EQT 'House of value creation'
EQT has delivered amazing returns across a number of strategies - seems they have a big emphasis on structured value creation programs.
Anyone have any specific insights into their approach?
Shortly after acquisition, EQT supports the portfolio companies with the development of full potential plans to help them execute on set targets that the portfolio companies will be continuously evaluated against. EQT carries out established periodic performance reviews, which provide an owner’s forum for high-level and forward-looking discussions on value creation.
What do you mean by outstanding returns? I think they are very good.
But from 2015:
- All equity funds: 2.1x gross MOIC / 42% IRR - very solid but many large funds have similar performance.
Grateful if you have more recent data.
I feel like its not so much the 'house of value creation' but sector allocation - it seems they were overweight on TMT / HC at the right time.
Care to share which large UMMs / MFs are still pulling >2x? I took a look in the recent past and concluded that only really EQT and Advent are still sitting comfortably above that mark. Tbf, I didn’t check all and can see some names still being up there albeit mostly due to sector selection (eg all the Tech guys), so genuinely curious which other ones you’ve seen
I'm not saying EQT are bad at all, for the record, I think they are stellar returns. But, I think TA, Permira, CD&R, H&F have all performed equally well / similarly or slightly better (depending on which it is).
There are plenty of data to be found as EQT is a public company. Took a quick look at their Q4 and they are very heavily invested in HC. Target gross MOIC for all their PE funds are 2.3x.
Invested capital (private equity) split:
42% Healthcare
27% TMT
18% Services
13% Other
Recent fund performance:
EQT VII (2015, €6.9b): 2.6x
EQT VIII (2018, €10.9b): 2.3x
EQT IX (2020, €15.6b): 1.3x
EQT X (2022, €20b): 1.0x
Your point is fair.
https://cdn.sanity.io/files/30p7so6x/eqt-web-prod/2517f65322a56bad909f9… has the returns track record.
I'm just slightly sceptical of more recent funds because the valuation is likely to be more 'TVPI' than 'DPI'.
God damn. 42% IRR is insane.
Sardonic take but "value creation" outside of funds w/ true operational blood through-and-through is just fluff.
You think these reviews, templates and targets your firm is sending OpCo is actually helping them? No man the best thing you can do is call up the bank they're trying to get a revolver / loan on and bulldoze them for a better rate / put them in queue faster. You think management isn't already incentivized to 2x and create insane wealth on exit? All you're doing is stuffing paperwork in their face that is taking time away from actual ops
This is just marketing for LPs - which everyone does, so not saying it's not necessary - but need to read btwn the lines a bit more here. What's happening here is no different than ESG-washing - everyone's going for the same pockets of capital and IM materials need to look good
Agree with you completely.
It's marketing spiel for LP's - all this 'toolkit' stuff is just the usual, operating partner, Chair, talent pool, data etc. etc.
Who in your mind are those truly operations focused funds? What tools/frameworks are they using to deliver this “outperformance”?
when rates are where they are today that extra 25bps lower margin on rcf is not gonna create miracles imho
I heard that Vista as specialist software investors have created 100s of playbook strategies or tactics? Anyone have intel whether this is also just marketing.
If that "paperwork" is seen as useless, then maybe those "reviews, templates and targets" are of poor quality and not addressing the needs of PortCos
I concede that what you're saying might be valid for some small cap PE but for large cap deals you need professional teams and frameworks that support delivery of the strategy.
I completely disagree.
Any company that qualifies for a "large cap deal" should be equipped to perform w/ or w/o your firm's "professional teams and frameworks." That's literally why you're paying 8-15x for the business.
The small cap PE companies are the ones that might actually really need the support, as they're more likely to be financially unsophisticated and may require some hand holding on execution as they presumably scale
The most value creation a MF generalist strategy is providing is around relationship management, markets support and capital structure optimization. This paperwork you're shoving upstairs is for LPs to better track performance (growth, leverage coverage) and meet certain allocation goals and enables GPs to have more depth in providing marketing KPIs. All front-facing to please sustained fundraising efforts.
As an investor you are taking directional beta on where the economy and industry is moving forward, and you do your best to pick winners. You are overly embellishing the role if you think otherwise - contrary to how some, most notably mgmt consultants, think - you will not know any business more than guys who have rolled up their sleeves and have been on-site for more years than you've been alive.
The actual exceptions are industry-specific (tech, power, etc) and/or strategy-specific (turnaround) where your firm may have an in-house ops team and perhaps a full list of C-suite employees on speed-dial that are ready to step in. But that is not what the OP is referring to
I think there are a few exceptions to the rule on value creation / operating differentiators being bullshit.
First is firms that actually have a deep enough senior executive / operating partner talent bench that they can and will replace management with the right team or teams. Everyone obviously has benches but certain firms have better / deeper benches than others and often times incumbent management is fine but not great.
Second is in heavy roll-up / buy and build strategies certain firms are much worse than others on the integration process.
Third is firms that actually come with portfolio company level strategic supply / supply chain discounts across all portfolio companies which provide a day 1 lift on portfolio company costs.
Fourth is firms that actually have enough experience with certain stakeholders that they can truly have a differentiated impact. Best example I can think of is KPS with unions but there are likely some government specialists out there / industry focused guys who know a ton of potential customers as well.
do you mind elaborating on the KPS union comment?
Director in PE here. I agree with all that was said about a big part of the value creation being in financing/roll-ups/network (less on portfolio-wide discounts as I've seen next buyers cross that out from EBITDA at exit).
However, I think you guys underestimate the pressure that MF teams put on management with their continuous asks for KPIs and reporting, especially when supported by very experienced industry advisers that co-invested alongside the fund and have aligned incentives. You shouldn't expect a PE professional to come up with a strategy for a company and obviously not even executing it. However, from what I've seen at my portfolio cos throughout the years, there is real value in providing management with a sparring partner and continuous focus on the business. If you think of the way boards work at public companies vs at portfolio companies of funds like EQT work - it's completely different worlds. The amount of focus that people put in those discussions, not to mention the speed of reaction, is just a different world. Not all funds do it that way, you really need to have some sort of operational focus (otherwise you either aren't incentivized to put in that focus, or you're not able to allocate capacity)
There's also another type of contribution. In the past I've directly taken on entire execution workstreams from management from time to time on really specific projects where corporate finance knowledge was needed - but that's less impactful, you're just filling in for a missing head at the company.
all in all - I agree that it is not rocket science at all. It’s just that in the alternative system (public markets) this governance pressure just isn’t there
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