Business Breakdowns
· Sean Barrett
[00:00:00] S1: Yes. So moving on to the infrastructure business. Of EQT's 140 billion euros of fee-paying AUM, this business is about 40 billion euros and it's growing really quickly, so I'm glad we're touching on it. Consistent with EQT's thematic strategy, this business isn't buying toll roads, they're buying assets in big thematic growth areas. So they specialize in stuff like digital infrastructure and energy transition markets. Both of these are massive growth opportunities, but they require a lot of deep sector expertise. And EQT has been investing in both for a really long time. By chance, both of these sectors have really exploded with AI, which requires a lot of digital infrastructure or data centers, but it also requires a lot of energy to power those data centers. So EQT is in a really good spot now with what the world probably looks like in the next 10 years, and the numbers are just totally astronomical. But both of these sectors will require many trillions of dollars of investment in the next couple decades, and the capital just isn't there. Whenever you have a large supply-demand imbalance like this, it generally results in really great returns. And EQT we think, is probably the best positioned out there to capitalize on AI trends. Briefly digging into the business of EQT infrastructure just for a second. It's the same size flagship fund as the private equity. So they have a 22 billion euro flagship fund in infrastructure that's up from the last vintage at 16 billion euros. And historically they've generated about a 2.5x gross MOIC on their infrastructure business. So we're really excited about this business. Not only do we think EQT will continue generating great returns in infrastructure for their investors, we think that'll result in a lot of growth in the flagship fund and then they're also launching sleeve strategies outside of that that will supplement growth.
· Matt Reustle
[00:00:00] S0: Yeah, it's certainly very thematic and of the moment. Speaks for itself. What is the final bucket of the four?
· Sean Barrett
[00:00:00] S1: Yeah. Lastly, we could briefly cover the EQT real estate business. This was formerly known as Exeter, an acquisition they made in 2021, and again they've doubled AUM at Exeter since then to about 20 billion euros today. Digging into the business of EQT real estate, it's a really unique business because they effectively raise a new vintage every year. So that's different from how a lot of opportunistic real estate investors work globally, and then they put that to work and then they go back and raise more. Like the rest of EQT, the real estate strategy is focused on thematic investing using local with local's approach. And that's a real advantage in real estate. Around 90% of the business is industrial and warehousing. That benefits from trends like global e-commerce. And they're local with local investors. Again, make it a great fit. But it's vertically integrated real estate. They talk a lot about doing real estate, not just investing in real estate, meaning EQT does all the development operations, leasing and property management themselves. Again, this is super unique in the industry, and in fact they're so good at it that when they sell a property, the buyer usually retains EQT to continue operating the asset. I think that just speaks worlds to how good they are at operating. I mean, imagine buying an asset from a competitive yours and then paying them to continue running that asset. And that's literally what people do with EQT. Historically, the EQT real estate business has been top quartile or top decile across its funds. Just a really exceptional track record. Blackstone Real Estate is the gold standard in the industry, and obviously they've done an exceptional job. But we think EQT has the right to grow based on its historical returns, and we think this can be a much bigger business over time. So if you put all of that in the soup. We talked about four strategies. I gave you a lot there. But EQT as a whole is generating amazing returns for its investors, and as a result, the LPs are entrusting it with more and more capital over time. So we think the GP can double its assets in the next few years and then probably double assets again in the next four or five years after.
· Matt Reustle, Sean Barrett
[00:00:00] S0: That one follow-up I had on the real estate strategy, the annual fundraising. Is there a reason why they go with that versus what you would see in the other strategies? [00:00:00] S1: It's really interesting. I think it's actually a part of the history of Exeter, which was a unique asset manager that did things that way for so long. And I think when EQT bought it, they had the idea that the rest of the industry does it this other way, raising opportunistic funds every three to five years, but actually this way that Exeter does it makes a lot of sense. They've done a really good job doing it, and the returns have been incredible. I think there are some benefits to it, and I think the investors, the LPs in Exeter have been so happy that they're really excited to go back and invest more and more every year. You can't do that unless you have really strong DPI or distribution of paid-in capital. If you're not giving money back to your investors, you can't expect them to re-up every year. But EQT has seasoned its investors, if you will, to get them used to the idea of giving more and more money or entrusting the firm with more and more money every year. And it's really unique.
· Matt Reustle
[00:00:00] S0: The last piece of the deal process that I wanted to talk about relates to exiting an investment. And I think you brought up a very interesting case there where they own a business for 17 years, which would fall out of any traditional fund timeline. So do they have a different philosophy when it comes to owning investments? It's something that's very topical right now in the market, and just the thought process around that. I think it's something that Christian was actually talking about in that previously mentioned interview. How do you think about their approach to the final step of the process and realizing a return on investment?
· Sean Barrett
[00:00:00] S1: I think this gets to EQT's ability to innovate over time and stay ahead of the group when it comes to both sourcing but also exiting. And so when we look at exiting, historically in the alt market, there were really two ways to exit investment. That was to either sell to another private equity firm or a strategic, or take a company public. And the problem with those two things is that they both require at the very least a very stable macro environment, and usually a pretty good macro environment to get either one of those done. EQT has innovated a lot as far as how it exits. So obviously they still have the regular way exits, the IPOs, the sales to strategics, the sales to private equity firms. Increasingly they have started using alternative forms of exits, some that are unique to EQT. So the first one that they actually just started doing recently, and I think you'll see a lot more of, is what they call a private IPO. Historically, secondaries, if you wanted to sell a secondary, you would just sell a 50 or $100 million chunk to one buyer. You would negotiate directly with that buyer. What EQT realized was the secondary market is growing very quickly. There are actually a lot of buyers for potential secondaries. So why don't we run a process like you would with an IPO? You can sell a billion euros of stock to 20 investors, and behind the scenes, they're probably competing with each other for capital. It's giving EQT a better price, but it also allows them every year for a business they love to just have this private IPO, hold on to what they want to and monetize what they want to. So that's a really cool piece of innovation. We think they'll use that a lot more in the future. They continue to use the secondary market. The secondary market's growing very quickly. It's actually got a lot of tailwinds behind it. And we think with more and more capital, that'll actually be a benefit to private equity sellers as well, who want to monetize a bit. And then the last one is something we talked about, but it's running with the winners, is what EQT says. And that can be in the form of continuation funds or selling investments to future funds. Now they have to be careful because continuations of bad deals would really upset investors. But EQT has historically done a good job holding onto its true winners for a long time.