The State of Nordic Private Equity 2022

We have talked to Frida Einarson, who is a Partner at Verdane, about the past year, Verdane’s impact fund (Idun I, which closed at the end of 2021), the uncertainty in the markets going forward, and her expectations for the future.

Argentum (A): Verdane started 2022 by announcing the final close on your first Impact fund, Idun I, which was Europe’s largest growth impact fund. Could you tell us a bit more about both the interest that you’ve had from investors for an impact fund and why Verdane wanted to undertake this project?

- We had thought about this idea for quite some time before we launched the fund. There were a couple of factors that drove us. Firstly, we saw an incredible amount of exciting activity among companies that had been founded with the purpose of making the word a little better, either in social areas or in more environmental areas. The reason we established Idun I was that we saw many exciting opportunities within sustainability and impact, especially in the Nordics, but also in other geographies, such as Germany.

The second factor was that, when analysing our historical deals, we could see that the companies that really made a difference to at least one of the UN Sustainable Development Goals also had, on average, performed better than our portfolio as a whole. For us, this was a clear indication that impact and good returns can really go together, hand in hand. It doesn’t have to be the case that you sacrifice returns to do something good for the climate, or society more broadly.

The third and final factor that was important to us in the establishment of the fund was that we saw very clearly that the world was moving in this direction. It is increasingly important to have a good methodology for evaluating impact, for measuring it and reporting it to investors. This also became a very good driving force for us to get the relevant toolkits in place. We believe that our other funds, that are not specifically impact funds today, also benefit in many ways from the fact that we have all these frameworks and tools in place.

A: How was the interest in the fund when it was first launched?

- It was very strong. This is a topic that, encouragingly enough, countless people are thinking about today and many want to invest in. And what is challenging from an LP perspective is that there are not very many managers in Europe or in the world that have a good track record of making this type of investment. We had an advantage, because, in our broader experience base, we have also done several deals that met the impact criteria that we envisioned we would have for this fund.

This, I believe, reassured the investors that we can create value, return and impact at the same time. Idun I made its first investment back in September 2021, but Verdane had a track record of investing in the sustainability space long before.

A: Some critics would argue that it is difficult to create profitable businesses when impact is your main focus. What are your reflections on this?

- We have seen in our data that it does not have to be the case, or even a particular challenge. I think one of the advantages that we have, as an investor that really understands technology, is that we often use technology to scale these companies. And that is essentially the beauty of technology, that it often contributes to a different kind of scalability. For us, I think that’s part of the answer to why we’ve been able to create profitable businesses at the same time.

However, I can sympathise with the argument that, on a more theoretical level and for a certain type of impact, it may be better to achieve it through philanthropic initiatives. It is then, of course, important to have long-term funding, as the projects may never be self-financing.

And then it’s also worth saying that it’s not just environmental technology that we’re investing in, but it’s also, for example, software for organising sports activities. This app, called Spond, has become very popular in Norway – and beyond. The whole idea is that it is very important for civil society that children are activated and get moving, without volunteers having to spend a lot of time on administration. So, if you have a tool to organise football matches, for example, and everything else that is involved in activities or sports, then you can spend more time on the actual activities and get more children taking part in exercise or social interaction. Spond is a great example of how technology really helps to create a societal benefit.

Another example is a company called QBtech, which helps diagnose people who have ADHD in a more objective way, so that we can move from a suspected diagnosis to a diagnosis more quickly, and increase their quality of life sooner.

A: What is your core focus for the fund going forward?

- When looking at the deals we are working on for Idun, we see incredibly exciting opportunities in decarbonisation, specifically in energy transition and resource efficiency. And we will continue to do deals in that area.

While we’re on the topic of climate change, Verdane announced this spring that, as the first private equity firm globally, we will remove all the CO2 emissions we make from the atmosphere. We will achieve this through permanent carbon removals. We think that is quite an exciting initiative and are backing three different providers. We see that it is not only the fund that can make an impact, but also us as a company. And we encourage more companies to join us in this. We also launched our own initiative, in partnership with Södra and Equinor, called Njord Carbon, which ultimately aims to make high-quality, permanent, engineered carbon removals more cost effective and accessible.

A: Let’s discuss the uncertainty the market saw in 2022. How would you characterise the year from your point of view, and how has the geopolitical situation affected the market in which you operate?

- It has been horrible to witness war in Europe, and our thoughts are of course with the people of Ukraine and everyone else impacted. Besides this, we were fortunate enough to be able to continue business in 2022 without interruption, and we continued to do new deals. We made 16 new investments. Our flexible approach to how we do business can explain why we were successful at this.

We can work with both majority positions and minority positions. We can work with primary capital, and we can buy used shares (secondary). So, we can indeed find solutions, even if there is some difference in valuation expectations in periods of uncertainty. In our business, we are also independent of bank financing in general, which is another important factor.

For us, contrary to the general trends, we were very active on the realisation side. In fact, in 2022 we were net sellers. We made 7 big realisations in 2022. These primarily concerned software companies, which, even in a more uncertain environment, have a stable customer base and have contracted sales. This means that these companies have a buyer’s market, even in times of increased uncertainty. It is in such moments that we can really prove to our fund investors that we have created value that we are giving back. We could provide our investors with over four times their investment on average, which are strong returns we are very proud of.

A: What are the most important factors for success as a PE fund in an uncertain market?

- I think it can be pretty much summed up in that we always try to take a very long-term perspective. We try to find markets that should really be structural growth markets and that should grow through different cycles and different macroeconomic changes. So, I think that’s part of the explanation for our success. For example, we apply something we call the 2040 test to all our investments, to ensure that we are investing in the businesses that will be winners in 2040 – when we, for example, expect the environmental focus to be even stronger, and externalities, such as generating emissions, will be costlier for companies.

The long-term perspective we have means that even uncertain times can be handled well. Such times can also be a period where you can find opportunities. So, we believe that these coming years can be very interesting years to invest in.

A: What do you expect for 2023? What do you think will be important, and what might be less important?

- We strongly believe that the climate and climate change will be important. I don’t want to call it a trend because it is much bigger than that, but we must come together to solve the climate crisis. It really is such a priority for us as a world.

There is so much capital that must be reallocated in order for us to be able to solve the climate crisis. In a long-term perspective, this is what is at the very top of the agenda for us – as investors, parents and colleagues, and as people. After all, we want to keep this beautiful Earth. We hope and believe that this topic will become more and more important.

We also expect that fast consumption and overuse may become less important in the years to come. We have already made some very exciting investments in companies within the circular economy. For example, reusing used clothes and books (momox) or phones (Swappie) and electronics (AsGoodAsNew). And when people have less money to spend, there is also an economic reason to move towards such models. We hope there will be less wear and tear, and less unsustainable consumption in the future.

With regard to our industry, there are so many investors now who want to allocate capital because they also see exciting investment opportunities within this space. As is often the case, with a challenge you also get an opportunity. After all, impact investing makes good business sense because sustainable companies thrive in the long term and move the needle towards a better future.