Equity Rally Doesn't Correlate With Good IPO Market, Says EQT's Liu

This is 40% bigger than your prior fund, your largest ever, 4 billion away from being the largest fund raise ever. We had it in the intro there—one of the most difficult environments for fund raising. Are the people that say that wrong?

I think it's been a difficult environment. There's not been as much liquidity.

James says in 2023 they returned the lowest amount of cash to the investors since the great financial crisis. How do you raise a record fund in that environment?

We're pleased with this outcome. I would say there's three things that led to this. The first is performance. Performance really matters in all markets but particularly markets that are a little bit more choppy. I think we've demonstrated the ability in which we operate. I think the second thing is our approach to investing. Relative to some more traditional private equity firms, the way we invest and interact is different and I think that matters. The third thing also is that our limited partners—we've been around for 30 years as a firm. A lot of the institutional investors have been with us for a very long time. They're quite loyal as a firm. We treat them as partners and they want to see us successful.

We were chatting about this discussion this morning and the one thing we want to understand is there's this gap between the buyers who don't really want to pay up because they're potentially facing a recession and the sellers who paid a lot but don't want to sell at a loss. Are we reaching an inflection point? Are you coming closer together? Is the marriage getting better?

I think it depends on the company. If you look at any market, there's always going to be a gap between buyers and sellers at some point until the transaction occurs. What's happened in the past year—valuations increased almost nonstop between 2021 and 2022 for a given asset. People paid a lot for the same asset they would have earlier, but for the good companies, particularly ones that are growing, they can grow into the valuations over time. So maybe the average holding period prior to 2011 might have been five years, and the last few years they've shrunk. You can hold assets and still achieve your targeted rates of return. I think what we're seeing now is going back to slightly longer holding periods in order to deliver the capital that you need.

Could it be solved with valuations coming down? That's one of the things you said—valuations were higher and that made this difficult. Could that be the solution, and is that likely that we do see a period, be it recession, macro stress, that valuations come under pressure?

It's funny, a little bit like the real estate market. Let's pretend you have a whole bunch of houses on the same street. People remember what their neighbor's house sold for. If it doesn't sell, they sit on it. But over time, as companies grow into them, then companies will.

People are worried about commercial real estate right now.

We spend every day on here talking about AI and the Magnificent Seven. There are other things in the world. But I'm curious, and again the debate is where do you deploy—and avoiding AI or not having it as an integral part is perhaps the biggest risk of all. And the debate we were having, which was would you buy a pure AI investment with this new fund? How is it going to play out?

This particular fund, and we have a number of investment vehicles—this is the largest—mature, cash-flow-positive companies. We wouldn't invest in a pure AI tech company. The thing we focus on in this fund is for the portfolio we have: is it a benefit or threat? How do we take advantage to make our company as valuable as possible.

We're in this moment where stocks are at an all-time high. We can argue whether that is fundamental or seven stocks. But do those make the IPO environment more attractive? Is this the market window now to exit in that way?

I can't comment on them specifically. But I would say the IPO market is different than the overall equity market. It's dominated by those seven stocks. If it's not one of the seven, the market is a little bit thinner than we've seen. In order to take a company public, you want to see the company price well and trade well. You need to see those conditions exist in order for the IPO market to come back.

Dani gave us the data. I'm curious to know where you went in terms of the core raising in this fund, because the whole world is travelling to Abu Dhabi, Riyadh. To what extent are they still the key deliverers of liquidity at this moment in time?

Our investor base is comprised of pension funds, sovereign wealth funds. The base has been pretty consistent over time. A lot of the sovereign wealth funds increased their commitments between the prior fund and this one.

Do you see a more significant participation from the Middle East?

I think from different geographies. The thing that's new is the contribution from private wealth—a huge area of focus for us going forward, because that will be a bigger part as we try to scale our future funds.

The big picture thing is you've seen huge growth. When you IPOed in 2019, 24 billion euros under management, now 232 billion euros under management. You're putting up numbers like Blackstone. And for long, the criticism has been this commoditization of private equity—the creativity is gone because you're so large. So what happens to EQT now that you're so large? Do things necessarily need to change when you have over 200 billion euros under management?

The firm itself has 200 billion under management, but for the individual funds and partners, we've been deploying capital at scale for years. When I joined the firm ten years ago, we were doing larger deals. So the size of deal, the value creation strategies have been consistent over time. So the scale doesn't impact the amount of creativity and the valuation strategies we have to deploy individual assets.

Next, circle back and finish off with the markets and the impact it has on flow to your world. When you see these record highs and this kind of frenzy, mania—choose your word, whichever one you want—I just get the sense that there's more of a reason then for you to present to me as a potential customer. Are you finding it easier in this frenetic public market to deliver a cogent story on why I should participate in private equity?

I think, as I mentioned earlier, the sort of frenzy is confined to part of the universe that maybe we don't interact with every day.

But are these people who would have been in the public markets and say, 'I don't like what's going on here, I'm going to look towards private'?

As you think about how our asset class has developed, I think particularly for high-net-worth investors, having a percentage of their assets in it—it's easier for people to invest in a firm like EQT.