GP Profile: Nordic Alpha Partners on hard-tech, hypergrowth mode

Nordic Alpha Partners (NAP), founded in 2017 in Denmark by five former business executives and investment professionals, is a growth fund targeting highly scalable hard-tech companies in sustainable industries, often referred to as ‘greentech’ or ‘cleantech’.

The firm has made 10 investments to date, nine of which remain part of its portfolio. NAP does not expect to make any further investments as its DKK 945m (EUR 126m) Fund 1 investment period will end this year.

The GP’s value creation is focused on enabling hypergrowth of 40%+ CAGR in businesses within their early growth phase. The team invests months of work in companies, even ahead of an acquisition, in an attempt to bring both the business and its founders on board for a hypergrowth journey. According to Bach Sørensen, more than 50% of the fund’s resources are dedicated to value development from the inside of the business, working with a target company’s objectives up to one year ahead of investing.

When deploying its value creation model, NAP works with the target company’s management, tests new business models, and puts the company on track for global expansion and hypergrowth. Providing a good strategy, financial know-how and sophisticated trajectory projection all help de-risk a potential investment at the same time, Bach Sørensen explains.

“Approaching an immature business with a mature strategy, an ambitious method for hypergrowth, and building trust has given us a unique positioning in this space. Some peers question whether we are giving away free value or free strategy, risking months of work for nothing, but our thesis is that if you provide value early on, it comes back in the shape of a better relationship, faster growth acceleration, and often a better price when investing. The effect of our approach is that we are almost always the preferred buyer, so it is never time wasted,” Bach Sørensen says.

As an example of how quickly businesses can develop once NAP deploys its model, Bach Sørensen highlights AquaGreen, a company in which NAP acquired a minority stake in May 2021, after having grown its team from four to 20 employees over a period of nine months before investing. Another example Bach Sørensen highlights is Green Hydrogen Systems, a power-to-X energy storage (P2X) company, which NAP worked with during pre-investment, enabling it to expand from an eight-man team to one with 100 staff in just seven quarters following the investment. NAP later listed the company on the Nasdaq Copenhagen’s main market, raising EUR 170m in capital during the largest IPO in Denmark in three years, Bach Sørensen says.

So far, portfolio companies in Fund I have achieved average year-on-year growth of 199% since entry, Sørensen says, as NAP’s value creation model enables the growth fund to invest earlier on the S-curve compared to when other growth/buy-out funds normally would, but with a similar failure ratio.

More investment capacity
In Fund 1, NAP typically has acquired 25% to 40% stakes, but for its next fund the firm will target as big a stake as possible, Bach Sørensen says, adding that looking back, “Fund 1 has in reality been too small for our highly operational investment model.”

“Essentially, we have been minority investors acting as majority owners with all the operationality that comes with deploying ambitious growth targets and strategies. Our sweet spot will increase significantly for our next fund, and while I can’t say much on a new fund, we are currently preparing for the next phase,” Bach Sørensen says.

While investors in Fund 1 included large Danish LPs such as ATP and Vækstfonden, a potential new fund is likely to attract the attention of international LPs. However, the GP did not want to elaborate further on the presence of new or existing LPs, meetings taking place, or the size of commitments.

For Bach Sørensen, Fund 1 was about proving that the math works and that the value creation model could propel hard-tech hypergrowth while reducing risks found in early-stage greentech businesses. Based on the learnings from Fund I, NAP’s partner team believe that a larger fund with a similar number of investments is more suitable for their model.

“A key learning from fund 1 is that scaling greentech is more capex-intensive than expected, which was one of the reasons we took two of our assets public last year. In our next fund, it is key for us to have a larger investment capacity to fuel our investments than we could on fund 1. This is where we will now prove the concept and emphasize our containment, Bach Sørensen explains.

There is also a “strong rationale” for expanding NAP’s geography slightly, he said. While NAP is already present in Denmark, Sweden and Germany, a new fund could see the GP extend outwards into the Nordics and the DACH region more broadly.

Sustainable investments
One element that will not change going forward is NAP’s underlying thesis, which Bach Sørensen refers to as “economic sustainability”, or “green transformation based on free market terms”. He says there is unseen growth potential associated with greentech companies with healthy business models independent of regulatory dynamics and subsidies.

This thesis is also why Fund 1 is made up of 100% sustainability investments, and chances are that a future fund will follow the same principles.

“Private equity is in many ways paving the road to a green transition. Not only because of the natural responsibility of alternative investments, but because of private equity’s expertise in fueling transformations,” Bach Sørensen says.

NAP is taking its sustainability focus one step further, with the co-founding partner saying that a future fund is expected to attain SFDR Article 9 classification.

“There is no doubt that being able to demonstrate high portfolio growth and value developments while delivering solid climate impact within cleantech investments, provides an attractive opportunity to raise capital in these times, and we expect interest from new LPs to be high,” Bach Sørensen says.