EQT AB (publ) (OTCPK:EQBBF) Q2 2024 Results Conference Call July 18, 2024 2:30 AM ET
Company Participants
Olof Svensson – Head of Shareholder Relations
Christian Sinding – Chief Executive Officer and Managing Partner
Gustav Segerberg – Head of Business Development
Kim Henriksson – Chief Financial Officer
Conference Call Participants
Hubert Lam – Bank of America
Magnus Andersson – ABGSC
Arnaud Giblat – BNP Paribas
Ermin Keric – Carnegie
Angeliki Bairaktari – JPMorgan
Jacob Hesslevik – SEB
Haley Tam – UBS
Nicholas Herman – Citi
Bruce Hamilton – Morgan Stanley
Isobel Hettrick – Autonomous Research
Oliver Carruthers – Goldman Sachs
Olof Svensson
Good morning, everyone, and welcome to the Presentation of EQT’s Half Year Report 2024. For today’s call, as always, if you’ve registered ahead of the call, you should have received an e-mail with your personal pin code to participate in the Q&A. Next slide, please. Let me start by summarizing the key highlights for the first half of the year. We concluded the fundraising of EQT X at hard cap, EQT Future and the Asia mid-market growth fund at close to more than twice its target fund size.
Across strategies, we had inflows of approximately €7 billion and our fee-paying AUM is now €133 billion. We expect active fundraising efforts for Infrastructure VI to materially conclude this year and for the fund to reach its €20 billion target fund size upon final close.
We continue to invest at a strong pace with €12 billion of investments announced in the first half of the year. When it comes to realizations, activity levels are higher than volumes may suggest at €4 billion. Valuations across the key funds were up approximately 5% in the first half, and the EQT key funds all continued to perform on or above plan. EQT revenues grew 7% compared to the first half of last year, paced by higher management fees. Carried interest was lower at €40 million, partly due to the relatively low volumes of completed realizations.
And with that, I’ll hand over to Christian. Next slide, please.
Christian Sinding
Thank you, Olof, and good morning, everyone. Overall, we see an improving market backdrop. Inflation is coming down. We’re on a path to lower interest rates and important elections in Europe and Asia are behind us. Yet geopolitical uncertainties continue, not least with the U.S. elections. Now having said that, EQT is built to invest and create value over cycles and to drive long-term performance across times of volatility. We celebrated our 30th anniversary this year, and our flagship funds have always delivered at least 2x returns and always paid care.
However, it’s about more than driving value creation now. In today’s market, perhaps more than ever, liquidity is key for our clients. And as you probably know, realization volumes across private markets were a decade lows in 2023. And back in 2021, buyout and exit volumes were around $1 trillion each. But in recent years, the ratio of client distributions to contributions has been actually less than 0.7.
Therefore, we’re driving best practices and exits across the firm. For example, across — after the combination with BPA, we implemented their exit and liquidity committee all across EQT. Here, we systematically review exit priorities and drive liquidity, whether through M&A, IPOs, private IPOs, recaps, continuation vehicles, fund-to-fund transfers, et cetera and thus ensuring a thoughtful approach to client liquidity and solutions.
In the first half, we had more than 10 exit processes completed. Some of these were smaller exits as we optimize the portfolios. Others such as Idealista are significant liquidity events for our clients. And through our recent IPOs, Galderma and Waystar, we create also a significant optionality for future sell-downs and liquidity. And those 2 are actually 2 of the largest IPOs in the world this year, one in Europe and one in the U.S.
If you look at EQT’s invested capital, it’s actually relatively young with only about 10% of companies held for longer than 5 years versus approximately 25% for the overall market. As such, it could take some time before part of our portfolio is ripe for exits.
But even so, we have a large number of realization processes underway and in preparation. Activity levels are very high and as you’ve probably also seen from the reporting by the bulge bracket I banks, pitch volumes at their houses were up 3x from last year. Of course, market conditions will need to be conducive for all these exits to materialize. From a competitive perspective, we have top quartile DPI, which means cash returns to our investors in our relevant key funds. And this follows a systematic approach that we’ve been running since well before the pandemic to drive exits and liquidity.
Also, we have a robust long-term financing structures in place across the portfolio. So we can afford to be patient if markets aren’t right. Finally, we also believe that our — the underlying value creation of our companies will become more evident now that we’re hopefully entering into a period of more stable multiples in the market. Next slide, please. In terms of clients, we see a long-term trend where commitments are concentrated to scaled players like EQT.
And we continue to improve our client services. Fund reporting time lines have been reduced from 57 days in 2022 to 25 days in 2024. We’ve launched a liquidity forecasting tool for investors where we believe we’re actually the first in the private markets to do so. And we launched a pilot of our AI-powered assistant for due diligence to also simplify the client experience as a couple of examples. Furthermore, we launched EQT ThinQ, an online publication for our shareholders and stakeholders to drill deeper into current topics together with different experts across our network internally and externally.
And we’ve also expanded the EQT [Academy] across to our clients. Although we expect liquidity to remain constrained for our clients for a while, we are selectively launching new strategies. This includes the successful mid-market growth fund in Asia, building on our strength in that region, and it’s positioned very nicely to complement our Asia flagship Fund IX, which will soon start fundraising. The health care growth strategy complementing our leading health care franchise has also been launched, and we’re preparing for the transition infrastructure strategy, building on our track record and energy transition and to go after the huge opportunity to decarbonize the world, as we talked about at our Capital Markets Day. EQT Nexus, our semiliquid private wealth product has been active for about a year now.
And we’ve launched EQRT, which is focused on the U.S. real estate market just recently. And we have a number of new initiatives ongoing, which you’ll hear more about from Gustav. To win in the private wealth channel, we’re building out the teams, strengthening our brand and engaging with distributors all across the world. Over the long term, private wealth products have huge potential.
Therefore, we’re spending more to ensure that we have all the capabilities needed to win. We also continue to build on the EQT platform for the long term. In May, we opened our new Warsaw office as a tech hub to drive efficiencies across the group. And we opened a new office in Bengaluru, India that’s going to host junior investment advisory professionals working alongside EQT’s global investment teams as well as with Motherbrain. Next slide, please.
Now the recent PI ranking is a testament to our relative strength with EQT being top 3 globally in terms of private equity fundraising for the third year running. Our value creation approach has been sharpened during our first 30 years. But as we continue on our path of outgrowing the private markets, we need to evolve, we need to stay ahead of the curve. We need to stay paranoid. And therefore, we say at EQT, everything can always be improved everywhere at all times.
This is our moniker. And the next slide, please. So what are we doing? Well, first, we’re sharpening our PE model of the future. This involves doubling down on our main competitive advantage, talent.
And so we can be the choice for management teams and boards and be the best coach for all of them. It’s about sharpening our sector playbooks to get repeatable models for driving value creation in each sector. And second, it’s a push to stay at the forefront of future proofing, particularly now in artificial intelligence and sustainability. Of course, we’ve been working with them for a very long time and will continue ensuring that we remain leaders in these key areas for all companies in our portfolio and across the world. As you know, we started Motherbrain artificial intelligence unit back in 2015 then focused on deal sourcing.
Today, AI and Motherbrain are becoming really ubiquitous in our business and AI is really being integrated into the strategy plans of all of our portfolio companies, and there’s a lot of work ongoing around that. We recently gathered our tech CEOs and chairpersons for reflections on the future of AI, and it’s clear that both generative and specialist AI is coming faster and having a bigger impact than even people think today. Just like AI sustainability is integrated into the investment decisions and into the strategy of our companies, simply because doing good is good business. We believe that by improving operational sustainability and growing sustainable revenues will help reduce risk in our companies and also improve their future outlook and thus improving our exit options and liquidity valuations. As proof, 65 of our portfolio companies now have validated science-based targets, their path on net 0 validated by the Science-based Targets Institute.
And according to research by BCG, this is 3x the number of any other owner in the world. Third, since going public, we’ve completed several acquisitions and integrations and combinations. This has helped propel our platform in terms of scale, the strategies we offer clients and insights we gain from global teams. We expect the private markets industry to continue to consolidate, and we will continue to actively drive that consolidation, be it in terms of complementary teams, strategies or capabilities like solutions. And with that, I hand over to Gustav.
Gustav Segerberg
Great. Thank you, Christian. Next slide, please. Thank you. So we think, as Christian mentioned, that the private wealth space offers significant growth opportunities for the global private markets.
No doubt, this will be a segment where competition is and will continue to be high. However, we believe that EQT has some unique angles to offer. Our products invest into the underlying EQT funds or make direct investments leveraging our own deal expertise. Hence, we’re not relying on other managers, which means competitive fee structures, top quartile performance across the investment strategies and strong liquidity management with high visibility on drawdowns and distributions and as Chris mentioned, short fund reporting time lines. Furthermore, we can use the EQT AB balance sheet strategically to make seed investment, allowing us to launch new private wealth products that are starting off in value-creation mode.
We are now 1 year into the launch of EQT Nexus and where we’ve really seen the power and the strength of the seed portfolio in the investment performance of the fund. In the past quarter, we have continued to add distributors in existing and new countries and we now have around 15 significant engaged distributors for the fund. Looking out 12 months in time, we expect to at least double that number including entry into 10 to 15 new countries. NAV for EQT Nexus is currently around €700 million. Furthermore, we’re preparing for additional products and are aiming to launch 3 new products in the coming 12 months, either catering for specific regions and/or specific investment strategies.
With this ongoing product development, we have a continuous need to strengthen the private wealth platform. This involves hiring talent, both within sales and marketing, product management and product development capabilities across U.S., Europe and Asia.
It also involves increasing brand awareness through client engagement and brand campaigns as well as educating distributors and advisers on the EQT offering. Next slide, please. So moving on to fundraising. During the period, EQT X reached its hard cap with almost €22 billion of fee-generating AUM, which was a 40% increase from EQT IX. The EQT Future fund closed with total fee-generating commitments to the strategy, which includes fee-generating co-investment totaling €3.6 billion.
During the late spring, BPEA EQT mid-market growth closed at more than double its target size, raising $1.6 billion in total fund commitments. As a reminder, EQT Future and BPEA EQT mid-market growth, both charge fees on invested capital and are currently about 50% and 25% invested, respectively. Fundraising continued for EQT Infrastructure VI with €16.2 billion of fee-generating commitments, up more than €1 billion during the quarter. We expect active fundraising efforts to materially conclude during ’24, and the fund is expected to reach its target fund size upon final close. As of today, BPEA VIII is 65% to 17% invested and our Asia strategies are performing at its highest level.
We expect to formally launch the BPEA IX fundraising by mid-August and that the new fund will be activated during the first half of 2025. Over the past year, we have seen some signs of improvement in the fundraising environment. The denominator effect has abated. We have seen a recent increase in risk appetite for co-investments. However, having said that, fundraising time lines continue to be extended and in order for the fundraising market to further improve, we need realizations to pick up materially across private markets.
We continue to expect fund cycles of 3 to 3.5 years for our flagship funds, which strikes the balance between investing well-diversified portfolio and having time to realize investments in earlier funds to provide liquidity to clients. As a reminder, BPEA VIII has been activated for 2 years and 10 months, EQT X for 2 years and EQT Infrastructure VI for 1 year and 7 months. With that, let me hand over to Olof to cover investment and realization activity in some more detail. Next slide, please.
Olof Svensson
Thank you, Gustav. EQT’s investment activity continued at a strong pace with €12 billion of announced investments in the first half of the year. Notably, we announced 3 public to privates in Europe across infrastructure and private equity. The investment pace has been particularly strong in BPEA VIII, as Gustav just mentioned, which is now 65% to 70% invested, up from 45% at the start of the year. And in Infrastructure VI, which announced new investments of more than €5 billion across teams such as data centers, renewable energy and cold chain logistics.
We had €4 billion of announced realizations in the first half of the year, whilst absolute volumes are on par with H1 ’23, activity levels are quite high. We have a number of companies being ready for exit over the coming next 12 months. Looking across the market, there are signs of global deal activity picking up from low levels. The M&A market is seeing encouraging signs, corporates are increasingly active, supported by liquidity and stronger public market valuations. The IPO market is still in recovery mode, but certainly stronger than it was a year ago, with strong demand for must-have assets.
And with €1 trillion of dry powder across buyout funds, sponsor activity should pick up, we think, with financing readily available and at lower financing costs. However, exit processes still mean navigating choppy waters, we think. Bid-ask spreads have not fully converged yet. And we sometimes ask if we think there is a maturity wall, which will trigger more deal activity in private markets. Let me share some thoughts on this on the next page.
Next slide, please. EQT’s Capital Markets team is working continuously to manage portfolio company financings. Looking at the overall market, current maturity profiles mean that around 30% of total debt is maturing over the next 2.5 years. Across the EQT portfolio, we have about 7% of the outstanding debt maturing over this time period and more than 3/4 of our portfolio debt matures in 2028 and beyond. Credit markets have been strong in recent quarters.
We see healthy financing appetite across banks, capital markets and private credit, and we’ve seen a meaningful tightening in new issue yields. We’ve also worked actively to improve terms across financings, reducing interest rate expenses while further improving covenants. Over the past 12 months, we have executed more than 20 maturity extensions across the portfolio. And with that, I’ll hand over to Kim. Next slide, please.
Kim Henriksson
Good morning, everyone, and thank you, Olof. Now let’s have a look at fund valuations. On average, value creation in all key funds amounted to approximately 5% during the period. Looking across the portfolio, revenue growth rates have remained stable and earnings growth has further improved. The key EQT Infrastructure funds and more recent vintages across both private capital businesses saw the strongest performance.
The Infrastructure funds continue to see strong tailwinds from our focus themes. For example, the digitalization trend and AI propelled demand for data centers and the energy transition continues to offer opportunities.
Some of our Infrastructure funds are up 10% year-to-date. The Asia funds are also seeing strong performance, driven primarily by strong operating performance, most noticeably in the tech services sector. In all of the latest key fund vintages, underlying value creation is strong. But remember that as we continue to make new investments, which are added at 1x gross mark, it takes time before the funds show the underlying returns. Turning to EQT VII and EQT VIII specifically.
We have had several quarters where gross MOICs have not increased, and there are a few reasons for this. In some cases, lower reference multiples have been applied in the valuations and the listed assets in the portfolio have on average traded down. We’ve seen certain pockets of underperformance. For example, one of the portfolio companies has been significantly impacted by strikes in the industry in which it operates and we’ve taken measures to strengthen the balance sheet in another company, which has not been performing according to the acquisition case. There are, however, no systematic challenges.
The financing is robust across the portfolios and the vast majority of the companies are performing in line with our underwriting cases. Both of these funds continue to perform above plan, which means we expect both to deliver a gross MOIC of more than 2.5x. Looking at realizations to date, the funds have so far delivered gross marks of 3x or above. On a general note, keep in mind that private valuations tend to be more resilient compared to public markets and moving more slowly both when markets are up and when markets are down.
Next slide, please. Moving on to the financials. And during the period, management fees increased due to closed out commitments in several funds, noticeably EQT X and Infra VI and carried interest is lower than in the comparison period due to lower volumes of closed realizations and no material sell down yet in the recent IPOs. Margins increased slightly through operational efficiency and scaling effects. We are enhancing cross collaboration across our global investment teams, and we are working systematically to optimize the central platform.
In the mid- to long term, we expect fee-related EBITDA margins to reach the 55% to 65% EBITDA margin target range that we have stated. In the near term, however, we continue to hire for future growth and to build our private wealth platform by, for example, growing our brand and marketing capabilities. The scaling effect needs to be looked at over a fund cycle rather than a quarter so as we raise the next generation of flagship funds, the effects will be seen. Next slide, please.
As previously mentioned, as of January 1, we’ve changed the formal accounting policy for recognizing carried interest moving from IFRS 15 to IFRS 9 to further increase the transparency here. This means that the reported IFRS figures for carry in our financial statements will be based on mark-to-market fund valuations. This metric is a good representation of the direct impact of fund valuation changes. We will continue to report adjusted revenues. There’s been no changes to the basis of this number.
But to remind you, we apply a valuation buffer of between 30% and 50% on the unrealized part of our fund. And when the fund enters carry mode after the discounts are applied, we recognize carry in the financial statements.
This is typically when we reached a MOIC of 1.7 to 1.8x and made a few exits. And this recognition method provides visibility on the expected midterm cash flows. We will, of course, also continue to disclose a cash carried interest, which is the realized actual carried interest. Over the fund lifetime, the 3 methods recognize the same amount of carried interest, as you can see in this illustrative graph on the page. Next slide, please.
And as mentioned, carried interest and investment income for the period is lower than the corresponding period last year, primarily due to the muted exit environment. But performance is the foundation of our success and as our key funds continue to perform on and above plan, we have a very high conviction that we eventually will deliver significant carry as markets become more supportive. And as you heard, we have a high level of exit activity plan and ongoing. Short term, we are, however, still humble to the fact that carry might take a while to realize. Consequently, our prognosis regarding the performance of key funds is important in terms of our confidence in delivering long-term carry.
Also, let me remind you that the general mechanics of carry recognition is through the so-called whole fund waterfall, whereby carry’s earned only after all contributed capital for all investments is returned to the investors. Next slide, please.
We saw a slight increase in the number of FTEs during the period, primarily to strengthen the platform to support certain strategic initiatives, such as private wealth and branding. We have signed more new hires in the first half of 2024, who are yet to start. And that growth is expected to continue in targeted areas, such as within capital raising and private wealth. The growth will typically be in higher-cost jurisdictions and higher cost functions. Medium term, we will continue to strengthen our investment organization globally and further accelerate the build-out of our capital raising and central platform to accommodate for our private wealth efforts.
Next slide, please.
Our balance sheet is robust and a key enabler for future growth. We have a prudent approach to leverage with an average net debt to fee-related EBITDA below 1x during the period. In July, we extended our €1.5 billion revolving credit facility, and the facility will have a new 5-year maturity on largely the same terms as the current RCF and the facility remains undrawn. Let me also remind you that June and December are generally the low point in our cash balance as we get cash flow management fees upfront in July and January.
As mentioned during our Capital Markets Day, we aim to maintain a solid investment-grade credit rating. And we are now, in addition to our current A- rating from Fitch been assigned and A- rating from S&P, underscoring our operational strength and robust financial position. The additional rating also provides further access to capital markets should that be needed for future business development or M&A.
With that, I hand over to Chris for some concluding remarks. Next slide, please.
Christian Sinding
Thanks, Kim. So overall, the fundraising market continues to be a bit challenging, and we think that will materially improve only once client programs have a better cash flow profile from realizations and drawdowns but there’s a huge push on that across EQT and the industry, as you know. The successful fundraising we completed in the first half, I think, are a testament to the strength of our platform and our global client relationships particularly EQT X was fantastic. And we’re excited to soon launch our flagship fund in Asia, Asia 9 with the great opportunities we see across that entire region. If you reflect on the industry we’re in, we believe that managers with a repeatable model for value creation, a systematic approach to realizations, a best-in-class platform to engage with clients will continue to gain share and an ability also to receive large amounts of capital and invest those wisely.
Therefore, we continue to selectively launch new strategies as well. And we’re, of course, spending a lot of time and effort to build out our capabilities around private wealth, which we believe is — remains a huge opportunity for the long term, but still very early days. Internally, we remain laser focused on exits and performance. That is a key message that you should bring with you. And behind that, we want to remain at the forefront of AI and digitalization and sustainability.
We believe that having the future capabilities that companies need to win for the long term is key, so we continue to build that out. And if you look behind that, like I said, more than half of actually of our portfolio by capital now has verified science-based targets. So we’re starting to prove that we’re improving our companies in those spaces. Finally, we are continuing to improve all the time around exits and liquidity, our playbook there to become the best we can be at both private market and public market solutions and we’re challenging ourselves really to take our value creation model, how we create value in our companies and our buildings really to the next level. And that’s what’s going to continue to drive superb performance together with thematic strong deal selection over time.
And performance is, of course, ultimately what matters to our clients, to EQT and of course, also there to other stakeholders and to the shareholders. So with that, I thank you for listening to the broadcast, and we open up for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take the first question coming from the line of Hubert Lam from Bank of America.
Hubert Lam
I’ve got 3 of them. Firstly, if I look at the investments, they’re growing at a much faster pace than your exits. Does this mean you expect a big pickup in realizations near term just to keep up the pace with investments and the fundraising that is expected to come up as investments grow? That’s the first question. The second question is on the costs.
How should we think about the cost for the rest of the year? Is — would you look at H1 as a good proxy for the cost in H2? Or do you expect H2 to grow above the H1 cost number? And also related to that, how should we think about FTE in the second half — And FTE growth in the second half? And lastly, about Nexus.
I saw that only Nexus NAV only grew marginally by I think about €100 million quarter-on-quarter. Is there a reason why the growth there has been a bit slower? And also around the new EQRT. How should we think about the potential size for that fund?
Christian Sinding
I’ll take the first one, Kim, and then Gustav. So we see an incredible amount of investment opportunities across the world, actually, across the sectors we’re investing in. We’re pretty unique in the fact that we have a global — we really have a global and a local approach. We’re local with locals in every single country we’re investing in, and we invest thematically then behind that. So we’re generating a lot of deal flow, both from the sectors and subsectors, but also from geographies.
And those opportunities are quite attractive. And we believe with all the dry powder that we have, that deploying capital today started already, as you might remember, beginning of last year to start to accelerate our deployment rate is the right thing for the long term. Of course, on realizations, like we — I think we mentioned in the call, we have a large number of exit processes ongoing and in preparation. We’ve done quite a few here in the first half and expect to do more as the next 6 to 12 months pass. That’s, of course, dependent on markets, but there is a huge amount of activity out there.
Kim Henriksson
And on costs, so we are a growing operation. So you should expect also costs to be somewhat higher in H2 than they are in H1. In addition, I think we did mention that we were making sure that we are well prepared for the private wealth growth by hiring people, both on the sales and marketing side and on the more administrative side around it. We are investing in our brand, et cetera. So there will be some more costs in H2 and forward from there.
And the same also goes for headcount. And as was mentioned, we have some visibility on that already because there is a number of people who have already signed but not yet started. So you should expect the head count growth also to be somewhat higher.
Gustav Segerberg
And I can cover Nexus. So you should see that number as a net number. i.e., that we’re still taking out some of the seed capital that EQT AB put in initially. So the gross number is a little bit higher, but we’re talking about around €40 million, €50 million per month, so to speak. So and we’re expecting that number to go up as we’re onboarding new distributors.
Hubert Lam
And for the real estate fund that you have, just — size for that?
Gustav Segerberg
And for EQRT, it’s still early days. You should not expect it to, let’s say, be a material part of flows here during the rest of ’24. So it’s — of course, as you — most of you probably know, the market for [indiscernible] at the moment is quite tough. And that, of course, also includes when you’re starting the initiative.
Christian Sinding
And maybe just a final comment around private wealth. We have a number of additional products in the works that we’re planning to launch over the coming 6 to 12 months, both in North America and in the rest of the world.
Operator
We will now take the next question from the line of Magnus Andersson from ABGSC.
Magnus Andersson
A few questions. First of all, on valuations there, you say the underlying allocation is around 5% of the portfolio. And we see the multiple low invested capital up in the 3 latest flagship infrastructure strategies. Just wondering if you could tell us, is it a broad-based earnings growth across the portfolio that has driven this? Or is it a few holdings or certain segments?
That’s the first one, how broad-based the valuation was?
Kim Henriksson
Should we take them one by one? Do you want to — okay, I can comment on that. Yes, it is a broad-based valuation uptick as was mentioned, there are — in a large portfolio, we have 300 or so in total companies. There’s always going to be some companies that stand out positively or negatively. But the earnings growth, the revenue growth and thus the valuation — the value creation has been broad-based.
Magnus Andersson
Okay. And then just on the fundraising of Infra VI. You reiterate that it will be materially done in 2024 that you expect to reach the target at final close. Is it reasonable to expect the final close then in mid-’25 or so?
Gustav Segerberg
Yes. I would say that, as we said, materially done by ’24, which means that we might — or we expect to tap into ’25 for some clients, but it will — that it will be concluded by Q1.
Magnus Andersson
Okay. And finally, just on a detailed note, the carried interest in the first half year of ’24, which funds would that derive from?
Kim Henriksson
Well, it was obviously a fairly small number. So you shouldn’t draw too many conclusions of it. It was primarily from BPEA VII and EQT VII.
Magnus Andersson
BPEA VII, EQT VII, fine. And when you look into the second half of ’24, first half ’25, from which fronts do you think the expected lion’s share of exits and carry realization?
Kim Henriksson
There’s a chart in the back of the pack there that shows which — all of our funds and which funds are in carry mode and which funds are close to carry mode. So you need to have a look at that and get a sense for it and follow our press releases on exits.
Operator
We will now take the next question from the line of Arnaud Giblat from BNP Paribas.
Arnaud Giblat
I’ve got 3 questions, please. In the press release, you talked about your impact fund being launched soon. Could you talk about what size you’d be targeting? My second question is again on valuations. If you could zoom in on EQT VII and VIII obviously, the unrealized MOICs have come down despite that being new investments.
So can you talk a bit about the moving parts there in terms of EBITDA growth in the underlying portfolio companies against valuation multiples and particularly in EQT VIII, I’m wondering if the Galderma IPO had any impact on valuation. I mean, the shares are up 50% since or 40%, 50% since IPO? And my third question is, if I can follow up on wealth. You talked about on a previous question about launching an American product soon. Could you give a bit more detail there?
Have you got the wirehouses signed up to distribute this?
Christian Sinding
Great. Thanks for that and very good questions. On the first one, I guess, you’re referring to our Infrastructure transition fund, which will invest in the transition of the economy from fossil to decarbonize across the energy space and transportation space, which we think is a — it’s a multi-trillion dollar opportunity and need for that transition. That’s exciting. We’ve done quite a few investments there already.
That fund, when we typically launch first-time funds, the typical range is somewhere between €1.5 billion and €5 billion. as a target. We haven’t set the target yet, but this would clearly be at the upper end of the range.
Kim Henriksson
And on valuations, I believe we’re already in the script here, went into some of the details around VII and VIII about why the MOICs are broadly flat. Now the MOIC is also a measure that doesn’t really show small changes in the underlying performance. I’d say that keep in mind that there’s say, in total, between 15 and 20 companies in each fund. So there’s going to be — this is the blended effect of a lot of — of a lot of things that take place, including multiples and performance in the underlying companies.
But as mentioned, we see no systematic issues on the performance side. On the contrary, growth in revenue is really good and growth in EBITDA is even better. So we are very comfortable with longer-term trends there and that we will reach the 2.5x MOIC in both of these funds eventually.
Gustav Segerberg
And on the last question around wealth, as Chris mentioned, we’re working on a number of initiatives, including 2 initiatives in the U.S., one targeting private equity and one targeting infrastructure, and they are about 6 to 12 months more towards 12 months away. And the — when we will launch them, we expect to have strong distribution partners to team up with, which would then also include the wirehouse or some of the wirehouses.
Operator
We will now take the next question from the line of Ermin Keric from Carnegie.
Ermin Keric
Maybe if we could just start on your AUM development from here. If you could give us any indication. I mean, is it reasonable to expect your AUM to be somewhat flattish here until you get BPEA IX activated with, I suppose, Infra VI contributing on the positive side, but then you’re doing exits at the same time?
Gustav Segerberg
Is it — do you want to take…
Kim Henriksson
Yes. They want a more full answer. No, no, but it’s correct. Those are — they are working in opposite directions, then there, obviously, it’s then a question of whether these exits do take place or not. And as mentioned, BPEA IX is expected to be activated during the first half of next year.
So that’s the timing.
Ermin Keric
Got it. That’s helpful. Then talking about carry, I mean, if I’m quite right, you’ve started to provide your clients with some liquidity forecasting. Is there anything you could share given that it would help us quite a bit on how to think about the carry as well? And also just — I mean you’re talking about if markets are conducive that you have quite an active pipeline coming up, would you say that they are conducive currently, you just need to wrap up the preparations or is it still anything missing for you to feel comfortable with launching additional exit process?
Kim Henriksson
Well, I can take the carry — listen, the carry forecasting is not carry, but liquidity forecasting is done fund by fund for the clients that are invested in that fund, that’s a sure that we provide to our clients, and it’s not real conducive to have it to a broader audience. It will involve sort of how much they have in terms of drawdowns, how much do they have in terms of distributions, costs, et cetera, so it’s not something that we can share more broadly. There was another part…
Olof Svensson
There was a question on exit activity and how we look at that, and I can add some color on that question. So I mean, if you look back a year ago, I mean, we were saying and even 6 months ago, we were saying that we still see uncertainties in the market and that are so significant that we don’t think it’s worth putting management team’s time and effort into exit processes that may not materialize. I would say that, that macro picture has changed. And now we’re in an environment where as Chris alluded to, probably on a path to lower interest rates, we see less political risk, albeit there is still some significant political aspects for the second half of the year. But and the financing markets have much improved.
We think that new financings are probably 200 basis points tighter today than they were, say, a year ago. So all these factors drive our confidence in initiating exit processes. And at the same time, we have several companies that are performing well that we think are in good shape for exits. As you’ve seen, we have done some very, very significant IPOs this year, but those have primarily raised primary capital, but we have created optionality across the portfolio to drive exits. But we, of course, continue to be very humble to market conditions.
And with a portfolio, as Kim was alluding to, that is performing strongly. We have very long-term financing structures. We are also under no pressure to exit these assets if we don’t think that the valuation levels and the market conditions are conducive for it. So as you think about us ramping up exit activity, I think you should think about it as in terms of possible windows that we have for the second half of the year and for things to continue to ramp up into 2025 with this macro picture that we are outlining materializes.
Operator
We will now take the next question from the line of Angeliki Bairaktari from JPMorgan.
Angeliki Bairaktari
Just, first of all, for the avoidance of doubt with regards to Galderma, I know that the exit — the IPO was primary. But just want us to understand in terms of the adjusted carry that you have recognized in the first half, there is no contribution whatsoever from the markup of Galderma from the pulp between where it’s currently trading relative to the IPO price and also relative to where it was in your books. So would we need to see some exits from you in order to crystallize that gain? And if you were to crystallize that, would that may crystallize from the 100% of what you own in Galderma or you have to crystallize as you exit only on what you exit effectively? That’s my first question.
Then second question, are you seeing any pressures from LPs not being able to finance their existing commitments, their existing capital calls due to lack of distributions? And third question, with regards to the Idealista exit, can you give us some color with regards to the exit multiple for that investment?
Christian Sinding
Thanks, Angeliki. In terms of details on separate companies, we typically don’t provide that, and Kim will answer in a second, how to look at the different carry questions that you have. We’re very satisfied with our Idealista multiple. We’re super happy about Galderma’s listing and Waystar’s listing overall. And of course, those 2 will help create future liquidity potential.
Very, very little was sold as public information in secondary shares in those 2 companies. So the future will — as we sell down, that will create direct liquidity for our investors and our funds and also co-investors, which we have in both of those. When it comes to your question on LPs, no, there’s no problem like that whatsoever. This is just a cyclical element in the industry that drawdowns are exceeding distributions for a period of time, we believe that’s going to change because of all the exit activity that’s ongoing at EQT and in the market. That will take a little bit of time, but then we’ll be through that adjustment period and kind of back to normal.
Kim Henriksson
And if I may comment on the carry mechanics briefly. I think that, first of all, you should think of carry recognition as a whole fund. So it’s not specific to any specific company that — so you have to look at the realization or the value creation in the whole fund. So Galderma per se does not directly have a carry contribution. That’s one observation.
Second observation is that all of the companies are — including Galderma is mark-to-market each quarter. And in the Galderma’s case, it will now be mark-to-market at the IPO — or not the IPO, the listed share price as it has a listed share price and then we will apply a buffer to the — again, the whole fund valuation to — before we realize carry from that fund from an accounting point of view.
Angeliki Bairaktari
So just to confirm, even though there is actually a market price today for the Galderma shares, right, which is different from having a private investment, and even of the recent market price, you still apply a haircut of 30% to 50% on the entire fund valuation. There is no unwinding of that discount just because that particular stake that you have is quoted.
Kim Henriksson
That’s correct. .
Operator
We will now take the next question from the line of Jacob Hesslevik from SEB.
Jacob Hesslevik
My first question is on fundraising. You say you aim to raise BPEA IX, EQT XI and Infra VII within the next 2 to 24 months. Where do you see most of the flows coming from? Is it mainly a recurring customer who are aiming to push into any new geography and client type. And second, will you agree with me that we should soon be facing a positive denominator effect given how strong public market has been which could result in large inflows from maybe American investors?
Christian Sinding
Very good questions. Yes, the denominator effect is effectively over, no pun intended there. So the remaining challenge with some LPs, some clients is this cash flow question that we’ve talked about. And we believe that’s going to change, like I said, over the coming 6 to 12 months. Or something like that.
So we do expect the next cycle here to come — to be more normalized. And therefore, if you look at the timing of our — of the next wave of flagships, and you’re right, all 3 flagships are in that time zone with the first one being BPEA IX being launched in mid-August. We think is a reasonably good time. Having said that, right now, the fundraising market is still in that situation where cash flows are somewhat limited so my guess is that the fundraisings will take some time in the same way that we’ve seen in the last couple of years. But we’re performing well.
We have great relationships and I think that we’re going to be very well prepared for those launches. Olof, do you want to talk a little bit about some of the stats around investors in the funds?
Olof Svensson
Yes, sure. So I mean, if you look at our flagship fundraisings, you will typically as you now see a very high rate of returning customers, so to speak. And if you look at the EQT term, for example, you will have had the investors in EQT IX effectively subscribing to capital — to the same amount of capital that they subscribe to also in EQT X. And then we have additional clients on top that are coming in. And I think if you look forward, you see a slight difference in the fundraising environment across regions.
As you know, over the past year or 2, we’ve seen the most challenges in North America and in particular, with pension funds in North America. And one of the reasons there’s been the denominator effect, as you say, they have very mature private equity investment programs where they’re already at target allocations and not all of these are still increasing their allocations to private markets. You have a different picture across Asia, where many of our clients are meaningfully increasing their commitments to private markets, and we’ve seen increasing ticket sizes in our latest fundraisings. Similarly, in the Middle East, you see a strong interest in our fundraisings as we launch the next fund for Asia. We think we have quite an interesting dynamic to where this is a relatively young market from a private equity point of view where many clients are still interested in increasing their allocations to private equity at DACH region, for example, and Europe, I would put somewhere in between, and it depends a bit on the type of client that we have, but we, of course, have some very, very strong relationships across Europe that are participating across our funds.
Operator
We will now take the next question from the line of Haley Tam from UBS.
Haley Tam
Could I ask 3 questions, please? One on valuation, the second on the refinancing activity and the third just on the FRE margin. With valuation, just to confirm something, the multiple on invested capital that you report for the various funds, I understand it includes the mark-to-market value and then you listed assets. Is it at that date to the 30th of June price, there’s no lag or anything like that? And just to confirm as well, to talk about Galderma that, that is a 180-day lockup expiry for you to make sure that’s correct.
With the refinancing question, you did mention you’ve done a lot of refinancing in the period. And I just wondered, is there any quantification you could give us on average in terms of maybe a funding cost benefit in having done so? And then the third and final question on the FRE margin, 55% to 56% to help you get there with the next generation of flagship funds. Obviously, those are quite large scale. And I think you just said the fundraising might still take some time.
How should we think about that statement? Is it something sort of towards the beginning of the activation cycle or the middle where we might think about that 55% to 56%?
Kim Henriksson
If I may take the first one to start with. The mark-to-market as of 31st — 30th of June, is at that specific date, both for listed companies and for the companies that are completely private that we value based on multiples or DCF or whatever valuation methodology we use. So that’s at that particular date. I don’t know the lockup period for Galderma, maybe someone else on the call knows, but that’s probably something that can be checked somewhere else. Do you want to comment on refinancing or…
Christian Sinding
I think it’s 180 days, but it’s obviously public information. So…
Olof Svensson
On the refinancings, we’ve had more than 65 debt actions across the portfolio over the past 12 months, 22 of those have been maturity extensions, and we’ve had about 30 repricing or refinancings. I’d say the refinances that we do now probably have, on average, 150 basis points tighter cost than it would have been, say, a year ago. And through these debt actions, we have some very, very significant interest rate savings, I would say, without putting a number to it.
Kim Henriksson
And then on the FRE margin, maybe just to reiterate that this is a long-term financial target of ours to reach that range. So it’s not something where we’re going to put an exact date on when it’s going to happen. We are not far off. But as we’ve said before, there are factors such as the fundraising cycle, which impacted. There are factors such as us growing our private wealth and branding efforts that impacted in the short term and the medium term.
So I can’t give you more specificity than that.
Christian Sinding
And maybe one final comment on the financing side, our financings are — the maturities have been pushed to 2027 or beyond, which is significantly better than the market. So we have very robust financing structures in addition to the benefits that Olof was talking about.
Operator
We will now take the next question from the line of Nicholas Herman from Citi.
Nicholas Herman
I also have 3, please. Firstly, on compensation costs. I guess FX was slightly helpful for you, but it still looks like that on a per head basis, comp inflation is tracking high single digit to 10% year-on-year. Just curious, is there anything lumpy in there? Or is that a good run rate?
Secondly, on fund cycles, I know that’s a topic we talked about at length in the past. You’ve guided in the past of BPEA IX be activated mid-’25 and then EQT XI and Infra VII following broadly 6-month intervals. But equally, you’ve been deploying pretty rapidly, I guess, particularly Infra VI.
Now I appreciate the deployment is lumpy, but in the context of super healthy pipelines, but does that mean that Infra VI will be fully or close to fully invested by the time those vintages are activated rather than, let’s say, the 70% to 80% commitment levels that you’ve done in the past? And then finally, on exit pipelines. So good to hear that you are kind of cautious optimistic around that. But I’m just curious, when you look at your exit pipeline and the tracks that you’re running, how does the mix broadly split across IPOs, be it public or private, strategic or sponsor acquirers?
Kim Henriksson
I’ll take the comp one to start with. Keep in mind that our compensation or personnel cost line is — constitute sort of the fixed element of salaries, et cetera. And then about half of it is actually variable. And that variable cost is, of course, something that may deviate quite a lot from the 10% you just mentioned, it can go up and it can go down. So I wouldn’t like to be too specific on that.
That’s going to be dependent on our performance. And secondly, I reiterate that when we are now hiring, even if it’s a fairly small proportion of our installed base of employees, so to speak, we are hiring in more expensive regions and more expensive people. There are sign-on bonuses, et cetera. So I’d say that, that also impacts the cost base somewhat.
Gustav Segerberg
And number two, you’re right that on BPEA IX, we said mid-’25 and then let’s say, EQT X following 6 months and Infra VII another 6 months, so to speak. And I would say — what we’ve seen now with BPEA IX is that we’re — it’s being invested a bit quicker. So what we’re seeing now is first half of ’25. But I would then also take, let’s say, the remaining EQT XI and Infra VII, that they will also then be in what we’ve talked about 3 to 3.5 year cycles. So for EQT XI, that would then imply the H2 of ’25, so to speak, in order to be both in 3 to 3.5 years and similar for Infra VII then to be in the first half of ’26, so to speak.
And then we’re talking about activation period and not when fundraising will start. But when we’ll actually activate the fund, which is, of course, the key point from when the fee is starting to be generated.
Nicholas Herman
That’s helpful. I guess my question was more around thinking about the commitment levels of the existing vintages. So if I look at, let’s say, the last 9 months, I think you’ve deployed around — on Infra VI around 35% of the fund, which I guess if you annualize that, that would be more like a 50% run rate. Obviously, I appreciate that the deployment is lumpy. But does that kind of mean that on that basis, you would be kind of that fund in Infra VI example would be fully invested by the time that then Infra VII comes around?
And maybe I guess some are similar is point only EQT X?
Kim Henriksson
I would say we’re not planning to do it anything differently that we’ve done from the past. As you say, it’s lumpy. There’s been a lot of activity in Infra VI which, of course, given what I’m saying, you should probably expect that activity level to be a little bit lower in the coming 6 to 12 months in order not to get to the next fundraising too quickly, so to speak.
Christian Sinding
If I may complement that. We manage that process pretty closely as well. There are fund technicalities like where we can recycle capital. We do, of course, significant co-invests as we move on some deals, we had one deal in Italy that ended up not going through. So you’re right about the lumpiness.
So I think it’s probably better to follow the guidance that Gustav is giving than to try to extrapolate based on a period and then annualize that.
Nicholas Herman
And then finally on the exit kind of mix?
Olof Svensson
I could take that. I mean if you look historically, and as I think you know, approximately 20% of our exits in private equity has been through the public markets and IPOs. And in infrastructure, we have done one significant IPO, but typically less IPO activity in infrastructure and even less so in real estate. If we look ahead, as you know, we typically run several tracks at the same time and who, what we end up doing, depends on the company and who’s the most suitable buyer? And what’s the most suitable ownership of that company that typically ends up having the most competitive price.
As we have larger assets, some of those tend to be more suitable for the public markets, and we think that the larger and more liquid assets are the types of assets that the public markets cater to very well. So if you look ahead, we do have a mix of private equity tracks. We will have significant appetite from strategics going forward, we continue to expect and the IPO market will continue to be probably a relatively similar share of our exit pipeline over the years. And then as Christian alluded to as well. We are, of course, thinking both systematically and also creatively around exit solutions and for each and every exit, there might be nuances compared to the traditional exit methods that we deploy.
Operator
We will now take the next question from the line of Bruce Hamilton from Morgan Stanley.
Bruce Hamilton
Firstly, I just wanted to take a bit more on the sort of private market or the private client sort of opportunity, which we agree is significant. I guess I mean, Nexus is growing quite gradually, as I think you’ve always indicated was the case. So is the real acceleration going to come when you launch U.S. products, private equity or infra. I guess Blackstone is obviously built quite quickly it’s PE product.
And what’s most important to watch for? Is it signing up the distributors? Or is it the brand awareness? And just so — just trying to understand slightly better that the pace may be looking out over the next sort of couple of years on that. Second question, on the fundraising — so to clarify, it sounds like you’re saying deployment pace will mean a 3- to 6-month pull forward likely across the Asia flagship PE and infra strategies.
I just wondered, given that obviously realizations and cash flows for LPs are important. How does that feed into that? Is that going to be a constraint, particularly on the infra side? Or is that okay? And then finally, linked to that, I know DPI, you’ve talked about being very important, and that’s been strong in your PE franchise, but is it equally strong in infra?
Or is that, again, a bit of a constraint on how quickly you can fundraise going forward?
Gustav Segerberg
Yes. Maybe I’ll start with one and then I would say probably all of the things that you mentioned in your question is part of the answer, so to speak. One, U.S. is by far the largest private wealth market, mostly developed. So it’s, of course, critical to be there to have real scale.
Some of our competitors have been in the space for longer and hence have more buildup teams, relationship, et cetera. And that’s why we have reiterated that for us, this is a long-term game. We’re building our capabilities in it.
We think that over time, also the European/Asia products can have significant scale but that it will take some time. And of course, critical to that over time is going to be performance in the funds and being able to build, let’s say, a global brand to the private wealth space. So I would say it’s a little bit of all of the things that you mentioned. On the second question on fundraising. I think we feel very comfortable with the indications that we’re giving and that we will be able to execute this on the 3- to 3.5-year cycle, That, of course, implies that we continuously need to deliver liquidity to our clients, both on the private equity side, but also on the infra side.
And that’s what we’re expecting to do as well before the launch of Infra VII.
Christian Sinding
And on your DPI question, we’re top quartile and DPI both in private equity in Europe and the U.S. and private equity in Asia and also in infra.
Operator
We will now take the next question from the line of Isobel Hettrick from Autonomous Research.
Isobel Hettrick
I have 3, please. So first, you’ve talked about in recent months on progress on private market IPOs. So just wondering if you can give us some color around where you are developing these and then my final 2 questions are a bit more guidance related. So on the tax rate, it seemed quite low around 15% on the adjusted P&L, given global minimum. So if you could just give us some guidance about how we should be thinking about this for full year ’24 and then going forward.
And then you’ve flown to net interest income rather than expense for the period. So can you just explain the dynamics there, please? And if we should expect this to be recurring into future periods?
Christian Sinding
I guess I’ll take the first one there. And Kim, the others. When it comes to the private IPOs, and I think as Olof also mentioned, we’re — when we run our exit processes, we evaluate different opportunities for realization. And in some companies, particularly the bigger ones or ones where we really are, I would say, and ones where we really believe there’s a strong future that we are a great owner of the company that the management Board want to continue, and we see significant value creation, we will evaluate a private IPO. We have a couple of transactions ongoing right now where that might end up being the structure.
So hopefully, this year will be our first time that we can say that, call it a private IPO and where we really create liquidity in the shares of the company beyond a normal process, a normal recap or a co-investment or a partial sale. So I’d say lots of activity, but it will come in different forms. And I think what’s important here is rather that — there’s a lot of innovation going on surrounding solutions, both for LPs and for GPs across the industry, and we are participating in that and building out capabilities around it.
Gustav Segerberg
And if I may comment then on the more technical questions. On tax rate, the sort of global minimum tax implementation rules are still somewhat in flux and somewhat unclear how they will exactly be implemented in different jurisdictions but we think that would they be implemented as planned, then our tax rate should be a few percentage points higher, so in the 18% to 19% approximately on the same basis calculated as you mentioned going forward. Whether that’s going to be already this year or more forward-looking? Let’s see on that one. On net interest income, the net financial expense line has — it’s a bit of a mix of things with interest on cash and interest on bonds going out, but also certain financing costs that are depreciated on that line and certain effects that also may hit that line.
So it’s not very easy to forecast. But if you only look at our real cash interest expense on the bonds, which will be fixed for the foreseeable future. And then on the other hand, you see that our cash interest, we can manage more actively. We should be in a pretty good position to have sort of positive-ish net interest income, excluding these other matters that may also impact it over time. And for example, now when we had the refinancing of the RCF, which I’m very happy with, by the way, of course, that’s going to cost us something, not in interest expense, but in transaction costs, and that transaction cost will also hit that line over time.
So it’s a complicated answer. We can take the rest offline.
Operator
Thank you. We will now take the last question from the line of Oliver Carruthers from Goldman Sachs.
Oliver Carruthers
Oliver Carruthers from Goldman Sachs. One final question for me. Sorry, it’s a bit of a technical one, but I’m just trying to understand some of the moving parts in the adjusted carry number. So it looks like Fund VIII called and invested about €300 million of capital in the quarter. And it’s a fund that’s already in carrier recognition mode.
So just trying to understand the negative impact this drawdown would have had on your adjusted carry recognition, if any, for that fund? Because you’re effectively contributing fresh capital at par and then applying a 30% to 50% discount in the carry recognition. So just any help on that would be great.
Kim Henriksson
Yes, that’s exactly right. So if you contribute new capital to a fund, it will have — it will come in at 1x gross MOIC. So for the MOIC of the fund, it has a dilutive effect if the fund is at higher than 1. And also when it comes to the carry recognition, that capital will have a 30% to 50% discount when applying it to the carry — to the carry waterfall, yes.
Christian Sinding
Thank you, everyone. Appreciate the questions. I appreciate the engagement this morning. I wish everyone a very good summer, and see you in Q3.
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