Eric Liu is a partner and global co-head of healthcare at EQT, one of the most active healthcare investors globally.
With approximately €39 billion ($47 billion) of enterprise value invested in healthcare private equity across 20 PE deals since 2016, healthcare represents 38 percent of all capital deployed in EQT VI. EQT IX just closed on €15.6 billion, which is already more than 40 percent invested.
EQT has maintained a consistent healthcare strategy, putting capital to work across life science tools, pharma services, life sciences and healthcare IT.
Recent highlights include EQT’s first-ever US initial public offering, Certara, whose biosimulation software fuels drug development; an additional investment in IVC Evidensia alongside Silver Lake, valuing the European vet chain at approximately €12.3 billion; and most recently, its acquisition of French medical diagnostics provider Cerba Healthcare at a reported €4.5 billion valuation.
On the heels of a productive pandemic period of investment for EQT, PE Hub caught up with Liu, who says the healthcare sector is about as competitive, active and popular as he’s ever seen.
How does EQT distinguish itself in highly competitive markets like healthcare?
If we’re pursuing something, we tend to be fairly disciplined around picking things that we know, areas that we think we’d be a good owner, and therefore have a high likelihood of emerging as the winning bidder in a competitive process. I think advisors like that.
In most of these competitive processes, particularly for high quality assets, if you’re not uncomfortable at the finish line about the price you just paid, it means you probably just lost. It’s very easy to come in second or third. Being the one that paid the highest price is always a bit uncomfortable, frankly. You have to be pretty sure you have a good right to win when you’re going into something, because if I think it’s attractive, chances are others do too.
In the eSolutions situation, we already had Waystar – with a great management team with a lot of synergies – and we still barely beat out a standalone private equity firm. It’s much harder when you don’t own Waystar, which is usually the case. [Waystar in 2020 bought Francisco Partners‘ eSolutions in a $1.3 billion-plus deal, PE Hub wrote.]
With the successful development of vaccine in under 12 months, what good has come out of the covid environment for the broader healthcare sector?
It [vaccine development] is really remarkable, and a testament to the value of innovation of the healthcare sector; but normally it takes a bit longer for the market to adopt or develop new technologies.
The life science tools industry – companies that sell things to scientists – has been a phenomenal sector during covid. The reason that people have been able to iterate on these vaccines so quickly is because these scientists have been working on these things for years, and some of the things that were a little bit theoretical have now been applied to. There’s been a real problem they’ve been able to solve.
[EQT-owned] Aldevron, for instance, manufactures DNA for use in gene therapy. They are very good at manufacturing things to a GMP standard, and turns out, some of these vaccines, even if they are an RNA vaccine, use DNA as their raw material. And so Aldevron has supplied covid vaccines at scale.
Covid also has encouraged more capital to the sector. Innovation is sometimes disruptive, but in healthcare frequently it’s incremental and you need people willing to take risks, willing to spend their time, willing to sacrifice capital – in order to develop these incremental innovations that that next person can then go build on.
Tell me about EQT’s governance approach. How does it differ from the typical private equity firm?
The main thing that differentiates EQT from other private equity firms is our approach to corporate governance.
Our boards are majority-comprised of independent executives from industry including an independent chairman. It’s unique in private equity because most firms put their own investment professionals on the board because it’s a more efficient way of making decisions. At EQT, we prefer to build diverse boards comprised of executives with deep operating experience and industry knowledge.
There are trade-offs of course to our approach, but most board members that we recruit have been successful CEOs or CFOs themselves. They like our model because while they are not active in operating the company, our governance approach enables them to add value and engage in a way that feels meaningful to them.
Why does EQT stray from joint-control transactions, an increasingly popular private equity deal structure?
EQT is the majority owner in nearly every transaction we do. [Joint control] is definitely not our preferred approach and the reason for that is we have a very unique corporate governance model, which is antithetical to how every other private equity firm operates.
Additionally, our limited partners want to see that they have access to unique transactions, and if we’re partnering with someone else, it means they can get access to that transaction through somebody else.
The third reason is we have a lot of large limited partners, and a lot of the investors that invest in EQT funds do so because they want access to co-invest. If we were to co-invest with another private equity fund, it would potentially be depriving our co-investors that access to co-invest, and so we would have to have a pretty good explanation for why we did that.
Any exceptions to this?
Where you’ve seen it happen is in situations where we are trying to buy from somebody and they want to monetize, but they really like the company, and therefore they want to retain a small piece. That happened in Certara, Aldevron and Waystar.
Or, because we’ve bought something, and we still want to control it but we’ve monetized a minority piece to somebody else who wasn’t as focused on needing control.
For example, at the time we bought Aldevron, it was one of the best investments in the history of TA Associates. It was an opportunity for them to monetize a fantastic investment, but also reinvest a portion of proceeds and share in continued upside with us. They’ve been great partners, and since then we have actually done several other deals with TA around the firm, including selling them a minority stake in our enterprise software company IFS.
What have you learned from the deals you’ve won and lost?
Although private equity firms spend a lot of time doing analysis and determining the right price to pay for assets, small changes in value rarely change the outcome. Good companies are generally better than you think and bad companies are usually worse.
For deals that end up being good, if you had paid 5 percent or 10 percent more, it usually still would have been a good deal. For the bad deals, you could have paid 25 percent less, and it would usually still be a bad deal.
Although investment committees spend a lot of time debating whether a deal should be a 20 percent, 21 percent, or 22 percent IRR, I did an informal analysis of the recent exits from EQT deals, and very few even ended up between a 15 percent and 25 percent IRR.
This interview has been edited for clarity.