EQT, Arvindh Kumar - Transformation and Carve Outs at Innovyze (S1, EP.5)

Episode Summary

Executive Summary: EQT’s Arvind Kumar explains how the firm built Innovize by carving out two non-core water-infrastructure software businesses, integrating them into a scaled vertical software platform, and ultimately selling to Autodesk at a rich multiple. The discussion highlights why niche, mission-critical water software is attractive, how EQT used active ownership to fix management, systems, and product issues, and why the firm later refocused on its flagship strategy.

Main Topics: EQT’s platform and investing philosophy (Priority: 5/5): Arvind outlines EQT’s evolution from a Swedish firm to a global private markets platform and explains its local-with-local approach, ESG focus, and active ownership model. Why water infrastructure software was attractive (Priority: 5/5): The transcript makes the case that water utilities are conservative, underdigitized, and facing growing climate-related demand, creating secular tailwinds for specialized modeling software. Carve-outs and deal sourcing (Priority: 5/5): Innovize was assembled through two public-company carve-outs—XP Solutions and Innovize—with EQT leveraging long market diligence, management relationships, and auction discipline to win both deals. Integration and operational transformation (Priority: 5/5): A major part of the value creation came from replacing much of the leadership, redoing ERP systems, rationalizing SKUs, reorganizing sales into pods, and upgrading the product/tech stack. Growth, add-ons, and expansion of TAM (Priority: 4/5): EQT used the platform to acquire add-on Imagine and move from a niche hydraulics market into operational analytics and AI, expanding the addressable market and improving growth. Exit to Autodesk and strategy refocus (Priority: 4/5): The business’s strong growth, margins, and inbound interest led to a strategic sale to Autodesk at about 30x EBITDA, after which EQT chose not to continue the mid-market strategy and instead focus on its flagship fund.

Key Arguments: Niche vertical software tied to mission-critical workflows is attractive because it has high switching costs, sticky revenue, and room for operational improvement. Water utilities are technologically underinvested and face worsening climate-driven problems, so demand for modeling software is secular rather than cyclical. Carve-outs are difficult, especially at sub-scale, because standalone costs, ERP conversion, and management replacement create execution risk. A strong CEO relationship matters in auctions, but EQT still had to pay the clearing price and move quickly to win the deals. Value creation came less from financial engineering and more from active ownership: board engagement, management refresh, product rationalization, and sales redesign. The business could expand beyond a $600 million niche into a larger market by acquiring into operational analytics and AI. High retention and recurring maintenance revenue gave EQT the confidence to make disruptive internal changes without harming top-line performance. The sale process was optimized by sequencing strategics ahead of private equity and selecting a banker with the right sector relationships. EQT ultimately refocused on its flagship strategy because running separate mid-market and flagship approaches was too complex for a still-evolving U.S. platform.

Data Points: EQT assets under management: nearly $100 billion - Described during the overview of EQT’s current scale EQT employees: 1,500 - Firm-wide scale and global footprint EQT offices: 23+ - Global presence across regions XP acquisition price: $49 million - First carve-out, bought from Cardno XP EBITDA multiple: 11x EBITDA - Arvind says the $49 million price was about 11x EBITDA XP EBITDA: about $4 million - Implied profitability at purchase Innovize acquisition price: $270 million - Second carve-out acquired from Stantec Combined purchase price: $319 million - XP plus Innovize total purchase consideration Innovize multiple: ~15x with synergies; ~19x standalone - Described after the acquisition Combined revenue: high $20 millions - Combined XP and Innovize revenue base Combined margin: close to 50% - Combined business profitability Maintenance retention: 97–98% - Recurring revenue stickiness in the installed base Growth after integration: about 20% - Exit growth rate after two years of integration EBITDA margin at exit: 40%+ - Business profitability at sale Seller price received by Autodesk: $1 billion+ plus $35 million tax assets - Strategic sale of Innovize platform Exit valuation: ~30x EBITDA - Autodesk purchase multiple Typical trading multiple referenced: low-to-mid 20s - Comparable businesses were said to trade below the exit multiple Market size of water hydraulics: about $600 million - Size of the original niche market Add-on acquisition Imagine revenue: $3 million - Small tuck-in acquisition sourced through Motherbrain

Pivotal Quotes: "Water utilities are historically and notoriously conservative and relatively slow moving, were very paper-based, had adopted very old technological solutions, or had in-house solutions." — Arvind Kumar: Explaining why the market was underdigitized and ripe for vertical software "We had one failed ERP implementation, and we had to do a second one." — Arvind Kumar: Highlighting the operational complexity of carving out and integrating the businesses "Vertical market software, niche vertical market software is for me the most attractive place because... you have the license to make a lot of tough changes." — Arvind Kumar: Summarizing EQT’s investment thesis and value-creation approach

Implications: The episode shows how value in private equity can come from operational transformation, not just buyout structure. For investors, niche vertical software with sticky revenue and ESG relevance can support aggressive change, high multiples, and strategic exits.