Norway’s private equity market dates back to the mid 1980s when venture capitalists such as Birger Nergaard moved back home to Norway from California – the centre of the private equity revolution – to found Four Seasons Venture, now known as Verdane Capital Advisors. More than 20 years later, Norway has grown to become the second largest venture capital player in the Nordic region after Sweden.

The largest growth spurt came in 2006, when the Norwegian private equity industry raised around EUR 1.7 (USD 2.2) billion in new capital, according to the Norwegian Venture Capital & Private Equity Association (NVCA). In the first half of 2008, seven new funds raised another EUR 1.5 billion to reach EUR 6.7 billion in total capital under management. The industry has invested less than half that amount, leaving the potential to unleash EUR 3.7 billion in seed, venture and buyout investments over the coming years.

“The Norwegian Private Equity funds have really gained spending power in the past couple of years,” said Knut T. Traaseth, Secretary General of the NVCA. “The industry has matured and they can now compete on international deals.”

The Norwegian private equity industry has typically spent the greatest amount in venture capital, i.e. investments made for the launch, early development, or expansion of a business, whereas the international private equity industry traditionally has leaned towards buyout investments. However, there has been a recent shift in Norway towards buyouts, according to the NVCA. The buyout segment is now almost equal in size with venture, representing nearly 40% of investments.

The bulk of new portfolio companies making up the Norwegian private equity market are information, communication, and technology (ICT) companies, a trend that dominates internationally as well. However, the country is heavily represented by the oil and energy sector as the world’s fifth largest oil exporting nation. Energy and environment received more than half of all investments in the first half of 2008.

Herkules Leads the Pack
The current industry leader in Norway is Herkules Capital (previously known as Ferd Equity Partners), which was established as a separate external fund by tobacco billionaire Johan H. Andresen and managing partner Gert W. Munthe in 2003 under a limited partnership agreement.

Herkules recently raised NOK 6 billion (USD 870 million) in the largest fund ever by a Norwegian private equity company (Herkules III) and paid NOK 5.7 billion for oil service company Aibel in 2007 in the largest ever Norwegian private equity buyout. Herkules currently has NOK 12.3 billion under management in its three funds. Andresen’s company Ferd holds about 50% in the first two funds, but only 7% of the last.

Herkules is typical of the Norwegian private equity industry in that it targets companies located in the Nordic region, primarily Norway. Herkules I owns Pronova BioPharma, Noratel, Handicare, European Beds, and D&F Group; Herkules II holds Nille, Micro Matic Norge, Nordic Interior Group, Hatteland Display, EFG European Furniture Group, Aibel, Network Electronics and Maarud/Estrella and Herkules III holds Gothia.

Foreigners at the Gate
At first glance, it would look as if all the activity is taking place within the country. Norwegian private equity funds have invested in 431 Norwegian companies versus 185 foreign. In 2007, 80% of the money came from Norwegian investors. Foreign funds, on the other hand, have invested in 35 Norwegian companies. In the first half of 2008, foreign funds invested EUR 92 million in Norway, which means that every sixth Euro invested in Norway was made by a foreign fund.

But, there are clear signs of a more international approach to capital raising activities among Norwegian funds. Kathryn Baker, NVCA chairwoman and partner at Norwegian private equity company Reiten & Co, has seen this trend. International investors did not invest in Reiten’s funds until 2004, and the level was 34%. In 2007 that figure doubled to 70% when it raised EUR 260 million in its seventh and largest fund to date.

“For many years the Norwegian (private equity) market was viewed as small and insignificant, so people didn’t bother,” said Baker. “What is the market opportunity for Norwegian deals they asked? And in 2005, it was hard to prove. A lot of investors were saying ‘I would just like to watch and wait a little’. ”

“Our advice (to investors) is that it is a very wealthy country and also has a good infrastructure geared towards education, good healthcare and good underlying values. So we have a good starting point.”

“In general there will be more international capital flowing into the market,” she added.

Norway presents itself as an interesting investment case going forward. The country boasts a higher number of firms with EBITDA margin over 20% than Sweden (6,768 versus 5,773), according to Gjermund Grimsby, a senior economist at Norwegian consulting group Menon Business Economics. Moreover, the current financial turmoil has led to a re-pricing of Norwegian companies, thus opening up for buying opportunities for international investors. And as it become more expensive with the credit crunch to borrow money from banks, more companies will become open to private equity and financial partners

“This market opens up for great opportunities for private equity companies,” said Traaseth.