In some ways, it almost feels like little has changed since we last interviewed Lennart Blecher, EQT’s real assets chief, back in February 2013. At the time – like now – Global Infrastructure Partners had recently closed the largest ever infrastructure fund, a move shortly followed by EQT Infrastructure closing its own record fund. To underline the similarities, a US President was also at the start of his term following a fiercely fought election campaign.
Four years on and the difference is mostly one of scale: GIP’s third vehicle is now $15.8 billion in size, up from its predecessor’s $8.25 billion; EQT Infrastructure more than doubled its €1.9 billion tally, closing its latest fund at €4 billion; and Donald Trump, a larger-than-life personality, is at the start of what is expected to be an eventful presidency.
“We could have been up there [with GIP and Brookfield] if we wanted to because the demand was just enormous,” Blecher recalls.
In tandem with the increasing size of EQT Infrastructure’s funds, Blecher says his team of investment professionals – or “hunting squads”, as he affectionately refers to them – has grown to close to 40 from the 14 that helped with its first fund in 2008. Yet when it comes to EQT Infrastructure, perhaps the greatest example of supersizing can be found in the returns it generates, with Fund I and II posting IRRs of 26 and 35 percent respectively, according to sources familiar with the funds. As we sit in EQT’s Zurich office, one of the Swedish firm’s 16 bases across the world, Blecher attributes this success to EQT’s industrial approach and network, which consists of over 250 advisors who have worked in businesses including Ericsson, GE and Blecher’s former parish ABB Financial Services Group.
“The EQT industrial approach is to develop a very clear, understandable and solid business plan [for portfolio companies],” he says. “From day one, we make sure that the plan is communicated to the management team, that they really understand it and buy into it to make sure that the EQT governance works. All our boards are populated with industrialists so we don’t have a majority of financial people on the boards. It’s performance, performance, performance. That’s my mantra.”
NOT JUST AN OWNER/OPERATOR
It is an approach that Blecher says is just part of what makes EQT Infrastructure different from many of the other managers in the market. It is also a strategy that he believes is key to succeeding in an industry like infrastructure.
“If you buy a company that produces shorts, no one cares who the owner is,” Blecher asserts. “But if you want to buy a company providing an essential service to a municipality, be it a telecoms or heating company, that municipality really cares about who the next owner is.”
While the owners of certain clothes manufacturers might disagree, Blecher’s point stands. He is passionate about the manager’s dedication to developing the companies they invest in and leaving them in a stronger and more sustainable position than when they were bought, while providing an essential service to the societies they are based in.
He points to Finnish district heating firm Adven, bought in 2012 as part of EQT Infrastructure I and sold in 2015 to Infracapital and AMP Capital, having expanded its reach into Sweden and also progressed into geothermal development capabilities, as an example. Respective money multiples of 2.4x and 1.7x for the first two funds suggest Blecher’s showering acclaim on EQT’s strategy carries more than a little bit of substance to it.
It is often said EQT Infrastructure operates on a value-add strategy, pursuing investments that can sometimes seem more suited to private equity. Yet Blecher believes this strategy is driven by another one of the firm’s key differentiators: being more than just an owner or operator of an asset or company. It is why, he explains, you will see the firm investing in relatively few energy assets or almost no PPP projects.
“You don’t see much of renewables or things like that in our portfolio,” Blecher says. “It’s not that we don’t like renewables. We like them, but we are focusing on buying assets where we can do something operationally. There must be a value-creation potential. After we have been the owner of a company for a couple of months we start developing a ‘full-potential plan’.
“Once we deliver that full potential, we ask ourselves, ‘Is there more gas in the tank or is it time to start to exit?’ Sometimes that takes seven years, sometimes it takes three and a half years. EQT should own a company for as long as it takes to bring it to its full potential, that’s a responsibility towards the LPs.”
EQT Infrastructure’s first fund followed this philosophy. The 2008 vehicle, which raised €1.2 billion, has exited seven out of the nine investments it made. Blecher says every investment bank in the world asks him when one of the remaining companies – Norwegian offshore fibre network operator Tampnet and US-based midstream oil and gas company Peregrine – will be sold. The latter, though, is one of the few blots on the EQT copybook, with the firm filing for bankruptcy last February after it said liquidity challenges left it with no alternative.
“If you buy 20-plus companies, it is inevitable that everything doesn’t go the way you like,” Blecher concedes. “We don’t do development projects, but in this case we met all the engineers, who explained that the development risk was very manageable, and they convinced me and the investment committee.” He adds that EQT Infrastructure is now working to bring Peregrine to a healthier state and prepare it for an exit in line with its philosophy.
Peregrine was a diversification from what is generally a risk-averse investment strategy and perhaps it is no coincidence that EQT Infrastructure’s only other major misstep – its ill-fated €500 million or so core infrastructure fund, abandoned in 2015 – came when it deviated from its central tenets.
These include stringent criteria that dictate investments must be made in the US or Europe and require taking full or controlling stakes in mid-sized, brownfield assets. Minority or co-investments are absent from the EQT equation, with Blecher’s belief being that if a company is to be transformed as per his mantra, somebody has to take charge and that somebody needs to be EQT.
“EQT doesn’t want [minority stakes] because we want to control our destiny,” he explains. “When I was asked to start an infrastructure strategy with EQT, I decided to think about what I didn’t want to do. I didn’t want to do development of infrastructure because it’s too unpredictable. I didn’t want to deal with emerging markets because I’ve lost my hair and become grey by developing private power projects in India with ABB.”
Blecher argues that he generates higher returns from investing solely in US and European brownfield, rendering emerging markets and development projects unnecessary risks in a strategy that has so far delivered more than just modest returns.
That being said, Blecher and EQT are not averse to entering markets in the throes of political change or instability. In April 2017, such markets might be nigh on impossible to avoid, but Blecher feels political risk is always present in infrastructure investments, which is why he prefers to focus on companies or assets that are more commercially driven than politically so. “We don’t shy away from complicated situations but it has to be in our core markets, Europe or North America,” he notes.
As a prime example, Blecher points to one of the last acquisitions made by EQT Infrastructure II: buying GB Railfreight from Groupe Eurotunnel, which transports about 15 percent of the UK’s rail freight, four months after the country voted to leave the EU. “We believe that the UK will hang around for quite some years,” he predicts. “It might be rocky within the coming years, but we believe it will stabilise at some stage.” GB Railfreight was EQT Infrastructure’s second such investment, joining Hector Rail in Sweden as the firm attempts to create an “independent pan-European rail freight operator”, for which Blecher is now looking for the “missing piece in the puzzle”.
Similarly, he points to EQT Infrastructure I’s investment in Spanish car park operator Parkia in 2011 during the middle of the global financial crisis and in one of the countries that suffered most significantly. “Everyone flew out of Spain and we flew in,” he states. “You have to make an assessment of that political risks. We try to investigate opportunities where there is less political dynamic and more commercial dynamic.”
Somewhat inevitably, our conversation at this stage turns to the new leader of the free world and proposer of a $1 trillion infrastructure plan. Blecher is cautiously optimistic about President Trump and his bold infrastructure pledges, expressing hope that Trump can remove bottlenecks in the permitting of sites that have held back US infrastructure development in recent years, while also fulfilling his promises on job creation.
“I think perhaps the new administration will look seriously into how they can improve the whole permitting process,” he says. “As I see it, building and improving infrastructure today is one of the few things in Western society that creates jobs.”
LEADING THE WAY
Talk of global politics serves as a reminder of the global nature of EQT Infrastructure III. The fund’s LPs had an equal geographic spread across North America, continental Europe, the Nordics and Asia-Pacific. Among the latter were Japan’s Dai-ichi Life Insurance and Sumitomo Mitsui Trust Bank, something Blecher believes is of interest for the future.
“I think that the Japanese investment community over the last 18 months has started to wake up when it comes to infrastructure investing,” he observes. “I was a little bit surprised myself with the large amount of interest from the Japanese institutions, actually. Something changed in the last 18 months and I think that’s a very interesting trend.”
Newer LPs might well want to check EQT’s definitions of infrastructure, as the manager begins deploying Fund III, which is already 30 percent invested. This is, after all, the outfit that in previous funds has invested in a cooking oil business and laundry company imaginatively named WASH. Did its LPs smell something funny, perhaps?
“Some of them had opinions about it,” Blecher admits, before embarking on a passionate defence. “When you look at WASH, we have 500,000-plus washing machines in multi-family houses and universities in the US. It’s an essential service because you can’t go to school or you can’t go to work if you don’t have clean clothes. It’s very stable and cashflows and earnings are based on long contracts because of a deal with the landlords.”
Whether the the deal is infrastructure or not might come out in WASH’s eventual exit. When Antin Infrastructure Partners sold crematoria group Westerleigh last year, OTTP stuck it in its infrastructure bucket while USS placed it in its private equity one. But EQT Infrastructure’s sale of cooking oil firm RTI went to traditional private equity firm Aurora.
Blecher jokes that WASH was previously “the second-largest provider of coins to the Federal Reserve in the US” until EQT Infrastructure came in with an industrial partner from Ericsson who began to link the washing machines with a smartphone app, alerting customers when a machine is free and introducing flexible pricing depending on the time of day. “So that’s our value creation idea around why we bought this company and it ticks all our boxes for what’s infrastructure,” he asserts.
Where Blecher says the manager has not been aiming to just tick boxes is with its ESG performance. The company has previously been recognised for its ESG efforts and adherence to the UN-backed Principles for Responsible Investment Initiative, to the extent that portfolio companies’ health and safety issues are at the top of the agenda at board meetings.
“We think it’s good business and good business would lead to higher multiples and higher carry for my investment professionals,” he explains. In the same vein, he says the company is selective about who it exits investments to as well. “People should know when they buy a company from EQT [that] it’s a good company. We are state of the art.”