eQ - The most boring money machine

Stocks
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I was already waiting for Sauli’s comment on eQ’s announcement. This is indeed a great change in the right direction, and eQ got to puff out its chest as an industry pioneer:

“Our goal is to improve transparency, openness, and comparability, and we hope that such an overview will become the standard for financial reporting of Finnish real estate funds in the future. Our clientele consists mainly of institutional investors, but we also have smaller investors as clients. We want information to be equally available to everyone,” states Jennifer Eloheimo, Head of Real Estate Investments at eQ.

“This reform is a strategic choice for us. Regarding real estate funds, there has also been public discussion about whether regulation should be changed. In our opinion, regulation is sufficient, but funds should report their operations more openly and commensurately. The industry must develop its operations itself, and as a significant player in the field, we want to be at the forefront of development.” Eloheimo continues.

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Did Sauli gain any new insights into fund returns, costs, and assumptions when he got to see deeper into the numbers? The comment (and the recently released YouTube video) only discussed at a general level that it now gives investors a better view into how funds operate.

So, are these numbers a disappointment, meaning the returns don’t match the sales pitches, or is it even a better product than one might assume? Of course, there are also two sides to this in the context of the chain: the investor in the fund itself vs. the fund company’s profitability.

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The reports actually confirmed my previous views. YKK is indeed a well-structured fund and will continue to have good prerequisites for generating reasonable returns for investors. However, what is also important to understand regarding YKK is that the fund generates 3-4% based on cash flow, and a higher return requires appreciation of its assets. Considering the profile of the assets under YKK, this is, in my opinion, a realistic expectation.

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Regarding commercial real estate, the situation is exactly as difficult as I had expected. Due to significant underutilization and higher financing costs, the fund’s cash flow profile is clearly weaker than YKK’s, and these parameters must improve for the fund to generate reasonable returns for investors in the future. The main challenge in occupancy rates is particularly with offices.:office_building:

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The million-dollar question is how the fund’s team will tackle this underutilization problem. If underutilization improves, the fund’s cash flow profile will clearly improve, and this would likely also reduce financing costs.

This underutilization problem in offices is, in my understanding, also part of the reason why the fund has paid redemptions so slowly. There is significant underutilization in offices => they are difficult to sell at book values. On the other hand, the fund cannot sell only other sectors, as otherwise, the portfolio would have too large a weighting in offices. :office_building:

For both funds, the valuation parameters are very reasonable, and I found nothing to criticize in them.

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Our colleague Sale has completed a new comprehensive eQ report during the evening shift, which is available for everyone to read among other comprehensive reports. :slight_smile:

eQ’s recent years have been difficult, and it has suffered badly from real estate fund challenges. However, the bottoming out of earnings is approaching, and we expect a significant improvement in results starting next year. In the short term, however, uncertainty is clearly elevated, and relative to this, the valuation level remains challenging. We reiterate our target price of 11 euros and a reduce recommendation and await an improvement in the risk/reward ratio.

Quoted from the report:

Overall, we expect eQ’s revenue to grow by an average of approximately 5% between 2026-2029. The growth will come entirely from recurring fees in Asset Management (9% growth), as Advium and Investments will no longer grow after the 2026 improvement. Costs will grow slightly slower than revenue, and we forecast operating profit to grow by an average of 7%. The operating profit margin will remain above 50%, which is an excellent level both absolutely and relatively. We note that the historical level of nearly 60% was achieved with exceptionally lean resources and a very strong fee mix (high proportion of real estate funds). Therefore, we find it difficult to see the company reaching similar levels without significantly higher performance fees.

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Thanks for the report.

How do you, @Sauli_Vilen, think that pursuing potential international growth would affect good cost efficiency?

I would argue that eQ has remained this efficient precisely because it has been able to keep both its customer base and its fund structures very straightforward and thus scalable. International sales inevitably require not only an international sales team (which is not cheap to build) but also structures suitable for international investors. It’s easy to say that we sell a good product to international clients, but their view of a good product can be quite different, and it probably doesn’t include a Finnish fund structure, at least not in its simple form.

At a minimum, a Luxembourg structure or similar would be needed, as with other Finnish peers. Or if they were to heavily target, for example, Swedish investors, then some local structure (and a distribution partner?) might be necessary. This all requires significant investments in administration in addition to sales efforts, although it can certainly be handled at least partly through partners and service providers – in which case, however, these also take a share of the margin, eroding profitability.

Not to mention that competition in Europe is also next level compared to Finland; if you want to sell fund of funds to institutions there, you have to be better than UBS, Allianz, and a hundred other larger and smaller competitors, who are also already familiar to clients and have all the systems in place. In this race, it might not be enough to have achieved a tenth of a percentage point better return over some period (even though it is a necessary prerequisite), but you also need to be able to offer tax-efficient and familiar structures and good service.

Thus, in pursuing such growth, it’s easy to burn through good profitability with a relatively high risk, at least compared to the current business model. An acquisition in Europe might be a possible way, but that’s where the real risk lies, at least if it’s of a size that genuinely seeks a quick impact on the bottom line. And otherwise, it’s also a long road.

If, on the other hand, we start with the idea of simply selling the current well-functioning model outside of Finland, perhaps through a distribution partner, then I find it very difficult to believe that such sums could be raised in that way that would truly have any significance for eQ’s size. And yet, even a single foreign investor means a change in reporting and customer service language, tax reporting, a distribution partner, or an international sales team…

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And let’s clarify a bit further now, that I am specifically talking about significant sales to foreign investors. Individual investors, perhaps in the tens of millions range, could very well be lured without very big changes to the current model, but that doesn’t really change eQ’s big picture much yet.

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A new comprehensive report on eQ has been prepared again! :open_book: This required an exceptional amount of thought, and I don’t remember an eQ report requiring this much deliberation in a long time. Historically, the eQ case has been very clear, but now the company is undergoing significant changes on their scale. :thought_balloon:

eQ’s last couple of years have been very weak, and earnings have been on a steep decline due to real estate funds. It is illustrative that in our 2022 comprehensive report, we projected an operating profit of over 80 MEUR for 2025, whereas now the actual figure in the forecast remains around ~28 MEUR. What has happened in the meantime? The era of zero interest rates ended, and real estate funds in Finland plunged into crisis. In addition, PE has also faced headwinds due to weaker sales and especially deferred performance fees. Against this background, it’s no surprise that the stock has halved since August 2022. :sled: :chart_decreasing:

eQ is currently undergoing major changes, and one could say the company is in a kind of “reset.” A significant number of new personnel have been hired on eQ’s scale, and there’s a clear sense of drive in their work. Regarding the strategy, the steps are quite clear in my opinion, and I expect expansion both in the customer base and on the product side. :world_map:

In the short term, the stock’s risk level is clearly elevated in my opinion, and the following factors contribute to it: :police_car_light:

  1. The volume of redemptions from real estate funds, which now determines the depth of the current earnings trough. :office_building:

  2. The scale of performance fees from PE funds. These are finally starting to come in as cash flow, but there is clear uncertainty regarding their scale. If the fees are what the company itself indicates, then the stock’s valuation picture is clearly more attractive than it is currently. :money_bag:

  3. The turnaround in new sales of PE funds. New sales of PE funds have been declining for the past couple of years. Although the level is still quite okay, sales should start to grow robustly from here for management fees to turn to growth. Next year will be a big acid test, as the company is simultaneously raising four PE products, and significantly more volume should be achieved. :chart_increasing:

  4. What kind of strategy will ultimately be published? Although we have a strong understanding of the upcoming strategy, there is always uncertainty associated with it.

Relative to the elevated risks, a P/E of 21x is not particularly attractive. Of course, the valuation will correct to a clearly better level next year (P/E 16x) with robust earnings growth, but even then, there isn’t significant upside potential. On the other hand, I want to remind investors that eQ is still a very high-quality company. If the implementation of the strategy leads to results faster than our expectations and the company also receives tailwinds from the market (especially from real estate), growth would be more rapid than our forecasts. Due to the company’s tremendous cost efficiency, this growth would be highly profitable, and earnings multiples would quickly become significantly more attractive. As uncertainty dissipates and the predictability of earnings growth improves, the company should again be valued with high multiples. In this scenario, the current share price would offer a good buying opportunity. However, I am not ready to lean on this myself and want to see how those risks dissipate. In the next 6 months, we will be much smarter regarding these matters.

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Excellent reflection! Let’s break down your arguments a bit and start with sales costs. If we consider that the company would hire, say, 5 people for international sales and their costs would be 400k/year, that would mean 2m/year, or about a 7% reduction in profit. A 5-person team would already be very large, and this scale would naturally not be pursued without some evidence of interest. With this hypothetical 5 people, I merely tried to emphasize the scale. If, on the other hand, placement agents are used, they take a certain percentage of ongoing fees. So, I don’t really see the financial investments being particularly large, and this growth should scale nicely.

Lux structures. We agree on this; international sales are easier for Lux structures. Of course, for example, Evli has successfully done this also with domestic products, but even Evli has admitted that the volume would have been better with Lux structures. In my opinion, as part of international investments, the company should also establish Lux structures and related support functions. In monetary terms, these investments are not very large according to my understanding, but they do take time and effort.

Are eQ’s products competitive enough? Now we’re at the heart of the matter, my friend! In Finland, competition in the PE sector has been limited, and buyers have had a strong desire to increase their PE allocations. Additionally, in Finland, eQ has had an extremely strong brand and a strong sales team (they know the customers, etc.). In international markets, you have none of this. In international markets, eQ must follow the same recipe as Mandatum/Evli/Aktia/Taaleri, as a boutique asset manager with certain very high-quality products. In my opinion, an international breakthrough would be a very strong indication of the quality of the company’s products. Currently, the probability of success in international markets is very difficult to assess, and I have not loaded any strong expectations for it into my sales forecasts. I also remind you that building international sales from scratch is slow. Customers don’t know you beforehand and make large one-time investments, so sales cycles can last considerably long. It’s not at all impossible that you get on the radar of institution X during the first year, and after that, institution X follows your development for 1-2 years before they are possibly ready to make an investment in your fund (a long due diligence process may still be involved with these investments).

So, in summary, no quick impact on profit will be gained from here; rather, this is more about building a foundation for growth towards the end of the decade.

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Iikka and Sale are waiting for their turn on the bench, or how did that go again :slight_smile:

Topics:

00:00 Introduction
00:44 eQ’s results have come down
02:22 What can be expected in the future?
06:29 eQ’s positioning in the competitive landscape
08:13 Was eQ a one-trick pony?
11:30 Why are we not on the ‘add’ side?

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CFO of Real Estate Business Aku Väliaho spoke about the eQ Community Properties fund at the Real Estate Evening. :slight_smile:

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I shouldn’t consider a significant improvement in results due to the Private Equity market picking up as nearly certain:

The valuations of many growth companies have come down in the stock market, and this also pressures PE market valuations. For example, in the Nordics, QT, Admicom, Revenio, Talenom, Novo Nordisk, Ambu, Tomra, Nibe have faced enormous valuation compression, where multiples may have more than halved from earlier levels. Share prices may have fallen 70-80% from their peaks. Thus, it is harder to sell less known businesses if quality can be bought from the stock market at a relatively cheaper price. I acknowledge that the peer group here is completely wrong in relation to PE peers. The purpose is to illustrate what the rise in interest rates did to the average valuation of growth companies. Inderes’ model portfolio is a great example of this: the model portfolio primarily consisted/consists of high P/E growth companies. The consequences have been accordingly in recent years.

Can PE exit multiples be defended in the reality of elevated interest rates and declining stock market valuations?

There is a huge willingness to sell in the PE market. PwC estimates it to be worth a trillion dollars. Will the bottleneck open without having to lower the price level of the assets for sale?

Analyst forecast changes over the last year summarized: down, down, down, down, down, down. It is concerning that this is not just about the 2025 results, but also 2026 and 2027 have decreased on the same scale. It is illustrative that EQ was forecast a year ago to make cumulatively about 150 million in operating profit for 2025-2027. That figure today is about 100 million. Thus, the can has not merely been kicked down the road. The direction of 2026 surprises for EQ is likely downwards.

https://www.marketscreener.com/quote/stock/EQ-OYJ-1412428/consensus-revisions/

Communication from within the industry is also quite grim reading:

“Per Franzén says inability to raise fresh funds may leave many firms only managing existing investments in coming decade”

https://www.ft.com/content/49d2cb79-5e0b-4c71-9258-b3fea4ca70c4

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The most stereotypical private equity (PE) investment targets are small caps in traditional industries. After PE enters, their balance sheets are usually fully leveraged with debt in pursuit of returns.

How attractive and generally interesting does a small cap company from a “boring” market sound in this market, one that cannot pay dividends due to too large a debt load? Market hype is at the complete opposite end: mega cap growth TECH from sectors with strong free cash flows (Nvidia, MSFT, Alphabet, etc.)

Other PEs don’t buy these because they can’t perform their usual financial maneuvers, as the previous PE has already done so. Valuations of comparable companies in the IPO market are already sluggish. With a good dividend yield, one can sell to the public, but that’s not possible for these companies due to debt. It shouldn’t come as a surprise to anyone why the PE market is stuck.

The exit is an interesting question, and how long it will take and what will trigger it? New zero interest rates? Forced sales when the extension of fund lifespans eventually comes to an end? Will it finally be admitted that returns will remain mediocre, below the public stock market?

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PEs often buy targets from other PEs. However, financial engineering doesn’t seem to be the only thing they do in a company.

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PEs often buy targets from other PEs. However, financial maneuvering is probably not the only thing they do in the company.

During a boom, this happened a lot as valuations kept growing, and a new buyer could expect this to continue during their tenure until they sold to the next buyer at an even higher valuation. Now, the PE-to-PE market is very stuck. Valuations and selling expectations have been pushed too high under the funds relative to comparables and the public market, and there is no room even with this balance sheet maneuvering to increase risk (returns), which would be another option.

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eQ continues recruitments in the international market. https://amwatch.com/AMNews/People/article18834064.ece

Here are selected excerpts from the article behind a paywall:

Independent asset manager eQ has hired the UK-based fundraising veteran, Sara Hedberg Chance, to support its international expansion, the company reports in a press release.

“eQ believes Sara’s experience and relationships will provide excellent support for eQ’s international expansion strategy through international distribution partnerships and institutional investor relationships,” the press release reads.

According to Staffan Jåfs, head of private equity at eQ, Sara Hedberg Chance’s “long experience working with Tier-1 Nordic institutional investors is very helpful and is already opening doors for us in Sweden”.

I have to say, I’m not entirely sure which press release is being referred to here. At least I couldn’t find any press release on eQ’s own website or by googling :thinking:

In any case, they have recruited a high-caliber person, and eQ is clearly serious about its international sales. Overall, the company also has a noticeable energetic drive and momentum, it will be very interesting to see what kind of results they achieve next year.

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Sauli is warming up, as eQ will release its Q4 results on Tuesday, Feb 3rd. :slight_smile:

In addition to the operational figures, the focus of the report will be particularly on the announcement of the new strategy, which is expected to provide concrete milestones for returning to a path of earnings growth. Although earnings will return to growth on a quarterly basis from a weak comparison period, the result remains under pressure due to issues in real estate funds. Other points of interest in the report include the development and outlook of performance fees from PE funds, as well as potential comments regarding the situation of the real estate funds. The eQ earnings live stream can be followed on InderesTV starting at 7:50 am.

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Press Release
29 Jan 2026, 11:40 am

eQ has raised 155 million euros for Private Equity funds – Janne Holmia as advisor to the PE team

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Here are Sale’s comments on how eQ raised 155 million euros for its PE funds. :slight_smile:

eQ announced on Thursday that it has raised a total of 155 MEUR for four new private equity and venture capital funds. Fundraising fell somewhat short of our forecasts, but we remind that the fundraising process is only just beginning. Therefore, we see no immediate need for forecast changes. The company has a heavy burden of proof this year, as it needs to get PE fund sales back to brisk growth.

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I read the thread from start to finish while getting to know the company more closely, and there are good observations here on both sides. eQ is at a clear turning point, and the range of possible outcomes for earnings in the coming years seems quite wide, so the risk profile has clearly increased. I have burned my fingers a few times in similar situations, but I am still intrigued by the company’s incredibly high profitability and historical track record of strategic choices and their execution. History is, of course, no guarantee of the future, so one shouldn’t rely too much on that. In any case, it was nice to hear the perspectives of long-term eQ followers on a few things I haven’t managed to clarify for myself.

To what extent are eQ’s open-ended real estate funds products for institutional versus private investors? Is it possible to estimate whether redemptions are purely related to private investors or are institutions also withdrawing their investments? If these funds are also favored by institutions, what distinguishes eQ’s social infrastructure real estate from Titanium’s Care fund in the eyes of institutions? As I understand it, Care (Hoiva) is a pure private investor fund (please correct me if I’m wrong).

With redemptions stuck and their total amount unclear, it is also relevant to ask: to whom would these assets primarily be sold? In a normal situation, probably to other funds (?), but currently, the majority of real estate funds are in “selling mode.” What about pension insurance companies? Global real estate investors?

All of this makes new sales for real estate funds difficult, even when the situation normalizes. Sauli has mentioned several times (and Larma mentioned it in the Q2/2025 interview) that eQ’s funds have sold their properties quite well, or at least tried to be active compared to other similar funds. I wonder if eQ’s funds can gain any kind of advantage from this when capital starts flowing back into domestic real estate funds, or will investors feel that all funds failed equally badly.

I also follow the realization of Private Equity (PE) fund performance fees with interest. Good points have been raised in this thread about the fact that “the air” may not have been let out of the valuations yet, and private equity funds are also in a waiting mode regarding realizations. Significant performance disappointments would naturally not be good, and in the worst-case scenario, both of these growth engines could sputter at the same time.

I have also been pondering the sensibility of the fund-of-funds concept from an institutional investor’s perspective. In a FoF concept, there is one additional layer of management fees to be paid, and visibility into the assets owned by the fund presumably weakens compared to a situation where a manager invests in assets directly. What is the benefit of that structure then? Diversification is likely a significant advantage, i.e., when eQ invests in several funds, the risk associated with an individual manager decreases. It is often said that the differences between a good and a bad manager are huge, so fund-of-funds likely have, on average, better opportunities to get into the best funds than an individual institution due to their ability to pool larger amounts of capital. What does the Finnish institutional field think about this? Many probably invest in both structures (e.g., eQ and CapMan), but it would be interesting if someone could shed light on the nuances related to this.

After all this, it seems essential to question whether eQ’s quality status has permanently weakened in the eyes of fund investors, or if last year’s SFR survey result was merely a temporary hiccup.

As a final point, I also wonder why eQ owns a Corporate Finance business. Does it support asset management in some way? If it doesn’t, why own a cyclical business whose impact on the Group’s figures is very minor?

There are many question marks in the air, and the range of possible scenarios is significant. However, I am considering investing because the company has historically been able to choose the right strategy and provide top-tier products. There are also growth opportunities in the logical expansion of both the customer base and the product offering. It is unlikely that the company will completely wither and die; rather, it’s a question of the baseline from which growth will eventually start and whether now is a good or bad buying opportunity relative to that. Next week’s strategy release is therefore extremely interesting, and its impact and credibility will significantly guide my own investment decision.

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This depends on the investor. For smaller institutions (foundations, pension funds, etc.), it can make a lot of sense to invest in the market through FoFs, as they don’t have enough capital to achieve proper diversification by other means. Nor do they usually have the expertise or resources to evaluate the best managers themselves. Generally speaking, small institutions investing individual millions are not attractive to top international funds, and they often lack access to them (or at least cannot negotiate good terms) — that’s why they need a FoF in between to provide that access. In this regard, the access provided by eQ (and also CapMan) through their partners, especially to the US markets, can be valuable.

On the other hand, if we’re talking about truly large institutions (in Finland, mainly pension insurance companies), they generally have no use for FoFs, as they are capable of investing directly in the funds they want without that extra layer of fees. They might still invest in, for example, emerging markets through partners. At least in the early stages when they are just building the portfolio.

It is likely also typical for smaller institutions to invest directly in domestic/nearby markets, but use FoFs for more unfamiliar markets.

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