Imagine you're an expert at renovating houses. You don't just flip them with a cheap coat of paint; you're a master craftsman. You find undervalued, sturdy houses with “good bones” that others overlook. You buy the house, not with all your own cash, but with a combination of your own money (equity) and a mortgage (debt). Then, over several years, you meticulously rewire the electrical, modernize the plumbing, and add a beautiful new extension. Finally, you sell the vastly improved home for a significant profit. In the corporate world, EQT is that master craftsman, but for businesses. EQT is one of the world's largest and most respected private equity firms. In simple terms, they do for companies what our expert renovator does for houses: 1. Fundraising: They raise huge pools of money, called funds, from large investors like pension funds, university endowments, and sovereign wealth funds. These investors trust EQT to be a good steward of their capital. 2. Acquisition: EQT's teams of specialists then scour the globe for promising but underperforming companies. They might be a family-owned business ready for the next generation of growth, a forgotten division of a massive corporation, or a public company that has lost its way. They then buy the company outright, often using a mix of their fund's money and borrowed money (a Leveraged Buyout or LBO). 3. Transformation: This is where the magic happens and where EQT's philosophy shines. For the next five to seven years (or more), EQT acts as a hands-on, long-term owner. They don't just watch from the sidelines. They bring in industry experts, upgrade technology, expand into new markets, and instill a culture of efficiency and growth. Their goal is to turn a good company into a great one. 4. Exit: Once the company has been fundamentally improved and its intrinsic_value has substantially increased, EQT sells it. This “exit” can happen through a sale to another company, or by taking the company public again through an Initial Public Offering (IPO). The profits are then distributed to their investors, with EQT taking a share for its successful work. Unlike a stock market investor who buys a small fraction of a company, EQT buys the whole thing. They are not traders; they are business builders. And since 2019, you, as an individual investor, can buy shares in EQT AB (the parent company) on the Stockholm stock exchange, effectively owning a piece of the master craftsman's workshop itself.
“The basic ideas of investing are to look at stocks as businesses, use market fluctuations to your advantage, and seek a margin of safety. That’s what we’ve been doing. That’s what we’ll continue to do.” - Warren Buffett 1)
At first glance, the fast-paced world of multi-billion dollar private equity deals might seem far removed from the patient, careful world of value investing. But looking closer, EQT is not just relevant; it's a powerful case study and a potential investment that embodies many core value principles. 1. EQT as the Ultimate Business Owner: Value investing, at its heart, is about thinking like a business owner, not a stock renter. Benjamin Graham taught us to analyze the business behind the stock ticker. EQT does exactly that, but on a massive scale. They conduct incredibly deep due diligence, focusing on a company's competitive position, management quality, and long-term growth prospects—not on next quarter's earnings. When you study EQT's methods, you're getting a masterclass in long-term, fundamental business analysis. They are forced to hold their investments for years, insulating them from the market's daily whims, a discipline every value investor strives to cultivate. 2. A Source of High-Quality, “De-Risked” Companies: When EQT decides to sell one of its transformed companies via an IPO, it can present an interesting opportunity for value investors. These newly public companies have often undergone years of operational improvements, financial discipline, and strategic repositioning. They return to the market as leaner, stronger, and more focused businesses. While you must still do your own due diligence and seek a margin_of_safety, a company with an “EQT pedigree” is often worth a closer look. 3. EQT's Stock (EQT AB) as a Potential Investment: Investing in EQT's own publicly listed stock is a way to gain exposure to the private equity asset class. It's a “picks and shovels” play. Instead of betting on a single gold mine, you're investing in the company that sells the best equipment to all the miners. EQT's business model is attractive from a value perspective:
4. A Market Catalyst and Information Source: When EQT buys a public company and takes it private, it's often a sign that a professional, value-focused buyer sees deep, untapped potential. If you own a stock that EQT makes a bid for, it can act as a powerful catalyst that validates your own value thesis and unlocks the value you saw. Watching which industries and types of companies EQT is targeting can also provide valuable insights into where smart, long-term capital is flowing.
Analyzing a private equity firm like EQT is different from analyzing a car manufacturer or a software company. You need to focus on the unique drivers of its business.
A disciplined value investor should approach EQT by dissecting its components and assessing their quality and future prospects.
1. Value the stable management fee business separately, perhaps by applying a multiple to its annual fee-related earnings.
2. Value the carried interest component by looking at the value of the current investment portfolio and the potential for future performance fees.
3. Add them together and subtract any corporate debt to arrive at an estimate of [[intrinsic_value]].
* Compare EQT's valuation metrics (e.g., Price/Fee-Related Earnings) to its direct peers like Blackstone, KKR, and Apollo to see if it's trading at a reasonable price relative to the quality of its franchise.
A good investment case for EQT from a value perspective would involve:
Be wary if the stock price soars to a point where it implies flawless, record-breaking investment performance for years to come. The future is uncertain, and even the best investors have periods of mediocre returns.
Let's imagine you are a value investor who has been analyzing “Legacy Systems Inc.”, a publicly-traded software company. Your research shows it has great technology but is poorly managed, has a bloated cost structure, and a confusing strategy. You believe its intrinsic_value is $50 per share, but it's currently trading at just $30. You've bought a small position, but are waiting patiently. One morning, you see a headline: “EQT Private Equity offers to acquire Legacy Systems for $45 per share.” How do you, as a value investor, process this?
1. Sell Your Shares: You can sell your shares on the open market, which will have likely jumped to just below the $45 offer price. You lock in a quick, handsome profit.
2. **Wait for a Higher Bid:** Sometimes, an initial offer from a PE firm will flush out other potential bidders, leading to a bidding war that could drive the price closer to, or even above, your $50 estimate. This is a form of [[special_situations|special situation investing]]. 3. **Reject and Hold (if possible):** If you are a very large shareholder, you might try to rally others to reject the offer as too low. For most individual investors, this is not a practical option.
In this scenario, EQT's action acts as a powerful catalyst that forces the market to recognize the value in Legacy Systems. It shows how the world of private equity directly intersects with public markets and can create profitable outcomes for patient value investors.