Privately Speaking: EQT's Thomas von Koch

For a private equity firm with deep Nordic roots, EQT’s London office could hardly be in a better location: in the middle of Soho, overlooking leafy Golden Square, but more importantly, next door to an authentic Nordic bakery. As PEI arrives, the smell of freshly baked bread is coming out of the bustling shop.

Upstairs in the office, the Northern theme continues, with photos and paintings of Scandinavian landscapes hanging on the walls. While the firm is clearly happy to show off its roots, it wouldn’t be accurate to class EQT purely as a Nordic-focused private equity house. Only five years after launching in 1994, the firm had already expanded into Germany. Fast forward 20 years and it has become one of the biggest GPs in Scandinavia and the DACH region. It has 19 offices in 14 countries in Northern and Eastern Europe and Asia, and it recently opened up in the US. As well as doing buyouts, EQT has also branched out into infrastructure and credit investing. All told, the firm has raised 17 funds totaling approximately €22 billion.

Thomas von Koch, who has been with EQT right from the start, has seen the firm grow and evolve over the years. He says there was “no golden plan” on how the franchise would develop. In March 2014, the 48 year-old took over from founding managing partner Conni Jonsson, who stepped up to become chairman.

According to the new man at the helm, the firm is well known for its entrepreneurial spirit and has never been afraid to expand into different geographies and try out new strategies. Not necessarily a mind-set that is instantly loved by investors, he admits.

“All LPs say the same thing: ‘We like what you have done in the past. Do absolutely zero in change going forward, because we invest on the back of your track-record, so don’t move. However, the world moves. We have a business to run. And if we are not able to grow, we will not retain and develop our business.”

Expanding and taking risks is vital for success, he adds. “We are a growing animal and the day we stop growing we might encounter issues, which you have seen in some other funds that have mono-business lines.”

He refers to groups that have been forced since the crisis to raise smaller funds: “These firms will have to scale back, which often means that the underperforming partners will be asked to leave. However, it often also means that some of the best people will decide to leave as well. You are then left with the guys that are in the middle.”

What he feels is a particular threat to any private equity firm is the phenomenon he describes as “golfing partners”. These are people who have done a lot of the good deals in the past, earned a lot of money, are now in their fifties and have other priorities in life, he says. Spending time on the fairway is one of them, but the investors are pushing for the veterans to stay and carry on making investments. “The LPs want to retain them, but it’s a real turn-off for all the people below who do all the heavy lifting.” The best solution is to be strict, he says. “Either [they] stop playing golf and come back, or you need to find a new role for them, but then you also need to review their ownership of the business.”


EQT claims it doesn’t have any golfing partners, which according to its managing partner is due to the ownership structure of the firm. “From the outset we have said: we are going to be long-term greedy. I have [just] 3.5 percent ownership of EQT- [only] 15 percent more ownership than a senior partner we recruited in 2006. The same is true for Conni Jonsson.” He says he is proud of this model, and gives credit to his predecessor for installing it. Because of the ownership structure, executives are not in an easy position to complain about the terms, he explains. “If I have some partner coming up to me saying: ‘I don’t get enough rewards for my great work’, then I often turn around and say: you may have a higher salary than I have; you even have a bigger [stake] in the firm, and you are not the founder. So buzz off’. That is very efficient,” he says with a smile.

The structure also reflects the firm’s thinking on succession: “Below me are about 10 senior partners. If I get a heart attack, I’ll be replaced tomorrow, because we cannot have the firm depending on one person at the top. That individual could be getting through a divorce, get sick, leave the firm and suddenly everything starts to crack.”

Sharing the wealth fairly equally means that on paper at least, EQT looks quite complex, which makes it hard to tell from the outside who is driving the firm. LPs aren’t always content with this, he admits, adding that they often want clarification on who the key men are: “It’s a continuing fight with them because they would like to narrow it down and we would like the flexibility. I have a business to run and if we have a person in the team who’s had his best years behind him, I need to be able to move that person because otherwise I won’t be able to promote the people with potential. Investors are not buying me, but they are buying this army of 25 to 30 people.”

Earlier this year, after taking over from Jonsson, von Koch travelled to all of EQT’s offices to reiterate the message that EQT is a team, rather than a firm with one or two individuals at the top. “I told the German office: ‘I have some good news for you. Your football team doesn’t have Messi or any of the top 10 players in the world. Yet [Germany’s national side] die Mannschaft is the best football team in the world because they work as a team and everybody is playing for the same goal’. And then they happened to win the world cup, which meant my story became even better,” he laughs.

He then quickly turns serious again. “None of us can claim we are the best investor in the world, but as a team we are pretty good.”

The average gross money multiple on sold deals from EQT’s buyout activities over the last 20 years is 3x, the firm says. EQT’s earlier funds are fully realised, but EQT III (raised in 2001) and EQT IV (2004) still have a number of businesses in the portfolio. EQT III has one investment left: Finnish-listed Munksjö, in which the firm has an 11.5 percent stake, while EQT IV has three companies in its portfolio. This includes an 11 percent stake in ISS, which it partially exited last year, and Sanitec, for which a trade buyer recently has put an offer in. That company is likely to be sold before year end, EQT says.


One time when team effort was particularly important was during the global financial crisis, when many firms found themselves facing some scary problems in their aggressively geared portfolios. “A lot of people in this industry went from wealth to non-wealth during the course of a day. We united and we didn’t lose a company, but of course we struggled.” In 2009, EQT realised it would need €1 billion for debt refinancings from the banks while it only had between €300 million and €400 million on its balance sheet. “Banks were not in a position to lend, so there was potential trouble ahead. So we sat there and called in all the partners and said: everything is going down, our portfolio companies could be worth nothing.”

EQT negotiated extensively with its lenders in order to save its portfolio. “We went to the banks and said, ‘this is the solution, this is our plan, here is some additional money; but I am sorry we are unable to meet your exact demands and in order to save this company, you also need to give. We need to get through this thunderstorm, but if we get through this then you will also benefit from the upside. We are better equipped to run these businesses than you’.” The banks were reluctant, but they did agree. “Looking back, I think banks are relieved we fixed it like that, compared to firms who just handed them the keys, because that was also a practice that was done.”

One of the companies that struggled was Sanitec, a bathroom ceramics specialist which EQT acquired in 2005 for approximately €500 million. EQT did not manage to streamline production and operations fast enough. It injected another €100 million during the financial crisis and implemented necessary changes. Von Koch clearly likes telling the story of the turnaround, “not because it was a great return all in, but it went from being as dead as a company can be to recouping all the money and it has been very sound since then. A trade buyer has presented an offer for [the business]. People may think I am crazy but I am very proud we made the money back; because it was a basket case. We also have investments in the same fund that had money multiples of 14x [EQT floated German diesel engine maker Tognum in 2007] and clearly I am very proud of that too.” But having successfully turned around some of the deals during the crisis has helped EQT in other ways too, he adds. “The next time the rain comes, we have proven that we are a credible party to lend to and that we will see investments through. We already had a good relationship with the banks, but this has strengthened it even further.”


Speaking of rain, though: von Koch seems to have no doubt that more is on its way. He speaks of widespread ‘euphoria’ in the debt markets, which he says he finds ‘scary’. “It will end up in tears. In 2006, 2007, before Lehman Brothers fell, firms were looking at high underlying growth of the companies, so there was a rationale around it. Today, to apply that kind of debt while the underlying growth is very small is very gutsy.”

High gearing ratios have pushed up acquisition multiples and as a result, investing is a lot more challenging – if you don’t want to pay too much at the entry level. “We are selling aggressively because the multiples you see in today’s market are much higher. The IPO market has been very good, but it has become a bit shaky in recent weeks. And firms are now trying to figure out where we are in the market. Is this a new dip or is it a correction? I do think many people are cautious.”

Even so, EQT has obviously no choice but to carry on investing. “We cannot go to our investors and say: we won’t be doing anything for two years because everything is too expensive. Investors are not happy to pay fees on the capital they allocate to our fund and then for us to do nothing.” More than ever perhaps, EQT is focused on buying companies that can weather any upcoming storms. The firm recently acquired Bureau Van Dijk, a Belgian provider of business intelligence, which was formerly owned by Charterhouse. That company, EQT’s first Benelux deal, “is performing really well and growing 5-10 percent per year,” von Koch adds.

Having access to the right companies is vital – especially at times when valuations are sky-high. But many businesses are not keen to sell to private equity, he says, particularly in Germany. “If you meet a Mittelstand management team, they will tell you that the company is not just relevant for their own wealth but also for the wealth of the village. They won’t just call Goldman Sachs and say: sell my beloved treasure and by the way I will have to move from my village because everybody will look down on me for selling out. The management of these companies are only interested in whether you have actually built something in your life.”

Gaining access to such businesses helps explain why EQT maintains 22 offices. Also, according to von Koch, the firm does plenty of preparation before entering a new market: “We are not taking macro bets whereby we sit in a dark room, look at the world map and just say: we want to be there, and there, and there. That’s not how it works. Whenever we build up a presence somewhere we take it step by step; we are quite boring in that sense. We would only enter a market if it makes sense and if we can find the right people.”

The firm also works hard to engrain new joiners in the organisation. “They first have to go to boot camp in Stockholm for a few months to understand how EQT thinks. When people come in who do not understand how we operate, that is jeopardising the firm. Private equity is a people business. You’ll be amazed what good people can do and you can also be amazed how not so qualified people can destroy value. So we are slow movers but we are very persistent.”

Last year, EQT opened a Benelux office in Amsterdam, and it is now also expanding into North America. Jan Stahlberg, deputy managing partner and head of EQT Mid-Market, has recently moved to the US and is currently looking at mid-market opportunities. Notes von Koch: “We had some very good deals in the infrastructure business in the US and that’s when we figured, why not also look at US companies, expanding them into Europe.”

However, the firm is not looking to compete with US mid-market buyout funds, von Koch stresses. “We won’t be buying American companies and develop them in the US and think we are smarter than the Americans – that would be very ignorant. But with the presence we have in Europe, we can take an American healthcare company and develop them in Europe because we have the relationships. We bring a very strong Northern European network to the table.”


Back in its home markets of Scandinavia, the firm is facing some strong headwinds in the form of public scrutiny. Due to a number of investments in privately-owned education and healthcare providers that attracted some negative press coverage, private equity’s reputation has been tarnished in Sweden. Left-wing political parties have called for a ban on private investment in these sectors, which would prohibit private companies from paying dividends or retaining profits, says von Koch. “Currently, there’s an investigation taking place on whether this needs to happen. But politicians aren’t business people and the effect of this investigation is that every bank is calling their clients invested in these companies saying: just so you know, your credit facility will run out in six months’ time. The investigation is a decision by itself.”

EQT owns Sweden’s largest private school and so would be directly affected if the legislation goes through: “Due to the current uncertainty, it is impossible to value the business.” As well as for private owners and investors, these proposals are negative for the wider economy, he adds. “Small, very well run private initiatives will fall down in the coming months.” Normally in Sweden, common sense will win and these proposals won’t make it through parliament, he says. “However, this is a very unfortunate situation. Because just having this on the table creates a notion of concern and it feels like we are going back to the 1970s. But we are talking to politicians and trying to lobby so we hope that they will wise up.”

The concerns about private ownership brings the EQT frontman to what he believes is one of the most important topics for private equity: how to improve the industry’s reputation. EQT has taken some material steps in this area, such as moving its funds onshore in recent years. It has also teamed up with other Nordic GPs to establish a Code of Conduct in order to improve transparency. The rules will relate to employees of portfolio companies, labour unions and transparency, as well as environmental, social and governance issues (ESG). The self-regulatory code, which will be administered by a board that will handle complaints, is expected to be in place by year-end.

Von Koch is keen to get transparency higher up the agenda – not just in the Nordics, but also further afield. In June, he gave a speech at EVCA’s private equity summit in Vienna in which he called for more openness. “By not engaging we have a debate that is not based on facts and that is very scary. I am telling my colleagues all the time: just so you know, we all need to be very transparent going forward. The problem is imminent and accelerating by the day. If we are not respected, we will not be accepted as new owners to companies that are family-owned, so it has a direct effect on deal flow.”

And that would be the last thing this ever-expanding group can afford. In addition to building a North American platform, the firm is opening an office in Spain – mainly for its infrastructure team, but it may consider doing buyouts in that region at some point. On top of that, EQT is gearing up to come to market for its next European buyout fund next year, which is likely to have a target of around €4 billion, according to investor sources. (EQT declined to comment on fundraising.)

The plans don’t stop there. Von Koch wants EQT to be an influential investor in the decades to come. “My ambition is that EQT is still here and growing in 100 years’ time.” For this to be possible, private equity must address its reputational issue, and if von Koch is right, success in this area isn’t optional: “We are part of society, we contribute to society and if we don’t then we won’t have a license to operate.”