Taking care of business

The past year has been a busy one for Stockholm-based private equity firm EQT Partners (EQT), starting with the launch of the firm’s second infrastructure fund offering, EQT Infrastructure II, which closed on
€1.925 billion in 11 months, exceeding its €1.5 billion target.

A month later, in February last year, EQT acquired Nasdaq-listed Westway Group, a global provider of bulk liquid storage, headquartered in New Orleans, for $415 million. A second US acquisition followed in April with the purchase of Houston-based Synagro Technologies, a water and wastewater management business, which is able to recycle industrial and municipal organic waste into fertilizer and alternative fuel. That transaction was worth $455 million.

Liquid storage terminals and waste management are just two of the sectors EQT focuses on infrastructure. The others are oil and gas, ports, and most importantly, energy.

ROOM FOR IMPROVEMENT

“What we felt was important was to find infrastructure assets that are already in the private sector, where you can identify opportunities for operational improvement,” says EQT partner and head of the New York
office Glen Matsumoto, referring to the strategy he and the firm devised when preparing to open the New York office in 2008. 

“So what you will see in our portfolio is a large percentage of energy infrastructure because it has been in the private sector for decades,” he adds.

But that is not the only reason EQT is drawn to energy. It is also the complexity and management requirements which offer more opportunity for operational improvement.

According to Matsumoto, the waste sector, ports and utilities fall into this category. Within those sectors, EQT focuses more on existing infrastructure.

“I think there’s a lot of existing infrastructure that’s been neglected for years,” he says, adding that “we think there’s a lot that can be done with it”.

That’s exactly what EQT did in the case of Midtown Cogeneration Venture (MCV), the largest gas-fired cogeneration plant in the US. The firm bought MCV, a Michigan plant that had been operating since 1991,
in 2009. Within a little over three years, EQT increased the plant’s capacity from 1,530 megawatts (MW) to 1,630MW without building new infrastructure.

“We were able to double the efficiency of the main steam turbine generator, which not only made the company more money but also benefitted the environment ,” he notes. “We actually took some thermal photographs before and after this improvement and you could see the difference in terms of the waste heat being released into the environment,” he explains.

EQT sold MCV in December 2012. While it did not disclose the sale price, news reports estimated EQT’s internal rate of return to be approximately 40 percent.

ALL ABOUT GOVERNANCE

Part of the firm’s success can be attributed to its governance model, according to Matsumoto.

The firm draws from its Industrial Network – a network of nearly 80 industrial advisors – to select a chairman and fill out the board of directors of the acquired company. An EQT partner responsible for the deal is also part of the team, while the chief executive is either the portfolio company’s own or a new one that EQT selects.

“We require those individuals, as a condition for being on the board, to invest their own money in the company,” Matsumoto explains.

Top managers of the company, as well as the EQT partner assigned to the team, are also required to invest their own capital.

“So that alignment – for the partners of the firm, for the board members and the management – are all part of our governance; it’s a key part of our governance,” he stresses.

“The other part of the alignment – which I think is a little unique – is that the owner partners of EQT do
not receive annual bonuses, they do not get paid bonuses when closing a deal because our attitude is ‘you make an acquisition, that’s not even half the story,’” Matsumoto continues. “The full story is how that acquisition does from entry to exit.”

In real terms, that attitude translates into a typical entry-to-exit timeframe of four to six years, a long-term approach in dealing with an acquired asset.

Aside from alignment of interests, another vital element of EQT’s business model is industrial expertise.

“The chairman [of each portfolio company] is always an industrial person,” Matsumoto says, referring to
the firm’s Industrial Network, which comprises former senior-level executives from various multinational companies and across industry sectors, such as banking, telecoms, aviation, health care, construction and engineering.

In the case of Synagro, says Matsumoto , its chairman Jeff Roberts has not only worked in the environmental services industry for over a decade, but he also has a sewage plant license which means he knows and understands the company’s operational issues.

One of its board members is a former chairman and chief executive of Southern California Edison, the second-largest electric utility in the US.

“Our thought was it’s not only someone who we know and trust and has really good business judgment, but he also has a deep understanding of operating in a regulated environment and understanding the concerns of environmental groups,” Matsumoto says, illustrating the selection process EQT undertakes
when choosing a chairman and other members of the board for its portfolio companies.

TECHNICAL EXPERTISE 

It is this level of knowledge and technical expertise that has helped with management buy-in after an n acquisition.

“The management’s reaction is: ‘This is different. This is not someone with an MBA coming in and telling me how I should be doing things differently when he has no idea how this business model works,’” he claims.

Matsumoto credits EQT and its Nordic heritage for the success of the business model. “It goes back to the
Wallenberg family [EQT founders], it goes back to the way corporate governance has been a focus in Scandinavia for generations. I think we’ve been able to translate that into modern-day reality and kind of implement it beyond Scandinavia,” he notes.

With an investment period of six years, EQT has another five years to deploy the rest of EQT Infrastructure II’s €1.9 billion. According to Matsumoto, approximately 25 percent of the fund has been invested so far. In addition to Westway and Synagro in the US, the fund was used to invest in two other assets in Europe: German waste company EEW Energy from Waste; and Norway’s Tampnet, a supplier of high-capacity
and low-latency communication to offshore oil and gas installations in the North Sea.

“Our whole framework here has been to try and avoid some of the constraints that this industry gets into
sometimes,” Matsumoto explains in reference to EQT’s six-year investment period, which may be a bit longer than a typical investment fund.

“If your investment period is too short and you start running out of time, there’s a tendency, unfortunately, in this industry, to maybe do things you otherwise wouldn’t do.”

For the same reason, the firm has chosen not to place strict geographic constraints on the fund either. “Otherwise, you end up trying to do deals that – again – just don’t make sense,” he points out.

Asked whether EQT plans to start raising a new infrastructure offering any time soon, Matsumoto is clear:
“We have plenty of time [to invest EQT Infrastructure II]. We’re not even thinking about the next fund at
this stage.”

His answer is not surprising given that the key principles of the firm’s business model are the responsible
and sustainable development of the companies it acquires – something that cannot be rushed.