Business Breakdowns
· 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?
· Sean Barrett
[00:00:00] S1: They have four strategies. We're actually tremendously excited about all four of them and they're really great franchises. So stop me if anything becomes interesting, but the first strategy is private equity, Europe and Americas. So that's Asia. It's about 50 billion euros of fee-paying AUM and again they invest behind thematic sectors. So it's a lot of healthcare and tech within that strategy. That's most of the strategy if you really break it down. And I think they're trying to find important tech and healthcare companies of the future, usually leaders in their markets, but businesses that need some help, future-proofing and growing to get into that inflection and hit the next level of their growth. I think a good case study, for example, would be IFS, which IFS is a leader in industrial software or software that helps companies manage their assets and people. It's effectively an ERP software company for capital-intensive industries. This was a publicly traded company 10 years ago that nobody really cared too much about. It was doing a few hundred million of revenue. It was on-premise software, it was growing single digits. EQT took it over and really got to work. I think they had the vision that this was a great market and they got to work on future-proofing the company. So what did that mean here? That meant switching the company, replatforming the business into a true cloud provider. And today that business is doing 1.2 billion euros of ARR, growing 30-plus percent with EBITDA margins of 30-plus percent. So think about that as a transformation. That is not your old boring private equity playbook. That's taking a business at 300 million of revenue, growing single digits, 4x-ing the business and taking revenue growth from single digits to 30%. It's really impressive. And that's the playbook at EQT.