In October last year, the €4.75bn fund raised by Stockholm-based buyout firm EQT Partners reaffirmed it as one of Europe’s strongest private equity houses. It is now targeting Asia.
EQT’s story starts in 1994, as a joint venture between Investor AB, an entity 44% owned by Sweden’s powerful billionaire Wallenberg family, alongside bank Skandinaviska Enskilda Banken and US investment firm AEA Investors. Until 2007, Investor AB held a 67% stake in EQT.
Conni Jonsson, managing partner of EQT, has been with the firm since its beginning. He spent seven years at Investor AB and was one of EQT’s founding members.
He said: “The private equity market was blooming, but it was early. Most private equity firms became very financially orientated, from banking or accounting, but very few private equity firms had grown with an industrial culture. We agreed we should be doing this at Investor.”
EQT’s traditional area of focus has been the Nordic region and Germany. When it acquires a firm, it appoints a new board of directors, adding an industrial adviser as chairman to this day, a relic from its association with Investor AB.
In its early years, Jonsson credits two key developments for EQT’s eventual success – developing expertise in Europe’s burgeoning cable sector and entering the German market in 2001. He said: “Strategically, it was a very gutsy step, and we were questioned about it by everybody, but performance in Germany has been great, we have created great companies. It made us confident that our business model travelled.”
Jonsson said the most difficult period at EQT was during its fourth fund, closed in 2004 at €2.5bn. He said: “We had acquired too many investments in the heydays, when assets were overpriced, and deals were overleveraged and overpaid by us. To be able to turn investments from that period around was the most challenging part.”
However, EQT’s fourth fund was rescued by the extraordinary performance of one of its investments, engine manufacturer Tognum, which achieved a 45 times return after an initial public offering and allowed the firm to distribute €2bn to investors in June 2007.
One of the firm’s key moments came in 2007, as management agreed to acquire a controlling stake from parent investor AB. The deal would prove a pivotal moment in the EQT story.
In January 2007, Investor AB struck a deal to transfer 31% of its 67% stake to management, who now hold 69%.
One private equity investor said the transition of power, something that could have unsettled investors, proved to have a positive effect.
He said: “They are now even more independent, and have proven solid, and devoid of obvious weaknesses.”
Reputation for stability
The investor added “stability” was a reason for EQT’s successes since the deal. He said: “What the market likes is that they are a mid-cap firm, with a stable team, with no succession issues. They have people making good returns, and have had no major portfolio issues, unlike some of their competitors in the market.”
Jonsson said he hoped Investor AB would continue to enjoy a long-term working relationship with EQT, despite the fact Investor reduced its stake in EQT’s sixth fund from 10% to 6%.
EQT has investments in 90 companies in Europe, and has offices in 12 countries employing 220 staff and 120 investment executives worldwide.
In November, research from Private Equity News found that EQT was the third-largest private equity firm in Europe based on estimated dry powder – or unspent funds – (€5.4bn), and capital raised (€13.8bn).
EQT has diversified into infrastructure, credit funds and is looking to expand geographically, in markets where private equity is expected to develop over the next five to 10 years.
The company closed a $535m greater China fund in 2006, and is set to double the size of its latest Europe-focused credit fund to €750m, according to Dow Jones Newswires.
Jonsson said Asia remained important to the business. He added: “We need to be bigger in Asia over time. We have plans to grow our credit business, but it is too small for us at the moment.”
Sweden’s private equity firms have faced criticism from local authorities over the globally contentious issue of carried interest – the portion of general partners’ fund profits – and whether it should be charged as capital gains tax instead of income tax.
Tax on carried interest
Politicians in Sweden have called for the retrospective taxation of Sweden’s private equity firms.
Jonsson said: “We need to improve clarity. We are not fleeing, we are discussing this issue. If you don’t have predictability, people will become nervous about doing business in Sweden.”
The firm also announced the intention to base its future private equity funds onshore, as a result of political pressure. Jonsson said the firm was currently considering using the Netherlands and the UK.
EQT’s latest and sixth fund reached a final close of €4.75bn raised in nine months with half investors coming from outside Europe.
However, some investors are sceptical over EQT’s growth plans. One European investor warned geographic expansion was not necessarily a good thing. He said: “EQT clearly has a desire to grow, and has a desire to increase its assets under management. Putting Asia on a PPM will sell to investors, but focusing on expansion for geographical reasons, rather than what you can add to companies there, is approaching the issue the wrong way. Firms will have better options than EQT for credit funds, the US, or Asia.”
Jonsson said: “Asia is a very challenging market but we are happy with our performance there. It is a fair concern, but it is always easier to be local to do deals. But when we went to Germany, we started from a blank sheet of paper, and we have proven we are able to travel.”
• EQT funds in detail
The performance of EQT’s funds is subject to debate. According to one investor, four of the firm’s funds should be classed as top quartile, while only the performance of EQT Opportunity fund could be described as “poor”.
However, data provider Preqin found only one of EQT’s funds, EQT V, a top-quartile fund. The EQT investor disputed the findings from Preqin. EQT declined to comment on fund performance.
As measured by an investor*
EQT I: Achieved four times its investments, making it a top-quartile fund, according to investors
EQT II: Was also top quartile, achieving twice its investments
EQT IV: Top-quartile fund, achieving 1.8 times its investments
EQT V: Also top quartile, achieving 1.1 times its investments
EQT III: Achieving roughly 1.7 times its investments
EQT Opportunity fund
As measured by Preqin**
EQT Expansion Capital I
EQT Opportunity fund
EQT’s Expansion Capital II
EQT Credit fund
*Investor measure based on returns from EQT
**Preqin compared the EQT funds against the median by vintage year, fund type and, where possible, geographic focus.