Harbinger of change

“Private equity: are we good for ourselves and our LPs only? Or are we contributing to society? Or are we just one of those parasites that shouldn’t be here anymore?”

Those were the questions posed by EQT managing partner Thomas von Koch in his keynote address to delegates at Private Equity International’s Operating Partners Forum Europe in April. The industry, he said, is “under immense fire”, especially in Sweden, the UK and the Netherlands where it has been the subject of parliamentary roundtables, pre-election rhetoric, inquiries from select committees and codes of conduct designed to ensure GPs act as responsible owners.

“We need to justify our existence, not only to our LPs but also to society in general,” von Koch said. “It’s important that we do this once and for all, because we will not exist if we don’t contribute to other stakeholders than our LPs.”

All GPs, von Koch argued, have the means to prove their worth at their fingertips; they need only harness data from their portfolio companies.

EQT analysed the 22 companies that it has acquired, developed and sold in Sweden to investigate their performance five years after the firm’s ownership period. The findings showed that the average annual sales growth during the five years post-ownership was 9 percent and the average annual increase in employees 8 percent. EBITDA and personnel income tax both grew by an average of 6 percent per annum.

“We should always take long-term perspectives when acquiring a company, even though we know that we will not remain eternal owners,” said von Koch. “It’s our responsibility to make sure the company’s future-proof and in shape to continue to prosper after our ownership. If we sell bad companies we will never be successful long-term.”



But how does EQT go about building exceptional businesses with robust long-term prospects? For starters, it has to
identify the right business.

“Good companies are better than you think, bad companies are worse. It’s easier to make a good company better than make a bad company good. What this implies, and actually it’s our true conviction, [is] that good companies are under-priced and bad companies are overpriced.”

EQT would rather “pay up a healthy multiple” for those good companies and then undertake its vigorous industrial method to “really make them grow and put them on steroids” than try to get a good deal on a lower-calibre business.

“In this environment where we are right now, unfortunately it’s extraordinarily pricey and you need to take risk. If you’re not taking risk today, you’re not going to get the 25 percent return,” von Koch said. “Sitting and being very good financial engineers […] is not enough. You need to be bold, you need to take risks if you’re going to do deals today. Otherwise I think you should abstain [from] the market.”

Having acquired a company, EQT then appoints the board of directors – one or two EQT partners, and three or four industrial advisers from its industrial network, one of whom will become the chairman. These industrial advisers will be invited to invest in the portfolio company.

“I’ve been fooled a lot of times during my 25-year career, so I’ve become a little bit cynical,” von Koch told delegates. “I trust people that put money behind their words. There’s a lot of people that like to be part of boards, but when push comes to shove, do they really subscribe to what they just said? Well, put your money behind it and I believe you.”

The success or failure of a portfolio company, von Koch argued, comes down to one thing: people.

“It’s solely about people. The right people. And if you have the wrong people, you need to change them. And I mean the right people at the private equity firms, on the boards, in the management teams. If you don’t get the right people, you will just not succeed, and I don’t care what kind of operational models that people portray.”

Once you have the right people in place, you need to empower them. EQT does this through its “Troika” model – a triumvirate consisting of the chairman of the board, an EQT partner and the portfolio company CEO, who has been appointed by the board of directors. This trio has an informal telephone call each week to discuss any issue within the portfolio company.

“The first thing I say when I meet the CEO is, ‘How can I make you a hero? When you’re a hero, I’m a hero. We’re in the same boat, we’re bedded all together, I’m not your enemy. We’re together. When you fail, I fail. So how do we solve this?’” von Koch said. “That’s the kind of dialogue, and that’s the kind of atmosphere you need to create here to really get the CEO empowered and go out of that meeting and take actions. Because it’s all about actions. Actions become numbers.”

Despite EQT taking an intensive “industrial approach” toward developing its portfolio companies, von Koch’s commitment to empowering the CEO means he does not believe in operating partners.

“If you put in operational partner models under the CEO, they’ll undermine the management team day one. The guys below will say, ‘Ok, here’s the owners saying one thing, the management saying one thing. Who should I obey?’ And the CEO will blame us for taking control of the company and feel no accountability for results.”

Private equity, von Koch asserted, is a “superior ownership model” which “can be an agent for radical change” when executed in the right manner. The industry itself has gone through change in recent years, switching from a focus mainly on investors to becoming “an important part of society”, both as an owner and employer and as the guardian of institutional capital such as pension money.

Von Koch urged delegates to “respect all stakeholders” and “continue to create strong, more competitive, innovative companies, leading to more jobs, tax income and prosperity in general”. That, he said, is the only way to create “sustainable superior returns to investors”.