A Storm Investors Can’t Hide From Is Brewing, EQT Partner Says

The biggest Nordic buyout fund is turning to the most stable industries to protect itself from a market upheaval it says is coming.

Thomas von Koch, who runs EQT Partners AB from Stockholm, says that with central banks needing to unwind their balance sheets and political risks on the rise, markets look like they’re headed for a sizable shock. And the in-tandem movement of different asset classes means there’s basically nowhere for investors to hide, he said.

Read more: These are the elections to care about after France

EQT is doing what it can to prepare its portfolio of companies “because the storm will come,” the managing partner said in an interview from the fund’s head office in Sweden’s capital. “There’s a tornado warning and we’re in the prairies of the Midwest. We just need to prepare for when it strikes us.”

Von Koch, who also voiced serious concerns about Sweden’s investment climate as private equity partners there face considerably higher tax bills, says asset values are unnervingly high. A lot of buying is debt-funded and there are too many potential disruptions ahead, he said.

Read more: Swedish buyout funds are in shock after tax ruling

Von Koch cites historically big balance sheets at the Federal Reserve, the European Central Bank and the Bank of Japan, all of which will need to be unwound at some point, sucking cash out of the world’s biggest economies. He also worries that markets will turn if U.S. President Donald Trump fails to get any meaningful legislation through Congress.

“When the change man can’t change anything, when he’s stuck in Washington like everybody else,” then there’s a risk that the “business community turns on Trump,” von Koch said. “That would be an interesting event.”

Read more: Obamacare repeal in the House faces hurdles in the Senate

It’s not all doom and gloom. Von Koch, who correctly predicted Britain’s exit from the European Union and Trump’s election win, says the the French election left him “more optimistic about Europe than I’ve been for a while.”

Read more: Macron pledges to unify France after defeating Le Pen

The CEO says private equity can outperform other investors because it can directly influence the way its portfolio companies are run. EQT is hiring more tech-savvy people to digitize all corners of its empire, which von Koch says is crucial to staying agile and surviving market ups and downs. The fund’s employees are also expected to be up on the latest, when it comes to technology and its workplace benefits.

"We’re drinking our own Kool Aid,” von Koch said. "If we’re telling everyone else to become agile we need to start with ourselves."

Among the stable industries that EQT likes are broadband infrastructure and healthcare services. Healthcare “needs to be reformed,” von Koch says, “and it can’t be done without the private sector.” In October last year, EQT bought Press Ganey, which makes analytics tools for health care companies, in a $2.35 billion deal.

EQT (Scandinavia’s biggest buyout fund, which was co-founded by the Wallenberg family’s Investor AB) invests in unlisted companies, in real estate and infrastructure, and in credit. It has raised about 35 billion euros ($38 billion) in funds, 22 billion euros of which is invested in portfolio companies across the globe. Of late, EQT has been inundated with cash as institutional investors, pension funds in particular, turn to private equity to help generate extra returns.

But von Koch says investors need to start adjusting their expectations. “Let’s be honest, the returns must come down,” he said. “The capital raising in our industry is exuberant.”

He says that if a stock market crash comes, the abundance of capital could quickly evaporate.

“The dry-up of capital to our industry could happen in a month,” von Koch said. “We are in a very shaky place, and nobody has taken any account of it when it comes to asset pricing. It’s just a bonanza.”

Before it's here, it's on the Bloomberg Terminal.