Denmark's new Social Democratic leadership gets mixed reviews from dealmakers who are wary of planned tax increases but optimistic about potential investment opportunities in infrastructure and other sectors.
Helle Thorning-Schmidt is set to become the country's first female prime minister after promising to raise taxes on banks and the rich to pay for better hospitals, schools and homeowner rebates. The incoming government also promised to roll back some of the austerity cuts planned by the previous government to balance the budget.
Denmark's struggling economy was a central theme of the Sept. 16 election, which helped the Social Democrats end 10 years of Left, Liberal Party of Denmark-Conservative People's Party rule under Prime Minister Lars Løkke Rasmussen. The result was narrower than expected, with the Social Democrats securing 92 seats in the 179-seat parliament for a five-seat victory over the Liberal-Conservatives.
"We have been in election campaign mode for a long time, and even though it's a close result, at least we have some clarity, which hopefully will remove some of the uncertainty in the markets," said Jan Johan Kühl, managing partner of Polaris Private Equity, a Copenhagen-based buyout shop focused on the lower midmarket.
As Thorning-Schmidt prepared for five-party coalition talks that started Friday, Kühl and other Danish dealmakers offered their thoughts on what the change in leadership may mean for business.
Most are skeptical that the new government will be able to put Scandinavia's worst-performing economy on solid footing as it continues to recover from a burst housing bubble that sparked a banking liquidity shortage and stifled consumer spending. Gross domestic product in Denmark is projected to grow only 1.25% this year, compared to 4.5% in Norway and 4.5% in Sweden.
"In general the new government will struggle to get the economy to grow and to continue to find productivity gains both in the public and private sectors," said Steffen Thomsen, a Copenhagen-based partner with London buyout shop 3i Group plc. In Denmark, 3i's portfolio includes ferry operator Scandlines GmbH and women's clothing company Soya Concept A/S.
While less outsourcing from the public sector may hurt private equity, 3i's Thomsen said that on the plus side there may also eventually be more government investments in infrastructure. "Whether this will be open to private finance remains to be seen."
Kühl is also optimistic that the government's plans to boost green energy and household demand will create possibilities for private equity financing.
Longer term, "our hope is that the planned modernization of the public sector will open up new growth opportunities for private companies in Denmark, much the way the modernization of the public sector in Sweden has created investment opportunities here."
Denmark's beleaguered banking sector inspires considerably less optimism.
"Up until summer, the banking sector had again become more comfortable providing capital to private equity-funded companies, but in August it all froze," said Ulrik Spork, managing partner of Novo Growth Equity.
The company makes equity investments in life science on behalf of Danish holding company Novo A/S, whose holdings include majority stakes in pharmaceutical company Novo Nordisk A/S and enzyme maker Novozymes A/S.
"This is obviously not just a Danish phenomenon," Spork added, "but until the ability to leverage comes back, many potential deals will not be able to advance to closing."
Earlier this month, Danish lawmakers passed the fourth bank rescue package in three years, enabling the government to take over bad loans from ailing banks in case of a merger.
Though it is not clear whether Thorning-Schmidt will continue this policy, she has publicly supported the idea of separating, or ring-fencing, banks' retail activities from their other operations, as is planned in Britain over the next few years. She has also said that banks that received aid during the crisis should be forced to give back more to society, including funding schools.
Although Novo Private Equity does not have any investments in Denmark in its current portfolio, Spork said he wouldn't rule it out "if the right opportunity arose."
He and others also worry that raising taxes in a country that already has among the world's highest tax rates may scare off investors looking for startup prospects. "Up until now we have done a reasonably good job creating entrepreneur-based companies in Denmark," Spork said, "but if you keep raising the tax burden, then individuals will be discouraged from building businesses here and head elsewhere."
Regardless of whether the incoming Danish leadership follows through on all its campaign pledges, private investors are hoping that their role in jump-starting the economy won't be overlooked.
"We hope that the government will acknowledge that the private equity sector is providing growth capital to midsized companies and creating value for society," said Polaris' Kühl.