EQT, one of Europe’s largest private equity investors, is pushing to expand its US footprint. In January, the firm hired Arvindh Kumar as a partner and the new head of EQT’s North America efforts in technology, media and telecom.
To start, tell me a bit about EQT’s new US tech platform?
EQT, being historically a European domiciled firm, saw that tech presents a big growth opportunity.
In terms of the team and the effort, we focus on the following areas: enterprise software, marketplaces, and data monetization businesses such as information services. We are operating through our flagship fund and, as publicly disclosed, we are raising our ninth fund, EQT IX, which will be approximately €15 billion ($17.75 billion).
Part of what excited me about joining EQT is that we are not rookies in the US tech arena.
Some notable deals include the acquisition of Waystar, acquisition of Cast & Crew, sale of Press Ganey, and acquisition of Certara.
We’ve done several deals that are very strong, such as Innovyze and Zemax. I inherited the coverage of these two companies and am the lead partner on those boards now.
How would you characterize your investment approach?
I am looking to do new deals that are very thematic with EQT’s investment criteria. What that means is four things: growing end markets where we invest with the trend, market leaders that are accelerating digital transformation, one-to-two transformative opportunities to accelerate growth, and demonstrable international angles.
We are trying to invest in businesses that are accelerating due to digital transformation. We are spending time in supply chain, transportation, logistics.
We also like infrastructure software: we’ve had success in companies like SUSE, which just bought Rancher Labs. There is a lot of activity and growing need for cloud infrastructure software, including themes like cybersecurity and working from home. There is a lot more risk of being hacked and there is a lot more need for cybersecurity.
In vertical enterprise software, we are pursuing businesses with low digital maturity levels and businesses that are behind on tech adoption, such as in construction, for example.
How does EQT differentiate from its private equity peers in the US tech arena?
First, EQT is pretty specifically focused on end-markets, not turnarounds. We believe that the best businesses are often even better than they look and bad ones are often worse than you think. So we are really sticking to a very high bar for quality and we are willing to pay a fair price for that.
Secondly, what also differentiates us is the international component. EQT has best-in-class access to support a European growth agenda or technology companies of unique networks. We have a unique network with local European offices and we have a unique footprint in Asia, where we have offices in Singapore, Hong Kong, Shanghai.
So with technology companies where we have an opportunity for go-to-market and have M&A perspective internationally, I think we can be very differentiated in helping our businesses. And we are also one team within EQT, so collaboration is very strong.
Thirdly, we have a pretty unique governance approach.
In governance, EQT engages a large network of advisors. How does that work?
We have about 400 industrial advisors; they are not operating partners because they are not exclusive with EQT. The term industrial advisors really came from EQT – starting as industrialists in Sweden who helped industrialize the Swedish economy and other parts of Europe.
There is a growing number of US tech industrial advisors. One of my priorities when I joined was to really grow the quantity and quality of North America TMT industrial advisors, and we’ve done that.
We have a growing list of advisors with whom I already worked on existing portfolio companies and on new opportunities.
The work that they do can be on diligence of new deals, it can be on serving on the new boards of companies once we acquire them, it can be just an advisory type of assignment. It really varies across the board and there is no one-size-fits-all approach.
These are ex-CEOs, ex-CFOs, ex-sales people. It’s a diverse pool because what different companies need is a different thing.
For our portfolio companies, we create tailored-made boards consisting of former operators.
So each time I am buying a company I look at what are the three best operators that map to what we are looking for, in terms of the thesis that this business is providing. So whether it’s go-to-market strategy, or improving the product, or SaaS transition, or expanding our reach internationally – we’ll try to find operators that have done that. That’s a pretty unique governance approach rather than putting the same operators on everything.
We are also really focused on not directly interfering in the management process of a portfolio company. So what we try to do is very much to empower the company through the board and through the industrial advisors.
Did covid-19 impact your investment process in any way, and if so, how?
What covid did is it cut out companies that are not accelerating customers through digital transformation.
If it’s not pretty obvious how they are accelerating the customer journey, we don’t really spend time on them. Companies that are doing so are even more expensive than they were pre-covid. So it is very difficult to invest in attractive risk-reward.
To get deals done you need a real angle to get conviction. Covid is really feeding a bigger bifurcation between “have” and “have nots.”
What I mean by that is there are companies that pretty asymmetrically benefit in the covid environment, such as Zoom, Amazon, Salesforce. But there are smaller businesses that are doing the same thing. So we focus on those.
Businesses with longer sales cycles, higher touch with customers – those are the ones that are suffering more. If you have an old technology stack, if you are deployed on premise – those companies are not doing well in this market. So we are not spending time on “have-nots.” It sounds simplistic, but it’s important to get to the bottom of that when you are investing in businesses.
When I think about our portfolio companies – the ones that have done well had acted very, very quickly during the crisis. From an expense perspective, they were quick to manage their expenses and therefore liquidity. They were quick to communicate with their customers and to figure out what they can do. Companies that acted the fastest with clear purpose were the companies that recovered the fastest and avoided debt and liquidity issues.
Action Item: See PE Hub’s coverage on Waystar’s acquisition of eSolutions.