EQT AB [STO:EQT] – Market Cap as of 04/10/2019 SEK 83.58bn (USD 8.49bn)

Introduction

On Tuesday, September 24th 2019, the Swedish group EQT— the second largest Private Equity group in Europe — listed on the Stockholm Nasdaq in what was the biggest Private Equity listing of the past decade and one of the most successful European IPOs thus far this year. EQT saw a one-day pop causing the stock price to surge 25% in the early hours of trading Tuesday and close the day up 34%. The company achieved an impressive feat given the amount of lacklustre IPO debuts this year and the history of disappointing Private Equity IPOs of past years. Overall, EQT’s public listing represents an opportunity for the company to strengthen its balance sheet.

About EQT

EQT was founded 25 years ago by the influential Wallenburg family. The company now has over €40bn in assets under management, shared between three business units: Private Capital, Real Estate, and Private Credit, with more than half of the assets invested in Equity. In terms of geography, EQT invests around a quarter of its funds in North America, half in Northern Europe, which includes the Nordics as well as Germany, Austria and Switzerland, and the rest of the funds in other European countries and Asia Pacific.

In terms of ownership structure, EQT has been a corporation since its inception, with a one vote per share governance system. This is unlike many of the large Private Equity firms, which started as partnerships and made the transition to corporation structure later on, with the most recent examples being Carlyle and Blackstone. Compared to the publicly traded partnerships, corporations pay higher taxes but they can more easily raise funding from mutual funds, which are often deterred from investing in PTPs because it implies completing lengthy tax forms. Prior to EQT’s IPO, the company’s 70 partners owned about 79.8% of shares, with the largest shareholder being the Wallenberg family’s investment vehicle.

Despite being a PE firm, EQT has the same economics as most asset managers. Indeed, the company generates most of its revenue through management fees, with less than 30% of revenue coming from the performance fees on capital gains. Last year, the company generated revenue of €393m and net income of €121m, corresponding to a 31% net profit margin. EQT’s profitability is in-line with peers: it compares with 22% net margin for Blackstone and 46% net margin for KKR in the year 2018. However, the company uses much less leverage than its peers, with its current debt-to-equity ratio standing at 0.55 compared to 4.5 for Blackstone and 6.2 for KKR.

EQT showed impressive growth in H1 2019, in which the group generated €295m in revenues, nearly double that of the same period last year. Similarly, EQT’s Assets Under Management increased by 25% during the same period, which outpaced the AuM growth of rivals such as Partners and Blackstone.

The Swedish firm has been in the spotlight several times this year. It recently raised its status with investors after it purchased Nestle’s skin healthcare business for $10.1bn five months ago in one of the year’s largest private equity deals. This big acquisition resonated well with investors as it leveraged several hot trends, notably the world’s ageing population and increasing demand for skincare products. The group also demonstrated the ease with which it could raise money this March when it amassed €9bn from pension and sovereign wealth funds for its new infrastructure fund.

IPO Structure

EQT listed on the Nasdaq Stockholm and raised SKr 5.8bn ($600m) in new capital, representing a 10% dilution for the company’s existing shareholders. In addition to the SKr $5.8bn in primary shares, the company floated around SKr 7.0bn ($710m) of secondary shares, which were sold down by existing shareholders such as the Wallenberg family investment vehicle and some of the company’s senior executives. The partners agreed not to further sell down their holdings for a lock-up period of at least for three to five years after the IPO.

The issue comprised entirely of ordinary class shares, although the company reserves the right to issue C-Class shares in the future, which would give its holders one-tenth of a vote per every share owned. The deal priced at SKr 67 per share, near the top of its original 62-68 SKR per share pricing range. EQT was able to find buyers at nearly every point of the range: order books were 10 times oversubscribed as EQT’s offering attracted strong interest from domestic and international institutional investors as well as the Swedish general public. The offering comprised of a greenshoe option, which gives the banks underwriting the transaction the possibility of purchasing additional shares in EQT—up to 5.5% of the total shares in the offering — for 30 days after the IPO at the pre-defined purchase price and reselling it on the markets. The banks are likely to exercise this option, as EQT has shown strong performance in the aftermarket so far.

Deal Rationale and Industry Overview

The IPO is intended to increase EQT’s financial flexibility in what the PE firm is calling important growth opportunities. The Group aims at expanding its business across geographies and investment strategies and improving its perception among public investors, limited partners already investing in the funds and business partners. Lastly, a portion of the proceeds would also be used to attract talent, create a more transparent governance structure and have access to capital markets.

Going into more details, EQT intends to invest the IPO’s proceeds in medium-term projects involving a scaling up of its Real Estate platform, expansion into the Asian-Pacific region, the introduction of a Venture Growth strategy and the expansion of the smaller Credit business.
Additionally, the Group wants to increase the number of Special-Purpose Vehicles (SPVs) in order to enlarge the scope of the firm’s investment strategies. In this way, EQT can attract more investors that will be invited to invest alongside the Company in exchange for management fees and carried interest.

Generally speaking, the global savings market, which includes the entire range of providers of professional investment management services has grown impressively in recent years with a CAGR of 7% since 2012 in terms of AUM, from $64tn in 2012 to $85tn in 2016 and with an expected CAGR of 6% in the next years. The increase is a mix of increasing equity valuations and increasing inflows, due to the rising number of pools of wealth coming from an ageing population which are also trying to find attractive returns in a low-interest environment. At the same time, markets share of private savings is expected to continuously increase and reach 11% in 2025.

 

As an alternative form of investment, private markets include a wide variety of specialized investment strategies including Private Equity, Venture Capital, Infrastructure, Real Estate and Credit. According to a recent PwC research on private markets, AUM, which stood at $4tn in 2012, have reached $7tn in 2016, corresponding to a CAGR of 15% and are expected to increase at 10% annually until 2025. The strong growth recorded and expected has been underpinned by a rising allocation of capital coming from institutional investors that want to meet the increasing demand for these alternative assets; the strong outperformance of private markets investments against public markets and the search for higher returns.

As a matter of fact, total investable capital from institutional investors, which is positively correlated with the allocation of a portion of it to private markets investments, has increased in the last years and is expected to grow in the future at approximately 5.5% annually since 2012. Of the global investable capital, asset managers have benefitted from a good 40% that is constantly growing and is having positive spillovers on private markets investments.

Furthermore, according to a Preqin’s research, nearly 84% of surveyed investment institutions are planning on increasing their current investment in private markets. Among the already mentioned investment strategies, private equity appears as the more requested, followed by Infrastructure, Credit, Real Estate and Venture Capital.

Moreover, Private Equity firms are in increasing pressure to invest capital in a period where equity valuations and dry powder (capital invested by PE firms) have reached unprecedented levels. The median EV/EBITDA has touched 11.1x which is quite close to the multiple of 11.3x reached before the financial crisis. At the same time, leverage ratios have improved significantly as Debt/EBITDA has reached a 5.5x compared to a 6.6x in 2007. This should be considered together with an overall environment of low interest rates, stabilizing the industry.

Changes are also occurring in exit strategies and holding periods of investments. In particular, average life spans of investments increased between 2013 and 2017, going to a period of over 6 years for half of the funds in 2017 and over 8 years for 26% of the funds in 2016, when only 25% of the funds could touch a maturity of 6 years in 2013. Today, holding periods have decreased in time length due to pressure in equity markets coming from the recent trade war between the US and China which spilling over the global economy and equity valuations. PE funds will try to exploit exit opportunities while equity markets are still high in valuations.

Last but not least, it would be interesting to stress how exit strategies are shifting towards a sponsor-to-sponsor way of selling targets, as 30% of exits in 2018 can be considered of this kind. This comes at the expense of IPOs which are too costly, time-consuming and at the centre of an increasingly volatile equity market. At the same time, PE firms are more and more able to control every business stage of a company, easing the transferring process of the target from one financial sponsor to another one.

Market Reaction

Shares in EQT surged by more than 25% after its IPO. Shares saw their value jump from SKr67 to SKr84.57 in early trading Tuesday, September the 24th, giving it a market cap of $7bn. The surge reflects the high interests and demand towards the company and its overall business. Signs of potential success could be inferred before the official IPO date by the fact that EQT could price its shares at the top of its price range, well above an initially proposed market cap of $4bn. The event marks a big success for EQT as Oaktree and Carlyle had disappointing IPOs in 2012 and are complaining about how public investors do not understand the business with their implied short-termism.

The event stands as a big surprise as EQT’s US competitors are well known for not having achieved the same success in their respective IPOs, with shares barely performing like the S&P 500. Blackstone and Carlyle have seen their respective shares underperform the market and the only outlier is Partners, which is listed in
Switzerland and saw its share outperform its local market index (The Swiss Market Index).  The logical question is why this happened in the first place. It would be interesting to note that Valuations of Blackstone and Carlyle have increased this year due to a shift from an arcane governance structure, the Partnership, which has not been fully understood by public investors, into corporations. EQT, on the other hand, has always operated as a corporation with a one-share one-vote kind of structure.

An additional unknown that public investors have considered in these years is the fact the everyone is throwing money in an industry which is long on capital but short on targets opportunities. EQT, on the other hand, sets its business apart thanks to the numerous business opportunities in Scandinavia in which the Group has established strong connections.

Last but not least, the reason most of the actual listed Private Equity firms underperformed relative to their market index is also linked to the cyclicality of the business which determines unpredictability in terms of performance fees and cash flows, ultimately. Public investors that decide to allocate a share of capital to Private Equity firms will also have to face the fact that investment project will have a time span of 3-7 years which is in contrast with the requirements of disclosing financial results every quarter.

Underwriters

J.P. Morgan and SEB acted as joint coordinators and joint bookrunners together with Goldman Sachs, UBS, Morgan Stanley and Nordea. ABG Sundal Collier, BNP Paribas and Bank of America Merrill Lynch acted as Co-Leader Managers.


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