Business Breakdowns
· Sean Barrett
[00:00:00] S1: When we refer to retail in the alt space, it's really referring to a lot of it's coming from the wirehouse channels. So think the big banks that serve high-net-worth clients. And again, this is a benefit of not going first. So if you look back at the history of this market, the idea that the alts would serve retail was a bit of a pipe dream for a long time. And Blackstone did a ton of work on this and then other great investment firms in parallel were doing a ton of work. Ares and others that you know that are public, KKR, Apollo, et cetera. So at EQT they've built out this retail business called Nexus and it's a NAV-based strategy unlike its other funds. And it effectively offers evergreen vehicles to retail investors. So again, frankly, following the Blackstone playbook that's been so successful. So this is like BREIT, the non-traded REIT that Blackstone has BCRED, but it's for EQT's flagship funds. EQT started with a retail vehicle in 2024 in private equity. They quickly raised a billion euros. They realized, wow, this is a big opportunity. Our brand is actually good enough that we can do this now. And in 2025 they're set to launch five more retail vehicles around infrastructure in different geographies. So this is going to be a big growth driver for them. Again, we think retail for EQT is probably 10% of the capital today. We think it can go to 20% of AUM over time. Big buckets. And I think they'll take advantage of those.
· Matt Reustle
[00:00:00] S0: As you think about the fundraising target of 100 billion for the next cycle, we've touched on you drive returns that leads to higher likelihood of successful fundraising. What else would you just discuss when you think about monitoring that target and following along that pace of fundraising? Because you have the fee base and then the carry and the fee base is a big piece of the story. So how do you think about framing that? What is another very large number?
· Sean Barrett
[00:00:00] S1: And it is a big piece of the story. I mean, what we've seen historically is that the stock prices tend to be very well correlated to asset growth for the alts. So it's an important part of the thesis. It starts with generating great returns, like you said, and having LPs who are willing to entrust you with more and more capital. I think for the upcoming fundraising cycle, there is a lot of skepticism in the market from investors and research analysts as to whether EQT can raise the 100 billion euros. It's a lot of capital. They manage 140 billion euros today, so adding 100 billion euros to that is no small feat. And if you look at the market, rates are a lot higher than they were during the last fundraising cycle. And a lot of investors are increasingly full up on private equity. At the same time, large LPs need to generate good returns to cover their future liabilities, which are also growing very rapidly with higher inflation and higher social inflation. So those investors are looking to best-in-class private equity firms to help them accomplish those goals. I think smaller PE firms will struggle in this environment, especially those that haven't generated great returns for their investors. But the large, best-in-class PE firms with great returns are frankly benefiting and gaining a ton of share. We just saw a couple weeks ago, Thoma Bravo announced they'd raised $34 billion, $24 in the flagship private equity vehicle and $10 billion in sleeves around that vehicle. That tells me that the market's healthy enough for great investment firms to continue raising money. But I think the mediocre ones will have a lot of trouble. And then while the market's tougher today than it was in 2021, EQT also has some growth drivers today that it didn't have back then. So we talked about the retail business, continuation vehicles, the sovereign wealth channel. That's becoming a bigger part of their business. And then lastly, EQT is innovating and launching these carve-out strategies like the transition strategy, regional strategies, future strategy. So even if the fundraising environment is tougher, going back to the building blocks again, we build up and predict this business based on each fund.
· Sean Barrett, Matt Reustle
And when I look at each flagship fund they're trying to raise across private equity across Asia, infrastructure and real estate, the returns and the DPI have been so good in the last five or 10 years that you build those up and you realize that those franchises are likely to continue growing pretty substantially. And the last thing I'll say about it, the first data point we have on this fundraise is BPEA Baring Private Equity Asia, which is raising its flagship fund right now. The last fund was 10 billion. It looks like this next fund will either hit the hard cap at 14 billion or maybe end up at 12 and a half to 13. But it's a 30% step up and that's consistent with what you want to see. For them to go from 75 billion in the last fundraise to something more like 100 in this fundraise. [00:00:00] S0: Yeah, it's interesting how power law shows up. Feels like what you're describing in the private equity space is another example of that being the case. One thing you mentioned there, which is admittedly how I thought about this, the asset growth and what assets they have under management. The fee-based model is very easy to understand and run through in Excel versus the investment results, which most people just aren't going through the individual funds to model that out. Do you see large gaps or opportunities just from your own perspective as looking at these as stocks where there's a disconnect between the AUM and what they're generating within the funds themselves that create opportunities?
· Sean Barrett
[00:00:00] S1: Oh, definitely. If you go back, gosh, 10 or 15 years, the best time to invest in these alts was always when people were not expecting much in the form of carry. So that's a lesson that I got to see for many of the other alts and it's something that we've applied to EQT. If you look back to 2015 and 16, investing in firms like Apollo and Blackstone, at the time, macro was shaky and public market investors were very reluctant to ascribe value to the future carry that could be generated by those great firms. And it turns out that was a great time to invest because those were growing innovative firms. And if you fast forward, of course they did generate a ton of carry, and on top of that they innovated and they grew substantially in the years ahead. So we're using that pattern recognition here to our advantage. At the moment, analysts are expecting very little for EQT in the form of carry over the next few years. Meanwhile, EQT has generated carry on every fund it's ever had since the early 1990s. And management has said that just on the existing funds, they think they'll generate over 8 billion euros of carry. That doesn't include the funds from the next fundraise. So it's pretty likely that you end up getting back almost a third of your market cap in the form of carry just in the next five years. And then of course, the firm can continue generating a lot more carry after that.
· Matt Reustle
[00:00:00] S0: It's a very interesting observation that that then leads into a feedback loop with the fundraising. So it's fun to get into the weeds on this. I think we've covered the financial model in some high level, but can you just describe how you would frame the business maybe from an income statement standpoint through margins, which you described a little bit, into free cash flow? Just whatever description you might have, and the easiest way to frame it for EQT?