Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: The nuance and the nitty gritty details, but I always find that stuff interesting and it can make a difference sometimes. Some of those differences in rates can compound quite largely over time. So interesting to hear about getting into their strategy, which you outlined really well. One question I had on the thematic approach, are they deploying that with specific funds dedicated to those themes or are those underlying themes that exist within a broader private equity fund where we're going to target these three themes within this vintage, how did they approach that?
· Sean Barrett
[00:00:00] S1: Historically it was all part of big flagship private equity funds and a fund. Historically the flagship strategy at EQT was roughly 40% healthcare and 60% tech-enabled services. A lot of software, a lot of tech. Increasingly over time, again Blackstone led the charge and really created the playbook for everyone. Everyone should be very grateful for that. But over time, EQT has actually started launching sleeve strategies that allow investors to have exposure to one trend if they want it. An example of that would be energy transition. So out of the infrastructure business, their infrastructure business really focuses on growing sectors. It's not toll roads or what I would call boring infrastructure. These are growthy businesses like data center businesses that have lots of underlying tailwinds from stuff like AI digitization and AI infrastructure. But then within that they've also realized that people might want exposure specifically to data centers. And they can focus on that through co-invest or specifically energy transition where EQT is very good and so they have an energy transition fund. And I think these sleeves will be more and more common. Another example is that EQT Asia, we'll get into more detail on it really has an advantage in India specifically. So something like 40% of the Asia private equity business at EQT is India focused. They've done a tremendous job investing in India. It's a very hard place to invest. You need talented people on the ground. That's become a strength. I wouldn't be surprised at all if EQT launches an India sleeve at some point so people can just focus on that. And by the way, I think it would be really valuable for their investors if they chose to do that.
· Matt Reustle
[00:00:00] S0: Unbundling of private equity or private capital, just like everything else, the conglomerate era is no more certainly makes a lot of sense and I think we see it everywhere. Diving into the strategies that you laid out a bit, there's increasingly sleeves of different strategies that they're looking into. I think when I looked at various presentations that talked about private assets, real assets, wealth. Would you say that there is a bellwether strategy for the business that you think is viewed as the most important thing to monitor or a growth strategy that you think is most important to keep an eye on? Obviously they're all important, but how would you frame that?