Business Breakdowns
· Sean Barrett, Matt Reustle
[00:00:00] S1: Yeah, absolutely. To understand EQT, you really need to understand EQT's heritage, which was driven by the Wallenberg family. So the Wallenberg family was responsible for the founding of SEB in the 1850s. SEB is the largest bank in Sweden today and was instrumental in the country's growth over the last 150 years. So early on SEB the bank took ownership stakes in companies during downturns. They would lend to these companies and they would end up with shares, which led to the creation of Investor AB in 1916 as a dedicated holding company. The Wallenbergs became investors in a bunch of Swedish industrial giants over the years. And then in the early 1990s, Conni Jonsson, now the chairman of EQT, then in his 30s and a vice president, pitched the idea of a Wallenberg-backed PE firm. And Investor AB gave Jonsson the mandate to create EQT in 1994. So that was a big moment. That launch was backed by the Wallenbergs, but it was also backed by the Rockefellers and the Mellons. And Conni's vision was really to marry Wallenberg corporate governance practices, values and industrial expertise with active ownership that EQT is known for today. [00:00:00] S0: The Wallenberg ethos, it's a name that I keep seeing as I research different things, particularly abroad. What goes into that?
· Matt Reustle, Sean Barrett
[00:00:00] S0: The Wallenberg ethos, it's a name that I keep seeing as I research different things, particularly abroad. What goes into that? [00:00:00] S1: Yeah, the Wallenberg family is really legendary. They've been a huge part of Swedish culture and financial development over the last hundred or two hundred years, but their values are incredible. And I think when it comes to their values, and it's different from a lot of the private equity world, frankly, they say do business the right way. Doing good is simply good business. They say things like make friends, not enemies. And if you actually go to EQT offices and you meet people who work there, they're kind, they're transparent, they're authentic, they're informal. These are the kinds of things that the Wallenbergs wanted to see. Those were the values they lived. And it's really played out and into this culture that embodies the old values of the Wallenbergs. And then from a more tangible perspective, it actually results in really high employee retention, which is rare in the finance space. I think the attrition rate at EQT is something like 10% as far as employee attrition per year. And regrettable attrition we think is 1 or 2% that comps very, very well to the private equity world. And a lot of that comes from these values from the Wallenbergs that makes EQT such a great place to work and a great place to be an investor.
· Sean Barrett, Matt Reustle
[00:00:00] S1: Yeah, the Wallenberg family is really legendary. They've been a huge part of Swedish culture and financial development over the last hundred or two hundred years, but their values are incredible. And I think when it comes to their values, and it's different from a lot of the private equity world, frankly, they say do business the right way. Doing good is simply good business. They say things like make friends, not enemies. And if you actually go to EQT offices and you meet people who work there, they're kind, they're transparent, they're authentic, they're informal. These are the kinds of things that the Wallenbergs wanted to see. Those were the values they lived. And it's really played out and into this culture that embodies the old values of the Wallenbergs. And then from a more tangible perspective, it actually results in really high employee retention, which is rare in the finance space. I think the attrition rate at EQT is something like 10% as far as employee attrition per year. And regrettable attrition we think is 1 or 2% that comps very, very well to the private equity world. And a lot of that comes from these values from the Wallenbergs that makes EQT such a great place to work and a great place to be an investor. [00:00:00] S0: So they got this incredible foundation or backing, but you obviously can learn a playbook. It doesn't mean you can execute a playbook. What did the execution look like over the next 25 plus years that led them on this path to where they are?
· Sean Barrett
[00:00:00] S1: There were a few really important milestones, I would say, or inflection points. So in 1994 they launched the first fund that was about 100 million euros. It was just focused on Nordic industrial companies and tech companies. But the idea was to take these companies and future proof them, find businesses in growing sectors and future proof them and make them better. So it's very similar to what you hear EQT talk about today, but it was a smaller version. And then in the late 1990s, EQT expanded out of Sweden and I think that's a really important moment. Their first office was in Munich, but it's a really important part of the company's history because they wanted to invest across Europe and someday they had aspirations to even go further than that. But they realized that they couldn't do that with just a small team sitting in Stockholm. If they wanted to grow and do it in a thoughtful way, they needed people all over. And that really led to their local with locals approach. And the local with locals approach is something they talk about a lot today. It's a differentiator for EQT, but they have people all over the world, I think 30 plus offices at this point. So if you have a deal getting done in Italy, it's led by an EQT-arian in Milan who probably knows the selling family, knows the local nuances, the local regulations. That was born by necessity really in the 90s when they realized they couldn't do it well just sitting in one office. And when it comes to putting a 22 billion euro fund to work and doing a really good job with it, they really only need to do about a deal per office versus a lot of peers that manage big funds out of two or three flagship offices. And it becomes much more difficult for those firms to generate great returns cross border.
· Matt Reustle, Sean Barrett
[00:00:00] S0: Yeah. Deal making is very much a contact sport and having some connectivity to the counterparty certainly helps, I think. In the U.S. there's often cliches about the coastal elites trying to make their way to the Midwest to do deals and not quite clicking. [00:00:00] S1: Yes. [00:00:00] S0: So, yeah, I think this is a particularly good example. Before we push forward, I want to get into a lot more of what you just mentioned there. If you were to take a snapshot of what truly differentiates EQT, and I think you mentioned some aspects with Thematic. But if we were to take the big names in the US, like an Apollo, KKR, Brookfield and comp EQT, what stands out that might feel different about EQT's operations from those large players in the US?
· Sean Barrett
[00:00:00] S1: It's probably a good moment to just discuss why we like the alts space to start with and then I can get into the differentiating factors. Obviously, I've been investing in the alts for many years, as we discussed. I would say, number one, we're in the middle of a multi-decade shift from banks and traditional asset managers to alternative capital providers. And when you look at the alts, they can provide capital with more flexibility, more consistency. So that's number one, the alts space is gaining share, growing 10% a year. We think the alts space will double by 2030 and probably double again by 2040. Number two, within the alt market the space is consolidating and the leadership positions are really durable. So there's a lot to like. You mentioned some of the other alt players. There is a lot to like about these scaled players. If you look at the list of leading alts 20 years ago, it's more or less the same list that you see today. So these are very durable businesses and the barriers to success are very high. Number three, the financial models for these businesses are really attractive. They have long-term capital, 10 year funds, the businesses are easy to model and predict for the most part and they generate a lot of free cash flow. And then lastly, with few exceptions, the large alts are run by super highly ambitious, talented and innovative leaders which is hard to find in most companies but it tends to concentrate pretty well in the alt space. And then to your question, what makes an attractive alt for us? How does EQT differentiate? We think about quality in the alts like we do for any business at Counter which is based on product and profits. So for product quality, this is a people business. The quality of the business really starts with the quality of the people. And does the firm have an ability to recruit and retain amazing people? We talked about EQT having industry low attrition rates. They've got a great culture and they've got the ability to recruit and retain amazing people and they pay them well. So it self-selects for great investors who want the accountability around carry. Second, we want to see the firm have a repeatable process for generating great returns at scale. If a firm can't do that, we aren't interested. EQT's generated 20% net IRRs for its investors at scale for many decades.