Business Breakdowns
· Sean Barrett
[00:00:00] S1: But yeah, yeah. The differentiation at EQT really starts at the beginning of the life cycle of an investment, which starts with the firm's thematic investment approach. So they're investing in growing sectors. A lot of what they do is software, healthcare and data centers. And within those, they're typically buying a leader that will benefit from those secular trends and benefit from pricing power. With regards to sourcing, EQT operates that local with locals approach that started really in the 90s and again it allows them to do two things. One is that if a deal is getting done by a local, that local investor has better knowledge of the respective geography and the local nuances and usually has a relationship with the seller. So that helps with the returns, but it also leads to higher velocity deal sourcing. As we talked about on a 22 billion euro flagship fund, EQT only needs about a deal per fund, per office to get that fund complete. So it's a real differentiator. From there, they future-proof the companies they own. That work typically starts with establishing a new board, improving the management team if needed, and establishing a plan to digitize the business. So that's their big thing, digitizing and future-proofing businesses. And then the board has an informal subcommittee which is called a troika. And this is really unique to EQT. The troika is made up of the portfolio company CEO, an EQT partner and the chairperson, who is generally an independent advisor from the EQT network. On a side note, EQT's specialty in governance and management is really unique. It's consistent with its Nordic heritage; a lot of it's attributed to the Wallenbergs. And governance practices in Sweden are, I think, unique globally. I sat on the nominating committee of a public company for many years in Sweden and it's a really admirable corporate culture where the board explicitly works for the nominating committee who explicitly works for shareholders in Sweden. It's great process, it's great alignment, and a lot of that is attributed to EQT and the Wallenbergs. And then after the acquisition, EQT gets to work on adding value further, often through making bolt-on acquisitions. Now historically, making bolt-on acquisitions in private equity was a super time-intensive process.
· Sean Barrett
You'd usually have an analyst and an associate go and put together a list of maybe 20, 30 targets. It might take them two or three weeks to create that list, debate it internally, see if they can find contact information. EQT realized this was an important part of their playbook and they started what 10 years ago was just a data analysis tool called Motherbrain. Motherbrain actually evolved into an AI automated decision support tool over time and it's a real differentiator for them. So effectively it pulls data from tons of sources online, PitchBook, LinkedIn, and then it also combines that data with EQT's internal data from prior diligence. So when a portfolio company today wants to make an acquisition, instead of an associate spending two weeks pulling a list together and maybe reaching out to people a month or two down the line, Motherbrain can take a few prompts and give the team a list of targets immediately. Usually that's accompanied by revenue size and contact information. So that's been a really cool differentiator for the business. And I've given you a lot here, but when you combine all that, the strategy around thematic investing, the repeatable process, future-proofing companies based on local with locals, and an intense focus on governance, it's all resulted in EQT owning companies that on average grow revenue 12 to 15% a year and EBITDA 15 plus percent a year on average. So the composition of EQT's fund returns is much more growth driven than multiple expansion or leverage driven. And that's what's resulted in this top quartile return generation at scale with 20% net IRRs for their investors.
· Matt Reustle
[00:00:00] S0: Yeah, it certainly seems like there's an operational expertise which is differentiated and stems from the business itself of EQT into the businesses that they own. And that's reflected with some great naming conventions for the various things that they roll out as well. One of the things that we usually talk about when we talk about alts, which we haven't really got into with EQT, is the leadership team. And you described some of the early leaders of the business. Usually you have someone who holds the torch. And then we've seen with some of the North American alts, there's been a passing of the torch recently. I know EQT has a slightly different model, so walk through that and the players that are involved or even how you would frame leadership's importance to what they're doing.
· Sean Barrett
[00:00:00] S1: Leadership at the alternative asset managers is so critical because again, it is a people business. And going back to first principles on what makes a great alt for us, the ability to recruit and retain and manage great people, that's a first principle requirement for success. So when you look at a lot of the alts, they've dealt with succession in a pretty similar way. They've started with a founding group and they've passed it on to a successor group that they think can run the business usually for 15, 20 plus years. And you've seen that in the US with some really great leadership transitions that worked really well. This was a big risk. If you go back 10 or 15 years, there was a big philosophical question about alts going public: how would they be able to handle the transitions from founder groups to the next generation? Would that disrupt the businesses in meaningful ways? And I think most of the alts did a really fantastic job of finding a great next generation of leaders. If you look at EQT, they've handled it differently. So instead of the founders picking a new leader or a new generation that can run the business for 20 years, they've decided that they will run the business more like a typical operating company or a typical company. So if you look at average CEO tenure in public markets, I think it's about five years in Europe. And EQT has been pretty similar in its current form. EQT has been around for about 30 years. They've had five or six CEOs. And Christian Sinding, the CEO for the last six and a half years, just recently was elevated to chairman and passed the reins on to Per Franzén, who was running the private equity business for a bunch of years. Christian's young. I think Christian's in his 50s, he's got a lot of energy. And I actually got to spend some time with him in London last month and I asked him: why now? You're young, you're obviously a talented manager, you've done so much for this business. He's had an incredible impact on EQT. He started with EQT something like 28 years ago. He ran the PE business and ultimately led the firm through its IPO in 2019. Since then, EQT's assets have increased four-X and the firm's returns have been excellent. So it's been an intensely productive period for the company and a lot to be proud of for Christian.
· Sean Barrett
But as Christian pointed out to me, EQT's culture is very forward thinking, very forward looking, and they believe deeply in elevating generations of leadership while those new leaders still have the energy and the ambition to create substantial value. So Per Franzén is taking over as CEO for Christian, but when Per elevates from head of PE to CEO at EQT, it's not just one person elevating, it's actually a whole group of people who get to elevate. Again, this is a bit different from how the US alts have thought about succession. Like everything at EQT, they do it in their own way and stick to their values. And this is one of their values.
· Matt Reustle, Sean Barrett
[00:00:00] S0: Yeah. There was a somewhat viral interview with Chris Hohn and Christian on stage recently and my immediate takeaway was Christian does not look old enough to retire. When you consider what he went through as CEO over the past five years, that is a career's worth of accomplishment. So I can certainly understand that. But I do have this sense of succession planning as a piece of very effective governance and tying it back to the culture there. And I think it's perhaps overlooked sometimes in the US where succession planning is done when there's an event that requires catalyst that it needs to happen rather than being thought out well in advance. And I think the precedent of these five year or so, 10 years would point to that. So it is interesting to see how that differs from some of the other businesses where it feels like the value really sits with a lot of the people at the top of the business and it's hard to differentiate the enterprise versus the individual. [00:00:00] S1: Yes, absolutely. [00:00:00] S0: So one other question I had which somewhat referenced the idea that the alt space has had this opportunity recently with the flexibility that they have, especially relative to banks or historical funds. And one thing that comes to mind whenever I think about flexibility is regulation. Regulation is the one thing that can hamper down flexibility and restrict it. Is there anything unique about operating in Sweden, operating in Europe, that is very different from what North American funds would have to think about when it relates to regulation?