Business Breakdowns
· Sean Barrett
[00:00:00] S1: This is actually one of the really fun parts of investing in the alts. There aren't many sectors today in public markets that are still inefficient. People mostly know how to invest in tech companies and how to value them. People mostly know how to talk about industrial companies and value them. If you look at the alternative asset managers and you even go in and look at a research report with comps and you compare it to three other analysts on the street, they'll all use different frameworks; they all use different multiples. One of them might be using fee-related earnings pre-tax and not even thinking about carry, just talking about the FRE multiples. The next one might use total net income for 2025, and they won't even mention whether carry is under-earning or over-earning for that year. And so there's a lot of inefficiency in this market that actually continues to create a great opportunity. And so let's step back for a minute, and I can share how we value the alts. I think our way of doing it has had some predictive qualities and some consistency that we see, or at least correlation to good outcomes. So every alt has a little bit of a different carry profile. And as we've talked about, some are private equity heavy like EQT, and they generate a lot of carry, and other alts generate very little carry. So we try to value the carry business, remove that from the enterprise value as if it was cash, for example, and then isolate the value of the management fee business. EQT's management has said that existing funds will likely generate about 8 billion euros of carry or more in the coming years. That's net of payments to their employees. So that's 8 billion to the public shareholders. And on top of that, they're kicking off a big fundraise for 100 billion that can probably generate many billions more of carry over time. So there are a few ways to value carry. You can use an NPV, or you can capitalize it at a mid-single-digit multiple of annualized earnings. The number comes out to roughly the same, which is that we think the carry business here is worth something like 10 billion euros or a third of the market cap. And in our base case model, EQT will generate a lot of carry in the next five to 10 years. On a net basis, probably between 30 to 50% of the market cap will be returned to shareholders just from carry.
· Sean Barrett
So doing that exercise that allows us to isolate the management fee business, which is really important because then we can compare it on an apples-to-apples basis versus other managers that might have different strategies. The way we do it at Counter is we isolate management fees, and we always look at net income after burdening for stock-based compensation, depreciation and taxes, or stock-based comp, capital intensity and taxes. On this basis, the space trades at an average of about 35 times forward net income. And the average alt is growing management fees something like 6 to 10%. On a side note, EQT is pretty unique in that they have very low stock-based comp. So you've got a quality of earnings benefit here. Low stock-based compensation, low tax rate relative to peers globally. And so EQT trades at about 20 times this isolated management fee net income, something like a 30 to 40% discount to most of the space, but it will grow at much faster rates than the space over the next five years. On a free cash flow yield, we think EQT again will generate a baseline of 3 to 5% return to shareholders via dividends or stock buybacks in 2025 and 2026. And that should grow to something like 7 to 10% free cash flow yield in the years ahead after that. So back to your first question: based on growth and quality of earnings, we think EQT deserves a premium, but it trades at a big discount right now. We think a lot of that is due to its geography and lack of carry generation in the next 12 months.
· Matt Reustle, Sean Barrett
[00:00:00] S0: And Sean, this has been a fascinating conversation. We finish these off with the lessons that you can potentially take and apply elsewhere as an investor. What stands out most about EQT that could potentially be applied elsewhere? [00:00:00] S1: I'll probably pivot away from the investment side at this point. I mean, we talked a lot about the pattern recognition from lessons learned in the market from 2010-15 that still apply today in the alt space. But I think to answer your question more directly on what I've learned from EQT, I think looking at EQT reinforces a really important lesson, which is just to invest your own way. It reinforces the importance of being authentic and sticking to your strategy. EQT with its Nordic heritage, they could have tried to copy others. They could have expanded into a bunch of new sectors in search of growth, but they didn't do that. They maintained what some would call a really narrow focus, mainly on tech and healthcare, and they stuck to their values. So that really resonates with us. At Counter Global, we have a really narrow focus. We only invest in tech and financial services, and it's a pretty small number of companies we care about. [00:00:00] S0: Well, this has been a pleasure, Sean. Thank you for joining us and breaking down EQT. [00:00:00] S1: Thank you so much, Matt. Really enjoyed it.