Swedish private equity firm EQT has said it is avoiding making too much use of leverage when buying and refinancing companies, in part because of the prospect of a recession.
The group’s chief financial officer Kim Henriksson said “leverage is at high levels right now” in the industry as a whole.
“What we’re trying to do now is also preparing for a downturn that will inevitably come,” he said. “So if we have room on the leverage side, instead of taking out dividends and levering up companies, maybe we renegotiate better terms and more flexibility so that whenever there’s a more challenging situation we can manage that as well.”
He said that “leverage isn’t really where we create value at all,” with value instead coming from improving companies’ margins and earnings.
The group on Tuesday said it plans to raise its ninth private capital fund next year, in its first quarterly report since its initial public offering in September.
EQT is “intensifying” preparations to raise new money after investing between 65 and 70 per cent of its latest fund, which launched in May 2018 and is worth €10.9bn. It has invested the money at a faster pace than usual for the industry, driven in part by a large deal to buy Nestle’s skin health business this year.
The group hasn’t yet set a target size for the new fund, but it aims to be ready to start investing from it once 80 to 90 per cent of its current fund is deployed, which could be towards the middle of 2020.
EQT became the biggest buyout group to list for years when its shares started trading on Stockholm’s Nasdaq on September 24. That was “merely a watering station for us,” Mr Henriksson said. “It’s business as usual, but now with a balance sheet.” Its shares rose 2.6 per cent on Tuesday after the report was published.
As investors pour money into private equity funds in search of higher returns, buyout groups face competition for deals at a time when company valuations are high. “We need to work harder and smarter to create those same returns,” Mr Henriksson said. “But that’s what we are doing.”
The group’s sixth fund, which started in 2011, has generated returns of 2.4 times the money invested, the group said in its quarterly report. Its latest fund has so far delivered a 1.1-times return and is “on plan” to deliver a return of between two and 2.5 times.
The fresh fundraising would make EQT the latest private equity group to raise more money for European deals. On Tuesday, US-based rival Kohlberg Kravis Roberts closed the fundraising process for its largest-ever European fund, worth €5.8bn, and last month the Carlyle Group said it had raised €6.4bn for its latest European fund, exceeding its target by almost €1bn.
The market for fundraising is “supportive,” Mr Henriksson said. Its current fund, the group’s eighth, is €4bn larger than its predecessor.
EQT had €40.5bn in fee-paying assets under management as of 30 September, up from €36.6bn in December 2018. Assets under management in private capital funds, its largest business area, have fallen 1.8 per cent to €21.9bn since the end of last year as it sold some investments but the value of assets in its real assets and credit divisions rose.
The group’s total investments in the three months to 30 September amounted to €3.4bn.
EQT is expected to propose a €200m dividend for the 2019 fiscal year, to be paid in two equal parts in 2020, it said.