EQT AB (publ) (EQT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to EQT's Half Year 2021 Results Presentation. Today, I'll be joined by Christian, Caspar and Kim. As we approached 2 years since the IPO, we thought it would be timely for Christian to start off by reflecting on our journey to date, and more importantly, our strategic priorities ahead. Christian -- Caspar, sorry, will share an update on our clients. Kim will talk about our financials, including Exeter, and wrap up with a few comments on our targets. After the presentation, there will be a Q&A. [Operator Instructions] And with that, I'll hand over to Christian.

Thank you, Olof, and good morning, everyone. We continued to enjoy healthy momentum across the board in H1. Investment and exit activity is quite high and value creation in our funds is also strong. We've taken further steps to expand our palette of active ownership strategies in line with our purpose. And notably, we closed the Exeter transaction and we announced a longer hold strategy in Private Capital, a strategy which will have impact at the core and drive long-term sustainable transformation together with financial returns. So let's look at the half year in a bit more detail. The Exeter transaction closed in April, and EQT Exeter is experiencing healthy momentum. EQT AB, as the first private equity firm in the world, successfully raised EUR 500 million sustainability-linked bond. Fundraising across EQT is also progressing well with EQT IX having concluded in April. EQT Infrastructure V has reached its hard cap and its final close is expected during the second half of 2021. We set the target for EQT Growth at EUR 2 billion, as previously announced. And fundraising has been initiated for EQT's longer hold strategy in Private Capital. Turning to deal activity. We've seen a continued strong investment pace throughout the first half of the year. We see strong deal-sourcing capabilities based on our thematic investment approach and our local-with-locals approach. H1 was actually a period for EQT when exit volumes surpassed investment volumes, a testament to our ability to generate performance and return capital to our clients. Value creation continues to develop well across the board. EQT VII and EQT Infra III continued to develop above plan. EQT VIII is also enjoying very strong performance with a significant value uplift this year and a strong outlook. Now when it comes to people, we have welcomed approximately 230 new employees from Exeter to the EQT family, and the collaboration is excellent. A lot has happened since EQT went public almost 2 years ago. Our AUM has increased to EUR 71 billion from EUR 40 billion, which shows the trust our clients put in EQT. EQT's mission is to generate superior risk-adjusted returns, and we're delivering strong performance across the EQT funds. This is the bedrock. When we perform, our companies are happy, our clients are happy and we get the confidence and the resources to continue to grow our business. And being solely focused on active ownership strategies and generating strong returns, that should also contribute to fee levels continuing to be stable. Furthermore, the organization has grown to over 1,000 people globally. Our employees carry our values and culture to fulfill our vision of being the most reputable investor and owner. Our revenues have increased significantly, paced by the growth in AUM and a pickup in carried interest. EQT is a platform built for scale, but it's also fair to say that we are well ahead of the plans we had at the time of our IPO. We're, therefore, accelerating investments in people and technology to prepare for continued growth. Next slide. As we set our strategic priorities and continue to grow, we do so by building on our unique strengths. People are, of course, our most important asset and our culture is truly unique. At EQT, we live by 5 core values: high-performing, respectful, entrepreneurial, informal and transparent. Our culture and values are the bonds that bring us together and ultimately help us succeed as a team. We are, as you know, entirely focused on active ownership strategies, strategies where we can put our purpose into practice: to future-proof companies and make a positive impact. In fact, EQT is the only large private markets firm globally that can back companies across the development life span from start-up to maturity, and this makes us a smarter investor. We bring learnings and themes from early stage into all of our strategies and our network and experience as an owner into the early-stage companies. And of course, increasingly, we do these kinds of knowledge sharing by using Motherbrain, our artificial intelligence unit. Our values together with our purpose and focus on active ownership strategies is what makes EQT a truly unique private markets firm and underpins our ability to deliver superior returns. So let me recap our recent strategic milestones. We divested Credit last year in order to focus solely on active ownership strategies. By introducing EQT Growth, we added a missing piece in our Private Capital puzzle. EQT Growth has further strengthened EQT's ecosystem where our global investment advisory teams across all business lines share insights, best practices and spot the latest trends. EQT's thematic approach is about investing in the positive, long-term trends in society and driving transformation of companies. Now by joining forces with Exeter, we also created a global leader in value-added real estate. When it comes to Asia Pacific, we're sharpening our strategy and expanding geographically, although developments have been progressing a little bit slower than initially anticipated. Now let me share some more color on our longer-hold strategies. There are several reasons for us to introduce longer-hold strategies. First, they're aligned with EQT's purpose. The strategies will have a longer holding period with impact at the core and a focus on generating social and environmental impact at scale. With this, we will be able to capture the largest opportunities to spot investments that will reshape the future. The businesses will also be in robust sectors that are suited to long-term ownership, such as essential services. And as you've seen, Anticimex is the first investment we made in this Private Capital long-term strategy executed together with our key clients. Second, the strategies will build on EQT's approach to value creation, leveraging EQT's platform and deal flow. Our strategies will focus on the same geographies as our existing strategies and be aligned with EQT's sector focus while addressing specific themes. They will also leverage our capabilities in digitalization and sustainability. Third, our clients are looking for further opportunities to invest with EQT in a risk/return segment, which we do not address today, slightly lower returns with lower risk with strong value creation over the long term. Now this is still in its early days, but we currently expect that the longer-hold strategy in Private Capital and the potential infrastructure core strategy over time could constitute about EUR 10 billion of AUM in total. In terms of people, some talents will join from existing strategies while we continue to further strengthen our investment teams with new hires. More to come around this during the fall. Now EQT was one of the first private market firms to commit to Science Based Targets, which simply put, means that we will set emission reduction targets in line with the Paris Agreement. Our membership in FCLTGlobal, focusing capital on the long term is one example of how EQT takes part in the global conversation about the power of investing with purpose. EQT AB is already converted into renewable energy, and all of our portfolio companies are accelerating renewable energy transformation with a long-term target of 100%. We've been working hard for several years to improve diversity, in particular, gender. We're doing this primarily by recruiting more women at junior levels, which eventually will lead to a more balanced organization. And we're slowly seeing progress. And during the period, actually 61% of all of our hires were female. Over the past year, we've implemented several financing structures, which are linked to all of our ESG targets. If we meet these targets, we obtain cheaper financing, which is a great way to reward actionable ESG performance. We truly believe that we will generate stronger and more resilient returns by driving sustainable transformation. And these, along with many other initiatives, are a good start. But of course, we have a lot of work to do and a lot of opportunities ahead of us to continue to make EQT an even more diverse organization. I firmly believe that EQT, and in fact, the private markets industry has the capital, the governance and the business model to invest to support a healthier planet and people. Looking ahead, our longer-hold strategy is a superb example of how we will sharpen our ESG approach and truly drive positive impact at scale. We're pushing boundaries with new initiatives, such as having impact-linked carry and impact management framework and a mission board. Selective M&A, used to add competencies or to strengthen certain segments or regions, will continue to be a part of EQT's strategic agenda. In most cases, we will continue to build capabilities ourselves, leveraging our platform. When we acquire, the bar is high in terms of culture and alignment with our active ownership strategies and our thematic investment approach. Importantly, we will significantly accelerate investments in EQT central to future-proof EQT's continued growth journey. We will, for example, grow our capital-raising team by adding talent and making continued investments in our interface. We will invest in EQT Digital, including EQT's proprietary artificial intelligence colleague, Motherbrain. And by accelerating investments in our platform, today, we actually future-proof performance. We constantly need to invest to stay ahead of the curve, and that's what we've always been doing and always will do. The key is to continue to develop our talent to make sure we stay at the forefront and have the skills for our mission. Nurturing our culture and developing diverse talent through our in-house training program, EQT Academy, has become more important than ever. And as we slowly exit the pandemic, new ways of working will make this even more important. We recently announced 2 new sustainability hires for 2 newly created strategic roles. Bahare Haghshenas joins us as Global Head of Sustainable Transformation, and Sophie Walker joins us as Head of Sustainability for the EQT Private Capital segment. Together with the existing sustainability expertise within EQT, they will drive further integration of purpose and sustainability into the way EQT works, invests and transforms companies. In these benign market conditions, we also need to stay alert and humble. Economies see cycles, and our investment and exit activity is correlated to broader market conditions. Inflation has picked up, but we're growth investors, focused on companies with strong secular growth trends. We're therefore not so concerned about inflation when it comes to how we deploy capital. However, we are looking at inflation from a 360-degree perspective, how it impacts our clients and their investment strategies, how our portfolio companies may be impacted and how financing structures may be impacted as well. We see economies opening up post pandemic, but COVID is still a stark reminder of how external factors can have a tremendous impact on us all overnight, and in a way, few of us were able to predict. Therefore, we will be and we need to be prepared for the unpredictable and remain vigilant about performance. With that, I hand over to you, Caspar.

Thank you, Chris. As you know, a typical fundraising cycle is around 3 years in the normal market conditions. In stronger markets, we have seen fundraising cycles closer to 2 years, whereas cycles have been closer to 5 years in more difficult market conditions as we saw in the global financial crisis. EQT IX is 55% to 60% invested approximately 12 months after being activated. We see a healthy pipeline of investments. And depending on deal activity develops, it's possible that EQT IX will be invested in the time frame of about 2 years. This is consistent with a very strong market environment that we're currently in, but also the strong value creation we see in our predecessor funds, including EQT VII and EQT VIII. In addition, as we continue to drive exits actively, we free up, over time, resources to manage new investments. EQT Infrastructure V has EUR 15.1 billion in fee-generating commitments, and fundraising is expected to be concluded during second half of this year. This fund, like EQT IX, has also had a high development pace and is now 50% to 55% invested. And similar to EQT X, we could envisage a relatively short cycle and there is a scenario where Infra VI is in the fundraising not too long after EQT X. To be clear, we don't think that this is a new normal when it comes to fundraising cycles. As we think about flagship funds beyond EQT IX and Infra V, we still think that the typical cycle will be around 3 years in normal markets. And importantly, our mission is to generate returns for our clients. And the competitive situation in the market remains high, and several different types of buyers are competing for thematic assets and the financing markets remain buoyant. We invest where we have conviction and that will meet our return requirements. We will continue to stay disciplined when it comes to investments, and we need to raise the bar and invest in our platform and people to stay ahead of the curve, as Chris mentioned. In terms of other strategies, the 2 longer-hold strategies could, as Christian mentioned, constitute some EUR 10 billion of AUM in total over time, across Private Capital and Infra. While the strategies build on our existing strengths and deal flow, they are first-time funds and fundraising will take time. Our recent flagship fundraisings have taken over a year from launch to final close and fundraising for longer-hold strategies will take more time. And importantly, the strategies will charge on fees on invested capital. And regardless of fundraising, it will take time for fees to ramp up for those strategies. EQT Growth fundraising is ongoing, and the fund started generating management fees at the end of the reporting period. Being a first-time fund, it will continue fundraising into 2022. As Christian mentioned, APAC is taking a bit longer. And directionally, we expect APAC strategy to be in line with EQT Growth in terms of size. In addition, fundraise at EQT Exeter is progressing according to plan. As previously mentioned, we expect EQT Exeter to raise about $5 billion in 2021 and at least a similar gross amount in '22. EQT Exeter has an active exit agenda with some larger potential sales coming up. However, a large part of the asset sales are often directed to recap vehicles where EQT Exeter continues to retain management fees, although in a different structure. Next slide, please. EQT has approximately 700 clients globally now. We have continued to broaden the client base geographically, and Americas and APAC now represent more than half of the commitments across the EQT's active funds. Over the past year, we've raised more than EUR 25 billion and generated another EUR 7 billion in co-invest. And looking at EQT IX, about 70% of the volume was committed by clients who invested in EQT VIII, and we had over 200 clients participating. About 30% of the commitment by volume came from clients who were either new to EQT or have not previously invested in EQT VIII. Similarly, we see significant commitments from existing clients in EQT Infrastructure V. We're increasing our focus on the private wealth channel under the leadership of one of our new hires joining as a partner in the CR team, Peter Beske Nielsen. A meaningful amount of the commitments in Infra V has come from high net worth individuals. Exeter added some 6 new clients to EQT. And as Exeter is raising new flagship funds, we're introducing EQT clients to EQT Exeter and vice versa over time. And with that, I'll hand over to Olof.

Thank you, Caspar. Activity continued at a sound pace with investments representing EUR 7.7 billion announced during the first half of 2021 compared to announced investments of about EUR 10 billion in the second half of 2020. EQT has a highly thematic investment approach, as you know. We continuously refine our focus, identify new angles to invest with broader trends, but also to drive specific themes. To give you one example. Several investments made by the EQT funds over the past year have electrification and reduction of greenhouse gas emissions as a key value creation component. This includes investments such as First Student buses in North America or Torghatten in Norway. Driving sustainability is a way of future-proofing companies, which in turn drives returns. As anticipated, we have continued to execute on the exit pipeline. This resulted in announced exit volumes during H1 of almost EUR 10 billion. It's been a strong period, but it's important to keep in mind that activity can be lumpy. The financing market continues to be strong and we see all exit routes being opened, be it sales to strategic or financial buyers or through IPOs. Igenomix is one example where we ran a multitrack process eventually transferring ownership to a strategic buyer, Vitrolife, as announced early July. In June, EQT VIII announced the sale of Aldevron for an enterprise value of approximately USD 10 billion to Danaher Corporation. We run competitive exit processes, but we're also mindful of finding the right home for our portfolio companies in order for them to continue to develop well under the new ownership. Looking ahead, we continue to expect a number of further exits this year, including certain material exits, should market conditions remain strong. Next slide, please. Value creation across our key firms continued to develop well during the first half of 2021. As announced in our Q1 update, we expect EQT VII to deliver returns above plan. The fund is now valued at 2.6x gross MOIC, up from 2.5x in our Q1 update, supported by strong company performance and a number of realizations in the fund. EQT VIII is performing very well and is now marked at 2x gross MOIC. The valuation marks a significant uplift compared to the 1.6x gross MOIC valuation as of Q1. The long-term performance of the fund is also looking strong, but it would only be -- we would only change our guidance to above plan if the expected gross MOIC was persistently and materially above 2.5x. Further, Infra III continues to develop above plan and is now valued at a gross MOIC of 2x while all other key funds remain on plan. We continue to track the impact of the pandemic on our portfolio companies as part of our regular performance and liquidity dashboards. We only had very few companies, which were significantly impacted to start with, and we have subsequently exited some but not all of those companies. We also get some questions about inflation and the potential impact on portfolio companies from, for example, global supply chain disruptions. Generally, we have not seen such factors having a meaningful impact on the portfolio companies to date. EQT's fund investments, as you know, are skewed to sectors such as tech and health care, which have no or little dependency on raw materials or components. With that, over to you, Kim, and next slide, please.

Thank you, Olof, and good morning, everyone. Let's have a look at the development in assets under management to start with. AUM increased by 36% during the first 6 months, mainly driven by Exeter adding some EUR 9 billion in AUM as of closing and contributing some EUR 10 billion of AUM as of the end of June. A major contributor is also the fundraising of Infra V with the fund having reached EUR 15.1 billion in fee-generating commitment as of the end of H1. In general, fundraisings continued to develop well in line with plan, as mentioned. As a reminder, commitments which are closed out in '21 will pay management fees from the time the fund was activated and related so-called retroactive fees or also called late fees or catch-up fees will be booked in '21. So when the revenue that relates to 2020 for these commitments is recorded, it means revenue in that H1 '21 period is temporarily elevated. As you know, the AUM base in older funds is reduced with the cost of investments as the funds exit their holdings and this is only reflected when the exits have closed, not when they are announced. So many of the exits announced in the first half of '21 are yet to close. All else being equal, this means then that AUM will go down, but we will over time see this being offset by new funds such as EQT Growth, APAC, the longer-hold strategies and eventually the next run of -- around the flagship fundraises. Next slide, please. So let's continue to look at the revenue during the period. Our revenues for the first 6 months have increased by 172% year-over-year. But this number includes Exeter, so does not only constitute organic growth. And we've almost doubled the management fees in the first half of '21 compared to the first half year 2020, largely due to the activation of EQT IX and Infra VI, and as mentioned, the related retroactive fees, which in practice relate to 2020. And we have also recognized carried interest, the vast majority of which relates to EQT VII. Note that Exeter's financials were only accounted for during 3 months of the first half of '21. And as you've seen, the year started -- has started off very well with sound exit activity, coupled with high and increasing valuations. If this development continues into H2, carry recognition from an accounting point of view could continue this year. Next slide, please. So in line with EQT's growth plan, the number of employees increased in H1 '21 across all business lines, geographies and central functions. The FTE+ count increased by 294 persons in the first half of '21 from 710 to 1,004 with Exeter contributing 229 FTE+ as of the end of H1. When we think about the remainder of '21, we continue to expect a meaningful increase in the number of employees. And longer term, we expect the cost per FTE to increase somewhat, for example, due to growth in more expensive regions. And so far, during the first half of '21, the recruitment pace has developed reasonably well and we have a good number of new colleagues expected to join us during the second half of the year. As mentioned, we do expect to increase the investments in personnel, and thus, increase costs to support the activity level you have seen here and our growth ambitions that Chris laid out. Next slide, please. As mentioned, we've significantly increased the management fees in the first half of '21 compared to the first half year 2020, keeping in mind when this includes the so-called retroactive fees and it includes Exeter for 3 months. In addition, we've had considerable carried interest recognized during the period, which also fuels the revenue growth and thus margins. As a consequence, the EBITDA margin has increased to 69% during H1, of which, however, some 3 percentage points is due to retroactive fees. Next slide, please. The transaction with Exeter was completed on April 1. So we thought it would be useful to show Exeter's contribution separately. As mentioned, EQT Exeter will, on a continuous basis, be reported in the Real Asset segment, so not separately, but Exeter is now integrated with EQT Real Estate under a joint EQT Exeter brand and the collaboration has started off very well, I would say. Given the consolidation as of April 1, the key financials are only for 3 months and they include EUR 39 million of revenues and EUR 25 million of EBITDA, as you can see here. AUM as of end of June, EUR 10.4 billion and 229 FTE+. Investments by the fund in the period was EUR 0.5 billion and exits were rounded off to EUR 0 billion. Next slide, please. Let's wrap up by looking at our financial targets. As I stated at the IPO 2 years ago, we expect an EBITDA margin of between 55% and 65% over the long term. Whilst being above this target in H1, this target should be viewed over a cycle and we think the range is still a good indication of where we expect margins to be over the mid to long term. Indicatively, we have also said that, over time, the share of carried interest and investment income is expected to grow towards 25% to 30% of total revenues. Carry and investment income corresponded to 24% of total revenues in H1. And the more recent funds, such as EQT VIII and Infrastructure IV, are expected to have a larger impact on carry in our financials once they start generating carry, given the larger fund sizes and EQT AB's higher share of carry from these funds. As always, it's important to look at carry on a long-term basis over the lifetime of the funds. Regarding the timing aspect of recognition, we previously said that timing of carried interest recognition is driven primarily by exits, but also by increases in unrealized values. So in order to get a good feeling for the timing aspect, it's therefore needed to keep an eye on the exits we announced and subsequently closed as well as the developments of total gross MOIC. When it comes to our cost base, we are accelerating investments in our platform, and near term, we expect a faster growth in expenses, also noting that AUM may grow at a slower rate next year with the recent flagship fundraises being fully reflected in our '21 management fees. We've stated that our ambition is to generate a steadily increasing dividend in absolute euro-denominated terms. And our dividend in the last 2 years has been in line with this policy. We have a strong balance sheet, and our net debt as of June 30 stands at EUR 113 million. As a reminder, our management fees are charged immediately after the half year, thus, we're already net cash positive as of today. Next slide, please. So to conclude, we continue to make progress on our strategic agenda. Fundraising has progressed well and preparations are ongoing for new initiatives. We will continue to invest into our operating platform to future-proof the organization, which will lead to higher FTE count and costs. Market conditions have been strong with activity levels keeping a good pace while valuations across our key funds are developing well. So while markets are strong, we know that things can change quickly and we need to stay alert. So deal activity, both on the investment and exit side is dependent on market conditions and our outlook for carry as well as timing of fundraisings is thus subject to how markets develop from hereon. Thank you, and now it's time for questions.

[Operator Instructions] And our first question comes from Arnaud Giblat from Exane BNP Paribas.

I've got 3 questions, please. Firstly, could you quantify the amount of late fees ended in the period? And my second question is on the investment pipeline. You've discussed a healthy investment pipeline. Could -- I mean if market conditions remain the way they are, could we see a pace of investment similar to what we saw in H1? And to that, how do you think about vintage risk when you think about portfolio construction? And my third question is on M&A. I mean it seems like Exeter is pretty well vetted and you've started cross-selling, doing a number of actions. Could you maybe elaborate a bit more on whether or not you're looking at the potential of acquiring any other managers?

I'll take the question.

Yes. Please, Kim. Go ahead.

Yes. On the first one, it's so that -- when we have our 2 flagship fundraises running across 2 calendar years, these late fees becomes more pronounced than it otherwise is. But it is something that we will have also on an ongoing basis. I mentioned that it impacts approximately 3 percentage points on our EBITDA margin for the period, which translates into approximately EUR 60 million.

Caspar, do you want to start on question 2?

Yes. Investment pipeline and vintage risk. So basically -- well, we continue to see a very healthy pipeline. So if -- will it continue with the same pace as H1, I mean I think it's difficult to judge. It's been a busy -- obviously a busy first half and the pipeline looks good. But in the end, the actual pace depends on whether you win or lose and sometimes you win a little bit more, et cetera. So I would say would not be above H1. Could be H1, but it also could also be lower in the end. I think, as I alluded to, I think we see for EQT IX more of a 2-year investment period. And I think there will -- obviously, if you've invested a fund over 2 years, there will be a bit of a vintage risk. But in the end, we think that we invest in very robust good companies. We've made, I think, 11 investments in EQT IX. So I think we have a reasonably good diversification to start with in very, very good industries. So we keep an eye on that risk, but it's nothing that we're very concerned with right now.

Yes. Thanks for that, Caspar. And if you look historically, during the best periods in the market, we have been investing in around the 2-year cycle. The average is around 3, and during the weaker longer cycles to -- like the great financial crisis, then it was about a 5-year investment period. So this is still within the range of history as well. When it comes to the final question on M&A. Yes, given that we built this platform and the integration of Exeter is going very well and our cooperation -- or the new EQT Exeter is performing nicely then we are, of course, actively evaluating those kinds of opportunities. But as we've said before, first of all, it has to -- any M&A opportunity has to fit strategically into how we build the firm and also maybe most importantly that there's a real cultural fit between the people and the cultures of the 2 firms. So we are having some dialogues of mostly smaller, and let's say, medium-sized type of businesses. And if that develops more actively, then we'll inform about that further during the fall.

The next question comes from Bruce Hamilton from Morgan Stanley.

Just 2 questions from me. You talked a little about the recent fundraising from the sort of the high net worth channel and how that was a bit more important in Infra V. Can you give sort of any rough sort of percentages? And sort of give us some thoughts about how important that channel you expect will be to sort of future fundraising in terms of the proportion from that side versus institutions? And then secondly, on -- I guess, it's a bit hard to pick on APAC as the one area where maybe things are running a little bit slower, partly COVID related. But just to make sure I heard correctly, you were saying a size somewhere around sort of growth size so $2 billion. I guess given the size of some of the specific region, Asia region funds out there in the industry, I thought it might be high. So what are the -- some of the challenges that have maybe held that back?

Caspar, you take the first one, I'll take the second one?

Sure. So when it comes to fundraising from high net worth individuals, I think -- I mean, to start with, that is typically done through intermediaries, i.e., private banks and similar. So it's not us directly. Even though we do -- you can say some of the family offices are somewhere between high net worth individuals and sort of institutional capital. So there's a blurry line there as well. But I would say this is still a very small part of our fundraisings. I would say it's still single-digit percentage out of the total in for -- as an example, in Infra V. But it's increasing, and it's a market that is growing and it will over time, but longer time grow as a percentage of the total for sure. But it will still -- this will still very much be an institutional market for many years to come.

Thanks, Caspar. When it comes to Asia Pacific, you're right, Bruce, that -- part of it, of course, is due to the COVID situation. But if you look at the existing strategy that we have there, we have about $800 million in the existing fund in the Mid Market. So growing from $800 million to $2 billion is actually -- or the $2 billion range is actually quite a significant step. We're also building out our teams. As you've seen, we've started a cooperation in Japan and we've opened up our Sydney office. And as we're building up the team, we're building out the strategy as well. So it's rather that we're taking and building stone upon stone and investing to really build the platform in a high-quality way. And then we'd rather spend a bit more time doing that than to try to take a giant leap.

Next question comes from Ermin Keric from Carnegie.

I think you've kind of already touched upon it during your prepared remarks. But could you just try to summarize the outlook here now for fundraising? So you said that it tends to take around 2 years...

Excuse me, could you slow down your -- could you slow your question down a little bit? It's a bit hard to hear. Can you repeat that.

Okay. So if you could just summarize the outlook for the fundraising. So you mentioned that EQT IX, we should expect perhaps around 2 years to be fully invested. So when could we expect you to start with EQT X raise? And would you start with Infra VI after the EQT X is kind of materially concluded? And also for Exeter, you mentioned before around EUR 5 billion for this year and gross EUR 5 billion for next year. How should we think about that gross number for the next year in terms of kind of net AUM contribution from Exeter?

Caspar?

Yes. I mean it's very detailed questions. But -- so I think as we mentioned, we -- the honest answer, we don't know exactly, right, because it depends on investment pace, et cetera. But as I said, we could be on a 2-year investment period for EQT IX and that's sort of the trajectory as it looks right now. And that means basically we would be fully invested about a year from now. And if you do that math, you could conclude that in order to have funds to be invested a year from now, we need to start ahead of that time. So I would say sometime during -- I don't know the exact time and date where we will start fundraising, but it will be to handle that situation sometime in '22. When it comes to Exeter, I think we mentioned a lot of the exits that you see in Exeter in general terms are portfolio exits. And typically, those portfolios continue to be managed by Exeter. So the sort of gross to net is somewhat different in Exeter than you would see in private equity. You would not see a lot of outflows from exits. You will see some, but not a lot. And I think that's as much guidance as we can give on that. So less outflows than in the other funds when it comes to Exeter.

Okay. Perfect. That's very helpful. Then perhaps a question also on the carried interest outlook for EQT VIII. You've done a few exits there, and obviously, the value creation has gone very strongly as well. Could we see that you start to recognize carried interest for EQT VIII already in the second half of this year?

I can take that. We don't want to give a specific guidance on carried interest recognition for any specific fund. But also it cannot be ruled out the scenario you are suggesting, but it would be dependent then on this highly -- this very strong market continuing, us continuing to make exits and the underlying value is continuing to increase. So that's approximately as much as I can give.

Got it. Then one final question, just there's obviously been a lot of discussion globally about tax rates and minimum tax rates and so on. And currently, I believe you're not paying tax on carried interest due to different other mechanics. But do you see any kind of residual risk that you might have a higher tax rate in the future?

Yes. Well, we can maybe share it, yes. I think carry is a different animal because in our book, that's capital gains. And I think that it's quite common that, that is not taxed fully. So we'll leave that aside. I think -- and I think we also pointed out that we are growing at a higher pace in countries where the average tax rate is maybe somewhat higher than we're currently in. So would we see a higher average tax rate over time? Yes, I think so. Will it be materially different from where we are today? I wouldn't say so.

That's a fair summary.

The next question comes from Hubert Lam from Bank of America.

Just a few questions. Firstly, on the retroactive fees, should we expect some more coming in the second half? And if so, is it fair to assume it will be lower than the first half number? Second question is on management fee rate. You reported 142 basis points for the first half. Is this a reasonable assumption for the run rate fee margin -- management fee margin going forward? And lastly, in terms of the outlook for carry in the second half, how should we think about that? Is there a skew -- particularly higher skew towards the first half? Or should we expect similarly high levels if market continues to be where they are today?

I'll start and maybe, Chris. Yes, yes. On the -- right, it was carried. It was retroactive fees...

And fee margin.

And margin. On the margin, to start with, we don't want to guide on -- with 2 decimals on the margin. But what we have said is the 1.4% is a good approximation of our overall fee margin, and we continue to stand by that guidance. In terms of retroactive fees in the second half of the year, we are materially concluded our fundraising on Infra V. So there will not be any meaningful retroactive fees in the second half of the year. So therefore, the impact that you've seen really has hit the H1 numbers. And lastly, on carry and the skew, there's no reason to think that it would be sort of skewed one way or the other from a seasonal perspective. But -- so no, there's no reason to see that it's skewed in any direction really.

The next question comes from Magnus Andersson from ABG.

Yes. Just first on assets under management, I take it from what you were saying, Caspar, and the discussion we had in relation to the Q1 announcement that the minimum fundraising cycle is 2 years. You talked around 3 before and you now gave us kind of interval between 2 and 5. So is it -- should we take it that it's highly unlikely that it ever will be shorter than 2 years? That's number one on assets under management. The second one, you talked about the EUR 10 million (sic) [ EUR 10 billion ] in the longer-hold strategy. Can you give us any feeling about when you would be around the EUR 10 billion? Thirdly, just on carry split in the first half, I saw that you had EUR 34 million investment income out of the EUR 172 million, which leaves EUR 138 million. Could you give us some feeling for the split there? I think you mentioned that the lion's share was EQT VII, but some more color if there is Infrastructure -- contribution from Infrastructure III, for example, in this half and what it is from Infra II and EQT VI?

Caspar, you want to take the first one?

Yes, sure. So AUM, I think it's very difficult to be categorically saying we will never do shorter than 2 or never do longer than 5. But I think if you take sort of statistically, I think it's unlikely that it will be shorter than 2 or longer than 5. And the reason for that is not only investment pace, it's also a little bit -- I think I talked about that during Q1, it's also a little bit about the expectations of the clients and how quickly you can come back and how good visibility they have on the portfolio of the predecessor fund. So I think 2 years is already a very short period, if you ask me, and it's not the new normal. I think we were very clear on that. I think we continue to see 3 years as the normal pace and 2 years as an exception to the rule rather than anything else. When it comes to the sort of round number of EUR 10 billion that I talked about in the longer-hold strategies, I think it's -- in order to achieve that, you first have to raise the commitments and then you also have to make the investments. So this is nothing that will happen tomorrow. This is over a number of years. I would say I don't want to give sort of a forecast and I think we said longer term, but it's not the ...

2 to 5?

Yes. Maybe between 2 and 5 again, right?

We're there again, easy to remember. Yes.

Yes. And remember these longer-hold strategies, just to be crystal clear, the fees will then be on invested capital. So even if the fund size is of a certain size, we're not going to get paid for that until we actually deploy the capital. And of course, that capital will be held over a longer period of time. And as these 2 strategies develop, one in private capital and one in infrastructure, we're of course going to inform about it, but we just wanted to give you a feel for the size range.

Yes. That's appreciated. And finally, on the carry then?

On the carry question, I can take that. We have not recorded carry for Infra III from an accounting point of view in the period. And say, some 90% of the total carry relates to EQT VII.

The next question comes from Roberta De-Luca from Goldman Sachs.

Congratulations on the results. I just have 2 questions. One, if you can maybe elaborate a bit more on the drivers of the step-up in MOIC that you've seen in EQT VIII, even just understanding the concentration of that? And then maybe a clarification on the carry. Can you help us maybe link -- so on the exits that you report on Page 12, if I understand correctly, you have EUR 9.9 billion in the first half of 2021, which is a significant number compared to the second half of 2020. However, the carry is not that much higher in the second half. Do you perhaps, in this number, the EUR 9.9 billion, do you include announced but not closed deals and therefore deals that would generate carry in the second half of the year?

Kim, you can take the last one. On the first one, maybe I'll start. We're not going to go into details of the composition of the funds and the drivers of valuation per company or per sector. But we have more than 15 companies in the EQT VIII portfolio. They're invested highly thematically across our core sectors of health care, TMT and services and some industrial tech. The drivers of valuation increases are several. There's those that we're building the companies to the best of our ability through our full potential plans, investing in organic growth and investing in acquisition growth, investing in innovation and growth and then, ultimately, again, transforming and growing the companies. So that's one of the elements. Another element is in certain sectors, as we reposition and transform companies, they become more valuable. We can apply a higher multiple to them. There have been in a few exits as you've seen as well to strategic buyers in Igenomix and Aldevron. And I think those are kind of the various components. So this is just a result of our investment strategy, which is highly thematic and the way we develop companies, which is -- which has a lot of energy and drive behind it. And that's what you see across actually more -- all of our funds at EQT.

And on the second question, you're right in that when we announce our transactions as they are signed and there could, therefore, be transactions in the -- in there that are closed at a later stage and thus carry is recognized at a later stage. But it's not a linear relationship. So I'm not sure you can really infer anything out of the numbers you were mentioning. It's more complex than that because you also have the valuation effects, et cetera, in there. And obviously, we're always talking about whole fund carry here from an accounting perspective. And thus, it's the whole single exits do not per se generate carry.

The next question comes from Jens Ehrenberg from Citi.

Just a couple left from my side. Firstly, on EQT VII, which is now clearly performing very well above plan. Is there any sort of expectation on your side how much higher performance can get there? Then secondly, partly coming back to Roberta's question on the EUR 9.9 billion, but from a slightly different angle. So as you said, yes, EUR 9.9 billion of exits during that period, presumably some of these will not have closed yet. Just sort of trying to bridge the gap, if I look at the AUM development, where you had some exits of EUR 1.4 billion or EUR 1.5 billion during the quarter, now I understand that's probably big differences between sort of the invested capital and then the actual realization, but any sort of help to bridge that gap would be appreciated. And then the last one, apologies in case I've missed it, but when we think about the long-hold strategy and sort of the fee expectations at some point in the future, appreciate it's being charged on invested capital. Any sort of view on the fee margins that you would expect there? Are they expected to be different from your usual closed-end funds? Or how can we think about that?

Thank you. I'll start on the first one then Kim and Caspar can take the second two. On EQT VII, we don't give specific guidance on what we expect [indiscernible] [ moderation ] specifically. But we do believe that we'll continue to create value with all of our funds as long as we have companies in them that at least are material to the fund. And that's still the case for EQT VII. So I think that's just maybe a generic answer. We obviously, in our philosophy, never give up, but reflecting also on where we are in the markets, and to the earlier question, certainly valuations are high now and maybe even particularly so for the types of companies that we are investing in, which are companies that are -- that have long-term secular growth trends behind them that are purpose driven or have at least ESG as a core value-creation lever. And therefore, some of the valuation uptick is, of course, coming from the very strong market that we're in. And that is of course, something we cannot fulfill, and therefore, we're also subject to market conditions just to make that point as well. Kim, do you want to take the second one?

Yes. On the second question, I mean, the exit amount that we mentioned is, of course, the market amount and not invested. So it should be like 2, 2.5x difference there in that. So there's not a direct link. And secondly, on the mechanics, the -- it is right that the fees are paid on the AUM based on closed deals only, so not signed ones. So there is a lag to the -- how the AUM then goes down over time. I don't think this forum lends itself well to the exact mechanics of that, so we can go through that separately. But that's -- those are the sort of components of it.

Fee margins on longer-hold, should I take that? Yes.

Yes.

So I think our fee margin for EQT, the 140 points, is obviously a blended margin and you will have some products generating slightly above that and some slightly below that. I think if you look at Ventures and Growth, they're both going to be above that 140. And if you look at the longer-hold strategy, sort of the more core-plus type of strategy, they're probably going to be slightly below that margin. But as we've said, we still think that the 140 that we've said still remains a good proxy for the totality.

The next question come from Maths Liljedahl from SEB.

Yes. But I think all my questions actually have been answered, so I'll pass this time.

[Operator Instructions] We have a question from the line of Jakob Brink from Nordea.

Just one detailed question. You mentioned in relating to Exeter, I was just reading the transcript here. You said something about the asset sales are often directed to recap vehicles where EQT Exeter continues to retain management fees. I'm not sure I understood that part. Could you try and elaborate, please?

Yes, I can do that. I think there is a slide in an appendix somewhere maybe on this as well. But in any case, so typically, the Exeter business model, if I spend just 30 seconds on that is buying smaller assets in the local communities where they're at, maybe under managed, and redevelop those and basically turn them into logistics portfolios. I mean if you take the industrial and logistics. So -- and then, they're sold not as single assets, but as a portfolio. Typically, those portfolio are sold to pension or sovereign wealth funds, typically clients of Exeter. So in essence, what happens is they buy those portfolios, but they don't have the capacity to manage them themselves, so they actually leave the management back to Exeter to do it. So it's not the same management fee, it's a different management fee. And it's typically also calculated somewhat differently in those transactions, but that is normally how it looks like. So you sell the portfolio to someone who then puts a new debt package on top of that portfolio and continues to own it, and we continue to manage it for them. Hope that was clear.

So basically -- so when you sell the asset to the pension fund or whatever, then they leave the exits or AUM, but you keep getting a fee margin. Is that correctly understood?

No, because they enter a new AUM. So they leave for one fund and then they typically enter as a managed account AUM.

Okay. But they are still included in the roughly EUR 10 billion?

Yes.

Yes. Okay. Fair enough. And then, sorry, just one follow-up. I know we have talked about this a number of times now, but the launch of the new funds, I remember with the EQT IX, you had the fundraising announcement in January 2020, i.e., 6 months ahead of the actual launch. So with the pace that we are currently seeing, and you elaborated a few times that the second half of this year could be as good as the first half, we don't know obviously. But if it is, it seems like 2 years could be maybe a bit long, and hence, in order to be ready with the new money, shouldn't you then be prudent and already come out in connection with maybe Q3 to fund the fund launch announcement? Or is that the wrong way to think of it?

Maybe I can start, and Caspar, you can add to it. The way we -- when we announced fundraising and launches, that's actually formally when we launched, so we did launch actually in January last year for EQT IX. And -- but I think what we did explain is that before we do fundraisings and actually even on -- now in the modern world, as part of our customer relationship management, we're, of course, always speaking with our clients about our deployment, about our portfolio construction, about value creation, about the market conditions where it's now quite frothy, as everybody knows, and of course, in planning for the next fundraise. So that part is very dynamic. But from an announcement point of view and we have a material fund or a key fund that we call it that goes into fundraising, we actually launch that when we formally launch.

Thank you. And as there's been no further questions, I will turn the conference to speakers for any closing remarks.

Yes. Thank you for the very good questions and for participating this morning. I do want to reflect a little bit on where we are in terms of the market just to make that even clearer. This is a particularly strong time for private equity. The combination of a very strong deal flow of exit possibilities through all channels, IPO, strategic sales, family offices, long-term funds, whatever it may be, private equity and stock markets that are quite highly valued. And my point of saying this is that I don't think we should expect that these kinds of market conditions will continue, and therefore, you also see us doing a number of deals, a number of exits and investing our funds at the more rapid end of the spectrum that Caspar mentioned earlier in the 2 to 5 years. We do not expect these kinds of conditions to continue. If you look at our history, over the last 27 years or so, our average investment pace in the 3; and in excellent markets like now, 2 years; in harder markets, 5 years. And value creation typically takes longer than we are seeing right now. And buying companies at valuations, which are today, of course, that value-creation plan for each of those companies is very intense and needs a lot of resources, and that's why we're investing in those resources. But again, I just want to make sure that everyone following EQT understands where we are in the cycle and I think you see that with a number of our competitors as well. And that we understand that today and these times now are particularly strong. I don't know if Kim and Caspar want to add anything to those reflections.

That's fair. Maybe I can say on the cost side as well that we are growing faster on the activities than our original plan. And that also means that we need to add to the people and to the firm generally in order to keep up with that growth. So we're trying to ensure that you get that point also.

Yes. Thank you, Kim. So with those words, then we thank you again for your participation and wish you a continued nice summer.

Thanks, everyone. Bye.

Thank you.

Thank you.