Business Breakdowns
· 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?
· Sean Barrett
[00:00:00] S1: Yes. Operating in Europe is actually quite complex and the EU is obviously a big place, but there are tons of borders and each country has its own set of regulations, its own set of rules and its own cultural nuances. So I actually think operating with success in Europe is very, very difficult. It has some pros and cons when it comes to regulation around the financial side of the business. Sweden actually has its own central bank, so that's unique within Europe. It has the Riksbank, it's called, whereas there are broader central banks that manage the rest of Europe, UK and the US. So that's a nuance. But the Riksbank has always been, I think, really well managed. Their focus at the Riksbank is basically to manage inflation, whereas a lot of central banks around the world have dual mandates to manage inflation and employment. That focus on stability at the Riksbank I think actually makes it a really nice place to operate as a financial services firm and then benefit. I would say, depending on how you look at it, is you do have at times looser regulation around financial services firms in the US and at times in Europe. The US has really adopted this model of asset bases being the important focus. And when you hit a certain asset base, that's when you get more regulated in the banking system. That starts at 50 and 100 billion and then 250 billion is a real line in the sand where your regulation goes up substantially from there. In Europe, I think they think more around systemic risks and they tend to have really responsible operators as a result who don't want to get into that gray area of systemic risk. And then the last thing I would say that's interesting about operating in Europe as a financial services firm and specifically for EQT, is that based on their ability to have entities in different jurisdictions, they benefit from a really low tax rate. EQT's tax rate on a blended basis is something like 10%. They actually don't get taxed at all on the carry business. And that's a nuance that might change over time, but the tax rate is very low and so the free cash flow generation that they can send back to shareholders is actually substantially higher than other markets.