"Entrepreneurs want to take on new ventures"

Finanstid has met with Andreas Lindström and Sven Otto Littorin, co-founders of the newly established corporate finance firm Stadsholmen Equity, to gain a deeper understanding of the market for unlisted equities.

In the interview, Andreas and Sven Otto share their thoughts and experiences on investments in unlisted companies, and give us an insight into how they view the development of the Swedish market. They tell us how private investors can explore the this market, why many entrepreneurs want to be part of new growth journeys, and provide tips on how to think about different exit strategies. They also discuss the risks and opportunities they see in the unlisted market given that Sweden is entering a recession in 2023, and the biggest political risks for the unlisted market in Sweden.

What is the background of starting Stadsholmen Equity?

"In Sweden, there are about 600,000 limited liability companies, of which only about 1,000 are listed – hence 99.8% of all limited liability companies are unlisted. Personally, I have worked with private banking clients at both Carnegie Investment Bank and Erik Penser Bank for many years and have seen that there is a great interest in unlisted investments within this segment," says Andreas Lindström.

"At the same time, I saw that the trade in unlisted equities is inaccessible and fragmented, and that there is no firm that clearly took the lead in that segment, especially in the more mature unlisted companies that are facing a potential listing within a few years. Together with a team of very experienced people, Stadsholmen Equity was founded last year, with the vision of helping unlisted companies take the next step in their growth journey," continues Andreas.

"For many years, I have met both growth companies in need of capital and entrepreneurs and investors with time and money for new challenges," says Sven Otto Littorin. "It is obvious that more arenas are needed where they can meet and where venture capital, competence and networks can contribute to faster growth and better returns in tomorrow's growth companies. It applies in good times, but perhaps especially in bad times. We want Stadsholmen Equity to be the platform that, with security and transparency, connects venture capital with exciting growth companies," continues Sven Otto.

What is your niche?

"We look outside Stureplan both in terms of investors and companies. There are many knowledgeable investors and good companies in these areas, but they are often already very well-connected. We believe that there is a need and an opportunity to look beyond the traditional centers and to focus on the growth companies that are located outside the major cities. We also believe that there is a lack of knowledge and information about these companies and therefore also a need for a trusted and transparent platform where private investors can invest in unlisted companies," say Andreas and Sven Otto.

How can a private investor explore the unlisted market?

"The unlisted market is by nature a non-transparent market, and it is associated with risk. Therefore, as an investor, you need to carry out proper due diligence yourself and never invest more than you can afford to lose. Seek a lot of information, follow larger investors, attend various events, and keep up with the news. Unlisted companies certainly require more from the investor.

When it comes to individual companies, it's important to understand more about the business model and its drivers, any underlying technology, and market potential, but most importantly, to look at the team behind it. Understand strengths and weaknesses and see if the plan they have is realistic. In tougher times, cash flow and customers are particularly important, or at least some sort of uniqueness in the offering that near-term market exposure can lead to revenue.

As an investor in unlisted equities, it is also important to consider your own portfolio and that you are able to handle the longer time horizon required to see liquidity in your holdings. And to be able to manage if the investment does not go as planned," says Andreas.

What factors may contribute to Sweden attracting so much international venture capital compared to other countries?

"Sweden is one of the most interesting countries for investments in unlisted growth companies. According to the European Commission (and several other actors), Sweden is the EU's most innovative country. We also have the largest number of unicorns (i.e., young growth companies valued at more than a billion dollars) of the Nordic countries - of 321 unicorns in Europe in 2021, 21 were founded in Sweden. Wharton School of Business wrote a few years ago: "What do Silicon Valley and Stockholm have in common? Rapidly growing tech companies valued in billions of dollars. After Silicon Valley, the Swedish capital produces the highest number of so-called unicorns per capita than any other global city." It's clear that this attracts.

Sweden has a good starting point. In addition, we have an institutional framework that works with strong corporate governance and an ecosystem that has been developed over a couple of decades. There is also experience throughout the system in starting, running and developing growth companies. Many talented entrepreneurs have previous experience from other growth companies, or from the Swedish export industry, and bring that experience into new constellations.

From an international perspective, we also have relatively moderate valuations on growth companies. These companies also come from an environment where internationalization is a given component and the companies often scale very early. This often means that the upside is higher for the investor," says Andreas.

What risks and opportunities do you see in the unlisted market given that Sweden is entering a recession in 2023?

"Capital has become more expensive and harder to attract, which means that even fundamentally sound companies may face financing problems. Investors are more demanding and debt financing becomes harder to access. In addition, the transaction market cools down and uncertainty leads to longer decision-making times throughout the chain," says Sven Otto Littorin.

"At the same time, there is still plenty of capital seeking returns, but that requires more security and preparation. Moreover, mobility in the job market increases and it becomes easier to find the right talent. Well-capitalized companies have an easier time finding new opportunities. In tough times, many weak companies become weaker, but strong companies have the opportunity to become stronger. Those who emerge from the recession in good shape have a golden opportunity to create value for their shareholders."

Valuations have come down significantly in both listed and unlisted environments over the past year. When the economy eventually turns around and stock listings begin to pick up, it means a high potential upside for many unlisted companies," concludes Sven Otto.

Companies plan for different exit strategies, do you have any specific tips on how private investors should think in different scenarios?

"It is possible to sell one's shares even in unlisted companies, but it is slightly more complicated and requires greater handholding than in listed companies. Here you can also get help from a broker like Stadsholmen Equity to find a potential buyer for your shares. So-called secondary market transactions are one of our businesses," says Andreas Lindström.

"The important thing in a recession is to have endurance so that you can handle a weak year before it turns around. But as I said, if you have it, now is the time to make really good deals," Sven Otto Littorin adds.

What are the biggest political risks that could have a big impact on the unlisted market in Sweden?

"Right now, perhaps the biggest risks lie in the geopolitical uncertainty that prevails. The war in Ukraine, supply chain issues, increased protectionism, rampant inflation, and rising interest rates create uncertainties that affect both the public market climate and the climate for unlisted investments. At the same time, we should remind ourselves that Sweden has gone through at least eight financial crises since 1880 and we have emerged from them as well," says Sven Otto.

"Even though interest rates are now significantly higher than they have been in a long time, it was unsustainable in the long run that the cost of capital was zero. It is the change and adaptation that is troublesome, rather than the levels themselves. When I look at the risks, I also see opportunities. And I think we will see a lot of opportunities for those who are prepared."

What is the reason Stadsholmen Equity primarily focuses on the tech and real estate sectors?

"We assess that there is good access to quality companies in these niches, but also a pool of very qualified investors who understand the sectors and can help companies grow. There are thus good opportunities for long-term value growth," says Andreas Lindström.

"When it comes to tech, the restructuring of the fourth industrial revolution continues with even greater force after the Covid pandemic. AI, SaaS, blockchain, and many other niches are changing essentially all other industries at their core. When it comes to real estate, it is more about identifying hidden values and opportunities. Even if interest rates rise and Excel sheets change, people will still need to continue to live," adds Sven Otto Littorin.

Considerations when investing in unlisted companies

There are essentially three risks to consider as an investor:

Transparency/risk: By definition, unlisted companies are less transparent than listed ones. As an investor, you need to be more careful with your due diligence.

Liquidity: Unlisted equities are harder to sell than listed equities, so it may be difficult to get your capital out quickly if you need to. It is therefore important to only invest capital you are willing to lock up for a longer period.

Regulation: Unlisted companies are not under the same regulation as listed companies, so there is an increased risk of fraud and irregularities. It is therefore important to invest in companies you trust and have done thorough research on.

About Stadsholmen Equity

Stadsholmen Equity is an independent corporate finance advisor in the Swedish capital market with a focus on qualitative unlisted companies in the tech and real estate sectors. The company was founded in 2022 by four finance profiles, Andreas Lindström, Filip Dunér, Sven Otto Littorin and Johan Svärd.

Link to full article (Swedish): finanstid.se/intervju-med-stadsholmen-equity