds have more than 250 investors and include pension funds, financial institutions and funds of funds with focus on long-term returns.

CVC’s current investments in Denmark are: Matas, which through a large number of shops all over Denmark sells personal care products as well as products that contribute to a healthier lifestyle. The Matas shops also sell OTC medicines etc.

Post Danmark, which provides a basic postal service for all customers in Denmark – both senders and receivers.

CVC’s previous investments in Denmark include: DT Group, which sells materials and related services for construction sites and home improvements in the Nordic region.

Dania Capital Advisors was founded in 2003 and is domiciled in Copenhagen.

The focus of Dania Capital Advisors is Danish companies operating within industry, trade, distribution and service.

Assets under management DKK 600m Investments in Denmark 4 Exits 0 Revenue in present companies DKK 1.3bn

Dania has a capital commitment of DKK 600m and has four partners. Dania Capital Advisors’ investors are Fonden Realdania and the partners in Dania Capital Advisors.

Dania Capital Advisors’ current investments in Denmark include: Hammel Møbelfabrik, a leading manufacturer of quality furniture – primarily flexible storage systems – sold in the north European markets.

BIVA, Denmark’s leading low-price furniture chain.

Novenco, a global supplier of system solutions within ventilation and fire protection for marine, offshore and buildings.

Wiking Gulve, a niche manufacturer of high-quality plank flooring primarily for the Danish market.

As yet Dania Capital Advisors has no exits from Danish investments.

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DANSK KAPITALANLÆG Assets under management DKK 900m Investments in Denmark 10 Exits 5 Revenue in present companies DKK 1.6bn

Dansk Kapitalanlæg was founded in 1984 and is domiciled in Copenhagen.

Dansk Kapitalanlæg invests in and develops medium-sized Danish companies with revenue of around DKK 100–500m. This is done with a view to long-term value creation.

Dansk Kapitalanlæg has a capital commitment of around DKK 900m and has four partners. The ownership includes Danske Bank, ATP, PFA, Nordea Liv & Pension, Augustinus, Danica, the Employees’ Capital Pension Fund (LD) as well as partners and managerial employees.

Dansk Kapitalanlæg’s current investments in Denmark include: C.F. Nielsen, the world’s leading manufacturer of mechanical briquette presses and briquetting solutions for industry and private customers.

KA Interiør, Denmark’s largest manufacturer of customised sliding door cupboards and interiors for e.g. bedrooms and nurseries, kitchens, recreation rooms and offices.

Atomistix, which develops and sells software solutions for computer-based nanoscale research and development.

Dansk Kapitalanlæg’s previous investments in Denmark include: ENKOTEC, the world’s leading manufacturer of machines for mass production of precision nails based on patented technology.

Synkron, Denmark’s first supplier of CM systems.

Assets under management DKK 325m Investments in Denmark 1 Exits 0 Revenue in present companies DKK 45m

Deltaq – which is listed on OMX Nordic Exchange Copenhagen – was founded in 2007 and is domiciled in Hørsholm north of Copenhagen. Deltaq invests in small and medium-sized companies, usually with a need for a generational/ownership change or for capital and stronger management to ensure development and continued growth.

In addition to many private shareholders, Deltaq’s ownership includes a number of local financial institutes that, together with Finanssektorens Pensionskasse and Købstædernes Forsikring, have invested around DKK 325m in the company. Deltaq’s management has also invested in the company. Deltaq has two partners.

Deltaq’s current investments in Denmark include: ElitePlast-Hammar Display, a plastics processing company that manufactures display solutions for the Nordic market as well as plastic articles for e.g. machine shielding.

As yet Deltaq has no exits from Danish investments.

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Assets under management DKK 900m Investments in Denmark 5

The innovative investment company EVO was founded in 2007 and focuses on the acquisition of medium-sized, well-run companies, mainly in the Nordic region. The acquisitions are made to further develop and ensure the individual companies’ continued success. EVO introduces the necessary competences and improves the companies’ strategic positions. EVO aims to be the preferred partner of medium-sized companies in connection with a change of ownership. The existing management will often be retained or become co-owners, or a new management will be identified to invest in the company together with EVO.

Exits 0

EVO has total assets under management of around DKK 900m divided between two private equity companies: EVO Energy A/S and EVO Capital A/S. EVO’s investments are managed by EVO Management A/S.

Revenue in present companies DKK 1.6bn

EVO’s current investments in Denmark comprise: Dencam A/S, which manufactures plugs, moulds and 1:1-models, mainly for the wind turbine industry.

Welcon A/S, which develops and manufactures towers and steel structures for the wind turbine industry. The company specialises in customised solutions and has built up solid experience over more than 40 years, which puts it at the cutting edge of technology.

Suntex A/S, which occupies a leading position within the sale of sun protection products. Suntex A/S designs and sells standard and made-to-measure sun protection products in the Danish and other Scandinavian markets.

Contrast A/S, which specialises in developing licence-based products within a number of product categories, including children’s clothing, home textiles and accessories.

Byggros A/S, which sells industrial products and building textiles to the industrial and building trades and the DIY segment.

As yet EVO has no exits from Danish investments.

Assets under management DKK 84bn Investments in Denmark 5 Exits 5 Revenue in present companies DKK 47.4bn

EQT was founded in 1994 and has its head office in Stockholm. EQT invests primarily in market-leading medium-sized and large companies of high quality in growth industries. EQT also has funds that specialise in turnarounds and the financing of growth companies. EQT has more than DKK 80bn in assets under management divided among 11 funds. EQT currently has 27 partners.

EQT’s current investments in Denmark include: ISS, one of the world’s leading suppliers of facility services with more than 410,000 employees in 50 countries.

Dako, a global leader in cancer diagnostics.

EQT’s previous investments in Denmark include: Sabroe Refrigeration (Johnsons Controls), a world leader among manufacturers of industrial refrigeration machines.

IHI, a world leader in travel and health insurance.

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Assets under management – Investments in Denmark 8

Erhvervsinvest Nord A/S constitutes an independent business area in the Spar Nord Bank Group. Since 1988 Erhvervsinvest Nord has been investing in small and medium-sized non-listed companies. The investments have been made on a number of different occasions and have included both venture and private equity. Erhvervsinvest Nord has always invested as a minority shareholder and often in conjunction with other professional investors with the same profile. In the last few years there has been less investment activity than previously. At present there are eight companies in the portfolio.

Erhvervsinvest Nord’s current investments in Denmark include: Brynje, which manufactures and sells safety footwear.

Exits 1

Futarque, a technology company with strong competences within digital TV.

Revenue in present companies DKK 860m

Saxotech, which develops and sells editorial software solutions for newspapers and magazines.

Weiss, which manufactures industrial boiler systems and energy supply solutions based on the burning of biomass.

Assets under management – Investments in Denmark – Exits – Revenue in present companies –

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Executive Capital is an investment company founded in December 2007 that primarily invests in small and medium-sized Danish companies within industry, trade and services. The company has a partnership circle consisting of 20 experienced business people (called executives) who take an active part in screening, investment and development of the individual companies. The executives involved always invest their own funds and actively intervene in the strategy and business development of the portfolio companies.

Executive Capital also works with selected private equity companies in connection with the introduction of industry expertise and with active co-investing board members in selected cases.

The company’s first investment is expected to be made in the third quarter of 2008.

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Assets under management DKK 40bn Investments in Denmark 3 Exits 4 Revenue in present companies DKK 6bn

Industri Kapital was founded in 1989 and is domiciled in London and Stockholm. Industri Kapital usually invests between DKK 400m and DKK 1bn per transaction. The companies must have stable cash flow and growth potential. Industri Kapital prefers to have the majority shareholding in the acquired companies and focuses on the Nordic region, the Benelux countries, and France and Germany.

Industri Kapital has more than DKK 40bn in assets under management divided among six funds and has 13 partners.

Industri Kapital’s current investments in Denmark include: Kwintet, Europe’s leading manufacturer and supplier of work clothes.

Superfos, which develops and manufactures easy-to-use, high-quality packaging solutions for consumers.

Industri Kapital’s previous investments in Denmark include: F-group, which comprises the radio/TV chains Fona and Fredgaard.

Hjem-Is Europa, a leading direct distributor of ice cream in the Nordic region.

Crisplant Industries, a leading manufacturer of industrial sorting and gas filling systems.

HTH Køkkener, a leading manufacturer of kitchens in Denmark. HTH Køkkener is an affiliate of Nobia AB, which was bought by Industri Kapital.

Industri Udvikling was founded in 1994 and is domiciled in Copenhagen.

Industri Udvikling invests in small and medium-sized Danish manufacturing companies with revenue of DKK 50–200m. Industri Udvikling is always a minority shareholder.

Assets under management DKK 700m

Industri Udvikling has around DKK 700m in assets under management divided among two funds and has three partners.

Investments in Denmark 40

Industri Udvikling’s current investments in Denmark include: Omada, one of Denmark’s leading consultancy houses specialising in project management, SAP, IT management and process optimisation.

Exits 46 Revenue in present companies –

Danelec Electronics, which specialises in the design, development and manufacture of electronic products for the maritime industry, especially black boxes for ships.

Industri Udvikling’s previous investments in Denmark include: Fibo Intercon, which is currently a leader in the market for supplying machines and equipment for manufacturing products in light clinker concrete.

Zealand Care, which provides services, IT and consultancy within the area of the disabled and elderly.

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Jysk Fynsk Kapital was founded in 2005 and is domiciled in Copenhagen.

Jysk Fynsk Kapital provides capital and professional management to small and medium-sized Danish companies with the potential for significant value growth.

Assets under management DKK 350m

Jysk Fynsk Kapital has around DKK 350m in assets under management. Jysk Fynsk Kapital is backed by a number of business funds and investment companies.

Investments in Denmark 6

Jysk Fynsk Kapital’s current investments in Denmark include: SkanDek Tagelementfabrik, which manufactures patented steel roofing elements that are assembled into modules adapted to specific construction contracts.

Exits 0

Dansk Overflade Teknik, southern Scandinavia’s leading company in hot dip galvanising, shot blasting, metal coating and paint treatment.

Revenue in present companies DKK 860m

Assets under management DKK 6.7bn Investments in Denmark 21 (LD 2 + LD 3) Exits 2

As yet Jysk Fynsk Kapital has no exits from Danish investments.

LD Equity was founded in 2005 and is domiciled in Copenhagen. LD Equity invests in Danish companies as both minority and majority owner. LD Equity can invest in all company size categories, but generally focuses on companies with revenue of DKK 200–1,000m, primarily within traditional industry, trade and services.

LD Equity administers eight own and external funds and portfolios comprising more than 80 companies and a total capital value of DKK 7.5bn. LD Equity’s three own funds – LD Equity 1, LD Equity 2 and LD Equity 3 – have a total capital commitment of DKK 6.7bn.

LD Equity is backed by the Employees’ Capital Pension Fund (LD) and a number of institutional investors. LD Equity has six partners.

Revenue in present companies DKK 5.7bn (LD 2 + LD 3)

In addition to LD Equity’s own funds, the company also has a number of external investment mandates. These include Dansk Erhvervsinvestering, Dansk Innovationsinvestering and PKA. LD Equity’s current investments in Denmark include: R82, which develops and manufactures technical aids and appliances, generally for disabled children.

Gram Commercial, which develops, manufactures and sells refrigerators and freezers for industrial use.

Da’Core, a leading company in its industry in the Nordic region that develops and manufactures garden cushions, furniture and parasols.

LD Equity’s previous investments in Denmark include: Carl Bro, one of the largest Scandinavian companies in engineering consultancy specialising in building, construction, water, environment, energy, industry and IT. Kirudan, a market leader within the marketing, sale and distribution of medical devices for hospitals, doctors and nurses in Denmark.

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Nordic Capital was founded in 1989 and is now domiciled in Stockholm, Copenhagen, Helsinki , London and St Helier, Jersey. Nordic Capital invests primarily in medium-sized companies in northern Europe.

Assets under management DKK 36bn Investments in Denmark 4 Exits 2

Nordic Capital has a capital commitment of DKK 36bn divided among six funds.

Nordic Capital’s investors mainly comprise a number of pension funds. Nordic Capital has 17 partners.

Nordic Capital Advisory’s current investments in Denmark include: Kompan, which manufactures outdoor toys for playgrounds.

Falck, which provides rescue services and auto assistance.

Revenue in present companies DKK 36.1bn

Unomedical, which manufactures disposable articles for hospitals and the health sector around the world as well as infusion sets primarily used in insulin pump treatment.

Dangaard Telekom, which distributes mobile phones, smart phones and accessories.

Nordic Capital Advisory’s previous investments in Denmark include: Nycomed, which manufactures pharmaceutical products for hospitals and the health sector in general.

Sonion, one of the world’s leading suppliers of components for the mobile phone and hearing aid industry.

Nordic Growth was founded in 2005 and is represented in Denmark, Finland and Sweden. Nordic Growth administers Nordic Growth I and NG Private fund of funds.

Assets under management – Investments in Denmark – Exits – Revenue in present companies –

Nordic Growth I is a private equity fund that actively invests in Nordic companies with the potential for significant growth arising from a technology-based competitive advantage or business model. The fund focuses on contributing to the company’s internationalisation and the financial advantages that can be gained by reviewing the company’s strategy. Nordic Growth I invests mainly in companies that have established a significant position in their market.

NG Private fund of funds invests in selected private equity funds. The investors in NG Private fund of funds have the opportunity to compile their own individual portfolio based on the funds recommended on an ongoing basis. The fund attaches importance to an underlying fund investing within a sector or geographical area with expected above-average financial growth during the fund’s lifetime, and that the management team in the underlying fund should have a background and experience that are consistent with the proposed strategy for the fund.

As yet Nordic Growth I and NG Private fund of funds have no investments in Denmark.

In Denmark the team behind Nordic Growth currently administers i.a. the companies Configit Software and Tpack.

Previously in Denmark the team behind Nordic Growth has administered Zapera.com, which in autumn 2007 was sold to YouGov plc.

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Polaris Private Equity was founded in 1998 and is domiciled in Copenhagen.

Polaris invests in majority holdings in well-established Danish and Swedish companies with good development potential and revenue of more than DKK 150m.

Assets under management DKK 3.4bn Investments in Denmark 5

Polaris has DKK 3.4bn in capital commitment divided among two funds. Polaris is backed by business and institutional investors such as A.P. Møller - Mærsk, ATP Private Equity Partners, Danica Pension, Dansk Kapitalanlæg, Danske Bank, Glitnir, Teachers’ Pension and Life Insurance Company Limited, PensionDanmark, PFA and Topdanmark. Polaris has seven partners.

Polaris Private Equity’s current investments in Denmark include: Skamol, which develops, manufactures and supplies insulating materials for industry and fireproofing.

Exits 6 Revenue in present companies DKK 3.1bn

Polaris Private Equity’s previous investments in Denmark include: NOVADAN, which manufactures and distributes cleaning agents and chemicals primarily in Denmark, but also in the rest of the Nordic region and Poland.

Novasol, Europe’s largest letter of holiday properties with more than 17,000 holiday homes.

Sonion, one of the world’s leading suppliers of components for the mobile phone and hearing aid industry.

Assets under management DKK 100m Investments in Denmark 3

SR Private Brands was founded in 2005 and is domiciled in Copenhagen. SR Private Brands invests long-term in Danish branded goods companies that are in private ownership. SR Private Brands buys minority holdings in well-run companies where the existing owner and management wish to continue.

SR Private Brands has a capital commitment of DKK 100m. SR Private Brands is backed by a number of private investors.

SR Private Brands’ current investments in Denmark include: Ticket to Heaven, a Danish manufacturer of quality children’s clothes.

Exits 0 Revenue in present companies DKK 175m

Mammamia, a café chain with almost 30 cafés in shopping centres in Denmark, Norway and Sweden.

Unidrain, a Danish manufacturer of floor drains.

As yet SR Private Brands has no exits from Danish investments.

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“My job is interesting because it gives me the opportunity to invest funds entrusted by investors in companies set up by skilled and enterprising people and to further develop them to the benefit primarily of the investors, but also of other stakeholders in the companies.”

Anders Bruun-Schmidt, partner & CFO, Dania Capital

Anders Bruun-Schmidt is a partner and CFO with Dania Capital, where he has worked since 2004.

Anders Bruun-Schmidt previously worked for Dansk Naturgas (2002–04), ATP (2000–01) and Dansk Olie og Naturgas (1980–99).

Anders Bruun-Schmidt has a master’s degree in political science and economics and an MBA from London Business School, and he has taken several management training courses at INSEAD.

IX.

List of buyouts in Denmark Entry year

Exit year

Name

Sector

Acquiring fund

1989

1993

Kosan Group

Conglomerate

SDS

1991

–

Reson

Technology for harbour protection etc.

Dansk Kapitalanlæg

1991

1997

Hjem Is

Ice cream

Industri Kapital

1991

1993

Broen Armatur

Ball valves and taps

CapMan

1992

2000

Microtronic

Components for hearing aids

CapMan, Euroventures

1992

1995

Crisplant

Sorting systems

Industri Kapital

1992

2001

Toftejorg

Tank cleaning equipment

CapMan

1993

1999

Kosan Teknova

Gas valves

CapMan, ECI Ventures

1993

–

DanFysik

Hi-tech equipment for the pharmaceutical industry

Dansk Kapitalanlæg

1993

1995

Nordtank

Wind turbines

UBS

1994

1998

Vestas

Wind turbines

Gilde, Mees & Pierson

1995

1997

Everton Schmidt

Bicycles

Axcel Axcel

1995

2000

Monarflex

Tarpaulins

1995

–

Ferrosan

Health products and pharmaceutical preparations

Management

1995

–

M&J Fibertech

Machines for manufacturing fibre yarns

German Equity Partners

1995

–

Bilwinco

Fully automated weighing/dosing solutions

Industri Udvikling

1995

–

DanTruck-Heden

Manufacture and sale of fork-lift trucks

Industri Udvikling

1995

–

Kirk Telecom

Telecoms

Dansk Kapitalanlæg

1996

1998

Osteometer Meditech

Scanners for measuring osteoporosis

Doughty Hanson, CWB

1996

1999

Sabroe Refrigeration

Industrial refrigerating installations

EQT

1996

2005

Audionord International

Hi-fi and speakers (manufacture and retail)

CapMan

1996

2000

Tvillum-Scanbirk

Furniture

Axcel

1996

2007

Lindplast

Packaging

CapMan

1996

–

ME-FA

Post boxes

Dansk Kapitalanlæg

1996

2006

Carl Bro

Consultancy engineers

LD Equity

1997

2000

Oxford Biscuits

Biscuits

Management, Nykredit

1997

–

RTO Holding

Children’s clothing and sportswear

CapMan

1997

2006

VariantSystem (now Bekaert Handling Group)

Rolling and pallet containers

Axcel

1997

2007

EET Nordic/IOD

IT accessories

CVC

1997

2003

Dansk Heatset Rotation (now GraphX)

Printing

Axcel

1997

2006

F Group

Radio and TV

Industri Kapital

1997

2002

Time System International

Calendars

CVC

1997

2002

Føvling

Furniture

Axcel

1997

–

JHL (J. Hvidtved Larsen A/S)

Sludge extractors

Industri Udvikling

1997

–

PF Management

Manufacture and sale of safety steps, grates, scaffold planks and gangways

Industri Udvikling

1997

–

VPG (Vital Petfood Group)

Pet food and products

Industri Udvikling

1998

2006

Laundry Systems Group (Jensen Gruppen)

Textile finishing equipment

Axcel

1998

2001

Struers (Scientific Product Group)

Measuring instruments

EQT

1998

2006

Thygesen Textile Group

Healthcare and clothing

Axcel

1998

–

BB Electronics

Components for the electronics industry

Axcel

1998

2006

Kilroy Travels International

Travel agency

Axcel

1998

–

Daehnfeldt

Vegetable seeds

Hicks, Muse, Tate & Furst

Danish Venture Capital and Private Equity Association

112

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

–

–

–

–

–

No

Secondary buyout

619

Yes

Secondary buyout

150

–

Trade sale

140

Yes

Stock exchange listing

1185

Yes

Trade sale

60

No

Trade sale

–

No

–

–

No

–

–

–

–

–

–

Secondary buyout

141

Yes

Secondary buyout

181

Yes

–

–

–

–

–

–

–

–

No

–

–

No

–

–

No

Secondary buyout

100

–

Secondary buyout

2940

Yes

Secondary buyout

650

No

Secondary buyout

666

Yes

Secondary buyout

130

Yes

–

–

Yes

Secondary buyout

–

–

Secondary buyout

–

–

–

–

No

Secondary buyout

526

Yes

Trade sale

720

Yes

–

168

Yes

Secondary buyout

1983

Yes

Trade sale

400

Yes

Trade sale

425

Yes

–

–

No

–

–

No

–

–

No

Secondary buyout

350

Yes

Secondary buyout

466

Yes

Secondary buyout

375

Yes

–

288

Yes

Secondary buyout

1038

–

–

300

–

113

Danish Venture Capital and Private Equity Association

Comments

Sold to Icopal, of which Axcel was co-owner.

Owns 50%.

Majority shareholder from October 2005.

Second buyout.

Majority on entry.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

1998

2004

Rationel Vinduer

Windows

Axcel

1998

–

EM Fiberglas

Glass fibre products

Industri Udvikling

1998

–

K.P. Komponenter

Metal components

Industri Udvikling

1999

2006

Løgstør Rør (now Logstor)

District heating pipes

Axcel, Polaris

1999

2007

10Contex

Large-format scanners and 3D printers

EQT

1999

2005

Kwintet

Work clothes

Axcel

1999

2002

Nycomed Pharma

Pharmaceutical products

Nordic Capital

1999

2001

Partner Electric

Digital telephone switching systems

Bridgepoint

1999

2004

Aston IT Group

Software, hardware and consulting

CVC

1999

2005

Louis Poulsen El-teknik

Wholesale in electrical equipment

Polaris

1999

2007

Louis Poulsen Lighting

Designer lamps

Polaris

1999

2003

Nordic Info Group (RKI)

Credit information

EQT

1999

2004

Eurogran Holding

Drink powders

Alpininvest

1999

–

Superfos

Packaging

Industri Kapital, Ratos

1999

–

Superfos

Plastic packaging

Industri Kapital

1999

–

Agramkow Fluid Systems

Hi-tech processing systems for the appliance and auto industry

Industri Udvikling

2000

2004

Novadan

Cleaning agents

Polaris

2000

2005

Wittenborg

Coffee machines

Compass

2000

2005

Cybercity

Broadband

Advent International, Lehman Brothers Communication

2000

2008

Microtronic (now Sonion)

Components for hearing aids

Nordic Capital, Polaris

2000

–

Vital Petfood Group

Pet food

Axcel

2000

2008

Kirk Acoustics (now Sonion)

Components for mobile phones

Nordic Capital, Polaris

2000

2005

Aalborg Industries

Ship boilers

Axcel

2000

2007

Icopal

Roofing felt

Axcel

2000

2004

Svenska Fönster

Window frames

Axcel

2000

2002

Novasol (now Novasol Dansommer)

Holiday home rental

Polaris

2000

–

A/S Kurt Hansen

Thin sheet processing products

Industri Udvikling

2000

–

Omada

Consultancy contracts in project management, SAP, IT management and process optimisation

Industri Udvikling

2002

2005

Glud & Marstrand

Metal packaging

Axcel

2001

2005

IHI

Health insurance

EQT

2001

–

Royal Scandinavia

Porcelain, designware

Axcel

2001

–

Wolfking

Meat processing equipment

UBS

2001

–

LM Glasfiber

Blades for wind turbines

Doughty Hanson

2001

–

SMEF Group

Machines and accessories for the wooden products industry

CapMan

2001

–

Lindab

Ventilation pipes

Ratos

2001

–

Jamo

Loud speakers

FSN Capital

2001

–

Martin Gruppen

Computer-controlled effects lighting

Schouw & Co.

2001

2002

Dansommer (now Novasol Dansommer)

Holiday home rental

Polaris

2001

–

Rovsing Dynamics

Industrial measuring instruments

3i

2001

2007

Bison

Clothing

Dansk Kapitalanlæg

2001

2006

Carl Bro

Engineering consultancy

Bure

2001

–

A2SEA

Set-up of marine wind turbines

Dansk Kapitalanlæg

Danish Venture Capital and Private Equity Association

114

IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

Secondary buyout

464

Yes

–

–

No

–

–

No

Trade sale

1046

Yes

Trade sale

233

Yes

Trade sale

1887

Yes

Trade sale

730

Yes

Bankruptcy

200

Yes

Secondary buyout

136

Yes

Secondary buyout

1900

–

Secondary buyout

740

–

Secondary buyout

90

Yes

Secondary buyout

120

–

–

2616

Yes

–

450

Yes

–

–

No

Secondary buyout

280

Yes

Trade sale

320

Yes

Secondary buyout

130

Yes

Secondary buyout

355

Yes

–

453

Yes

Secondary buyout

143

Yes

Trade sale

1000

Yes

Trade sale

5825

Yes

Secondary buyout

533

No

Secondary buyout

560

Yes

–

–

No

–

–

No

Trade sale

1300

Yes

Secondary buyout

970

Yes

–

2660

Yes

475

Yes

–

1900

Yes

–

450

Yes

–

4200

Yes

–

500

Yes

–

578

Yes

Secondary buyout

300

Yes

–

100

–

Trade sale

140

No

Secondary buyout

1500

–

–

–

No

115

Danish Venture Capital and Private Equity Association

Comments

Amalgamated with Kirk Acoustics and renamed Sonion.

Amalgamated with Microtronics and renamed Sonion.

Combined exit as Novasol Dansommer.

Combined exit as Novasol Dansommer.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

2001

–

Bladt Industries

Manufacture and assembly of onshore and offshore steel structures

Industri Udvikling

2001

–

Timberman

Wooden flooring, indoor staircases and loft stairs

Industri Udvikling

2001

–

Virklund Sport

Facilities for the sports sector and manufacture and trade in sports equipment

Industri Udvikling

2002

–

Fibertex

Fibre yarns

Schouw & Co.

2002

2006

Vest-Wood

Wooden doors

Axcel, Polaris

2002

2006

Dansk Droge

Vitamins, dietary supplements

Polaris

2002

–

Weiss

Bioincineration facilities

Dansk Kapitalanlæg

2002

2006

RGS 90

Recycling

CapMan

2002

2006

Dan-Foam (Tempur World)

Pillows and mattresses

Friedman, Fleischer & Lowe, TA Associates

2002

2005

Nycomed

Medicine

CSFP PE, Blackstone, NIB PE

2002

2007

Eco-dan

Control systems for agriculture

CapMan

2002

2005

Nettest

Equipment for testing network security

Axcel

2002

–

UI (Union Engineering)

Carbonic acid and CO2 systems

Industri Udvikling

2003

–

Maersk Medical (now Unomedical)

Disposable pharmaceutical products

Nordic Capital

2003

2007

Ilva

Furniture

Advent

2003

2006

Danske Trælast (now DT Group)

Sale of building materials for professional and private use

CVC

2003

2005

Illum

Department store

Merrill Lynch

2003

–

Bukkehave

Sale of special vehicles and spare parts

Industri Udvikling

2003

–

PhaseOneTrials

Pharmaceutical product clinical trials in phase I and II

Industri Udvikling

2004

2007

H+H Fiboment (now Expan Holding)

Concrete elements

Procuritas

2004

–

M&J Industries

Waste reducers

Dansk Kapitalanlæg

2004

–

Anhydro Holding

Processing systems for spray-drying, evaporation etc.

CapMan

2004

–

DSV Miljø

Soil cleaning, contract transport and gravel supply

Triton

2004

–

Junckers Industries

Wooden floors

Axcel

2004

–

Norlax

Smoked salmon

Glitnir Total Capital

2004

2007

3D

Pharmaceutical equipment

Axcel

2004

2006

FLS Aerospace (now a part of SR Technics)

Technical aircraft servicing

3i, Star Capital

2004

2005

Dan Net

Calculation of roaming fees for mobile telephones

Advent, Providence

2004

–

Buksesnedkeren

Design and distribution of leisurewear

Change Capital Partners

2004

2008

Kosan Crisplant

Sorting systems

Segulah

2004

–

Falck

Rescue services and auto assistance

Nordic Capital, ATP PEP

2004

–

Bramidan

Equipment for compressing waste

Industri Udvikling

2004

–

Green Farm Energy

Production of electricity and fertilisers in bioenergy plants

Industri Udvikling

2004

–

Royal Danish Seafood Group

Live eels and hot-smoked fish products

Industri Udvikling

2004

–

Skandinavisk Køkkengruppe

Kitchens

Industri Udvikling

2004

–

Trip Trap WoodCare

Oils, soaps, stains, lacquers and other surface treatments for wooden products

Industri Udvikling

2005

2008

Blücher

Manufacture, plumbing and heating, pipes and sanitation

LD Equity, Nykredit Realkredit A/S, Danebroge ApS

2005

–

Ferrosan

Health products and pharmaceutical preparations

Altor

2005

–

Glud & Marstrand

Metal packaging

AAC Capital

2005

–

Kompan

Playground equipment

Nordic Capital

2005

–

Nycomed

Pharmaceutical products

Nordic Capital

2005

–

DISA Holding

Machines for iron casting

Procuritas

Danish Venture Capital and Private Equity Association

116

IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

–

–

No

–

–

No

–

–

No

–

704

–

Secondary buyout

1900

Yes

Secondary buyout

300

Yes

–

–

No

Secondary buyout

550

No

Stock exchange listing

1900

Comments

– Trade sale

940

Yes

Secondary buyout

–

No

Secondary buyout

600

Yes

–

–

No

–

1820

Yes

Trade sale

680

Yes

Secondary buyout

14878

Yes

Trade sale

600

Yes

–

–

No

–

–

No

Secondary buyout

446

Yes

–

–

Yes

–

740

Yes

–

1000

Yes

–

683

Yes

–

197

Yes

Secondary buyout

300

Yes

Trade sale

2496

–

Trade sale

380

Yes

–

371

Yes

Trade sale

193

Yes

–

4224

Yes

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

Secondary buyout

240

Yes

–

910

Yes

–

1546

Yes

–

733

Yes

–

4800

Yes

–

600

Yes

117

Danish Venture Capital and Private Equity Association

Kaupthing Bank has to take over Ilva, which is sold on to an Icelandic furniture group.

Majority shareholder from April 2007.

Divested to SR Technics, which was owned by 3i and Star Capital.

Sold to Watts Industries Europe BV.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

2005

–

Hammel Møbelfabrik

Furniture

Dania Capital

2005

2007

LEO Pharma Animal Health (now VetXX)

Pharmaceutical products and animal feed

Montagu

2005

–

ISS

Facility services

EQT, Goldman Sachs Capital

2005

–

Brandtex (BTX Group)

Clothing

EQT

2005

2007

Danfoss Marine Systems (now Damcos)

Valve and tank control systems

3i

2005

–

Chr. Hansen

Ingredients

PAI

2005

–

Gram Commercial

Industrial refrigeration systems

LD Equity

2005

–

Legoland (now a part of Merlin Entertainment Group)

Amusement parks

Blackstone

2005

–

Post Danmark

Postal services

CVC

–

2007

7-Technologies

Software for controlling water systems

Dansk Kapitalanlæg

–

2007

Active Sportswear

Trade in sportswear

Dansk Kapitalanlæg

–

2007

Easy Film

Film producer

Dansk Kapitalanlæg

–

2007

Nyscan

Servicing for lorries

Dansk Kapitalanlæg

2005

2007

Welltec

Machines for raw material extraction

Management, The Riverside Co.

2005

–

Illum

Department store

Baugur

2005

–

Mach

Calculation of roaming fees for mobile phones

Warburg Pincus

2005

–

ESKO-Graphics (now EskoArtwork)

Machines and software for card packaging printing

Axcel

2005

–

Scan Jour

Document handling

CapMan

2005

–

Aalborg Industries

Ship boilers

Altor

2005

–

Københavns Lufthavne

Airport

Macquarie Airports

2005

–

TDC Forlag (now a part of European Directories)

Telephone directories

Macquarie Capital Alliance Group

2005

–

Kwintet

Work clothes

Industri Kapital

2005

–

R82

Technical aids for children

LD Equity

2005

–

Rahbekfisk

Frozen ready-meals

Glitnir Total Capital

2005

–

Wiking Gulve

Wooden floors

Dania Capital

2005

–

Belika

Knitwear for men

Industri Udvikling

2005

–

Comwir

IT hardware, software and infrastructure services

Industri Udvikling

2005

–

Danelec Electronics

Electronic products for shipping

Industri Udvikling

2005

–

Dan-Iso

Insulating products

Industri Udvikling

2005

–

Meincke

Production and installation of machines for the baking industry

Industri Udvikling

2005

–

Vitral

Integrated, customised glass roofs

Industri Udvikling

2006

–

Reson

Industrial sonar systems

LD Equity

2006

–

SFK Systems

Abattoir machinery

LD Equity

2006

–

TDC

Telecoms

Apex, Blackstone, KKR

2006

–

York Novenco Group (now Novenco Group)

Industrial refrigerating installations

Dania Capital

2006

–

Green House of Scandinavia

Fashionwear

Odin Equity Partners

2006

–

Nordplan

Storage and archive systems

Odin Equity Partners

2006

–

Haarslev

Abattoir machinery

Odin Equity Partners

2006

–

Logstor

District heating pipes

Montagu

2006

–

Scanvogn

Mobile site huts

Dansk Generationsskifte

2006

–

Medianet Innovations

Software development

LD Equity

2006

–

SkanDek

Roofing elements

Jysk-Fynsk Kapital

2006

–

Ticket to Heaven

Children’s clothes

SR Private Brands

2006

–

Dangaard Telecom

Mobile distributor

Nordic Capital

Danish Venture Capital and Private Equity Association

118

IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

–

105

Yes

Secondary buyout

240

Yes

–

40355

Yes

–

3280

Yes

Secondary buyout

400

Yes

–

1460

Yes

–

211

Yes

–

395

Yes

–

11255

No

Trade sale

–

Yes

Trade sale

–

No

Trade sale

–

No

Trade sale

–

No

Secondary buyout

170

–

–

600

Yes

–

420

Yes

–

820

Yes

–

100

No

–

1650

Yes

–

2527

Yes

–

890

Yes

–

2900

Yes

–

184

No

–

400

Yes

–

50

Yes

–

–

No

–

–

No

–

–

No

–

–

No

–

223

No

–

–

No

–

179

Yes

–

525

Yes

–

39941

Yes

–

495

Yes

–

100

Yes

–

–

Yes

–

492

Yes

–

892

Yes

–

–

Yes

–

654

No

–

24

Yes

–

35

No

–

11545

Yes

119

Danish Venture Capital and Private Equity Association

Comments

Majority shareholder from June 2005.

Merged with Brightpoint, of which Nordic Capital controls around 37%.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

2006

–

Jacob Holm and Sons STA (and Tytex)

Advanced textiles

LD Equity

2006

–

Biva

Furniture

Dania Capital, Odin Equity Partners

2006

–

Netcompany

Portals, e-commerce, CRM

Axcel

2006

–

Arovit Petfood

Animal feed

Gilde

2006

–

Color Print

Printed advertising material

Polaris

2006

–

Da’Core

Home textiles

LD Equity

2006

–

Hi-Con

Balconies, concrete

Jysk-Fynsk Kapital

2006

–

J. Hvidtfeldt Larsen

Mobile systems for cleaning liquid materials

LD Equity

2006

–

TCM Group

Kitchens

Axcel

2006

–

Zone Company Denmark

Ironmongery

Procuritas

2006

–

FM-Søkjær

Detached houses

Axcel

2006

–

Alfred Priess

Master and transformer stations

Dansk Generationsskifte

2006

–

Ball Group

Fashionwear

Axcel

2006

–

Bang & Olufsen Medicom

Meditech development

LD Equity

2006

–

Bodilsen

Furniture

EQT

2006

–

Dansk Cater

Catering

Altor

2006

–

Kabooki

Children’s clothes

Jysk-Fynsk Kapital

2006

–

Lilleheden, Palsgaard, Høeg Hagen, Interbuild

Building timber

LD Equity

2006

–

Noa Noa

Fashionwear

Axcel

2006

–

TIA Technology

Policy handling software for the insurance industry

Dansk Kapitalanlæg

2006

–

Carl Vollstedt Eftf.

Sausages and delicatessen products

Industri Udvikling

2006

–

Despec Nordic

Distribution of office and IT accessories

Industri Udvikling

2006

–

E.J. Badekabiner

Prefabricated bathrooms

Industri Udvikling

2006

–

Jönsson Gruppen

Building control, turnkey and general contracts

Industri Udvikling

2006

–

Labofa Munch

Office furniture

Industri Udvikling

2007

–

C.F. Nielsen

Briquette presses

Dansk Kapitalanlæg

2007

–

Mahe Freight

Air freight

Odin Equity Partners

2007

–

ScanAm Transport (now a part of Scan Global Logistics)

Transport and logistics

Odin Equity Partners

2007

–

Stema Engineering

Machines for steel production

Odin Equity Partners

2007

–

Cane-Line and Sika Horsnaes

Furniture

Langholm Capital

2007

–

Matas

Cosmetics

CVC

2007

–

A+

Data and telecommunications

LD Equity

2007

–

Haslev Møbelsnedkeri

Furniture

Erhvervsinvest

2007

–

Essential Aircraft Maintenance Services (EAMS)

Aircraft maintenance

LD Equity

2007

–

KA Interiør

Furniture

Dansk Kapitalanlæg

2007

–

KE Fibertec

Ventilation

Jysk-Fynsk Kapital

2007

–

Blip Systems

Solutions for mobile marketing

LD Equity

2007

–

DAKO

Medical equipment for cancer screening

EQT

2007

–

EET Nordic

IT accessories

Capidea

2007

–

Hurup Møbelfabrik

Furniture

Erhvervsinvest

2007

–

Hamlet Protein

Soya protein for special feed

Polaris

2007

–

Icopal

Roofing felt

Investcorp

2007

–

Imerco

Ironmongery

M. Goldschmidt Capital

2007

–

Mammamia Danmark

Café chain

SR Private Brands

2007

–

Scandlines

Passenger and freight ferry services

3i, Allianz Capital

2007

–

SystemTeknik

Electric control panels

Jysk-Fynsk Kapital

Danish Venture Capital and Private Equity Association

120

IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

–

500

No

–

360

Yes

–

130

Yes

–

1155

Yes

–

1200

Yes

–

136

No

–

40

Yes

–

160

Yes

–

600

Yes

–

160

Yes

–

379

Yes

–

170

Yes

–

400

Yes

–

126

Yes

–

817

Yes

–

2700

Yes

–

125

Yes

–

850

Yes

–

540

Yes

–

42

Yes

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

Yes

950

Yes

–

2000

Yes

–

303

Yes

–

228

Yes

–

2700

Yes

–

93

No

–

–

–

–

–

Yes

–

–

Yes

–

55

Yes

–

–

Yes

–

1700

Yes

–

750

Yes

–

–

–

–

210

Yes

–

7000

Yes

–

1300

–

–

90

No

–

4078

Yes

–

112

Yes

121

Danish Venture Capital and Private Equity Association

Comments

The two funds each own 40%.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

2007

–

Unifeeder

Container shipping

Montagu

2007

–

Aagaard-Bræmer Holding

Jewellery

Capidea

2007

–

AH Industries

Metal components for wind power and offshore

Ratos

2007

–

Cimbria

Machinery for the food industry

EQT

2007

–

Contex

Scanners and image processing

Ratos

2007

–

Dansk Overflade Teknik (DOT)

Surface treatment

Jysk-Fynsk Kapital

2007

–

H.P. Værktøj

DIY and nonfood products

Dansk Generationsskifte

2007

–

IT2 Holding

Treasury management systems

CapMan

2007

–

Skamol

Hot-insulating materials

Polaris

2007

–

Winnie Papir

Wrapping paper

LD Equity

2007

–

Wrist Group

Ship supply

Altor

2007

–

Calamus

Wholesale in radios, TVs and computers

Altaria

2007

–

Hansen & Pedersen

Men’s clothing

Polaris

2007

–

Skovbo

Wooden houses

Polaris

2007

–

Bramming Plast-Industri

Industrial cellular plastic products

LD Equity

2007

–

Gatetrade

E-commerce

Warburg Pincus

2007

–

Louis Poulsen Lighting (now Targetti Poulsen)

Designer lamps

3i

2007

–

Schou Company

Ironmongery

Dansk Generationsskifte

2007

–

Transmedica

Temping agency in the health sector

Odin Equity Partners

2007

–

Unidrain

Drainage

SR Private Brands

2007

–

Barto Holding

Customised steel solutions

LD Equity

2007

–

IDEmøbler

Furniture

Axcel

2007

–

K.P. Komponenter

Metal components

Capidea

2007

–

Unwire

Mobile solutions for consumers

LD Equity

2007

–

ElitePlast-Hammar Display

Display solutions

Deltaq

2007

–

Fan Milk International (Emidan)

Dairy products and equipment

LD Equity

2007

–

Johs. Møllers Maskiner (JMM Group)

Contracting equipment

LD Equity

2007

–

Riegens

Lighting

Erhvervsinvest

2007

–

Bila

Automation solutions with robots

Industri Udvikling

2007

–

Dansk Mink Papir (DMP Partners)

Production and distribution of equipment for the mink industry

Industri Udvikling

2007

–

Dan-Web

Manufacture of machines for paper pulp processing

Industri Udvikling

2007

–

Glenco

Heating, plumbing and sanitation, ventilation and electricity

Industri Udvikling

2007

–

Intego

Electrical installation for industry and infrastructure

Industri Udvikling

2007

–

Interieur

Set-up solutions for the retail trade

Industri Udvikling

2007

–

Stema

Bending machines for reinforcing steel

Industri Udvikling

2008

–

BabySam

Retail in baby equipment

Polaris, AAC

2008

–

Holmris Office

Office solutions

Industri Udvikling

2008

–

Kosan Crisplant

Sorting systems

United International Bank

2008

–

Tøjeksperten

Men’s clothing

Polaris

2008

–

Alpharma API

Pharmaceutical ingredients

3i

2008

–

Biblioteksmedier

Loan materials for libraries

LD Equity

2008

–

Pandora

Jewellery

Axcel

2008

–

SSG A/S

Damage control services

LD Equity

2008

–

United Textile Group

Ladies’ clothing

Jysk-Fynsk Kapital

–

–

A/S Jydsk Aluminium Industri

Aluminium cast articles

Industri Udvikling

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IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

Comments

–

2799

Yes

–

185

Yes

–

375

Yes

–

1266

Yes

–

728

Yes

–

500

No

–

550

–

–

60

Yes

–

260

Yes

–

240

Yes

–

25000

Yes

–

200

Yes

–

600

Yes

–

60

Yes

–

240

Yes

–

–

Yes

Acquisition investment for Mach.

–

825

No

Bought together with Targetti. Transaction structured as share capital expansion by Targetti.

–

450

Yes

–

–

No

–

48

No

–

108

No

Additional investment for Fiskarhedenvillan in Sweden.

–

1300

Yes

–

–

Yes

–

100

Yes

–

45

Yes

–

600

No

–

800

No

–

300

–

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

303

No

–

500

Yes

–

113

No

–

302

Yes

–

1100

Yes

Acquisition investment for Hansen & Pedersen.

–

654

Yes

Norwegian headquarters, but majority of production takes place in Denmark.

–

293

Yes

–

1100

Yes

108

No

–

250

Yes

–

–

–

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Formerly part of Glenco A/S.

IX. List of buyouts in Denmark

Entry year

Exit year

Name

Sector

Acquiring fund

–

–

Bilcon

Aluminium tankers

Industri Udvikling

–

–

Bilwinco

Fully automated weighing/dosing solutions

Industri Udvikling

–

–

BioDan

Diarrhoea remedies and dietary supplements for animals

Industri Udvikling

–

–

Danplate

Laminated wood

Industri Udvikling

–

–

Dansk Møbelglas

Furniture and façade glass

Industri Udvikling

–

–

Fibo Maskiner

Production plant for the light concrete industry

Industri Udvikling

–

–

First Impression

Information kiosks

Industri Udvikling

–

–

Gama Dan Equip

Solutions for the photographic industry

Industri Udvikling

–

–

GJ Industrilakering

Industrial lacquering

Industri Udvikling

–

–

GK Glas

Double glazing

Industri Udvikling

–

–

Globe Meat Technology

Abattoir start-up and operation

Industri Udvikling

–

–

Green Farm Energy

Energy systems based on biogas

Industri Udvikling

–

–

Gråkjær Staldbyg

Stabling for pigs and cattle

Industri Udvikling

–

–

HMK Holding

Vehicle body building

Industri Udvikling

–

–

Hokodan

Machining work on large steel articles

Industri Udvikling

–

–

ICEA Denmark

Film and photo packaging products

Industri Udvikling

–

–

I-Data International

Printer connectivity products

Industri Udvikling

–

–

Incon

Internal transport systems

Industri Udvikling

–

–

J. Zartow

Knitwear

Industri Udvikling

–

–

KE Fibertec

Ventilation and extraction filters in fibre

Industri Udvikling

–

–

Kjærgaard – El & Industri Automatik

Industrial automation and electrical installation

Industri Udvikling

–

–

Marketing Group

Playthings in known brands on licence

Industri Udvikling

–

–

MatchWork World Wide

Internet-based job procurement systems

Industri Udvikling

–

–

Mermaid Technology

Computers and flat screens

Industri Udvikling

–

–

Metropak

Printing on metal and manufacture of metal packaging

Industri Udvikling

–

–

Multifurn

Sale of furniture

Industri Udvikling

–

–

Nordjysk EDB-Center

IT consultancy

Industri Udvikling

–

–

NTD International

Ships and ship equipment

Industri Udvikling

–

–

P.N. Erichsen Holding

Machine parts for the wind power industry

Industri Udvikling

–

–

PNE Steel

Machining work on large steel articles

Industri Udvikling

–

–

Saint Tropez Holding

Wholesale and retail in fashionwear

Industri Udvikling

–

–

ScanView

Scanners and imagesetters

Industri Udvikling

–

–

Stema Engineering

Bending machines for reinforcing steel

Industri Udvikling

–

–

Sunprojuice Denmark

Raw materials for juice manufacturers

Industri Udvikling

–

–

Syntax Gruppen

Back-office solutions for the retail industry

Industri Udvikling

–

–

Tinglev Elementfabrik

Concrete elements for construction

Industri Udvikling

–

–

Trip Trap Denmark

Furniture and gift products

Industri Udvikling

–

–

Tømrer & Snedkergården

Manufacture of windows and doors in wood

Industri Udvikling

–

–

Ulmadan Productions

Edge processing machinery

Industri Udvikling

–

–

Ulmadan Research & Development

Edge processing machinery

Industri Udvikling

–

–

UM

Teaching equipment for physics and chemistry

Industri Udvikling

–

–

Vildbjerg Papir

Printing and production of paper bags

Industri Udvikling

–

–

Zacho Mørup

Knitwear

Industri Udvikling

–

–

Zealand Care

Aids for the elderly and disabled

Industri Udvikling

–

–

Åkerbergs Maskiner

Mobile cranes

Industri Udvikling

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IX. List of buyouts in Denmark

Exit to

Approx. revenue at time of acquisition (DKKm)

Is the PE fund majority shareholder?

–

–

–

–

–

–

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

–

–

No

Source: Robert Spliid and DVCA.

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Comments

Guidelines

More openness creates value for private equity funds and their investors Foreword

Since autumn 2007 a large number of DVCA’s members have been working on creating the framework for greater openness and transparency in private equity funds. With these guidelines DVCA hopes to kick-start a dialogue on active ownership.

The guidelines will set new standards for the communication of private equity funds with the outside world. DVCA is aware that parts of the outside world have hitherto perceived the industry as being too closed, and naturally we ourselves must accept the main responsibility for this. DVCA recognises that dialogue with the outside world not only brings about greater appreciation of how we work, but may also be valuable for enabling the industry to pick up the signals that the outside world is sending.

The drawing up of the guidelines is just the beginning. Now they must be put into operation, and in future this will be reflected in greater openness in private equity funds and in the companies which the funds own. DVCA will itself lead the way with a more proactive role which can help to direct more focus on how active ownership can create sound, strong companies. Among other things, DVCA will in future be publishing a yearly report containing detailed accounts of progress in the industry.

During the working process, DVCA has drawn on the services of an external reference group consisting of Ingerlise Buck (head of department, Danish Confederation of Trade Unions, LO), Professor Jan Schans Christensen (University of Copenhagen), Jørgen Mads Clausen (CEO, Danfoss), Bjarne Graven Larsen (chief investment officer, ATP), Peter Schütze (head of retail banking, Nordea) and Bente Sorgenfrey (chairwoman, Confederation of Professionals in Denmark, FTF). We would like to take this opportunity to thank them for the outstanding commitment of this group to the work on the guidelines. However, it must be stressed that the responsibility for the guidelines rests solely with DVCA. A special thank you must also go to the working group which, on behalf of the industry, has taken time to draw up the guidelines.

DVCA will now monitor how the guidelines are observed and how important they prove to be for our stakeholders. On this basis, in 2010 we will evaluate the need to revise the guidelines.

Ole Steen Andersen Chairman, DVCA Christian Frigast Chairman of DVCA’s working group and deputy chairman, DVCA

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Introduction

“A private equity fund can be seen as a professional investment vehicle where a number of investors – typically pension funds, financial institutions and large companies – invest in companies deemed ripe for acquisition.”

What is a private equity fund and how does it work?

A private equity fund is a professional investment vehicle where a number of investors 1 – typically pension funds, financial institutions and large companies – invest in companies deemed ripe for acquisition via a management company which advises on investments in companies matching the criteria agreed on by the investors and the fund.

The fund exercises active ownership on behalf of the investors and develops the companies with a view to increasing their value. Active ownership means that the fund not only makes capital available but also works actively with the company’s board and management on the company’s development.

The typical investment horizon for those investing in private equity funds is 10–12 years. During this period, known as the commitment period, the funds use the time to find the right companies in which to invest and then spend the rest of the period developing and subsequently selling these companies.

Characteristic of private equity funds’ investments in companies is for a combination of equity and loan capital to be injected when the acquisition is financed, and for a group of key employees to become co-owners of the company along with the private equity fund.

Characteristic of private equity funds’ investments in companies is for a combination of equity and loan capital to be injected when the acquisition is financed, and for a group of key employees to become co-owners of the company along with the private equity fund.

When a private equity fund is set up, it receives a binding commitment on the provision of capital from its investors. In Denmark, this is typically via a limited partnership or similar corporate form familiar to investors from international private equity funds. The fund’s management company is then free to use this capital within the agreed constraints.

The management company exercises its right to draw on committed capital as companies are acquired. Investors’ capital therefore remains with the investors until a concrete investment is made, and repayments are made through ongoing divestments of companies. This results in the best possible use of investors’ capital.

The fund’s overall return depends on the performance of the individual companies in which it has invested. Two different methods can be used to measure this return: the internal rate of return (IRR) or a return multiple, namely the relation-

1. Investors are also known as limited partners.

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ship between the amount paid when the fund is liquidated and the amount that the fund has drawn from its investors.

The average annual return on investment in companies owned by private equity funds in Europe in 1996–2006 as measured by the IRR method was 13.6%.2 In Denmark the return on divested companies was just above 30% p.a. in the period from 2000 to 2007.

Why is there a need for guidelines for private equity funds?

In Denmark, private equity funds and the companies in which they invest are covered by the same legislation as other businesses. However, private equity funds have a responsibility for and interest in ensuring that the sector in general behaves and is perceived as a credible corporate citizen, and that there is broad understanding of private equity funds’ business model. This requires that the funds exercise responsible ownership.

As a result of the relatively high returns that many funds have generated in recent years, more and more money is being invested in private equity funds.

Private equity funds therefore own a growing proportion of companies, both in Denmark and abroad. For example, it was estimated in 2006 that approximately 4% of employees in the Danish private sector worked for companies owned by such funds.3 When a company is taken over by a private equity fund, the main goal is to increase the value of the company by developing and strengthening it. This is typically achieved by accelerating its growth and raising its profitability, often combined with acquisitions of other companies or activities. The company may also be streamlined through the divestment of non-core activities.

After a company has been taken over by a private equity fund, significant strategic changes will normally be made so that the company is as well-equipped as possible to tackle the specific challenges that it faces. These sometimes farreaching change processes – as well as recent years’ increased activity in the private equity sector – have resulted in greater public interest in private equity funds, both in Denmark and abroad. This has led to a growing desire for openness about the way in which private equity funds do business. This applies

2. Source: European Private Equity & Venture Capital Association (EVCA).

3. Source: Kapitalfonde i Danmark [Private equity funds in Denmark], Økonomisk Tema, Danish Ministry of Economic and Business Affairs, November 2006.

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throughout the cycle from the initial acquisition of a company through its development and on to its sale to new owners after a number of years.

Private equity funds, investors and the rest of society have a mutual interest in the companies owned by private equity funds being competitive on a healthy basis. Responsible ownership in private equity funds means that funds have an opportunity to develop their companies in close collaboration with each company’s board, management and employees. One important requirement in this respect is for the wider society to be confident that private equity funds operate on a known and transparent basis. DVCA wishes to promote this through these guidelines, which pave the way for openness and dialogue through better reporting and greater transparency.

Private equity funds, investors and the rest of society have a mutual interest in the companies owned by private equity funds being competitive on a healthy basis.

Responsible ownership in private equity funds means that funds have an opportunity to develop their companies in close collaboration with each company’s board, management and employees.

Companies owned by private equity funds fall somewhere between companies owned by individuals or foundations, which are not subject to exacting communication and disclosure requirements, and listed companies, which are subject to detailed rules on reporting to the outside world. It is therefore important to stress that there are a number of key differences between the communication from a listed company and that from a company owned by a private equity fund.

In listed companies, ownership is typically spread across thousands of different owners (shareholders) who are constantly trading in the company’s shares, which means that a company must communicate proactively with the public to ensure that important information about the company reaches both existing and prospective new shareholders simultaneously. Companies owned by private equity funds differ significantly from this because they may have as little as one owner. There is also the important difference that the company’s shares are not constantly changing hands. The company and the fund that owns it have direct and more informal access to both the fund’s ultimate investors (limited partners) and the company’s employees.

Communication between a fund and its investors also differs significantly from listed companies’ communication with their shareholders and the market in general. This is because an investor in a private equity fund commits his investment to a portfolio of companies for a lengthy period of time (corresponding to the life of the fund), whereas a shareholder in a listed company can, in principle, decide at any time to sell his shareholding, as mentioned in the previous paragraph. The information needs of an investor in a private equity fund are therefore different and typically of a more long-term/strategic nature than those of a shareholder in a listed company.

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Listed companies are subject to formal requirements for detailed quarterly financial reporting. This is needed to ensure that all shareholders always have the same insight into a company’s performance. By way of contrast, a private equity fund’s close relationship with its investors can provide a better opportunity to focus on the long term, because it is agreed from the outset that the fund will pursue a strategy for each individual company that may stretch over 5–7 years.

This does not necessarily mean that investors receive less information. They simply receive it on a more ad hoc basis and are not limited to quarterly reports.

Companies owned by private equity funds therefore avoid the administrative burden associated with preparing formal quarterly reports etc.

However, it has to be recognised that today’s private equity funds own companies that may be of broad interest to society. These may be companies that are important for infrastructure or play a major role in the local area. They may also be companies that employ large numbers of people. In addition, many investors in private equity funds are pension funds, whose most important stakeholders are pension savers – typically ordinary salary earners.

The general public may therefore have an interest in gaining insight into how a private equity fund works and creates value. This is the background to why these guidelines specify a number of areas where private equity funds and their portfolio companies should publish information.

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4% In 2006 approximately 4% of employees in the Danish private sector worked for companies owned by private equity funds.

DVCA’s guidelines for responsible ownership and good corporate governance in private equity funds in Denmark Introduction to the guidelines

These guidelines apply at both company level and fund level. They also touch on DVCA’s communication at sector level. First there is a brief description of relevant stakeholders and the application and scope of the guidelines.

Comments are attached to the guidelines to some extent. These comments are not part of the guidelines but briefly present the background to them.

DVCA has attempted to make the guidelines sufficiently flexible for them to be applied in practice in the world in which private equity funds and their companies operate – a world of constant change in both terms and expectations. It is therefore intended that the need to revise the guidelines will be assessed in 2010.

The guidelines make allowance for the diverse nature of private equity funds and their portfolio companies, which implies that there may be differences in good corporate governance and the way in which active ownership is exercised.

DVCA is of the opinion that it is neither possible nor desirable to have specific and detailed legislation in this area.

The use of these guidelines on a “comply or explain” basis instead of legislation is dependent on the responsibility shown by private equity funds. This selfregulatory approach engenders an expectation that, as a general rule, private equity funds will comply with these guidelines, and that these guidelines are a suitable instrument for increasing general levels of information. This is first and foremost because such self-regulation is based largely on values accepted by a broad majority of players. However, not all funds and companies are alike, and so there is a need for a degree of flexibility.

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Contents

I. The guidelines’ origins, target group and stakeholders . . . . . . . . . . . . . . . . . . . . . . . . .134 1. Content and application of DVCA’s guidelines for responsible ownership and good corporate governance in private equity funds in Denmark . . . . . . . . . . . . . .134 2. Who has an interest in these guidelines? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134 3. DVCA’s working group on transparency and active ownership in private equity funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136 4. Entry into force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 5. Which private equity funds and companies are covered? . . . . . . . . . . . . . . . . . . . . .137 II. Guidelines at company level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138 1. Requirements for reporting and corporate governance . . . . . . . . . . . . . . . . . . . . . .138 2. Submissions to DVCA by private equity portfolio companies . . . . . . . . . . . . . . . . .140 III. Guidelines at fund level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142 1. Communication and reporting by a private equity fund . . . . . . . . . . . . . . . . . . . . .142 2. Submissions to DVCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144 3. Reporting to limited partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144 4. Requirements for communication by private equity portfolio companies . . . . . .145 5. Private equity funds’ relations with their industrial network . . . . . . . . . . . . . . . . . .147 IV. DVCA in the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148 1. Requirements for DVCA’s communication and data resources . . . . . . . . . . . . . . . .148 2. DVCA’s committee for good corporate governance in private equity funds . . . . .148 Appendices Appendix A: Funds covered by DVCA’s guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 Introduction to Appendix B: Walker Working Group – the UK guidelines . . . . . . . . . . . .150 Appendix B: Comparison of Danish and UK guidelines for private equity funds . . . . . .152

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I. The guidelines’ origins, target group and stakeholders 1. Content and application of DVCA’s guidelines for responsible ownership and good corporate governance in private equity funds in Denmark

These guidelines have been developed under the auspices of DVCA and are the responsibility of DVCA. To ensure that the guidelines reflect relevant stakeholders’ needs for transparency, the process has been linked to an external reference group which has monitored and commented on the development of the guidelines. This reference group, which represents private equity funds’ most important stakeholders, comprised: Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO) Jan Schans Christensen, professor of corporate law, University of Copenhagen Jørgen Mads Clausen, chief executive officer, Danfoss Bjarne Graven Larsen, chief investment officer, ATP Peter Schütze, head of retail banking, Nordea Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF) Jan Schans Christensen not only commented on the content of the guidelines but also advised DVCA on their design.

2. Who has an interest in these guidelines?

The main target group for these guidelines is private equity funds operating in Denmark and the companies in which they have invested. The guidelines are also expected to be of interest to investors in these funds and to employees, creditors, advisers and public bodies. The wider public may also have an interest in gaining an insight into how private equity funds work.

As members of DVCA, private equity funds and portfolio companies that meet the criteria set out below are expected to follow these guidelines on a “comply or explain” basis. This means that, as a general rule, the funds and their companies are expected to comply with these guidelines. Where a fund or company does not comply with the guidelines, the reasons for this are to be given.

DVCA wants these guidelines to serve as a practical tool. DVCA will therefore always engage in dialogue with funds and portfolio companies that can be expected to be covered by the guidelines. The definitions below should therefore be taken only as a general guide as to whether funds and companies are covered by the guidelines.

DVCA also encourages other players that operate as private equity funds but do not immediately fall under these definitions to subscribe to these guidelines.

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DVCA’s reference group Jørgen Mads Clausen, chief executive officer, Danfoss Jan Schans Christensen, professor of corporate law, University of Copenhagen Ole Steen Andersen, chairman, DVCA Peter Schütze, head of retail banking, Nordea Ingerlise Buck, head of department, Danish Confederation of Trade Unions (LO) Not pictured: Bjarne Graven Larsen, chief investment officer, ATP Bente Sorgenfrey, chairwoman, Confederation of Professionals in Denmark (FTF)

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DVCA’s working group Søren Vestergaard-Poulsen, CVC Thomas Schleicher, EQT Michael Haaning, Nordic Capital Christian Frigast, Axcel (chairman) Søren Møller, LD Equity Viggo Nedergaard Jensen, Polaris Anders Bruun-Schmidt , Dania Capital Bill Haudal Pedersen, Deloitte Not pictured: Christian Dyvig, Nordic Capital Lars Berg-Nielsen, Deloitte

3. DVCA’s working group on transparency and active ownership in private equity funds

DVCA’s transparency and active ownership project has been led by a working group comprising a number of representatives of private equity funds that operate in Denmark: Lars Berg-Nielsen, Deloitte, Anders Bruun-Schmidt, Dania Capital Christian Dyvig 4, Nordic Capital Christian Frigast, Axcel (chairman) Søren Møller, LD Equity Viggo Nedergaard Jensen, Polaris Private Equity Thomas Schleicher, EQT Søren Vestergaard-Poulsen, CVC The working group has been assisted by communication consultant Joachim Sperling (project manager), state-authorised public accountant Bill Haudal Pedersen from Deloitte, senior consultant Gorm Boe Petersen from DVCA, and chief financial officer Lars Thomassen and communications manager Trine Juul Wengel from Axcel.

4. Succeeded by Michael Haaning in January 2008.

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I. The guidelines’ origins, target group and stakeholders

4. Entry into force

The part of the guidelines that concerns private equity funds enters into force on 1 January 2009. Provisions relating to disqualification apply from today’s date, cf. paragraph 5 of section III on private equity funds’ relations with their industrial network.

At company level, the guidelines apply to financial years starting on or after 1 January 2008.

5. Which private equity funds and companies are covered?

A private equity fund is covered by these guidelines if it is: B

a private equity member of DVCA and

B

has committed capital of at least DKK 500 million, calculated as total committed capital for all funds that are managed by a given management company (general partner) and invest directly in companies and

B

has a company structure which includes one or more investors (limited partners) and

B

undertakes the bulk of its activities in Denmark.

Members of DVCA whose ultimate parent company is registered in a country other than Denmark cannot therefore be required to comply fully with DVCA’s guidelines, as they may be subject to the guidelines that apply where the fund is registered.

Those parts of a foreign private equity fund’s activities that can be attributed to Danish investments are nevertheless covered by the guidelines in paragraphs 2–5 of section III in the same way as Danish private equity funds.

A private equity portfolio company covered by these guidelines is a Danish company (group) which B

is controlled 5 by one or more Danish or foreign private equity funds (regardless of whether these funds are covered by the guidelines) and

B

is, as a minimum, of a size resulting in classification as a class C (large) company under the Danish Financial Statements Act.

The criteria for class C (large) companies as at 1 January 2008 6 are: B B B

Revenue in excess of DKK 238 million (EUR 32 million) Assets in excess of DKK 119 million (EUR 16 million) More than 250 employees

5. Control means that a private equity fund has a decisive influence over the company in question.

6. On 3 June 2008 the Danish Parliament adopted an act amending the Danish Financial Statements Act (L 100) according to which, among other things, the criteria for class C (large) companies have changed with effect from financial years beginning 1 September 2008 or later. Subsequently, the criteria are DKK 286 million for revenue and DKK 143 million for assets.

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II. Guidelines at company level 1. Requirements for reporting and corporate governance

A. Background Compared to many other countries, such as the UK, relatively rigorous requirements are made of companies’ annual reports in Denmark. This means that private equity portfolio companies covered by these guidelines are already obliged under the Danish Financial Statements Act to include a management report in their annual reports, which generally entails a high level of information.

However, the Financial Statements Act is relatively unspecific about the level of detail that the information in the management report should contain, which means that there may be a need for information that is not covered by the requirements of applicable legislation. It has therefore been deemed appropriate to supplement the provisions of the act.

B. Guidelines Annual report in general Companies are to provide additional detailed information on the following in their annual reports as a supplement to applicable legislation: B Operational and financial developments B Corporate governance B Financial and other risks B Employee matters These extended requirements for the management report in the annual report build on two fundamental principles: substance over form, and materiality over box-ticking. This means, for example, that companies are to present information that is relevant to the company’s specific situation in the light of its being owned by a private equity fund.

It is recommended that the management report states that the company’s owner and thereby also the company are covered by DVCA’s guidelines. It is also recommended that reference is made to DVCA’s website, where these guidelines can be found.

The audited annual report is to be made available on the company’s website as soon as it is published.

Operational and financial developments The report on financial developments is to include a presentation of revenue and earnings broken down by principal business segment, together with a general assessment in the light of the established strategy.

The management report is also to include a description of the company’s expected revenue and earnings performance and of any significant changes in the established strategy.

Corporate governance The management report is to include information on the company’s ownership and capital structure. The main aim of this information is to provide an overview of the management set-up and capital structure established by the company’s owner – the private equity fund.

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This information is to include: a. Which private equity fund owns the company and the size of its holding b. Which partner(s) in the private equity fund represent(s) the fund in the company c. Who nominated the individual members of the board d. Capital structure (e.g. breakdown into share classes etc.) e. The general meeting (any special provisions in the articles of association concerning the board’s powers/authority to approve distributions etc.) f. Stakeholders (specification of who are the company’s primary stakeholders and what management is doing to accommodate them) g. The board’s work (number of board meetings, use of committees etc.) h. Current remuneration of the board and management i. Shares held directly by the board (collectively) and management (collectively) if they exceed 5% on the balance sheet date

Financial and other risks The report is to have a particular focus on financial risks associated with the chosen capital structure.

Where relevant to the company, the management report should also contain information on the company’s environmental performance and possible impact on climate change.

Employee matters The report is to cover employee turnover (terminations, recruitment, number of employees at beginning and end of year, broken down by Denmark and rest of world) and any other special matters of significance to employees.

Companies delisted in connection with a transaction To ensure that the flow of information – in the form of interim and annual reports in accordance with OMX Nordic Exchange Copenhagen’s rules – to the company’s shareholders while it was listed does not deteriorate as a direct consequence of the private equity fund’s takeover and delisting of the company, the company’s initial half-year and annual reports are to provide the same level of information as when the company was listed.

After this period, the company is to prepare a half-year report (without detailed financial information) that describes whether the company is pursuing the general aims published in the annual report for the previous year. This report is to be made available on the company’s website within three months of the end of the period.

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2. Submissions to DVCA by private equity portfolio companies

A. Background In order to provide the data needed to assess private equity fundsâ&#x20AC;&#x2122; activities, private equity portfolio companies covered by these guidelines are to submit a variety of information to DVCA (or a company designated by DVCA). See also the comments on DVCAâ&#x20AC;&#x2122;s duties in section IV.

B. Guidelines Companies covered by these guidelines are to submit data relating to the following to DVCA or the company designated by DVCA: B Revenue and earnings B Organic growth B Capital structure B Employee turnover (terminations, recruitment, number of employees at beginning and end of year, broken down by Denmark and rest of world) B Investment in human capital (employee development), investment in fixed capital, expenditure on research and development B Cash flows DVCA will send a guideline and a reporting form to the companies concerned.

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III. Guidelines at fund level 1. Communication and reporting by a private equity fund

A. Background The aim of these guidelines is to bring about the necessary transparency and information from private equity funds and the companies they own. Beyond this, the guidelines do not themselves make recommendations as to how ownership of portfolio companies is to be administered. However, DVCA advises its member companies to formulate guidelines for social responsibility in their investment policy. Because the investors behind private equity funds have very often already formulated such guidelines themselves, the development of guidelines for social responsibility can usefully be performed in collaboration with investors.

B. Guidelines Information on the private equity fund’s website A private equity fund covered by these guidelines is to include on its website: 1. Confirmation that the fund follows the “comply or explain” principle with regard to these guidelines.

2. Information on the extent to which the fund departs from these guidelines, with an explanation for any such departures.

3. A description of the fund’s history and origins.

4. A description of the fund’s management and organisation, including general partners and individual board members, showing significant directorships and other posts held by each member.

5. Possibility of downloading the management company’s accounts.

6. Where the carried interest programme for general partners departs significantly from the market standard, a general description of the programme is to be given.

The market standard is currently for general partners to receive carried interest (additional return) on their investment in a fund if they generate an annual return in excess of a basic rate of return (normally 8%) on committed capital after all costs (such as management fees). The size of this carried interest varies, but is typically 20% of any return generated over and above the 8% basic return. This basic return is also known as the “hurdle rate”.

Management fees and administrative expenses etc. are to be reimbursed before carried interest can be paid out.

7. General strategy for the fund, including a description of the fund’s working methods and strategy for developing companies (streamlining, restructuring, expansion etc.).

8. Policy on corporate social responsibility – a description of the fund’s principles for social responsibility in its investment policy.

9. Investment criteria a. The fund’s geographical focus b. The fund’s sector focus

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10. Investors by type and country. The breakdown by type is to show the proportions of pension funds, insurance companies, banks, funds of funds7, industrial investors, SWFs8, private investors etc. The breakdown by country is to be divided into Denmark, other Nordic, other Europe, USA, rest of world.

11. Information on assets under management.

12. A description of the fund’s companies stating a. Geographical location (Denmark, other Nordic, other Europe, USA, rest of world) b. Industrial sector (agriculture, food, textiles, chemicals etc. – cf. Statistics Denmark’s classifications) c. Contact names or references to the companies’ websites, key figures for the companies d. Examples of how the fund has created value in relation to its investments 13. General information on developments in portfolio companies and any significant changes in portfolio companies each year.

14. An overview of divestments by sector, fund and exit year with a description of the buyer of each company.

15. Possibility of downloading annual reports from portfolio companies (possibly in the form of a link to the portfolio company’s website).

16. Press contact.

7. A fund of funds is an undertaking whose primary activity is investing in private equity funds.

8. SWF is an abbreviation for sovereign wealth fund (a state-owned fund).

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III. Guidelines at fund level

2. Submissions to DVCA

A. Background It is appropriate for private equity funds covered by these guidelines to submit a variety of information to DVCA (or a company designated by DVCA) in order to provide the data needed to assess private equity funds’ activities. See also the comments on DVCA’s duties in section IV.

B. Guidelines A private equity fund is to submit the following information to DVCA: B The amount raised per fund and the upper limit for the size of the equity investments that the private equity fund may then make B Purchases and sales of companies and their enterprise value broken down by company

3. Reporting to limited partners

A. Background Limited partners are a private equity fund’s investors. Communication with limited partners is extensive and follows EVCA’s guidelines, which provide a standardised framework for communication.

As a result of the extensive and often business-critical communication between limited and general partners, it is not possible to share the content of this communication with the public. DVCA nevertheless recommends that, taking due account of their business model, funds impose as few restrictions as possible on their investors’ disclosures concerning their involvement in a particular fund.

B. Guidelines Private equity funds covered by these guidelines are to: 1. Follow established guidelines for communication with limited partners/ investors, which will normally be EVCA’s guidelines, which can be found at www.evca.org. This information is to include a short description of each individual investment in the fund, an overview of the individual limited partner’s involvement in the fund, and details of fees to general partners.

2. Value portfolio companies in accordance with the valuation guidelines published by the International Private Equity and Venture Capital Board (IPEV) or the Private Equity Industry Guidelines Group (PEIGG) or such other standardised guidelines as may be published in the future.

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III. Guidelines at fund level

4. Requirements for communication by private equity portfolio companies

A. Background Besides the general need for increased transparency in relation to private equity funds and the companies they own, there may be situations where there is a particular need for communication.

B. Guidelines General A private equity fund has a duty to communicate effectively with employees and other important stakeholders, either directly or through its portfolio company, throughout the period of ownership. This is to happen wherever relevant and possible, but taking due account of the legitimate interests of the private equity fund and the company in confidentiality, which may pose an obstacle to communication.

Private equity funds are to prioritise good and open ongoing collaboration with the company’s employees through information, consultation and negotiation with union representatives and other employee representatives.

The private equity fund and/or company must keep union representatives or other employee representatives updated through the company’s works council, employee-elected board members etc. concerning any plans the fund may have for the company that may be of material significance to employees. Information must also always be provided in accordance with applicable legislative requirements and stock exchange rules.

Communication in connection with a private equity fund’s acquisition of companies Regardless of whether investment is being made in a listed company or another type of company, planned investments are not normally communicated before they are made. However, this does not apply if disclosure is required by applicable legislation or stock exchange rules.

The following applies when a private equity fund takes over a company: In connection with the acquisition, the outside world is to be informed about the new owner’s plans for the company.

External communication, including press releases, is to contain, as a minimum, information on the following: B The new owner’s identity B The commercial rationale for the investment B Development plans for the company (general strategy) B Expectations for the company’s development B Expected ownership horizon B Effect on stakeholders The private equity fund and/or company is to hold meetings with union representatives or other employee representatives under the auspices of the company’s works council etc. to organise information for employees and develop a plan for internal communication.

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III. Guidelines at fund level

4. Requirements for communication by private equity portfolio companies (continued)

Internal communication in connection with a private equity fund’s acquisition of companies In connection with the acquisition of a company, the company’s employees are to be informed of the new owner’s plans for the company and of the opportunities and consequences that the change of ownership will have for employees.

This is to happen as early as possible and in accordance with relevant legislative requirements and stock exchange rules.

Communication materials, messages etc. should be formulated in collaboration with representatives of the company to ensure relevance and backing within the organisation.

A plan for internal communication in connection with the acquisition of a company is expected to contain the following: B Description of what is to be communicated to whom and when B Timetable for employee meeting(s) to present the new owners B Plan for following up on employee meetings, including follow-up on topics that employees can reasonably be expected to want answers to B Internal releases (elaboration of press release, possibly including the owners’ reasons for deciding to sell to the new owners) B Q&A list that as far as possible answers the questions that can be expected from employees and other stakeholders B Relevant internal communication, which is to be made as widely available as possible, either by using existing channels or by establishing new ones (intranet, newsletter etc.)

The private equity fund and/or company must also ensure that the company can fulfil its obligations under applicable labour agreements and legislation to ensure that union representatives or other employee representatives are kept informed and involved in matters of material significance to employees’ terms of employment as early as possible.

Communication in connection with a private equity fund’s sale of a company A plan for internal and external communication in connection with divestment is to be an integral part of the divestment strategy, and is to be developed in conjunction with the buyer of the company.

In principle, the buyer assumes responsibility for communication concerning the takeover of the company once the agreement is entered into. The private equity fund is as far as possible to ensure that DVCA’s guidelines for communication are observed during the sale process, regardless of whether the company’s new owner is a member of DVCA.

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III. Guidelines at fund level

5. Private equity funds’ relations with their industrial network

A. Background Private equity funds’ particular strength is active ownership in the form of the capacity to offer companies strategic advice, industrial expertise, suitable capital resources and a network based on the specific circumstances of the individual company.

Private equity funds’ industrial network (in other words, the people who either advise the management company or are included directly on companies’ boards) normally consists of people who are or have been active players in the industry. This group of people can advise at fund level on the acquisition and sale of companies, and contribute at portfolio company level to developing the company in question. This collaboration can take many different forms, including advising on a consultancy basis.

B. Guidelines There must be no doubt about whose interests the individuals involved in a transaction are acting in. This applies particularly if a person is actively involved in the management of a company and has a decisive influence over possible transactions.

Particular problems can arise when one or more private equity funds show an interest in a company in a purchase or sale situation. In such a situation, executives, directors and financial advisers of a candidate company who have a significant financial or commercial interest in the bidding private equity fund have a duty to inform the chairman of the company in question of this in accordance with standard disqualification principles. This applies regardless of whether this person is part of the private equity fund’s formal advisory network as published on the fund’s website.

The above applies from today’s date.

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IV. DVCA in the future 1. Requirements for DVCA’s communication and data resources

To create a better understanding of private equity funds, it is important that the sector itself takes responsibility for collecting and consolidating data. These data are to come from both portfolio companies and the funds.

DVCA is to publish a yearly report on the basis of a variety of information submitted by private equity funds and portfolio companies. This report is to include a general account of trends in the industry and a statement from DVCA’s corporate governance committee.

The idea is for DVCA’s yearly report to include general information on: B Total assets under management B Capital structure and financial gearing B Total return relative to benchmark B Number of employees in portfolio companies B Total number of acquisitions and transaction sizes B Key figures for portfolio companies, such as revenue and earnings B Estimates of changes in number of employees due to terminations and recruitment B Estimates of investment in fixed capital, R&D etc.

To support the preparation of an aggregated analysis at sector level of the main sources of value creation, the following are to be included: B Capital structure and financial restructuring B Growth in market multiples B Growth generated by strategic restructuring and operational improvements To ensure consistency from country to country, this analysis will be developed in close collaboration with Walker Working Group and the British Private Equity and Venture Capital Association (BVCA).

2. DVCA’s committee for good corporate governance in private equity funds

A committee will be appointed to monitor compliance with these guidelines and propose any necessary adjustments. This committee will comprise DVCA’s chairman, a state-authorised public accountant and an independent industry representative.

These guidelines are to be seen as a first step in creating a set of general rules for funds’ activities, and the idea is for the guidelines to evolve in line with practice in the sector.

In addition, the committee will issue an annual statement in connection with DVCA’s yearly report concerning the extent to which DVCA’s members have complied with the guidelines.

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Appendix A

Funds covered by DVCA’s guidelines List of private equity funds that are members of DVCA and covered by the guidelines as at 1 June 2008

Fully covered by the guidelines Axcel Capidea Dania Capital Dansk Kapitalanlæg EVO LD Equity Polaris Private Equity

Partially covered by the guidelines (see paragraphs 2–5 of section III) 3i Altor CapMan CVC Capital Partners EQT Industri Kapital Nordic Capital Nordic Growth Nordic Telephone Company (Apax, KKR, Permira, Blackstone, Providence)

Not as yet covered by the guidelines ATP PEP C.W. Obel Danske Bank – Danske Markets Danske Private Equity Deltaq Erhvervsinvest Nord Executive Capital Industri Udvikling 9 Jysk Fynsk Kapital KIRKBI SPEAS SR Private Brands

9. Has acceded to the guidelines.

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Introduction to Appendix B

Walker Working Group – the UK guidelines Background

Walker Working Group was established in 2007 by a number of international private equity funds with a view to developing a voluntary set of guidelines on openness and transparency in private equity funds operating in the United Kingdom. A consultation document setting out the foundation principles for the guidelines was published on 17 July 2007, and following a consulting process the final guidelines were published on 20 November 2007.

The guidelines follow the so-called comply or explain principle. This means that funds must either comply with the guidelines or explain why they are not complying.

Who is covered by the guidelines from Walker Working Group?

B Private equity funds authorised by the FSA that are managing or advising funds that either own or control one or more UK companies or have a designated capability to engage in such activity in the future B Companies which are acquired by one or more private equity funds in a secondary or other private transaction where enterprise value at the time of the transaction was in excess of GBP 500 million, more than 50% of revenue was generated in the UK, and there were more than 1,000 full-time employees

Greater requirements for communication by portfolio companies

Portfolio companies must provide the following in their audited annual reports in addition to the legislative requirements: A business review conforming to the provisions of § 417 of the Companies Act, incl. sub-section 5, which normally only applies to listed companies. This subsection lays down requirements pertaining to general trends and factors affecting the company’s future development, performance and market position, and also requires that information must be provided on environmental matters, employee matters and CSR.

New requirements for industry communication

The UK industry organisation for private equity funds – BVCA – will in future communicate more proactively with the outside world. Among other things, this means that an aggregated analysis will be carried out at industry level of the main sources of value creation in companies owned by private equity funds.

This concerns the effects of: B Gearing and financial restructuring B Growth in market multiples and earnings in the industry B Growth generated by strategic restructuring and operational improvements in the business

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About Walker Working Group

The responsibility for the work on the UK guidelines lay with Sir David Walker, former chairman of the board of Morgan Stanley. The working group established to advise him – Walker Working Group – consisted of representatives of a number of important UK and international funds: Sir Michael Rake, Chairman, British Telecom Adrian Beecroft, Deputy Chairman, Apax Partners David Blitzer, Senior Managing Director, Blackstone Group International Ltd. Anne Glover, Chief Executive, Amadeus Capital Partners Ltd. Robin Hall, Managing Partner, Cinven Baroness Hogg, Chairman, 3i Lord Hollick, Partner, KKR & Co Ltd. William Jackson, Managing Partner, Bridgepoint Dwight Poler, European Managing Director, Bain Capital Ltd. Rod Selkirk, Chief Executive, Hermes Private Equity A detailed summary of the differences and similarities between DVCA’s guidelines and the UK guidelines is given in the following pages.

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Appendix B

Comparison of Danish and UK guidelines for private equity funds DVCA’s guidelines

1. Who is covered by the guidelines?

Private equity funds

All private equity funds which are members of DVCA and exceed: – Total commitment > DKK 500 million

Portfolio companies

Companies (class C size under the Danish Financial Statements Act) which exceed: – Revenue > DKK 238 million (EUR 32 million) – Assets > DKK 119 million (EUR 16 million) – Number of employees > 250

2. Basic principles of the guidelines “Comply or explain”

Yes. Noncompliance must be published on the private equity fund’s or portfolio company’s website.

Substance over form

Yes

Materiality over box-ticking

Yes

3. Guidelines for portfolio companies’ reporting 3.1. Requirements for the annual report Deadline for publication

5 months from end of financial year (in accordance with the requirements of the Danish Financial Statements Act).

Requirement for a verbal statement on the current and expected financial activity

Yes. Management report (cf. requirements of the Danish Financial Statements Act).

The management report/business review must cover the following operational areas:

The company’s main activities

Yes

A statement on the progress of the company’s activities and financial affairs

Yes

The company’s expected progress, including special conditions and uncertain factors on which the management has based the description

Yes

Environmental issues

Yes

Employee matters, including knowledge resources of major importance for the company

Yes

A statement on employee turnover, including terminations, recruitment etc.

Yes

Social and societal issues

Yes, via other issues

Policies relating to the environment, personnel, and social issues and their effectiveness

Yes, via other issues

Research and development activities

Yes

Significant events occurring after the end of the financial year

Yes

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Comments

A company authorised by FSA which owns a portfolio company covered by the guidelines.

The UK works with a definition based on FSA authorisation, whereas Denmark works with a definition based on typical characteristics for private equity funds.

Companies which exceed: – Enterprise value > GBP 500 million – Revenue > 50% in the UK – Number of employees > 1,000

The Danish guidelines cover almost all companies owned by private equity funds, while the UK guidelines affect roughly only the 100 largest companies. Lower threshold in Denmark and no Danish requirement concerning distribution of revenue in Denmark.

Yes. Noncompliance must be published on the private equity fund’s or portfolio company’s website.

Yes Yes

6 months Yes. Business review + financial review.

The information in the business review is in line with listed companies in the UK. This must be seen in light of the fact that it is only the really big companies that are covered by the UK guidelines.

Yes Yes Yes Yes Yes No Yes Yes No Yes

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Appendix B: Comparison of Danish and UK guidelines for private equity funds

DVCA’s guidelines The management report/financial review must cover the following areas relating to financial risks/corporate governance:

The management report must include information on the special risks as well as ordinarily occurring risks within the company’s sector, including business and financial risks that may affect the company. This description must focus in particular on the financial risks that are associated with the chosen capital structure.

Which private equity funds own the company and the size of their holdings

Yes

Which partner(s) in the private equity fund represent(s) the fund(s) at the given company

Yes

Who the individual members of the board represent

Yes

Capital structure (e.g. breakdown into share classes etc.)

Yes

The general meeting (any special provisions in the articles of association concerning the board’s powers/authority to approve distributions etc.)

Yes

Stakeholders (who are the company’s primary stakeholders and what is the management doing to accommodate them)

Yes

The board’s tasks and responsibilities (employee representatives, number of board meetings etc.)

Yes

Current remuneration of the management and board

Yes

Shares held directly by the board (collectively) and management (collectively) if they exceed 5% on the balance sheet date

Yes

3.2. Requirements for reporting/communication Publication of annual report on the website

Yes

Requirement for a half-year update (verbal statement)

Yes, but only for delisted companies.

3.3. Key figures covered by reporting to the industry association Revenue and earnings

Yes

Employees

Yes

Capital structure

Yes

Investment in fixed capital

Yes

Investment in research and development

Yes

Cash flows

Yes

Responsibility for data handling

Audit firm/DVCA

Annual report prepared by

DVCA

4. Guidelines for private equity funds’ reporting and openness 4.1. Information on private equity funds’ websites Confirmation that the guidelines are being followed

Yes

Description of the fund’s history, origin, management and organisation

Yes

General strategy for the fund, including investment criteria (geography/sector)

Yes

Investors by type and country as well as investor policy

Yes

Description of carried interest programme

Yes, if it departs significantly from the market standard.

Description of policy for social responsibility

Yes

Statement of types of asset under management

Yes

Description of the fund's companies (geography, sector etc.)

Yes

Annual statement on general progress of portfolio companies

Yes

Statement on divestments

Yes

Possibility of downloading annual reports from portfolio companies

Yes

Press contact

Yes

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Appendix B: Comparison of Danish and UK guidelines for private equity funds

Walker Working Groupâ&#x20AC;&#x2122;s guidelines The financial review must include information on goals and policies for risk management in relation to the companyâ&#x20AC;&#x2122;s primary financial risks and uncertainties, including gearing (with references to relevant balance sheet items, cash flows and notes).

Yes Yes Yes No No No No No No

Yes Yes

Yes Yes Yes Yes Yes No Audit firm BVCA

Yes Yes Yes Yes No No No No Yes No No No

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Comments The Danish guidelines lay down requirements for information on corporate governance that are more extensive than those in the UK. The extended requirements are in accordance with the recommendations relevant for private equity funds that are laid down for listed companies in Denmark, cf. the Recommendations for good corporate governance.

Appendix B: Comparison of Danish and UK guidelines for private equity funds

DVCA’s guidelines 4.2. Reporting of data to the industry association The raised capital per fund in the previous year and the upper limit for the size of transactions that may then be carried out on this basis

Yes

Listing of purchases and sales of portfolio companies and the values thereof for the previous year

Yes

Estimate of the overall fees paid to external consultants and financial institutions in the previous year

No

Responsibility for data handling

Audit firm

Annual report prepared by

DVCA

4.3. Reporting to limited partners (the investors) The communication with limited partners/investors must comply with EVCA’s guidelines, and the continuous fund reporting must include: – Summary of each individual investment in the fund – Detailed overview of the individual limited partner’s investment and return in the fund – Details of management and other fees paid to general partners

Yes

Valuation of companies must follow the valuation guidelines published by the International Private Equity and Venture Capital Board (IPEV) or the Private Equity Industry Guidelines Group (PEIGG) or such other standardised guidelines as may be published in the future

Yes

Recommendation that, taking due account of their business model, funds impose as few restrictions as possible on their investors’ disclosures concerning their involvement in a particular fund

Yes

4.4. Private equity funds’ reporting of strategic changes in the portfolio companies Requirement that the private equity fund communicates effectively with employees and other important stakeholders either directly or through the portfolio company in connection with strategic changes.

This is to happen as early as possible and taking due account of the confidentiality aspects which may be a natural obstacle to communication

Yes. Also includes detailed guidelines for external and internal communication in connection with the private equity fund’s purchases and sales of companies as well as the continuous dialogue with employees via employeeelected board members and the works council. Effective communication must be carried out with employees throughout the ownership period.

If a company experiences problems in relation to its operations such that its financial situation is critical and it is not deemed possible to introduce further capital, the private equity fund’s board representatives must undertake not only to inform the investors but also to bring about the necessary initiatives to the extent that is practically possible

No. Danish legislation, including the Danish Bankruptcy Act, adequately ensures that the board must respond to financial difficulties.

5. Other matters General guidelines for private equity funds’ relations and use of industrial and other consultants

Yes

6. Continuous updating and observance of the guidelines A committee will be appointed for good corporate governance in private equity funds with the following tasks:

Yes

Assess the need for updating of the guidelines

Yes

Monitor that the existing guidelines are being observed by the private equity funds and their portfolio companies

Yes

Publish an annual report on the committee’s work, including statistical material on the private equity fund industry

Yes

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Walker Working Groupâ&#x20AC;&#x2122;s guidelines

Yes Yes Yes Audit firm BVCA

Yes

Yes

No

Yes. No further details.

Yes

No

Yes Yes Yes Yes

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Comments

CEBR research report:

Private Equity in Denmark

Introduction

The Centre for Economic and Business Research (CEBR) at Copenhagen Business School has produced a report on private equity in Denmark on behalf of DVCA. The full text of the report (in Danish) can be downloaded from DVCA’s website: www.dvca.dk.

The report is the result of an independent project carried out on the basis of a mandate agreed upon jointly by DVCA and CEBR. This mandate can also be found on DVCA’s website.

The researchers were granted access to study ten transactions in depth and had access to information that is not normally publicly available. The researchers were also given an opportunity to meet the companies’ management and the private equity funds’ partners.

DVCA believes that the report’s sections on capital structure and tax are of particular interest to the public, and so these sections are reproduced in lightly edited form below, together with the relevant parts of the report’s executive summary and a list of references.

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Executive summary Capital structure of private equity portfolio companies

Section I provides an overview of the capital structure of private equity portfolio companies. Perhaps the most important characteristic of private equity funds is that they undertake leveraged (debt-financed) buyouts, where the capital structure of the companies acquired is shifted towards more debt and less equity. This increase in debt has given rise to concerns about the financial vulnerability of the companies acquired. However, debt-financing the activities of a company or private equity fund is not necessarily a problem, rather a natural part of economic reality in modern society. The debt is matched by a risk assumed by professional lenders that must be assumed capable of looking after their own interests.

Through a survey of Danish companies, we have found that debt levels at private equity portfolio companies typically rise following the buyout, in some cases quite considerably, but are brought down again over time. We have not found reason to criticise the capital structure of private equity portfolio companies.

However, the complexity of private equity structures, including borrowing through holding companies and complex loan contracts, means that we cannot claim to have a complete picture. This can therefore be said to be another area where greater transparency is needed to clarify private equity funds’ impact on the wider economy.

Tax implications of private equity ownership

Section II reviews the tax implications of private equity buyouts. There is good reason to expect that, in most cases where a private equity fund takes over a company, the company will pay less corporation tax than if it had remained with its original owners. Private equity funds aim – and have unique opportunities – to increase the ratio of debt to equity at their portfolio companies. This leads to larger interest deductions, which erodes taxable income and translates into lower tax payments, at least in the short term.

The actual buyout generally leads to payments of tax by the previous owners on the capital gains they make on the sale of the company. Similarly, investors in the private equity fund will pay tax on their capital gains when they, in turn, sell on the company. However, these capital gains taxes are not unique to a private equity situation. The original owners could also sell the company later to another player, realise a capital gain and pay tax on this. It is therefore difficult to say whether, on balance, a period of private equity ownership leads to higher or lower payments of capital gains taxes.

In any case, corporation and capital gains taxes account for only part of the overall tax implications of a private equity fund’s ownership of a company. A complete picture requires information on where the previous owners invest their money after they have been bought out; where the banks supplying loan capital to the portfolio company obtained their funds; how the investors in the private equity fund finance their investments in the fund; and so on. It is particularly important to ascertain whether the increased deductions of interest on loan capital in the company (or holding company) are offset by increased taxation of capital income for those supplying funds to the banks furnishing the company with the additional loan capital.

There are a number of uncertainties when it comes to the tax treatment of private equity funds’ activities. The ongoing official review of (private equity funds and) acquired companies can be assumed to raise numerous issues requiring clarification. Nor can we rule out further changes in tax law, which may have an impact on the activities of private equity funds. However, this situation is by no means unique to Denmark. Equivalent uncertainties and points of contention concerning private equity funds’ tax position can also be found in other comparable countries.

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The research team behind the CEBR report Morten Bennedsen, PhD, professor, Department of Economics and CEBR, Copenhagen Business School Thomas Poulsen, PhD, senior analyst, CEBR, Copenhagen Business School Steen Thomsen, PhD, professor, Department of International Economics and Management, Copenhagen Business School Søren Bo Nielsen, PhD, professor, Department of Economics, Copenhagen Business School Not pictured: Jakob Bundgaard, PhD, associate professor, Law Department, Copenhagen Business School

Despite these elements of uncertainty, a private equity fund is nothing special from a tax viewpoint. It is a particular type of financial institution that “makes its living” from buying and selling companies, but the investments made by the funds and the cash flows resulting from these buyouts are captured by the tax system. However, it is also a fact that funds accentuate and test weaknesses in the tax system. For as long as interest on debt is treated differently to returns on equity, for as long as the taxation of international income remains inconsistent, for as long as there are problems differentiating between the fruits of labour and the returns on savings in the tax system, and for as long as different types of capital income are taxed in very different ways, taxpayers will be able to “think tax” and maximise their income by minimising their tax liabilities. Where this happens in connection with the activities of private equity funds, it seems to be an expression of a more general phenomenon.

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I.

Capital structure of private equity portfolio companies Capital structure refers in the first instance to the relationship between debt and equity, and in the second to the relationship between long-term and short-term debt. The level of debt finance – leverage – can be measured relative to either equity or earnings.

Characteristic of private equity funds is heavy debt-financing of both buyouts and subsequent investments in the companies acquired, which has given rise to criticism and concern about how the high debt burden will impact on the companies’ competitiveness.

However, it is worth noting that listed companies also make extensive use of debt finance when making acquisitions. Many listed companies have also adjusted their capital structure in favour of more debt and less equity, for example by buying back shares or paying high dividends. Debt finance is also used by private individuals, most notably for house purchases, which are mainly debt-financed in the form of mortgage loans (and in many cases the deposit too is financed with a bank loan). Thus almost anyone who has bought a home in recent decades has made a highly leveraged investment and reaped the rewards of this in a rising market, where a relatively small deposit can grow into a large amount of home equity. Most of us will also be familiar with the risks associated with falling house prices. So there is nothing unusual or suspect about debt-financing an investment.

So debt and leverage are not necessarily a problem. But there can be situations where debt may be problematic. For example, leverage played a significant role in the stock market crash of 1929 and the lengthy depression that ensued, and leverage has definitely exacerbated the ongoing sub-prime crisis. If equity levels at Danish companies fall to critical levels due to private equity ownership, these companies’ vulnerability to economic downturns and strategic room to manoeuvre will be drastically reduced. As bankruptcies and other financial problems at some companies can also impact on other companies, this can become a political issue, and so it is reasonable to consider whether there are any special problems associated with the capital structure of private equity funds and their portfolio companies.

Capital structure of private equity funds

An assessment of the capital structure of private equity portfolio companies requires a general understanding of the way private equity funds work.

Figure I.1. Capital structure of a private equity portfolio company.

Investors (committed capital)

Fund

Management company

Injection of (equity) capital

Lenders

Acquisition vehicle/holding company

Injection of (equity) capital

Portfolio company

Lenders

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A private equity fund’s equity consists of capital committed by pension funds and other investors that might otherwise have invested directly in equities and bonds. For a set period, the fund’s managers – the management company – are entitled to call capital from investors up to a pre-agreed level. The fund can supplement this capital with loans of, say, twice this amount, enabling it to acquire the target company from its previous shareholders (and, where necessary, settle its debts). The fund’s capital is transferred to an acquisition vehicle, which takes out the necessary loans from banks and other creditors and acquires the company. Following the takeover, it is not uncommon for the fund to have the company pay out a large dividend to the holding company, enabling it to pay off the loans taken out in connection with the buyout. This dividend is funded by reducing the equity of the acquired company and/or having it raise its own debt. This process is known as a debt push-down.

The acquisition vehicle/holding company can have several functions, and in large transactions there may be several holding companies one above the other.

It may be appropriate to differentiate between creditors, as debt further down the line (such as that taken out by the company itself) ranks higher and therefore entails less risk (and lower interest costs), while debt further up the line (in the holding company) is more risky (and expensive) because debt at the company itself is repaid first. There may also be tax incentives or other motives for holding company structures (see discussion of tax below).

A complete assessment of the capital structure of a private equity portfolio company demands a general understanding of the whole of this structure. For example, it is possible for the management company to call further investments from investors if this is deemed necessary. It is also possible that the holding company will take out further loans and invest in the company. On the other hand, there may be great pressure on the company to generate sufficient earnings for the holding company to be able to pay its borrowing costs out of dividends.

Legally speaking, there are watertight bulkheads between fund, holding company and portfolio company. Thus the fund is not legally obliged to help out a company in need. In practice, though, things are less clear-cut. The bankruptcy of a portfolio company will damage the management company’s reputation and make it difficult to borrow money or attract new investment in the future. In addition, there may be agreements with banks and other creditors that commit the fund beyond the company’s equity.

The possibility of calling additional capital from the fund’s investors gives an added level of security that makes it possible for portfolio companies and their holding companies to increase their leverage and secure better credit terms than a stand-alone company.

However, it is not always possible for a fund to avoid bankruptcies in its portfolio. While there have been hardly any examples of this in Denmark, there have been abroad. A downturn in the economic climate, rising borrowing costs and a tighter credit market can put companies with low equity levels under pressure.

Besides the risk of bankruptcy, there are costs due to companies losing their freedom to manoeuvre – for example, they might be unable to make attractive acquisitions in a troubled market.

Lenders are mainly banks, which often choose to share the risk with other banks through syndicated loans or other mechanisms. Buyouts of Danish companies are typically financed by Danish or Nordic banks, as they are assumed to know the business better and so be in a better position to assess the risk. This means that the company’s interest costs are typically matched by interest income at a

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Capital structure of private equity funds (continued)

Danish or Nordic bank. When it comes to large transactions, though, it is more common for the private equity funds to borrow from large foreign banks that are more willing to take on the risk. Very large companies may also issue bonds that are bought by institutional investors and others who find it attractive to accept this risk.

A key factor in this context is that banks are professional investors that must be assumed capable of assessing the risk they are taking on by lending to private equity portfolio companies. They can decide not to lend their money. They can demand a higher interest margin if they consider the risk to be greater than for other exposures. And they can impose special covenants on the borrower, such as monthly audited reporting of debt multiples to the bank, limits on debt/ EBITDA, loan credit quality, loan interest as a function of borrowing, charges on the company’s assets, rights to veto specific decisions and repayment in the event of sale.

Debt at private equity portfolio companies is, if at all, a problem first and foremost for the banks that have lent the money. So one might ask whether any debt problems (cf. the current credit crunch) should be put down to the funds or to the banks. Everything suggests that the credit crunch is due to a bubble in the housing market and the associated poor-quality (sub-prime) mortgages, whereas private equity funds are only a very small part of the problem.

The costs and benefits of debt (leverage)

In theory, debt has both costs and benefits. Researchers have not been able to pinpoint the best of all possible capital structures, and there seem to be differences in capital structure even between companies that are similar in other respects.

Other things being equal, debt finance has major benefits. Because shareholders are rewarded after creditors and accept more risk, they require a risk premium over and above the lending rate, which makes equity more expensive. In addition, interest costs are generally deductible for corporation tax purposes.

Finally, debt and interest costs serve as a constant reminder to management that capital is not free, and may therefore help to prevent unprofitable investments.

However, high debt levels increase the risk of a company not being able to meet its financial commitments, resulting in losses for creditors in the event of bankruptcy or financial problems. This is reflected not least in a higher rate of interest on the company’s debt, as banks and other creditors apply a risk premium. On top of this comes perhaps the most important issue, namely a loss of freedom to manoeuvre due to high interest costs and restrictive covenants, which may mean that profitable investments are not realised.

Where the line should be drawn – the mix of debt and equity that serves the company best – varies from company to company. During periods of low borrowing rates and economic growth, it will probably be advantageous to have higher levels of debt finance, while the benefits of a solid equity base only really emerge during more difficult times.

The following looks at a hypothetical example of a leveraged investment. A private equity fund finances a DKK 3bn buyout by investing DKK 1bn in an acquisition vehicle and borrowing DKK 2bn from the bank (giving a debt-to-equity ratio of 2, which is not unusual). The investment proves a success, as the value of the company increases by 100% over a period of time to DKK 6bn (roughly corre-

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sponding to the rise in the stock market from 2003 to 2006). Assuming unchanged debt, this means that the company’s equity has grown to DKK 4bn, giving a return on investment of 300% for the period.

Table I.1. Example of leverage.

DKKbn

Start

Finish

Return

Equity

1

4

300%

Debt

2

2

Value of company

3

6

100%

A leveraged investment is therefore advantageous when asset prices are rising, and many private equity funds with leveraged investments have undoubtedly benefited from rising share (asset) prices in recent years. On the other hand, though, it is not hard to see that a 33% decrease in the value of the company from DKK 3bn to DKK 2bn would completely wipe out its equity and give a return of -100%. In other words, debt (increased leverage) is not a fail-safe solution for lower capital costs.

Debt and capital costs in the company

On the face of it, reducing a company’s capital costs by taking out debt seems unproblematic. Imagine a company financed with 30% debt and 70% equity.

Borrowing costs are 6% (just above the bond rate), and the cost of equity is 9% (6% plus a 3% risk premium for a lower-ranking and riskier investment). The cost of capital is then 30%*6% + 70%*9% = 8.1%. If the capital structure is changed to 70% debt and 30% equity, the cost of capital is immediately reduced to 70%*6% + 30%*9% = 6.9%.

But to some extent this simple calculation is misleading. The underlying risk associated with the company’s earnings has not changed, and so, in theory, the change amounts only to a redistribution of risk between shareholders and lenders. Shareholders’ risk of not receiving dividends on their investments has increased (which should lead to a higher required rate of return), and the same applies to the banks’ credit risk (which should lead to a higher lending rate).

However, it is undeniable that it has often been possible to ignore this risk in practice, and that neither equity investors nor lenders have fully discounted the financial risk in their required rates of return.

Tax benefits of debt

Since the cost of debt can be deducted from a company’s taxable income, debt also has some rather more tangible tax benefits.

The following looks at a hypothetical example of the change in a company’s cost of capital due to increased borrowing. Imagine that the company has assets of DKK 5bn and that its debt is increased in connection with the buyout by DKK 2bn, which is used to buy back shares. Before the buyout, the company had debt of DKK 2bn and equity of DKK 3.5bn. As can be seen from table I.2, the increase in debt leads to a substantial reduction in the cost of capital from 7.4% to 6.0% if we ignore other taxes and the higher required rates of return on both equity and debt due to the increase in leverage. The effect of the increase in leverage on the value of the company corresponds to the increase in interest deductions, in this case DKK 500m.

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Table I.2. Example of reduction in cost of capital.

Tax benefits of debt (continued)

DKKbn

Start

Finish

Required rate of return (r)

Equity (E)

3.5

2

9%

Debt (D)

2

4

6%

Value of company (V)

5.5

6

Cost of capital

7.4%

6.0%

E D — · rE + — rD (1- tC ) V V Note: t C is the percentage rate of corporation tax, which has been set at 25% in this example.

What this example again fails to take into account is that higher leverage increases the risk associated with both equity and debt, and thereby the required rate of return on both equity and debt. On the other hand, higher leverage has a neutralising effect, as the company is now making more use of the cheaper form of capital. In a perfect capital market, these two effects will precisely cancel each other out. The only effect, therefore, is a reallocation of risk among the providers of capital; the overall level of risk is unchanged.

Empirical study

This section analyses leverage at a number of Danish private equity portfolio companies before and after acquisition. The data for the analysis are a combination of data from Vinten (2008) on 73 Danish companies bought out by one or more private equity funds, and data from Experian on these companies’ financial disclosures to the Danish Ministry of Economic and Business Affairs. Like Vinten (2008), we have used data for the parent companies, as these are generally the surviving entities. However, the figures are naturally sensitive to structural changes in capital structure over time (such as the phasing out of shareholder loans due to a change in the law) and differences between the companies in terms of holding companies and where the debt is located. They must therefore be taken only as a rough guide to the companies’ development.

Table I.3 analyses developments at the 73 companies before and after acquisition by private equity funds. The average company has assets of DKK 2bn (which is naturally related to a small number of very large transactions). The companies are growing rapidly pre-buyout in terms of assets, whereas the typical company’s assets fall post-buyout due to disposals and the optimisation of working capital. Debt is also growing pre-buyout, but not at the same rate as assets, and so the debt-to-assets ratio is in decline, which can be seen as unused debt capacity. Debt rises dramatically in the first year post-buyout, but is then brought down again. However, as assets are being reduced even more quickly, the debtto-assets ratio continues to climb.

Table I.3. Leverage at private equity portfolio companies.

DKKm

t-3

t-2

t-1

0

t+1

t+2

t+3

Debt*/assets

0.59

0.57

0.53

0.54

0.59

0.62

0.65

Debt*/equity

5.39

3.52

2.21

2.66

3.60

3.61

1.96

Assets

440,634

865,772

2,305,414

1,948,507

1,902,527

812,874

667,442

Debt

218,548

530,899

1,151,673

907,437

1,499,279

530,577

414,408

40,562

150,735

521,042

340,762

416,920

147,104

211,959

Equity

The table covers the period from three years prior to the year of acquisition until three years after the year of acquisition. 0 is the year of acquisition, t-1 the year before the year of acquisition, t+1 the year after the year of acquisition, and so on. *: Debt is the sum of current and non-current interest-bearing debt.

Note that this is a highly heterogeneous sample, resulting in substantial variations around the averages presented in the table.

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Equity is also reduced, but surprisingly not until years 2 and 3 post-buyout.

Nevertheless, equity in year t+3 seems to be markedly better than in year t-3 prebuyout. The overall picture is thus that ďŹ nancial leverage (debt/equity) falls in the years before the buyout, rises somewhat thereafter, and is then brought down again (and ends up lower than a couple of years before the buyout).

Movements in the debt-to-assets ratio are illustrated in ďŹ gure I.2.

Figure I.2. Debt-to-assets ratio.

0.70 0.60 0.50 0.40 0.30 0.20 0.10

t-3

t-2

t-1

0

t+1

t+2

t+3

It can be seen that, on average, debt falls relative to assets in all three years leading up to the buyout. There is a shift in the buyout year, and leverage increases (by just under 10 percentage points). In other words, the typical private equity buyout focuses on companies that have seen growth in their equity levels and so have unused debt capacity. It can also be seen that there is indeed an increase in debt post-buyout, but this does not seem dramatic (less than 10 percentage points). Leverage does nevertheless remain high during the three years postbuyout, and there are no signs of the debt-to-assets ratio coming down.

As could be seen earlier, though, there is a sharp drop in both assets and debt in the post-buyout years. As average debt is brought down, just less far than assets, the ďŹ gures cannot be considered alarming.

Figure I.3. Debt-to-equity ratio.

7.00 6.00 5.00 4.00 3.00 2.00 1.00

t-3

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t-2

t-1

0

t+1

t+2

t+3

Conclusion

Figure I.3 shows the companies’ leverage in terms of the relationship between debt and equity. It can be seen that the debt-to-equity ratio falls during the three years leading up to the buyout, and again this is a result of a relative decrease in debt. This supports the hypothesis of unused debt capacity as a (partial) explanation for the buyouts. It can also be seen that the debt-to-equity ratio increases in the buyout year and continues to rise in the following two years before falling back in the final year to the level of the year before the buyout.

All in all, these figures do not give cause for concern. Debt rises after the private equity buyout, but not beyond levels that the acquired companies were able to cope with a couple of years before the buyout. Debt is reduced in absolute terms after the buyout, and there is a substantial decrease after the initial raising of debt relative to both revenue and earnings – the measures considered most relevant by both lenders and private equity funds.

However, we must stress the uncertainty associated with these figures. Debt taken out by holding companies is not included in these figures, and we know that a substantial share of private equity funds’ debt is raised through these vehicles. A more detailed picture of private equity funds’ effects on capital structure will therefore require a more far-reaching study that also takes account of these factors.

Debt-financing the activities of a company or private equity fund is not necessarily a problem, rather a natural part of economic reality in modern society. The increased debt taken on by companies under private equity ownership has nevertheless given rise to public debate, and this debate is justified, because aggressive leverage makes companies and the economy more vulnerable in the event of a downturn. However, private equity funds’ debt appears to account for only a tiny share of overall borrowing, and is therefore of only peripheral significance in the ongoing credit crunch, which can be attributed primarily to mortgage finance and, in the second instance, banks’ general credit practices. It seems likely that, like other borrowers, private equity funds were favoured up until 2007 by an ample supply of credit and favourable lending standards, which helped to create what is now considered to be a bubble in the prices of houses and other properties, equities and other assets. There is reason to assume that banks will be more cautious in their lending practices in the future – including when it comes to lending to private equity funds.

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Private equity portfolio companies’ debt typically increases after the buyout, sometimes dramatically, but this debt is matched by a risk assumed by professional lenders that must be assumed capable of looking after their own interests (after all, they do not have to lend the money). In the case of Danish portfolio companies, the majority of lenders are well-known Danish (Nordic) banks like Danske Bank and Nordea. The increase in debt also steps up the pressure on earnings at portfolio companies, which is viewed as a conscious part of the investment philosophy. This is not suitable for all companies, but is particularly well-suited to mature companies with a stable cash flow.

Thus we have not found reason to criticise the capital structure of private equity portfolio companies. However, the complexity of private equity structures, including borrowing through holding companies and complex loan contracts, means that we cannot claim to have a complete picture. This can therefore be said to be another area where greater transparency is needed to clarify private equity funds’ impact on the wider economy.

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II.

Tax implications of private equity buyouts 1.

Background

This section looks at areas of Danish tax law relevant to an analysis of how private equity ownership impacts on overall tax payments to Denmark.

The starting point in Danish law is that there are no special tax rules for private equity funds. This means that these funds’ activities are subject to the same tax rules as other businesses.

The extent of Danish taxation of the actual private equity funds depends on whether they are registered in Denmark or abroad. A Danish fund may be fully liable to tax in Denmark if it is organised as a limited company (as management companies may be). If, on the other hand, a Danish fund is organised as a partnership, taxation is at investor level. Foreign private equity funds will, in principle, have only a limited tax liability to Denmark on their earnings from Denmark.

Thus it may be the case that foreign funds and their investors have a limited liability to pay Danish tax on dividend or interest payments out of Denmark.

The vendor of a target company will normally realise a capital gain when selling the company’s shares. The tax treatment of this gain affects an overall assessment of the impact of private equity buyouts and ownership on tax payments.

In this respect, the outcome may be affected by the vendor’s identity and nationality. No tax liability to Denmark will be triggered if the vendor is a foreign physical or legal person. In this situation, taxation will depend on the rules in the vendor’s homeland. In the case of a Danish vendor, however, the tax treatment depends on whether the vendor is a physical or legal person. Gains made by physical persons are taxed as share income at a rate of 28/43/45%, but may be tax-free for some small shareholders due to transitional rules from the previous regime for listed shares. Legal persons pay no tax on gains on the sale of shares held for more than three years.

If the vendor is a Danish physical person and planned the sale of the target company, ownership will therefore typically be through a holding company that has held the target company for more than three years. When the net sale proceeds eventually reach the vendor personally in the form of dividends from the holding company, they will again be taxed as share income at a rate of 28/43/45%.

Buyout structure When it comes to the actual buyout structures, these too will be taxed under the standard tax rules. One commonly seen structure involves the formation of a Danish holding company that takes out large amounts of debt to finance the buyout, leading to substantial financing costs and so losses at the holding company.

Under the current rules on compulsory joint taxation of Danish groups of companies, this loss is offset against the operating profit of the target company.

This structure is not a consequence of special rules for private equity funds but of existing standard tax rules that apply to Danish companies in general.

Debt finance The key criticism to date has concerned the often very high levels of debt finance used and the substantial interest costs and losses that result. Under section 6, paragraph 1, letter e of the Danish State Tax Act, these interest costs are deductible from Danish companies’ taxable income. The same applies to losses on debt under section 6 of the Danish Gains on Securities and Foreign Currency Act.

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Thus the key feature of private equity funds from a tax perspective seems to be their extensive use of debt finance. It is also in this light that the legislative changes made to date need to be considered. On several occasions, these changes have been made as a direct result of private equity funds’ buyout activities, and in particular the financing thereof.

It has been estimated that the Danish government is losing out on billions of DKK in tax revenue as a result of these activities. More specifically, it was stated in the notes to Bill L 213 amending the Danish Corporation Tax Act that private equity buyouts of seven large groups of companies led to a DKK 2bn decrease in corporation tax revenue relative to the year before the buyout.

2.

Concrete tax issues

The following discusses a number of issues relating to private equity structures and buyouts, as well as other issues that have either attracted a great deal of attention or can be expected to do so in the future. The Danish tax authorities – SKAT – have embarked on a special review of private equity buyouts of seven Danish groups of companies. The main aim of this review is to identify all of the cash flows involved and assess them in the light of Danish tax law. Although the review is not yet complete, SKAT’s status report of 20 March 2007 provides an indication of the issues on which it is focusing. As a starting point, the status report says that all cash flows are to be examined with a view to producing a tax evaluation of all income and expenses.

For now, it has to be expected that the following issues will be raised at some point as a result of the ongoing review: B Identification of the “beneficial owner” of interest and dividends paid out of Denmark. This issue is crucial, as it determines whether Denmark is entitled to levy Danish withholding tax on interest and dividend payments. In principle, this is not the case for payments to companies registered in the EU or countries with which Denmark has a double taxation agreement (DTA). In several cases, though, it has been seen that intermediate holding companies registered in EU/DTA countries have been inserted between private equity funds registered outside these countries and the Danish target companies. The question in this context is whether the Danish tax authorities are entitled to disregard these intermediate holding companies as the beneficial owners of interest and dividends. The tax minister has claimed on several occasions that withholding tax can be levied in cases of a “flow-through entity”. There have yet to be any legal test cases in this area in Denmark, but the topic is also high up the agenda internationally, with several important court rulings pending. SKAT is looking for information that can document the absolute last link in the chain, and whether this is in a non-DTA country. It is also looking to document whether the intermediate entities between Denmark and the ultimate recipients of dividends or interest/capital gains can be viewed as flow-through entities. The tax literature includes a detailed analysis of this issue and concludes that, with certain reservations, there must be fairly narrow limits on the tax authorities’ right to disregard flow-through entities as the beneficial owners of income (see Bundgaard and Winther-Sørensen in SR-Skat 2007/5&6).

B

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There also seems to be a focus on the terms of loans from group companies (shareholder loans), and in particular whether interest payments comply with the arm’s length principle.

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2.

Concrete tax issues (continued)

B

There have also been cases of very high rates of interest that are not paid but instead added to the principal, with the loan perhaps subsequently being converted into share capital. In this context, SKAT is looking at whether there will be a limited tax liability on such interest payments.

B

Although it is not mentioned explicitly, it has to be expected that SKAT will look into whether existing financing instruments meet the criteria for being considered debt under Danish rules, and whether the return on them can be considered debt for tax purposes. As an extension of this, it must also be expected that the recently introduced section 2 B of the Danish Corporation Tax Act will be applied in certain cases where a hybrid financial instrument in the homeland of the private equity fund or an intermediate holding company is treated as equity. The Danish companies issuing such instruments would then lose the right to make interest deductions.

B

SKAT is also expected to focus on payment flows in connection with the buyouts. Straight after a buyout, dividends may be paid to the shareholders, who immediately lend the same amount of money back to the Danish group, resulting in substantial interest costs. SKAT has called this very aggressive tax planning and noted that “from a normal financial perspective” it would be natural to let the money work in the Danish group without the extra cost of an intermediate entity with additional interest costs and a relatively high interest rate. In this context, SKAT has hinted that it will look into whether in all such cases there are actual payment flows behind dividends and loans that are closely related in terms of volume and time. This aspect of the review is expected to highlight the issue of whether dividend payouts and subsequent loans that are valid under civil law can be set aside as if they had never taken place.

B

Another area expected to attract attention is the costs associated with buyouts and the ensuing transactions. This includes the tax treatment of commitment fees and other establishment costs when raising debt. “Stay-on bonuses” to senior employees are another relevant issue. In several cases, such bonuses have been treated as a deductible operating cost. However, in a case involving LM Glasfiber, the courts have ruled that these are not a deductible operating cost, because the senior employees in question were effectively performing work for the shareholders in the form of sales promotion activities for the employer company.

The problems highlighted correspond largely to the issues being raised in many other countries where private equity funds have given rise to tax policy debate.

However, it should be noted that commenting on the tax implications of private equity ownership is no straightforward matter, because it requires a broad assessment of the overall effects. An attempt to do just this will be made below.

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3.

A standardised example of a private equity buyout

This section presents a highly simplified example of a private equity buyout and its immediate tax implications.

Scenario 1. First comes the formation of the actual private equity fund (referred to as PEF in the following). The investors behind PEF are assumed to consist of three groups. The first two groups are “passive” investors: institutional investors and private investors. The third group consists of “active” investors: the partners in the fund’s management company (referred to as MAN in the following). Besides working for MAN, they also invest personally in PEF. PEF is set up as a limited partnership.

2. PEF’s investments are governed by an extensive limited partnership agreement between the passive investors on the one hand and the active investors on the other. Among other things, the agreement specifies the management fee that MAN is to receive for managing the capital committed (and subsequently actually invested) by the passive (and active) investors.

3. One of the companies considered by PEF to be a buyout candidate is the company TARGET. (This could be listed or privately held and is perhaps most likely to be family-owned.) PEF makes an offer to the existing owners of TARGET, and this is accepted.

4. The buyout now takes place in the following steps: a. PEF sets up the holding company HOLD, a limited company, and injects some of its capital into HOLD. b. HOLD arranges loans from one or more banks to finance the acquisition of TARGET. c. TARGET’s management are invited to become part of the new ownership group and invest their own money in HOLD. d. The previous owners of TARGET are bought out with money from HOLD, and TARGET’s previous borrowings are repaid.

5. The first tax implication of the buyout is the capital gain made by the previous owners of TARGET on the sale of their shares in the company. Whether or not this gain is taxable depends on the identity of the previous owners. Tax will not be payable if the previous owners are foreign physical or legal persons (companies). If the previous owners are Danish, the tax treatment depends on whether a vendor is a physical or a legal person. Legal persons do not pay tax on gains made on the sale of shares held for more than three years, while physical persons are taxed at a rate of between 28% and 43% (see section II.2 above).

6. TARGET continues to operate under its new ownership and files its first set of accounts. Taxable earnings will be calculated for the whole “group”, i.e.

HOLD and TARGET taken together. These earnings will reflect two elements of change from before: – Changes in operating conditions (changes in economic and market climate, internal restructuring etc.)

– Changes in the level of debt capital While the first element may not necessarily have anything to do with private equity ownership per se, the second is a typical consequence of a private equity buyout.

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3.

A standardised example of a private equity buyout (continued)

As a rule, a private equity buyout will result in a substantial increase in the level of debt in the company (group). Other things being equal, this means larger interest payments – due partly to the increase in the amount of debt and partly to the lowest-ranking debt (such as mezzanine finance) being more expensive to service than higher-ranking debt. These higher interest payments erode earnings and so bring down taxable income. It is therefore typical for private equity portfolio companies to pay less corporation tax, at least for the first few years after the buyout. This is the second tax implication of a private equity buyout.

7. Private equity ownership is generally associated with more active ownership than other forms of ownership. There are many examples of companies’ earnings capacity gradually improving after a buyout. If this is the case, the company’s earnings before interest deductions will be higher, and so, other things being equal, will its taxable income. This is the third potential tax implication.

8. Private equity funds are known for offering their portfolio companies’ management relatively strong performance incentives (stock options, bonuses etc.), and these alternative forms of remuneration have special tax implications. However, many other companies besides private equity portfolio companies have remuneration systems with strong performance incentives, and so the tax implications of this are not considered further here.

9. Having owned TARGET for a period, PEF decides to sell the company to a new group of investors. TARGET could be floated on the stock exchange, sold to a trade buyer, or sold to another private equity fund. The exit strategy depends on the circumstances.

In any case, HOLD will receive the sale proceeds. After repayment of the debt taken out for the original acquisition of TARGET, these become income (or capital gains) that can be paid back to the investors. HOLD is liquidated, and its assets are returned to its owners – TARGET’s management and PEF’s three investor groups.

For TARGET’s management, this translates into a capital gain on their shares in HOLD, which will be taxed in the usual way (see section II.2). Institutional investors will pay tax in line with the Danish Pension Returns Tax Act (PAL tax) at a rate of 15%. Other investors and the partners in MAN will typically pay tax at a rate of between 28% and 45% (see section II.2).

10. Once PEF has sold not only TARGET but also its other portfolio companies, PEF is wound up.

How tax payments change – an example The scenario above is based on the buyout structure illustrated in figure II.1 below. To gain an idea of the potential extent of the tax implications of private equity ownership, figures have been attached (see figure II.1).

Immediately before the buyout, TARGET has debt of DKK 1.0bn (with an interest rate of 8%) and equity (for accounting purposes) of DKK 0.7bn. Over the past year the company has generated revenue of DKK 1.9bn and EBIT of DKK 190m.

After interest costs of DKK 86m, this translates into taxable earnings of DKK 104m. With a tax rate of 25%, the company pays corporation tax of DKK 26m. Its remaining earnings are used to reduce its debt from DKK 1,078m to DKK 1.0bn.

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Figure II.1. Private equity ownership of TARGET. (All figures in DKKbn)

Passive investors

Partners in MAN

0.662

0.018

PEF

Management 0.02

0.68 HOLD

TARGET 2.0

1.3

Banks

PEF and other interested parties work out that the company’s true value is somewhat higher than DKK 1.7bn (the sum of debt and equity) and offer a higher price.

PEF wins with a bid of DKK 2.0bn.

PEF injects DKK 680m into HOLD. Of this, DKK 18m comes from MAN’s partners, DKK 350m from institutional investors, and DKK 312m from PEF’s other investors. TARGET’s management is also invited to invest DKK 20m in HOLD, taking its equity up to DKK 700m.

HOLD takes out standard loans of DKK 1.1bn with an interest rate of 8% and an additional DKK 0.2bn in mezzanine finance with an interest rate of 15%.

Thus HOLD has put together the capital needed to acquire TARGET for DKK 2.0bn. Of this DKK 2.0bn, DKK 1.0bn is used to repay the company’s debt and the remaining DKK 1.0bn is used to buy out the previous owners. (In practice, HOLD must also obtain financing for the transaction costs associated with the buyout, but these are ignored in the following for the sake of simplicity.)

The previous owners are the founders of the business, and their combined capital gain on the sale of their shares is therefore the full DKK 1.0bn. The taxation of this is described above: they will either pay capital gains tax at a rate of between 28% and 45% or, if the gains are “parked” in a holding company, eventually pay tax on dividends from the holding company at the equivalent rates.

There is a modest improvement in TARGET’s operating results in the first year.

Revenue and EBIT are DKK 100m and DKK 10m higher than the year before. From the resulting EBIT of DKK 200m, interest costs of (1,100*0.08)+(200*0.15) = DKK 118m must now be deducted, leaving taxable income of DKK 82m (see table II.1 below). With a tax rate of 25%, the company pays corporation tax of DKK 20.5m, leaving net earnings of DKK 61.5m, which are used to repay bank debt, bringing it down to DKK 1,038.5m. 1

1. It is assumed in this example that no dividend payments are made whether the company comes under private equity ownership or remains with its original owners as in the alternative scenario presented in table II.2.

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3.

A standardised example of a private equity buyout (continued)

Table II.1. Earnings and tax under private equity ownership.

Variable/year

0

1

2

3

4

190.0

200.0

210.0

220.0

230.0

Interest

-86.0

-118.0

-113.1

-107.3

-100.5

EBT

104.0

82.0

96.9

112.7

129.5

Tax

-26.0

-20.5

-24.2

-28.2

-32.4

EAT

78.0

61.5

72.7

84.5

97.1

1078.0

1300.0

1238.5

1165.8

1081.3

-78.0

-61.5

-72.7

-84.5

-97.1

1000.0

1238.5

1165.8

1081.3

984.2

EBIT

Opening debt EAT Closing debt All figures in DKKm.

In subsequent years, the group’s revenue and EBIT continue to grow by DKK 100m and DKK 10m each year. In year 2, the accounts read as follows: EBIT of DKK 210m less interest of 83.1+30 = DKK 113.1m leaves EBT of DKK 96.9m, resulting in tax at 25% of DKK 24.2m and EAT of DKK 72.7m.

Earnings and tax are calculated in the same way for years 3 and 4, after which TARGET is sold (see table II.1). The selling price for TARGET at the end of year 4 is assumed to be DKK 2.4bn. Less debt, which now totals DKK 0.98bn, this results in a payment to the owners of HOLD of DKK 1.42bn. Relative to their original investment of DKK 0.7bn, this represents a considerable increase in value of DKK 0.72bn and corresponds to an IRR on PEF’s investment of around 19%.

This sum is distributed between the investors on the basis of the size of their investments and the terms of the partnership agreement behind PEF. Institutional investors pay PAL tax of 15% on their returns, while other investors pay capital gains or dividend tax depending on their circumstances.

Alternative scenario without private equity ownership To gain a better insight into the tax payments associated with a period of private equity ownership, the scenario above is now compared with an alternative scenario. To make the two as comparable as possible, it is assumed in the alternative scenario that there is no private equity buyout at the end of year 0, but TARGET is still sold in year 4 to the same group of investors that acquires the company in the private equity scenario, and for the same price. This alternative scenario is presented in table II.2 below.

It is also assumed that the original owners and the original management together manage to improve the company’s operating results in the same way as the private equity fund above. In other words, we are ignoring for now the additional earnings in which private equity ownership may result.

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Table II.2. Earnings and tax in the alternative scenario.

Variable/year

0

1

2

3

4

EBIT

190.0

200.0

210.0

220.0

230.0

Interest

-86.0

-80.0

-72.8

-64.6

-55.2

EBT

104.0

120.0

137.4

155.4

174.8

Tax

-26.0

-30.0

-34.3

-38.8

-43.7

EAT

78.0

900.0

102.9

116.6

131.1

1078.0

1000.0

910.0

807.1

690.5

-78.0

-90.0

-102.9

-116.6

-131.1

1000.0

910.0

807.1

690.5

559.4

Opening debt EAT Closing debt All figures in DKKm.

Interest costs in year 1 amount to 1,000*0.08 = DKK 80m, giving EBT of DKK 120m. The tax on this is DKK 30m, leaving EAT of DKK 90m, which is used to repay debt, bringing it down to DKK 910m. Equivalent tax payments and use of EAT to reduce debt are assumed in the following years. Thus corporation tax of DKK 34.3m, DKK 38.8m and DKK 43.7m is paid in years 2–4 respectively.

In this alternative scenario, there is naturally no capital gain for the owners to be taxed on in year 0. However, there is a higher capital gain at the end of year 4 when TARGET is sold. The sale proceeds less debt come to DKK 1.84bn in this example (selling price of DKK 2.4bn less closing debt of DKK 0.56bn). The tax payments in this alternative scenario are therefore the company’s annual payments of corporation tax and the final taxation of the capital gain made by the original owners.

Differences in corporation tax It is now possible to compare the immediate tax implications of (a) private equity ownership and (b) continuation of original ownership. In scenario (a), corporation tax payments of 20.5+24.2+28.2+32.4 = DKK 105.3m are made during the four-year period. If these payments are compounded at an interest rate of 8% to the end of year 4, they come to DKK 116.9m. In scenario (b), corporation tax payments of 30+34.3+38.8+43.7m = DKK 146.8m are made. Compounded to the end of year 4 at an interest rate of 8%, they come to DKK 163.0m.

As expected, private equity ownership is, on the face of it, associated with lower corporation tax revenue. In this example, the amount of tax paid falls to less than three quarters of what it would have been.

Tax on capital gains Besides the company’s/group’s annual taxable earnings, there are also other amounts in this example that may have tax implications. In scenario (a), there are the sale proceeds of DKK 1.0bn falling to the original owners at the end of year 0 and the capital gain corresponding to the difference between the sale proceeds (net of debt) of DKK 1.42bn for HOLD’s owners at the end of year 4 and their original investment of DKK 0.7bn at the end of year 0. Whether, and to what extent, these capital gains (or parts of them) lead to tax payments depends on the specific circumstances discussed in section II.2 above.

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4.

Expansion of the example

Additional benefits of private equity ownership It is often claimed that private equity ownership, where this equates to more active ownership, can improve the performance of the company acquired. This can be illustrated by making a simple change to the previous example. If we assume that the company’s EBIT increases by DKK 15m each year rather than by DKK 10m, table II.1 turns out like this: Table II.3. Earnings and tax under particularly active ownership.

Variable/year

0

1

2

3

4

190.0

205.0

220.0

235.0

250.0

Interest

-86.0

-118.0

-112.8

-106.4

-98.6

EBT

104.0

87.0

107.2

128.6

151.4

Tax

-26.0

-21.8

-26.8

-32.2

-37.9

EAT

78.0

65.2

80.4

96.4

113.5

EBIT

Opening debt

1000.0

1300.0

1234.8

1154.4

1058.0

EAT

-78.0

-65.2

-80.4

-96.4

-113.5

Closing debt

922.0

1234.8

1154.4

1058.0

944.5

All figures in DKKm.

As a result of this stronger earnings growth, it is assumed that PEF can be sold in this scenario for an increased price of DKK 2.6bn. This leads to an increased capital gain of 2.6-0.94 = DKK 1.66bn. Along the way, corporation tax payments of 21.8+26.8+32.2+37.9 = DKK 118.7m are made. Compounded at an interest rate of 8% to the end of year 4, they come to DKK 131.5m.

The increase in earnings results in both a higher selling price and lower debt at the end of the period, together leading to a considerably higher capital gain. The capital gain now corresponds to an IRR of around 24%. The increase in earnings is also reflected in larger corporation tax payments.

Restrictions on interest deductions The private equity ownership scenario above needs, in principle, to be tested to see whether interest deductions will be subject to any restrictions. There are three steps in this process: 1. As the debt capital raised by TARGET is not from within the group but external, there are no grounds to limit interest deductions under the thin capitalisation rules (see section II.2).

2. However, the latest change in the law (Bill L 213, see section II.2) could result in reduced interest deductions in the example above. The new rules mean that Danish companies may only deduct the year’s net financing costs to the extent that these do not exceed the tax value of the company’s assets times a standard rate of return.

To illustrate the possible effects of this ceiling on interest deductions, it is assumed that the tax value of the company’s (group’s) assets is DKK 0.5bn throughout the period. (For the sake of simplicity, no depreciation is charged on existing capital stock, and no new investments are made.) The standard rate of return is assumed to be 7%. This means that the maximum interest deduction allowable each year is 500*0.07 = DKK 35m. (With these assumptions,

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the company will actually be affected by this interest deduction ceiling both before and in the absence of private equity ownership; we will ignore this in the following.)

3. Finally, the company needs to be tested for the EBIT rule (see section II.2). This means that net financing costs (after any reduction due to the asset test in point 2 above) are deductible only up to a maximum of 80% of taxable income before net financing costs. This last rule is not relevant in this example.

Once the ceiling on interest deductions in point 2 above is applied, we end up with table II.4 below, which is a modified version of table II.1.

The ceiling on interest deductions affects all four periods (cf. table II.1). This means that allowable interest costs are well below actual interest costs, and so taxable income and corporation tax payments are higher than in table II.1. There is a corresponding decrease in EAT, which means that debt is brought down more slowly.

At the end of year 4, debt has been reduced to DKK 1.07bn. The new owner may very well also be a private equity fund and may also find that the interest deduction restrictions kick in. We nevertheless assume that the selling price will be unchanged at DKK 2.4bn. After the repayment of existing debt and costs, the private equity fund receives DKK 1.33bn, which is approximately DKK 85m less than had the restrictions on interest deductions not been introduced.

Table II.4. Effect of restrictions on interest deductions.

Variable/year

0

1

2

3

4

Calculation of corporation tax: EBIT

190.0

200.0

210.0

220.0

230.0

Allowable interest

-86.0

-35.0

-35.0

-35.0

-35.0

Taxable income

104.0

165.0

175.0

185.0

195.0

26.0

41.3

43.8

46.3

48.8

Tax Calculation of EAT: EBIT

190.0

200.0

210.0

220.0

230.0

Actual interest

-86.0

-118.0

-114.7

-110.6

-105.6

Tax

-26.0

-41.3

-43.8

-46.3

-48.8

EAT

78.0

40.7

51.5

63.1

75.6

1000.0

1300.0

1259.3

1207.8

1144.7

-78.0

-40.7

-51.5

-63.1

-75.6

1000.0

1259.3

1207.8

1144.7

1069.1

Opening debt EAT Closing debt All figures in DKKm.

Given the prospect of these limited interest deductions and the prospect of the eventual buyer of the company possibly also being hit by the restrictions, it is natural to assume that PEF will not be able to bid quite as much for the company at the end of year 0 – say DKK 1.8bn rather than DKK 2.0bn – and will have to sell the company for less – say DKK 2.16bn rather than DKK 2.4bn.

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4.

Expansion of the example (continued)

These considerations raise the issue of the incidence of the interest tax deduction restrictions – in other words, the question of who will really bear the burden of these new rules capping interest deductions. To some degree, the burden can reasonably be assumed to be spread across the previous owners of companies to which private equity funds are attracted, investors in these funds, and the prospective buyers of portfolio companies following private equity ownership.

In a way, the interest deduction restrictions will probably act as a (marginal) supplementary tax on private equity funds’ earnings, which could lead to a (marginal) reduction in their activity.

Corporation tax with capped interest deductions The example with capped interest deductions naturally leads to higher payments of corporation tax during the period. These rise from 20.5+24.2+28.2+32.4 = DKK 105.3m in table II.1 to 41.3+43.8+46.3+48.8 = DKK 180m in table II.4.

Further complications The scenario presented above for the sequence of events and tax payments with and without private equity ownership is in many ways a stylised example. Some of the additional factors that a more realistic scenario would include are: B Extraordinary dividend and debt push-down B TARGET being a large multinational group of companies rather than a single company In several buyouts, one of the first things to happen in the new group is for the target company to pay an extraordinary dividend to the holding company. At the same time, the target company takes out loans, and the holding company repays its loans. This is, in effect, a debt push-down – the debt previously with the holding company is effectively transferred to the target company. This means that the loans pushed down are closer to the assets serving as collateral for the loans.

(And if the target company has unnecessarily large amounts of cash, this may form part of the extraordinary dividend to the holding company.)

In the context of this analysis, this debt push-down is mainly a technicality with no real tax implications.

If the target company is not a stand-alone company as in the example but a large multinational group of companies, its tax position will be much more complex.

However, this is not because it has been taken over by a private equity fund, but because the tax affairs of multinationals are always vastly more complex than those of purely domestic operators.

On the other hand, there are other factors that are essential for a complete picture of the tax implications of a period of private equity ownership. We will look at these in the following section.

5.

A broader perspective on the tax implications

Additional tax issues In the simple standardised example in section II.3, where the private equity fund PEF acquires the target company TARGET through the holding company HOLD (which also involves the management of TARGET), the focus was on the following tax implications of the buyout: B Corporation tax (from both TARGET and the group comprising TARGET and HOLD) B Capital gains tax (from the previous owners’ sale of TARGET in year 0 and either PEF’s subsequent exit in year 4 or, in the alternative scenario, the original owners’ sale at the end of year 4)

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However, this paints only a very partial picture of the overall tax implications of the private equity buyout. To make the picture more complete, we need to ask a number of additional questions: 1. If institutional and other passive investors did not invest in HOLD/TARGET via PEF, where would they have put their money? And with what tax implications?

2. If PEF’s active investors/partners did not invest in HOLD/TARGET, where would they have put their money? And with what tax implications?

3. If TARGET’s management did not invest in HOLD/TARGET, where would they have put their money? And with what tax implications? (Or, if they debtfinance their investment in HOLD, what are the tax implications of this?)

4. What happens to the money that the original owners receive through the sale of TARGET at the end of year 0? And with what tax implications?

5. What do the banks that have their loans repaid in connection with the buyout of TARGET do with this money? And with what tax implications?

6. Where do the banks that provide the loan capital for the new group HOLD/TARGET get this money from? And with what tax implications?

These questions also make it clear that a private equity fund’s formation and acquisition of a portfolio company will generally impact on a variety of financial markets – supply and/or demand will be affected, possibly resulting in (albeit marginal) price reactions. And these price reactions can also, in principle, impact on the tax implications of private equity ownership.

An extended example The following hypothetical scenario makes the wider tax implications somewhat easier to appreciate. Assume that: i. Institutional and other passive investors, the partners in MAN and TARGET’s management would instead have put their money (DKK 0.7bn) in the stock market. ii. The financial institutions that have their loans repaid (DKK 1.0bn) use that same money to extend loans to HOLD. iii. The previous owners of TARGET, who receive DKK 1.0bn on the sale of the company, put DKK 0.7bn of this in the stock market and DKK 0.3bn in the bank. iv. The banks in question then lend this DKK 0.3bn to HOLD. This scenario is illustrated in figure II.2 below.

If these assumptions are met precisely, we see that neither the stock market nor the credit market is directly affected by the private equity buyout. In the stock market, DKK 0.7bn disappears on the demand side, but new investors bring in exactly the same amount. In the credit market, loans of DKK 1.0bn are repaid and an additional DKK 0.3bn is deposited, and the sum of these two flows is exactly the right amount to fund the flow of loan capital to HOLD. In other words, the changes on the supply and demand sides cancel each other out. On the face of it, therefore, there will not be any great need for price reactions in either the stock market or the credit market. (However, the rate of interest on the lowest-

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Figure II.2. Extended example.

(All figures in DKKbn) 0.68 PEF

Stock market 0.02 0.7

0.68

Management 0.02 Previous owners

HOLD

TARGET 2.0

1.0 1.0

0.3

1.3 Banks

Withdrawal Investment

5.

A broader perspective on the tax implications (continued)

ranking loans to HOLD will reflect the greater uncertainty, and it is naturally far from certain that the investment patterns of the investors withdrawing money from and injecting money into the stock market will be the same.)

However, if assumptions i–iv are met, supplementary tax accounts to take account of questions 1-6 above can be produced relatively easily. We get the following outcome: a. The tax implications of changes in investments in the stock market (questions 1–3 and part of question 4) are limited to those caused by possible differences between the tax position of investors exiting the stock market (passive investors, active investors and management) and that of those entering the market (previous owners of TARGET). b. As banks’ lending to HOLD/TARGET increases, they will earn a higher average rate of interest than before, which may push up their tax payments. c. The previous owners deposit DKK 0.3bn in the banking system and will be liable for tax on the returns on this, either personally or through holding companies etc.

It is particularly this last effect that will be noticed. The investment of additional loan capital in HOLD is offset by additional deposits with the banks that fund the increase in debt, and the return on these will be taxed. Assuming an interest rate of 4% and a personal capital income tax rate of 59%, deposits of DKK 0.3bn will result in a tax payment of DKK 7.08m. This almost matches the difference in corporation tax payments between the alternative scenario (b) and the private equity ownership scenario (a) in section II.3 above.

Of course, it is highly unlikely that assumptions i–iv will actually hold true. But this does not mean that it is not worth considering the wider tax implications of private equity ownership, or that these will probably be significantly affected by the additional tax payments resulting from savers making money available to the banks, which then supply the private equity portfolio company with additional loan capital.

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The partners’ tax position So far we have paid little attention to the tax aspects associated with payments from the private equity fund PEF to the management company MAN that manages the fund’s assets and exercises the active ownership. The partners employed by the management company will be paid a regular salary for looking after the fund’s investments, and will also be rewarded with a share of PEF’s capital gains – including a disproportionate share of returns over and above the agreed hurdle rate.

To shed light on this last element of the partners’ remuneration, let us assume for a moment that the target company TARGET represents the average for all of the fund’s portfolio companies. Let us assume that PEF’s hurdle rate is 8% and that any capital gain in excess of this is distributed at a ratio of 20:80, whereby the partners receive 20% and the passive investors (and TARGET’s management) receive 80%. Based on table II.4, the total capital gain for PEF is DKK 630.9m.

The part of this that corresponds to the 8% hurdle rate works out at DKK 252.3m.

This means that the excess return is DKK 378.6m, and 20% of this is DKK 75.7m.

Next, 18/700 of the normal (gross) return is DKK 24.5m (i.e. including the partners’ own investment of DKK 18m). Net of the management fee of 2% of the capital invested in the fund, or DKK 13.6m, the partners’ gross proceeds from the sale of TARGET come to 75.7+24.5-13.6 = DKK 86.6m (including their investment of DKK 18m). However, the partners’ return on investment is not actually calculated individually for each investment as done here, but for all of the fund’s investments as a whole, which means that investments with a lower return will reduce this figure.

The total invested by the other investors (including TARGET’s management) was DKK 682m. These investors’ gross proceeds from the sale of TARGET come to 302.9+927.8 = DKK 1,230.7m, which gives a multiple of around 1.8 and an IRR of about 16% for the passive investors.

Note that these calculations ignore the not insignificant transaction costs associated with the acquisition and sale of TARGET, which will reduce the return for all investors, both passive and active.

Foreign players In the above, all players were treated as though they were Danish, so there was little doubt that the payment flows resulting from the private equity fund’s acquisition and subsequent sale of the portfolio company would be taxed under domestic tax rules.

Frequently, however, foreign players come into the picture. The fund itself may be registered abroad, and so the management company, its partners and the passive investors in the fund may also be foreign. The taxation of the fund’s capital gains from a period of ownership of the portfolio company will therefore depend on the degree to which these gains can be subjected to domestic taxation (in other words, the degree to which the players concerned have a limited tax liability to Denmark). Are there double taxation agreements in place? Are there grounds for taxing the fund’s gains at source?

Of course, the previous owners of the portfolio company may also (in part) be foreign taxpayers. Again the issue is whether a limited tax liability to Denmark on the capital gains made on the sale of the company can be enforced.

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5.

A broader perspective on the tax implications (continued)

There has been some debate about cases where foreign private equity funds have invested in Danish companies. There has also been debate about instances of private equity funds using foreign financial institutions when raising money for the acquisition. The concern has been that, if the portfolio company is heavily debt-financed and the associated interest is deducted from taxable income, the Danish tax authorities will ultimately miss out on tax revenue.

However, it is worth pondering this for a moment. Assume that the portfolio company’s financing before the buyout was a mixture of equity from domestic shareholders and loans from domestic banks, and that its debt capital after the buyout consists entirely of loans from foreign banks. Before the buyout, the tax authorities could count on corporation tax from the company, taxes from the lending banks, and taxes on the people depositing money in the banks. After the buyout, not only do payments of corporation tax from the company decrease due to a higher debt-to-equity ratio, but there will be no tax from the foreign banks.

Tax revenue seems to be evaporating on every front.

But this would be an overly hasty conclusion. When a private equity fund finances its activities with foreign loans to the portfolio company (holding company), this cannot in itself change the overall balance of payments between home and abroad. Domestic and foreign net saving are unchanged, and the same therefore applies to Denmark’s net external claims. In the first instance, the foreign lending to the holding company causes a decrease in Denmark’s net external claims, but this tendency is offset by at least one opposite transaction.

The previous owners and the previous creditors of the portfolio company have received money that needs to be invested, and if they do not themselves invest abroad, they will set in motion a chain of events that results in other Danes investing abroad or repaying foreign loans. When Danes acquire external claims in this way, the return on these claims will boost aggregate tax revenue and so offset the loss of tax revenue from the private equity fund’s borrowing abroad.

This example underlines once again the necessity of “closing the circle” if we want to gain a complete picture of the tax implications of a private equity fund’s formation and acquisition of a domestic company. Both the tying up of funds and the release of funds impact on tax revenue.

6.

Conclusions about tax and private equity funds

The following conclusions can be drawn from the discussion of tax implications above: 1. There is good reason to expect that, in most cases where a private equity fund takes over a company, the company will pay less corporation tax than if it had remained with its original owners. Private equity funds aim – and have unique opportunities – to increase the ratio of debt to equity at their portfolio companies. This leads to larger interest deductions, which erodes taxable income and translates into lower tax payments, at least in the short term.

2. The actual buyout generally leads to payments of tax by the previous owners on the capital gains they make on the sale of the company. Similarly, investors in the private equity fund will pay tax on their capital gains when they, in turn, sell on the company. However, these capital gains taxes are not unique to a private equity situation. The original owners could also sell the company later to another player, realise a capital gain and pay tax on this. It is therefore difficult to say whether, on balance, a period of private equity ownership leads to higher or lower payments of capital gains taxes.

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II. Tax implications of private equity buyouts

3. In any case, corporation and capital gains taxes account for only part of the overall tax implications of a private equity fund’s ownership of a company. A complete picture requires information on where the previous owners invest their money after they have been bought out; where the banks supplying loan capital to the portfolio company obtained their funds; how the investors in the private equity fund finance their investments in the fund; and so on. It is particularly important to ascertain whether the increased deductions of interest on loan capital in the company (or holding company) are offset by increased taxation of capital income for those supplying funds to the banks furnishing the company with the additional loan capital.

4. The tax implications of a private equity fund’s acquisition and ownership of a company are particularly complex when the fund, its investors or its lenders are foreign. If, for example, the target company (holding company) is financed with loans from foreign banks, it will, on the face of it, be impossible to recoup the drop in tax revenue due to the increase in the debt-to-equity ratio.

However, for the economy as a whole to have unchanged net external claims, there must be a net acquisition of external claims elsewhere in the economy.

The return on these claims will be taxable in Denmark and will therefore (at least partially) offset the decrease in corporation tax revenue.

5. As discussed in detail in section II.2, there are a number of uncertainties when it comes to the tax treatment of private equity funds’ activities. The ongoing official review of (private equity funds and) acquired companies can be assumed to raise numerous issues requiring clarification. Nor can we rule out further changes in tax law, which may have an impact on the activities of private equity funds. However, this situation is by no means unique to Denmark.

Equivalent uncertainties and points of contention concerning private equity funds’ tax position can also be found in other comparable countries.

6. Despite these elements of uncertainty, a private equity fund is nothing special from a tax viewpoint. It is a particular type of financial institution that “makes its living” from buying and selling companies, but the investments made by the funds and the cash flows resulting from these buyouts are captured by the tax system. However, it is also a fact that funds accentuate and test weaknesses in the tax system. These weaknesses include: – The treatment of debt vs. equity for corporation tax purposes – The treatment of foreign vs. domestic capital income and, more generally, the right to tax international capital income – The distinction between income from employment and income from capital for the purposes of personal taxation – The taxation of different types of capital income For as long as interest on debt is treated differently to returns on equity, for as long as the taxation of international income remains inconsistent, for as long as there are problems differentiating between the fruits of labour and the returns on savings in the tax system, and for as long as different types of capital income are taxed in very different ways, private equity funds – just like other taxpayers – will be able to “think tax” and maximise their earnings by minimising their tax liabilities.

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III.

Literature Amess, K. (2002). Management Buyouts and Firm-Level Productivity: Evidence from a Panel of UK Manufacturing Firms, Scottish Journal of Political Economy 49, 304–317.

Amess, K. (2003). The Effect of Management Buyouts on Firm-level Technical Inefficiency: Evidence from a Panel of UK Machinery and Equipment Manufacturers, Journal of Industrial Economics 51, 35–44.

Amess, K. & M. Wright (2007). The Wage and Employment Effects of Leveraged Buyouts in the UK, International Journal of Economics and Business 14, 179–195.

Bruining, H., P. Boselie, M. Wright & N. Bacon (2005). The Impact of Business Ownership Change on Employee Relations: Buyouts in the U.K. and the Netherlands, International Journal of Human Resource Management 16, 345–365.

Cao, J. & J. Lerner (2006). The Performance of Reverse Leveraged Buyouts, NBER Working paper no. 12626.

Cressy, R., A. Malipiero & F. Munari (2007). The Heterogeneity of Private Equity Firms and its Impact on Post-buyout Performance: Evidence from the United Kingdom, Working paper.

Desbrierers, P. & A. Schatt (2002). The Impacts of LBOs on the Performance of Acquired Firms: The French Case, Journal of Business Finance and Accounting 29, 695–729.

Driessen, J., T.C. Lin & L. Phalippou (2007). Measuring the Risk of Private Equity Funds: A New Methodology, Working paper, University of Amsterdam.

Gaughan, P.A. (2007). Mergers, Acquisitions and Corporate Restructurings, John Wiley & Sons, New York.

Guo, S., E. Hotchkiss & W. Song (2007). Do Buyouts (Still) Create Value? Working paper.

Harris, R., D.S. Siegel & M. Wright (2005). Assessing the Impact of Management Buyouts on Economic Efficiency: Plant-level Evidence from the United Kingdom, The Review of Economics and Statistics 87, 148–153.

Holthausen, R.W. & D.F. Larker (1996). The Financial Performance of Reverse Leveraged Buyouts, Journal of Financial Economics 42, 293–332.

Kaplan, S. (1989). The Effects of Management Buyouts on Operating Performance and Value, Journal of Financial Economics 24, 217–254.

Kaplan, S.N. & A. Schoar (2005). Private Equity Performance: Returns, Persistence, and Capital Flows, Journal of Finance 60, 1791–1823.

Lehn, K. & A. Poulsen (1989), Free Cash Flows and Stockholder Gains in Going Private Transactions, Journal of Finance 44, 771–778.

Lerner, J. & A. Gurung (2008). Globalization of Alternative Investments, Working papers volume 1, The Global Economic Impact of Private Equity Report 2008.

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Lerner, J. & A. Schoar (2005). Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity, Quarterly Journal of Economics 120, 223–46.

Lerner, J., A. Schoar & W. Wong (2007). Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle, Journal of Finance.

Lichtenberg, F.R. & D.S. Siegel (1990). The Effect of Leveraged Buyouts on Productivity and Related Aspects of Firm Behavior. Journal of Financial Economics 27, 165–194.

Ljungqvist, A. & M. Richardsson (2003). The Cash Flow, Return and Risk Characteristics of Private Equity Funds, Working paper, New York University.

Muscarella, C.J. & M.R. Vetsuypens (1990). Efficiency and Organizational Structure: A Study of Reverse LBOs, Journal of Finance 45, 1389–1413.

Nyrup Rasmussen, P. (2007). I grådighedens tid. Kapitalfonde og kasinoøkonomi [The era of greed. Private equity funds and the casino economy], Informations Forlag.

Phalippou, L. (2007). Investing in Private Equity Funds: A Survey, Working paper, University of Amsterdam.

Phalippou, L. & O. Gottschlag (2007). The Performance of Private Equity Funds, Review of Financial Studies, in press.

Smith, A. (1990). Capital Ownership Structure and Performance: The Case of Management Buyouts. Journal of Financial Economics 13, 143–165.

Spliid, R. (2007). Kapitalfonde. Rå pengemagt eller aktivt ejerskab [Private equity funds – asset strippers or active owners?], Børsens Forlag.

Swensen, D.F. (2000). Pioneering Portfolio Management, New York: Free Press.

Vinten, F. (2007). The Performance of Private Equity Buyout Fund Owned Firms, Working paper, Copenhagen Business School.

Woodward, S. (2005). Measuring Risk and Performance for Alternative Assets, Working paper, Sand Hill Econometrics.

Wright, M., S. Thompson & K. Robbie (1992). Venture Capital and Managementled Leveraged Buyouts: A European Perspective, Journal of Business Venturing 7, 47–71.

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Glossary This glossary includes both terms used in the report and a number of other terms commonly encountered in private equity.

Acquisition vehicle

Company formed exclusively to acquire another company (target company).

Debt finance is raised by the acquisition vehicle, but subsequently transferred to the target company through a debt push-down.

Beneficial owner

The true owner of an investment and ultimate recipient of returns on that investment, even though the asset may be held in another’s name.

Buy-and-build strategy

Active organic growth strategy.

BVCA

British Private Equity and Venture Capital Association, www.bvca.co.uk.

Carried interest (carry)

The general partners’ share of the return on the fund. Normally 20% of the return in excess of the hurdle rate.

Collateralised loan obligation (CLO)

A portfolio of loans, such as senior or mezzanine loans, packaged together into a pool that is then structured into rated tranches. The lowest-rated tranches take the first losses, but also offer the highest coupon. The highest-rated tranches have the lowest coupon, but only absorb losses when all of the other tranches have been lost.

Committed capital

The capital that the limited partners agree to make available to a private equity fund.

Coupon

Interest.

Covenant

An undertaking to do, or not to do, something. When a loan is taken out for an investment, the target company undertakes to meet limits for various financial key figures (financial covenants) and to perform, or not to perform, a number of specific actions. As a rule, banks demand three covenants: leverage (maximum limit), cash flow coverage ratio (minimum limit) and capital expenditure (maximum limit).

Covenant-light

A loan with only one or two financial covenants.

Debt push-down

A target company is normally acquired through an acquisition vehicle, which initially takes out a loan secured against the target company’s shares. To give the banks more security, this debt is then transferred to the target (operating) company by having the target company take out a loan and pay out the proceeds of the loan as a dividend to the acquisition vehicle, which then uses this dividend to repay its loan.

Due diligence

An investigative process performed before a private equity fund acquires a company. There are various different types, including financial, legal and commercial. These provide a basis for assessing the value of the target company.

EAT

Earnings after tax.

EBIT

Earnings before interest and tax.

EBITA

Earnings before interest, tax and amortisation.

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EBITDA

Earnings before interest, tax, depreciation and amortisation.

EBT

Earnings before tax.

Enterprise multiple

EV/EBITDA.

Enterprise value (EV)

Value of the whole business. Measured as the market value of all claims on the business, i.e. the sum of debt and equity.

EPS

Earnings per share.

EVCA

European Private Equity and Venture Capital Association, www.evca.com.

Exit

Sale of a portfolio company.

Flow-through entity

Tax-transparent entity whose income is taxed to its owners.

FSA

UK Financial Services Authority.

Fund of funds

Private equity fund that invests in other private equity funds.

Fund-raising

Getting investors to invest in a company with the help of a private equity fund.

The private equity fund’s fund-raising involves getting new and existing investors to commit to invest (up to) a certain amount once the fund finds suitable investment objects.

Gearing

Another word for leverage.

General partner (GP)

The general partners in a private equity fund are responsible for the management of the fund’s investments. The general partners have unlimited liability, but normally invest through a limited company so that liability is limited to that company’s capital.

Goodwill

That part of a company’s value that cannot be attributed to its book assets. When a company changes hands, goodwill is the difference between the price paid and the book value of the company’s assets. The difference should be an expression of the part of its future earnings that cannot be attributed to its book assets.

Hedge fund

An investment vehicle that invests in different sectors or countries or on the basis of other parameters, typically with a relatively short time horizon.

Hurdle rate

The percentage return on investors’ capital required before any return accrues to the general partners. Normally 8%.

IFRS

International Financial Reporting Standards. All European listed companies must prepare financial statements in accordance with IFRS.

Initial public offering (IPO)

The initial sale of shares to the public when a company is listed on the stock exchange.

Interest coverage ratio

EBITDA/interest expense. Measure of a company’s ability to pay its interest costs out of operating earnings.

Internal rate of return (IRR)

The annual return on an investment.

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Glossary

J-curve

A J-curve is the typical profile for movements in the value of a private equity fund. The curve shows that a fund’s return on investment will normally be very limited in the first two or three years, as its strategic initiatives have yet to result in higher earnings. The J-curve is seen primarily because costs are incurred in establishing and operating the fund, and the expected increases in the value of the investments made do not arrive until after a couple of years of ownership, once value-adding measures and/or investments begin to impact on the portfolio companies.

Lead manager

The bank or other organisation that heads a syndicate.

Leverage

The use of debt to finance a transaction. Also known as gearing.

Leverage multiple

Debt/EBITDA.

Leveraged buyout (LBO)

Acquisition of a company using a high proportion of debt finance.

Limited partner (LP)

External investor in a private equity fund. The limited partners assign the management of their investments to the general partners. Their liability is limited to the capital they have invested or committed to invest.

Limited partnership

A limited partnership has two types of investor: limited partners, whose liability is limited to a predetermined amount, and general partners, who have unlimited liability. However, a general partner may be a company, in which case liability is limited to that company’s capital. A limited partnership is a tax-transparent entity: its income is taxed directly to the general and limited partners.

M&A

Mergers and acquisitions.

Management buyout (MBO)

Leveraged buyout where the company’s management takes control of the company.

Management company

The company that buys, sells and monitors a private equity fund’s portfolio companies.

Mezzanine

Debt finance that ranks below bank debt but above equity.

NDA

Non-disclosure agreement.

Portfolio company

Company owned by a private equity fund.

Private equity (PE)

Investment in mature companies, as opposed to venture capital, which is invested in start-ups.

Public-to-private

Acquisition of a listed company that is then delisted.

Recapitalisation

In the context of a leveraged buyout, this denotes an increase in debt that makes it possible for the private equity fund to withdraw equity from the company. If a portfolio company reduces its debt more quickly than expected, the fund can use this technique to realise some of the gain.

Secondary buyout

The sale of a company from one private equity fund to another.

Senior debt

Debt that ranks above all other debt. In a leveraged buyout, this means bank debt.

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Glossary

Subordinated debt

Debt that ranks below other debt, such as senior debt. Mezzanine ďŹ nance is always subordinated to senior debt.

Syndicate

A number of banks that together make a loan available or underwrite an issue of securities. A syndicate is usually led by one or two banks known as the lead managers.

Target company

Company that a private equity fund wishes to acquire.

Thin capitalisation

A company is thinly capitalised when it has a high level of debt relative to equity.

In Danish tax law, this means a ratio of more than 4 to 1 (80% debt, 20% equity).

Trade sale

Sale of a portfolio company to another company.

Tranche

Portion of a loan with particular characteristics in terms of coupon and repayment.

Venture capital

Investment in new companies (start-ups).

Vintage year

The year in which a private equity fund makes its ďŹ rst investment.

Warrant

Right to purchase shares. The shares are not issued until this right is exercised, and so the exercise of warrants leads to an increase in share capital.

Source: Robert Spliid, DVCA and translator.

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Editor and project management: Joachim Sperling Forretningsudvikling og Kommunikation ApS Photos: Pernille Ringsing, POLFOTO, iStockphoto and courtesy of the companies Design and production: Branded Design ApS Translation and proofreading: Borella projects Printed in Denmark by Bording A/S (DS/EN ISO14001:1996)

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