Conni Jonsson on EQT and Private Equity
The Studio 12 interview. Today's guest is: Conni Jonsson, CEO of EQT.
Welcome, great to have you here.
For a long time you haven't been out in the open.
But now you've become a public figure. What do you think about that?
I don't mind it at all. I've always been active in the industry and available–
–as well as worked with media personally.
But there's been a change. You've been in a lot of debates and interviews.
That's because the business I've worked in for 20 years has developed–
–and become large–scale. There's a greater demand for us to be transparent.
The basis of private equity is just that – private equity.
It worked as long as it wasn't too large–scale.
You've also gone into public funded businesses.
We always have been.
Is that the reason we see more of you nowadays?
The business seems to be more easily affected by politics.
We've had companies that have been in the public sector for years.
In the light of that the tax we pay equals more than half of the GNP–
–there's almost no company operating without tax funding.
Now we've entered sectors where private equity hasn't been an option.
The welfare sector and the education sector.
It's not a huge difference. Our responsibility as owners stay the same.
Speaking of the welfare sector...
A lot of politicians, like Björklund, are debating this.
Anders Borg believes ownership should be limited to ten years.
He thinks that would scare off certain owners. Will it?
There's a difference in how long you own something and how you act as an owner.
You could own a company for 2000 years and run it poorly.
That doesn't make you a good owner.
You can be a shareholder and be a responsible owner.
You have to separate owner responsibility from how long your ownership lasts.
Within all lines of businesses owner responsibility differs.
It doesn't matter if the business is private, public or if it's a foundation.
The debate has become polarized. Maybe they're focusing on the wrong things.
What do you think about a ten year minimum for owners?
AcadeMedia is an important investment.
But some of our companies have 600 000 employees.
We run schools and businesses all over the world.
This isn't an important issue for EQT. But it's an important issue for Sweden.
The debate has taken a wrong turn there.
It is the result of venture capital firms not taking their responsibility as owners.
My wish is that we start discussing what we can accomplish together.
How much damage has the JB–bankruptcy done?
There are numerous bad examples of how venture capital firms have acted.
There is even a greater number of examples of how other kinds of owners acted badly.
As a venture capital firm you're associated–
–with the negative things venture capital firms caused.
The venture capital business was previously called investment companies–
–or developing companies. There have always been intermediary owners.
But this kind of intermediary owners have only been around for 25–30 years.
Its golden age was during that period. As a result our line of business grew.
It might have been hard dealing with the consequences of becoming so large.
People got into the venture capital business because they wanted privacy.
It's a process of maturity that we've gone through as a line of business.
You've come into the light more. I don't see as much of Björn Savén in the media.
Should people be more open?
They can do as they please. I take full responsibility for my assignment.
It has to do with the fact that we are closely linked to the Wallenberg sphere.
I've worked for the Wallenberg family for more than 25 years.
I share their fundamental views on being responsible.
A well–functioning venture capital business is a competitive advantage.
I don't care that much about what other people do.
I've often heard you being negative to those–
–who've listed their company on the stock exchange and managed it poorly.
Shouldn't you act on this together?
We discuss various things in the business. It's a very entrepreneurial business.
It's made up of many strong individuals.
A favorite expression in our business is:
"Making the venture capital business go in the same directions is like walking cats."
It's hard making these entrepreneurial venture capitalists–
–agree upon common perceptions, nationally as well as internationally.
You have to accept the way things are and do the best you can with your obligations.
Do you have the same revenue requirements in publicly funded organizations?
There's a greater political risk there than what we initially thought–
–when we invested in AcadeMedia.
Aleris was different. There were already many private operators there.
It was easier to assess the political risk.
The political risk is the revenue we'll make up for.
With AcadeMedia the development for the company has been positive.
But the political risk has been higher.
We should have the same revenue for AcadeMedia as for other businesses.
What is your revenue?
We want revenue that compensates our investors for their investments.
If we compare ourselves to stocks listed on the stock exchange–
–we should have revenue that's 3–5 points better.
And the exchange should give...?
You tell me! Think about inflation and safe rates. Today it's about 7–9 percent.
Add five percent on top of that. That's what we should give our investors–
–after they've paid our fees.
12 to 13 percent? How have you performed historically?
We've been way over that. AcadeMedia will be at that level.
When we perform well it shows in the wallets of our pension recipients.
The Swedish pension system struggles with the revenues being too low.
This is an investment where the revenue is better.
And people are annoyed that the revenue is too good – it makes you a bit schizo!
You could say that it's well functioning. Let's guarantee that the rules–
–that apply to venture capital firms are clear and distinct.
Give them conditions that are acceptable, clear and predictable.
Then we'll see if they continue delivering good revenues.
Jonas Sjöstedt says that the entire school capitation allowance-
-should go to education. My first reaction is that it sounds cogent.
Shouldn't it go to education?
There are numerous ways you could run an educational establishment.
I have a firm belief–
–that having diversity in ownership–
–is positive for the welfare development.
There are few systems in the world that work using planned economy.
I thought the public debate would have advanced from that level–
–considering what's happening around the world.
But apparently few people have the interest to carry on–
–and debate this issue politically and publicly.
The politicians have failed in regulations when it comes to your business.
Absolutely. That is the flaw.
Isn't that often the case for businesses you enter? Infrastructure, for example.
The government used to own a lot.
These are different issues. There's something called natural monopoly.
In a natural monopoly there are no natural competitors.
There are two ways of running them.
Either by regulation. Price control often comes to mind.
In most countries where they've privatized the public sector–
–it's done based on well–grounded regulation systems.
Systems that are established in all economies-
-where natural monopolies are privatized.
In telecommunications, we have the Swedish Post and Telecom Authority...
...to govern the interests of the consumers in a natural monopoly.
You should think through the effects of a deregulation before carrying it through.
Set up the conditions for it and make sure there are authorities to govern–
–the users', customers' and the public's interest before you start privatizing.
The education sector might have been privatized before any clear conditions–
–where set up and we're feeling the effects of that now.
Do you regret acting too soon?
No. I feel passionate about what we can accomplish in the public schools–
–together with the Swedish Schools Inspectorate–
–in order to improve the Swedish educational system.
We could use not to invest in health care and education in Sweden.
But it would be a shame not to seize the opportunities to help each other improve–
–and make our common assets last longer.
Since we're discussing unclear terms from the government, the tax issue...
It's odd that you choose moving your funds back home now. Why is that?
We'll never move our organization to a place where it's optimal taxwise.
We want to run our business where the conditions for running it are the best.
We say "locals with locals". We want to be active in countries where we invest.
We have Germans in Germany, Chinese in Singapore and Americans in the US.
We'll continue working that way.
We're convinced that the ongoing taxation cases–
–that have been the downfall in each case until today, will end in a positive way.
We don't think the actions taken by the Swedish Tax Agency–
–with retroactive taxation and pursuing theses of their own–
–instead of acting according to Swedish law, will sustain.
If it does we'll stay in Sweden.
You've raised your first fund – Infrastructure 2 – in 2013.
Was it harder to raise due to the fact that it was raised here?
The political conditions weren't there.
There are opportunities of running those businesses in certain European countries.
Is that why the administrative work is done in Great Britain and not in Guernsey?
Their principal center is there.
You should be able to run that type of business based in Sweden as well.
We've discussed that issue ever since the Swedish presidency of the EU.
We tried to make them introduce, before the regulation was implemented–
-make a proposition of how to run such a business.
And to run it in any country in Europe. But they weren't ready to do so.
Is it as profitable running the funds-
-from Luxembourg and Great Britain as it was from Guernsey?
The taxation is higher.
Does that mean revenues have to be raised by five percent more?
No. The effect is that the profit decreases.
Our revenue is based on a settlement between us and our investors.
Then there are a number of costs of running the business.
But the effects of the regulation that's coming up will be a greater cost for us.
It's legitimate that our business is regulated in a new way.
The cost for running our business is legitimate.
How did investors react when you moved the funds? What do they say?
That depends on where the investor is active.
You have 260 investors. 200 of them are international. Who likes it?
Investors who have public assignments–
–and are situated in countries where these issues are important like it.
I'm mainly thinking about European and American investors.
They're in another part of the world.
All they worry about is maximizing their revenues, so they don't care that much.
Half of the world care about this issue while the other half doesn't.
We're active in Sweden so it's important for us to follow the debate.
It's important that we participate in the public debate here.
It's important that the Germans are active in Germany and the Danes in Denmark.
We can talk a little about your business.
When you buy a company you have something called a "troika". Tells us about it.
Claes Dahlbäck came up with that. We didn't think of that at first.
Within private equity there are conditions–
–to create the best functioning model out of all ownership models.
That's because the owners, the board and the management can reach consensus.
You can agree on what needs to be done. We share the same views.
Everybody who can affect the company's development shares your view.
You can create the perfect conditions for realizing your business plan.
There are few other ownership models that can create as clear structures.
If you're listed on the stock exchange there are many owners.
If you're owned by a family, they might only have one company.
The family's economy becomes dependent on the company's economy.
This particular ownership model that private equity represents–
–can create very clear ownership models.
To become even more efficient as owners we've created something called a "troika"–
–and developed it further.
The chairman of the board, the CEO, and the EQT partner–
–who really is a representative of the owners, forms a small executive committee.
That's where all the sensitive, difficult discussions take place–
–that are then decided on by the board.
One of the most important issues is that the CEO of a company often feels lonely.
The CEO is very exposed.
He is hounded by the board and runs an organization – he has no friends.
The troika is a way to create security and support for the exposed CEO.
It also clarifies the different roles of the owner, the board and the management.
If we make the personal chemistry work the troika is almost always a good investment.
It sounds like an amazing model, I am sure that it works.
The troika consists of an EQT partner, a chairman, often someone from your network–
–and you often replace the CEO when you enter a company.
–Three people strongly connected to EQT. –The CEO is often not.
But the CEO will work with you.
When you sell... You say that the people in the company make the company.
Do you risk taking the value with you? The chairman might leave–
–the CEO might not stay and the EQT partner is gone.
How much of the value was in the people you brought in?
That depends on how the sale is done. If we sell to a strategic buyer–
–then they are not interested in keeping anyone from EQT or the board.
They want to run the company themselves. To them the management is important.
If the company is to become quoted the board is more important.
They can provide continuity and show the new owners–
–credibility, seriousness and create continuity.
When we think about quoting the company we check that the management wants to stay–
–and that the board also wants to stay.
That way it won't be all new people when a new shareholder arrives–
–if that shareholder can't take control of the company.
There are good rules and we have a responsibility to make sure–
–that the board is familiar with the company and is fit to develop it further.
And that can get the trust of the shareholders.
It is difficult to generalize, but I perceive no weakness in the model.
A year ago you said that quotation was a low priority. What is your view of it now?
Today quotation is an interesting option, since the market has gone up a lot.
–Our job is to deliver profit responsibly. –What is the perfect quotation?
If the stock climbs too much, your investors will say that it was too cheap.
–That is mostly not a problem. –Hasn't it gone that well?
Yes, in one quotation the stock doubled in the first week.
That was not good, the price was a bit too low. But 5-20 percent is no problem.
Most shareholders have stock left, they don't sell all of them.
It's become more common for owners to stay on for a while.
You have to if you do a quotation. You can't sell 100 percent.
I don't think that has ever happened. I don't know if it is allowed.
Continuity is key. If we sell everything the other shareholders would get nervous.
"EQT are selling everything, then we don't dare to buy."
Is it best to do as you did with Duni for Rune Andersson?
That can be discussed, bringing an investor in beforehand.
I Sweden it's great. But it does not facilitate international sales.
Other countries don't have our tradition of physical shareholders.
In England a board member is not allowed to be dependent on the owners.
Nordic banks think that it's a good thing.
The "syndication desk" in London finds it very complicated.
Then we have to explain to all buyers who the new shareholders are.
One size doesn't fit all.
You did something similar with Nederman, now Gustaf Douglas is a major shareholder.
That is funny, he was one of your strongest critics.
We have made many deals with Gustaf, like the deal with Securitas Direct.
I don't want to comment on Gustaf. Those who know him know what he's like.
Another thing that creates a credibility problem for you...
Is there no opposition to selling companies that are so great?
You say that you build value for the next owner. But why sell something so great?
Sometimes it feels like a shame to sell a great company.
But we can't not sell.
Our assignment is to return our investors' money within 12–13 years.
Per fund, you can juggle the money between funds.
The problem is that they mostly don't have the same investors.
The investors in the fund we are selling from will say:
"How can we be sure that the price is right?"
And the others: "How do we know that we're paying the right price?"
We often have rules that prevent us from making deals between funds in that way.
But you enter expansion capital funds and "save" impossible companies, like Munksjö.
Not our... We have credit funds that buy loans.
Those are just loans. We don't take over companies with our capital or ownership.
We had a fund, "Opportunity", for trying to save badly run companies.
But then we didn't buy from ourselves. That is the closest we've come to that.
But Dometic went to another venture capitalist, then you took them on again.
It was taken over by the banks who wanted to find new owners.
Then we thought: "We know and like the company."
"Let's take care of it for a few more years until a likely quotation."
You did such a great job, then the banks took it over. Was that due to 2008?
We developed Dometic very well. Then we sold to another venture capitalist firm–
–that maybe didn't do as well. That was when the banks took it over.
That was a British based private equity fund.
–What about Thule? –That was the same thing.
We bought Eldon and developed Thule. Then Thule was bought by a British fund.
Candover, then they sold to Nordic Capitol.
They paid a bit much and didn't run the company... It didn't go as they hoped.
They made a deal with the banks to keep developing the company.
Thule was a well–functioning company. We did the same thing with Sunnytech.
Let's return to the stock market.
You were part of a big discussion group in the Stockholm Stock Exchange.
People say that you were very active in it.
Can you tell us about that work? What should the stock exchange do?
We discussed the quotation process a lot.
That's one part of...
...the regulations that needs overseeing for a more competitive stock exchange.
There are still parts of the regulatory model that don't work well, unfortunately.
That might be partly due to...
The board members of these companies are often agents to the owners.
They aren't owners themselves.
I'm not sure that they have the right incentive to develop them and take risks.
You don't make good profits without taking risks.
Without a clear assignment to take risks, an owners' representative–
–might avoid risks and focus on that avoidance.
They might fill the board with committees and people who are averted to risks.
–That can affect companies' development. –Can the stock exchange rectify this?
There are parts of the code that could be worth pondering.
I don't understand the motive for independent members.
It stems from a more Anglo-Saxon governance tradition that is unlike ours.
Many other parts of it are very good. The nomination committees work very well.
They might not be necessary in companies with a clear owner.
But one should make sure that those in charge of the companies–
–have the right assignment, to develop the company.
They should spend more time doing that than reducing the risks.
Another thing that I've thought about... You say that our job is to take risks.
But I see others as more of venture capitalists.
Creandum and Northstone, they get involved at an earlier stage.
They have managed to get involved with incredible investments, like Spotify.
Has that ship sailed for you?
That is a different strategy.
I worked with venture in the 80's within the health care sector.
It's very difficult. They have trouble getting a good return on their funds.
The model is much harder.
We do work with investments in technology, but at a later stage.
Our strategy is that all the companies we own should develop well.
In a venture portfolio with 15 companies, five can go bankrupt, that's no problem.
It's a different model and we try to help them as much as we can.
Together we create good conditions for that part of the value chain as well.
That works less well today than wanted, investments at earlier stages.
Partly because we don't have the kind of help that other countries have.
Like business angels, tax exemptions, deductions for venture capitalists–
–that makes it less risky to invest at earlier stages.
It is a problem and we're not there yet.
Those who are do a great job. I would like to see more of them.
Regarding your investments you say that your returns are due to–
–operational improvements in the companies.
–But how much is due to interest levels? –A lot, but I can't separate it.
Everyone worries about venture capitalists have made too much money.
The conditions have been very good.
In a more normalized market the returns won't be at this level.
Is there such a thing? What do you think of the quantitative exemptions?
I'm no market economist. But the risk taking has returned–
–to almost uncomfortable levels.
–That must be good for you? –I'm thinking more of loans than capital.
If you follow the high yield market...
There is a lot of capital looking for returns.
So the risk premium, the price of risk, has gone down a lot.
You talked about the short term, but even in the long term–
–venture capitalism has had great conditions, which created the high yields.
In a normalized state the returns won't be that high.
When will a normalized state come?
We are much closer one now than we've been before.
Is that why you invest in infrastructure even if there is a monopoly?
One of our companies work in a monopoly-like...
It's not a monopoly, I'm referring to Swedegas.
The deliver gas, but gas is not the only energy source, so it's not a monopoly.
It's a monopoly in the short run.
We saw a business opportunity with many assets of a kind–
–that will need new owners as the public sector has to prioritize.
There are a lot of pension administrators who wants to invest in infrastructure.
They can't quite find the way on their own, so we can facilitate that.
You invest in many different sectors, but have your own infrastructure funds.
–Are your demands on them different? –Yes, since they are more predictable.
The investors know that. There are categories...but we won't go into that.
Next year you celebrate 20 years at EQT.
Have they stopped asking if you're going to become CEO of Investor?
–How will you celebrate? –We are so spread out around the world.
We'll see how we do it, but there will be some celebration.
What deal are you most pleased with?
The deal that gave us the best return–
–with very little effort from us, was Tognum in Germany.
A good deal, but we didn't do much with the company, we didn't own it for long.
I'm very proud of Duni. The return on the deal wasn't great.
–But we changed the company a lot. –You worked on it for a long time.
Ten years for almost no yield, but the company does well now.
That's my passion, creating better companies.
Whether in the educational sector, health care, broadband or IP-Only–
–where we try to create a better structure for broadband access.
–So that is what makes you happy? –Yes, that gives me a kick.
Neither your name nor your accent is common around Stureplan.
What's it like to be named Conni in the conservative finance industry?
It hasn't been a problem, really. A few journalists found it funny to joke about.
When I got to Investor my career took off.
There it became a point of strength not to be like everyone else.
They were quite similar and I was a bit different.
I was a help rather than a hindrance.
–Thank you very much for coming, Conni. –Thank you.
If you want English subtitles, press ”T” at the bottom of the video player.
Conni Jonsson, managing partner and chairman of the board at EQT, talks about EQT, investments, the stock exchange and the future of Private Equity.
If you want to see the interview with Swedish subtitles, click here.