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EQT reduces pref on infrastructure fund in hot fundraising market

  • Fund III targets 2.9 bln euros/4 bln euros cap
  • LPs say fundraising has been strong
  • Fundraising strong in infrastructure space

EQT Partners reduced the preferred-return threshold on its third infrastructure fund, which is in the market targeting 2.9 billion euros ($3.06 billion), according to three people with knowledge of the fundraising.

Fund III, which has a 4-billion-euro hard cap, reduced the preferred return to 6 percent from 8 percent in Fund II, the three people said.

Carl Leijonhufvud, spokesman for EQT, declined to comment.

Several high-profile firms in market have either dropped or reduced preferred returns on new funds. These include Advent International, which dropped a hurdle rate from its eighth fund. Advent Fund VIII closed on $13 billion last year.

CVC Capital Partners reduced its preferred return to 6 percent on its Fund VII from 8 percent in the previous vehicle. Fund VII hit the market this year with a 15-billion-euro target and is expected to have a fast fundraising.

Preferred returns, also known as hurdle rates, refer to the minimum return a fund manager must deliver to its investors before it can collect its share of the fund’s investment profits. By reducing its hurdle rate, EQT is lowering the threshold at which general partners can start collecting carried interest. Higher hurdle rates are generally considered to be friendlier to limited partners.

Some LPs in market said reduced preferred returns are among the changes of terms that concern them in the strong fundraising market. But reductions or removals of preferred returns on new funds don’t seem to be hindering those fundraisings.

A lower preferred return on infrastructure funds is viewed as more reasonable than on buyouts funds, two of the people with knowledge of the fund said. Generally, infrastructure funds target lower returns than buyout funds, they said.

“It’s hard to say you’re looking for a net return of 8 percent and have an 8 percent preferred return,” said one of the people.

EQT Infrastructure III has been in market since last year. It’s charging a 1.6 percent management fee (1.5 percent for first-closers) and a 20 percent carried-interest rate, an investment report from New Jersey Division of Investment says.

All transaction fees will be used to offset management fees, the investment report says.

Fund III will invest 50 million to 300 million euros in 12 to 14 portfolio companies, according to New Jersey’s report.

Fund III focuses on investments in energy (midstream, power and utilities), transport and logistics (ports, rails, airports and parking), environmental (waste, water and industrial), telecom (towers, fiber and data centers) and social (public services and facilities), New Jersey said.

The group looks for investments with certain characteristics, “like providing an essential service to society, recession resilient, stable cash flows, regulation or high barriers to entry and inflation protection,” New Jersey said.

EQT raised 1.92 billion euros for Infrastructure Fund II in 2013. That vehicle was generating a 26.9 percent net internal rate of return and a 1.82x multiple as of June 30, 2016, New Jersey said.

Fund I, which closed on 1.2 billion euros in 2008, produced a 17.6 percent net IRR and a 2.39x multiple as of the same date, according to the investment report.

Key executives on EQT’s infrastructure team include Lennart Blecher, deputy managing partner and head of EQT Real Assets; Andreas Huber, partner and head of infrastructure in continental Europe; Stefan Glevén, partner; and Alex Darden, partner in New York.

Infrastructure fundraising has ramped up in the past few years, hitting $62.2 billion in 2016, more than any other year in the past decade, according to alternative-assets-data provider Preqin.

Action Item: Reach Lennart Blecher here: lennart.blecher@eqt.ch

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