EQT AB

STO:EQT

Earnings Call Transcript 2022-Q3

[Olof Svensson, executive]

Good morning, everyone, and welcome to EQT's Q3 Announcement. Together with Christian and Kim, we will present for about 30 minutes before opening up for Q&A. Caspar is unfortunately ill and will not be joining us today. [Operator Instructions] It's a slightly new procedure. As you will all have seen, we have now closed the combination with BPEA. And before diving into the Q3 update, we'll start off with a short video. Video, please.

[Presentation]

[Christian Sinding, executive]

Good morning, and welcome, everyone. As you can see, we're quite excited to have closed the combination with BPEA, and we're now starting to really work together with Jean and his team on best practices, on deals and on integrating our 2 great companies. The combination means that we not only have a scaled platform in Asia, but a truly global platform and is diversified across geographies, asset classes, sectors and investment strategies, and we remain focused on active ownership, where we can make a difference with each and every investment.

Fundraising progressed well in the third quarter despite being a very competitive market. We've now raised EUR 25 billion year-to-date at EQT, and BPEA recently closed its latest flagship fund at the hard cap of $11.2 billion. So we're quite pleased to see our clients continue to invest with EQT to meet their long-term return objectives, and it's a testimony to our track record, BPEA's track record, and, of course, our combined current strong performance.

The global economy is facing a number of challenges, and we are well prepared to manage these. We have a young portfolio of thematic investments with clear value creation plans, as well as recession and inflation actions. Our companies and buildings have long-term financing structures in place. And on the investment side, we expect to have more than EUR 50 billion of dry powder to deploy across strategies in 2023. And our deal pipeline across regions and sectors remains quite solid. Of course, this new environment has an impact on everyone.

The financing markets continue to be constrained. New debt financing has become substantially more expensive with close to 10% yields on leverage financing in Europe and the U.S. right now. However, in Asia, rates actually remain a lot more attractive with lower inflation and more financing availability. But in terms of size across the world, actually, it's hard to raise more than around EUR 2 billion of credit for buyouts at this time, even from the private credit players. Having said that though, on the infrastructure and real estate side, financings are more available, given the inflation protected assets in those strategies. Thus, our investment and exit activity have slowed down markedly, as we're patient in finding the right thematic opportunities across the Group.

Now, we nevertheless announced a few thematic investments in the third quarter, and we continue to actively evaluate a number of potential targets. And moreover, our portfolio companies are working actively to source add-ons like WorkWave's purchase of [ TaskEasy ], for example. And we've made a few exits at solid valuations and returns.

Now while our portfolio companies are generally doing well with strong top and bottom line growth, some of them are seeing a slower pace of EBITDA growth. Now including BPEA, we have a team of more than 1,750 talented people to help us through this more disruptive time. And as mentioned already in our H1 update, we have significantly slowed down hiring efforts and our focus on really scaling the EQT platform and utilizing this great talent group that we have.

Next slide, please. It's been 3 years since EQT went public. Since then, we've more than doubled the team, more than doubled our client base, tripled AUM and quadrupled EBITDA. At the same time, we've continuously developed our value-creation toolbox and taken leaps when it comes to sustainability agenda, as you could hear from the video. We've continuously developed our digitalization capabilities, including with Motherbrain artificial intelligence and now starting to try to bring that to our companies. And importantly, of course, the core delivering solid returns for our clients.

As you know, we thought about the IPO as a watering station being part of a long journey to give us new tools and new energy. We thus have a very long-term perspective on this journey, and we're quite confident in our path ahead of being active owners and now also being in a much stronger global position than ever before, together with BPEA.

Next slide, please. Today, EQT is a purpose-driven global leader in active ownership strategies. Our purpose is to future-proof companies that make a positive impact. We've scaled platforms in our 3 main strategies. Across private equity and in infrastructure, we are top 3 in the world in both of those. And in real estate, we're now top 10 globally based on capital raised in the last 5 years. We're local-with-locals and geographies representing 80% of global GDP, and we invest from ventures to mature companies across resilient and growing sectors like healthcare, technology, logistics, the energy transition and essential infrastructure.

We have a global client base with approximately 1,000 clients across Europe, Asia, Middle East and North America, and we're now nicely diversified. Almost 20% of our AUM is in private capital Asia, 40% in Europe and North America in private capital, 25% in infrastructure and 15% in real estate. And then across regions, roughly half of our invested capital is in Europe, 1/3 in North America and 1/5th in Asia. And this scale and diversification means that we can leverage insights across the platform, as we evaluate opportunities and risks. We're now on the forefront of future-proofing companies and using tools like AI to make us a smarter investor. We have the scale actually and the talent to be able to continue to build that.

With our position, we have also a wider range of investment opportunities like the recent public to private a Billtrust in the U.S., finding those unique opportunities in this more difficult market. And we can, of course, support our companies, as they scale across the globe.

And finally, with our values-based culture, we continue to attract really great talent to EQT and retain the great talent in EQT, also in our advisory network, which is expanding now together with BPEA and talent to the portfolio companies. And taking a step back, our platform now builds on almost 30 years of experience and performance over cycles, and I think that's actually key in these more challenging times. So we know how to deal with challenges, but also take advantage of investment opportunities, which can be quite attractive now.

And talking about that, next slide, please. When it comes to Asia, we believe the region offers a really attractive investment opportunities. The region is on track to represent the majority of global GDP growth and the Asian private market is expected to outpace the growth of global private markets by almost 2 times. This growth is supported by both companies and economies maturing leading to attractive investment opportunities across the region.

We're, for example, particularly excited about India, where tech services and next-generation software companies provide excellent deal opportunities. And the team of BPEA has decades of experience in choosing the right assets and the right geographies and being diversified across a large and dynamic region. For example, BPEA has about 12% of its AUM in thematic investments in China versus now more than 20% in India, showing a little bit where we see the best opportunities.

And like I said, we can't -- we couldn't find a better partner to seize this Asian market opportunity [indiscernible] Jean and his team. The combination of our 2 firms brings real advantages to both platforms and creates this global leader in private markets. And if you're looking at BPEA's latest flagship funds, it's one of the largest private equity funds ever raised in Asia, meaning we have significant dry powder to invest from.

Unlike at EQT, the portfolio companies are generally performing quite well, but also some pockets of underperformance here and there, but generally quite strong performance. And valuations in Asia in the portfolio also remain quite stable at BPEA just like with EQT. In addition, BPEA has been able to drive a number of exits this year, both full exits, also partial exits, showing the resilience of their investment strategy.

Now our sector teams are joining forces to source thematic opportunities across the region and of course, across the world. We exchange intelligence, sector insights, best practices, and actually have, of course, teams joining when there's an education deal, for example, a BPEA team member will join EQT when there's a software deal, maybe an EQT member will join the BPEA team, and this is going to help us strengthen our investment strategies. And we're also working to strengthen the value-creation toolbox globally and in particular in Asia, with driving sustainability, digitalization and Motherbrain even more actively. Of course, we also share knowledge about preparing companies for harder times both from an economic point of view, in terms of cybersecurity or whatever may come.

Now looking ahead in Asia, we will gradually build our mid-market growth focus there as well as the first step in expanding our strategies in the region. On the real estate side, with EQT Exeter, we're strengthening the real estate platform in Asia. Together with this combination, I think we'll have about 75 great team members in real estate in Asia, and that represents the third leg of the global expansion for EQT Exeter. And in infrastructure, we will, of course, leverage this platform that we now have in Asia to continue to source new attractive investments for that global strategy.

Next slide, please. We've since Q1, worked actively to make sure portfolio companies are ready for different macro scenarios being a prolonged recession or more temporary downturn or longer-term inflation or whatever it might be. Our objective is to really develop resilient future-proof companies, which continue to drive intrinsic value through the cycle, and we can be active owners and developing these companies organically through acquisitions, transformation, whatever is needed.

And last year, of course, we also began reviewing capital structures, extending maturities and pursuing refinancings, where relevant. So we have an average maturity level in terms of our financings in the portfolio companies of 4 years to 5 years for private equity and infrastructure, and we do have solid financing structures in place for our companies.

We also started early in reviewing procurement, pricing and product offerings. And if you look at our investment strategies, we have a very significant B2B exposure, very little consumer exposure. And so far, this means that we've effectively managed to offset inflation pressures in most companies. And of course, in infrastructure and in real estate, there's inflation protection built into the business models.

Portfolio companies are also now and have been for the last year or so reviewing cost structures, ways to improve cash flows and preserve liquidity in case really tough times come. But this is also a time to strengthen product offerings, continue to invest in R&D and build platforms, which are really scalable for when the macro environment at some point in time stabilizes.

So like I said, many of our companies are looking at bolt-on acquisition opportunities. In the third quarter, we made a number, including for Solarpack, including SAUR and Schülke, and the one that I mentioned earlier for WorkWave. So that is great. There's a real opportunity to strengthen our companies during this time and to do acquisitions or add-on acquisitions at slightly lower multiples than in the past.

Also, EQT Exeter is seeing healthy demand in their portfolio, having, for example, renewed expiring leases at actually more than 20% rent increases in the Core-Plus portfolio earlier this year. But of course, also in EQT Exeter, the team is showing a more measured pace on investing during this uncertain time. The Exeter portfolio is invested thematically as well with about 90% in logistics and industrial properties and the remaining 10% split evenly between life sciences office and multifamily. EQT's overall approach to active ownership and creating intrinsic value through cycles means that our key funds have always delivered at least 2x the money, 2x MOIC since inception, and every key fund at EQT has delivered carry.

Next slide, please. Long-term structural growth drivers mean allocations to private markets will continue to increase. Private markets have consistently outperformed public markets across all time periods. Returns have been more resilient and more stable over time, as we also see in this current environment, a lot of it, of course, is due to the active ownership approach.

In many regions, Asia, in particular, institutions still have relatively low allocation to private markets and the private wealth segment is actually expected to increase significantly their investments from quite a low base globally. We believe private markets play a critical role in society and helping companies transform and grow. For example, there is a significant infrastructure funding gap, which we are helping to bridge, where a lot of capital and resources are required, for example, to drive the energy transition.

And we have an ability to make real positive impact at scale, driving sustainable transformation across portfolio companies and value chains, a trend, which our clients really support, and in great companies like Covanta, which is the largest waste energy provider in North America, which is critical in today's environment.

Now back to private wealth, we do seem -- see a strong interest from a wider range of private wealth clients to invest with EQT. And therefore, we're in the process of evaluating structures that would facilitate access to EQT's investment strategies through different private wealth channels.

And while the long-term prospects are exciting for all the reasons I just mentioned, we do believe that we see that the fundraising market is quite competitive. And in the U.S. in particular, we continue to see the denominator effect affecting allocations to private markets for some of the U.S. pension funds. So in the short term, we expect some headwinds in fundraising in the global market until markets stabilize and realizations pick up again.

And to give some more color on that, I'll now hand over to Olof, who will talk about our fundraising momentum and progress.

[Olof Svensson, executive]

Thank you very much, Christian. So let us now focus on the ongoing fundraisings, which proceeded well in the third quarter. EQT X, as you may have seen, had its first close at about EUR 15 billion. We launched fundraising for Infra VI with a target size of EUR 20 billion. And as Christian mentioned, BPEA Fund VIII closed at hard cap, making it one of the largest private equity funds ever raised in Asia.

Within EQT Exeter, we have raised EUR 6 billion year-to-date with the final close of the EQT Exeter Industrial Core-Plus Fund IV at $3 billion, which was above its $2.5 billion target. We recently initiated fundraising for Exeter's European Industrial Core II fund with target size of EUR 2.5 billion. EQT Exeter now has AUM of about EUR 17 billion and including funds in fundraising, EQT Exeter will have around EUR 10 billion of dry powder in the near term. Considering the very active exit agenda Exeter had last year and to some extent, this year, EQT Exeter is therefore in a quite strong place.

EQT Growth held final close at over EUR 2 billion, making it the largest first-time growth fund based in Europe, and we're making good progress with Ventures III. In line with our communication in H1, some of our new initiatives, the longer-haul strategies, in particular, are taking longer to raise. These strategies, which charge fees on invested capital are also taking a slower approach to investing in this environment. All in, we've raised close to EUR 30 billion this year, including the BPEA fundraisings this year.

Next slide, please. Let's next focus on the AUM development. And as I mentioned, we activated EQT X in the third quarter, and we'll be charging management fees from the beginning of August. Closed-out commitments, as of the 30th of September are therefore now included in our Q3 AUM number. And the AUM base for EQT IX has stepped down to invested capital. EQT X fundraising will continue well into 2023.

And as mentioned, we've launched fundraising for Infra VI and the vast majority of this fund will be raised in 2023. The fund has not been activated, and activation depends on the investment pace in the predecessor fund, Infra V. And as you know, we're taking a patient approach to new investments in this environment. BPEA's AUM as of Q3 amounted to EUR 22 billion. And together with the EQT funds, this means our AUM is now close to EUR 114 billion.

Next slide, please. Turning to investment and exit activity. There was some activity, but it was muted, we'd say, in the third quarter, and we remain disciplined when it comes to our underwriting processes and keeping a strict focus on thematic opportunities. And we think there is a continued gap in valuation expectations, and there will still be some time before buyer and seller expectations meet.

The debt financing continues to be challenging, as Christian mentioned, and the syndicated loan market remains on hold, whereas financing is available in the private credit market for the right types of deals. And we're also seeing continued appetite from commercial banks for infrastructure style financing. We've recently financed one deal in private equity with commercial banks as well. However, for any type of debt financing, the cost has increased meaningfully and large-scale buyouts will likely not be possible in this environment.

In Q3, we announced 2 deals in EQT X United Talent Agency and Billtrust, a public to private in the U.S. As of late, our investments have mainly been in North America or Asia or in European companies with global platforms. We continue to look at opportunities in resilient sectors with low correlation to the cycle. And across the key funds, EQT X is now 10% to 15% invested; infrastructure V, 75% to 80% investment -- invested after a few add-on acquisitions among the portfolio companies; and BPEA is reported to be 15% to 20% invested BPEA VIII, I should say.

And on the exit side, we realized close to EUR 2 billion of announced real estate exits in Exeter and also GPA Global and EQT Mid Market Asia portfolio company. And in Ventures I, we exited a company called Risk Methods. And last week, you'll have seen that we announced a part sale of GlobalConnect by Infra III.

And with that, I'll hand over to Kim to talk about our fund valuations.

[Kim Henriksson, executive]

Thank you, Olof, and good morning, everyone. Portfolio companies are generally seeing continued strong sales and EBITDA growth, contributing positively to fund valuations. And in our H1 update, we mentioned a growth rate of 25% and 22%, respectively, for our broader private equity and infra portfolios and EBITDA growing at high teens. At this point, we've not seen an impact on top line growth with around 25% top line growth across both private equity and infrastructure, looking at key funds over a year -- year-over-year until August. In infrastructure, we estimate that 90% plus of the companies are able to pass on inflation. And in private capital, the portfolio companies, often being B2B businesses in thematic sectors also have a strong ability to pass on cost inflation.

A few portfolio companies see some headwinds impacting EBITDA growth though. For example, transportation companies are affected by higher energy prices. Social care companies see some wage inflation, some of which have a lag when it comes to inflation adjustments in their -- in their contract. COVID restrictions earlier in the year affected a couple of companies. And whilst we don't have much exposure to manufacturing companies, we have seen supply chain issues having an effect on a few assets.

Generally, there is a difference in how valuations develop in individual funds depending on the vintage. So looking at our earlier vintages, like EQT VII, but also Infra II and Infra III, valuations are stable partly because a meaningful portion of the assets have already been realized. More recent funds like EQT IX are still in the investment phases or value creation phases, where lower public market references are offset by positive operational and financial developments. This goes also for Infrastructure IV and V. Generally, we see the infra fund valuations being quite stable.

In private capital, the average reference multiple in our key funds is down 13% over the last 12 months by sectors. The implied multiples and services have seen the highest declines, whereas healthcare has been the most resilient sector. In Infrastructure, DCF valuations are commonly used and discount rates are higher, where applicable. In the cases, where public markets, multiple references are used for valuations, these are generally somewhat lower, but transaction multiple references have, on the other hand, had a positive impact on valuations in Infra.

Importantly, realizations by the EQT funds continue to support valuations. Most recently, Infra III realized part of GlobalConnect at a level, which is 0.3x higher than the gross MOIC valuation at the start of the year. And the realization of GPA Global in our mid-market fund came in at a gross MOIC level comfortably above the previous fund valuation. So while valuation is not an exact science, external evidence also support our valuations.

Let's go to the next page to give some specific examples of valuation drivers in our funds. Next slide, please. So to provide some specific examples, I'll go through the developments in EQT VIII and Infrastructure IV over the past -- over the past 12 months. There are some much smaller funds in our portfolio of funds with exposure to early-stage tech or public markets, which have had a more challenging development. But here, we focus on 2 what we call our key funds.

Companies in both these funds have seen strong underlying performance. Keep in mind that improving company performance is at the core of what we do. It's all about active ownership. Both sales and EBITDA grew over 20% in EQT VIII over the last 12 months. A large part of the private capital portfolio is valued based on peer group multiples. In EQT VIII, the average multiple reference is down 17% over the last 12 months. Similar to other funds, the healthcare assets are largely flat, where certain higher-growth assets have seen meaningfully lower valuation marks.

The listed holdings in EQT VIII are down almost 15% on a weighted average basis over the last 12 months. And for Infra IV specifically, comparable transaction multiples in relevant sectors have supported the reference multiples used in the valuations. Infra IV has no listed holdings. And as you may remember, in Infra, we have so far not have exited any holdings via IPOs, but rather exited to strategic or financial buyers. In Q3, we had a positive effect from FX in EQT VIII, as our U.S. dollar-based companies are valued in euro in our key fund valuations. However, across the key funds and over the last 12 months, the FX effect was neutral on fund valuations.

Companies are, for the most part, valued on an enterprise value basis. So to reconcile valuations to an equity value, we therefore need to take net debt moves into account. And if a fund does add on investments, those are booked at 1x in the fund valuation, which means that new investments really lower the fund gross MOIC valuation somewhat, everything else equal. So that's a summary of the various factors affecting the valuations on our books. The operational improvements actively achieved at the portfolio companies are at the core of a value creation.

Next slide, please. We now have a global team of about 1,750 employees, and this includes over 200 joiners from BPEA. And in the first half, we had about 100 people joining from LSP, Bear Logi and Redwood. As mentioned in our H1 update, we have slowed the hiring pace significantly. We have strong teams in place across investment strategies, and we built out key functions such as sustainability and Motherbrain. So the slowdown is not fully visible yet, as our Q3 FTE number reflect hires earlier in the year, having joined during the quarter.

Whilst being much more restrictive, we may still hire people to support selected growth initiatives, for example, our continued expansion in North America and our private wealth initiatives. As always, we are also looking at ways to optimize our operations through scalable processes or digitalization. Christina Drews, our new COO, will play an important role in driving these initiatives on a global basis.

Next slide, please. Having now closed the combination with BPEA, we will include BPEA in our consolidated accounts from now on. BPEA brings about 225 employees and EUR 22 billion of AUM, as of Q3. And as part of the closing, we're issuing about 191 million shares, together with the USD 1.6 billion cash consideration, which we raised in the bond markets earlier in the year, as you may recall.

We have a solid cash position, and we will receive our contractually recurring management fees in January. And in addition, where it's needed, we have an undrawn revolver of EUR 1.5 billion. As mentioned at the time of the combination announcement, BPEA expects to generate management fees of EUR 350 million to EUR 375 million in 2022. And with the successful raise of BPEA VIII, we continue to expect BPEA to be within this range on a full year basis.

Carry expectations follow the same pattern as mentioned before, i.e., in the near term, carries likely to be delayed given market developments, but our carry expectations over the longer term remain.

With that, I hand back to Christian for some final remarks. Next slide, please.

[Christian Sinding, executive]

Thanks, Kim. So to summarize, we are excited as you could hear to close the combination with BPEA becoming a world leader in active ownership strategies. Now we're diversified across asset classes, regions, sectors and investment strategies. And with this truly global platform, we become even better at assessing opportunities and risks, identifying thematic investments and to future-proof performance and make a positive impact. Given our strong performance for our clients and our differentiation, fundraisings are still progressing well despite being a competitive market, as clients continue to invest with EQT.

We're in quite a strong position from a dry powder point of view, soon expecting to have more than EUR 50 billion of capital across strategies to deploy in these thematic investment opportunities. But we're staying patient and disciplined as the market is highly uncertain. Also, the financing market, of course, is limited -- limiting the larger deal activities for the time being.

We're increasing our focus on the Private Wealth segment and expect strong interest from private wealth clients to invest with EQT, and we'll have much more to come about that in the coming quarters. We've had 4 quarters of largely stable fund valuations. In this time period, companies have developed strongly in our portfolio, while valuation references have been lower. Looking forward, we expect uncertainty to prevail both in the macro economy and also in the capital markets.

Taking it back to EQT, we believe that during this kind of time that active ownership is really important. We're continuously working to future-proof our portfolio of companies, investing in innovation, making them more resilient in terms of stronger cybersecurity protection or whatever it might be, making them more efficient and driving add-on acquisitions, as we mentioned earlier, staying relevant to customers becoming more sustainable, which means that you can make the companies more valuable also for the long-term and more relevant to society. And all these elements, we think, and we know actually, over the cycles helped drive performance through that cycle.

So with that, I round off the webcast and open up for the Q&A. Thank you.

[Operator]

[Operator Instructions] We have the first question coming from the line of Arnaud Giblat from Exane BNP Paribas.

[Arnaud Giblat, analyst]

I have got some -- 2 questions first, please. Could you talk about the investment opportunities you're seeing a bit more in detail. I mean, you highlighted that the cost of funding had gone up significantly. Is that now being reflected in the purchase price multiples that, that you might be negotiating or what needs to happen essentially for that to be leveling off in the bid-ask?

My second question is regarding BPEA. Could you talk a bit more about building out Exeter and Infra? Is the first step, just really going out to doing outright investments within the global funds and later on, maybe having dedicated Asian funds. Could you talk a bit maybe about the timing of that, if that's the case?

And finally, wealth -- on the wealth side, I'm interested to hear a bit more about the structuring of the products you're thinking about offering to wealth clients, who are the potential distribution partners as well?

[Christian Sinding, executive]

Excellent questions. Thank you very much. With regards to the investment opportunities, I think the -- a great example is Billtrust and that we just took private in the United States. It's a leading software company in the accounts payable space in the U.S., which is super, super thematic, a great platform, both for organic growth and for add-on acquisitional growth and actually really improving the business. And this is a company that went public in a SPAC, a couple of years ago and probably is a little bit too small actually to really be successful, as a public company.

So we're taking that private and really accelerating the development of the business. It's a deal around EUR 2 billion, a little bit more than that. And I think that's the -- that's about the maximum size that we see deals being done at maybe a little bit larger than that as possible. But like I mentioned earlier, in the private equity space, it's hard to raise more than about EUR 2 billion of credit for deals, and most of that will be coming from the private wealth -- private debt providers.

Now if you look at infrastructure and in real estate, banks are more active. Like I mentioned there, those asset classes are perceived to be or actually really are actually more inflation protected. I think we mentioned that 93% of the portfolio in infrastructure, for example, has a real inflation protection built into the business models of those companies. So there's more financing available there. But also there, I think the size of deals will be a little bit muted compared to where we were a year ago or significantly muted.

I think that if you look at valuation levels for thematic assets, really attractive companies with resilient markets, strong sectors, real value creation plans, valuations are down somewhat. But since a lot of that value creation is actually not necessarily dependent on leverage or the financing markets, we still see healthy prices for those companies because they have some great opportunities throughout the cycle to create value.

We see also quite a few investments in the energy transition space. I mentioned Covanta earlier. We are looking at a number of renewable energy players. We're looking at a lot of add-on acquisitions for the renewable companies, also for that -- for Covanta types of businesses. Electrical vehicle charging stations, we have 2 companies there, driving a lot of organic growth and some add-on acquisitions. So the themes that we're investing behind are relatively consistent, but we're even more disciplined in terms of making sure that we have real downside protection built in and crystal clear value creation plans, so that we're less dependent on, on valuations.

And I think you'll start to see more and more public to privates, as this, let's say, the new valuation levels start to land. And again, Billtrust is one of those. We're looking at a number of other public to privates, but it does take a little bit of time for shareholders and Boards to maybe readjust their expectations a bit and also for the confidence of the buyers. That's why you'll see I think muted deal making for some time going forward.

When it comes to Asia and EQT Exeter, we have a -- within BPEA, we have a real estate business of a couple of billion, which is investing in logistics and other thematic properties. When it becomes part of EQT, Exeter also has a business in Asia, and we've done some smaller add-on acquisitions. In total, we'll have about 75 people investing across Korea, Japan and other regions, and in exactly the same way that we do in the U.S. and in Europe, in logistics and industrial and multifamily and in life sciences office. So we think there's a great opportunity. And ultimately, our plan is to have EQT Exeter be global in all those 3 strategies. So in the U.S., in Europe and also in Asia.

When it comes to Infrastructure, that strategy is a little bit different. We're raising a EUR 20 billion fund right now. It's a global fund, and it's very thematic. And in those themes, they're investing in the best assets they can find globally. We've done a number of investments in the social infrastructure side, for example, in Asia, that have gone very, very well. And with the combination with BPEA and our organic growth, where we're building our teams in Korea and Japan and Australia, Southeast Asia and probably also India, where we have an investment, we see really interesting opportunities to deploy more capital over time in that strategy, but from the global fund primarily.

And then finally, on private wealth, it's a little bit early for us to go into specifics. But what I can say is we're looking into products that are handling both our private capital infrastructure strategies, as well as the real estate strategies.

[Operator]

The next questions come from the line of Ermin Keric from Carnegie.

[Ermin Keric, analyst]

Perhaps if you could start on sort of the investment pace in Infra. You mentioned that commercial banks, et cetera, have been perhaps a bit more open to also participate in funding there, but it seems like the investment pace has been a little bit slower on the Infra side than on the buyout side. Is there any special reason for that? Or is it just kind of finding the right opportunities.

[Christian Sinding, executive]

Yes. Actually, there's a really good reason and is that we invested the previous fund relatively quickly in some really great companies and platforms, and those platforms are driving a lot of growth organically that needs capital actually from the fund and doing add-on acquisitions. So we've been more -- in this more disruptive time been more focused on building that existing newer portfolio out than deploying new capital.

Having said that, actually across regions and across the different investment areas of infrastructure, deal flow continues to be strong and actually very similar to what we see in -- on the private equity side, where they are both public to privates and private opportunities, both from strategic buyers and other types of owners. So -- so it's really about prioritization and where we see the best risk reward at this point in time, and that's really building that existing portfolio.

[Ermin Keric, analyst]

And maybe just to follow up on that directly then because we actually see the Infra VI fund being activated without any new large acquisition being added to the Infra V fund, but the remaining capital go into add-on acquisitions you mentioned?

[Christian Sinding, executive]

That's a little bit too specific to comment on because the way that, that private equity works is that you're always working on a number of different investment opportunities both in terms of add-on acquisitions and new investments. And exactly how they play in, in size, in timing and in form, determine exactly how the portfolio composition of the single fund is. So like I said, deal flow remains strong. Add-on acquisitions are actively pursued. Organic growth is actively pursued with deep investments, and for example, expanding the EV infrastructure in both the U.S. and Europe, which needs capital. So I think I have to answer it in that way. And I'll let Kim come back to, if he want to comment at all on activation of Infra VI.

[Kim Henriksson, executive]

No, nothing more specific than that. I mean we've said that it's not activated, and it depends on the investment phase in the predecessor fund. And like Chris mentioned, in theory, your scenario is possible, but it's up to so many different things that we can't say much more than that.

[Ermin Keric, analyst]

Got it. That's very helpful. Then just a couple of questions on BPEA as well. So you mentioned that you expect them to have around EUR 350 million to EUR 375 million in management fees for 2022. Should we expect that to be kind of back-end loaded given that the VIII fund only closed more recently? And also the kind of mid-teens guidance that you had on the acquisition multiple at the time of acquisition, is that still relevant to 2023? Or should we expect it to be a bit higher given that carries now maybe being a bit pushed forward?

[Christian Sinding, executive]

Please, Kim.

[Kim Henriksson, executive]

Yes. There's -- yes, there is a tilt towards the latter part of the year, but we're not going to give more exact guidance than that. As you know then, as I mentioned, we will start consolidating as of now, as of today or yesterday, I guess, the BPEA and come back to you then in due course with the exact details of that. What was your other question?

[Ermin Keric, analyst]

And the other question was at the time of acquisition, you mentioned...

[Kim Henriksson, executive]

Yes, yes. We stay with the same guidance, as we have said at that point. Obviously, the purchase price is also difference if you look at the share portion of it now so.

[Christian Sinding, executive]

Yes and 85% or so of the acquisition was financed through shares, so since it was a share for share exchange. So maybe another way to say is that we -- and that the deal is still accretive both in short-term earnings and long-term earnings.

[Ermin Keric, analyst]

But just to be clear, so when we're seeing it's still mid-teens, is that based on the kind of final acquisition price or on the price that was at the time of announcement?

[Kim Henriksson, executive]

It's based on the...

[Christian Sinding, executive]

Because it's a share for share exchange and earnings is changing a little bit from carry, we're not going to be as that specific on guidance, as you know, because we never provide guidance on carry. So I think the way to answer it is rather the way that I did on an accretion basis.

[Operator]

We got the next question is coming from the line of Tom Mills from Jefferies.

[Thomas Mills, analyst]

Just congratulations on consistent....

[Christian Sinding, executive]

Hey Tom, your line is breaking up, at least for me.

[Thomas Mills, analyst]

Is that better?

[Christian Sinding, executive]

Yes, if you speak slower, it's better.

[Thomas Mills, analyst]

Yes. Is it better now?

[Christian Sinding, executive]

Yes. Thank you.

[Thomas Mills, analyst]

Yes. Okay. I'd like to ask a question about the partial realization of GlobalConnect from EQT Infrastructure III and IV. I know the terms of that deal weren't disclosed, but according to press reports at least it looks like it could have been a fairly chunky deal with an EV of over $7 billion and I appreciate that's not an equity check. I think you mentioned on the call that the partial realization was done at MOIC 0.3x higher than the start of the year.

And I guess that must have been attractive in the context of EQT Infra III's MOIC of 2.7x or you wouldn't have done the deal this -- in this kind of market backdrop. Could you give us an idea, as to whether there is much of an uplift already reflected in the 3Q MOIC for EQT Infra III and IV? Or should we expect that to come through in 4Q? Really, I'm just trying to understand if the upside from that deal is offsetting weakness elsewhere in the portfolios? Or should we see it as genuine upside? That's it.

[Christian Sinding, executive]

Maybe I'll start, and then, Kim, you can take over. I wouldn't think about it in this way that for a single investment in a single fund that is already marked at a reasonably solid MOIC, a small uptick in that MOIC won't make a big difference to the valuation of the entire fund. So yes, it's a very positive transaction. It's great and incredibly well done by the team. It's quite sizable. It's all equity, of course, coming in. There's no change to the capital structure of the business. And I think it's great for EQT III, it's great for EQT IV, and the new investors be able to continue to create value with the company. But I wouldn't say it's shifting valuations in a major way, Kim.

[Kim Henriksson, executive]

I agree with that. And the reason we brought it up was merely to exemplify that, that the external data points we have on our valuations, i.e., all of the exits we've done basically during this year have been at valuations above our book valuations. So we feel that, that is a good data point for the market to also understand.

[Operator]

The next questions come from the line of Hubert Lam from Bank of America.

[Hubert Lam, analyst]

I've got a few questions. Firstly, can you talk about your return expectations going forward for your new private equity infrastructure funds, just given the higher rate environment now, like what are your expectations for IRR going forward?

Second question is on performance fee outlook for the second half. I know you've done a few deals and how should we think about it for this half?

And lastly, can you remind us on the debt exposure of the underlying companies that you have in your portfolio, what's the average leverage ratio? Can you -- I think you mentioned a bit about that they have long-term financing, but can you remind us on -- in terms of the financing profile going forward?

[Christian Sinding, executive]

Thank you. Again, I'll start and then my colleagues can add. With regards to return expectations, actually bringing it back 3 years, 4 years, 5 years, we did not change our return expectations during that boom period and neither are we changing our return expectations now during this more complicated period. What that means is -- and that the different parts of the cycle, it means that you need to really choose your -- the investments that you make very carefully, you need to have crystal clear value creation plans, and you need to have a real understanding of what the downside and the upsides are in each investment and thus in the portfolio construction.

And the reason that the market slowed down when there's uncertainty, of course, is that we don't know what's happening with the capital markets, we don't know what's happening in equity and debt, we don't know what's happening with inflation and interest rates and the global economy. So when there's more uncertainty, that's harder for buyers and sellers to meet -- and their expectations.

So we remain -- our equity or buyout strategies remain -- they remain focused on 20% to 25% gross returns -- gross fund returns and the infrastructure funds, 15 plus, 15% to 18% or so in -- and the value-add infrastructure strategy in the key funds. And that's the way that those numbers have been the same for quite a long time. And the reason we don't lower them in good times and raise them in bad times is that we think it's our job to find the right investment opportunities and find the right value creation time -- strategies across the cycle.

But when it comes to outlook for the -- for Q4 in terms of deals and exits, if that's what you were curious about, I'm not going to make any prognosis other than what we've said. There is a -- there is good deal flow across the Group. And there are some exits that we have -- that we are working on. But with this uncertainty that's out there, it's very hard to say exactly when those investments may or may not be done or those exits may or may not be executed.

And on the debt exposure, we typically don't go out with that much detail. What I -- like I said, our typical debt maturities are 4 years to 5 years. We're typically hedging our interest rates for 2 years to 4 years at a time. We have -- during the hot cycle, our strategy has been more to focus on growth and companies that can -- that we can build, meaning that we've rarely maximize leverage. We don't use a lot of PIK notes and other creative instruments.

It's mostly bank financing, maybe some mezzanine or some private high yield, not much high yield in the public market actually, and then some unitranche facilities from private credit players, which, of course, understand our business model very well. So -- so that's maybe the generic comment that I can make, and see if Kim or Olof wants to add anything.

[Kim Henriksson, executive]

Yes. It's Kim here. I think Hubert may have asked about the carry outlook actually for the rest of the year here, which we're also not commenting on that. But I may still say that what I've said before that accounting carry is a function of both valuation changes in the funds and exits then in the funds. And after H1, you've seen the valuation changes. Basically, valuation has been -- has been broadly flat if you look across the funds. And in terms of exits, there hasn't been any [ brash ] of exits exactly. So that should give you a sense for carry expectations as well.

[Olof Svensson, executive]

Maybe I can add a few comments on the financing of the portfolios. And Hubert, you may remember, we added some stats on this in our H1 update, and it has not changed meaningfully since then. And as Christian referred to, we have debt maturities of 4 and 5 years on average across private equity and infrastructure and solid financing structures with interest coverage ratio of 2.5x in private equity and closer to 4x in infrastructure.

And generally, we have also in line with what Christian said, has taking slightly lower leverage than we would have the opportunity to combine with very, very strong relationship with banks. I think we are in a good position with everything being coordinated from our central financing team run out of London. And in addition, as you know, about 75% of our financings are covenant light, which goes with our approach to financing. And again, as Christian said, a very high portion of that is fixed rate, over 70% either through fixed rates or through interest rate swaps.

[Christian Sinding, executive]

I can say the same goes for BPEA. They have very, very similar strategy in how they manage their credit portfolio in terms of the credits to the portfolio companies that is.

[Operator]

The next questions come from the line of Michael Werner from UBS.

[Michael Werner, analyst]

Just 2 questions for me, please. First, you noted that in terms of financing, it's tough to get anything over $2 billion. As we look at the EQT X, if this continues needs to be the landscape as you look out over the next couple of years, is this something where you may just see, a few, a large, or a more number of portfolio companies at a smaller scale? Is that something that you have the capacity for?

And then second, within the Private Capital business, particularly the PE business, you noted that some of the businesses, B2B have natural price hedging, inflation hedges. Have you been aggressive on price increases within those portfolio companies? Is this a lever that you feel like you can continue to pull going forward?

[Christian Sinding, executive]

Good questions. When it comes to our sweet spot in EQT X, it's from about EUR 500 million or so of equity up to a couple of billion, and we can do those larger transactions also together with our clients and co-investments. And then with the available credit that's out there, I think we can construct this portfolio in quite a similar fashion as actually EQT IX. What you probably won't see, at least not in the short-term is, something like Galderma, which was a $10 billion deal. But the sweet spot where most of our buyouts are like Billtrust, I mentioned, are still very available and is how -- what we're focusing on now.

There might be some more smaller platforms that we decide to buy, like an SPT Labtech that we did in May or June, a smaller portfolio company in life sciences, there we can grow aggressively through organic growth and add-on acquisitions. So there might be some more smaller platforms, but time will tell. It depends a little bit on where the best risk reward is.

And in terms of capacity, yes, we have the youngest portfolio of companies in private equity and infrastructure in the world, at least in our kind of size brackets. We've done a lot of exits. We've exited most of the older funds. Like, an example of this is, the oldest company we have in the portfolio in Private Equity is from 2016. So we have quite a bit of capacity in the team. We also have all of our industrial advisers around the world where we have about 600 of them now that are helping us in the portfolio companies and in the acquisition phase. So we actually scale EQT a lot more beyond our own teams as well. So no issues there.

And then on the -- sorry, what was the question on hedges? I just wrote down hedges?

[Michael Werner, analyst]

It was more on pricing, how…

[Christian Sinding, executive]

Yes, exactly. On inflation and pricing, well, in -- the process that we go through is, and we started this already in Q3 of last year is to look at every single company and give them the tools and capabilities if they don't have them to deal with inflation. And one of those elements, of course, is pricing. Another one is sourcing and procurement and all that kind of stuff.

And on the pricing side, it's kind of impossible to answer the question because it's a dynamic one. If you raise prices too quickly, too harsh, then you might affect demand too much. So this is a fine balance that's really built portfolio company by portfolio company. But we've been on it for the last year on bringing capabilities to all of our companies to make sure we do that in a wise way.

[Operator]

The next questions come from the line of Magnus Andersson from ABG.

[Magnus Andersson, analyst]

Thanks for the color on the income side. Just if I might then take a question on the cost outlook. Now, Kim, you mentioned that the hire pace -- hiring pace would slow in conjunction with the H1 report, and we see that's happening now in Q3. And you also said that it's not fully reflected, the slowdown in this quarter, which I guess maybe then in Q4. So my question there is, in underlying terms, excluding BPEA, is the kind of Q4 sequential increase from Q3, what we should expect on an annual level roughly for 2023, unless the environment would change?

And secondly, there just -- if I remember correctly, when I looked at BPEA back in March, it looked like their cost base has been flat for 3 years, 2019, 2020, 2021, whether you now -- since you think that the environment is better in Asia than in Europe and probably in the U.S., you might ramp up investments now from 2023 in BPEA?

And finally on cost, just the average FTE cost per employee, what we should expect including BPEA, if it should be this similar as what we've had previously?

[Kim Henriksson, executive]

That was a lot of questions, actually, but let me start disentangling them. There's a -- when it comes to sort of explicit guidance on headcount growth for next year, we don't want to give that. But what we're saying is that, we have slowed down significantly the hiring pace, this will show in Q4. And I don't know exactly what it will be now. But -- so whether it's a great guidance for 2023 are not. I'm not sure as of this point.

But obviously, we will calibrate the future growth then based on how the market development looks like. If it looks different in Q2 of next year, then we may have a different view on these matters. But right now, based on what we know right now, we will be very, very cautious and the only growth in headcount will be in this -- will be in sort of specific areas that we are investing in order to grow our business, like the Private Wealth initiative Chris mentioned here, like in North America that was mentioned.

And I wouldn't exclude also that we are investing a bit more in some parts of BPEA's operations in Asia in order to be ready for the next leg of growth there. And when it comes to sort of cost per head, there's always a number of different factors working in different directions here, where one is that, we are growing in sort of more -- the new headcount we have is in more expensive parts of the world and in more expensive areas such as the private wealth area that was mentioned.

On the other hand, we always have the variable part of the compensation to work with as well. So taking all of this together, you need to calibrate those in different directions. And I'm not going to give you an exact number of what that will be going forward.

[Magnus Andersson, analyst]

Okay. And the variable share of staff cost, is that around 50% or…

[Kim Henriksson, executive]

Yes, it was slightly -- it was above 50% last year when -- in a great year such as 2021 and historically been around 50%, yes.

[Magnus Andersson, analyst]

Okay. And then secondly, just short on fundraising, Olof, you mentioned that you expect the newer initiatives to take longer time to raise in this kind of environment. But when it comes to the flagship fund, for example, now in Infra VI, do you then expect a normal fundraising for that one in this environment?

[Olof Svensson, executive]

Should I take this, Christian or do you want to?

[Christian Sinding, executive]

Yes, you can just start, I'll add.

[Olof Svensson, executive]

No. I mean, Infra VI we said, we started fundraising in September, as you know, and we've said that's going to continue well into 2023 with most of the fundraising taking place in 2023. I mean if you think about different asset classes and as we've been alluding to throughout this call, there is a strong interest in infrastructure as a segment, and it's also -- we talked about the investment days having been relatively slow throughout the year within this segment, but also some very interesting investment opportunities ahead within infrastructure, in particular, and Christian pointed to a few of those drivers. So definitely, it's mostly a 2023 event, but the backdrop infrastructure fundraising is solid.

[Christian Sinding, executive]

Yes. Well said. If you look at our Infrastructure strategy, we're the best-performing Infrastructure investor in the world. We have this global position. We have a lot of trust from our investors, a great team, and there's so much capital needed to transform infrastructure, drive the energy transition, for example, across the world. So there are some real positives and then you have the downside protection built into that business model, but it is still a smaller market than the private equity market. And so I would say that it probably will take a little bit more time to raise than in the up cycle, but with good momentum.

[Operator]

The next question comes from the line of Jacob Hesslevik from SEB.

[Jacob Hesslevik, analyst]

If we just go back to financing, Olof, you mentioned earlier that 7% of your financing in the portfolio companies are fixed. And I don't know if it was you or Christian, gave us that the duration is 4 years to 5 years, but what is the interest rate on average of these loans? And could you disclose how much the average rate has increased year-to-date or versus a year ago?

[Christian Sinding, executive]

I don't -- typically, we don't go into that kind of detail on the portfolio. But I don't know if you want to add anything, Olof, any sort of sharper comments that -- this is a -- and it's also so diverse. We have some companies that have very little debt or no debt, because it's all about organic growth and driving acquisitions, et cetera. We have some that are more leveraged. We have some that are older, some that are newer. We have different currencies, different structures. So these averages are maybe not that helpful either. I think what's important is that, we have -- in the comments that we made earlier around our philosophy and how we protect ourselves against the moments. Olof?

[Olof Svensson, executive]

Yes. Nothing to add.

[Jacob Hesslevik, analyst]

All right. So no way to see how the average rate has changed compared to a year ago.

[Christian Sinding, executive]

The value creation in our portfolio from leverage or from -- or the actual effect of interest in our value creation plans is quite small actually. And 2/3 of our debt is hedged, and it's in different currencies and different structures and different maturities. So even if I would have that number at hand right now, it's not something which would have any meaningful impact on valuations or performance.

[Kim Henriksson, executive]

Maybe to add. Given the fixed rate structure on this take up, it means, of course, that you're not going to have a material change in the existing portfolio. But of course, for new financings and as we do new investments, it's a different rate environment at which we are financing companies.

[Christian Sinding, executive]

Yes.

[Jacob Hesslevik, analyst]

Yes. But that should be reflected in the purchase prices then I guess as well, that's not an issue.

[Christian Sinding, executive]

Exactly.

[Jacob Hesslevik, analyst]

But then what is the biggest reason of more transaction occurring? I mean there are some great listed companies that have seen its valuation half this year, but so far, quite limited amount of bids. I mean you said it's a bid spread and bid ask still...

[Christian Sinding, executive]

Yes. In the difference between…

[Jacob Hesslevik, analyst]

Even this business has heightened and then what is the most important part?

[Christian Sinding, executive]

Yes. The most important part are they -- that's -- when you're trying to take a company private, you have to gain full control of the company. While if you talk theoretically, a public company is valued on the most recent share trading of a tiny minority stake of that business, right? That does not mean that the control of that business is worth the same. And then therefore you see typical premiums of 30% to 35%, maybe even 40% in a typical market for M&A, because there's a controlled premium to control that company and be able to do with the things that we do to our companies and transforming them and making them stronger and better and faster and more sustainable.

So what's hard now is to find out what that premium is for the sector at any point in time. And probably the sellers want a 60% premium today or 50%, and we might want to pay a 25% and then it takes a little while before we get more confident and they get a little bit more patient. So it's things like that. But it's really having to do with the difference between a liquid share in a public company and control of that public company, which is materially different.

[Jacob Hesslevik, analyst]

Okay. But should we then view that it's more likely that acquisitions going forward is going to come from other key funds where you might have an IR or something, which has a time effect. And I mean all key funds currently sits on an enormous amount of dry powder. I guess it's been all interested to some activity starting to go in the future or…

[Christian Sinding, executive]

Yes. We are -- no, no, it's -- I think all sources are available. You might have certain families that want to diversify. You might have an industrial company that needs a different kind of financing structure or some capital in to focus on their core business or financial buyers that want to do an exit because they have an old fund or public to privates. So all these sources are available. So it's -- I don't think you can see a systematic difference right now. It's up to us to choose the right investment opportunities.

I mean a typical private equity and infrastructure fund, we're doing 15, maybe 17 investments over on average of 3-year cycles, we're doing 5, 6 deals a year. And we have hundreds and hundreds of investment opportunities we're looking at all the time. So it's really about picking those, the right ones. And yes, and that's why we have people on the ground in the sector teams, locally all across the world, all across Asia. We're in 25 countries now. And then the beauty of that is that we can hopefully find those best deals to invest in, both during good times and bad times.

[Operator]

The next questions comes from the line of Jakob Brink, Nordea.

[Jakob Brink, analyst]

Just 2 small detailed questions for you Kim, I believe. So we talked about before on the carry recognitions for the second half of the year and where you are on that? Could you just remind me, in the exits that was done in the first half of the year, was all the carry from those recognized in the first half or is something left for the second half, for example, just that hasn't closed yet? Has some of it been postponed to H2 or was it all recognized in H1?

[Kim Henriksson, executive]

Not all of the transactions that were announced in Q1 were -- or in H1 were closed in H1. Some of them closed even, I think, in Q4 here, earlier this month. But none of them would have a meaningful impact on the carry for the rest of the year or for the second half of the year.

[Jakob Brink, analyst]

Okay, yes, exactly. So -- and also just on that, so when you've been talking historically about the 30% to 50% discount, so let's say now that you might have started with a 50% discount, but then due to estimates maybe have come down or whatever, then maybe you need a local buffer. Is that the right way to look at it? But you could also write-down the discount, so to say, if in a scenario like the current one?

[Kim Henriksson, executive]

Yes, it is possible, yes. I'm not saying that we are, but we do have the flexibility to -- within this 30% to 50% discount to make an assessment on what is a reasonable discount to have in order to not risk a reversal of carry, more than under extraordinary circumstances. So yes, there is some flexibility there.

[Jakob Brink, analyst]

Okay. And then just a last one. I can't remember, but what have you said regarding the restructuring charges on the BPEA deal? Will there be anything here in H2 or H1 next year or is it just -- yes.

[Kim Henriksson, executive]

Well, not restructuring charges really, but there will be transaction costs. There will be some booked in the context of the deal here during the second half of the year. There were some already in H1. So yes, there will be -- I don't think we've given an exact number on that.

[Jakob Brink, analyst]

Just a ballpark maybe or…

[Kim Henriksson, executive]

Now, if we haven't given a number, I don't want to throw it out here. If we have, I'll give it to you afterwards.

[Operator]

We have no further questions at this time, I hand back the conference to you for any closing comments. Thank you.

[Christian Sinding, executive]

Thank you very much everyone for your participation and great questions today, and wish you a great continued Tuesday. Cheers. Bye.

[Kim Henriksson, executive]

Thanks.

[Olof Svensson, executive]

Thank you, everyone.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.