Welcome to the EQT AB half-year results 2020. 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, this conference call is being recorded. Today, I am pleased to present Christian Sinding, CEO. Please begin your meeting.
Thank you. Good morning, everyone. Welcome to EQT's first half 2020 announcement. Today you're gonna hear me and Kim Henriksson, our CFO. After the presentation, we're gonna open up for a Q&A. First, we hope you're all safe and well, and that you, your families, and your businesses have fared well during this difficult pandemic period. At EQT, we remain cautious, and we pay our respects to all those who have been affected. Nobody knows when this will be over or how exactly a new normal will look. Our ambition is to maintain business as usual as much as we possibly can. We also see it as our responsibility as active owners to continue to build for the future and thus make a positive impact.
Looking at the first half of an unprecedented 2020, even though it has been a challenging period, we've delivered on our strategy and our priorities as a firm. Our thematic investment strategy remains firm, and we support our portfolio companies in every way that we can. Some are, of course, going through quite testing times, especially in the most exposed sectors, while others are really thriving. Overall, we're pleased to see how our business model and our dedicated teams across the globe work in this tough and disruptive environment. As you know, with crisis comes new ideas and new opportunities, and we do believe EQT is uniquely positioned to influence a new normal. Thus, we will continue with our long-term responsible and thematic investing, future-proofing companies, and making a positive impact. Building on that, EQT is driven by our purpose.
As you know, in March, we elevated this into our own governance. As a pioneer in private markets, we've articulated and formalized our statement of purpose. This outlines our responsibility to make a positive impact and having a broad stakeholder perspective. Thus, it includes our commitment to increase diversity, support equal rights, and also address climate change. In March, our statement of purpose was signed by the board of EQT AB. Our articles of association were updated and also approved by the annual general meeting thereafter. We did this because we believe purpose-driven companies are crucial for long-term prosperity and for driving value for the different stakeholders in society. We, of course, hope that others will continue to join this move.
Now, before we dig deeper into the first half figures, let me go through some of the main events at EQT. First of all, the fundraisings of EQT IX and Infra V were launched, and EQT IX was actually activated in July following the conclusion of EQT VIII commitment period. Plus we found also a great new home, for the EQT credit business line in Bridgepoint, and we opened offices in both Sydney and Paris. I'd also like to mention two elements relating to sustainability. First of all, the ESG-linked subscription facility that we presented on the last call, which is now in use, and also the A+ score, of our own overall sustainability strategy and governance received from the UN PRI initiative. This is the result not only of an integrated approach to ESG, but also a strong belief in transparency and governance.
As you know, and as I've said, we believe that making a positive impact in future-proofing companies ultimately drives better returns. Next page. Please note that all numbers in this presentation, unless stated otherwise, exclude the business segment credit. Now, despite a slowdown in investment and exit activity post the COVID-19 outbreak, we can clearly see that the deal market has started to pick up again, especially for quality companies, which are the ones that EQT pursues. The companies that have been resilient or growing throughout COVID are now actually even more attractive than the ones they were before the COVID outbreak because of that resilience. Importantly, we see a strong pipeline of such thematic investment opportunities to deploy the capital of the new funds.
We remain focused on those types of companies that we can, with EQT, with our tool set, really develop and accelerate. Of course, having said this, markets are still uncertain, and therefore, you know, getting deals done, it remains a little bit more complicated in this environment than it was before. To some more numbers. In total, EQT invested EUR 2 billion in the first half of 2020. Post this period, we made additional exciting investments such as EdgeConneX and Metlifecare and Infrastructure IV, and the Waystar add-on in EQT VIII. Further, with the acquisition of IFS, the EQT VIII commitment period was terminated, and the remaining capital of EQT VIII will be used for add-on acquisitions and strategic capital injections.
The successor fund, EQT IX, has as of July 14 started generating management fees and also done its first investment, and that is in IFS together with TA Associates and EQT VIII. We reinvested in this business. On the exit side, activity has been clearly lower compared to last year. However, we actually have executed some quite good exits, including after the period end, which was IFS from EQT VII, a significant sell down in our public company Musti in Finland in the mid-market fund. We do have several exits in the pipeline over the coming 6-12 months. Of course, assuming that market conditions will remain open for that.
When we look at the expected returns for our key funds, we still expect that they will deliver according to plan in Private Equity and in Infrastructure II and IV, and above plan in Infrastructure III. However, some of the long-term value creation will take longer, as we've stated before. Overall valuations have been resilient in our key funds. Looking at some of the older funds, the ones that are in carried interest generating mode, those valuations are somewhat lower. You can see that on one of the pages that Kim will present. With COVID continuing and some companies continue to be challenged, those two facts are reflected in the revenue line of carried interest and investment income. Kim is gonna revert to this in more detail to explain how that works. Now, moving on to fundraising.
The main focus is raising EQT Infrastructure V and finalizing EQT IX, as well as the ongoing fundraising of EQT Public Value. Now I'm quite pleased with the progress of EQT IX fundraising. It's running according to plan, and it's anticipated to be materially concluded during the third quarter. It's a great job there by the team, and thank you to all of our LPs supporting us. Turning to EQT Infrastructure V, we announced a target size of EUR 12.5 billion in July. With EQT Infrastructure IV getting close to be fully invested, we expect to start investing from EQT Infrastructure V during the fourth quarter, and therefore also start generating management fees from that time. As stated earlier, we expect that the fundraising for EQT Infrastructure V is expected to take a similar amount of time as for EQT IX.
That gives you an indication of how much we expect to have raised by the end of the year as well. Looking at AUM at the end of H1, we had EUR 36.5 billion under management as compared to EUR 36.8 billion as per June 30, 2019. That, of course, is excluding credit. Remember, we activated EQT IX after the period end, so that is not included in the numbers on this page. When it comes to the number of FTE plus, that's now 699 persons, up from 608 a year ago. The bulk of these new talents are recruited before the outbreak of COVID-19, as recruitments have been purposely slower during this challenging period. Both to recruit and integrate people virtually is more complicated, of course.
Talking about talent, we're really pleased to announce the recruitment of Olof Svensson as Head of Shareholder Relations at EQT. Olof spent more than 15 years at JP Morgan's equity capital markets team in London. He has extensive experience from the international equity capital markets, combined with really deep knowledge about EQT, working with us for a long time that we think makes him a great fit to further develop the relations with EQT AB shareholders, analysts, et cetera. We welcome Olof, he's joining us the first of September. Now looking a little bit more at the financials. Our adjusted revenues for the first half of the year amounted to EUR 261 million, a decrease of 7% compared to the corresponding period last year.
Management fees remained flat, and carried interest and investment income amounted to EUR -4 million due to lower fund valuations, again, in the older carried interest generating funds that have very few companies left in them. That means primarily EQT VI and Infra II . Those funds do not have many holdings left, and like I said, where some of the companies have been more affected by COVID-19. Our new funds, as you know, have not yet started generating carried interest. So looking at the future of our larger funds, ones with the potential to really impact EQT, the key funds, they're all performing well, as I've already stated. We do expect to meet our targets for those.
Our operating expenses increased for the first half of the year to EUR 181 million, driven by growth in the number of employees to support our continued expansion, as you've also heard about. Thus our adjusted EBITDA for the first half of the year amounted to EUR 80 million, and of course, Kim will come back to this in a lot more detail. Next page on strategy. We continue to drive the business forward. On EQT Growth, this is a really interesting opportunity which will invest in the market segment between private equity and ventures. It's an area of really high strategic logic for us, given our strong private equity business and our strong ventures business. This is really attacking the white space in between, both in Europe and the U.S.
Using our local-with-local strategy, together with our Motherbrain artificial intelligence unit, we believe we are gonna be fairly unique in this space in how we approach it. We're already up to speed with strategy setting, reviewing deals, and building up the team. We're evaluating deals and some of those deals could be executed this year as a balance sheet investment. This is exactly what we talked about when we went public last year. What we're gonna use our capital for is to make investments in new business areas that ultimately will turn into a business line and fund. We expect to launch this strategy during 2021. On Asia Pacific, we opened our Sydney office, and we're building out the team across the area.
In that regard, I'd also like to take the opportunity and announce that Simon Griffiths has rejoined EQT to head EQT Private Equity in Asia Pacific. Simon is an old EQTarian with strong entrepreneurial skills and long knowledge about EQT. He established EQT's office in Singapore in 2009, then led our investments there until 2015, in fact. Given his familiarity with our culture, our ways of working, his strong investment skills, and his knowledge of APAC, we believe he's ideal to lead that expansion, and we're very happy that he came back to us. Good luck, and we expect this strategy also to be launched in 2021. On the real estate side, we're developing the real estate business through new geographies and strategies.
We're really looking for thematic opportunities in this new normal that we're starting to see unfold. Of course, given COVID, some of these new initiatives may take a little bit longer. On the M&A side, the focus at the moment is our current business and our portfolio, of course, but we are reviewing attractive investment opportunities. When evaluating those targets, people and culture are highly important, and therefore, also M&A activity is a little bit slower now that we're all working over video conference than it otherwise would be. It is active. On credit, we signed the agreement, as you know, to sell to Bridgepoint, which will be a great new owner, we think. Closing is expected in Q4 2020.
I really wanna thank the team for great continued cooperation during this transitional time. On the topic of teams, over the last years, Hjalmar Winbladh has helped build EQT Ventures into a very successful business with a strong portfolio and a dedicated team. Ventures is actually a top decile performer. Hjalmar is now longing to get back to his entrepreneurial roots. As he says, he's never had a job as long as he's had with EQT. He's gonna go back to driving his entrepreneurial businesses, and we wish him the best of luck with that. On our side, Lars and Alastair will co-head the team, and together with the team, I'm sure we'll be developing EQT Ventures successfully going forward as well.
Finally, on people regarding the EQT Foundation, this is the foundation we started last year, which focuses on EQT's philanthropic initiatives. Here we've recruited Cilia Holmes Indahl, who was previously with Aker BioMarine and Katapult Group in Oslo, to head this important organization. We'll hear more about that after her first 100 days. With those words, I will hand over to Kim, our CFO.
Thank you, Chris. Next slide, please. One more. There. Thank you. I'd like to start with a page that I have shown before, just to reiterate that our way of thinking about the business remains the same, that EQT is a performance-driven firm, which means that everything we do starts with generating good and consistent returns to our fund investors, and that is as true now as it was before the pandemic. We are convinced that the good risk-adjusted fund returns compared to the alternatives that are available to our fund investors will, in turn, drive growth in our assets under management. Growth in our AUM will generate income, both management fees as well as carried interest and investment income revenues to EQT AB.
As has been said before, the management fees are contractually recurring and the carried interest revenues, they in turn are an integral and essential part of the long-term business model we have. On the cost side, our cost base is mainly our people, our employees, and other costs, which are also driven by the number of employees. Next slide, please. Let's move over to value creation and valuations have shown resilience given the turbulent environment in this period. The majority of our key funds have somewhat improved the gross MOIC during the latter part of H1. When looking at the first half of 2020, investment income in our P&L was flat.
Since investment income is a function of the mark-to-market valuations of our own investments in the EQT funds, it illustrates the current performance across all funds. Having said that, we are in some cases still below the valuations as of year-end. As you have seen, this has also impacted the carried interest and investment income line in our P&L. It may be worth noting that this is an accounting effect only, not a cash effect. This effect relates to the older funds, which can also be seen on this chart. The older funds are also the ones having realized carry so far.
EQT VI and Infra II have fewer assets left in the portfolio and are also somewhat more exposed to the pandemic than the more recent funds, where our thematic investment strategy has been further refined. This can be seen on the development of the gross MOIC on this slide as well, i.e., on EQT VII and VIII and Infra III and IV , which have a different development. Maybe worth noting also is that the older funds constitute a very small part of our total assets under management. As Chris also mentioned, the impact from COVID-19 has delayed exits and realizations.
While these exits are primarily expected beyond 2020, the long-term value creation expectations remain, and all key funds remain at least on plan to reach their target MOICs, while Infrastructure III continues to be above planned. A reminder still on this page also on carry interest and how that works. Carry recognition under IFRS will always require an underlying positive development of the fund valuations, and usually also exit of portfolio companies. The rule of thumb, as we've said, is that initial recognition commences typically once 1.7-1.8 of gross MOIC is reached, including then a few exits. This would typically be 4-6 years after first investment.
Since most of the funds in the current AUM are more recent than that, only a few funds have had enough time to enter carry mode as of yet. The funds that have generated carry to date are primarily the older funds, EQT VI and Infrastructure II. For future periods, however, the more recent funds will have a much larger impact on our financials for both because the funds are bigger in size and EQT AB's share of the carry is higher. The two key funds in turn to start generating carry according to IFRS are EQT VII and Infrastructure III.
Like Chris mentioned on the market environment, we currently see the market as somewhat stronger than when we last spoke, which could impact the timing of carried interest and investment income. Any recognition will still be dependent on both valuation increases and or exits taking place. With a stronger market, EQT VII could be closer to carry recognition, but at this point in time, we do not know if any recognition will take place in the current financial year. Next slide, please. Before we continue with the number, I just wanna highlight again also that all numbers here refer to our continued operations, i.e., excluding the business segment credit, and this is the way we will report going forward.
Maybe worth noting is also that this interim report comes in the midst of fundraisings in our two key strategies. None of the news around the activation of EQT IX are reflected in the management fees in H1. While we obviously from a resource perspective, we need to be ready to manage a significantly higher AUM, and the same is true for Infra V. Starting with the revenues here, we see a strong growth in AUM over a longer period. However, there was no material change in AUM over this period. As the management fees are recurring in nature and based on AUM, revenues from management fees in H1 remained flat. Effective management fee rate also remained at 1.43%.
When adding then carried interest and investment income, total revenues in H1 amounted to EUR 261 million versus the EUR 282 million in 2019. This decrease is then primarily driven by the lower valuations in the older, smaller equity funds, as just mentioned on the previous slide. We've noted here on the slide also that EQT IX has now, as of mid-July, started generating management fees. Given the investment level in Infra IV, we do expect Infra V to be activated later this year. Next slide, please. On the expense side, year-over-year, our group operating expenses have increased by some 22%, and it's primarily driven by growth in personnel.
The reasons behind the personnel growth, that's both preparations for growth in AUM as we are activating these new flagship funds and we are venturing into new strategies. It's also the full run rate effect of the preparations for the IPO in 2019. That can then be seen, the full run rate effect of that can be seen in this half year period. The hiring pace is currently somewhat lower due to the previously mentioned hiring pause put in place as a precaution. This does not mean that we have stopped strategic hiring in important areas, but rather that we are balancing the brake and the gas pedal at the same time. We are conducting highly strategic recruitment.
You heard Chris mention some of them, and in this context we are, for example, looking at additions to our new strategies in growth and our expansion in APAC. The other operating expenses, they're to a large extent FTE driven, and they increased along with the FTE growth during the period. Next slide, please. Turning to our EBITDA. EBITDA it also reflects the investments we have made in people as our personnel expenses have grown and timing wise ahead of our growth in AUM. For H1 2020, specifically on the right-hand side here, we also see the impact of less carried interest and investment income for this period. As previously mentioned, and this is due to the lower valuations in the older carry generating funds, EQT VI and EQT Infrastructure II.
The current fundraisings in our flagship funds and thus the development of AUM in both private equity and infrastructure will then affect the margin in the periods after the reporting period. Next slide, please. This slide pulls it together in a consolidated income statement for the group. Here, what we have done from an accounting perspective, given the sale of credit has now been signed, is to extract all revenue and cost items for the credit business segment, and then we have included them as only as one line at the bottom here, net income from discontinued operations. This is the way we will be reporting going forward here. I have on the previous pages commented until EBITDA, so let me mention a couple of things also below EBITDA.
Our depreciations have increased since 2019 or H1 2019, following with new office leases mainly. We have moved in Stockholm a year ago or so and we have opened up in Sydney and Paris, as mentioned. The net financial items in the first six months, they've been supported by some currency translation differences, so we do not have any meaningful interest income from our cash position in these numbers. Income taxes are down somewhat, but that's because of lower earnings before tax as well. Next slide, please. Let's have a quick look at the segment results then.
As mentioned by Chris, the investment activity in the first half of the year has been slower, with total investments in private capital funds of EUR 1.1 billion compared to EUR 2.5 billion in H1 2019. The gross exits in H1 amounted to EUR 0.2 billion compared to close to EUR 4 billion in the comparison period. This shows that the exit climate in the first six months has been uncertain. In combination with the relatively young portfolio of assets, the focus has been on continued development of existing companies. While fundraising activity has been very active, AUM in the reported period is flat versus H1 with EQT IX then activated in mid-July.
The total number of employees is similar to a year ago, but this hides some pluses and minuses and the organization has been prepared for the increased commitments from EQT IX. Given the expansion in growth and APAC, you should see this number increase further going forward. Adjusted revenue and gross segment result was around EUR 10 million lower than the comparison period, and again driven by the previously mentioned lower carried interest and investment income. Next slide, please. For Real Assets, which then consists of our infrastructure and real estate business lines, the total investments amounted to EUR 1 billion compared to EUR 3.2 billion in the comparison period.
Gross funds and fund exits were limited, and note that neither of Infrastructure III nor Infrastructure IV have started to realize any assets as of today. While fundraising preparations have been very active in the period, AUM in the reported period is flat, and the fundraising of EQT Real Estate II was materially concluded in the period with around EUR 950 million in committed capital as of June 30. Preparations also intensified for Infrastructure V, and then at the end of June, we announced a target size of EUR 12.5 billion. The total head count has increased over last year, driven by the anticipated growth in AUM, as mentioned r evenue.
Adjusted revenue and growth segment results, they decreased temporarily, driven by the lower carried interest and investment income and also the increased personnel base. Next slide, please. For completeness, please also see the results here for the credit business now reported as discontinued. As mentioned, we are confident that we have found a great new home for the business and the transaction is expected to close in Q4. The disposal is not expected to have any material impact on the central functions in EQT. 43 persons from the credit business line are expected to transfer upon closing of the transaction, and then there's another four that are currently part of the segment central that also will transfer. But no material impact on the central functions. Next slide, please.
As you can see, we continue to have a very strong cash position at the end of the period, with some EUR 800 million of cash and cash equivalents. The net decrease in cash compared to six months ago was driven by three things, financial investment into our funds, the first EUR 100 million installment of the 2019 dividend was paid out, and then seasonality effects of the personnel expenses, where variable compensation is paid out in the spring, but it's accrued for throughout the year, of course. With regards to the financial investments, they relate to EQT AB's commitments to the EQT fund structures. You should expect this to increase going forward as the larger funds continue or start to draw for investment and EQT AB's share in these funds is higher.
On the right-hand side, the cash items I just mentioned are also the main reason for the slight reduction in the size of our balance sheet in H1. In the actual half year report, you can see a detailed overview of our balance sheet, and in it, you will also see a new line item called Assets Classified as Held for Sale of EUR 45 million , which is included in current assets. Within the liability side, you can see that we have EUR 5 million of liabilities directly associated with assets classified as held for sale. Both of these relate to the credit business. In summary, our cash position and balance sheet is strong, and we will use it to grow in line with our strategy.
You could start to see some investments to advance our new strategies already before the year end. With that, I would like to hand back to Chris for some concluding remarks. Next slide, please.
Thank you, Kim. It's time to conclude the presentation. We expect the markets to continue to be somewhat unpredictable going forward, given that COVID is continuing. As we said, they have improved significantly since last quarter. The full impact on the economies across the globe is yet to unfold, but grounded in our resilient business model and purpose-driven approach, our strategy lies firm. We'll continue to invest thematically and support the portfolio companies to weather any storm and to work to really develop them for the best possible future. We also aim to play an active role in influencing the new normal post-COVID-19 as responsible, purpose-driven investors. With that, I will thank you very much and open up for questions.
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 is 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. Our first question comes from the line of Magnus Andersson at ABG. Please go ahead, your line is open.
Good morning, guys. Just starting with a question on fundraising. You mentioned in the report that it's taken longer than normal and is more complicated. At the same time, we saw EQT IX took nine months or is expected to take nine months, and you point at a similar period for Infra V. My question is nine months longer than normal, or is this primarily related to your new strategies? Because I noted on that slide four that for the first time you actually write that EQT Growth and APAC is expected to be launched in 2021.
Very good question. Hi, Magnus. You know, fundraising has taken longer, and, you know, typically, our flagship funds have taken in the past around six months to raise. Now it's taken about nine, so that is longer. But I guess we can say versus our updates in April, it's gone a little bit faster than that. That's why we, you know. In times of uncertainty, it's hard to be more precise. But it's. It's somewhat longer, but still, you know, well under a year, which is good. Now, there's always a small tail that continues for a little bit longer than that, but materially concluded is what we're saying.
Now, when it comes to the newer funds, they you know new fund strategies take significantly longer, typically, you know, 18 months plus. And that depends very much on the strategy, and the timing in the market and a number of other elements. At this point in time, I can't be any more specific than that.
Okay. Thanks. When you say that your growth and APAC strategies are expected to be launched in 2021, that's the fundraising then are going to be launched. It will still take quite a while before we see any meaningful P&L impact. Is that correctly understood?
Well, I'd put it this way, you know, when we formally announce the fundraise, we will, you know, inform the market about that. What's happening right now is in the growth business line, you know, we have a team in place, and we're starting to look at investments, and we'll make the first several investments from the balance sheet, and then we'll launch the fundraising thereafter. In Asia-Pacific, it's the same, but it's, you know, on a slightly slower path than growth. I'd like to defer, you know, the specific answer until we're closer to the fundraise, and then we can talk about that next time.
Yep. Okay. Thank you. Secondly, just a more broader question in relation to the IPO, you talked about a normal deployment period of roughly four years for new funds, and we could see that in your historic numbers. However, we see that between EQT VIII and IX , it's roughly two years. In between Infra III, IV, and V , if things goes according to plan, it will also be around four years. Could it be that for the larger flagship funds also going forward, the new normal is shorter than four years? Or do you think we will revert back to the previous deployment?
That's an excellent question as well. If you look at EQT's 25-26 year history, actually, our average investment period has been around three years. Now, we typically plan for many different reasons, we plan for a four-year deployment. And if you look at, you know, if you look at the period before and after the financial crisis, for example, before the financial crisis, we were closer to the three-year investing period, sometimes a little bit faster. During the financial crisis, it was a little bit more than five years. After the financial crisis, we came back to kind of the three-year timeframe. It's something which is, you know, difficult to make a very clear prognosis because it depends on a number of elements.
You know, how successful we are in winning deals, how successful we are in finding deals, how we build our portfolio in terms of constructing it to be as diverse as it can be, while still very value-creating, and of course, on market conditions. That's why we said in the IPO, we said, "Let's assume a four-year timeframe," but in fact, in the past it's been a little bit faster than that.
Yep. Yep. Okay. Thank you very much. That's all for me.
Thank you.
Thank you. Our next question comes from the line of Jakob Brink of Nordea. Please go ahead. Your line is open.
Thank you. Good morning from my side as well. I have three questions. I'll take them one at a time. Just coming back to Infra 5, please. I guess you must be extremely close to activating it since I know you've had two acquisitions in number 4, saying that you are 80%-85% invested, if I remember correctly. Is it fair to assume that there will be no more room for investment in Infra 4? Or is there still a little more room before you need to activate number 5?
Yeah. Typically, what we say is that, you know, when we're 80%-85% invested, we're fully invested. We haven't made that official announcement yet, which means that, you know, there may be another, you know, small capital injections we need, which will be from Infra 4. But any material new investments will be from Infra 5. Now, there's one other, you know, uncertainty, of course, in the market. You know, there's a difference between a signed deal and a closed deal. You know, until deals are closed, there's of course a little bit of theoretical uncertainty. For all intents and purposes, you know, the next significant deal would be in Infra 5, yes.
It's not possible to quantify it anymore? I mean, you said, or I think, Kim, you said in your presentation that it will be activated later this year. Could it be more specific or?
No, I don't think we can because, you know, we're in the private markets, we do. You know, in each fund, we do, you know, with the exception of ventures, which does more, but in the other funds, we're probably doing around five new investments a year. We're looking at more than 200, sometimes more than 300. Exactly which deal is going to end up in the fund and in what form and with exact timing is very complicated to give a prognosis on. I think we stick to what Kim and I have said before.
Okay, fair enough. Thank you. My second question regarding FTEs. You mentioned also back in July and reiterated today as well that you have been putting hiring on a pause at least. It will be mainly in the front office part where you could still be hiring. Looking at your divisional split, it's actually group functions which is adding 58 FTEs this year. I guess some of that happened before COVID-19 outbreak, but could you just clarify also. I guess many of these will be dealing with all the fundraising, but now you're fundraising to pick a flagship fund. When that's done, it will take, as you said, maybe three years before you'll have to do it again. What will happen to those 58 employees, or do you see any scope for taking that down even?
Kim, will you take that one?
I can comment on that one. First of all, there is the run rate effect also of employees having come on board earlier and that now show up fully in the 2020 numbers. We did beef up the central functions quite a lot in advance of the IPO. That's one thing. You should expect that the growth on the employee side will be geared towards the investment professionals and also the exceptions to the hiring pause that we have had are mainly on the investment professional side, i.e.
To advance the new strategies, for example, or to ensure that we can manage the significant new AUM that is coming in. Then in terms of the fundraising, without commenting exactly on your FTE numbers there on the capital raising side, it doesn't really work like that you sort of do a capital raising and then you wait for three years and then you start again. It is a constant work of meeting and serving our LPs, our clients. Like we have indicated, it is not unlikely that there will be other fundraisings going on during the course of next year instead.
Fair enough. Final question on the carried interest in the first half year. As you pointed out, I acknowledge it's in two old funds where the carried interest recognition was negative. Still, I guess this is somewhat different than what was mentioned in the IPO process. At least I thought that it couldn't be negative. So. Or theoretically, I guess it could. But now it happened. So what will this mean for your future recognition? Is this something that you have to build in, i.e. that you'll be more cautious in recognizing it on Infra III and EQT VII?
Kim?
I can take that, Chris, if you don't mind. First of all, the model that we've built already when we transferred to IFRS was such that it would be highly unlikely that you would have a negative carry, but not that it is impossible at all. We would have had it back in the financial crisis. Basically it was built so that under normal circumstances you would not have that. Now, I think most of us can agree that the last six months they have not been quite normal circumstances. They've been quite extraordinary. Thus, it has led to this effect. You know, combined with what we've said, that it's two older funds that have very few assets left, and also that those assets are somewhat more affected than our average portfolio, you could say. I do not expect it to change our accounting standards going forward.
If I could add a little bit. You know, we only have, you know, very few companies in these portfolios. If, you know, one or two of those very few companies are impacted significantly by COVID, then, you know, the valuation of the carry is impacted. This is that, you know, that unusual or highly unusual circumstance that does occur. I think what's important to look at is, you know, what our communication regarding the key funds and the, you know, the current values of those and the, and the trends, and the expectations of the long-term value creation, which remain on plan for all of them except for Infra III, which is above plan. I think our communication still stands from before, that this is still a highly unusual event, the way that our model works.
Okay. Thank you.
Thank you. Our next question comes from the line of Arnaud Giblat of Exane. Please go ahead, your line is open.
Yeah. Good morning. If I could just have a quick follow-up on the recognition of carry. Yeah, my understanding from the IPO was that you typically book a carry one or two years before the cash flows are actually received and the reversal probably just cancels out that early recognition. There's probably no significant cash flow impact here. Is that correct?
Correct. There is no cash flow impact at all.
Okay. No, that's clear. Secondly, on the fundraising environment. You've clearly become a bit more positive versus April, understandably. I'm just wondering how you're thinking about your sizing up your funds when you're talking to LPs, is there a great deal? Some LPs might have turned more cautious, I suppose, back in March. How is the appetite for the asset class evolving? Are you seeing a lot more demand perhaps? Is that evolving positively as interest rates are likely to stay at zero for a long time? Generally, is that what's driving your sizing, or is it more your views around capacity, investment capacity?
Very good question. It's both, you know, whenever we set the new size of a fund, we look at our team capacity, our portfolio, you know, the investment opportunity set, and of course then the demand from LPs. That's why we do it in two phases. First, we set the target, and then we start the fundraising, and then, after we, you know, have met with all the investors and have had the initial dialogues, then we ultimately set the hard cap a little bit later. You should expect the same for Infra V as in EQT IX in terms of process. Now you're absolutely right. I'm glad you brought that up actually.
You know, if you look at the macro situation for the private markets, given that long-term interest rates are now expected to be quite low for the foreseeable future, and there's still a you know, very significant need for yield for pension funds and financial institutions and pensioners all over the world. Yeah, we believe that the inflows to private equity will continue and actually continue to accelerate. I think we'll see now that the markets have corrected again. You'll see that there's still a lot of investors who are under-allocated to the private markets. Therefore, of course, it's a relatively supportive environment. It's a little bit more complicated, of course, to do a fundraising because you know, 99% of meetings are still virtual.
Therefore it does take a little bit longer time. I think we and our investors and investors in private equity in general are getting used to this way of working. We, you know, we have digital solutions and business models and portals and videos and all kinds of tools to help our investors get comfortable with this new way of interacting. That's where we are.
That's great. Thank you. A final question, if I may. Could you maybe give us a quick update on the debt capital markets? Clearly, spreads have come in a lot. Is this at all a constraint to getting a deal done?
Yeah, I remember the question from last time when I said yes, and this time I'd say more of a no. In other words, the debt markets are much more supportive. Now, there's of course a real bifurcation. You know, there are certain sectors like leisure, like retail, travel, and parts of oil and gas that are still very challenging. Of course, in those areas, the debt markets are highly restrictive and the themes are very different. In more robust sectors like software, like fiber, like data centers, which we just announced yesterday, we did a large data center investment, or in healthcare, med tech, essential services, those kinds of things.
You know, there both the equity markets and the capital markets are robust, you know, we actually did an IPO in March, like I mentioned, in Finland with a company called Musti Group, a pet care retailer. That's performing quite well, and we're able to do, you know, a sell-down here just a few weeks ago. There's a real you know, the markets are active, but they're very, you know, disciplined in terms of what areas they're active in.
I think it's changed quickly. Thank you very much.
Yeah, they do. Thanks.
Thank you. Our next question comes from the line of Bruce Hamilton at Morgan Stanley. Please go ahead. Your line is open.
Hi. Morning, guys. Three questions, if I may. Firstly, just on the sort of current fundraising, could you just give a sense of any difference in kind of fee rates relative to previous funds? I'm assuming not. Within that, I think when we sort of try to back out the numbers, Infra funds look like they generate a bit more than PE funds. Just to check that. Then secondly, in terms of sort of fundraising, the proportion of fundraising for EQT IX and what you expect for Infra V coming from existing LPs, because I think historically it's been like 75, 80%, or whether that's gonna be sort of broadened out, i.e., there's, you know, quite a lot of opportunity with new clients that you're starting to tap.
Finally, just on the fundraising, I guess to clarify on the big flagship cycles, it sounds like we should think somewhere between two and three years is the right way to think about it, not three to four. On the new strategies, in terms of size, we should think APAC would be larger than growth capital, which would be larger than real estate. Is that kind of directionally the right way to think about it? For APAC, it's not like raising your first PE fund. I assume it's gonna be, I don't know, is it any help in sizing that? Is it like, you know, your third generation PE fund, that sort of, you know, two, three, four? Oh, yeah. I guess any way to help us maybe think about how big those could be when they finally come through. Thank you.
Thanks, Bruce. Good and sharp questions. Kim, let's try to take them together. If I start with the current fundraisers and the management fee levels. You know, as these two funds, the two flagship funds are becoming closer and closer in size, I think you should expect that the management fee level also gets pretty similar. I'm just thinking how if I can answer it in any more detailed terms than that, but I think that's probably the way to say it, with the exception of maybe adding that we expect it to be more or less at the same level as the previous funds, maybe a tiny bit lower. It's hard to make a prognosis because it depends really on.
The reason I say that is that, you know, we have in the beginning of the fundraise, there's a first closed discount on the management fee, and then there's a ratchet in terms of size. Depending on when investors come in and at what size, that determines the final rate that's there. Overall, you know, quite a minor change versus the past. Do you wanna add anything to that, Kim?
No, no, that's right. We've said that the terms for the funds are broadly in line with the predecessor funds, and that is absolutely correct.
Yep. Slightly lower, if anything. Okay. On the proportion of existing versus new investors, you know, given that we're still in the fundraise, I'm not gonna be able to comment on it specifically. What I can say is that, you know, we are continuously trying to bring in, you know, new investors to EQT, as we grow and develop. That's, you know, both to help us grow and develop, but also, you know, have more capital for co-invest and for developing the firm, the firm's investment strategy, that is. I'd say. You know, let's rather come back to that when the fundraising is complete.
On the flagship fund cycles, you know, I answered that already. It's very hard to give a prognosis. I would think that, you know, 2-3 years is. That's a bit aggressive. Like I said, over our 25-26-year history for private equity and 12-year history or so for infrastructure, the average has been three, with, you know, slightly longer and more complicated market times and slightly faster and very attractive market times. You know, I'll leave you to build your own model the way you think about it. You know, shorter than three years, I think would be too aggressive. Kim, you wanna add anything?
No, that's right.
Thank you. Our next question comes.
Yeah. Well, there was a further question on the size.
Oh, yeah. Sorry, I forgot that one. Yeah.
APAC funds, et cetera. I guess you're right in that it's not our first generation of funds in Asia-Pacific, and that the market opportunity is huge. We haven't started sort of sizing the fund as of yet.
Okay. Yeah.
Thank you.
Yeah, but you know, for those three funds, I think we'll defer until we get closer to the actual fundraising before we comment.
Okay. Great. Thanks. Thanks.
Thank you. Our next question comes from the line of Gurjit Kambo of JP Morgan. Please go ahead. Your line is open.
Thanks for the presentation. I have three questions. Firstly, in terms of M&A, you know, what sort of areas are you looking at? Is this to sort of accelerate the, you know, the growth areas that you've identified, i.e., Asia ventures? Or is this sort of more sort of geographically focused M&A, that's the first question. The second one is, you know, how have sort of client return expectations developed, you know, sort of since COVID-19 around private capital, real assets, you know, given the low interest rate environment will be around for probably several years now? How are the expectations from clients changing?
Just finally, just in terms of the EUR -4 million carry investment income, you know, can you split how much of that is kind of a reversal of carry versus how much of that is maybe a negative mark-to-market on the investment income side? Thanks.
Thanks. I'll take the first two. On the M&A side, we're looking at both, Gurjit. We're looking at you know, both geographic expansion and product expansion, so in our growth areas. You know, I think what's gonna be most important are you know, on the one hand, it's the strategic fit with EQT, and on the other hand, the culture of the firms that we're speaking with that we have a you know, similar investment philosophy, similar culture, similar value creation methodologies, but where we together can be even stronger. You know, EQT can help them expand, accelerate their growth with fundraising, with digitalization, sustainability in our entire you know, platform you know, backing a smaller group. While the small.
You know, that smaller group, either in a product area or a geography can of course help, you know, they're the specialists, and probably highly performing in those areas can help us grow and develop, where we'd like to grow and develop. That's how we try to think about it. On client return expectations, you know, this is an interesting question. You know, if you ask different LPs, you will get different questions. I think the way that most, you know, large professional private equity investors will answer the question is that they're expecting, you know, 300-500 basis points of net outperformance versus public markets. I think that remains.
You know, 'cause the follow-up question is what do you expect the public markets to provide over time, et cetera. We're still razor-focused on, you know, on generating, you know, top quartile performance, you know, for our investors. We believe, as we've always said, that, you know, the performance is really the core. You know, as long as we perform, you know, as, you know, relatively strongly versus private equity and versus the public markets, we think that we'll be able to deliver, you know, what we need to do for our investors. In our funds, you know, we're not reducing our return expectations during this time.
We're continuing to find companies that, you know, on the one hand have, you know, are in a thematic industry, and are, you know, probably a fairly strong player in the industry, but that we can, you know, during our ownership period, really impact and transform to become an even better, even more exciting and even more future-proof company. So, you know, we're not going after the businesses where you buy the company, and you say, "Hey, good luck, guys. This is a great business. You know, we'll support you, and then everything will go well." You know, we really get close to the companies and really try to make transformative actions so they can continue to develop, to drive, sorry, those strong returns.
On the third question, the market effect on the investments we have made in our funds was approximately zero out of the four.
It's basically a sort of a clawback of carried interest. Is that correct?
Yeah. Correct. Again, it's not a clawback.
It's not.
In the sense of a cash clawback. It is just a reversal from an accounting point of view.
Thank you.
There's no clawback. You know, in our waterfall, there's no clawback. This is just an accounting adjustment.
Yeah. Thank you. Our next question comes from the line of Elizabeth Miliatis of Bank of America. Please go ahead. Your line is open.
Hi. Good morning, and thank you for taking my question. I've only got one, again, on carry. Is it safe to assume that in the reversal that you've recognized in this first half is all the carry that you might actually recognize? Or is there a potential for some more carry to be reversed in the second half, depending on, you know, if COVID continues, and we're going back in and out of lockdown, and there's still more pressure on the global economy? Thank you.
If we would have known of anything more, we would have taken it at the time of closing the accounts. We are not aware of any further reversals. Again, I would also put this in the context of the size of these funds and the AUM that we have from these funds, which is some EUR 2 billion, I think, out of the 37 we had at quarter end and significantly more that we will have at year-end. It's not going to be a meaningful impact on EQT AB overall.
Okay. Thank you.
Thank you. Our next question comes from the line of Ermin Keric of Carnegie. Please go ahead. Your line is open.
Thank you, and good morning. The first question was on EQT Infrastructure V. You said it would likely be activated by Q4, and that could give us maybe an indication of how much would be raised by then. I mean, if we just think about EQT IX, which you expect to close in roughly nine months. Would it be fair to assume just if we assume EQT Infrastructure V is starting to charge fees at the four and a half months from the start of capital raise, is that 50% of the capital raised by then? Should we think about it as linear, or is there something we should keep in mind there?
Kim, you wanna take that?
Yeah. The way we wanted to answer that was that we cannot give you any better guidance than thinking about it as linear for now because we cannot say what we expect it to be or what we think it will be. As you know, the way the economics work is that whatever we have at year-end, that is what will be recognized as management fee revenue then for this year. That's the number you should aim for.
Okay. Thank you. In terms of M&A, so what's your view on the optimal capital structure for EQT long term? We can think about the M&A firepower also with regards to the seed investments you wanna do on the new growth strategies.
Kim?
Yeah. As mentioned, we have about EUR 800 million of cash now, and we are just starting to make investments out of that for now. We are looking also at the potential for leverage. And obviously the markets are quite supportive and have been for some time for that. But in the foreseeable future, we would expect to have a you know, significantly positive cash positive balance sheet.
Okay, thank you. If we can move on to the cost side, how should we think about the output for the FTEs and other OpEx now? Should we think that you have sufficient scale to handle both EQT IX and Infra V ? Growth from here on will basically only be for the new strategies in the coming, let's say, 12 months.
We will continue to hire selectively also on the PE and infra side. We will hire more in a targeted way on the growth and APAC side, for example. It's not so that we can completely just stop recruiting for other functions and you know, capital raising, et cetera. Our FTEs will continue to grow. It's a bit of a slowdown during the course of this year in the growth, but assuming things go back to a new normal that looks something like the old normal, we would expect hiring to pick up then again during the course of next year.
Thank you. That's very clear. One final more detailed question from my side. Just on the income, could you just walk us through what's the adjustment that's made there on the carry and the investment income between the reported and adjusted figure?
Yeah. Before the IPO, we acquired a lot of carry to the house. In order for that acquired carry to be accounted for in the same way as the carry the house already owned, we need to make this adjustment. They are technical adjustments. Happy to go through them in detail in a separate occasion, if you'd like.
Of course. Thank you very much for taking the question.
No problem.
Thank you. Our final question comes from the line of Jens Ehrenberg of Citi. Please go ahead, your line is open.
Thank you. Good morning, guys. Just a few left over from me. Firstly, on the investments in your own funds, Kim, I think you had mentioned that you would expect that overall to grow a little bit going forward in line with the growing fund size. Just, can you give any indication of potential, like co-investment rates in your own funds that you target? Do you have anything penciled in there, or can that vary from strategy to strategy? That's the first question, and the second question, just a bit of a follow on your growth ambitions in Asia. To some extent, there's obviously focus on investment strategies in Asia. Will there also be focus on actually raising funds in Asia, i.e., focusing on Asian LPs to get on board with your funds, or is it really more on the investment side? Thank you.
Thanks. Jens, I couldn't hear so well for your first question. Did you hear the first question, Kim?
Yeah, it's kind of essentially the size of the LP stake. I mean, the we h istorically, the recent history has been in the region of 2% that we are expected to invest into our own funds or the carry holders, essentially. Then, you take that times what our share of the carry is, which is 35% in all future funds. Now this 2%, it is moving in one direction only, i.e., towards a larger percentage than that. That's a good estimate for now.
On the growth in Asia, you know, when it comes to fundraising, you know, we are working to continue to develop our capital raising team and strategy across the globe. We have a significant amount of capital already from Asia in EQT overall. You know, we are going to raise a separate Asia fund, so to answer that question, you know, under the leadership of Simon, and that'll be part of our private capital group. We're working very closely with private equity and in the same thematic way that we invest in other parts of the world. Exactly when we'll start that fundraise and the size we are, we can't really comment on yet 'cause it's too early.
Of course. No, it makes sense. Perfect. Thank you. That was helpful. Great.
Thanks. Thanks, Jens.
Thank you. As there are no further questions on the queue at this time, I'll hand back to our speakers for the closing comments.
Thank you, everyone. Excellent questions. Appreciate the participation this morning and look forward to next time. Have a great day. Bye-bye.
Thank you. Bye then.