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Youthful exuberance

16 July 2020 By Liam Proud

Europe’s private equity firms are younger and more exciting than stodgy American cousins like Blackstone, KKR, Apollo Global Management and Carlyle. That, anyway, appears to be the view from stock market investors, who value Sweden’s $20 billion EQT and $25 billion Swiss Partners Group at a massive premium to the U.S. giants using forward price-earnings multiples. The European groups’ allure, however, will be fleeting.

Christian Sinding’s Stockholm-based outfit EQT said on Thursday that its portfolio of private-equity and infrastructure investments has held up OK during the pandemic: He’s valuing it at 59 billion euros, compared with a cost price of around 40 billion euros. Meanwhile Partners Group, run jointly by André Frei and David Layton, managed to pull in $8 billion of new investment commitments in the first half of 2020, helping to boost total assets under management to $96 billion.

Shareholders are excited. After a near-80% rally this year, EQT is now valued at roughly 38 times the earnings that analysts expect it to generate next year, using Refinitiv SmartEstimates, compared with 17 on average for the U.S. Big Four. Frei and Layton’s Swiss group is valued at 26 times. Those chunky premiums hold whether valuing the companies on price-to-earnings multiples, dividend yields or equity value as a percentage of assets under management.

It mostly makes sense. EQT, which only listed in September, will grow its earnings by an average annual rate of 73% over the next two years, analysts reckon, compared with 31% for the Americans. Both Sinding’s firm and Partners Group also make most of their money from management fees – about 96% and 71%, respectively in 2019, compared with one-third on average for Blackstone and KKR. It’s a more predictable source of revenue than carried interest, which varies with fund performance, and therefore fetches a higher multiple.

Both effects will fade with time, however, as more of the company’s funds mature and riskier performance fees make up a bigger chunk of income. The question is how long the ageing process takes. Put EQT’s forecast 2023 earnings, using Refinitiv SmartEstimates, on Blackstone’s 26 times 2020 earnings multiple. On that basis, EQT would in three years be worth barely more than it is today. Investors may be betting too much on the spirit of youth.

 

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