Business Breakdowns
· Sean Barrett
[00:00:00] S1: Yeah, thanks so much for having me. Love the show. I listen to a lot of your episodes and it's great to be here. I've been studying and following the alt space for close to 15 years now. The history really goes back to 2011, 2012, when I started studying Blackstone. And back then it was a very complicated space, relatively speaking. I think there are still some complexities about the space that make it quite interesting and allow for investors to be differentiated. But if you go back to 2012, a lot of the alternative asset managers, pretty much all the alternative asset managers that were public were publicly traded partnerships or PTPs, and that created a lot of complexity. It meant investors would get K-1s. There was actually a question: if you invested in Blackstone, for example, you might end up with a K-1 in every state where Blackstone operates. So imagine someone making a $100,000 investment in Blackstone and having 50 K-1s. And then adding to that complexity was the accounting treatment, and that still continues today. A lot of these alts are required to consolidate their underlying funds globally. So what you end up with is just this mess of accounting if you don't know what to look for. But that's what makes it interesting as well and allows you to have some differentiation and have a view on the business that might be different from others. So over the years, I ended up studying these alts in a way that I thought was unique and allowed me to predict the businesses with a little more clarity than what I was seeing from the analyst community. That really started with building up these businesses on a fund level. So all of these alts, they manage anywhere from 20 to 50 to 100 funds, depending on the alt, that are meaningful funds for them. And I had this thought that if you could actually go down and understand each fund, then you would be able to understand the two earning streams better than most. So they earn management fees and carry. And if you understood what the funds were doing, you could figure out: are they likely to raise a bigger fund in the future? And obviously, if you could understand the investments in each fund, you could understand when and how much carry they were going to generate. So all very interesting stuff. That's still how I think about the space today. And, yeah, excited to go deeper.
· Matt Reustle
[00:00:00] S0: I'm just picturing a lot of tabs in an Excel model, depending on which alt manager you're looking at. But in many ways, we've come a long way since those early days of partnerships and the questions over 50 K-1s. We'll bring EQT into the conversation. You referenced some other names in that first answer, like a Blackstone. EQT I don't think gets the same type of press coverage that the others do, but there's some obvious reasons why, perhaps, and some less obvious reasons. How would you just describe EQT at a high level for those that aren't as familiar with the name?
· Sean Barrett
[00:00:00] S1: EQT is a thematic private markets investment manager. They're based in Stockholm, but they operate globally. By thematic I mean they invest behind large secular growth trends such as digitization, AI infrastructure, healthcare for aging populations and e-commerce warehousing. EQT manages about 270 billion euros of AUM on a marked basis and about 140 billion of fee-paying AUM. The business can be broken down into four strategies. They have a private equity business that focuses on Europe and the Americas. That's about 35% of fee-paying AUM. Private equity Asia is about 20%. So together private equity is about 55% of the business. Infrastructure is about 30% of fee-paying AUM and real estate is about 15% of fee-paying AUM. Historically, and this is important for the thesis and the story, EQT's funds have been top quartile performers across strategies, generating 2.5x gross MOICs for their investors on those funds and roughly 20% net IRRs for their investors across those funds. We can get into the differences later, but I think the whole space should be grateful that Blackstone went first and created this wonderful playbook. And now folks like EQT and others get to follow that playbook and grow their businesses substantially over the next handful of years.
· Matt Reustle
[00:00:00] S0: Yeah, standing on the shoulders of giants. Even if you become a giant yourself over time. Every alt manager I feel like has this incredible backstory, typically with larger-than-life characters. You mentioned Stockholm origins here. What is the backstory to EQT? And if you can get into just some of the major stepping stones along the way, however you would describe the various chapters, because they all seem to start with these small beginnings before they get to what we know them as today. What does that look like for EQT?
· Sean Barrett, Matt Reustle
[00:00:00] S1: Yeah, absolutely. To understand EQT, you really need to understand EQT's heritage, which was driven by the Wallenberg family. So the Wallenberg family was responsible for the founding of SEB in the 1850s. SEB is the largest bank in Sweden today and was instrumental in the country's growth over the last 150 years. So early on SEB the bank took ownership stakes in companies during downturns. They would lend to these companies and they would end up with shares, which led to the creation of Investor AB in 1916 as a dedicated holding company. The Wallenbergs became investors in a bunch of Swedish industrial giants over the years. And then in the early 1990s, Conni Jonsson, now the chairman of EQT, then in his 30s and a vice president, pitched the idea of a Wallenberg-backed PE firm. And Investor AB gave Jonsson the mandate to create EQT in 1994. So that was a big moment. That launch was backed by the Wallenbergs, but it was also backed by the Rockefellers and the Mellons. And Conni's vision was really to marry Wallenberg corporate governance practices, values and industrial expertise with active ownership that EQT is known for today. [00:00:00] S0: The Wallenberg ethos, it's a name that I keep seeing as I research different things, particularly abroad. What goes into that?
· Matt Reustle, Sean Barrett
[00:00:00] S0: The Wallenberg ethos, it's a name that I keep seeing as I research different things, particularly abroad. What goes into that? [00:00:00] S1: Yeah, the Wallenberg family is really legendary. They've been a huge part of Swedish culture and financial development over the last hundred or two hundred years, but their values are incredible. And I think when it comes to their values, and it's different from a lot of the private equity world, frankly, they say do business the right way. Doing good is simply good business. They say things like make friends, not enemies. And if you actually go to EQT offices and you meet people who work there, they're kind, they're transparent, they're authentic, they're informal. These are the kinds of things that the Wallenbergs wanted to see. Those were the values they lived. And it's really played out and into this culture that embodies the old values of the Wallenbergs. And then from a more tangible perspective, it actually results in really high employee retention, which is rare in the finance space. I think the attrition rate at EQT is something like 10% as far as employee attrition per year. And regrettable attrition we think is 1 or 2% that comps very, very well to the private equity world. And a lot of that comes from these values from the Wallenbergs that makes EQT such a great place to work and a great place to be an investor.