EQT's Private Market Strategy Will Transform Revenue for 12.6% Growth

Key Takeaways

• Strategic focus on private markets and new investment strategies in healthcare and infrastructure align with global trends, boosting revenue and diversification.
• Leading role in private market expansion and tech-driven efficiencies enhances deal activity, margins, and EBITDA growth.
• Challenges in geopolitics, inflation, and markets may affect EQT's investment outcomes, earnings, and future fundraising and revenue growth.

Catalysts

About EQT

• A global private equity firm specializing in private capital and real asset segments.

What are the underlying business or industry changes driving this perspective?

• EQT's strategic focus on private markets, which are expected to significantly outpace public markets, positions the company for strong revenue growth. The higher value creation in private markets is expected to drive both returns and diversification.
• The development of new investment strategies, particularly in healthcare growth and transition infrastructure, is anticipated to boost future earnings as these sectors attract substantial investment and align with global trends such as digitalization and decarbonization.
• EQT's ability to consistently deliver positive exit outcomes, supported by a strong global pipeline, suggests potential for increased deal activity and exit volumes, which would contribute to higher net margins through improved investment returns.
• The ongoing expansion and increasing consolidation in private markets, with EQT as a leading player, may lead to enhanced revenue streams and fee-related earnings as larger managers capture more market share and economies of scale.
• Investment in technological shifts, like the rise of AI, to drive efficiencies and revenue growth across EQT’s portfolio is likely to enhance EBITDA growth, making businesses more valuable and contributing positively to net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming EQT's revenue will grow by 14.5% annually over the next 3 years. I use 12.6% annually.
• Analysts assume that profit margins will increase from 29.2% today to 53.8% in 3 years time. I use 30% profit margins.
• Analysts expect earnings to reach €2.1 billion (and earnings per share of €1.82) by about March 2028, up from €776.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.8 billion in earnings, and the most bearish expecting €1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44 (original estimate 22.2x) on those 2028 earnings, down from 41.2x today. This future PE is greater than the current PE for the SE Capital Markets industry at 15.1x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

EQT faces longer-term questions regarding geopolitics, inflation, decarbonization, and AI which, if not managed well, could impact investment outcomes and earnings.

The private fundraising market remains challenging with timelines extended; it is expected to take until 2027 to recover to 2021 levels, potentially impacting future fundraising capacity and revenue growth.

EQT has discontinued a U.S. multifamily fund initiative due to a challenging fundraising market, resulting in costs and revaluation losses impacting net margins.

The real estate market, despite recent improvements, has faced challenges with prior activity levels being muted, possibly affecting revenue from real estate investments.

Economic growth in Europe has been slower, and despite the opportunities this brings for acquisitions, it could also limit revenue growth if European assets perform below expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of SEK374.291 for EQT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK461.05, and the most bearish reporting a price target of just SEK286.58.

In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.0 billion, earnings will come to €2.1 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 5.8%.

Given the current share price of SEK296.8, the analyst price target of SEK374.29 is 20.7% higher.

We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.