EQT has won the EU's €5bn superfund. Now what?

0:01Hello, this is the Sifted podcast and I'm Freya Pratty, Associate Editor here at Sifted. I'll be hosting these newsroom episodes while Amy, our editor, is on mat leave. On with the pod. This is something of an emergency episode. The competition that captivated European VC closed yesterday. So we'll be chatting all about the winner and what that means for the ecosystem. The European Commission has chosen Swedish investment firm EQT to manage its flagship 5 billion euro scale up fund. The decision follows a closely watched race among the region's top firms. We know, for example, that the UK's Atomico and France's Eurasio both submitted bids.

0:38The€5 billion pot will be Europe's largest, and investors are already thinking through the effect it will have on their portfolios. So joining me to talk about the Scale-Up Fund is Anne Traders, senior reporter. Where are you joining us from, Anne? I am joining you from my kitchen table in my apartment in Berlin. Great. I'm in Sifted HQ, our rather busy office today. So Anne, we've just got off the phone with EQT and we'll talk more about that and what they said later. They were really interesting. But let's start with some background on the fund. Why was the fund set up and where's this money coming from?

1:12Freya Pratty:So the Scale Up Europe fund was essentially set up to fill this so-called growth funding gap in Europe, where essentially Europeans say that we don't have enough growth stage funding to back all of these new critical technologies in areas like quantum and AI and defense. A lot of that money is coming from U.S. investors at this point. And so essentially the fund was set up to fill that gap to help Europeans invest more in European companies. And so currently, at least as of late last year, about 2.5 billion euros have been committed, with about 1 billion of that coming from the European Innovation Council and 1.5 billion coming from private investors, including Novo Holdings, Santander, APG Asset Management, and then the Sweden's Wallenberg family.

2:02The competition to manage the fund kicked off in November. I remember I was in Brussels at the time and there was lots of excitement within the commission and people around it. What were the selection criteria that they'd put out for that manager and who put their hats in the ring?

2:17Freya Pratty:There were a few different criteria they had to meet. For example, they had to have managed at least 500 million euros in assets, two funds. They had to have a team based in Europe, and they also had to have a history of successful exits. And of course, as you can imagine, lots of folks put their hat in the ring to manage this fund. It was quite high profile. And so we saw the likes of Eurasio, Atomico, Vitruvian Partners, Lakestar, a bunch of the big names were all applying to manage this fund. You and I have been following this competition really closely. Talk us through the stages that they went through.

2:51Freya Pratty:In December, the commission officially published their criteria and then VCs applied up until the beginning of February, after which point during, I presume, some deliberations and communication with the firms, there was a shortlist that was drawn up and which was narrowed to Atomico and EQT by April, which we reported on. And then last night, of course, EQT was announced as the winner. So the selection process really got the venture ecosystem talking. What's the market reaction been as the competition went on and perhaps now that there is a winner? There is definitely a lot of speculation and VC rumor mill gossip kind of going on around the process of this fund.

3:32Freya Pratty:I think some investors said, you know, it maybe would be better to have multiple one to two billion euro funds instead of one big one. And other VCs told us that there were some concerns over how the 5 billion euro fund could impact competition in the market, particularly obviously among some of the larger VCs. You know, one of the VCs told us that apparently other investors initially hated this idea until it became clear that it would happen. And then they all rushed to apply for it. A lot of the speculation did kind of center ultimately around EQT. It was kind of initially viewed as something of a front runner fairly early on.

4:09Freya Pratty:And there actually was a little bit of scrutiny around them. So in March, we reported that an anonymous emailer raised some concerns to the EU Startup Commission centered around an EQT advisor, Lars Froland, who worked with the EIC until October last year, where he advised on kind of the early stage concept of the Scalop Fund. but at which point he left the commission and joined EQT that same month as a part-time external advisor. And the commission, to be clear, told us he had never been involved in the fund selection process. And EQT also told us in a statement at the time that the firm strictly adheres to all applicable disclosure and governance rules.

4:48And then EQT were crowned last night. They just told us they found out four minutes before the press release went out, so they didn't get a ton of time to prepare their communication around it. That's right.

4:58Freya Pratty:But I'm curious, Freya, I think from your impression of the conversation, like what do you think is their vision for the fund? They were pretty tight-lipped on naming any, they named some sectors, but they didn't want to name any companies, which I think is probably what we expected. They named quantum, fusion, dual use, defense, applications, and AI, particularly the application layer, were the areas they picked out specifically. They want areas where Europe needs to boost its sovereign capabilities, and they want companies that could potentially look elsewhere, but through this fund will stay in Europe and ideally IPO here.

5:34So they've fleshed out the vision, but they weren't going to be drawn into naming specific companies that they're looking at.

5:41Freya Pratty:But do we have kind of any ideas about what they'll invest in or if they've started to look at companies so far? No names were given. They said they have an active pipeline of more than 100 targets. So it's a big list to go through. They also said that they did put some examples to the commission during the process to say this is a round that's happening at the moment and it's something that we would invest in. They wouldn't tell us what it is. But yeah, there's apparently more than 100 companies that could be looking for this. I think I've had really interesting conversations recently with other VCs saying that they thought people were looking at their portfolios and thinking which companies could be in line for this funding and whether they should wait for it to be announced.

6:21So there's a real buzz around the fund. And I think the first investment will be really interesting. We had a bit of a chat with EQT about what tone they'd want to set with that investment. And they agreed that it does need to be kind of set a tone for the fund. But they also said this isn't about a narrative. It's about being very strategic and ultimately about returns. So I think they need to set a balance between kind of a headline investment and something that shows that the fund can actually make returns as well. Yeah.

6:51Freya Pratty:I guess for us, just to brainstorm, I mean, I think you mentioned earlier the exploration company. I think we think of like maybe a Helsing. Anyone that kind of comes to mind for you that you imagine might be in line for this money? A VC brought up the exploration company to me last week. They said they thought it fitted the criteria of boosting Europe's sovereign capabilities and that it's very, very deep techie. So it fit those two criteria really well. Helsing's come up. Quantum Systems has come up. They're obviously reported to be raising at the moment. I think everybody will be looking at their portfolio and thinking, who can we line up to receive this money?

7:25Because there aren't many growth stage funds in Europe. So it is a real game changer. EQT were interesting. I put to them, do you feel like you're now a kingmaker? And they were not, they didn't love that wording. They were saying it's a big responsibility. We want to work with lots of funds. So I think they know that they are in like a game changing position, but they're also trying to make sure it's viewed as an ecosystem kind of community play as well. Yeah.

7:49Freya Pratty:And they even told us, I remember that, you know, they've already kind of heard from some of the other funds that were in competition with them to run this fund. And it's certainly going to be like a team effort, I think, across other funds as well that even were, you know, going off head to head with them to win the scale up fund. What's the timeline? What do we know about when we can expect to see investments from the fund? Yeah, so they said, you know, they want to start fundraising as soon as possible. So essentially how the fund was structured was that a certain portion would be raised beforehand.

8:19Freya Pratty:And then the fund that was selected to run it would kind of help to finish raising the fund. And so they want to start that as soon as possible. And then they told us that, you know, they would probably start investing by the end of Q3 this year. So around around the autumn. And you snuck in a question on whether there could be a second scale up fund. What was the answer? They said, absolutely. So it seems like this is something that they're thinking about as very much like a long term project. There might be multiple scale up Europe funds in the future. So I think that's definitely part of the plan, or at least that's what they hope.

8:52Great. Well, this is something we'll be watching really closely and reporting on as it starts to make investments. Thank you, Anne, for joining us. Thanks, Freya. Listeners will drop a link to our daily newsletter in the episode description so you can stay up to date with the fund. A deep dive into EQT will be hitting your inboxes by the end of the week. As always, please rate, review and share the podcast. This episode was produced by Maya Durampal-Hornby.