Trends in the Private Equity Industry

What are the main trends within the private equity industry at the moment?

There is a growing interest from investors to co-invest alongside the general partner. This allows the investors to allocate a larger portion to the private equity asset class but at a lower fee level. We believe this is a very interesting development as it will also make the asset class grow and create even stronger relationships with the investors.

More and more private equity houses are now focusing on portfolio company development and growth. This is rather an evolution than a trend. For EQT, this has always been the core of the investment philosophy. Creating stronger and more sustainable companies is what has made EQT successful over the years.

But strategic development and industrial value creation have been buzz words for some time now – how does EQT measure up in this area?

We strongly believe that the only way to deliver sustainable returns is by making companies better and more competitive for the long-term. EQT has a strong track record in creating value through strategic development, growth and operational excellence. This accounts for around 94% of the value increase at exit. EQT portfolio companies have, on average, increased sales by 8% per year, EBITDA by 12% and the number of employees by 10%.

In order to validate EQT´s value enhancing initiatives, a study was made how companies in Sweden, sold by an EQT fund, had developed five years after the exit. The study showed that the companies continued on a stable growth path, with an average annual sales growth of around 9%, while the number of employees had grown by around 7% per annum, on average.

What structural changes do you foresee in the private equity industry?

I believe there will be a consolidation where the most successful, high-quality firms will continue to grow into global investment houses, offering a diverse range of private equity products. EQT is a good example – developed from being a local Swedish private equity firm with one fund strategy to a global organization with four investment strategies and presence on three continents. I fear that the increased regulation in the private equity industry will fuel a shake-out where smaller firms might not be able to afford to invest in the necessary systems and competence. Being large is clearly beneficial. In EQT’s case, the organization is built to manage the increased complexity, enabling the investment advisory teams to focus on finding the most attractive investments and supporting value creation.

Investors are now finally pushing back on fees that do not serve long-term value creation, such as transaction fees, monitoring fees and termination fees, thereby increasing the alignment between General Partners and investors. In this context, it is worth re-emphasizing that EQT doesn´t charge these types of fees.

EQT has made five successful IPOs from the Equity funds during the past year – how long do you expect the IPO window to remain open?

That’s true, and in the most recent IPO, XXL (a leading Nordic sports retailer), the shares were as popular with investors as its stores are among sporting enthusiasts!

Looking back, after a “long, cold IPO winter”, we saw the public markets opening up last year for good companies. It feels rewarding that all companies that EQT has listed are doing well also in the public environment. We live in symbiosis with the capital markets and it is key for EQT to maintain trust with the public market investors to secure a long-term relationship.

Liquidity is still strong and interest rates at record lows, which intensifies the chase for yield and so far we have not really seen any signs of this abating. However, the macroeconomic environment is deteriorating, making it difficult to predict how the public markets will develop.

ESG sits at the top of many agendas – where does EQT stand at the moment on this and what lies ahead?

EQT's ambition is to deliver attractive, risk-adjusted returns to the investors, through the development of innovative and competitive companies that contribute to overall growth in the economy and society. A responsible investment approach is not only essential, it also makes commercial sense.

The concept of "shared value" has been a natural part of EQT’s corporate culture since inception. Creating sustainable value protects EQT’s license to operate as a private equity firm. We are continuously refining EQT’s ESG toolbox with particular focus on integration and accountability in the investment process, as well as during the ownership phase. I truly believe that by taking ESG matters into account, EQT will enhance value in the portfolio companies.

Will historical returns be sustainable given bleak growth prospects in many parts of the world?

EQT has delivered stable returns over time but for us, the focus lies on the future and how to continue to be successful. We work relentlessly to improve the deal selection process and governance model to drive value creation in EQT’s portfolio companies.

EQT’s investment approach brings together four key elements: 

• Engaging the right people and implementing a clear governance model.
• Using operational experts from the EQT Industrial Network to drive value creation in the portfolio companies.
• Constantly challenging business plans and value creation strategies.
• A clear performance management process with a focus on supporting value creation, while combining a high sense of urgency and prudent risk management.

In an environment with increasing competition, I strongly believe that EQT´s people, culture and approach to investing will secure our position as the leading private equity group in the markets where we operate.