Sweden: an investors dream or regulatory nightmare?

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Sweden, a nation famous for its vast state pension funds and high levels of taxation, made headlines in the PE world in 2017 thanks to a new tax law which hit retrospective earnings. However, despite a highly regulated business environment, increased appetite from pension funds and a growing online payments industry means the outlook looks good in 2018 for Swedish Private Equity.

In April 2017, after a long battle with the courts, Sweden’s tax authority introduced a new regulation classifying profits from investments as income rather than capital gains, and therefore taxable as such.

This new regulation, applicable to income earned as much as ten years previously, was met with horror from the Private Equity world.  Swedish authorities estimate firms will pay another $261 million through taxes, though some investors say it could be significantly higher.

Thomas von Koch, Managing Partner at Stockholm based PE firm EQT, described the regulation as “the biggest landslide ever to hit the industry,” and warned that the rules would make it almost impossible for private equity to operate in Sweden.

In June, Private Equity firm Nordic Capital announced it would appeal the decision, and in September Nordea, one of the countries’ leading investment banks, began the process of moving its headquarters to Finland.

Sweden has some of the highest tax rates in the world, and this new regulation will undoubtedly affect profits margins. New regulations often prompt high-profile expressions of discontent, and a few major moves. However, in the case of Sweden, investors giving the country a wide berth could be missing a trick.

Sweden continues to offer great opportunities for Private Equity. The region’s vast state pension funds are increasingly looking towards investing in Private Equity to generate higher returns, spurred on by new regulation. As of July 2017, Sweden’s pension funds, which hold a combined worth of over $150 billion, will now only have to hold 20% of their assets in the safest bonds, rather than 30%.  This is an excellent opportunity for private equity fundraising. PE firms looking to appeal to pension funds should demonstrate excellent standards of transparency and ESG, as well as robust growth strategies, to ensure confidence to those dealing with such a sensitive investment.

The private sector is also flourishing in Sweden despite new regulations, with high levels of activity in the online payments and technology sectors.

Last year, Permira bought a significant stake in Swedish payments firm Klarna, one of Europe’s highest valued tech start-ups.  On the sell side, Nordic Capital, sold Swedish payment-services company Bambora for €1.5bn in one of the largest deals of its kind. Sweden’s growing number of fin-tech and online payments companies should continue to attract investors this year.  The continuing upturn in the economy and large volume of capital in the market should also encourage investors of all sizes.

Though highly regulated, Sweden’s unique mix of huge pension funds, growing tech companies and new start-ups make it a fascinating and valuable market for investors.


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