Hello, and welcome to the EQT quarterly announcement for January to March 2020. Throughout this call, all participants will be in a listen-only mode, and afterwards, there'll be a question and answer session. Just to remind you, this conference call is being recorded today. Today, I'm pleased to present Christian Sinding, CEO. Please go ahead with your meeting.
Thank you. Good morning, everyone. Welcome to EQT's Q1 2020 announcement. Today, you're going to hear from me, Kim Henriksson, our CFO, and also Caspar Callerström, our COO. After the presentation, we'll open up for a Q&A. Now, taking a step back before we start the presentation, we hope you're all well and coping during this challenging period of time. Nobody knows when we'll be back to normal circumstances or what the new normal will look like. One thing is for sure, we can all contribute as humans, as business leaders, and also as members of society. I also want to thank all the persons who are on the front lines of this crisis, helping everyone out in this difficult time.
For EQT, this actually means that we keep doing what we do best, which is investing thematically and support our companies to improve and stay relevant for the long term and create value for society. As you know, we're driven by our purpose of future-proofing companies and making a positive impact. In times of challenges and disruption, we believe this is actually very crucial, and we have a real responsibility there. With that, I'll start with the formal presentation. If you see that on page two. I will start here with some overall comments on the current markets. Certainly, we're in an unprecedented situation. The markets around the globe are quite volatile, obviously coming out of this global pandemic.
We have restrictions in many countries that are closed down, and with governments and central banks across the globe taking really strong response measures, and helping society cope in this volatile period. We believe the key is, in this situation, to have a broad stakeholder approach and a long-term perspective. We're trying to be thoughtful, take quick and relevant action, and also to safeguard our values and culture. Now, as with any crisis, there are, of course, also a number of opportunities, including the opportunity to come out stronger for our companies and for ourselves after the crisis, while at the same time paving the way for a more sustainable tomorrow. If I look at the firm, the impact on EQT really depends on the magnitude and the timing of the crisis and how long it lasts.
We're still hoping for the best, as I said last time, but continuing to prepare for the worst. Our business model itself, of course, is relatively strong through its recurring revenue base and the long-term trends supporting our industry. If I look at the underlying portfolio companies of EQT, all the companies are in some form affected. Some very negatively, some in a more neutral way, some even positively to a certain degree, depending on, for example, our one retail investment, which is quite challenged, to a number of digital business models, which are, of course, delivering essential services to society at this point in time. Given our thematic investment strategy and our strategy of future-proofing companies, if one looks at the overall EQT portfolio, it remains relatively robust.
As you know, based on experience from previous crises, we've been preparing our portfolio companies for a downturn for some time. Obviously, we did not know about the magnitude or what was going to happen in the next crisis that we're now experiencing. The fact that we had these contingencies planned in place is really helping us respond faster in all of the companies, and make sure that we're handling our businesses, our customers, our employees, and all stakeholders in a good way. We'll have more details on the portfolio a little bit later in the presentation. If you look at what we're doing otherwise, together with the portfolio companies, we've actually taken, I think, quite a good amount of actions to help out in the current crisis.
We have on our website, you'll see lots of great examples of our portfolio companies contributing locally or internationally to the crisis. Like for example, Lima in Italy that's restructured their operations to deliver tubes for ventilators in Italy, and lots of great examples like this. That makes me quite proud. We're also doing a lot of things across our offices in our 19 countries where we're present, with creativity and empathy. Secondly, the EQT Foundation has announced its first initiative. We've donated from the foundation to the COVID-19 Therapeutics Accelerator, and this was launched by, amongst others, the Bill & Melinda Gates Foundation, to support research related to developing and scaling up potential COVID-19 vaccines and treatments. Thirdly, management of EQT has also contributed to substantially improved testing in our headquarter country of Sweden.
With that, I'll go to the next slide and talk a bit about our investment activity. Of course, the investment activity level has been slower since the COVID-19 outbreak. In the first half of the quarter, we did several thematic investments, including Deutsche Glasfaser in Germany and O2 Power in India, both done in EQT Infrastructure IV fund. In total, EQT has invested more than EUR 1.8 billion in Q1. Furthermore, in early April, EQT VIII announced the acquisition of Schülke, which is a leading provider of hygiene and infection prevention solutions. This investment is quite interesting, and it's very much in line with our thematic approach, which is guided by the United Nations Sustainable Development Goals. In this case, specifically SDG 3, which is good health and wellbeing. This company, of course, now is contributing to society in a very central way.
We had followed this company for quite a long time, and it's very topical now in the midst of the COVID-19 crisis with delivering essential products to hospitals in the German-speaking region and around the world. I think it illustrates our execution capabilities and the fact that we can deliver a solid offer to a seller and help the management come into the new ownership in a good and positive way. We're very bullish on this long-term investment and are happy that we were able to make that happen during this complicated time. Going to our valuations. At the end of Q1, our key funds are down on average approximately 5% in valuation versus the end of 2019. It varies a bit across the funds with EQT VII being the fund which is most impacted among the key funds.
We have received a number of questions on our valuations, Caspar will go through that in more detail later in the presentation. When we look at the expected returns for our key funds, we still expect that they're going to deliver according to plan in terms of multiple of invested capital in private equity and in Infrastructure II and IV, and above plan in terms of multiple invested capital in Infrastructure III. This is the same outlook that we gave in our Q4 presentation. Nevertheless, it is important to stress that it's very early to quantify the full impact of the portfolio companies in this turmoil. Even though we expect similar end results at the end of the day for the key funds, it will take a longer time and therefore will also have some impact on our IRR. Moving on to fundraising.
As we previously announced, the hard cap for EQT IX is set at $15 billion and that fundraising is ongoing. Due to restrictions from marketing, we cannot comment any more on that. As also mentioned earlier, Infrastructure is exploring various alternatives to raise additional capital, now also including starting preparations for Infrastructure V, which could be launched during H2 2020. Finally, as a firm, we're continuing to build the business. We are now over 700 employees and we're continuing to invest in our business for the future. However, given the uncertainty that we see around us, new recruitments are currently on hold. Pause, as we say. Next slide, please. You've seen this slide before, but we want to take a step back and focus on this, that we're on a long-term journey. We continue to have the ambition to grow and develop EQT for the long term.
We have come quite a long way from a Nordic buyout fund to a global, diverse and multi-strategy private markets firm. We also have experience in 25 years of cycles with a number of people at EQT having been here since inception, including Conni, Thomas, Fredrik, et cetera, and also Caspar and I having been here since 1996 and 1998 respectively. We've lived through a number of different disruptions and that's going to help us along this bumpy road that we're on. It also enabled us to, for example, be prepared early for whatever was coming, as I mentioned earlier. If I take a look back during the financial crisis, after that, many competitors actually reduced their fund sizes. We came out of the crisis actually stronger with larger funds than previous one.
Also during that time, we started our infrastructure initiative, which is now obviously one of our flagship funds. I think this is a good example of the kinds of opportunities that can arise from a crisis when you get the right people and the right strategy in place. Good. I think with that, let's go into a bit more on how COVID-19 is impacting EQT. Next slide, please. This is on EQT AB first. Certainly, as we talked about, the worldwide spread of COVID-19 has created a global economic disruption and also a lot of uncertainty. It's hard to predict and probably too early to quantify the full magnitude of the business and economic ramifications. Of course, the duration of the pandemic and the duration of the lockdowns and how we come out of that are key factors.
We run a number of different scenarios in these cases. We expect that fundraisings will take longer and also be more challenging in the current market environment. This is especially true for smaller and newer initiatives where fund investors need to meet with the team, get to know them, do more due diligence, et cetera. Even practically, everything is a little bit more complicated. On the investment side, the pace is also impacted, as I mentioned. We will continue to be highly thematic and very diligent in our approach. I think the Schülke transaction is one which is an example of the types of deals we will be looking to do in this market. For EQT's funds, looking at exits, these are also less likely for most assets until market conditions stabilize again.
You know what happens during a crisis like this is that the bid-ask spread for companies, even high-quality companies, increases. Therefore it's difficult to get sellers and buyers to meet. Furthermore, the financing market is also much more complicated to work with during disruptive times. Having said that, we have a very young portfolio, actually, across investment strategies, with an average age of our companies of 2.5 years in our key funds. Our oldest portfolio company is about eight years old, which is Anticimex, EQT VI, which is a very strong performer. What's important with that is that there is no pressure on us from our fund investors to sell or make exits during this time.
Just a reminder, and we come back to that as well, under IFRS, carry recognition will require both an underlying positive development in fund valuation and/or exits of portfolio companies. Kim will cover that again. EQT has a strong balance sheet, and we have a liquidity position with more than EUR 900 million in cash, which is good, especially from a long-term growth perspective and also for our ability to take advantage of this market to continue to develop EQT and drive strategic initiatives, which Caspar will come back to shortly. Next slide, please. On the portfolio companies in our key funds, we invest in healthcare, TMT, essential services, and essential infrastructure to society, as well as industrial tech. We have a strong focus on non-cyclical companies driven by long-term macro trends, secular trends such as digitalization, sustainability, healthy living, et cetera.
If you look at private equity, 90% of our portfolio there is in three core sectors, being healthcare, TMT, and services. Many of the companies have features such as being an essential service, having quite predictable cash flows, and also long-term business models. Such as, for example, some of our healthcare IT companies like Waystar or Certara. If you look at our venture investments overall, given that they're all digital business models, many of them, and most of them actually, are performing quite strongly during this difficult period. In infrastructure, more than 50% of the portfolio companies there are in fiber optic broadband investments, and the remaining are in other essential services, and we only have one company in the energy space in that. Having said this, it does not mean that our portfolio companies are not impacted.
Several of them are, of course, highly affected, and many of them are affected in some way. We do estimate an equity need from our support with equity in about 15% of our portfolio companies in the key funds. We believe, as we said last time, that we will need committed capital of around 5% from our key funds to support our companies. This is from what we know today. Good. On the preparations for downturn, there's a couple of more comments. What we did there was really prepare each company in terms of governance, in terms of actions, in terms of working capital liquidity, et cetera, to make sure they knew what to do when a crisis would hit.
We've also refinanced a large part of the portfolio across the key funds over the past years, removing covenants and pushing out maturities and creating more flexibility for the companies to both grow and develop and/or handle a more difficult period as we're in now. We do have enough fund capital to support our companies as well as to capture opportunities that might come out of this current situation, including add-on acquisitions. Given this relatively solid base, we are working also with some new transactions, and hopefully we'll be able to continue to make some investments during this period, even though it is a complicated time, and one of our most active funds, of course, is our public value fund, which is invested in the public markets in the Nordic region.
With that run through, I will then hand it over to Caspar, and he'll continue, and we'll be back with Kim after that, and then finally the Q&A. Thank you.
Okay. Thanks, Chris. Next slide, maybe. Like Chris mentioned, reflecting on the current market environment, this pandemic is impacting every business across the globe, and EQT is no exception to that. That said, our long-term strategy remains unchanged. Execution of that strategy may, however, take a little bit longer than we anticipated a half year ago. I'll give you a brief update on that and the components. On growth, like we've mentioned before, this is a part of private capital and an opportunity to invest in the market segment between private equity and ventures. It's an area where we feel that there's high strategic logic to us. Given our strong both private equity business in Europe and the U.S. and very high-performing venture business, I think we are fairly unique to capture and develop this aspect of the market, and we continue to believe so.
We believe in this strategy, and we're continuing preparations, including building up a team, including setting the investment strategies, and we are in early phases of reviewing this in this strategy. However, this will be done at a slower pace due to the current circumstances. We don't expect to get up and running with this during this year, but that gives you maybe a feeling for the timing. When it comes to Asia-Pacific, as announced earlier, we opened up our Sydney office in February, and the Asia-Pacific is still a very strategic area of growth for us. Growth in Asia-Pacific will take time, and it's focused mainly on what we have there on the infrastructure side, as well as over time building a stronger private equity business in the existing markets that we have, but also exploring new markets in that region.
On the real estate side, preparations for scaling our real estate business is ongoing, but new initiatives will also there take longer time. What I can mention is that the fundraising of real estate two is still ongoing, but we expect to have a final close on that during Q2. On M&A, although the main focus at the moment is on our current business and current portfolio, the market dislocation and the turmoil that comes with it may present attractive investment opportunities for us over time. We continue to monitor this and pursue certain ideas in this area. On the credit side, as you know, we are reviewing our strategic options when it comes to credit, and we are still expecting to revert back to the market before summer on the outcome of that review. Next slide, please.
We have received some questions regarding how our valuation process works. I'll provide you with a quick overview and hope to shed some light on that subject. Our valuation process is robust and consists of several valuation methods based on market practice and IPEV guidelines. I think the three pillars of that would be listed peers, so like normal peer review, but also comparable transactions with comparable companies in the private market and various ways of doing DCF. Typically, there's also a combination of these methodologies used when valuing a company. The assets that we hold are normally long-term private markets portfolio companies, average holding periods of four to six years, where value is created over time. Valuations are normally done with respect to the value of a whole company and not a marginal share in a listed company.
This means that the values of a whole company is typically more stable than a typical share price. Valuations are scrutinized from several angles to ensure that we give a fair view with the information known at the time. As part of that, valuations are also audited on a biannual basis. With that, I will hand over to Kim.
Thank you. May I ask for the next slide, or actually two slides forward, one called Our Business Model is Long-Term, Simple and Scalable. I'd like to start with this page, which I have shown before, just to reiterate that our way of thinking about the business remains. EQT is a performance-driven firm, which means that everything we do starts with generating good and consistent returns to our fund investors. That is as true now as it was six months ago. We are convinced that these good risk-adjusted fund returns, compared to the alternatives available to our fund investors, will drive growth in our assets under management. Growth in our AUM will, as a result, generate income for us. Management fees, carried interest, and investment income revenues to EQT AB.
As you know, the management fees, they are contractually recurring, and the carried interest revenues, they're an integral and essential part of the long-term business model we have. Our cost base is mainly our people and other costs driven by the number of employees. Next slide, please. Value creation remains relatively stable during Q1, we say. As mentioned, on average, the like-for-like value decrease during the quarter is approximately 5%, but of course, it differs across funds. While realizations exits are expected to be delayed and take longer in the current market environment, the long-term value creation expectations remain, and all key funds remain at least on plan, while Infrastructure III continues to remain above plan.
As a reminder, the way we have defined on plan is as a gross MOIC between 2x 2.5x for private equity and 1.7x- 2.2x for infrastructure funds. Next slide, please. Our AUM is largely unchanged from Q4 2019. Also if you look at it across the last 12 months, which is a more relevant period, given our long-term business model, the AUM is largely unchanged. However, during that time, we have increased the AUM with approximately EUR 3 billion, whilst also exited companies in older funds where the fee base is the invested capital. Again, as a reminder, our definition of AUM is such that only assets that are fee-paying are included in the AUM. There's a solid base of assets under management which provide recurring revenues to EQT AB. Next slide, please.
That brings us to a carry update. As mentioned by Chris earlier, carry recognition will require both an underlying positive development of fund valuations and typically also exits of portfolio companies. I reiterate our rule of thumb here that initial recognition would commence once we have reached a gross MOIC of 1.7x- 1.8x and including typically a few exits. This would normally be four to six years after the first investments. The two key funds in turn to start generating carry according to the IFRS are EQT VII and Infra III. For EQT VII, our current gross MOIC is 1.6x, and we've had three exits. For EQT Infrastructure III, our current gross MOIC is 1.5x, and we've had no exits so far.
As you've heard, the exit environment is currently not as supportive as in the beginning of the year, which we expect to impact the timing of recognition of carried interest as well. As per the previous slide on our expectation for the funds, we are still on plan or above plan to reach our gross MOIC targets. This is a delay compared to our earlier plans rather than a change. Let's just take EQT VII as an example here. At year-end, we didn't have any IFRS carry from EQT VII when MOIC was 1.8x, and now it is at 1.6x. Like for like, the portfolio is down in mid-teens in percentage terms. In order to recognize carry in 2020 from EQT VII, we would require both some exits and an increase in value to more than compensate for the recent reduction.
Everyone can draw their own conclusions from those facts. Next slide, please. As before, the headcount of EQT is a reasonable proxy for our cost base. We have, during the quarter, added a total of 25 FTE- plus, as we call them, and are now at 730 FTE- plus and 675 FTEs as of the end of the quarter. As mentioned earlier, currently the hiring is expected to take longer, and we've also actively decided to pause most recruitments unless they are highly strategic, in line with what Caspar mentioned here on our strategic ambitions. That said, during H1 2020, we expect the number of FTEs to increase still because it includes signed candidates that are expected to start during this period. After Q2 at a much slower pace than at the beginning of the year.
With that, I'd like to hand back to Chris for some closing remarks.
Thank you, Kim and Caspar. On the final page is our financial targets and dividend policy. I'd like to highlight the bottom of the page first. These targets should be considered over a fund cycle, so they are long-term targets. Starting with growth, our target is that our total revenue growth will exceed the private market's long-term growth rate. Our target on profitability is that we expect our adjusted EBITDA margin to be between 55% and 65% over the long term. That, of course, does include some income from carry. Finally, our dividend policy is to generate a steadily increasing annual dividend in absolute EUR-denominated terms. With those final comments, we will open up for the Q&A.
Thank you, Christian. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. If you change your mind or decide to withdraw your question, simply key 02 . I apologize if your name is said incorrectly. The first question we have is from the line of Magnus Andersson from ABG Sundal Collier. Please go ahead. There will be a short pause.
Can you hear me?
Magnus, please go ahead and ask your question.
Okay. Just on the fundraising, you say that it might take longer in this environment. I was just curious, is it primarily the fact that you are not available to have physical meetings, which you alluded to in some smaller strategies, for example, that they have to meet the investment team, et cetera? Or is it also allocation decisions among your LPs and general uncertainty? Can you rank the factors so that I understand what is really driving this?
Yep. I like your question. I'm not going to rank it for you, but you answered it yourself. It is all the above. It's the practicalities of having to do due diligence on EQT remotely rather than being able to meet in person. That means things take a little bit more time. Now we have a strong digital setup. We're completely in the cloud, and everything we do, from our operations to our deal making. That facilitates it, but it's complicated anyway. Of course, in the market as has been reported on and also some of the private equity press, LPs are depending on their portfolio and their strategies, also sometimes taking a little bit longer to take decisions or reallocating some of their capital, et cetera. All these elements together are contributing to the fundraising takes longer.
Okay. I must have missed you, Caspar, just on slide seven there, you were talking about EQT Growth and these continued preparations, but with the longer horizon. Did you indicate that you would not do any fundraising, most likely not during the remainder of 2020 or because I didn't hear you?
What I said was that we don't expect this to be up and running during 2020.
Okay. Thank you. Yeah. Just on slide six there, you talked about the roughly 15% equity need in portfolio companies in the key funds. Is that during 2020, or how should I think about that? Is it now, immediately, or?
What we do is we run different scenarios. We run, call it a more positive scenario, a kind of a medium scenario, then we run a real downside case for all of our portfolio companies. This number is based on a medium scenario, if I can put it in those terms.
Okay. On the 5% need required of your dry powder, that conclusion, how did that look, for example, in the previous crisis some 10- years ago?
That's-
Can we draw any parallels, or?
It's very good, but of course EQT is very different, that's why, because now we of course have, in terms of the key funds, we also have our infrastructure funds which are large and stable as well. I would say generally, maybe Caspar wants to add a comment, but generally, we're in better shape now than we were at the previous crisis because as I commented on in my part of the presentation, we've been really working with our capital structures to stretch them out, to create more flexibility, less covenants, more liquidity, et cetera. We have longer runaways before we need to bring in new sources of capital for the companies, everything else equal. Of course, the crisis is very different, but other than that, I think we're in better shape than this.
Yeah.
Anything to add, Caspar?
Yeah, I think maybe just to add that the portfolio composition back then was very different. We had much more concentration in certain portfolios, and therefore in certain funds, we basically didn't have the capital available to save all the companies in that particular fund.
Okay.
More or less, we're not at that situation now. It is a bit different. In terms of the capital need, I wouldn't know if it's similar or on average similar or less now. I would guess it's less.
Okay. Just finally, you were talking about in connection with the Q4 report of a potential bridging of the EQT Infrastructure IV. Is that still going on, still valid, or any update there?
What I can say is that we're continuing to work on bridging.
Yeah
We're also starting to prepare for the fundraising Infra V.
Yeah.
More details I can't give you right now because of the restrictions that we have.
Yeah. Okay. That was all for me. Thank you.
Thank you.
Thank you. The next question we have is from Liz Miliotis from Bank of America. Please go ahead.
Good morning. Thank you for taking my questions. I have two. Firstly, on EQT IX fundraise, when you're talking about it taking longer based on your discussions and your feeling of the market, do you think it'll be maybe one month longer or twice as long? If you get a sense of exactly how much longer, that would be awesome.
Yeah, thanks for the question, Liz. I'm not going to give a timeline because I'm not allowed to talk about fundraising in and of itself. It is taking a longer time. Having said that, I can flip it around and say we started preparations early last year, let's say the middle of last year, and I think we started talking about it in the market during the fall. There's a long pre-marketing period. We formally started the fundraising in January. We've done a lot of work on it ahead of the crisis, which of course is beneficial in terms of driving towards the close. I can't say anything else than that putting everything together versus a normal period will take a longer time. There are some investors that just need that extra time to commit. We're well prepared and well into the process.
Okay. Thank you. Secondly, on valuations and the gross MOICs on the flagship funds, some came down. I was a little surprised that some didn't come down further, and I appreciate your comments about it's a very resilient thematic portfolio. Just if we could get into the nitty-gritty of the valuations, if possible, a little bit more. Do you think we could see potentially a bit more pain on gross MOICs, maybe in Q2? Obviously, without guiding us, but a little bit more pain as we understand this crisis a little bit more and as things develop. Do you use forward or historical earnings when you're looking at valuations? Thirdly, you mentioned that transaction multiples are one method that you use when valuing assets, but I suppose transaction multiples are almost irrelevant at the moment.
Are some of the valuations in the current portfolio still using that method, or is it all based on earnings or DCF?
Caspar, will you take that one?
Yeah, it was many questions. I don't think we will go into the depths of the granularity of the valuation of each fund. What I can say about methodology is that I think we are using the methodology that I described, including comparable transactions. It doesn't mean that we're not going to sell these assets today. We're going to sell these assets in a sort of normalized environment. I think having comparable transactions will always be a part of the tool set when doing valuations. As I pointed out, the pricing of a marginal share is maybe not the best proxy for valuing an entire company. We use a combination of these methodologies throughout the portfolio.
Okay. Thank you. Just a follow-up question there. I know you can't guide, but do you think that there might still be some more pressure on valuations?
I think that the valuations that we do, we do at per quarter end, and that was what we believe to be the true and fair value at that point in time. It's very difficult to say what that picture will look like three months down the road or two months down the road. It's not that we take this in steps and that we foresee further development. I think it's fair to say that we've taken quite large in some assets, quite large write-downs of values, depending on quite large impact of this current situation, whereas other companies have been less affected. If it turns out that some of the companies that have been less affected are more affected, we will obviously have to bear the consequence of that. I think that goes for the stock market as well. I don't know.
It's the honest answer to that. What I do know is that it's sort of our best effort when it comes to the Q1 where we were at the 31st of March.
Okay. Thank you. I very much appreciate the color. Thank you.
Thank you. The next question we have is from Arnaud Giblat from Exane. Please go ahead.
Yeah, good morning. Arnaud Giblat from Exane. A few questions, please. Thank you for the slide on the appendix regarding how management fees are earned. I just want to clarify one point. If I understand that well, the only two driving elements to determine management fees on Fund Nine will be the timing of the initial close and the amount raised by the end of the year. The timings of other second, third closings in between don't have an impact on the management fees earned in 2020. Is that right?
Chris, may I comment on that? With regards to the size, for 2020, the management fee will be dependent on the size but has been closed out during 2020, because there will be a catch-up for that during the course of the year. With regards to the timing, it is a question of when the predecessor fund is closed for investment and the new fund is open for investment. That's the timing from when the management fees will be calculated.
That's great. Thanks. Secondly, I was wondering on the corporate M&A side, you talked perhaps of opportunities coming from the dislocation. Surely, I assume any potential seller will be thinking long term as well. Do you think that there really have been some big mark changes in potential valuations for some potential targets that you might be looking at?
I can take that one.
Go ahead, Caspar.
Yeah, I can take that one. We were not really alluding to that we will be able to do sort of bargain buys. That's not really what we're saying. Maybe it came out a little bit wrong there. What we are saying is that, in my view here, is that I think tougher times will also make it even more advantageous and important to be part of a larger group than to be sort of a standalone, smaller, maybe more local player. I think the advantages of being in a larger group with everything that comes with that will be highlighted even more. Therefore, I think these tougher times will maybe drive some of those founders and owners to pursue M&A more than they would have done before.
Great. Thanks. I had a last quick question on new deals. Could you comment a bit more about what funding terms are available to do new deals? As I understand, the credit market spreads have blown out and haven't come back in yet. Is that something you might be experiencing on new funding?
Yeah, I can take that one. It's complicated. If you're looking to do a large syndicated transaction today, that's very difficult. The secondary market's trading, depending on sector, between EUR 0.80 something on the dollar and maybe EUR 0.95 on the dollar still, and still volatile times. That's a very complicated funding source right now and probably unlikely in the short term, unless there's a very, very unique situation. Having said that, some of our relationship banks are strong and supportive. Also like we did in Schülke, the private debt market is very active, the private players are also available to support the financing. If I give the example of Schülke again, the leverage that you would achieve and actually want to have in the kind of market we're having today is also lower.
Quantum is lower, the financing structures are more conservative, and the sources are clearly different than in a typical market where you'd have high yield and syndicated loans being more available.
That's great. Thank you very much.
Thank you. The next question we have is from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes. Thank you very much. A lot of good questions have been asked already, but a few perhaps detailed ones, and perhaps just a follow-up on one of the last questions asked on the funding markets. How vital is it for you for the market of larger syndicated loans to be open in order to conduct the strategy that you are aiming for?
I'd say for the very, very large transactions, that makes it more complicated right now. For the medium-sized transactions like Schülke was close to EUR 1 billion , it's more complicated, but it's possible when you have close relationships and you work together with your financing partners. EQT has a lot of experience. We're coming from a different kind of financing structure historically, where we very often worked with our relationship banks, used what we call club deals with a number of relationship banks coming together to support the financing of a company. We would commit more equity capital typically in a market like today. There are other solutions, but for the very large deals where the syndicated loan market is necessary that'll take a little bit of time.
I just had a question on the equity injection need that you mentioned earlier and what you've seen so far. When that's done, does that have any tangible impact on the valuations that you will set for the individual companies? Or is that completely unrelated and you've already taken the equity need into account as it looks now?
Casper?
Typically, what you do is when we support new company with equity, it's not always in the form of equity. We can do an injection, which could be a loan to the company. If it is equity, it's typically then done as any normal company, i.e., you issue shares at the current market value. It should not affect the market values that we have here, which means that if we have a company that has not done an equity injection, it will be done at the current value, and the new money in will be valued at par at that point in time. I don't know if that answers your question.
Okay. All right. Does that mean then that the gross MOIC comes down or?
Well, again, we said we're talking about less than 5% of the fund capital. Obviously the money that comes in is valued at 1.0, right? It's valued at par.
Yeah.
There will be a slight dilution mathematically. In the grand scheme of things, it doesn't really have a big impact.
Of course. Yeah. Just trying to understand the dynamics there.
Yeah.
Just some detailed questions just on the bridge and on the Infra side. I think previously you mentioned, could it be that maybe 10% of the ambition of the upcoming Infra fund or something similar, which would pretty much result in a bridge amounting to maybe EUR 1 billion-EUR 1.5 billion, if I remember correctly. Has the size of it changed given the current environment, or is that unchanged?
Yeah. I don't actually want to comment on that since we're right in the middle of the fundraising process. What I can say is that EQT Infrastructure is 70%-75% invested. There are two alternatives which can either be complementary or you choose one of them. That's the bridge and/or starting the fundraising of Infra V. Depending on timing of investments and the timing of the fundraising processes of those two, we'll decide which way to go. No decisions have been taken yet, therefore I can't comment in more detail.
Okay. Thank you. I'll just shoot two quick final questions then.
The first one is, Kim, or both you, Caspar and Christian and Kim mentioned in terms of the pause and FTEs, but you were still having growth in FTEs during Q2. Is it possible just to give a number on how much FTEs will increase during Q2?
Well, it's a net number of course, and one element of that which we do not know, or one element is unclear, which is how many will leave, et cetera. If you assume that the pace during Q1 continues still during Q2, because anyone who starts in Q2 will have been signed prior to the pause. That's a fair assumption.
Okay. You know what? I think I'll stop there. Thank you for that.
Thanks, Peter.
Thank you. The next question we have is from the line of Jakob Brink from Nordea. Please go ahead.
Thank you, and good morning. Sorry, I just want to come back one more time to Infra V. I think Christian, in your preliminary speech y ou mentioned, I was just looking at the live script here. You mentioned something about you were in preparations for Infra V. It could be launched in the second half of the year. Just to understand exactly what that means. You're now in preparations, or will you be in preparations end year? When you start to launch the fund, does that start mean to launch fundraising, or does it mean to launch investments?
Good question. Right now we're in preparations, so we're starting to prepare. We may launch the fundraising in the second half, which would mean the formal launch as we did for EQT IX in January. That same type of launch could happen in the second half of this year. That's how I would answer that question.
Fundraising, just please remind me, how long time have that taken in periods like this, typically or historically?
Yeah. That's a good question, actually. I would say looking at the market and looking at EQT, in a very strong market, fundraisers take six to eight months, something like that. In a weaker market, they might take up to 12 or something like that. This is not an exact science, and it depends on a number of different factors, but we're talking about several additional months.
Okay. Thank you. That's very clear. On EQT VIII, you're 70%-75% invested by now. As you've pointed out a few times, there's not so much deal-making going on in these markets, I guess you need to go to, is it 85%- 90% before you would launch EQT IX? That's correct, right? Basically you need to invest Sorry.
Yeah, no, go ahead. You can finish.
Basically just if you're at 70%- 75% now and you need some 15 percentage points extra, that would be EUR 1.5 billion. When do you think you can find assets to buy worth around EUR 1.5 billion? How long time will that take in these markets?
Yeah. It's more dynamic than that. 70%-75% was given that we've also now signed the deal for Schülke, we're very much in the higher end of that range. We have 15-16 portfolio companies, something like that, in EQT VIII. A number of them are doing add-on acquisitions. Therefore, typically in those portfolios where we have a lot of add-on acquisition potential, then we close the funds when they're somewhere between, let me say 80%-90%, but it's probably closer to the 80%-85% type of level for those funds that have a lot of add-on acquisitions. That's why we say 80%-90%. It depends really on the portfolio constructions and the opportunity to build on the current businesses that we do own.
We expect to do, let's say, one or two more new investments in EQT VIII, thereafter we would start investing from EQT IX. Of course, it's very difficult to speculate on when that will happen.
Yeah, I understand. Thank you. The last question from my side on the, I think in the March call you did, you mentioned that you were under no pressure to start selling assets in these markets because you had strong IRRs. Could you maybe give us a bit more flavor on how long time can you actually wait before you need to start thinking about selling assets?
Yeah, good question. Our fund structures are 10 years + two years of extension, and then you can even extend beyond that in certain circumstances, if it's required. We have plenty of time to work with our portfolio companies. The oldest fund that we have a couple of companies left in is EQT VI and that's a 2011 vintage. We're up to the end of 2023, before any further extensions. As you know, from an EQT AB point of view, EQT VI is relatively small. For the rest of the key funds, we have many years to go. We're very comfortable with that situation.
Okay. Thank you very much.
Thank you. The next question we have is from Roberta De Lu ca from Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for the time. I have a few questions. The first one is, I'd like to understand maybe a bit more the impact of lower realization of EQT VI on kind of second derivatives. First, I remember at CEO, you mentioned that, for EQT IX, you were kind of accelerating. Well, you kind of needed the resources from EQT VI. I just would like to understand whether any delay in this actually means that you wouldn't have the resources for the deployment of EQT IX, on the other side, on the fundraising, if any capital from EQT VI needs to be freed up before clients can commit for EQT IX?
Yeah. It's an interesting question. The remaining capital in EQT VI is relatively small. I don't have the number right in front of me. Maybe Kim can bring that up, but we've already delivered closer to 2x the capital from that fund to our investors. The remaining investments there, we don't expect to have a material impact on the fund performance, and therefore, also it's not really connected to EQT IX. Yeah, that's how I'd answer that question.
Okay. Thank you. Maybe if you can try to help us understand how we can bridge the data that you give. You say that about 15% of the companies needs capital, and you only have a 5%, and that's based basically on your, let's say, base case scenario from what I understand. You have about 5% negative impact on the portfolio. Obviously, I know you wouldn't comment on competitors, but just to give you a bit of background, I'm sure you've seen peers reporting earlier in the week, they've reported about more than 20% negative impact. So the 5% negative impact strikes as relatively aggressive, but maybe there is something that you can highlight as to why it's only 5%.
Caspar, do you want to take that one?
Yeah. I'm not sure if we compare apples to apples here. When we say 15% of the companies will require capital and up to 5% of the capital in the fund will be used to do that. That was one thing. The other thing Chris mentioned was that, in terms of valuations, we are across the key funds, approximately 5% down in Q1 versus Q4. I was interpreting your question as some of the peers have more bigger drops in terms of valuations. Of course, I cannot really comment on their portfolios. What I can say is that if you look at our portfolios and you look at the exposures we have in industries, I think we are compared to the market, so to speak, underweight. Some energy sectors, some retail sectors, et cetera, which will have more significant drops.
We have our small share of those as well. There we've had significant drops in values. Since we have fewer of those assets, the impact on our overall portfolio will be smaller.
Okay. Yeah, of course, it's not apples to apples, but still thinking that 15% of the companies needs capital and the valuation downside is only 5%, it's striking, but I understand it's not apples to apples. One last question, if I may. Maybe specifically on EQT VI again. The negative impact on the MOIC there is relatively low. Looking at the companies you have there are some companies which I would expect to be impacted, like Nordic Aviation Capital or Flying Tiger. Is there anything specific that you can say about the performance of these companies?
No, we don't comment.
Yeah. Go ahead, Caspar.
No, go ahead, Chris. No, sorry. You go ahead.
That's okay. It's yours.
No, I think we will not comment.
No, you go ahead.
Yeah, we will not comment on individual companies. Of course, the travel sectors and the retail sectors are sectors that are badly hit, and that is also reflected in the valuation of companies in those sectors across our portfolio.
I can just add to that. Like I said earlier, EQT VI is a fund which is by far the majority of companies have been realized, so the remaining capital in that fund is relatively small. Therefore, any changes in valuation of that remaining small amount of capital doesn't have a big impact. That probably explains page 11 a little bit.
Thank you very much.
Thank you. The next question we have is from Gurjit Kambo from JP Morgan. Please go ahead.
Hi. Good morning, gentlemen. Just a couple of questions to follow up. In terms of the fundraising, potentially launching the infrastructure fund five in the second half, I think previously you'd indicated you wouldn't really want to be launching two funds at the same time. Just to really understand why you would be prepared to do that. Have you got the capacity to do that? That's the first one. Just on new growth initiatives, obviously ventures and public investments, you've mentioned in the past. Are you still on track to look at investing in those areas? Just on secondaries, are you seeing bigger opportunities in the secondaries market? I would have thought that would be quite interesting at this point. Last one, can you just remind me what the dry powder roughly is in the business at the moment? Thank you.
Thanks, Gurjit. I'll take the first couple of ones and then Kim can take the dry powder question. The fundraising point, as we talked about, what we didn't want to do was we preferred not to raise Fund V for Infra and Fund IX for Equity at the same time. The same time would have been launching in January. Now as I explained earlier in the call, we've come quite a long way on our EQT IX fundraising, therefore we're ready. We have the resources, we have the capabilities to start preparing for Fund V. They basically become sequential or as close to sequential as you can get, and not completely parallel. Hopefully that clarification-
Yeah.
Ventures and Public Value. Ventures is on their second fund, which we raised last year. The first fund is continuing to perform very well also during this time as I mentioned, because of their digital business models and really investing with future themes. A lot of those themes and trends will be accelerated now in the crisis. We also believe that those trends that were existing before the crisis, whether they were relating to sustainability or digitalization, whatever it might be, those are going to be accelerated after the crisis, and others will also be accelerated, maybe in a more negative way, possibly relating to oil and gas, et cetera. Ventures is very thematic and investing in that world. Public Value also now has been investing for more than a year. It's the only fund that we have, which is an open-ended fund.
It's kind of a hybrid between a hedge fund structure and a private equity structure for long-term commitments, but it's open-ended. They're, of course, quite active in the market now and looking to partner with interesting companies. On the secondaries, we don't have a secondaries business if you mean actual secondary buying, secondary portfolios, et cetera. If you're thinking of secondary buyouts, we're of course always looking at all sources of deals whether they're from private equity or families or public to privates or whatever it might be. I don't expect there to be any particular one of those areas being more active than another. It's really case by case, I would say. Kim, maybe you can talk about the other question on capital.
Yeah. With regards to dry powder, well, the information we would typically give is that we are 70%-75% invested in the key funds that we are currently investing out of. We have also said that we have sufficient capital to support the companies that need it up to the 5% that we have said that we may need in total.
Thank you. That caller has disconnected. We're now moving on to Bruce Hamilton from Morgan Stanley. Please go ahead.
Hi. Morning, guys. Thanks for taking all the questions and thanks for the color. Just two from me. One, just thinking about the topic of government coronavirus aid. Obviously, there's been a bunch of press reports in the U.S. saying that private equity wouldn't have access. In terms of how you think about government aid, is it completely academic because you would never take it because of the reputational hit? Obviously, at the moment, your portfolio, it sounds like you're pretty confident with the dry powder. You can support the companies you need to. I'm just interested in how you think about that topic and whether the industry as a whole will get access. Secondly, on Roman's specific fundraising of your funds, but I guess in conversations with LPs, is there any change in their thinking around allocation?
Anecdotal, I guess, because of denominated disruption in parts of their public equity portfolio and/or because they're being drawn on commitments as PE firms have looked to support portfolio companies. Is there any sense that there may be a reluctance or that growth trend changes, or is it just a pause and then we sort of return to the allocation story because people need to make up the unfunded pension liabilities, et cetera? Thank you.
Thank you. When it comes to government support, it's a very complicated question. We're of course primarily active in Europe. Talking a little bit about EQT, we are regulated in the EU. We have a licensed operator here. We're actually operating onshore as well. As you know, all of our funds are onshore here in the EU. We have local offices with people on the ground in almost every European country, or at least in many European countries. That's a little bit of background on EQT. What we think is that we're all in this challenge together. These are difficult times. Our goal is to help our companies in the best possible way we can. Thinking about that, we need to be a responsible owner, but we also have a fiduciary duty versus our investors.
If you think about who are the investors in EQT's funds, there are pension funds and insurance companies, and life insurance and these kinds of things from around the world. The owners of the companies that we're talking about in private equity, it's not EQT that owns these companies, it's actually our investors who own the companies. We're managing the companies on their behalf. We believe that if there is a situation where we're supporting a company and the banks are supporting a company and the government also would be a part of supporting that company, we think that's completely appropriate.
Okay, thanks.
Thank you. The final question we have is from Mike Williams from UBS. Please go ahead.
Thanks. Mike Williams from UBS. Thank you for all the answers. Just maybe a follow-up or two. I guess any color as to why the quarter-on-quarter marks in EQT VII were more negatively impacted than some of your other funds? Was this broad-based amongst the portfolio companies within EQT VII? Was there a particular company that saw maybe a sharper mark? That's one. Second, you noted how you will intend to, with Nestlé Skin Health, intending to cancel that transaction. Is there a risk of any other transactions that you have announced that may not see completion given any material adverse impacts? Thank you.
Thanks. Caspar, will you take the first one?
Yeah, sure. I can do that. I think when it comes to EQT VII, again, I don't want to go into specific portfolio companies, but it's really the portfolio composition there and the majority of that write-down actually comes out of one particular situation. That's the background. There is nothing else. If you look at the overall portfolio, it looks basically similar to others.
Chris?
Okay.
Yeah. First of all, there are not that many situations where deals are pending right now. That's not really a question that we expect to see on a broad base. We don't have any other public to private situations that we're working on either, or that is in the market now. Working on probably, yes, nothing that's in the market right now. That situation, I would say, is a very particular situation.
Okay. Thank you very much, guys.
Thank you.
Thank you. Ladies and gentlemen, that concludes the questions for today. I'd like to hand back to the speakers for any closing comments.
Thank you very much. We appreciate that everybody joined, and we appreciated a lot of good questions today. Hope it has been helpful, and look forward to seeing you next time. Thank you. Bye-bye.
Thank you. Ladies and gentlemen, that concludes your call for today. We thank you very much for joining and ask that you disconnect your lines. Thank you.