The value of clever choices

Roxane McMeeken describes how 3i is aiming to sustain this year’s ‘better-than-expected’ results. Big is beautiful when it comes to private equity houses, argues Jonathan Russell, global head of transactions at 3i. As the only private equity firm in the FTSE 100 index of leading British-based companies, 3i is Europe’s largest venture capital player. It is also a member of the Euro Top 300. But the group will invest in any type of private opportunity that has potential, according to Mr Russell. Currently, the overall portfolio holds more than 2000 companies. 3i manages Ł2bn (E2.8bn) in assets, of which Ł1.5bn is invested. It returned a negative 23.7 per cent for the year to date in May. Technology investments were cited as the cause of the negative result. While this performance is not great, it beats the FTSE All Share’s negative 29.8 per cent for the same period and 3i has seen a rally in its share price in recent weeks after revealing better-than-expected annual results. The firm has a global scope and takes an opportunistic approach. It is currently invested across 20 industry sectors. However, 3i tends to concentrate on two main areas – technology venture capital and, on the private equity side, buyouts and growth companies. These two strategies require very different sets of skills, according to Mr Russell, and 3i’s multiple research and investment specialists operating in three continents are divided along these lines. There are only two things the two divisions have in common. First, a focus on the primary economies of the world: Western Europe, South East Asia and North America. Second, “all private market investments are very illiquid, so for both sides it’s all about making sure the asset selection is excellent”. Beyond this the similarities end. Venture capital 3i’s venture capital division, which is made up of 50 members of staff, takes a global approach to technology. The key areas focused on are health sciences, software and information technology, communications and electronics. A proposal in one country is benchmarked against the state of the market worldwide. “We look for the ones that have a real future,” says Mr Russell. “Our close relationships with large IT corporations give us a very good idea of where the market is going. They allow us to understand where new technologies are going to fit into the broader technology map.” “The product involved has to have significant appeal. It needs to have the potential to fill a space in the next few years.” The companies selected by 3i’s venture capital experts tend to be smaller, lesser-known players. A recent success was the sale of a software firm called Placeware to Microsoft. Placeware provides technology that allows businesses to make presentations on the internet and telephone simultaneously. Buyout business The private equity arm, consisting of 75 members of staff, operates primarily in Europe, including the UK. “The buyout business is focussed on more mature companies, which tend to be locally-driven,” explains Mr Russell. “We see about 70 per cent of the opportunities in this market. Our extensive network of contacts allows us to buy cleverly.” 3i looks for businesses that have “value-growth potential” and management teams capable of delivering it. Mr Russell says, “if we sit down with the team and we’re confident they can do it, beyond that the playing field is literally wide open.” Past successes include buying the budget airline Go from British Airways and selling it to EasyJet. 3i has also bought the homebuilder Fairview and the aircraft building business of Swissair from the firm’s administrators. The firm generally targets returns “in the late teens”, over 10-15 years. Mr Russell places 3i’s better-than-expected annual results down to the strength and size of the business. “This is a people business. It’s about having people that make good calls. We have terrific people with long experience. We also have excellent access to opportunities due to our large size.” He adds, “this is an exciting place to work everyday. We are looking at new opportunities all the time and have the right skills to pick the best ones. That’s a powerful cocktail”.

Three top targets 3i’s objective is to achieve a leading position in each of the venture capital markets in which it operates:

• Europe: UK – maintain leading market position; Continent – build to 30 per cent plus of portfolio by 2006
• US: Build to 10 per cent plus of portfolio by 2006
• Asia Pacific: Build to 5 per cent plus of portfolio by 2006

'Our close relationships with large IT corporations give us a very good idea of where the market is going'
Jonathan Russell, 3i