Welcome to the EQT year-end report, January through December 2019. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Just to remind you, the call is being recorded. Today, I'm pleased to present Christian Sinding, CEO. Please begin your meeting.
Thank you very much, and also a very warm welcome from me to the year-end report for EQT, where this is our first financial report since our IPO. It follows up the Q4 announcement, which we released on January 23rd, which probably most of you also listened to. Today, it's going to be primarily me and Kim, our CFO, presenting, while Caspar, our COO, also our Head of Shareholder Relations, and Pavel, also in Shareholder Relations, are attending and will be answering questions. Taking a step back, I wanted to reiterate that EQT is a purpose-driven company. The financial results we're reporting today are really an effect of our commitment to future-proof companies and make a positive impact.
Our vision is to be the most reputable investor and owner. Our mission, as you can see there on the screen, is really through our talent and our network and our thematic investment approach to work every single day to create superior returns for our customers and also make a positive impact with everything that we do. Thank you. The next page, recapping 2019, primarily on the investment side, starting there. It was a record year with our total investments by the EQT funds amounting to EUR 11.9 billion, which is 38% versus last year. The market does remain competitive with high multiples for assets, but we continue to find attractive companies where EQT can really add value and drive superior returns for the long term. Our investment pace is a result of the focus on thematic investing in the prioritized sectors.
In private equity, that's primarily healthcare, TMT, and services, while we also have energy and environmental and transport and logistics in our infrastructure business. On the exit side, it was quite a busy year with gross fund exits of EUR 8 billion, which is 58% versus last year. Following the deal which was announced earlier this week by Infra IV to invest in Deutsche Glasfaser, a very exciting investment in the fiber space in Germany, the investment level in Infra IV has actually increased to 70%-75%. Given our investment pace in that fund, we've initiated work to find solutions to bridge or extend that existing fund, or by also using the secondary market. That is in process, but still in an early stage.
We, of course, want to make sure that we have sufficient capital in place to continue to make investments in Infra IV through this initiative. As I mentioned last time, we do prefer not to raise two of our flagship funds at exactly the same time, both for internal reasons, but also for customer service reasons. Therefore, we are working on this bridge alternative. For EQT VIII, the investment level remains at 70%-75%, which is the same as a few weeks ago in the Q4 announcement. We did set the target for EQT IX at EUR 14.75 billion. That fundraising is going according to plan. As you might know, due to marketing rules, we cannot comment further on that fundraise at this point in time.
On the value creation side, in our key funds, this develops according to plan. One of the Infra funds still above plan. Kim will come back to that later. That again, is due to our intense focus on driving value creation in our companies. A critical part of our value creation plan is centered around sustainability. It's really integrated in everything that we do in our investment process and during the ownership phase. We are now also raising our ambitions to take our sustainability efforts to the next level, both for ourselves as a company, but also importantly for the portfolio companies in the EQT funds. I'll come back to this a little bit more later. The record year is also reflected in our financials. Our adjusted revenues for the full year increased 54% to EUR 606 million.
Adjusted EBITDA grew to EUR 275 million, up from EUR 156 million a year earlier. With that, the board is proposing a dividend of SEK 2.2 per share, which will be paid in two installments during 2020, and this corresponds to the EUR 200 million dividend that we communicated during the IPO process. Reflecting on the current market environment, again, we do see a healthy pipeline of investment opportunities across the board in all of our investment strategies. We do also see a relatively supportive exit market for high-quality companies and a continued fairly good fundraising environment as well.
Having said that, there is some uncertainty in the market relating to the coronavirus that may affect certain exits in certain companies in our portfolio or others, but we have not seen a material effect yet. For EQT, our exit pipeline is strong, but it is tilted towards the second half of this year. As I stated, the financial results are an effect of our commitment to future-proofing companies and making a positive impact. We want to take a step back and talk a little bit again about how we drive our returns. We really have a set of differentiators that sets us apart from competition. First of all, we are intensely focused on future-proofing through thematic investing, which is really following long-term secular trends across our investment strategies.
We do this with our local, with locals infrastructure, if you want to call it that, where we're investing in each country with local people using our global thematic approach. Our governance model is also unique with our industry-leading network of industrial advisors, where the industrial advisors are always driving a lot of the board work together with the EQT teams. On our value creation toolbox, we've really institutionalized our approach to value creation while staying entrepreneurial, and we call that the EQT Way. We have a number of tools that teams use to really drive value creation in private companies. Importantly, we have a lot of focus on sustainability and digitalization. This is a part of the future-proofing strategy. We have in-house resources for both of those areas.
Like I said, we're integrating sustainability every day more and more into how we do and what we do. We also use it for deal selection, and driving value creation plans, and even setting up the companies for exit. We are guided there by the U.N. Sustainable Development Goals. What that means is that we only make an investment when we conclude that a company's product or service is actually delivering a positive impact or where it has potential to deliver a positive impact on society through the transformational support that EQT can provide. We ask a rhetorical question, if you have two companies that are exactly the same, one is more sustainable than the other or can become more sustainable than the other, which one will be more attractive over time? Which one will be more interesting to work for? Which one will attract the most talent?
Clearly, we believe it's the one that's going to be the more sustainable one. On digitalization, we're also continuing to invest a lot in both our Motherbrain effort and our own internal automation and digital business development. We don't think this is enough, so as a market leader in the private market space, we believe we have an opportunity and obligation, actually, to accelerate action towards sustainable business practices. We've decided now to elevate our societal ambitions. As a first step, we're setting new targets for EQT AB in transparency and accountability, on diversity and upskilling, and also the climate. A little bit more detail on transparency and accountability, we're committing to publish even more clear ESG data. I think more importantly and impactful is that we're linking incentive schemes at EQT to our sustainability objectives.
Secondly, we believe that diversity in general drives innovation, and it also helps drive returns, which is proven in our industry, and it's something very positive for everybody involved. Right now, we're focusing on gender diversity, and we're really committed to improving the gender imbalance at EQT. This year, we set a goal that 65% of our investment professionals shall be female, and that we're recruiting. That will help us over time get to the long-term goal, which, of course, should be an equal gender balance. We also require our advisors, such as commercial, legal, banking, et cetera, to have at least 25% of their teams being from the underrepresented gender. Otherwise, we won't allow them to serve EQT.
Thirdly, to act on climate issues, we've actually already since 2014, measured our carbon footprint, and we're now carbon neutral as a firm, and we continue to take steps to become carbon positive over time. Today, all of our offices are on 100% renewable energy, or where it's not possible to fully reduce emissions, we ensure that they're positively offset. I think more impactful than that is that we're requiring now all of our portfolio companies to start their transition to renewable energy. Finally, we have the EQT Foundation, which we launched at IPO, and this is going to coordinate and drive EQT's philanthropic efforts. EQT Foundation's mission is to help create a more inclusive world and to push the frontiers of societal impact. Good. Talking a bit more about the business side. 2019 was a record year for EQT and also probably for private equity industry.
We are operating in a very long-running bull market. I wanted to spend a little bit of time on how we act and invest in this market environment. Like I said, we're focused on thematic investing in relatively non-cyclical industries, in companies like Galderma, Aldevron, the fiber initiatives in infra with Zayo and Torgglas Fabrikker and EXEO, et cetera. Taking that from the company up to the fund and portfolio composition side, we're really working to ensure that we have a good and wise portfolio construction. We therefore use our co-investments with our LPs and deal syndication to make sure that we have the right allocation across sectors, geographies, currencies, and other drivers, so that we have little correlation in the funds to any particular theme. Well, this also helps us actually right-size our fund sizes, and it's something which is very good for our clients.
We see that as a real win-win with the co-invest. We have a global investment forum, which is really focused on what we say performance, performance. In the global investment forum, we are ensuring that we have a really consistent approach to our investments, to refinancings, to exits, and value creation plans in each of the funds that we're working with. Right now, I must say that our focus is to drive exits this year. We do know it's a good time to exit, and we want to really make sure that we continue to take advantage of that during the year. Like I said, the exits are skewed for a bit later this year. On the portfolio company level, we're really working, thinking about the long-term value creation for each company, that we can really drive transformation during our ownership phase.
We do also have each company preparing a Plan B. What happens in case of a downturn, or what happens in case of some kind of external shock? We're prepared in terms of governance, in terms of financing structure, cost structure, et cetera, to act if we need to. Very important is the financing side of things, where we're trying to work to make sure that we right-size the financings for the long term with the right level of cushion and the right level of flexibility and with covenant light and other elements. EQT, we're not the firm that maximizes the leverage of our companies at all times. We rather try to work over time to, as we own the companies, to create more and more flexibility so we can invest in building the business and building a better future for the company.
We're on a long-term journey, and we continue to grow. This is the growth chart that you've seen before. We believe, like I said, that our model really works well across geographies and investment strategies. You might remember me talking about people and performance. We're a very performance-driven organization. With this performance, we can invest in our people, and with our great people, we can invest more in driving performance, and this is a positive trend. We're going to continue to do that, and Kim will come back to that side of things in a few minutes. Now, we do see some interesting opportunities for continued growth and development of EQT across investment strategies. Now, we talked about our IPO as a watering station on a long journey, and we feel now that this is the case.
We have now capital to pursue a number of opportunities out in the world. Give you a quick update here on how that looks. First of all, on EQT Growth, this is a part of private capital, which is an opportunity to invest in the market segment between venture capital and private equity, where we have a lot of deal flow and a lot of opportunities, but we don't have a strategy yet to really attack that. We're working on that now, preparing with a team build-up and also making sure that we build a very sharp and unique strategy around it, including being fully data-driven with our Motherbrain initiative. In Asia Pacific, I'm very happy to say that our Sydney office opened yesterday. We had a big celebration out there with Thomas von Koch as our representative and the Wallenbergs also being there representing our network.
We look forward to continued investments in Australia and New Zealand. We're also opening up or planning to open a Tokyo office. We believe that both for infrastructure and for private equity, the Asia Pacific area is an area which gives a lot of opportunities. As you might have seen, we've done several deals already this year in that space or in that geography. On the real estate side, we're continuing to scale and build the business. Our fundraising is on track for EQT Real Estate II. We're looking at opportunities in the managed prime space as well as increasing our geographic footprint. With regards to M&A, we are considering M&A for EQT AB, especially in areas where we want to scale further. What I would say is that we see more opportunities in the M&A side than we had expected.
We have quite a few inbound initiatives, people coming to us wanting to cooperate, and there are a lot of opportunities out there, both in terms of different product areas, but also in terms of new geographies. We're evaluating those, but we're going to be very selective when it comes to M&A, whether we're looking at companies and/or teams. On the credit side, we announced in January that we're reviewing strategic options. That project is proceeding according to plan. Until it's concluded, we're operating the business as usual. We're investing, we're preparing for fundraising, and we're all in the normal course of business. We've launched the CLO where we've actually also committed equity from our balance sheet in terms of the first two CLOs that the team is driving. Good.
Now, the operating platform, as you can hear, we have a lot of exciting opportunities ahead, and we're continuing to grow and develop. Of course, to pursue these opportunities, we need to continue to invest in our business, and to really scale and digitalize our business so we become more automated and more efficient over time. We're going to continue to invest in the platform, our people with the EQT Academy, and training and leadership development. As you know, this business is very much about people and leadership. Digitalization, diversity also being other elements that we're investing in, and sustainability to give you some of the bullet points there. I wanted to reiterate Caspar's comments from when we were on the roadshow that we plan for our central functions cost to be growing at about half of the pace of AUM growth over time.
With that, actually, with the platform, I think I'll hand it over to Kim to talk more about our financials.
Thank you, Chris. Let me start with a reminder of our business model. Maybe you've seen this slide before, but it's an important one, so I'd like to reiterate that our focus is always first and foremost on creating attractive returns for our clients, and this, in turn, will lead to growth in fee-generating assets under management. With these assets under management, we will have two integrated revenue streams. We will have management fees that are sort of contractually recurring, and we will have carried interest when we perform, which we will. Our cost base is, as previously mentioned, two-thirds are directly personnel costs and the rest is also highly linked to the number of employees we have and consultants. With that, let's have a look at our value creation in 2019.
EQT's approach to investing in and developing companies has led to continued value creation across the key funds in 2019. You can see here the three fund generations of our flagship funds, and that we have during the year increased gross MOIC in all of the key funds, which we are pleased with. This also means that all of the key funds are at least on plan when it comes to delivering according to the expectations our investors and we have on them, with EQT Infrastructure III even being above plan. That brings us to the first financials here. You can see that there's some first signs of us demonstrating scalability in our business model, and total revenue increase of 64% during the period. This is principally due to the full year effect of Infra IV and of EQT VIII. That is in line with expectation.
As you can see also, the vast majority of our revenues continue to consist of management fees. We will get back to carry at a later stage. The revenue growth has also translated into EBITDA growth at a higher pace even, and therefore in robust margin expansion ending up at a 45% margin for the year. Let's have a quick look at the three segments and what is going on there from a financial point of view. Chris mentioned that we've had a good investment and exit environment while competition has remained strong for high-quality assets. In private capital, the AUM is in line with 2018, which was the year when EQT VIII was raised.
There have been no dramatic changes there, but the full year effect of EQT VIII drives the revenue growth close to 30% and the same at EBITDA or gross segment result as it is called here for private capital. Moving on to real assets, the investment and exit activity has been high and almost double the pace in 2019 as it was in 2018. Revenue has increased significantly, primarily due to the EQT Infrastructure IV closing in March. Here, a reminder that also investors who come into a fund at a later stage than the first close will anyway pay fees from the first close of such funds. There is a catch-up effect in the numbers for 2019 here as well on the revenue side.
Obviously, you can see the effect of that revenue increase in the scalability with a significant increase in the growth segment result as well. With regards to credit, revenue is in line with 2018, although it is less contribution from carried interest according to the IFRS revenue recognition we use. There is less carried interest in 2019. We have also continued to invest in the team and during 2019 in the preparations for the launch of the CLO program that Chris mentioned. Thus the margin is not at the same level as in 2018. Moving on to the group operating expenses at a consolidated level. As you know that the cost base mainly consists of people and related expenses to that.
We have continued to invest in people and in our business, both on the business line side as you have seen, but also in digitalization initiatives and in 2019 also in creating the prerequisites for life as a public company. We have invested in certain functions that we did not have before. The increase in personnel costs was thus driven both by a number of the FTEs, which grew, and the growth in average cost per FTE. A reminder here, again, that the partner compensation model has changed. In 2018, there are no bonuses for our partners but in 2019, there is. 2019 is a better starting point to estimate future costs from that perspective. Let's have a quick look at the full income statement on the next page. The column marked Adjusted here, that is the way that we follow the business internally.
Let me take you through a few of the adjustments. Well, the revenue adjustments has to do with the acquisition of Carry we did in April 2019. In order to have the same accounting effects of that revenue as our other Carry revenue, there is this adjustment of EUR 6 million in 2019. It will go away over time then. We had a special year clearly in 2019, and there are some one-off or items affecting comparability here. Firstly, it is the costs for preparing for the restructuring and preparing for the IPO and the IPO, including some IPO bonuses that were paid out to the teams. Secondly, we have made a one-off provision of EUR 32 million due to the VAT ruling that was announced in late January. Obviously that's the provision is there to cover for the historical costs.
We are of the opinion that the ruling is not expected to have any material impact on our future results and financial position. Moving on to the cash flow and balance sheet side of things. 2019 was of course a special year also on the cash flow and balance sheet side with the restructuring first and then leading into the IPO. If you dig into the details here, I have sympathy for it being slightly challenging to follow. If we again take a step back from that and see what has really happened, we have increased operating cash flow due to the reasons discussed before in terms of our operations doing well. We have the primary issuance from the IPO leading to an increased cash balance and to increased total equity on the balance sheet side.
That's the high level view of our balance sheet and cash flow. You can see here that at year-end, we had roughly EUR 900 million of cash on the balance sheet. With that, I will hand over to Chris to say some concluding remarks on our financial targets and dividend policy.
Thank you. This remains the same as we discussed last conference call, where our targets remain unchanged. This year we achieved a revenue growth of 54% and EBITDA margin of 45%. If you look over the long term, we expect our revenue growth to exceed the private market's long-term growth rate, and we expect our profitability to increase to an adjusted EBITDA margin of 65%, and our dividend policy remains the same. This year it's going to be EUR 200 million as planned, a level that we'll build from. The target here is to generate a steadily increasing annual dividend in absolute euro terms. With those comments, then we will open up for questions. Thank you.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Elizabeth Miliatis of Bank of America. Please go ahead. Your line is open.
Thank you. Good morning, gentlemen, and congratulations on the results. I've got a couple of questions. Firstly, on the M&A point that you made earlier, what kind of size are you looking at? Are there any particular regions or product categories that you're looking at? Would you expect that there'd be significant synergies out of it as well? Secondly, on the infrastructure bridging between Infra IV and V, would you be able to give us a sense of when you might be thinking to raise Infrastructure V, given that EQT IX is currently being fundraised? Thank you.
Thank you very much. I'll take those. On the M&A, let's say we're going to be focused on M&A in regions where we have more growth potential, where we're not already significant in size, and/or in product areas where we'd really like to scale. We actually have a number of opportunities that we're considering, and like I said, we're going to be highly selective, but we find it interesting that there are more opportunities out there, and we think that we will, over time, find some firms that have a really great fit with EQT and we can then together build a strong platform and a strong future. Right now it's still early days, so I can't really comment any further on that. When it comes to the Infra bridge, we're not at liberty to talk about when we believe Infra V is going to be raised.
We are working now on the bridging alternatives, and we expect those bridging alternatives to be something like 10%-15% of the size of the existing fund. Depending, of course, on the size of that and the actual investment pace that continues at Infra IV, that will then lead to Infra V thereafter.
Thank you.
Thank you. Our next question comes from the line of Peter Kessiakoff of SEB. Please go ahead. Your line is open.
Yes. Hi, good morning. Just a follow-up question on the M&A side. First of all, when we look at the IPO funds that you raised, could we see this as a potential reallocation of the use of those proceeds to perhaps do some M&A rather than seeding some of the new funds that you had expected over the coming, say, four to five years? That's my first question.
I don't think it will be instead of. I think it's going to be rather to help either scale existing strategies or help grow newer strategies faster or to support the growing regions of EQT. Very strategic, thoughtful, but it certainly won't exclude our organic initiatives.
All right. Just a few questions on the expense line. Given the significant changes that have happened with EQT going public and the changes in the corporate structure, in terms of expenses for next year, or rather 2020, is there anything material that we should take into account in terms of average salary expenses or on other expenses and so on that we need to take into account?
It's Kim. I'll take that. The main part of the expenses are, as you mentioned, on the personnel expense line.
The adjusted personnel expense lines is the one that you should be looking at. We have said that over time, the regions where we are increasing our presence have higher compensation models on average than our more traditional northern European regions. That will have an effect over time, but it's not a dramatic one. No, I wouldn't say there is anything special.
Okay. There's nothing in the structure that kind of changes from the structure that should be reflected in 2020?
No.
Okay. Just to understand, in terms of disclosure, we had a bit more disclosure on perhaps cost breakdown in connection with the IPO. Is what we're getting now, is that the kind of level of disclosure on the cost side that we will get ahead?
Well, there will be further footnotes to the financials in the annual report, but I don't see them as material from the point of view of getting an understanding of our business and performance.
Okay. Just my final question with the VAT ruling, and I know that you're saying that it will not have a material impact on the results. Is it possible to kind of quantify this to any extent? I mean, what's the definition of material?
You saw that we took a EUR 32 million provision for the historical costs. That's for a time period of four or so years. That gives you a sense. In addition to that, we will of course study the ruling in quite some detail and expect to be able to have also mitigating actions. That's approximately what I can say.
Sorry, just to pick your brain a bit, when I look at the level of provision made now, and I split that out over the period that it relates to, and perhaps make an assumption of what could be the run rate increase of, say, expenses on the back of this, is that the way to get an understanding of what the impact is onwards?
Well, we expect to be able to sort of mitigate some of that as well.
Okay. All right. Okay. I think I'll leave it there. Thank you very much.
Our next question comes from the line of Jakob Brink of Nordea. Please go ahead. Your line is open.
Thank you. The first question, I think, Christian, you said in the beginning of your introduction regarding the credit review or the credit business review, you have initiated that everything is so far as business as usual, and you'll be doing fundraising, I think you said as well, as usual. Does that mean that even though you're in this review, it will still be possible to go out and raise funds in credit?
Thanks for that question. I'm glad you asked for the clarification. What I meant is that it's business as usual and whatever the business needs, whether that's continuing to make investments or building out the CLOs which we're supporting or even future fundraisers, we would then support that. I didn't mean to imply that there was anything imminent going on. It was rather just several examples to show that we think it's important that as long as we're owners of the business, we want to support it in the best possible way. We also promoted two partners in credit now recently with the partner promotion cycle. Rather just showing that we have a very good cooperation with the team, and we want to support them as long as we're owners of that business.
I guess my question was more related to in my model, I have new credit funds being raised further on. The question is: Is it actually possible to go out and get, let's say, new money into a credit fund when at the same time you're thinking about potentially selling it?
I understand the question. I think that this process will be concluded before anything like that would arise.
Okay, great. Thank you. Regarding just coming back to M&A, how big could it be? Of course you have quite a big cash position now, but could it potentially be even bigger than that, or should we think of something within that size?
Maybe I'll let Caspar comment a little bit on how he's on the line, how we're thinking about M&A, just to give his perspective. He's also on the line from another location. You shouldn't expect anything earth-shattering in terms of size.
Yeah.
Yeah. No, Caspar Callerström here. I agree with that. We of course have the cash that we have on the balance sheet, and that should be not only for M&A, of course, but mainly to drive our other organic initiatives. I think it's also fair to say that with an IPO, we now also have another currency, and that is, of course, our own shares. That would also be one method of doing M&A. That said, I don't think you should expect anything very big in the very near future in general terms. We're going to be careful here, and I think we will also be careful about buying too large organizations because of the challenges that that would have in integration and culture.
Some of the approaches that you have had from, I think you mentioned that you had been positively, or there had been more approaches than you had expected. Have some of those approaches been so large that you would have to use your shares currency?
I think that remains to be seen. I think we've been positively surprised by the amount of inbound calls that we have received. I think it's fair to say that the vast majority of those inbound calls we have actually dismissed at a fairly early stage. There are a few things that we are looking further into, and let's see when and if we get further into that what such deals could look like. It's too early to tell.
Okay. Fair enough.
I think it's also important to say that's not only a size issue. I think, for us, even if for a fairly small deal, I think we would want the sellers of such business to become shareholders of EQT rather than to get the pile of cash. I think from a conceptual point of view, I think we would prefer to work with shares rather than cash when it comes to M&A, or a combination of the both.
Okay. Makes sense. Just final question. Sorry, coming back to the Infra IV bridging, how should this work? Will this mean that, for example, the commitment period of Infra IV is prolonged, or does it mean that it's a separate fund, more like an Infra 4.5 , with its own life? Just so we can get it correctly into our management fee calculations, et cetera.
Like I said, it's still very early in that process, and there are different alternatives. You can extend the size of the fund. You can do a structure with the secondary market where you actually sell a slice of the fund, meaning you get more capacity in the fund, and you have a sister fund on the side, and even other solutions. We have not yet decided exactly which way we're going to go, and therefore it's hard to be a bit more specific, but that's why I gave the number of whatever form the extension comes in, we expect it to be in the range of the 10%-15% of the existing size of Infra IV. When it comes to fees on that is also a bit too early to tell.
It certainly will be fee-paying in some form, but there are a number of different alternatives.
Okay. Fair enough. Many thanks.
Thank you. Our next question comes from the line of Arnaud Giblat of Exane. Please go ahead, your line is open.
If you have your internet on.
Yeah. Can you hear me? Hi, yeah.
We've got now, yeah.
Arnaud Giblat from Exane. Three questions, please. Firstly, if I can ask on infrastructure. Clearly, the investment pipeline is going well. I'm wondering with current headcount, can you continue investing at the pace you're currently investing at? Or do you need to extend the platform there? My second question is on M&A. Lots of traditional, I imagine, and alternative, I imagine, out there are talking about deals, and generally, we get a sense that pricing is too high. I'm wondering what's the edge here? Are you attracting prospective sellers who think they can leverage off the EQT platform to disperse more or something? Is there something there that makes you a more compelling buyer? And how would you consider a deal financially? What sort of financial metrics would you apply before deciding to acquire? And my final question is on private equity.
Clearly, there's a lot of reported interest in buying quality assets. You said it yourself. How do you see the investment opportunities out there for the assets you typically go for? Thank you.
Thank you. I'll let Kim answer the question regarding infra and people. Caspar can talk about the M&A edge and how to finance those. I'll take the PE question last.
Okay. On infra is definitely in growth mode both in terms of investments and in terms of people. They will be adding people in new jurisdictions or jurisdictions where we are continuing to grow. They will be building the pyramid of people with more junior resources to be able to continue to invest and develop companies.
Yeah. Caspar here. I'm not sure if I followed the M&A question. Can you repeat that so it's clear?
Yeah. Just on M&A, two sub-questions. The first is on pricing. Generally, we hear from other asset managers that who'd like to get into private equity or alternatives, that pricing is out of reach for them. I was wondering if since you've seen quite a lot of incomings, are sellers, people willing to sell themselves to you, looking to leverage off the EQT platform, and that might be a reason why pricing might be a bit more affordable? My sub-question on M&A was how you evaluate deals from a financial criteria perspective.
Yeah. Okay. First of all, when it comes to valuations and pricing of assets within our industry, I think it's fair to say that if you're a business with a one-legged business, i.e., not a multi-strategy large player like ourselves, for instance, I think that's a different type of valuation than if you have a global business with a full product platform. I would expect when we're talking M&A and where we would be more rifle shooting to fill in our strategic needs, that would be at valuations that would not reach the same level as our own level. That would be my expectation. When it comes to the value add, I think that would be one of the main drivers. If for an owner or seller of a business, I think in today's world you can go two routes.
You can stay very niche and very local, or you can become global and multi-strategy. Anything in between, I think will be over time difficult because of the regulatory aspects, because of the requirements from our customers as well. I think we can bring a lot to the table for the owners/sellers of such businesses. You can say it's synergies in one way. Yeah. When it comes to our financial, let's see when we get there. I think of course, we will look at many different aspects. I think first and foremost, we're going to look on the strategic aspect. Does this add value to our platform long-term, and in what way? If it does, I'm pretty sure the financial implications of that over time will be great.
Thanks, Caspar. On the private equity side, we continue our thematic investment approach. I would say we have quite strong deal flow in the core sectors and from our various geographies. We're being highly selective and really just going after the opportunities where we see that we can be the best owner and really drive a very strong value creation approach. Whether that's platform investments or high growth thematic investments or spaces which we really know very well, where we can drive a unique value creation plan, those are the kind of situations we're focusing on. We are walking away from those where we feel that the competition for the asset is really so tight that our ability to add value won't make a big enough difference.
All in all, the market remains pretty good and our pipeline remains quite strong, but we're selective and we'll be investing in the pace that we believe is right for the portfolio construction of the fund.
Thank you very much.
Thank you. Our next question comes from the line of Jan Zembe of Citi. Please go ahead. Your line is open.
Good morning. Just one question from me. I appreciate you've briefly touched on the coronavirus situation already. Could you just give a little bit of color on what exposure and what risk you see if you look across your portfolios right now? Less so on where your investments right now are based, more so on the potential supply chain side and potential disruptions on the supplier side.
Yeah. If you look at the majority of EQT's investments, particularly in the key funds, our exposure to China is relatively small or quite small. Having said that, there are certain supply chains that are getting more complicated where there might be increased costs or increased delays or increased working capital. Nothing that's material at this point in time yet. In some of our Asian mid-market investments, we have a somewhat higher exposure, but nothing that's material for the group and something which that investment committee and team is dealing with quite directly. When it comes then to exits, if the companies that are involved in exits have an exposure to China, that of course might also affect it, but that's a bit more of a general point.
Got it.
Does that answer your question?
Yeah.
Thank you. Our next question comes from the line of Gurjit Kambo of JP Morgan. Please go ahead. Your line is open.
Hi. Good morning, guys. Just a couple of questions. Firstly, when you refer to the sort of portfolio construction at the fund level, can you just maybe elaborate a little bit more on that? Is that looking at potentially portfolio construction across infrastructure, across private equity? Just a bit of more color on that. Secondly, are you doing anything in a sort of semi-liquid space, potentially, the DC space on pensions? Could you offer products into perhaps default pension schemes?
Yep. I'll take those. When it comes to portfolio construction, what we try to do is we try to create, for each fund, we try to build a portfolio where there is, within, first of all, clearly thematic investing behind long-term trends, but we don't have too much exposure to any single driver, whether it's a geography or a currency or other types of trends. We try to find long-term sustainable trends and really invest behind those, and then find companies where we can drive those trends proactively. Ultimately, what we want to find is, all companies now are fairly expensive. What we're trying to do is have a value creation plan with organic growth, add-on acquisitions, et cetera, that where the price that you pay for the original asset is not the main driver of returns over time. It's really how we build the business.
It's a bit more like you would do in the public market. Obviously, this is private market and much less liquid and different, but we try to really think about how to construct the portfolio to be as robust as possible. Then we also do right sizing of investments. For example, in Zayo or Galderma, which are quite big deals, and we do very significant co-invest to make sure that we don't overexpose any fund to any particular deal. Those kinds of thoughts. On your other question, this is something that we evaluate over time. We're not looking at any sort of insurance type of solution at this point in time. Particularly in our core markets, that's pretty complicated to do.
Having said that, we of course, are always discussing, in the long term, what types of strategies can we build which have a more kind of permanent capital type of structure around it. Having said that, for all the ones who call capital in our industry for permanent capital, there is no permanent capital. There is always some form of deadline, and/or an ability for the LP to withdraw the funds at some point, whether it is 10 years or 15 years or whatever. I don't think we are going to call it permanent capital whoever we work with. I think we would rather call it that we have more long-term capital sources that would match more long-term type of investments. That is for something later, nothing imminent and nothing that I would put in any models at this point in time.
Okay, great. Thank you.
Thank you. Our next question is a follow-up from the line of Liz Miliatis of Bank of America. Please go ahead. Your line is open.
Thank you. I just had a quick follow-up question on dividends. Your guidance is that we should assume the dividends should grow steadily in the medium term. Obviously earnings fluctuates quite significantly in the next few years in terms of growth. When we are forecasting dividends, should we be taking an average through the periods, and therefore the payout ratio will fluctuate quite significantly? Will the dividend growth year-on-year fluctuate a little bit? Thank you.
The tangent, you don't know, and we don't know yet. Yes, it will fluctuate as a payout ratio. That's correct.
Okay. Thank you.
That'd be steadily growing in absolute terms over time.
Thank you.
Thank you. Our next question comes from the line of Michael Werner at UBS. Please go ahead. Your line is open.
Thank you. Just two questions, please. First, you talked about sustainability earlier on in the presentation, Christian. I was just thinking, with regards to the fact that the carried interest generated by EQT, I believe, is not taxed at a corporate level. Do you look at that as being sustainable longer term? Is there any indication that that framework might change in the near future? Second, thank you for the outlook in terms of the realization environment. I was just wondering if specifically with regards to EQT VII, if there's anything going on there from an exit perspective that we should be aware of in the coming months. Thank you.
Thanks. Thank you for all the questions. Very good question. Carry taxation, both for EQT and for individuals, is taxed when that capital is actually received by whoever receives it at the end of the day. There is, of course, capital gains taxation, there is dividend taxation, but as it flows through EQT, it is not taxed. That's the same thing for our LPs. We set up fund structures for all the LPs where we make sure that it is not taxed when EQT is managing it, but it is of course taxed when our LPs receive and/or distribute their funds. It's kind of a misnomer that there's no tax on these kinds of income streams. It's just not taxed at the EQT AB level. If it was, we wouldn't be able to actually raise funds or invest in carry, because then you would get double taxation.
I hope that helps answer your question a little bit.
Thank you. Yes.
Yeah.
On the EQT VII.
On EQT VII, we never comment explicitly on exits, but as you've heard, this is an exit year, if I want to call it that, across multiple funds, including EQT VII. We do expect several exits from EQT VII, but rather towards the middle to the second half of the year than the first half of the year.
Thank you. Appreciate that.
Yeah.
Thank you. The final question on the line goes to Bruce Hamilton from Morgan Stanley. Please go ahead. Your line is open.
Hi. Morning, guys. Thanks for all the information. Just one, going back to the question about fundraising from new clients, if you like. I guess a few of your peers are doing a reasonable job of raising money from private clients, some through different liquidity structures of the product, some, I think, actually doing it in more standard 10-year lock structures, typically through distribution arrangements with large banks, Swiss private banks, or others. I know this was, I think, mentioned at the IPO stage as something of a longer-term opportunity set, but how are you thinking about that? Are you actually having any conversations with distributors at this stage to try and work forward on that? Thank you.
Yeah, excellent question. Good memory. Yes, we are working on that. We're working with a number of global institutions on that for our upcoming fundraisers. We do already have, actually, in the Nordic region and a few European countries private banking as a distribution channel. Going forward, starting this year, we expect also to have some of the leading larger global banks also partnering with us for that. It's a bit too early to tell you anything more, but you're absolutely on the right trend there, yes.
From that, it sounds like you'd expect this would be your normal typical fund structures. You wouldn't be doing anything different to service those clients.
Well, if you look at what's happening in the distribution world of private equity, and particularly in the U.S., there are new structures that are being created by the Vanguard and BlackRock, et cetera, of the world. We find that to be pretty interesting. That's more of a retail approach than a high net worth or private client approach. When I'd say that we are more focused right now on the private clients, high net worth type of channel. Over time, I wouldn't be surprised if, let's say, when the market is ready and when the solutions are right, more towards a retail approach, then of course we're going to use that distribution channel as well. It is still pretty early days, and it's a bit complicated in a number of different ways, including regulatory.
Got it. Thank you.
Thank you. As there are no further questions, I'll hand back to our speakers for the closing comments.
Great. Thanks everybody for participating today. Thank you for excellent questions. They were sharp and important. We wish you all a great day and the rest of the remaining part of the week. Bye-bye.