Thank you so much, good morning, everyone. My name is Kim Henriksson. I'm the CFO of EQT AB. I'm here with Åsa Riisberg, Head of our Shareholder Relations Operations, and Paweł Bączyński, Shareholder Relations Officer. It's my pleasure to present EQT's first quarterly announcement as a public company. We'll start with a brief review of the presentation material, after which we will have then an opportunity for Q&A, as mentioned. Before we dive into the material, just a brief recap of our reporting concept. As you know, we have a very long-term business model that our fund investors entrust us with their capital for 10 to 12 years, and a typical holding period for a portfolio company would be four to five years. In any one quarter, there will typically not be significant changes.
The key factors impacting our financial performance and the way we also follow the business internally include that we manage to find and invest client funds in attractive opportunities, and that we create value in the portfolio companies by making them into better and more future-proof companies, that we subsequently exit these investments, that such performance then in turn allows us to raise further funds to invest, and of course, that we manage to recruit the right talent to continue to grow. Information on all of the above factors will be included in the quarterly announcement presented today. Twice a year, following the year-end and after H1, we will also include full financials in the reporting. We believe that this strikes the right balance between focusing on the right things and on the long term, and ensuring sufficient transparency towards the shareholders and other stakeholders.
Given this is our first announcement and that our business model is not so familiar to all capital market stakeholders, the presentation material also includes some more educational slides. Bear with us, we will also cover the details of the announcement. With that, let's start with some highlights from the third quarter. There's, of course, one event in the quarter which has been very visible to the outside world, and that's the listing of EQT AB on Nasdaq OMX. We are very humbled by the support and interest in EQT, both from the most respected institutional shareholders in the world and from around 40,000 retail shareholders. We will be working hard to live up to that trust. For the third quarter, the good investment activity continued, roughly with the same pace as year-to-date. Year-to-date, the EQT funds have invested approximately EUR 10 billion.
Also, the exit environment continues to be supportive with a total of close to EUR 6 billion for the first nine months. Value creation in our key funds remain on plan, and let me revert to that later on in the presentation. In terms of headcount, we're continuing to grow according to plan, with total number of employees at the end of the quarter reaching 675. The fee-paying AUM, assets under management, has not changed much in the period. The ongoing fundraisings are focused on Ventures II and Real Estate II. We are, of course, continuously in touch with our clients, and such contacts will usually intensify the closer you get to launching a fundraising. We are now 65%-70% invested in EQT VIII. We expect to begin fundraising of EQT IX in 2020.
Turning to the next point to give a little bit of background again, as mentioned in the connection with the listing, this is merely a watering station for us. It's business as usual, now with a balance sheet. What's business as usual then? Well, it's future-proofing companies into strong long-term and resilient companies across the globe. How do we do that? We recruit and train talent driven by a strong purpose. We have a thematic investment approach. We invest with the trends. By making companies better, we both create returns and we make a positive impact to investors and to society and the companies. That's how we work towards our vision of becoming the most reputable investor and owner. As you can see on slide four, growth is in our DNA, actually since our inception 25 years ago.
You can see that here with long-term growth in the fee-paying assets under management, but also in our talent pool, our employees. Our employees and network, they are EQT's main assets, and they are people that find interesting investment opportunities. They have angles on how to develop, grow, and transform them. At the end of the day, creating strong companies that benefit society as a whole, that creates returns and gives EQT its license to operate. You can also on this slide see our geographical footprint. We are continuously expanding it, most recently with Milan in Italy, and currently we have a new office opening underway in Paris, France. On the next slide, you can easily get lost in the details of private markets investing, and the model may seem complex.
Let me take a minute to go through our business model from a helicopter perspective. Our primary focus is on creating attractive returns for our clients. That's the starting point. If we succeed with that, like we have done in the past, they will entrust us with further funds, so assets under management will grow. From those funds, we have two integrated revenue streams. We have the contractually recurring management fees, and we have the carried interest, which is a function of the performance of the funds. All of that on the top line and on the cost side, a vast majority of costs are related to our employees. With that, I'll hand over to Åsa for some color on EQT's investment activity.
Yes. Thank you, Kim. Good morning, everyone. We're seeing continued good investment activity in Q3 with a total amount of EUR 3.4 billion invested by the EQT funds in the quarter. Just to pick a few deals, in private capital, notable deals include Aldevron, which is a U.S.-based manufacturer and supplier of plasmid DNA, which is a mission-critical component in, for instance, gene therapy treatments. Another private capital transaction is Waystar, which is a U.S. revenue cycle management software business that helps hospitals and physician offices to manage claims and collect payments from payers and patients. In real assets, a notable deal was, among others, inexio, which is a fast-growing provider of high-speed internet to retail customers and businesses in rural Germany. These deals are all good examples of EQT's thematic investment approach to investments.
EQT focus on attractive sub-sectors that we followed for a long time in key focus industries such as healthcare and TMT. We combine this with the local execution by the local EQT deal teams. These are good examples of how we work at EQT with our investment activity. It should be noted, though, that when it comes to EQT's investment activities, individual quarters can be lumpy from time to time. We therefore prefer to look at the investment pace over a longer time period. As you can see here, for the first nine months of 2019, and which also Kim pointed out, total investment in EQT funds amounted to EUR 10.1 billion. Turning now to the exit side, we note a supportive exit environment. Total exit amounts to EUR 5.6 billion for the EQT funds for the first nine months of 2019. A few examples here as well.
For instance, in private capital, we've exited Press Ganey, which is a provider of patient experience and workforce engagement solutions. This was the first exit by private capital in the U.S. We also exited AutoStore, a Norwegian warehouse automation systems business. In real assets some recent exits include, for instance, Charleston, which is a German senior care platform, and GB Railfreight, a U.K. rail freight operator. This is just to give you a flavor of the investment and exit activity for the past nine months.
Thank you, Åsa. Let's move to the key funds and the value creation there. As mentioned, the expected value creation for our key funds is on plan. Let me take a moment to explain how some of the numbers here on this page hang together. Please turn your attention to the second column from the right, the gross MOIC as of September this year. This is the valuation of the underlying portfolio companies at that point in time compared to the initially invested capital. Turning to the column furthermost to the right. This refers to our current assessment of the future performance of the underlying assets, i.e., given our expectations on exit timing and valuation and so on. These are on plan with the exception of Infra III, which is above plan. There is no change from the prospectus on this.
What do we mean by on plan? Well, for private equity funds, the target gross MOIC is around 2.3x, and therefore on plan is a range around that between 2.0x-2.5x. For the infrastructure fund, the target gross MOIC amounts to around 2x, and therefore on plan would mean 1.7x-2.2x gross MOIC. That should give you a good sense for our value creation expectations. Moving over to assets under management. They remain at similar levels as in the beginning of the quarter. Remember that when we talk about AUM, it's always about fee-paying AUM. We have no other definition and do not include any other assets here. Year to date, the fee-paying AUM has increased with some 11%. The gross inflows have mainly been driven by Infra IV earlier in the year.
The Q3 development here illustrates well that not much necessarily happens in a single quarter if there had not been any major fundraisings. As mentioned, the fundraisings here are currently focused on Ventures II and Real Estate II. What is then the status of our key funds? Let me go through this in some level of detail. Although some of you have seen this before during the roadshow. Normally, you would start investing from a successor fund when you are 80%-90% invested in the predecessor fund. If there is such thing as a normal period, it would normally take four to five years, but more recently, the actual period has been more in the region of two to three years. Currently, Infra IV has made some additional investments and that has taken the investment level to 50%-55% in Infra IV.
In EQT VIII, it continues to be 65%-70% invested. Given where we are there, we are intensifying the preparations for EQT IX, and we expect to formally launch the fundraising then in 2020. At that point, we will of course also communicate to the market. Timing-wise, there's still some room to invest from EQT VIII, but we don't want to be in a situation where we are fully staffed and run out of capital to invest. It's also important to remember that it's in the nature of our business that we have multiple business segments and active funds, that we will always be buyers of assets, sellers of assets, and always be in fundraising or pre-marketing mode. Furthermore, to the right here, in terms of size, we will also inform the market when we set a target size for the next fund.
On the page here, we have indicated what the increases have been in our latest fundraises in the flagship funds. The fund we are currently investing out of on the private equity side, EQT VIII, was approximately EUR 4 billion larger than its predecessor fund, EQT VII. Just moving to the next slide and the second part of our revenue lines, and that's carried interest. This is a bit of an educational slide and with a fair amount of text. Maybe firstly, we have a conservative way to account for carry, where we take discounts on the unrealized valuations of the underlying assets. It's, for an external party, not possible to exactly replicate without access to the underlying financials.
We will obviously do the exact calculation, but we have given the markets here a rule of thumb that the initial recognition would normally take place when you are at around 1.7x-1.8x gross MOIC in a fund. Usually, you also need to have a few exits. Based on experience, this would normally occur four to six years after the first investment. That's kind of the general guidance on when carry would be recognized. On the right-hand side of this page, there's the status of the carried interest recognition for our key funds. EQT VI and Infrastructure II, they are already in carry recognition mode. EQT VII and Infra III are illustrated here. You can compare that to the rule of thumb that we are on EQT VII getting close, but we are not yet in carry recognition mode.
As we have stated earlier, we do not expect to recognize carry from EQT VII during 2019. EQT VIII and Infra IV, they are in the investment period and thus some years away from carry recognition. We said that it's all about people, and we are continuing to grow our talent pool according to plan, I would say. As of September, we were 675 employees, and we have and we will continue to grow that as well. Moving on to the last page and the targets, our financial targets and dividend policy. There are no news here, really, but let me just reiterate them anyway. Our target is that the revenue growth should exceed the private market's long-term growth rate. The latest available market expectations was about 10% compound annual growth rate between 2020 and 2025.
Our target is that our revenues will grow faster than the market. Not in every single point in time and every year, but over a fund cycle, let's say. We have said that we have a profitability target that our EBITDA margin should be at least 55%-65%. Our adjusted EBITDA in H1 was at 47%. In terms of dividend policy, we will have a steadily increasing annual dividend in absolute euro terms. The board of directors is expected to propose that approximately EUR 200 million will be paid out as a dividend for the current fiscal year in equal installments in next year. With that, the formal part of the presentation is concluded, and we open up for questions from the listeners.
Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question comes from the line of Magnus Andersson from ABG. Please go ahead.
Yes. Good morning. My first question is around the preparations for the successor fund, EQT IX, where you said that fundraising is expected to begin in 2020. Can you give us some flavor of what we should expect in terms of when you would possibly launch it?
The way you should think about the fundraising is given the guidance of 80%-90% invested, at that point in time, we want to be able to invest out of the successor fund. Well, when do we reach 80%-90%? We don't know. It depends on which transactions will happen and when they will happen. Based on historical pace, we've said that 20%-25% per year, it would be well within one year from now. At that point, we'd like to be ready. Not ready with the fundraising, but be able to start investing out of the new fund. How long does it take in between there? The whole fundraising may take anywhere from 6 months to one year or more, but we expect that we should be able to invest out of a new fund in a shorter period of time than that.
Okay. Thank you. My second question is just on the continued ramp up in the number of employees from here. You're now at 675 as of September 19. What should we expect in the coming year?
We are continuing to ramp up, you're right. We are ramping up according to plan. What we have said is that the percentage change in number of employees is likely to go down, whereas the absolute number is probably in the same region as it has been in the recent past, so 100 plus, minus some persons on an annual basis. We've also said that in a normal year, you would expect the second half of the year to have a slightly higher increase of employees. That just has to do with how the bonus structures and other things work in the financial industry.
Okay. Thank you. Finally, you were talking there on slide 10 about normal commitment period versus the actual commitment period in the last fund generations. Why do you think the commitment periods have been shorter in the last fund generations? Going forward, is it still four to five that you think is normal or is that more conservative?
If you look at it over an even longer time period, you could say that the three year or something around that is not abnormal in any way. You will have time periods during recession where that would be a longer period again. On average, maybe the normal is four to five. We feel that the two to three year is reasonable currently, or in line with what we're currently doing.
Okay. Thank you very much. That's all for me.
Thanks.
The next question comes from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes. Hi, good morning. Just a follow-up question on the fundraising. Could you just tell us what kind of news flow or comments should we expect from you over the coming year in terms of the EQT IX fundraising, given that you're new on the market now? What should we expect in terms of communication apart from what we've gotten today?
Well, I think the next step in terms of communication that you should expect is that when we launch the fundraising, we will come out and mention that. At that point, we will also set a target size for the fund, and we will announce that. After that, it depends a bit on how the fundraising then develops, about what information we will come out with. We will ensure that the market is always aware of the main aspects that could impact our share price, of course, and that there's not any difference in information available to the various participants in the capital markets.
Okay. Will we get any information on how much has been committed of the fund size? How that actually develops?
I will not commit to that. That depends on how the fundraising goes.
Okay. Just a second question on the carried interest, and as you reiterated we should not expect that EQT VII goes into carry during this year, even though it's at 1.7x gross MOIC, so it could very well start to generate carry. The performance there improved another 0.1x in this quarter. Assuming that kind of continues into the end of the year, should there be any impact of that? Perhaps the carry that comes through is even more front-end loaded than perhaps we've seen in historical funds? Is this just in line with ordinary development?
No, we do not see that this differs in any meaningful way from ordinary, if there is such thing as ordinary. As we have mentioned, it does differ quite a lot as to when a particular fund enters carry mode. The range has been between 2.5-6 years, or something like that. It can differ quite a lot. This should be kind of normal.
Okay, thank you. Those were my questions. Thank you for that.
Thank you.
The next question comes from the line of Michael Werner from UBS. Please go ahead.
Good morning. Thank you for the opportunity to ask some questions. I guess, going back to the fundraising and the expectations for EQT IX, I was just wondering if you could provide a little bit of color as to how long the fundraising process lasted for EQT VIII and Infra IV. Any color there would be quite helpful from when you announced the fundraising to the final close.
Well, I guess, first of all, I would say that the final close may not be the right timing to think of, since we would start charging on the fund from when we start investing out of that fund and close the predecessor fund for new investments. Essentially, that is the key timing from a sort of financial model point of view. Even if we then add to the fundraising after that, also those funds would then pay management fees from the first day of that fund opening up for investment. Really the key timing determinant is when will we close EQT VIII for investment, and with that one, we do not know. It depends on which transactions will take place, which ones will happen here over the course of the next, say, 6-12 months.
Okay. Thank you. I guess, in terms of the recently raised primary proceeds from the IPO, you've indicated that you plan to seed certain strategies. I was just wondering if you had any indication as to when we might see those strategies being launched, whether we should think about that as a 2020 or potentially 2021 event, particularly when it comes to kind of the CLO product, the managed to prime product which you guys have indicated. Thank you.
I guess the IPO was concluded about 6 weeks ago, and we had the plans in place at a sort of high level of what we would like to do. Some of them, like the CLOs, are fairly well advanced and could already commence here during the current year or at least next year. Real estate managed to prime probably earliest next year. The other part which we discussed during the IPO process is growth or venture growth or growth equity, which also we have sort of developed plans to initiate possibly already during the course of next year. We do not have any specific launch dates on any of these, but we are advancing well in our plans.
Excellent. That's very helpful. Thank you very much.
The next question comes from the line of Gurjit Kambo from JP Morgan. Please go ahead.
Hi, good morning. Just a couple of questions. Firstly, just in terms of the investing, you mentioned a couple of deals you've done in the U.S. I'm just trying to get a sense of where are you seeing most opportunities by geography for investing. That's the first question. Secondly, in terms of the gross exits, I know we shouldn't look at it on a quarterly by quarterly basis. Obviously exits were slightly lower in Q3 versus what you saw in the first half. Is that just the lumpiness or should we read anything else into the gross exit during the quarter? Thank you.
Yeah. Maybe I comment on the investment activity. I think, the way we think about the investment opportunity and the pipeline there, we really apply a thematic investment approach, which means that we look at the interesting sub-sectors that have interesting fundamental growth drivers, non-economic growth drivers like demographics or environmental trends or underlying growth that we like. We combine that with the local execution. We have local people in the geographies where we are investing, and we have a very strong network of offices as you know, in Europe, and we're building out our presence in North America. I think the way I would think about it is that the composition of deals is currently what we expect it to be going forward.
We'll see a mix of North American and European deals, and I don't think there's any major difference in the deal flow. It's more that in the recent time period, we've seen a few very attractive opportunities in the North American markets on the private capital side, that we were in a unique position to acquire, and we're very comfortable with those investments. Equally, on the real asset side, the Psy deal, for instance, that we talked about before, we've been doing fiber investments for 20 years, so we're quite well-positioned to do fiber deals whether it's in Europe or in U.S. I think that the composition that you've seen historically is what you can expect going forward. Obviously we are still under- indexed in North American market compared to many of our competitors.
On your second question with regards to gross exits, I wouldn't read too much into one quarter. We still find the exit environment supportive. Maybe it has grown a bit more selective during the course of the year. I wouldn't say that the Q3 is materially different exit environment from the rest of the year. I would put it more down to lumpiness for the time being.
Great. Thanks very much.
The next question comes from the line of Jakob Brink from Nordea. Please go ahead.
Thank you. Sorry for coming back to the question once again, but EQT IX, if I understood it correctly, just to get the data right. You said you want to be ready to invest when the old fund, EQT VIII, reaches 80%-90%, is that correct?
Yes, that's correct.
With the current speed of investment, isn't it also correct that you should be basically at 80% to 90% at H1 2020?
Well, whether it's H1 or after H1, I don't know. We don't know that, whether the deals will come true. We have a number of fairly significant transactions happening during the course of this year. If you just do a sort of mathematical exercise, you would end up in the latter part of the period you mentioned.
If you don't know, which I guess you cannot know, if it is actually going to be in last part of H1, wouldn't it be prudent to then start fundraising already just after Christmas? How does that normally work?
Well, fundraising is a process, not vastly dissimilar to an IPO, where, first of all, we are in continuous dialogue with our fund investors during and between fundraising. You start, for lack of better word, use pre-marketing, i.e., start warming them up, telling about how their predecessor fund is doing and how things are going. The formal launch is a sort of more a second or a further step in that. You kind of accelerate those steps. That you haven't started the formal launch doesn't mean that you're not fundraising or marketing or thinking about the fund together with your investor base. It's a gradual process, I would say. I don't dispute your comment, though.
Have you had those pre-marketing, what did you call it, pre-marketing meetings?
We are meeting with our fund investors, yes.
Okay. Thank you. Second question or whatever it is. I've seen some news recently that KKR and Carlyle have been out raising record large European funds in private capital recently. In that light, how does that make you think about the target size for EQT IX?
Well, it's true that the fundraising market also continues to be supportive, and we have seen some very large fundraisings from some of our competitors. Part of the pre-marketing that we are doing is also discussing with our investors about their appetite, of course and the second element is that we are making sure that we have the pipeline of deals and the resources available internally to ensure that we can deploy the fund size that we're after in attractive investments and in a reasonable timeframe. All of these taken together will then determine the fund size. For the time being, I don't have any better guidance to give than the increase in our predecessor fund was about EUR 4 billion.
Okay. Many thanks for the help.
You're welcome.
The next question comes from the line of Arnaud Giblat from Exane BNP. Please go ahead.
Good morning. I've got a couple of questions, please. Firstly, the investment environment has clearly been strong over the last nine months. I'm wondering, looking forward, is that something you expect to continue to remain the case, assuming that equity markets remain flat and nothing happens to the debt markets? My second question is, aside from fund nine, is there other areas where you might be looking at raising further funds? I'm thinking maybe in mid-markets or in credit in 2020. Thank you.
Was the first one about listing?
No, him asking like if we think it will continue to be strong.
Yes, we do. We see no signs of it not continuing to be strong. The pace in the third quarter has been similar to the earlier part of the year, and we still see good and attractive opportunities out there. We continue to believe in that. When it comes to other fundraisings, I mean, the ones that are in the market now are Ventures II and Real Estate II. We are on plan, and we're making good progress on those. Let's get them done here in the short to medium term. Then see what the next one. I'm not going to give out any specifics on that. Obviously, we have some open-ended funds such as Public Value, which is in continuous fundraising, you could say.
That's great. Thank you very much.
Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. The next question comes from the line of Bruce Hamilton from Morgan Stanley. Please go ahead.
Yes, morning. Thanks for taking my questions. One on some investments and one on fundraising, if I may. I guess we're now at sort of back to peak leverage levels in terms of sort of debt to EBITDA in deals both in Europe and the U.S. I guess some of your peers have mentioned certain sectors becoming more challenging to find value, including sort of tech, I think in healthcare. I mean, I understand your thematic and sector-driven approach, but some of those sectors seem to be amongst the hotter ones. What's your level of confidence, or how do you get comfortable that you can still drive the sort of MOIC you achieved historically if that's the case? Do you think that's not the right way to read the investment environment?
Secondly, on the fundraising, the sort of EUR 4 billion increase you saw between EQT VII and VIII, you mentioned that a couple of times. Are you trying to give an implicit sort of guide into what you think the increase might be in the following fund? That was the way I sort of read it, but I don't know if that was an overread. Thank you.
Okay. On your first one. Yes, we are thematic, and I would also say that historically, we have experience that we are great investors in growth companies, in making good companies excellent. That means that we are going to be paying full market price for those companies. If you look at it over a slightly longer period of time, of course, we need to work harder and smarter to create those same returns. That's also what we are doing. We still think that we can find attractive investment opportunities also in the sectors you mentioned and reach the same MOIC target as before. That's one thing. Secondly, I'm not going to give any formal guidance on the size of EQT IX.
Okay, thanks.
As there are no further questions, I'll hand it back to the speaker.
Okay. Thank you so much. Great questions. I hope this was useful for you listeners. We had a good first quarter as a listed company. Obviously, there were no major surprises. We hope in this it was only six weeks since the listing. We are looking very much forward to continuing the dialogue with all of you over the course of the next quarters and years. Thank you so much.