Good morning, and welcome to EQT's Q3 update. I am Olof Svensson, Head of Shareholder Relations at EQT since the 1st of September. I am joined today by Christian Sinding, our CEO and Managing Partner, and Kim Henriksson, our CFO. We will provide a brief update and present a few pages to you, and thereafter go to a Q&A session. Please remember, in order to participate in the Q&A, you will need to be dialed in on the conference call. With that, I hand over to Christian, who will kick off the presentation. Thank you. Next slide, please.
Thank you, Olof. Good morning, everyone. As you've seen from the report, we've had a busy Q3 with activities across the board, making thematic investments. We have good fundraising momentum, and we're making progress on our strategic initiatives. In fact, EQT continues to operate fairly close to normal, leveraging our digital capabilities and also our ways of working. However, the world is still in the middle of a pandemic, and the full long-term impact of this is yet to be seen. While Q3 saw a rebound in activity, of course, we cannot rule out another recession, and there are also political and fiscal events around the world which may change market conditions quite quickly. Thus, times remain uncertain, and our main focus is, as always, to remain disciplined and be a responsible investor and owner. We will continue to invest with the future in mind.
For example, increasingly in the positively impacted sectors after COVID, which we believe will grow even faster than before. These are actually core EQT focus areas such as TMT, healthcare, and essential infrastructure. Next slide, please. Now over to the Q3 KPIs. In short, our investment activity picked up significantly in Q3, where we invested EUR 6 billion of new capital. This means that for our key funds as of today, EQT IX is 15%-20% invested, Infrastructure IV is 80%-85% invested, and Infrastructure V is 10%-15% invested. Thus, market conditions actually stabilized in the Q3 and supported EUR 1.9 billion of exits, as well as making us ready really for the next push on exits, and we're preparing a number of those for the next 12 months.
Again, that exit activity will of course depend on market conditions and also the economic situation around the world. Value creation in our funds remain on track, with the vast majority of our companies remaining resilient through the crisis. We do have a handful of companies that remain significantly impacted by COVID-19 and will probably remain so for a while given the ongoing lockdowns across Europe and the world. EQT VI to VIII all remain on plan to meet the gross MOIC targets, multiple of invested capital. Infra II and IV are also on track, while Infra III remains above plan. On the fundraising side, we continue to act, would I say, close to normal, although of course it's not normal because it's all digital. We have announced the hard cap of Infrastructure V of EUR 15 billion.
We just closed Real Estate II second fund in that strategy at the EUR 1 billion hard cap. Thus, we continue to execute on fundraisings. More information on that later. We also continue to execute on our strategy, and we're super pleased to have announced key hires in our growth team that we announced just a couple of days ago. We're very excited to have Marc and everyone join us. The divestment of credit is still expected to close in Q4. Looking forward, we do continue to believe in the long-term growth of the private equity and private capital industry. Lower interest rates for longer means that private capital and private capital delivering strong returns means that capital will still flow to our industry.
In fact, a recent study we did with McKinsey on capital raising shows that we believe EUR 10 trillion will be invested in private markets over the next 10 years. Quite a significant amount. Building on that, we intend to increase the pace of hires and investments in our platform again. We want to make sure we're able to take advantage of these opportunities for the long term while still remaining vigilant for risk, of course. Next slide, please. I wanted to remind everyone again of who we really are at EQT. Our culture and values really define how we act as a firm, as individuals, and as members of society. We find themes supporting secular trends, and we invest for the future.
We act locally with deep sector expertise and have a clear governance model where we really nurture our relationships and draw on the best people we can. EQT leverages our network of more than 500 EQT advisors to help drive value creation through the investment cycle in everything we do. We really integrate these specialists and leaders into our business. We also do take risks. Without risks, there's no reward. We do make mistakes, but what we try to do is learn from those mistakes and improve continuously at all times. We're future-proofing companies through digitalization and transformation, and we're purpose-driven. Under purpose, we of course bring in sustainability, ESG, and really making the companies better, not just for shareholders, but for all stakeholders. Next slide, please. In fact, we've been purpose-driven since day one. Our mantra from the start was EQT, more than capital.
We inherited really Wallenberg's long-term responsible ownership values. This mantra has evolved over time, and we now say, as you know, our purpose is to future-proof companies and make a positive impact. Actually, this year we even changed our articles of association to include purpose in the articles, which means that we were one of the first companies in the world to do so, one of the first private equity firms in the world to do so, and I think the first Swedish company to do so. That is just showing how committed we are to making sure that we do future-proof companies and make a positive impact. We have two axes where we drive change and try to make a positive impact. On the one hand, we have the environment where we're, for example, moving all of our companies to renewable energy.
On the other hand, we have inclusiveness with lots of different initiatives this year to increase diversity. This year we're focusing on gender, and we've put a lot of demands on ourselves, on our boards and our suppliers, as you know, to help drive that move. We are making significant progress, although lots more to do. Other initiatives include our ESG-linked bridge facility and our funds which means there's a pricing mechanism designed to inspire the portfolio companies to actually improve on ESG factors and also us, of course, as the managers of the funds. We've also started the EQT Foundation with Cilia now as a leader, this is our own incubator where we're going to work to create a cooler and more inclusive tomorrow.
As you know, we seek to make a positive impact with everything we do, and we're really convinced that this will make us better and make us perform better and drive better performance. We want to deliver the best companies and deliver the best returns for our investors and contribute to a better world. We think those are really symbiotic. You've heard it before, you have two companies that are exactly the same. One is more sustainable than the other. Which one will attract the best new talents? Which one will attract the best new customers? Which one will have a better relationship with regulators? Which one will have the most future-proofed value chain? Well, we think it's gonna be the more sustainable one, therefore the more sustainable one will also be more valuable and be a great investment. That's how we think.
If you think about it, who else than private capital industry has really the governance, the resources, and the business model to drive positive change across a number of companies and industries? We do see this as a journey and there's still lots to do to bring this kind of thinking into an action actually into every aspect of our business. Next slide, please. With EQT IX, sorry we really took another step on our growth journey and as of Q3 our AUM stands at EUR 46.5 billion once we've activated EQT IX that is. Infra V is going to represent the next significant change in our AUM, and Kim will talk more about that in a few minutes. Performance continues to be at the core of our success. We're going to continue to expand our global footprint and our locals with locals approach.
We just announced our private equity team in Sydney, and we're going to be moving into Tokyo over the next year or so. Like I said, you see from this graph as well, we are on a long-term journey to continue to build EQT for the future. Next slide, please. Fundraising has continued to progress in Q3. We activated EQT IX in July and are moving now to finalize the fundraising. It's now materially concluded, but there will be a tail of fundraising into next year. In September, we announced the hard cap of EUR 15 billion for Infra V, and we expect to start recognizing management fees as from November. Historically, our fundraising cycles on average has been actually about three years if you look at this chart. That is typically what we do in the more positive market conditions.
When things are more difficult, like the financial crisis, that can stretch out to five years or so. I wanted to remind everybody in a downturn what we would expect to change. What we would expect fundraising to take longer, investment activity to slow down, exit activity to be slower, and also value creation to take longer, meaning carry recognition would be delayed. As an example, in the financial crisis, now the great financial crisis, it took five years between EQT V and EQT VI, and the fund sizes remained broadly flat, just grew a tiny little bit. Looking forward again, we do see an interesting pipeline actually of deals, but our pace of investments will continue to depend on market conditions. We're not going to compromise on our return targets. Performance is really at the core of everything we do.
We will stay true to our thematic investment approach and our value creation agenda and therefore we are going to be patient and we will only exit companies when prices do reflect their true value. Next slide, please. Like I said, we are executing on our strategy. On October 19th, on Monday, we announced a growth team where Marc Brown joins us as Head of Growth. He joins from Microsoft, where he has been Head of Business Development, has led more than 185 acquisitions, including companies like LinkedIn, GitHub, and Minecraft, which is a Swedish company, actually. Marc is joined by Carolina Brochado, who joined us earlier this year as a partner in London. She has formerly been a partner at SoftBank and Atomico, and they are joined by our talents, Johan, Dominik, Victor, and Henrik from various parts of EQT.
We believe that this team is very strong, and we look forward to building this strategy together. Now, geographically, Asia-Pacific, as you know, remains a strategic priority. We have seen COVID slowing down some of our progress there, but we have recently announced key hires to our private equity team in Sydney, for example, with Frank Heckes and David Forde. As background, we do believe Australia and New Zealand actually represent quite interesting markets for EQT. We've already invested in I-MED there and Nexon Asia Pacific, for example, as well as Metlifecare in infra. Over time, our APAC strategy, like I said, will focus on Japan as well and ultimately also South Korea. Probably a little bit less so regarding China in the near term. Moving over to real estate, we just closed Real Estate II at EUR 1 billion, the hard cap.
If you look at it, real estate is actually the largest single asset class globally. Allocations are increasing to that sector. Thus, over time, our ambition is to scale real estate really into one of our core significant strategies. When it comes to M&A, we're continuously evaluating opportunities, and we have a number of dialogues ongoing. We remain very selective. It could either be something like seeding a new team or a new strategy, as we did with EQT Public Value in real estate, or it could be more strategic moves to build a presence in certain geographies or strategies for that matter. The bar is high, and the culture and strategic fit is critical in anything we do. With the divestment of credit, which is imminent, we are solely focused on active ownership strategies.
This means that there are strategies where we can really actively drive value creation and transformation in the investments we make. Good. Let me talk to you on the next page, next slide. Let me talk a little bit about the growth strategy again. We do have this new dedicated strategy. It's really focused on partnering with founders and management teams of market-leading companies. We're going to do this through growth investments in a range of technology, tech-enabled, and scalable businesses. This growth strategy really fits perfectly between ventures and equity. EQT Growth is going to be an extension from a number of successful growth transactions that we have made, and a large number of investments that we've looked at but haven't been able to make because we haven't had that mandate.
These deals come in either from mid-market or private equity or venture strategies, and there's quite a good deal flow. We're also going to use Motherbrain at the core of Growth, and Motherbrain, for those of you who don't know, is our in-house artificial intelligence system. We have 17 or 18 data scientists working to continuously build that out every day. Motherbrain has actually already sourced about EUR 100 million of investments for the venture funds. It assists in identifying trends, and sourcing potential investment opportunities as well as potential threats, actually, for existing investments as well, and something we're continuously building out for other business lines as well. We think this is quite unique.
We've done our first balance sheet investment this quarter, which is a smaller participation in a very exciting company called The LIVEKINDLY Collective, which is in plant-based meats, and growing to become a global leader there. We're going to continue to use the balance sheet to do these types of investments for some time. The EQT Growth strategy is expected to be fully operational in 2021, in line with the strategy we described at the IPO last year, where we accelerate the strategy by making these balance sheet investments from EQT AB, and those can then subsequently be rolled into a new fund. Also, our EQT Mid Market Europe strategy will be morphed into Growth, for lack of a better word, and then we'll have ventures, Growth, and equity as the private capital strategy.
As you know, most of you know, we cannot comment on future fundraisings due to regulation. Of course, we do want to tap larger investment opportunities from the start to really build this strategy for the long term. With launching Growth, we're one of the few private market firms in the world that actually has investment strategies that cover all companies from the startup phase until mature leading businesses. That is quite exciting, and we think can really benefit us in terms of being in touch with all the different trends that are building businesses now and will make us a smarter investor. Now, we're of course always evaluating also the next step for EQT, and a natural extension of this could be a longer-term investment strategy beyond our private equity strategy.
This would be a strategy that has purpose at the core, of course, like everything else we do. It's an early idea. We're going to evaluate that further based on our own internal analysis and also demand from our clients. Actually with that, I hand over the word to Olof again, and then Kim will follow. Thank you.
Thank you, Christian. I'll talk a bit about the activity that we saw both on the investment and the exit side during the Q3. As you will have seen, we announced investments of approximately EUR 6 billion in the Q3. The announced volume represents about two-thirds of our investment activity over the last 12 months. I think it's important to keep in mind that some of the investments that we announced in this quarter, were also deals that we had been looking at earlier in the year that got postponed and then materialized during the Q3 as markets stabilized. If we look at our total investment volume over the past 12 months, you will see that approximately 80% were in our core sectors, TMT or healthcare. As you all know, EQT strategy is really to acquire high-quality companies, which we then aim to make even better.
I wanted to highlight two examples of those situations. The first one being EQT IX, who in September announced the acquisition of Natural Colors from Chr. Hansen in Denmark. This is a highly thematic investment. It's a company that is operating in a market that is supported by strong trends. The first one being increasing consumer awareness around health and the environment. Secondly, the ongoing transition from synthetic coloring to natural ingredients in line with demand for plant-based food. The second example that I wanted to highlight was the JV that EQT Real Estate II launched in the U.K. There we're going to build 3,000 high-quality homes with high sustainability credentials in more affordable areas of London. Then if we turn to exits on the right-hand side of the page, you will see that we announced exits of about EUR 1.9 billion in the Q3.
Again, this represents about half of our exit value in the last 12 months. Looking at both the investment and the exit activity over the past quarter, it is important to keep in mind that these are quite significant parts of the last 12 months activity, therefore, please bear in mind that both investment and exit activity can be relatively lumpy in any given quarter. We find that the financing markets are open still for transactions, in addition to the M&A market, we also see that the market for initial public offerings is available to us as we plan our exits. As a reminder, as part of our exit strategy, we continue to align our portfolio with our thematic approach and our sector priorities. Next slide, please. Now let me turn to our portfolio and update in light of the ongoing pandemic.
First, I'd say we remain focused on the risk of the pandemic and other external factors that may potentially affect us. For each portfolio, we continue as always to maintain base case and downside plans. We have continued to improve and extend financing structures during the quarter by tapping debt markets in Q3. These and other measures have helped us reduce the size of equity injections that we had anticipated in Q1. If we look at our portfolio, we segment it into three broad categories. In the first one, we put the companies that have been the most impacted by the pandemic. This constitutes approximately a handful of companies from both our equity and our infra strategies. These companies are primarily related to travel and leisure, consumer retail, and transportation. In the first half of 2020, we did certain equity injections to support these companies.
Those contributions represented approximately 1% of total commitments in key firms. That excludes EQT IX. You will see that this is quite significantly less than the approximately 5% that we mentioned in the Q1 of this year as we were evaluating the potential effects of the pandemic. However, please bear in mind that this category is one that we expect to continue to be severely affected by the pandemic for a long period of time, and these companies may only improve if and when travel and leisure and also social habits eventually return to and approach pre-COVID levels. At the moment, we're not expecting any significant additional equity injections to these companies, but we do not rule it out. As Christian was saying, the market outlook includes several uncertainties.
If we turn to the next category, the middle column of the page. This is where the vast majority of our companies are in the resilient category. Here we have our core focus, including TMT, healthcare, industrial tech, which all have been less affected by the pandemic so far. However, also for this category, the long-term impact of the pandemic and the other factors out there may of course eventually also have an effect on these so far resilient companies. Lastly, in the third segment, we do find that a few of our companies have actually been beneficiaries of the pandemic and the changes that we've seen to society as a result of the pandemic. We have companies in selective parts of our TMT and healthcare portfolios but also certain beneficiaries in our ventures fund, for example.
The beneficiaries see favorable valuation benchmarks, and for certain of these companies we may be able to accelerate the value creation agenda and therefore also plan for exits earlier than initially anticipated. Next slide, please. If we turn briefly to the valuation of our key funds, as Christian mentioned earlier, the value creation process remain on track for most of the funds or above plan when it comes to Infra III. To note in the quarter, we have increased the gross MOIC for EQT VII from 1.7x to 2.0x . The uplift in valuation for this fund was primarily driven by increased valuation assumptions for certain companies rather than us actually having realized any significant exits in this fund in the period. As mentioned, EQT VI and Infra II remain on plan.
Please keep in mind that these funds have fewer assets left, and some of them are more exposed to the pandemic. Worth also noting that our older funds, of course, constitute a relatively small part of our AUM. What all this means in terms of valuation levels and potential implications for carry is something that Kim will talk to. With that, I will hand over the word to Kim. Thank you. Next slide.
Thank you, Olof. In terms of how all of this impacts our financials, let's start with AUM though. The key driver of the increase in AUM in Q3 to EUR 46.5 billion has been the fundraising of EQT IX where we have as of quarter end closed out in excess of EUR 13 billion of investor commitments. Infra V has not yet been included in this number as there has not been any closing of Infra V there. When we report full year numbers, we expect to recognize management fees from Infra V from 1st of November, and as a reminder then in the current financial year the management fees charged will be on the commitments that we have as of the end of this calendar year. Worth noticing is also the so-called step downs we have when a successor fund starts charging management fees in an existing investment strategy.
It's a step down of the AUM base, but not of the management fee level. For example, the step down the AUM base in EQT VIII decreased by EUR 3.4 billion for the second half of 2020 when EQT IX was activated because the EQT VIII started to charge management fees on net invested capital instead. Net invested capital in turn includes only the closed deals but not the signed deals. Transactions that were signed but not closed in a particular period, they get included then in the AUM base in the period after the transaction has closed. That's a bit of a technicalities there. The AUM step down base, it's measured on a semi-annual basis, key date for H2 in 2020 is 30th of June and for H1, 2021 is going to be the 31st of December.
We have included further details of this mechanics in the appendix, but the main takeaway is that only one fund within each fund strategy can charge fees on committed capital at any given point in time. Next slide, please. In terms of carried interest, let me first remind you that internally at EQT the way we follow carry development is on a long-term basis and that the key data point for us is whether the funds are on plan to meet their long-term targets. For accounting purposes in a specific period, carry recognition is as previously discussed it's driven by a combination of increases in unrealized valuations and or realizations of investments. Given the recent valuation uptick that Olof mentioned in EQT VII from 1.7x to 2.0x the fund currently it fulfills the rule of thumb and the criteria for carried interest recognition.
That said, given the uncertainty around us we remain very cautious on the development we may have in the coming periods and the impact that that may have then on valuations and exit activity. We'd like however to take the opportunity to remind you of how the recognition of carry works in our accounting. May I ask you to turn to the next page, please. It looks a bit complex and I'll do my best to be pedagogic here, but it's important that you understand this regardless of the fact that we do look at it on a long-term basis. Starting on the left-hand side in the chart here the fund valuation for accounting purposes is then built up of two components.
It's the unrealized value, where we apply a 30%-50% valuation buffer on it. It's the realized value as we start to exit companies somewhat later in the fund lifecycle. Until we have approached this rule of thumb for carried interest recognition, all the accrued profits have been allocated to the fund investors. Then we test if there is carried interest for accounting purposes. We first deduct the valuation buffer, which I mentioned. The valuation buffer on unrealized investments is 30%-50% across our funds, depending on the investment strategy. From the value after the buffer, then you deduct the invested capital, the management fees, and the operating expenses of the fund. Any residual profit then is then shared 80/20 between the fund investor and the carried interest participants.
Out of that 20, EQT AB is then entitled to its share of the carried interest, and that varies between funds. In the most recent funds, it is approximately 35%, and in EQT VII that we just talked about here, it's 25%. This represents the accounting mechanics that we have at a certain point in time. Please, again, note that internally, we're looking at this on a long-term basis, the incremental steps of future-proofing the companies and building value towards the long-term targets. That's what ultimately drives the carried interest. As I have pointed out before, it's very challenging to predict with high certainty what level of carried interest we will book in any specific interim period, because small shifts in timing may occur without any material impact on the overall carry potential.
We feel very comfortable with the long-term targets and our plans to reach or exceed those targets. Next slide, please. Our dedicated employees are our main assets and instrumental for our future success. Like we have pointed out many times, around two-thirds of our cost base relates to personnel expenses, and the other operating expenses are also highly related and correlated to how we expand our footprint and the workforce. In Q3, we saw the effects of the hiring pause we introduced during the spring, and we saw only limited net additions in the last three months in FTEs with 709 FTEs plus by end of September, compared to 699 by end of June. We have already started easing the hiring pause, and we now expect the increase in hirings to lead to an uptick, both now in the current period, but also in 2021.
When we think about 2021, we expect it also to be impacted by a catch-up from the freeze that we have had here in 2020. That would be in addition to the historically approximately 100 person net additions that we have had. What areas are we investing in? We're investing in the launch of the new strategies, so adding investment professionals there. We also have some projects on the central function side, particularly focused on increasing our global fundraising capabilities and further digitalization of the platform that we're using. Those are a couple of examples. As I have mentioned before, the expansion we're doing is mainly outside Northern Europe, for example, in the U.S. and APAC, and those are also, in relative terms, more expensive regions. We could see a potential uptick in the average cost per employee going forward.
On a separate note, as we plan ahead, we also start to look at ways to create further flexibility in our capital structure. This could include possible debt facilities over time. Next slide, please. To conclude here, our strategy lies firm, but we do expect the markets to continue to be somewhat unpredictable and possibly bumpy. We aim to play an active role in influencing the new normal post-COVID-19 as responsible, purpose-driven investors with a laser focus on performance. With that, I'll say thank you and open up for questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find this answered before it's your turn to speak, you can dial zero two to cancel. If you're also watching the webcasted presentation, please make sure to mute your computer audio and keep listening to the audio in your phone. This is because of the time delay between the audio and the broadcast. Our first question comes from the line of Jakob Brink from Nordea. Please go ahead.
Thank you, and good morning, everyone. Thanks for taking my questions. I have a few ones, and I would ask them one at a time, if that's okay. The first one, just on the pace of investments in your funds. You said three years, Christian, but you also said that activity was relatively high right now, so I guess it could even be below three years, which means we might soon have to start thinking about the sizes of your next flagship funds. Just around that, what are you planning for here? In connection with the IPO, you said that the new fund should grow roughly in EUR terms, the same as the old funds. Is that still the guidance for the next flagship funds, or does something change there?
Yeah. Should we start with that? Very good question. I'm glad you're thinking about the future. We are investing, if the markets are reasonably healthy as they are right now, even though the world is in a complicated place, then we do invest on around a three-year basis. You can see that from the graph that we showed. That's what's happening as we speak. Of course, we don't know what's going to happen into 2021 and 2022, it's hard to give a prognosis. It's a little bit early for us to give you any indications of how we're thinking about the next fund generation. As we get a bit more invested in the two flagship funds, we will of course start to talk with you more about that going forward. I think we have to leave it at that for now.
Just sorry to follow up, you mentioned also that your McKinsey study had shown that x number of trillions would come into private capital over the next coming years. Would that then be in other funds or new strategies, or do you think that will go into your current flagship funds, or is there a limit on how big those can be?
That number is actually based on all of the asset classes where EQT is investing. Of course, it's a global number for the next 10 years, an analysis done by McKinsey. Who knows if they're exactly right, but what's important, I think is that given that low interest rates are expected to continue for a long time across the world, there's still a need for yield in many pension fund systems, healthcare fund systems, and for all investors. The private markets continue to drive yield, and we expect to be able to continue to do so over the long term, and therefore we will continue to attract capital. That's the logic. Of course, that means that we're going to be continuing to invest in EQT, in building our strategies, building our platform, and also continuing to expand as we have been geographically.
That's kind of how we think about the whole ecosystem.
Okay. Fair enough. Thank you. On your capital position and M&A and dividends, buybacks, other ways of paying out, what's your thinking? I think when you look at the slide where you mentioned your M&A, those potential M&As doesn't sound that capital intensive. I don't know if you agree with that, but if you agree, then could you maybe share your thoughts on dividend policy and also potential for doing share buybacks in the future?
I'll let Kim talk about the capital structure and dividends. When it comes to M&A, the way I'd categorize it is that we're looking at two different types of investments there, or add-on acquisitions. One would be smaller teams that we would bring in and build a business out from, like we have with real estate and with public value. It would be either geographic or sector specialists which would be more meaningful in size.
Thank you for a good question. Let me comment on the dividend part of it. What we've said as our targets is that we want to have a steadily increasing dividend in absolute terms, that still holds true. We do have a number of exciting investment opportunities on the horizon, not only M&A, but in terms of initiating these various new strategies. We have not been discussing any share buybacks. That's not on the horizon in the short term. What we've said is that to the extent we at some point in time in the future would be in a situation where we had excess capital, we could envisage paying sort of extraordinary dividends at that point in time.
That's really speculation far ahead in the future, because right now we are very focused on using that capital for the growth and benefit of the shareholders.
Thank you. Just on, Kim, you had your run through of the personnel or accelerated investment in personnel. Would it then make sense to assume around 150 increase in FTEs next year? The 100, and then it seems like you're 50 behind schedule in 2020.
I think the way of thinking of it that you're suggesting is correct. Whether it's exactly 50 that we're behind, we'll see how that pans out for the rest of the year. The way you're thinking of it is correct.
Thank you. The very last and small question. In the Q2 conference call, you mentioned that the prices on the new funds were slightly smaller than on the old funds. Could you be a bit more specific here, maybe? Thank you.
Is your question regarding the management fee rate in the new funds?
Yes. Exactly.
Kim, do you want to take that?
Yeah. I think the terms in the new funds are broadly similar to the predecessor funds. There's not a change in management fees there. The management fees, there's a number of different levels there in terms of size and in terms of when you come into the fund, at what timing you come into the fund, and that could impact the average rate. We are talking the second decimal or something here. It's nothing that we focus on a day-to-day basis.
Thank you very much.
The next question comes from the line of Ermin Keric from Carnegie. Please go ahead.
Good morning, and thanks for taking the questions. First one, just more detailed. On EQT VII, you said it's currently meeting all the requirements and sort of valuation and so on for carry recognition, but it's uncertain times. Should we read into that you will hold off on carry due to uncertain times or just that that could make valuation come down until we're sort of looking at H2 numbers?
The latter. I'm not saying that will happen. I'm just saying that it is generally very uncertain times with the second wave of the pandemic potentially on its way in Europe, et cetera. We are just being very cautious. Yeah, that's essentially what I'm saying.
Okay. That's very clear. Thank you. The second thing was also more detailed. On EQT VIII and the step down there, do I understand you correctly that, for instance, the deal for IFS that you acquired from EQT VII, that could basically make the step down be a small reversal in Q4 on that deal?
Not in Q4, but potentially in H1 2021 because it's measured as of end of year 2020.
Okay. I guess the dynamic is perfect. More of a philosophical question. Could you tell us more about the intention to use the balance sheet to seed investments? I know you've talked about this since the IPO, but could you tell us more? Will you carry the full investment risk or are there any mitigating factors to it?
Should I take that?
Yeah, go ahead Kim.
I'm going to take it from a strategic point of view.
Yeah, go ahead.
From a technical point of view, when it's on our balance sheet, yes, we take the full risk of it at that point in time. The idea, though, is to use our balance sheet to accelerate the growth of these new initiatives and then roll it into a new fund. We don't expect to sit with these investments on the balance sheet for a long period of time at all.
Exactly.
That's the sort of mechanics, but Chris, you may want to comment on that.
The reason we're doing this is that now we have, and the growth team is the best example. We have the team in place, we have the strategy clear on how we want to invest the funds, we have the deal flow, we'd like to be able to make those investments. After we've made a few investments, start the fundraising process, layer those deals into the fund, create this new fund strategy. The way that we had it before we had a balance sheet, what we needed to do was first then recruit the team, then sharpen the strategy, then go through the regulatory process of being able to fundraise, then fundraising, and then we could start investing. We're talking about a difference in time of probably 18 to 24 months.
This actually creates a better dynamic, I think both for the team and for EQT and for our LPs, and ultimately for the shareholders as well, and just helps us move the firm forward in a better way. That's why we do it this way.
Could you give us any sort of guidance on how much of your balance sheet could be deployed sort of at one time in these kind of investments?
Kim, do you want to take that?
Yeah. In any single investment, let's say it like this, we have a number of different initiatives. I would say that we wouldn't allocate more than, say, EUR 250 to any single initiative. Then within that initiative, you'd probably do between two to four investments out of it. It depends on the type of strategy. At least in Growth, it would look like this, probably.
Okay. Thank you. One last question sort of also on the Growth Fund. When looking at it strategically, it looks like it's quite similar position to the Mid Market. Does this mean you will discontinue the Mid Market strategy or will it just be a complement to it?
Yeah, I think that's a good question. The way I tried to say it in my introduction was that that mid-market is going to morph into growth. If you look at the mid-market strategy over the past several years, it's actually been very focused on growth investments. We've done some growth-like investments in ventures, some in mid-market and some in equity, but not to a full extent because we haven't had that full mandate. After this change, we're going to have the ventures funds, we'll have the growth funds, and then we'll have the equity business, and then maybe in the future, a long-term strategy as well. Mid-Market Europe will be rolled off and growth will be rolled in.
Superb. That's very clear. That's all from me. Thank you very much.
Great. Good questions. Thanks.
The next question comes from the line of Arnaud Giblat from Exane BNP. Please go ahead.
Yeah, good morning. A couple of questions, please. Firstly, in terms of the investment pipeline, I was wondering if you could give us a bit of a quantum in terms of the deals that you might be looking at. If markets hold up, clearly, you seem to be on good path to be raising in 2022. Aside from the, I suppose the dominant factor we should be thinking about here is market conditions more than anything else. Is that right? If you could also give me a bit of a quantum in terms of the pipeline, that would be helpful. Secondly, I very well understood from your comments that you seem to be targeting the same returns on these deals.
I'm just wondering what sort of moat, or could you give us some specific examples in terms of what the excitement is on some of these future investments? Thank you. Current investments in the pipeline.
Thanks. What I can say is that the current market is quite active, as you know. With our setup where we have thematic investing, sector-based investing on the one hand, with teams focusing on finding investments through finding interesting trends underlying these sectors, together with the other axis, which is being local with locals. We're, for example, the only private equity firm in the world that has offices in every major European country, and we invest always in all of the countries we're investing in, we're local with locals. They're also working to find deals together with the sector teams. Our deal flow is almost always quite strong. The difference is, do we believe we can make the investments at the required rate of return? Which we do, and that makes us highly selective.
When the market is good, then we're typically investing, like I said, on this three-year basis, and the pipeline right now is pretty strong. I can't really go into any more details, but we're looking at companies from all sources, from entrepreneurs, from public to privates, and from strategics, et cetera. What happens during a downturn is that, or a financial market downturn as well, is that sellers become less keen to sell, just like EQT, for example, earlier this year. The market slows down, and also with more uncertainty, the capital markets may not be there, and makes deals more complicated also for us. That's why there's kind of a cycle in this business. When it comes to target returns, we are not lowering our target returns. We're keeping them in the same.
You know our target MOCs for Infra and equity, and those are in the on-plan range. That's still how we're underwriting deals these days. In order to achieve that, of course, what we're doing is we're investing a lot in capabilities, and that's why we have our push towards purpose and sustainability, our digitalization strategy, our Motherbrain, and all these other value creation elements that can help us transform and take these businesses to the next level, because prices are high for assets these days. You have to do two things right. You have to select the right assets, but you also need to really create value with the companies. That's where we're investing in, obviously, both of those so we can continue to deliver for the future.
Very helpful. Thank you.
The next question comes from the line of Roberta De Luca from Goldman Sachs. Please go ahead.
Hi. Morning. One clarification please. The EQT IX, you said it's in excess of EUR 13 billion. I assume that's not on the final close. Is there any visibility or anything you can say about timing of a final close? I have another more, let's say, broader question on EQT Growth. I understand, obviously, kind of short-term goals cannot really be disclosed. How should we think about the strategy over the longer term? Kind of what are the ambitions on the Growth side? Also, given that now you have subsequently kind of all the parts of the equity investment, is there a scenario in which you could roll out an investment from a venture capital, from one of your VC fund into a Growth fund, or from the Growth into the private equity? Kind of sell it to your own funds.
Okay, thanks. Good questions. I'll answer the latter two, and then Kim can take the first one. When it comes to growth, we believe this can become a pretty significant investment strategy for us. Ultimately, we think it's going to become a global strategy. After several fund generations in the beginning, it'll start in Europe. If you look at the biggest players in the world in growth, the fund sizes are $6 billion-$8 billion for the time being. If we look at where we are right now, our mid-market fund is at EUR 1.6 billion. We would expect to start the strategy with a fund which has more firepower than that one. I guess that's how we comment on it. Maybe Olof and Kim want to give a little bit more color on that.
When it comes to moving investments between funds, it's a little bit more complicated question. Clearly, from ventures into growth, we can do partnership deals and help these companies grow from more startup phase into the more mature phase for sure. It's a very sensitive question, and each of these funds are separate and have their separate investment strategies and investment committees. Anything like that would always be done on arm's length terms and with a very predetermined process that we've developed over years, and which is aligned with best practices in our industry. Kim?
Yeah, thank you. Coming back to your first question, it's correct. The EQT IX has not had its final close. I believe Christian mentioned in his talk here that it will run into next year. There will be a tail into next year with the fundraising still ongoing. We're not going to be more precise than that.
The next question comes from the line of Bruce Hamilton from Morgan Stanley. Please go ahead.
Hi. Morning, guys. Thanks. Just got a follow-up question. I guess on the growth capital fund, you've given some useful color about thinking through possible capacity and that sort of thing. In terms of time frames, you've done one investment from the balance sheet, you've got the team, you're going to accelerate investments. Should we assume that there's a decent chance you'll be generating fees from a growth capital fund in the course of 2020? On the edge, running a little bit slower, would it be fair to assume that that's possible in 2022? Is there any kind of path you could talk to, maybe if you can't be more explicit on the current fundraising? Second question, just on the longer-term strategy. Obviously, you're at your earlier stage on planning that, can you help me understand how you'd structure that?
Would that be a sort of permanent capital vehicle, or would it just be longer than the typical 10-year duration funds? Would it be more like a kind of investment trust, or how to think about that? Finally, one clarifying question on cost. Kim, I think you said, along with the helpful comments around the hiring activity, that you'd expect some increase in the average cost per employee. I think I may have missed what you were referencing there, if you could just remind me on that'd be good. Thanks.
Yeah. I'll start with the first two. Thanks, Bruce. The growth strategy will make investments typically between EUR 50 million and EUR 200 million per deal. When it will start generating fees, we don't know yet today. The fact that we have our team in place now, we're starting to make investments, and it typically takes, let's say, a quarter or so to prepare a fundraising. Maybe that gives you some indications of the kind of timeline we're working on. When it comes to the long-term vehicle, this is still very early days. With a long-term vehicle, the idea would be to align it very much with what our investors are looking for in terms of generating long-term capital gains. Probably slightly larger investments, slightly fewer investments, and something which would have either a normal fund structure or some kind of evergreen fund structure.
That really depends on a number of factors. It's too early to tell right now, but we just wanted to indicate that it's a natural extension for us now that we can follow all companies through the life cycle. There are some assets out there that we think are really interesting that we can own for significantly longer than the typical private equity timeframe, and particularly companies that we can help future-proof and make more purpose-driven and more sustainable for the long term. Right now, we're just literally at that discussion level that I now just introduced to you, so I couldn't give you any more than that today.
Okay, thanks.
Bruce, on average cost per employee, the only thing I said was that the hirings we are making in the U.S. and in APAC and the geographic growth areas we have are on average a higher cost than the Northern European base. That will over time mean that we will have an increase in the average cost per employee.
Got it. Okay, that's helpful. Thanks.
The next question comes from the line of Gurjit Kambo from JP Morgan. Please go ahead.
Hi. Good morning. Thanks for the presentation. Just two questions. In terms of the investments that you're seeing coming to the market that you're looking at at the moment, just what sort are they? Smaller deals, larger deals? Are they companies which you would view as being beneficiaries of what's going on in the market. I'm just trying to understand that your sellers, are they selling things which they're having issues with, or are they selling companies which they still feel are seeing good growth? That's the first question. Just linked to investments, in terms of the new deals, obviously you've done quite a lot of deals and exits in Q3, how much of that was postponed deals from the start of this year, early last year, versus brand new deals that you've been seeing?
Good question. For EQT Strategies, we're not market timers. We typically don't buy troubled companies. The answer for us is that we're active in the healthier sectors, TMT, healthcare, essential services, essential infrastructure. That's an area where we're continuously building relationships, building the pipeline. If you were to visit one of our offices or one of our teams and ask about their pipeline, you'll see the short-term pipeline, you'll see the medium-term pipeline. You'll also see the dream. We'd love to own this company whenever that comes for sale, whether that's three years, seven years, or 10 years away. I think we followed on average in EQT VIII, I think we followed the companies on average between three to five years before we made the investments. This is a very long-term game.
Of course, there were a few deals in Q2, and therefore maybe Q3 was a little bit more active because of that. The fact is that with low interest rates, with companies in those sectors performing pretty well, and capital requiring a yield, if these market conditions stay, we expect there to be continued healthy activity at all size levels, really. Even the IPO market is open, as you know. As Kim also mentioned earlier, it is a very uncertain time right now. Pandemic, geopolitical issues, et cetera. We're just being cautious. It's a healthy, strong market. The sectors that are active are the ones that are EQT's focus areas, as you know. We just want to have our feet on the ground and not get carried away. Yeah, I think that probably answers the question.
Great. Thank you.
The next question comes from the line of Hubert Lam from Bank of America. Please go ahead.
Hi. Good morning. I've got three questions. Firstly, I just wanted to double-check. For the companies that are going to be hit by the pandemic, can you remind us which funds are they in, how big are they within these funds, and have they affected the overall performance of these funds? That's the first question. Second question is on performance fees. You've announced a number of exits already for this year. Just wondering what are your expectations for performance fees for the second half, or we should expect anything. Lastly, on a fundraising pipeline. Now that you're nearing the end of the fundraising for your two flagship funds, should we expect other funds to possibly close for next year? Just wondering, trying to get a sense on that. Thank you.
We talked earlier this year about the statistics on which companies were affected in our portfolio and which were not. Those are roughly still the same. We said I think around 10% of the portfolio or so were companies that were more impacted by COVID than otherwise. We also expected earlier that we would require about 5% of the capital in our funds to support the companies. The statistics now are we've only needed 1% of the capital to support the companies. I think we've been pretty successful in working with the companies and working with the financing providers and others to help the companies to where we are today. Of course, we don't know what's going to happen with the pandemic now. It's a little bit hard to give a prognosis.
The way that these more affected companies are placed, it's maybe one or maximum two companies per fund across a number of different funds. Per fund, it's a relatively smaller or quite a small exposure. Again, if you flip it around, that's as a result of our investment strategy, which is focusing on those sectors that I just mentioned in the last question, TMT, healthcare, essential services, essential infrastructure. Yeah. I think that gives some facts. Maybe Kim wants to add to it and answer the other two questions.
Thank you, Chris. No, that's fine. That's right on the pandemic and the fundraising. In terms of performance fees, I would just reiterate what I said, that EQT VII is the next of our key funds to be in carry mode. If you look at the numbers right now, that looks like we would be in carry mode at the end of this year, assuming that things continue as they are right now. That's approximately what I would say on that. I don't remember, was there another question still? Fundraising? Yeah.
Yeah. Maybe you could repeat your question on fundraising. That wasn't totally clear.
Yes, sorry.
It's okay.
You're nearing the completion of your two fundraising for your two flagship funds. Just wondering for next year, are there any other funds that are also expected to close as well? I assume this is smaller funds, just anything to look out for.
I think I'll answer it slightly differently. We have Real Estate II just closed. Public Value, which is one of our newer strategies, is an open-ended fund, with certain longer-term lock-ins. It's something which is more like permanent capital in a sense. That one is continuously fundraising. That's part of the answer. We will launch EQT Growth at some point during next year. It's too early to tell when any first closings would be of that. Anything to add, Kim?
No, those would be the key ones.
Great, thank you.
The next question comes from the line of Maths Liljedahl from SEB. Please go ahead.
Yes, good morning, guys. Sixth time in Q&A session, so I think most of my questions have been answered, but just a small technical one, Kim. If Infra V is activated from November 1, then we should have the step down of Infra IV all from that date. That is how we should see it or?
Yeah. We expect Infra V to be activated from November 1. You would calculate the management fee on whatever fund investors have committed to at the end of this year. Not on the full amount, but rather what would be in the books by the end of this year. Yes, the step down would be then, based on whatever the number was at the end of June.
Okay, thank you.
The next question comes from the line of Jens Ehrenberg from Citi. Please go ahead.
Hi. Good morning, guys, and thank you. Yeah, not many questions left on my side, either. Just a couple of follow-ups here. On the quartely portfolio update, I was just looking at slide 12, and I appreciate you mentioned the 10% of probably more impacted companies in your portfolio. Just to get a bit of a steer how that's distributed between, I suppose, the beneficiaries on the one-hand side and the more structurally impacted companies within your portfolio on the other hand side. Would you say that's, I don't know, fairly balanced, or is that more skewed towards one or the other side? Appreciate mostly we're always talking about more impacted companies in these times rather than better performing ones. I'm just trying to get an idea of that.
The second question I had is just very briefly on the JV within your real estate fund that you had announced with Sigma Capital in the U.K. I was just curious what exactly, beyond the capital in that JV, you bring to the table in terms of the really the ultimate investments that will be done in the U.K., if that's at all possible. Thank you.
Do you want to start on the first one, Kim, or?
I'm not sure I followed the question. Olof, did you?
I can give it a go. I think the first question was around what share of impacted companies we have versus the beneficiaries in the portfolio. I think it's fair to say defining the impacted companies the way we've described is probably more clear cut than defining the beneficiaries. As we said, we have about a handful of companies in the impacted category, and those are companies that are quite significantly impacted by this, and it's quite clear we've had equity injections in the quantums that Chris referred to earlier. In the beneficiaries category, there are various aspects of beneficiaries in this, so it's harder to put an exact number on exactly how many companies those are. This relates to some more degree in terms of themes that we're seeing, increase in data usage, for example, that benefit some of these companies.
As I said, there are some companies in the ventures front, for example, that benefit from changes in consumer behaviors, et cetera. There are probably more companies in this category than there are in the significantly impacted category, but it's on a broader scale.
Yeah. Thank you, Olof. I could give you maybe a slightly different twist to it. Just at a higher level, if you look at the targets for our funds, they remain as they were before. It may take a little bit longer time for some of them to get there. Some of them might actually perform a little bit better over time. Let's see for the key funds. You can also look at the valuations overall from December, through the different quarters till now. In total, the valuations of the portfolio are up 6% for the year. Sorry, I'm looking in the wrong place now, looking at the TV. That also gives an indication as to the balance of how this is playing out. I think Olof characterized it very well, and that other element maybe gives you some more meat to the bone.
And we.
On real estate, we're going to be investing this strategy over time. It's really a joint venture, where our partner is going to be somewhat more operational, and we're going to be more strategic. It's a sector that we know very well. We've done similar investments also in France, in either assisted living or low-cost living. We believe that whole segment within our strategy of sheds and beds, this is obviously within the bed strategy, and we find it to be quite exciting.
Got it. Thank you.
Just as a reminder, if you do wish to ask a question, please dial zero one on your telephone keypad now. We have another question from the line of Mike Werner from UBS. Please go ahead.
Thank you very much. Apologies if this was addressed there, but I was just curious with regards to the waivers on the lockups of the shares related to your discontinued businesses indicating that you expect shares up to about 1.5% of EQT's capital base to be sold. Do you have an idea from a timing perspective? Is that something we can expect between now and year-end, or is this something that we can expect more in 2021? Thank you. Sorry, just do we expect this to be done in a single process, or is this something that could be done on a rolling basis? Thank you.
Olof?
Sure. This relates to up to 1.5% of the share capital, so it may not necessarily be that full amount. I think once we know exactly how much will be sold, we will take final decisions in terms of exactly how we execute that. I think what we've said is that it will be a process that we coordinate from EQT AB, and we will do it in a way that we think is in the best interest for the share. It's also an opportunity to, on the margin, improve our free float slightly. In terms of the timing question, again, I think it will depend on various factors, but we may release some of those shares into the market before year-end, as you said. Yes.
Thank you.
As there are no further questions, I'll hand it back to the speakers for closing remarks.
Thank you everybody for participating and listening today. Thanks for, as always, very good questions. We appreciate the support, and have a great day. Thanks a lot. Bye-bye.