The private equity landscape is undergoing a significant shift, and it's time to delve into the intriguing story of EQT and its plans to shake up the industry. The rise of retail investors is challenging the traditional power dynamics in private equity, and EQT is at the forefront of this transformation.
EQT, a prominent private equity group, is contemplating a bold move: charging institutional investors more for their involvement in deals. This decision is driven by a surge in cash from wealthy individuals, reducing EQT's reliance on traditional funding sources.
But here's where it gets controversial... EQT is considering ending a long-standing practice of offering free co-investments to its core institutional investors. Instead, they plan to monetize these opportunities, especially as their private wealth and retail client base expands.
Per Franzén, EQT's CEO, highlighted this strategy during a recent analyst call, stating that co-investments are a "huge growth opportunity" for the firm. He revealed that EQT generated €17 billion worth of co-investments in the last year alone.
The potential change reflects a broader trend: institutional investors, once private equity's biggest supporters, are becoming less pivotal as firms introduce new fund types tailored to wealthy individuals.
"This is an existential risk," said the head of private equity at a large US pension fund, referring to the influx of retail money. "It's diminishing our role in the ecosystem."
And this is the part most people miss... Other large private equity firms are also exploring similar strategies, recognizing that the flow of fees from wealthy individuals reduces the need to offer free co-investment opportunities to institutions. Some firms have already implemented transaction fees for institutional co-investments.
EQT, managing €267 billion in assets, launched two retail-focused vehicles, Nexus, in 2023. These vehicles commit alongside institutions to EQT's flagship funds and directly invest in portfolio companies. Notably, investors in Nexus pay fees on these co-investments, a departure from the traditional model.
Franzén assures that institutions will still have "the most attractive" access to co-investment opportunities. He believes EQT can create a "win-win-win" situation for both client segments.
However, the influential trade body representing large private equity backers recently issued a warning about the risks posed by retail funds, from potential conflicts of interest to industry-wide performance concerns.
So, what do you think? Is this a necessary evolution in private equity, or does it signal a power shift that could disrupt the industry? We'd love to hear your thoughts in the comments!
