EQT: Private Equity with a Purpose

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; Therese Lennehag is Head of Sustainability at EQT Parnters; and Nina Nornholm is Head of Communication at EQT Partners. This post is based on their recent paper, forthcoming in the Journal of Applied Corporate Finance. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The private equity (PE) industry has grown enormously over the past 20 years, from roughly $650 billion in assets under management (AUM) in 2000 to almost $5 trillion in September 2019 (of which some $1.7 trillion is now “dry powder”), an increase of 16% from the prior year and a more than seven-fold increase from 2000. In comparison, the Dow Jones Industrial Average has not even tripled over that period, even when using its peak before the COVID-19 induced crash.

There are consequences to this size. Limited partners (LPs) have become dependent upon the returns earned in PE, although there are questions whether the industry will continue to earn them in the future. This asset class has grown large enough that it is also raising questions about its contributions to systemic risk, such as climate change and income inequality. To date, there is little transparency on these and other sustainability issues at either the General Partner (GP) or portfolio company (PC) level. Questions are also being raised whether PE firms are paying their fair share of taxes. Unless addressed, the PE industry can again come under increased scrutiny and face questions about its license to operate.

In order to ensure the continuing relevance and contribution of the PE industry, every GP needs to clarify its purpose, commit to sustainable business practices and positive impact, leveraging digital technology, across its entire portfolio as well as in the GP itself, and become more transparent. The global Scandinavian-heritage purpose-driven investment organization EQT provides an emerging model for how GPs can do this. EQT went public on the Nasdaq Stockholm Stock Exchange on September 24, 2019. It is one of the top 10 PE firms in the world in terms of capital raised over the last five years. In its 2019 Annual Report it published a “Statement of Purpose” which it declares is “to future-proof companies and make a positive impact.”

By “future-proof” EQT means that its PCs will be able to successfully compete and stay relevant long after they’ve left the funds’ control. “Positive impact” means that in addition to delivering attractive financial returns, the funds’ PCs will contribute to the Sustainable Development Goals which are most appropriate for the business or industry they are in. At its Annual Shareholders’ Meeting on June 8, 2020, EQT AB’s shareholders approved an amendment to the company’s Articles of Association that formally recognizes this Statement of Purpose as an articulation of the principles underlying the firm’s way of doing business and their consistency with, and role in, upholding the long-run interests of the company’s shareholders and other stakeholders.

Sustainability is one of the first two modern components for how EQT future-proofs PCs. The firm recognizes the strong link between sustainability performance and financial performance in terms of the “top line” (new products and services, new customers and markets, and premium pricing), the “bottom line” (increased operational efficiency, increased financial efficiency, and lower employee costs and turnover), and “context” (access to resources and competence, adaptability and agility, and regulatory sway). EQT invests in companies that clearly contribute, or those that have both the potential and ability to do so in the future, to one or more of the 17 Sustainable Development Goals (SDGs). Those that pass the test and join the funds’ portfolio are expected to adhere to four “EQT Absolutes”:

  1. Confirm adherence to the 10 principles of the UN Global Compact
  2. Communicate a sustainability-related code/policy or similar guidelines
  3. Share material from the annual strategic board discussion on sustainability
  4. Share the materiality assessment

All PCs are also held accountable for six “EQT Core KPIs”: (1) ethics & anti-corruption training, (2) diversity, (3) employee engagement, (4) greenhouse gas emissions, (5) water usage, and (6) waste to landfill. Each PC must then identify at least three “PC specific KPIs” based on their materiality assessment. Major sustainability opportunities/risks are categorized, inspired by the Sustainability Accounting Standards Boards (SASB) dimensions and general issue categories.

Short- and long-term targets are set for the Absolutes and all KPIs, supported by action plans to ensure they are achieved. Progress is reviewed on an annual basis. To the extent possible, the KPIs are benchmarked against industry peers, other EQT PCs, and public companies. The executives in PCs are encouraged to translate their KPIs into financial metrics whenever this is possible.

EQT is equally committed to sustainability as a GP. For example, it uses 100% renewable energy in all of its offices (partly through energy attribute certificates), has set a hard target that 65% of the investment professionals hired in 2020 be women, and wants minimum 25% of the teams of advisors to be of the under-represented sex. For all of these efforts at the GP and portfolio level, EQT recognizes that more work can be done. Two major areas of focus are the systemic issues of greenhouse gas (GHG) emissions and diversity & inclusion. In June 2020, EQT announced the largest ever ESG-linked Subscription Credit Facility (“SCF”) in the global fund financing market. The facility will accelerate action and drive performance within these two systemically important areas as well as actively contribute to increasing the availability of high-quality ESG data, critical for the financial markets to be able to build a resilient and regenerative economy. The ESG KPIs set for the SCF will be reported quarterly and audited annually.

The second modern way that EQT future-proofs PCs is by leveraging digital technologies. This began when EQT dramatically upgraded its own IT infrastructure and moved everything to the cloud and utilizing the most sophisticated security protocols available. During the most intense time of COVID-19, all of EQT’s 700+ employees were able to work from home with no loss of productivity.

Digital technology is leveraged all the way from sourcing and due diligence through the ownership period and at exit where the aim is that all PCs have the appropriate digital platform to optimize their business model. One example of how EQT is using digital technology is Motherbrain, an internal firm-wide initiative which helps the firm and PCs identify attractive investments/add-on acquisitions using big data, machine learning, and artificial intelligence. Motherbrain is managed by an internal team which combines a variety of internal and external data sources to develop advanced analytics, enable knowledge sharing, and provide decision intelligence for the people in the funds’ PCs.

Conni Jonsson, the Founder and Chair of EQT, began publicly speaking about the PE industry’s license to operate already back in 2010. The firm recognizes that it depends not only on its LPs and immediate partners in the ecosystem such as banks, commercial advisors etc., but also on the broader society. To maintain its broader legitimacy, the industry needs to eschew tax havens, be transparent about fees, not charge excessive but purposeful fees, commit to diversity, act more like owners than financial investors, and be open to engagement with a broader set of stakeholders. LPs have a critical role to play and many of them can do more than they have to date. LPs need to insist that their GPs put these principles into practice. Ensuring the industry’s license to operate is as important to them as it is to the GPs and their PCs – together, the different stakeholders across the entire system can move faster and achieve real change.

The complete paper is available for download here.

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