PRINT THIS PAGE Institutional Investor Profile: Lauge Sletting, Managing Partner, North Sea Capital31/10/2007. Source: AltAssets. 
Lauge Sletting on his fund's interest in distressed debt, the benefits of a contrarian approach to investing, and on the risk that too much capital in the market could drive returns down.  North Sea Capital, formerly the Nordea Private Equity team, spun out of Nordea Investment Management, the asset management arm of the Nordea Group, earlier this year. The Danish fund of funds manager invests capital on behalf of Nordea and Nordea's clients and is also bringing new investors on board. Currently, NSC has about €1bn of assets under management in this joint venture with Nordea.
Nordea Private Equity launched its first fund of funds in May 2001. Nordea and NSC are currently raising the business's fourth fund of funds - the second one with capital from investors other than Nordea and Nordea's clients. In Nordea Private Equity II – European Middle Market Buyout K/S, NSC managed to get a North American investor. Nordea Private Equity III - Global Fund of Funds K/S held a first closing on €125m in July of this year and is expected to close on €300-350m within the next year. In addition to this, NSC is managing separate client accounts.
Lauge Sletting joined Nordea in September 2000 from Danish early stage venture fund Novi Venture. Prior to that, he was head of investments at PensionDenmark. Sletting also worked as head of equities at LD Pensions.
What type of investments do you look for?
'We make private equity fund investments within buy-out, growth capital, venture capital and also within different special situation strategies, including distressed debt and turnarounds.
In addition to the primary fund investments, NSC seeks to acquire interests in private equity funds on the secondary market. We are also interested in co-investment opportunities.'
What size of investments do you make?
'Our fund investments range in size from €10m to €40m across the different NSC-advised investment vehicles.'
How does your investment process work?
'Firstly, we meet with as many interesting funds as possible (proactive sourcing through broad network and open door policy), then we screen the opportunities, doing a thorough and advanced due diligence. We concentrate on the following investment criteria: people, process, performance, value creation, strategy and portfolio fit. All these determine whether a manager is likely to achieve above-average returns. Funds that convince us make it to the last stage of our due diligence process: the legal due diligence, followed by negotiating the terms and conditions.'
How many investments do you intend to make over the next year?
'We are looking at 12 to 15 fund investments of which 50 to 70 per cent will be re-ups in existing fund relationships.'
What is your expected future allocation?
'We plan to invest €200-250m over the next 12 months in private equity funds, with 40 to 50 per cent allocated to both Europe and the US, and the remainder being allocated to emerging markets including Latin America and Asia.'
How do you find out about good investments?
'We source investment opportunities through different channels such as existing fund relationships and references from our broad network of local and regional investors with whom we exchange views on potential investments.
We also have meetings with a handful of professional investors to share information and track merger and acquisition markets because if we like the deals we might also like the buyers.
Placement agents are another important source of information. We consult them not just to find out what they have in their basket but also to hear about GPs that they have not been able to engage with so that we can approach the GP directly.'
What is your appetite for first-time funds?
'We invest quite heavily in first-time funds: approximately 25 per cent of our first fund of funds was committed to first-time funds. However, we only consider those that are being established by experienced managers. We are very reluctant to invest with first-time managers if they do not have a track record.'
Do you invest in distressed debt funds?
'We have a strong appetite for good managers in the distressed debt fund space as they have consistently produced strong returns. They take a different angle to obtaining control of companies. We also believe that distressed debt funds are in a period of strong deal flow and are likely to create great returns given the beginning of an increase in default rates and the record issuance of high yields bonds.
We have been investing in turnaround funds since the start of our fund of funds programme in 2001, and we have seen pretty good results from that. We previously allocated about 20 per cent to this segment, and we have now increased that to 30 per cent. The reason for that is that special situations investments have a limited downside risk and a very high upside. The downside risk is limited because when you acquire a turnaround or distressed company you only need to deploy a small amount of money. Then, as you increase your understanding of the company, you can decide how much capital you want to invest to get the company up and running.'
What do you look for in a good private equity manager?
'Good managers are firms that have the necessary capabilities to capitalise on emerging industrial trends and structural changes. They have good sector knowledge, operational capabilities and a diverse investment team led by strong leaders. They also need to understand institutionalised investment processes and - very importantly - a clear value-creation strategy and evidence that they have successfully implemented it.'
What are the most interesting countries/sectors going forward?
'We see "combining assets" opportunities across a broad range of geographies and sectors, and also in a number of different private equity strategies. Our funds are aimed at consumer goods, media and communication, technology, healthcare and retail in the emerging markets, and the whole range of different service companies in Europe are all of great interest to us. In other words, we look anywhere you can find assets that it makes sense to combine and get synergy out of because that is where the high returns will be generated.'
What advice would you give to a new private equity investor?
'Be flexible, because what you thought was a hotspot can suddenly change into an area which is over allocated with capital. If possible, invest with a somewhat contrarian approach, find a successful fund of funds manager with a global approach and avoid going for a set of too narrow investments or strategies - find managers who are not too specialised.
There are a lot of pitfalls to investing in private equity that you do not know about beforehand. Investing in top quartile managers is essential to create good returns and to be able to select them you need to have a good point of reference, which you get by meeting with a lot of funds.'
What is the biggest issue in the private equity industry?
'The vast amount of liquidity we see going into private equity on the manager side will eventually drive returns down. On the other hand, the large capital inflow also creates large scale opportunities that were not previously possible.
We are concerned that the alignment of interests between GPs and LPs may decline in the large and mega-cap segment as the fees become a larger part of the GP remuneration.
Tax issues need to be solved - it is important for LPs and GPs to know what is in it for both parties.'
How do you think the market will change in the future?
'We think the market (also for private equity) will continue to perform strongly even with the credit crisis hiccup just experienced. That may affect the large/mega-cap segment for some time but eventually they will get back on track, I believe, most likely with revised price levels and expectations as well as somewhat revised financing terms.'
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