EQT’s Sinding: State aid for PE-backed companies is appropriate

Governments, banks and PE firms need to support portfolio companies during the health crisis, the buyout giant's chief executive said on a Q1 earnings call on Friday.

EQT‘s chief executive has said private equity-backed companies should be included in global governments’ coronavirus aid packages where financial sponsors are taking their share of the burden.

“We believe that in [a] situation where we’re supporting a company, and the banks are supporting the company and the governments would also be a part of supporting that company, we think that would be appropriate,” Christian Sinding said on the Swedish buyout giant’s first quarter earnings call on Friday.

“We are all in this challenge together,” he added.

Sinding noted that EQT has a fiduciary duty to its investors at the same time as being a responsible owner and helping its companies in the best possible way.

“If you think about who are the investors in EQT’s funds, they are pension funds and insurance companies from around the world. The owners of the companies we are taking about in PE is not EQT, it’s actually our investors who own these companies. We are managing the companies on their behalf.”

Private equity firms in the last month have faced criticism in their efforts to access stimulus packages from governments. In the US, PE firms have been excluded from the Paycheck Protection Program, which would provide loans to small businesses to pay their employees.

On the impact of covid-19 on its portfolio, EQT estimates about 15 percent of its companies in key funds EQT VI-VIII and EQT Infrastructure II-IV will require additional equity. It will need to use around 5 percent of committed capital in its key funds to support such companies, Sinding said.

Within private equity, companies in healthcare, TMT and services comprise about 90 percent of its portfolio, and many of these operate in essential services industries with predictable cashflows which are performing “strongly”, he added.

Several of EQT’s portfolio companies are “highly affected” by the crisis and many of them are affected in some way, Sinding said. In line with this, the firm has selectively drawn down revolving credit facilities in some portfolio companies, removed covenants and created more flexibility for them to handle the difficult period.

In mid-April EQT withdrew its plan to take over New Zealand retirement village group Metlifecare for around NZ$1.5 billion ($911.5 million; €835.4 million) due to the impact of covid-19. It also reportedly suspended the auction for Swedish ERP software company IFS, which was valued at more than €3 billion.

Meanwhile, it bought Air Liquide’s hand sanitiser business Schülke & Mayr for roughly €900 million as demand for disinfectant products grows due to the pandemic.

The firm expects fundraising will take longer, exits will be less likely until markets stabilise and overall investment activity to be lower over the course of the year.

Sinding said that fundraising for flagship buyout fund EQT IX, which has a €15 billion hard-cap, will take longer due to the market environment. It is unclear how much the firm has raised so far for the vehicle.

“It’s the practicalities for being able to do their due diligence on EQT remotely as opposed to in person,” he said. “LPs are also taking a bit longer to make decisions or are re-allocating capital. All these elements together are affecting fundraising timelines.”

He noted that the firm is not under pressure from its LPs to sell assets due to the age of its funds, the availability of fund capital and a “strong balance sheet” with a liquidity position of more than €900 million in cash.

Revenues are also expected to take a hit over the course of the year. Valuations at the end of the quarter in key funds are down on average by around 5 percent, compared with the fourth quarter of last year, with its 2015-vintage EQT VII fund taking the biggest hit.

The firm’s AUM of €40 billion as of end-March is largely unchanged from the fourth quarter and the equivalent period last year. The firm made €1.8 billion of investments in the first three months of the year, of which one-third or €600 million was in credit. Gross fund exits in the quarter amounted to €400 million, half of which were within its credit investments, according to a statement accompanying the results.