Private equity could help fill the vacuum from less equity analyst coverage

The global private equity group EQT explores public market investment opportunities - how will it create value from investing in listed companies?

Johan Trocmé interviews Fredrik Åtting, Munich-based partner at global private equity group EQT in charge of the firm’s newest initiative to explore public market investment opportunities in Northern Europe. What made EQT want to expand into this area and how will it seek to create value from investing in listed companies? Also, will the new MiFID II regulation create opportunities for a strong private equity player?

JT: Could you briefly describe EQT’s new Public Value initiative for the public equity markets which you will run? What investment capacity will you have, and what size and type of investments in public companies will you consider?

FÅ: We have, since we started EQT in 1994, built a strong experience and knowledge bank about how to drive value creation in companies. Fundamentally, there is no difference in how you drive value creation between public and private companies. EQT has built a great level of collective knowledge, and we have seen many situations in public companies where we believe a strong, active owner could have made higher value creation possible. But EQT has not had the tools to pursue such opportunities. We have now reached a point where our organisation is ready, and we are taking a first step to start exploring such opportunities.

For us, this will be about taking the private equity model, the EQT knowledge and industrial network – what we call the EQT toolbox – and apply it to listed mid-cap companies in Northern Europe. We intend to offer this knowledge to management and the board of directors of any companies we choose to invest in.

Why focus on mid-caps? We believe these companies are the ones that most likely have the greatest need for the knowledge EQT can bring to the table. They often have limited centralised group functions; typically there is no business development department with ten ex-management consultants.

We aim to build a business together with the team at Zeres Capital. EQT will seek positions in listed mid-cap companies, with a market cap of up to some SEK 25bn, to become an influential owner and get relevant directors elected to their boards. The purpose is to drive initiatives for value creation together with other board members, with the management, and with other major owners. It is all about partnering with other stakeholders. In our view, core Northern European equity markets have a favourable governance model for shareholders, supporting an active ownership approach and an opportunity to influence.

JT: What drove the decision for EQT to enter this arena? Would you say Northern European equity markets are different today than they were five or ten years ago in terms of potential opportunities for you? If so, how?

FÅ: Even if EQT has not made these kinds of investments before, starting from zero ownership and building a stake in a listed company, EQT has massive experience from the public market environment. EQT has managed 16 IPOs in conjunction with exits from portfolio companies. Our experience is that institutional investors buying into the companies that EQT has floated, have appreciated a strong owner, who takes responsibility in the board’s nomination committees and pushes the group management’s agenda. That is a role which has been completely natural for EQT to take on, until exiting the remaining ownership in the company.

Seeking new business opportunities is part of EQT’s DNA. New initiatives typically tap into an asset class, sector or region where the EQT platform can make a difference. We see this as yet another opportunity to apply EQT’s proven approach to active ownership and value creation but in a new sphere.

We have been quite busy expanding into new areas in recent years, launching a venture fund, a real estate fund and several different geographical funds across the world. But the organisation has now become ready to look into the public market arena.

Growth in passive equity investment increases the need for strong and active ownership

Another factor which underpins our interest in public equity market investments is the massive growth in passive equity funds in recent years. From our point of view, a growing share of passive ownership in equity markets increases the need for strong and active ownership of listed companies. Here, EQT could have a valuable role to play.

To the left Fredrik Åtting and to the right Johan Trocmé.

JT: What could be typical situations you would be interested in investing in? What dimensions could you drive change in? Leadership? Capital allocation? Consolidation? Operational excellence? Others?

FÅ: On a general level, EQT will apply the same investment philosophy that it has for its private investments. EQT looks for companies in growing industries, where the company has a strong position in its market. The basics need to be sound and favourable.

Next, EQT wants to see opportunities to create value from using the EQT platform, or toolbox. This can be many things like driving international expansion, speeding up complementary acquisitions or industry consolidation, or changing business models in response to digital disruption. EQT has a sizeable digitalisation team of experts, which supports the portfolio companies. Another example is driving and speeding up sustainability initiatives.

To put it simply: EQT looks for a good company in an attractive industry where it can help the company to take the next major step in the development of its business. It is very much about long-term sustainable development. We have to believe that capital markets are efficient enough for investors not to be able to generate stellar returns from just buying into companies cheaply and selling at higher prices, or from splitting companies up and selling the pieces

We think our public value initiative is uniquely positioned to source deals, given EQT’s “local with locals” approach, sector knowledge, network and relationship with industrial advisors.

EQT looks for companies with a good position in growing industries, which can use help with taking the next major step in their development

JT: The new MiFID II regulation is disrupting traditional business models for investment research, and among other things, makes it difficult for banks to justify the cost of having analysts cover small and medium-sized listed companies. Less coverage could mean less transparency, less investor interest, and ultimately lower liquidity in such shares. Could this mean more or better “mispriced” opportunities for sophisticated and well-resourced investors like EQT in tomorrow’s market?

FÅ: We already see a clear pattern that large cap listed companies have perhaps 20 or more analysts covering them, while mid-caps have maybe three or four analysts. Moreover, those mid-cap analysts often have many stocks under coverage, which may limit the depth of the research on each individual company. No one knows exactly how MiFID II will impact analyst coverage, but there is undoubtedly a risk that fewer and fewer analysts will follow the smaller names on the stock exchanges.

MiFID II could reduce equity analyst coverage of mid-cap companies, creating opportunities for EQT, with its industry and research expertise

With its deep industry knowledge in many sectors, and its analytical expertise, EQT might be able to spot potential opportunities for investment in those parts of the equity market where research coverage, and hence ultimately transparency and investor attention, are decreasing.

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Analysts
Johan Trocmé | Director, Thematic Research | +46 101 56 34 22 | Analyst info

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