Governments, banks and private equity firms need to support portfolio companies during the health crisis, the firm’s chief executive Christian Sinding said on the call. EQT estimates about 15 percent of its companies in key funds will require additional equity and it needs around 5 percent of committed capital in the funds to support affected companies.
Private Equity International caught up with Sinding on what it means to be a responsible corporate owner at this time and how he is managing its holdings in preparation for worse to come.
PE has been criticised for its push to access government stimulus programmes (for example, the CARES Act in the US), do you think that is justified? What should PE firms be doing differently?
EQT will always consider every option available to support the portfolio companies, but it is a complex question because we have around 150 companies across the globe and every circumstance and jurisdiction is different.
If one of the funds’ businesses needs help due to the current extraordinary situation, we will first evaluate what help is required, what we can do with our tools, what credit suppliers can do and, if necessary, what governments may be able to help with.
This crisis is hitting everyone and we’re all in it together in terms of protecting jobs and livelihoods, but of course we must be thoughtful with what government support is accessed, particularly given it is limited in supply.
I believe that the private equity industry has a unique opportunity to drive positive change beyond financial returns and help address the big issues being faced by society. It is in times like these that this will be tested, and how our industry emerges from the crisis will in part be determined by the extent to which we all step up to the challenge.
How do you get the balance right between being a good corporate citizen/owner and preserving equity for LPs?
EQT has been taking steps throughout the pandemic to support initiatives at both the local and global level. For example, the EQT Foundation has made a significant donation to an initiative to accelerate and scale treatments for covid-19.
On the portfolio side, a good example is Galderma, the leading global dermatology business, which has initiated the development, production and shipment of hand sanitiser in record time to support healthcare professionals.
And there are many more great initiatives throughout the portfolio and also among our staff across the globe. All this together illustrates how our mindset of making a positive impact with everything we do can look in reality.
EQT also has a clear fiduciary duty to its shareholders and fund investors. The LPs in EQT’s funds are often pension funds and insurance companies from around the world – institutions that are relied on by millions of people worldwide. Managing the investments on their behalf, making sure the companies get the right advice and support during this challenging time, is a huge responsibility and it is vital we fulfil our duties to them.
How are you steering EQT through this period?
EQT has been preparing for a downturn for some time and is well-positioned for periods of upheaval. Thanks to our thematic and long-term investment strategy, the portfolio remains relatively robust with limited exposure to cyclical sectors.
We rely less on excessive leverage to generate returns, and in general our portfolio has headroom as many have recently refinanced and the vast majority have cov-lite debt facilities. But this is an unprecedented situation, there is no doubt about that – we are hoping for the best and preparing for the worst.
EQT has invested through a number of economic upheavals since the start in 1994 and we have always come through stronger. We have a stable senior team with vast experience in navigating past financial crises, and we support the portfolio companies to stay ahead of the curve.
While the full impact of the pandemic is yet to be seen, the portfolio companies already had contingency plans in place which has helped them to respond faster.
KKR and Blackstone have warned about the virus posing material risk to its revenues and fund performance. Do you expect EQT’s earnings to take a hit too this year?
The pandemic is impacting society and every business across the globe. This environment makes it even more important to have a responsible and active approach to ownership, and we are doing everything we can to support both EQT and the funds’ portfolio companies.
It is impossible to predict the extent of the impact the pandemic will have on private capital markets, but in the short-term fundraisings may take longer, exits are less likely and overall investment activity is likely to be lower until conditions normalise. Despite this, we are confident that the EQT business model is robust due to its recurring revenue base and the thematic investment approach.
What’s the main focus of your discussion with LPs now?
Transparency is a core tenant of EQT’s culture and way of working, and we remain in close and regular contact with LPs to ensure they are kept up to date with the key developments at EQT and the portfolio companies.
Christian Sinding is chief executive and managing partner of EQT.