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

Good morning, everyone, and welcome to EQT's H1 announcement. Together with Christian, Caspar and Kim, we will present the results for about half an hour before opening up for Q&A. As always, in order to ask questions, you need to be dialed in to the conference line. With that, I hand over to Christian. Next slide, please.

Thanks, Olof. Good morning, and welcome all. In the first half, we continue to take steps towards building a global leader in active ownership strategies. We announced the combination with BPEA, completed the smaller acquisitions of LSP, Bear Logi and Redwood. Investment and exit activity slowed down due to the market conditions, but we've also continued to make selective new deals and exits. In the busy fundraising market, we're making good progress, having already closed about 2/3 of the new EQT X fund. Overall, fundraising timelines are being stretched in this market. With regards to talent, we're happy to have secured strong talent during the past years. We always hire in anticipation of growth. We have great teams in place to invest our funds, manage our platform and serve our clients. Given the more challenging economic environment, we're now being more restrictive in hiring of course. Our commitment to leading the way in terms of future proofing and performance remains. Our key funds continue to perform well, but we are preparing, of course, for more challenging times. In sustainability, we've taken a further step by establishing a sustainability committee on the board. And similarly, we're continuously strengthening our digital approach, where Alexandra Lutz is now leading our Motherbrain team that now consists of 28 data scientists. In terms of financials, we're about to take the next step in our development as we add EQT X launch in for VI during the fall and we closed the combination with BPEA. Next slide. We ended last year with preparing for higher inflation and rising rates. We now also see spiking energy prices and the global economy is facing a number of uncertainties. Our senior team members have all lived through these kinds of economic cycles before. We've dealt with the dot-com bubble, the global finance crisis, and most recently, the COVID pandemic. We've learned from every market downturn and come out stronger every time. Importantly, we've always supported our portfolio companies and protected capital for our clients. In fact, since inception, the key funds have all realized at least 2x gross MOIC regardless of cycles. Being a long-term owner with 10-plus year funds means every fund will need to navigate different macro environments. It's certainly part of our model. And we have generated care in every single fund, every single key fund in our history. The fundraiser support we see today despite the market turmoil is the result of having -- EQT having delivered strong returns for our clients for almost 3 decades. Next slide, please. As mentioned, the environment we are operating has changed significantly and rapidly. When markets were strong, we strived to never become complacent. And to be prepared for any macro scenario is as a part of our model. It's at the core, actually, what we call future-proofing. So we're entering this period of uncertainty stronger. Now let me tell you why. First of all, we have a global platform solely focused on active ownership and diversified across geographies and asset classes. 32% of our AUM is in infrastructure with 48% in private capital and 20% in real estate. Being active owners means that we can take action very quickly. For example, we started preparing our companies for a downturn already in early Q1 this year. We've had a very active exit agenda for years with an announced realizations of around EUR [ 30 ] billion in 2021 alone. We can, therefore, be very selective when it comes to exits in this market. Also, we have a young portfolio, which has been invested thematically. In fact, the oldest fund and equity is through 2015, and Infra only has one company left in its 2012 fund. This means that we have the resources to continue to develop our companies. They're invested in long-term secular growth trends and have a robust financing structures. It also means that we don't have a tail of older often underperforming companies, which equally also are much more difficult to exit in particular during more challenging times. So overall, given our track record of returns, we believe we're well positioned in this market. Post-closing of the BPEA transaction, we expect to have more than EUR 50 billion of capital to deploy, we call dry powder, including Infra VI. Most likely the next few years will provide unique investment opportunities for our various funds, and I know that we have the right teams in place to find and develop those opportunities. Next slide, please. Across strategies, we've doubled down on our thematic approach in recent years. This is about finding industries and companies that are less correlated with the economic cycle. That's actually one of the key learnings we've had from previous cycles when we held, for example, building products and investments or other cyclical companies as we entered the downturn. That's not the case now. We now clearly invest based on long-term secular trends. Deals over the past years have been within our connected world, software, e-commerce, logistics and digital infrastructure, health and well-being, radiology clinics, dental technology, for example, and climate and energy transition like renewables and EV charging networks. And these are market leading companies that are able to pass on pricing increases and thus many of our investments actually provide a natural hedge to inflation. As a result, we expect our companies to have a relatively lower correlation with the economic cycle. And of course, as active owners, we will continue to build them through R&D add-on acquisitions and other future proofing actions. In private equity, 90% plus is invested in health care, technology and tech-enabled services. It's a well-diversified portfolio, mainly invested across the Nordics, U.S. and Europe. The investments in EQT IX have been underwritten on average at a 4x exit multiple discount to the entry level. So we were somehow expecting that the high valuations we've seen over the last years would come down. And we've stayed disciplined on leverage despite the very strong credit market seen in recent years. In fact, the average level of leverage in EQT IX is lower than it was in EQT VIII. In Infrastructure, we invest in companies and assets providing essential services to society. The companies are often asset-based or with long-term contracts with high cash flow visibility and inflation protection. EdgeConneX, for example, has contracted inflation protection and were proactive in placing orders ahead of anticipated price increases. Another example is evidia, whose contracts include inflation indexation clauses. The portfolio also includes several assets that EQT intends to transform into regional or global platforms, like SAUR, our water services business. And that we find a number of opportunities coming now in energy transition, digital infrastructure and beyond. In real estate, we're mainly investing in logistics, where strong demand and low supply underpins rental growth. Our model also here is hands-on and value-added and local with locals with specialist investment teams focused by geography and property sector. And this also includes driving more energy-friendly solutions into all the buildings, which is increasingly important, both for lowering costs with the energy crisis that we have, while also becoming more sustainable. Next slide, please. Over the past year, the portfolio of companies in our key funds within private equity grew sales by 25% and EBITDA by 18% compared to the previous 12-month period. In Infrastructure, the corresponding sales growth was 22% while EBITDA grew by 17%. And if you look at the first 5 months of 2022 through May, the portfolio of companies across private equity and infrastructure together grew sales at 20-plus percent compared to the first 5 months of 2021, whereas EBITDA grew mid-teens. So still strong operating performance. A majority of this growth is organic, further paced by add-on acquisitions and in line with our value creation strategy. Also importantly, the types of companies we invest in have long profitability track records. So 98% of the capital and 96% of the capital in private equity and infrastructure, respectively, you see on the slide there, is invested in companies which were EBITDA positive over the past 12 months. As we showed on the previous page, about 95% of our AUM is in private equity, infrastructure or real estate. And we've had some questions on this. Less than 5% of our AUM is currently in the ventures and growth business lines, where by definition, many of the companies are not yet profitable. Looking at invested capital across EQT, that number is even smaller and closer to around 3% of AUM. Having said that, this is an interesting environment for earlier stage strategies to deploy capital. Some of the best investments ever in venture capital in Europe, for example, were made during the global financial crisis. Interestingly, we're yet to invest almost 75% of the EQT growth fund and we're still fundraising Ventures III. Similar to EQT, BPEA is generally seeing strong operating performance in its portfolio of companies as well in Asia. With an attractive portfolio, BPEA has had realizations this year-to-date of $2 billion. And as a result of those elements, BPEA's first half valuations also are robust despite lower public market references. And the fundraising of BPEA Fund VIII is going well. Across all of our strategies, we're taking advantage of active ownership to create value. And with that, I'll hand over to Caspar, who will talk about our fund valuations.

Thank you, Christian. Next slide, please. So fund valuations in H1 have remained largely stable, both at EQT and at BPEA, despite the market turmoil. There are various drivers, both positive and negative behind the valuations, which I will cover in a bit more detail. Starting with factors impacting valuations negatively. First, most of the valuations in private capital are multiple based with comparable multiples, and our equity funds are down between 15% to 20% in Q2 compared to the year-end multiples. Second, our listed companies are valued at the closing price at the end of the quarter. This impacts the valuations in private equity, whereas we have no listed holdings in infrastructure. In Infra, valuations are, to a large extent, based on discounted cash flows. A couple of factors are offsetting the negative valuation effects. First, as Christian mentioned, operational performance across portfolio companies in private equity and infrastructure remain strong. We're continuously reviewing the outlook and budgets for the portfolio companies, which is accounted for in the valuations. A few portfolio companies are experiencing headwinds in this environment, but there are also some that benefit of, for example, higher energy prices. Second, we've secured exit at strong valuations levels. In EQT VIII, IFS and Workwave were, for example, marked at 2.1x cost in our year-end portfolio valuations, and we realized the assets at 3.0x in Q1. Similarly, Facile was marked at 2.5x the money at Q1 valuations, and we realized the exit at 3.2x now during the second quarter. And despite these strong exits, EQT VIII is now valued at 2.4x, down from 2.6x before. So this does not mean that we will always exceed fund valuations, but it does show that we tend not to have too optimistic valuation assumptions. And more generally, I would characterize our valuations as being more resilient, both when the markets trade up sharply and when they trade down sharply. As such, we did not markup valuation significantly in Q4 last year when public market valid. This is now the third consecutive quarter of largely flat valuations. And if you look at Infra and health care sector, if you look at those sectors where we have significant exposure, the public market indices have actually been relatively flat or looking back to Q3 last year. Lastly, and I've said this before, we value entire companies and the value of a company is different to the price of a marginally traded share in the public market. Next slide, please. As Christian mentioned, we're always thinking proactively about risks. Clearly, not all risks can be anticipated, but it's important to have the right toolbox, competencies and forums in place to identify and manage risks proactively. We've developed these tools based on our learnings over many cycles. To give a couple of examples, the EQT Global Investment Forum meets regularly to share insights from across our global platform, and this will be further strengthened as we add the insights and experience which the BPEA team brings to the platform. Our cybersecurity team has been working proactively across portfolio companies this year and many years before for that matter. And our Capital Markets team continuously ensures that portfolio companies have strong financing structures in place. We've also selectively added competencies to management teams and boards to make sure portfolio companies have the right teams in place to manage a more challenging environment. Let me share some perspectives on how we manage risks. We never had any meaningful exposure to Russia. We had no companies headquartered there and has not been a target market for fundraisings. The few portfolio companies, which have had any exposure, such as sales or service contracts related to Russia, were immediately recommended to wind down such operations and affected employees have been relocated. None of the companies or assets in the main equity Infra or real estate funds have any remaining material exposure. When it comes to inflation, the portfolio companies across private equity and infrastructure have a high ability to pass on higher costs. The portfolio companies have low exposure to raw materials, transportation companies are, for example, affected by higher fuel prices. But on the other hand, we also hold power producers, which are beneficiaries. Similarly, we see higher staff costs in some of our social infrastructure companies, which often have inflation-linked contracts. Exeter expects to be able to raise rents over time, while construction costs may go up. This also supports valuation and rent level over time. Higher financing costs may also reduce supply and competition for new investments. We see continued strong demand for thematic assets such as logistics assets. When it comes to financing structures, most companies have no covenants or covenant-light structures. Financing are either fixed rate or hedged with interest rate swaps or caps. Debt financings typically cover the expected ownership period. The average debt maturity across the private equity portfolio today is over 4 years. In Infra, it's over 5 years. Next slide, please. We have raised over EUR 14 billion in H1 2022. And EQT X is already 2/3 towards the fund size. We expect active fundraising for EQT X to be materially concluded within 2022 with the final close expected in 2023. Similarly, whilst the combination with BPEA is yet to close, we note that fund raising for BPEA's VIII flagship fund is proceeding well. And as we mentioned in the BPEA announcement, we expect them to reach about EUR 20 billion in AUM by 2022, which they have already reached. We anticipate healthy interest in infrastructure and real estate fundraisings. We expect to launch fundraising for EQT Infra VI in the third quarter, with most of the fundraising to take place in 2023. When we activate the fund for management fee purposes will depend on the investment pace in Infra V, which is currently 70% to 75% invested. It's a busy fundraising market, which is evident primarily in the U.S., where some of our clients are already at their target allocation towards private equity, which is accentuated by the drop in public equity valuations, the denominator effect. As a result, new fund initiatives will take longer to raise in this market, and we expect existing clients to represent a large share of our ongoing fund raises. Whilst we have a clear ambition to continue to grow our client base in the U.S., it's a strength in this environment to have a diversified global client base. Many of our APAC-based investors are, for example, continuing to increase allocations to private markets. Looking ahead, we see a strong long-term growth in private markets paced by rising allocations from both institutional investors, but also private wealth and over time, the mass affluent markets where access to private equity will increase. This is an area we're looking at, at various structures to access new segments. I will now hand over to Olof.

Thank you very much, Caspar. And as you just heard, we had a number of ongoing fundraisings, which together with our existing funds and the combination with BPEA means we expect to have over EUR 50 billion of capital to deploy. On the sourcing side, we continue to combine our sector-based thematic strategy with our locals with locals approach. We have a long-term approach to new investments, often following companies for a long time before we invest. In EQT IX, for example, 12 out of 15 companies were acquired outside of broad auctions. The investment teams are evaluating a number of opportunities, including corporate carve-outs, add-on acquisitions to existing companies and even certain public companies, which we have followed for years. In private equity, a majority of the pipeline is in our core sectors, such as health care and tech. And in infrastructure, we see interesting opportunities across our focus sectors. The energy transition in Europe further accelerates the shift from fossil-based energy production. The digitalization trend will continue to drive significant investments into digital infrastructure. And we see a significant investment gap in infrastructure across Europe and the U.S., while public sector spend is constrained. Next slide, please. Investment and exit activity has slowed down meaningfully given the market backdrop. We announced investments of EUR 5 billion in the first half of the year, down from EUR 8 billion in the first half of last year, and exits of EUR 4 billion compared to EUR 10 billion in the same period last year. As Caspar mentioned, we have had a couple of exits such as facile and IFS at strong multiples. And we expect private market valuations for resilient, profitable market-leading companies in our core sectors to continue to be robust. BPEA, as Christian mentioned, have closed 2 new investments in their fund during the last quarter, and their fund is now around 15% invested. BPEA have seen realizations of about $2 billion across Fund VII and VI during the first half despite the more challenging market conditions. Turning to the financing market. It's clearly important for deal activity. And in this regard, the banks are much more -- much less active given the market environment. The liquidity pool, however, is open for well-structured credits in defensive sectors, which is typically the types of sectors we invest in. We have as such, successfully placed recent financings with private credit funds. When it comes to new deals, we run different financing tracks in parallel to make sure we find the best structure and terms. In Infra, the fundraising sources are more diversified as we also benefit from infrastructure style financings. All of the financings are coordinated by our Capital Markets team, headed by James Yu in London and EQT Exeter has its own dedicated real estate financing team. As we look ahead, we have a number of exits and investment opportunities in the pipeline, including a few active situations. However, we will be patient to achieve the right terms. And with that, I will now hand over to Kim.

Thank you, Olof, and good morning, everyone. Before I jump into our financial development during the period, I just want to take a step back and walk through the key pillars of our financials. The bulk of our revenues are contractually recurring management fees. The investor commitments are long term, i.e., 10-plus years, and our fee margin has been stable at around 1.4%. From EQT X and the combination with BPEA and eventually, the activation of EQT Infrastructure VI, we expect a meaningful increase in management fees. We have historically done a good job of creating value for our investors, allowing us to maintain a profit sharing in the form of carried interest. The profit split is generally 80-20, and of total carry generated, EQT AB gets 35% of the 20%. We just have a sizable future carried interest if all of our funds continue to develop on or above plan. If all our key funds, including EQT X, performs on plan, we will make approximately EUR 6.7 billion in carried interest. As of H1 '22, we had only recognized approximately EUR 0.8 billion, there's considerable upside potential. And this excludes BPEA, where we're acquiring the right to carry in recent and all future funds. Looking at our expenses, they are largely driven by our FTE base. Personnel costs constitutes approximately 2/3 of the cost base. And our business model is scalable, but remember that we tend to hire ahead to secure future growth. Given the market conditions, we will continue to hire, albeit much more selectively. And as a reminder, our target is to have between 55% to 65% EBITDA margin over time. We use our balance sheet mainly for 3 purposes. One, we invest in EQT funds to get contractual right to carried interest; and two, we support new strategies with temporary capital; and three, we use our balance sheet for strategic M&A. We have a very modest leverage, and we have substantial cash, including the proceeds from the sustainability-linked bonds issued earlier in the year. The cash component of the BPEA combination is, therefore, fully funded. Next slide, please. Following that introduction, I want to jump into our AUM development. AUM increased slightly in H1, driven principally by gross inflows due to the closing of LSP and new fund commitments in EQT growth and Ventures III, along with Exeter Office Value Fund II. As you heard Christian mention, we've closed out about 2/3 of EQT X already as of today. However, investor commitments will only be included in our AUM from the first fee date. This is currently driven by the closing of the first deal in EQT X, which is expected during Q3. Another increase in our AUM will come with the closing of BPEA expected in Q4 '22. BPEA's fee-generating AUM as of Q2 '22 was approximately EUR 20 billion, as already mentioned. We may activate EQT Infra VI in '22, but this depends on the investment pace of Infrastructure V. And as Caspar mentioned, most of the fundraising will take place in 2023. Next slide, please. Moving over to our financials. As you can see on the left-hand side, we have experienced significant growth during these last years, and 2021 was an exceptionally strong year with a significant increase in management fees from EQT IX, Infra V and the closing of the acquisition of Exeter. We are expecting a similar step change with the upcoming activation of EQT X, the launch of Infra VI and the closing of the BPEA acquisition. Looking at the H1 '22, our revenues increased to EUR 733 million and carried interest during the first half primarily relates to EQT Infrastructure III and thus to transactions which were signed prior to the period. Keep also in mind that we had a meaningful impact of retroactive fees in H1 '21 related to 2020 then. As a consequence of continued growth of our organization and in anticipation of the previously mentioned initiatives, H1 EBITDA decreased year-over-year to EUR 413 million. Our LTM, EBITDA margin was approximately 62%. And looking at H1 in isolation, it was 56%. Next slide, please. As I mentioned before, we see that we have considerable carried interest potential if our key funds perform according to plan. This slide simply illustrates how much carried interest EQT AB is entitled to if all of our key funds develop according to plan. And mind you, EQT VII, VIII and Infra III are developing above plan and are continuing to experience resilient performance. As a theoretical example, if we were to realize the portfolio at today's valuations, we would be entitled to approximately EUR 1.2 billion in carried interest. Given that we have recognized approximately EUR 0.8 billion carry to date as of H1 '22, it implies that close to EUR 6 billion of carried interest is remaining to be recognized on our P&L in the coming years based on the current funds. Next slide, please. We've grown our total operating expenses by approximately EUR 100 million and added a total of 467 FTE plus year-over-year. Focusing on H1 this year, we added roughly 300 FTE plus, of which about 100 joined from Redwood, Bear Logi and LSP. As such, we've had more than 200 new joiners so far. And in addition to the employees needed to support the growth of our flagship strategies, we have hired talent for our new strategies. We have strengthened our central platform, including our digital and sustainability teams, and we have further strengthened our capital raising and fund operations teams. So we are cautious of adding a lot of cost, but a large part of hires are connected in various ways to strategic initiatives such as building up new distribution channels. Post-closing of the BPEA transaction, we're about to grow the year meaningfully. And as Christian mentioned, we expect to have north of EUR 50 billion of dry powder to deploy. With our existing teams and recent hiring efforts, we now have great teams in place to manage the next leg of growth. The majority of our hiring for 2022 is done, and the hiring pace is set to slow down in the second half of the year for 2 reasons. First, we have actively hired ahead for the growth I just mentioned. And secondly, we will be more selective in hiring decisions given the market environment. Something else to note is that we don't necessarily see costs per FTE increasing for the group as a number of the recent and planned hires are in our central operations or in EQT Exeter, which has a lower cost per FTE. Together with Christina, who has now joined us as COO, we will continue to optimize our operations, including our cost structure. And we also look very much forward to welcoming about 250 people who will join us from BPEA once the combination closes. Next slide, please. I outlined how our balance sheet works a little bit earlier, but I wanted to come back to this topic quickly. Looking at our assets, they include primarily financial investments into EQT funds and our sizable cash position. And our liabilities, on the other hand, consists of the sustainability-linked bonds totaling EUR 2 billion with different long tenors. We're well funded, and we have the BPEA cash consideration already financed. Our flexibility stays high. And on top of that, we have a revolving credit facility of EUR 1.5 billion, which is undrawn. We have a solid credit rating with an A- rating from Fitch, and our leverage level is very low relative to our size. With that, I hand back to Christian for some closing remarks.

Thank you, Kim, for that excellent walk-through. So to summarize, we've seen a rapid change in the market environment this year, and activity levels have slowed down as a result. However, I do believe that we're entering this period of uncertainty stronger. We're well prepared for whatever may come. Our portfolio consists of thematic investments. Over 90% of the companies in private equity and infrastructure were EBITDA positive over the past 12 months. The underlying performance of the company has been fairly healthy over the past 12 months. But of course, we are closely monitoring activity levels in demand and addressing risks and issues proactively. Fund valuations have been largely flat for 3 consecutive quarters despite the strong operational performance and also recent exits, which did exceed fund valuations as Caspar described. Flagship fundraisings are progressing well at EQT and BPEA despite being a busy market. Fundraising actually in general will take longer to conclude in this market. Furthermore, we expect to have more than EUR 50 billion to be deployed. You've heard that. These are really interesting times to invest. So to have that dry capital -- dry powder is quite important, and that's what we are building and will build during the rest of the year and into next year with Infrastructure VI. In terms of our financials, EQT is about to take the next steps in building its platform with the activation of EQT X, the combination with the BPEA and the upcoming launch of EQT Infrastructure VI in Q3. So with that, I thank you for listening, and we now open up for questions.

This is the conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Arnaud Giblat with BNP Paribas.

I've got 3 questions, if I may. Firstly, I was wondering if you could talk about your -- the cost to give a bit more detail. You mentioned that hiring is going to slow down in H2. Could you perhaps quantify that? And could you talk a bit about your plans for 2023? And also, you said cost per head were due to the acquisitions were lower. So any quantification you could help -- you could give us there would be helpful. Secondly, I was wondering on investment opportunities and your investment pipeline. How is pricing looking? I mean, usually, I think it takes a few quarters for pricing in the private markets to adjust downwards. Is that something you're waiting on? Or are there enough opportunities out there for you to execute at the right price to achieve your target or to have -- to be able to go for your targeted returns? And thirdly, on M&A -- corporate M&A. At the previous update in Q1, you'd highlight that there were a number of situations that you were looking at. Are these the ones you've closed on? Or are they further in the pipeline?

Thank you very much. Kim, do you want to start with the hiring and the cost question?

Yes. Yes, I can take that one. So roughly, we've had about 300 of increase during the course of this year. So if you take away 100 that is acquired growth and assume there's no acquired growth during the rest of this year with the exception of BPEA, then of course, when that closes and then you have the 200 of organic growth. And our guidance is that this will be significantly lower during the second half of the year. It will not be 0, but it will be significantly lower than that. And when it comes to cost, the current average levels is not a bad proxy for the cost for the year. But obviously, that will also depend on how the environment develops during the course of this year because the variable part of the compensation is not determined in many cases until late in the year when we see how things have gone.

Good. Thanks, Kim. With regards to the investment pipeline, given that we're local with locals in every single country that we're investing in and we have a thematic investment approach, our pipeline is typically always are quite deep. As you know, we follow companies for many, many years, typically before we invest in them. Having said that, what's happening now is that we're, of course, very selective, and we're selective in terms of the sectors we're investing in and the themes we're investing behind, and those companies would go after like SPT Labtech, for example, that we acquired, a life sciences tools manufacturer and equity, those companies are typically in strong, healthy markets where we can really add value through all of our future-proofing actions and M&A to really build the business to whole another level. So with regards to pricing, I'd say that for -- as one of my colleagues commented on, for healthy companies in healthy industries, multiples are still pretty good. And you can see that in the public markets as well. Infrastructure comps are not down much and neither are the ones in health care, which is our largest sector globally. But we'd rather take a cautious approach at this point in time, making sure we really find the right opportunities and to go after those. There is a pricing difference for companies in, let's say, more exposed industries, which we're not typically investing in. And then there are -- there's been a lot of talk about public to privates. Not that many have happened yet. It does take time before owners of companies and buyers of companies will find that equilibrium. But I do expect that to start being more active in the next 6 to 12 months. On the M&A, at the corporate level, yes, you're right. We've -- with Bear Logi and Redwood, these smaller bolt-on acquisitions and the EQT Exeter in our real estate strategy, those are the ones that we were referencing. We do have, of course, some dialogues ongoing, but it's not a major priority at this point in time. Arnaud, anything else?

The next question is from Ermin Keric with Carnegie.

Perhaps just on the recruitment, a follow-up question there. Are you -- would you say you're mainly reducing the recruitment pace because you see it's a bit harder to raise capital for new strategies? Or is it more that you kind of already right sized for all your needs now going forward for a while?

Well, I think what we said during the presentation is that it's twofold, the reasons. One is that we have already invested ahead of the upcoming fundraises and the upcoming size differential that we have. And secondly, this is a market where one wants to be cautious. So we are taking a cautious approach and being very selective in the hirings we do from here onwards.

And if I can add to that, what's happening in the market now is that timelines get more expanded. We're more careful in doing investments. The exits are going to be fewer and slower. Fundraising takes a little bit longer. So of course, with that also, it's natural to slow down our hiring pace.

Got it. And then just on the carry, I think you mentioned that the majority of the carry in H1 comes from Infra III and exits that were announced last year. Could you just help us on when do you typically dissolve that accounting discount you have for unrealized holding? Is it when you announce exit? Is it when they're actually closed fully?

No. When you announce it, you bring it up to the price level that you have signed with the selling party. But actually, you only -- the remaining discount you only typically do when you are certain that the deal will happen, i.e., at closing.

So exit from EQT VIII would then basically have an impact in the next half year period follows?

Yes, yes. But remember that IFRS carry is a function of both the -- under the valuation of the funds, which are not up in the period. And removing the discount on the exited companies, and there's been some. So it will completely depend on whether there will be -- how the valuation performance will be during the rest of this year and whether there will be further exits during the rest of this year, if there will be carried in the future or in the next period.

Got it. Then just one last question on BPEA. So as you said on the announcement of the deal, you talked about having about EUR 20 billion being added in AUM by closing in Q4, and now they've already reached that mark. Is there further upside? Or is there a fund #8 essentially closed now? So this is the level that will come in, but it's kind of derisked. Or how should we think about that?

It's -- we're -- we need to be a little restrictive in commenting on fundraising. But I guess you could say that it's -- as you see in EQT X for higher-performing flagship funds with strong managers in this market, fundraising is going well. And BPEA is now very near their target for that fundraise.

The next question is from Hubert Lam with Bank of America.

I've got 3 questions. Firstly, a question on EQT IX. If I look at the fund valuation there, that hasn't changed at all, whereas for EQT VII, VIII, they both come down. Any reasons for that for EQT IX specifically? And if you could just maybe also talk a bit about how investments have progressed for EQT IX just given that it seems like you deployed a lot of capital last year in that fund? Second question is on investments in infrastructure. Infrastructure -- Infra V currently stuck at 70% to 75% invested, and I don't think it's changed in the start of the year. Can you talk about progress in terms of investments in the Infrastructure side and why it's taking a little bit longer to invest for that fund? And lastly, for carry in the second half. Should we expect carry to be higher than the first half? You've already announced exit in EQT VIII in June, and that will close in Q3. So I assume that will drive performance in the second half. Just wondering how do you see the pipeline and outlook into the second half for carry?

Thank you. Why don't we do this. Kim, will you take the carry question? I'll take the Infra question, and Caspar can take EQT IX. We lost you. Hello?

Yes, we can hear you, Chris.

Okay. I can't see you on video any longer. Hopefully, the broadcast is still working. Can someone from the tech department confirm?

The broadcast is still working.

Very good. Then I'll go into -- I mean, the -- we don't give specific guidance on carry, as you know. And I would -- so I wouldn't like to answer your question directly. But I would rather point to what I said before that carry is a function not only of the exits we've made, but also of the development of the valuations of the portfolio. And that portfolio -- and as you've seen, the valuations are largely flat. So there would have to be movements both on valuations and exits in order for that to be carried. So I'd be cautious and I'd be following the market in order to forecast our carry.

Thanks, Kim. On Infra V, Infra V is 70%, 75% invested. The portfolio companies in that fund are performing well and actually have a lot of organic growth opportunities. These are very often relatively asset-heavy companies in terms of modern assets like we're one of the largest owners of digital broadband fiber in the world. So there's a lot of organic opportunities in those portfolio companies that need capital over time, which we think is an excellent risk/reward. And there are also quite a bit of M&A. Like I mentioned, the water services company, SAUR. I think we've done 3 or 4 acquisitions there. I mean, it continue to build that business. So that means that most likely, we're not going to make that many more investments in Infra V. So that's the reason that we're -- that you don't see a lot of new investments. It's rather the fantastic opportunities we have around the portfolio. And then we're activating the -- we're in pre-marketing now for Infra VI. Caspar, do you want to take the EQT IX question?

Yes, sure. No, I mean, on EQT IX, there's no difference compared related to the other funds i.e. so you have a very strong underlying performance in the portfolio of companies in general, offset by multiple contraction. And in this case, the portfolio composition ended up being flat rather than down as compared to EQT VIII. But there's nothing in particular for the fund that is different from the other 2. It's on the individual company levels. And maybe to point out, I think as Chris mentioned earlier, it's also in EQT IX, we have a multiple contraction assumed when we made the investments of 4 turns, which is, I would say, quite a bit. So it's not that we have gone into those investment believing that the world will always look like it did a year ago. So it's already embedded in the expectations of those companies.

The next question is from Nicholas Herman with Citigroup.

Three from me, please. Just from a valuation perspective, just to follow up on this. It's not clear to me how much multiple contraction you put through your valuations this quarter or half year. So could you just help us understand that, please? Then secondly, a question, a follow-up on fundraising. You mentioned that it is fundraising timelines are being stretched. Just to confirm your comments relate to some newer strategies rather than all strategies or I have misunderstood that. And I guess as part of that, how long do you see this congestion more difficult environment for fundraising lasting? And then finally, just you -- I'm just trying to qualify a comment about the retail-driven growth. Just curious in terms of what structures you are looking at and leading towards at this stage, please?

Yes. I'll take the latter 2 and Caspar can take the valuation question. With regard to the fundraising timelines, the market now is changing as we speak. So I would actually expect most fundraising to take somewhat longer. As you've seen, we've already raised 2/3 of EQT X. So that is in accordance with plan. So it's rather the second part of the finalization of the -- over the last 1/3, which we believe will take some more time than it would in a very strong market. And for the newer strategies, it's generally taking more time. So I think I'll answer it in that way. And on the private wealth side, we have a number of activities across various distribution channels from private -- from private banks to a number of the digital channels, the independent wealth advisers in North America. And we're working on let's say, some structures, which will make it easier for private investors to invest with EQT. So we'll inform more about those kinds of initiatives probably later this year when we've made more progress. Caspar you want to take valuation?

Yes, sure. As I mentioned in my presentation, I think when it comes to prime capital, where we have -- where the main methodology is really using comps traded and traded comps as well as comparable transactions, I think there, we've seen 15% to 20% lower comparables multiples, as I mentioned, being partly offset then by other things in performance, et cetera. On the Infra, it's more flat. And this goes both for comps as well as for the methodology, where DCFs are more commonly used.

Right. But in terms of -- just I don't have the -- sorry, I'm struggling with the assistance process to get the data. But clearly, your valuations are not up, 15%, 20%. So because is it fair to say we can then just back out then kind of if we apply 15%, 20% and then look at the difference in your valuations, we can kind of therefore back into how much value you ascribe to performance. Would that be a fair thing to do?

I mean let me take EQT VIII as an example, just to talk a little bit about the complexity. Obviously, there, we have some listed companies and the listed companies are valued at the year -- the quarter end valuations, basically, as they are. So that's one component. And there, we have 1/4 of the companies are listed. So you have natural fluctuations there. And then you have 2 exits. Obviously, they are, as Kim pointed out, valued at the exit values that were signed. And then you have another set of companies that are based on comps. And those comps are -- the comps numbers are down 15% to 20%, but then that can be out-weighted also by strong performance, strong performances in growth, in sales and EBITDA as well as in debt paydown and cash flow generated by the companies. So it's -- you can't really -- it's a pretty complex picture. And I tried to explain it in EQT VIII. So despite 2 north exits and good exits in EQT VIII, we're still down with 0.2 on the values of EQT VIII.

Next question is from Oliver Carruthers with Goldman Sachs.

So a fairly broad question. But is there a distinction that can be made in the current deal financing conditions that you're seeing between the sectors that you focus on in private equity on one hand and in infrastructure. And if so I would appreciate any color here. And perhaps if we look at over the coming months to any incremental deployment of Infra V and then on the activation of Infra VI, how is this feeding into your thinking in terms of the opportunities that are out there? I think you mentioned a possible activation in Q3 for Infra VI, if I heard correctly.

Yes. I see Kim ready to answer question 2. On the financing side, if we take a step back, Infrastructure has a different risk reward than private equity. So it's -- there's typically even more stable companies, long-term contracted cash flows of an asset-backed inflation protected. So yes, there is a -- the financing market for those types of assets is somewhat more attractive than for the private equity assets. Although the types of the companies that we're buying, like the ones I mentioned, are absolutely financeable in this market either through the banking market or through private credit. I think that where we see the most of the weakness is in high yield, which we actually don't use very much at EQT, or in the very large transactions. So very large transactions now in on the many billions of financing is quite complicated. So I would expect that these -- the kind of the very large deals, both in North America and in Europe and in Asia, will slow down due to just sheer size. But in our sectors, actually across our investment strategies, also in real estate and the sizes of deals, which is our sweet spot, we're able to still execute and get attractive, I would say still attractive financing, actually, with the right partners. But more work takes longer time, and this is a size question that I mentioned. Do you want to take the other one, Kim?

Yes. Yes. On Infra, I think what we've said is -- Chris mentioned that we are in the premarketing phase right now. But we also said is that it is likely -- we're likely to launch the actual fundraising towards the end of Q3 here. And then when it gets activated, we haven't really commented upon a specific timing, it may be this year. But that is completely dependent on deal flow, not on the fundraising, but rather on when there is a deal that will be put into this fund. And that dependent on deal flow for EQT V, i.e., are there add-ons and are there deals that are of the size that still should go into EQT V? Or are there larger new deals, which should already go into Infra VI? So we cannot give you an exact answer because we don't know. But likely to be later this year.

And if your question is how do you deal with that transition period? This happens in every single fund, actually. There's a transition period between the previous fund and the new fund. And for a certain period of time, we can use a bridge financing if the capital hasn't been raised yet. So that's something that's continuously available and quite standard in the market even today.

Next question is a follow-up from Arnaud Giblat with BNP Paribas.

Yes, sorry. I just had a quick follow-up on some line you said that you assumed a full turn contraction in multiple winning on deals. I was just wondering if those -- if that contraction has been put through into your valuations going into December? Or -- and that's why you've kind of held multiples? I mean, there's been less of a follow-up in front line. I just want to follow up on that.

No. I mean, it was more of a reference. So technically, how it works. When you do a buyout model, it's basically you buy something today, you make a projection of the P&L and the balance sheet over x years, and that you assume a future exit, right? And the difference between the 2 is really how your investment is going to develop and the IRR. And then you can, obviously, in your assumptions on your exit, you can look at what is your entry multiple, i.e., what are you paying in terms of EBIT multiple or whatever you want to use? And what is your assumption on the exit? And my reference was more that, okay, we are actually assuming a 4-turn contraction. So if we're entry at 20x, we're exiting assumption is at 16x. So it doesn't really affect the current valuations at all. It was more of a reference point to we have not invested in thinking that the world will continue to look as it looked a year ago. So that was more of a reference point. It actually doesn't really affect the quarterly valuations as such. They are based on the current valuations, basically.

And philosophically, we apply some kind of conservatism, as you saw from the 2 exits, for example. That's typically the case that exit typically happen at higher valuations than we have the companies in our books is because we apply these kinds of principles that Caspar was mentioning.

And if I can just follow up on that. What sort of uplift range do you typically have over the last few years?

Well, that's a big question in a sense that we have multiple different strategies. I don't think I want to speculate on that number right now, but I'd rather answer in the same way that we tried to be quite grounded in our valuations and apply a longer-term perspective to valuations. So when we're underwriting and when we're valuing companies, we look at long-term multiples, not just current multiples. We apply discounts for various reasons. And then we also look at the whole. So it's not a formulaic type of approach.

Next question is from Angeliki Bairaktari with Autonomous Research.

Just a few follow-ups from me, please, if I may. Am I right to understand that the exits that you have announced on IFS and Workwave and Facile are not yet fully visible in the carry recognized in the first half? And so we should see a further element from those 2 exits when they close? And then in terms of the fee margin, you mentioned that it's stable. It has been stable at around 1.4%. But in my calculations for the first half, it's closer to 1.5%. So I was just wondering whether there's anything in the AUM mix that justifies a slightly higher fee margin? And then in terms of the Infrastructure VI, is it fair to assume that it will be higher in terms of size than the EUR 16 billion of Infrastructure V? And perhaps a last more general question. You mentioned that fundraising is lower now and you also mentioned that most of the commitments you expect to get are from your existing LPs. Do you want to give us some color with regards to what you hear from existing LPs in your current strategies, but also prospective LPs that you talked to with regards to future fundraising? We have heard some U.S. peers mentioning that U.S. pension funds, in particular, are very squeezed and do not have any liquidity to allocate to the asset class. Would you confirm that?

Thank you. Very good questions. The first 2 Kim will take. Infra VI and fundraising, Caspar can take 6, and I'll take the fundraising question. Starting with that, I don't think we said that we don't expect new clients to EQT, at least we didn't mean to imply that. It's rather that our existing clients are supporting as well, and we are adding a number of new clients, both organically, but also as we made acquisitions of -- in combinations with LSP and BPEA. We're actually increasing the size and the number of clients plus, we're reaching new clients to the private wealth channel. So it's actually based on multiple different avenues how we're building the fundraising for the long term. The slower element is really driven by 2 things. It's, one, there are quite a few funds out there raising capital. So the clients are quite busy. That's nothing new, but that's one element. And the second element, of course, is the uncertainty in the market. And the reason that our fundraisings are going well is that we have a razor performance focus. We have been delivering superb returns for almost 30 years now. And if you look at our -- us versus our peers in our key funds, we are outperforming. And we believe that performance over time will be a key determinant of attracting private capital. And the reason that people invest in our industry is, of course, to generate these longer-term higher returns. And that's why you hear us talking a lot about all of our capabilities around future-proofing, around value creation, add-on acquisitions, how we work with sustainability, on our companies to really make them stronger and better and more resilient for the long term and digitalization and even AI, which is, of course, still quite new in private capital, but we think is going to be important for the long term. So that's, really, how the whole -- that whole market situation looks. And yes, and just when times are more complicated, things will stretch out a little bit. But we're still confident that we're going to meet our goals. Maybe I'll take an Infra VI. Normally, we don't comment on the size of our key funds until we actually take a decision. And that decision is based on the pre-marketing that's done and meetings with clients and discussions with clients and the opportunity set for that fund, which is obviously quite strong for Infra VI. So we will -- once we're through that process, we will, in the normal way, announce the target size for that fund. I'll let Kim take it from there.

And starting with the carry question. Again, we don't have deal-by-deal carry. You need to look at it over the whole fund and including also the valuations of the fund. And in this particular case, you should not be assuming that it's a similar situation as we had in Infra III, i.e., that we had deals that were signed and waiting to be closed, and then we had carried from that. It is not a similar situation here. And also, you will have seen that on the private equity side, the valuations are also down more often than on the Infra side. And on the fee margin, there's some -- there's -- there may be elements where certain clients come in earlier in a fund or certain clients come in later, which distorts the fee margin in a specific time period. That is why we calculate the underlying fee margin for you and provide it in the material, and there is no change to the underlying fee margin. It's at 1.4 with a couple of decimals exactly there.

Any further follow-ups on those questions? No. Okay. Then let's go to the next one.

The next question is from Tom Mills with Jefferies.

I think you referenced earlier the role of private wealth channel in relation to fundraising for EQT X, and it sounds like you're going to tell us more about your ambitions later in the year. Just now, I've seen Wall Street Journal articles asking you guys have been one of the biggest hires of private wealth talent globally over the last year amongst the old players. So just wondered if you could give us a bit of a preview there, given it sounds like quite a big investment you've been making.

I'll start and then Caspar, you can add. Private wealth is something we've been working on for some time across various channels. And as those channels multiply and as we become more global, we need more talent. I don't think it's been as significant as you might imply from that article. But we are building capabilities digitally and with people to make sure that we can structure this approach in the right way. And as you know, that over time, we expect trillions of dollars actually to come from private wealth into the private capital industry. So this is -- it's a very important space to build a strong position in. And also, as you saw a month or so ago, we hired a new Global Head of Marketing and Communications in [indiscernible] to also help make sure we strengthen our brand and our brand positioning as we move into those channels in a big way. In terms of fundraising percent, we're probably more than doubling or maybe even tripling the size of private wealth already now in EQT X versus previous fund generations. And so progress is already being made. Caspar, anything to add?

No, not really. I think maybe just to give a little bit more color to the hiring. I think we've been doing quite well from a long time ago -- since a long time, but we haven't had dedicated resources and now we do. And it's really the way to work with that channel. You need to have dedicated resources working only in that channel, and that's what we're building up. But we're not talking about a huge amount, but it's still needed.

The next question is from Jakob Brink with Nordea.

Just coming back to the FTE development, please. I was just rereading the transcript from Q1. Kim, I think you sounded quite bullish on you taking sort of your part of hirings going forward? And also, you said something about the total FTE number would land materially above 1,400 at the end of the year. I guess you could argue that it's already materially above. But I was more thinking about sort of the implications for the rest of the business since it seems like you're somewhat more conservative on the hiring path going forward? Or am I reading too much into it?

I think you should read in that we will be more conservative on the hiring going forward. I think that is a fact. And I think that the market environment has changed dramatically from the start of the year to the Q1 to now, and that will be reflected also in our hiring phase. Fortunately, we've done a lot of good hirings. We are very well prepared for the uplift that we will have in our business operations with EQT X, with Infra VI and with BPEA coming on board. So we're well prepared for that, but you will see a slowdown clearly in our hiring pace. And also maybe we're, again, pointing out that the 100 approximately of those are from acquired businesses of the increase.

So just a follow-up. So I'm just looking at consensus here. They have 150 and 200 FTE plus being added in '23 and '24, respectively. Does that more sound like the old plan? Or is that still in line with what you think?

No, I don't want to comment on '23 and '24 hirings here in the H1 '22 call. It is -- we are well prepared for the strategic sort of moves and the strategic initiatives we have with now. But we will, of course, continue to hire just to build a pyramid always and to ensure we have the right talent to the private wealth channel that was just mentioned, et cetera. So I don't want to give exact numbers for '23 and '24. Environment change, we are agile. It's not clear as yet.

Okay. Fair enough. And then on debt maturities, I believe you said in your presentation that private capital had 4 years average and Infra, 5 years. Could you tell us how much this is maturing in '22 and '23, please?

No, But I think -- I mean, I don't even know that figure, to be quite honest. I think the -- what we're saying is that the average tenure of the debt is that -- and it means that typically, you put one debt package in place for one company. And it means that, that debt package is typically a 7-, 8-year long package with amortizations suited for the business, meaning that the businesses are also generating cash flow, and that cash flow is partly used then to make amortizations. So exactly what amortizations we will have in that -- in those numbers, I don't know because it's built up from 70 or 50 different companies and different financings. But what we're trying to say is that we are very confident and feel very good about the debt packages that we have. I think we've also been quite transparent that we've been using the very good debt markets that we've had in the past 2 years to renegotiate that packages at better terms, at less covenants, at lower interest rates and less restrictive amortization schedules, et cetera. So I think in general terms, we're in a good shape when it comes to our debt packages.

Great. And then sorry to come back to this question once again. But on carry, just a bit confused. I think to Ermin's question in the beginning I heard it as if you have written or you discount to keep on companies until they're sold has actually been canceled or dismantled in the 3 exits or 2 exits in EQT VIII. Is that correctly understood? And then what's left for H2? Is the difference between the values in the fund and the exit value, was that correctly understood?

No, I don't think so. But let me explain once again. When you sign a transaction, you cannot use your old valuation anymore after that. You will use the valuation that you have agreed with the buyer in your evaluation between signing and closing. However, we apply a discount on the overall -- on the fund. And that discount, of course, goes away when the deal is closed. It goes away for that particular deal because then you get the cash for that transaction. So that's the mechanics around it.

So basically, the difference between the 2.5 and was it, 3.2 you showed, that one will be written up immediately and is included in the H1 numbers, but the discount disappears when you get the cash in Q3?

Correct. Correct. Or when we are sufficiently sure that the closing will take place. We have some leeway there. If it's completely certain, we can take it. But we cannot leave sort of a risk that it will have to be reversed at the later stage. But now we're getting into very technical questions. Happy to take that also offline with you.

Our next question is from Jacob Hesslevik with SEB.

I just have a question on MOIC. I mean you have a reduction of 0.1x in your chart. But I mean, presumably comps are down 15% to 20% this year. How do you get to adjust 0.1? That's my question. First one.

Yes. I think I've been trying to say that it's multiple sources here. And of course, multiples coming down -- comparable multiples coming down is one part of the equation. And it's a big part of the equation. But then you have other parts as well. And one of the bigger ones is the underlying performance in the companies. So if you apply a lower multiple, but to a higher earnings numbers, you will end up being more flat when it comes to value. I mean, just from a mathematical point of view. And then you have some realizations, as I mentioned, in EQT VIII as an example. So I mean -- so that's basically where we end up. But 15 to 20 is really where we have our comps figures being traded down in the multiples, but then outweighted by other things.

Okay. And at the risk of sounding like a broken record, when we think about the deployment pipeline, maybe could you give us a bit of flavor of some of the geographies and sectors that you guys are investing into? Or maybe let's put it this way, any particular areas that you are avoiding, unprofitable companies or specific geographies and maybe how that has evolved in this market spectrum?

Our approach is quite consistent actually over time and becoming more and more so. So we choose these long-term themes that we're investing behind that are driven by secular growth, that are driven by, for example, the energy transition or by demographics or by regulatory changes or lifestyle. So not necessarily connected to the economic activity. And then we break it down into various areas of health care, various areas of TMT and various areas of tech-enabled services and, of course, essential infrastructure for society and thematic real estate in areas that are growing, mostly logistics, but also multifamily. Again, back to lifestyle and trends. So the pipelines are still quite active across all of our strategies. It's rather now to find the right opportunities that have the right risk reward in today's market. We want to be thoughtful and careful and make sure that when we do deals like I just mentioned, the SPT Labtech or [indiscernible], for example, in private equity, then we want to make sure that those companies are the ones we can work with. If it takes longer to, let's say, we need to own these companies for longer, that we can really add value to them across multiple dimensions. So it's rather that. And we do stay -- we just generally have stayed away from since many years more cyclical companies, more capital-intensive companies related to the cycle, companies with very complex and long -- large value chains. We have little consumer exposure as well because it's also quite volatile, as you can see. So that's what we mean by thematic investing. And we believe it's quite robust, and that's also what you see in the performance of our companies across cycles. But it doesn't mean we're totally insulated. Of course, if we go into a complete recession, then all industries will be impacted in some form, but we don't see that yet.

Just one last question from my part, and it's basically on your ESG approach, how it's progressing. You had your first portfolio of companies at scientific-based targets. But what's your timeline here? How many companies do you expect to have its targets in place at this year-end? And secondly, some peers are raising their first climate fund, et cetera. Do you also have any plans on raising this type of fund in the future?

With regards to our science-based targets, we've committed that every single portfolio company will set their own size-based targets, is based on a timeline per company. We own 180 companies. So it's quite a job. And it's happening on a timeline. I don't have the exact goal for the end of the year. But it is something that our teams and portfolio of companies are working very hard on. And then with regards to those types of funds, if you think about our investment strategies that encompass venture capital growth, private equity, but in particular, actually also infrastructure and active core infrastructure. If I take those 2 as the example, if you look at the investments that we've been making in the infrastructure strategies, it's a lot about the energy transition. So we have electrical vehicle charging networks. We have solar and wind manufacturers. We have waste to energy. We do a lot with actually transportation. We own 2 -- 3 actually, really interesting companies, 2 ferry companies in the Nordic region that are leaders in electrifying ferries, which is really great for society. We own the world's largest yellow school bus company in the United States, 60,000 buses that were also committed to electrifying and driving transition that way. So we're also -- we're doing a lot in this space already. So to have a dedicated fund towards it, there would be, yes, too complicated, actually. We're already all over it. Thank you for the questions. It seems like those are the last questions that we've been asked today. Thanks, everyone, for an engaging session and wish you all a continued great summer. Thank you. .

Thank you.

Thanks.