Nordic countries have much in common — including a growing appetite for private credit

Randy Schwimmer

Co-head of senior lending Churchill Asset Management

What stood out was the degree to which they walk the walk on ESG

Norway, Sweden and Denmark share many similarities. The ‘Nordic model’ includes high standards of living, free-market economies, liberal welfare states, a tendency for workers to unionise, and a relatively narrow gap between low and high earners.

One of our senior strategists also comments on these countries’ common belief system around environment, society and governance. “What stood out in my mind after our trip,” he tells us, “was the degree to which they talk the talk, but also walk the walk, on ESG. Both in how they invest, and how they live.” The large number of bike-friendly commuting lanes, is one prime example of this philosophy.

It also seems private credit is capturing an increasing share of investor allocations in the Nordics. The sector’s traditional benefits — price stability, yield premiums, conservative structures, and portfolio diversification — are well understood. In the wake of higher rates, managers can now add double-digit all-in, unlevered yields, as well as lower borrower leverage and even tighter structures.

Denmark doesn’t have vast natural resources

But there are differences in the economies of the Nordic countries. Denmark is tied to science, technology, energy and transportation, while Sweden and Norway have enjoyed historic access to natural resources (the latter’s massive petroleum reserves and the former’s timber and iron ore). Denmark is a much smaller country with no such significant assets.

Currency-wise, the Danish krone is pegged to the euro, stemming back to the government’s decision in 1982 to tie its currency to the German deutschemark. This is also one reason why the DKK is less volatile than the NOK and SEK (the latter is free-floating) — and why Denmark has coped better with inflation.

Danish GDP has benefited enormously from the growth of Novo Nordisk, the maker of top-selling obesity and diabetes drugs, Ozempic and Wegovy. Without it, the first half of 2023 would have been negative, rather than a positive 1.7%. But Denmark also has a strong shipping tradition (for example, DSV and Maersk). And it was one of the founders in the 1970s of the modern wind power industry, with the production of wind turbines by Tvindkraft.

The Danish pension system is considered to be among the world’s best. It has a state-funded component, supplemented by ATP, paid by a small, fixed salary contribution. There are also commercial funds providing services to corporations with less union influence which pay attention to costs and returns in competitive environments. Occupational pension funds, on the other hand, are driven by strong unions with traditional labour values. Then there are voluntary private pensions.

The Danes are highly attuned to the recent run-up in yields for private credit. It’s also helpful that structures and leverage have tightened. As fixed-income-oriented investors, they understand the advantage of a floating rate asset class. Now it’s all about ensuring their managers have built portfolios that will weather whatever headwinds are in store for the rest of this year, and beyond.

Sweden has increased allocations to illiquids

Sweden, as with most of developed Europe, has a sophisticated banking system with commercial lending experience, including to the middle market. Nevertheless, the opportunity for direct lenders is growing.

Since 1960, the Swedish pension system has included so-called buffer funds. They account for about 20% of the total SEK 6 trillion AUM in the system. Designed to rebalance with demographic changes, the funds have diversified away from public equities and fixed income, and expanded allocation to illiquids from 5% to 40%.

This has been built out in a measured and thoughtful fashion. Sweden is historically a private equity-oriented country, but current return levels suggest more investors may be tempted to explore the benefits of private debt. That interest has historically been centred around insurance companies, thanks in part to favourable treatment under the European Parliament’s 2009 Solvency 2 directive.

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