3i shows hunger for debt investment groups

The private equity group 3i is looking to acquire more European debt investment managers after buying £3.7bn ($6bn) of credit funds from Japan’s Mizuho bank this year, its chief executive has said.

Michael Queen told the Financial Times that London-listed 3i had £2.1bn in cash and liquid assets, which could also be used to acquire local private equity groups in countries where it is lacking a presence.

“I do think the debt management industry will consolidate across Europe and that is absolutely part of our strategy,” he said.

“In private equity, acquisitions are very rare and very hard to pull off,” he said. “But the one caveat is there are teams around the world in geographies we might not be in at the moment that could be attractive targets.”

3i has gone almost a decade without buying a rival private equity business.

It bought Sweden’s Atle in 2001 and made an abortive hostile bid for Electra in the UK in 1999. Mr Queen made his comments as 3i reported results showing a total return of £117m in the six months to September, an uplift of 3.8 per cent in shareholder funds.

Since taking over from Philip Yea at the nadir of the financial crisis in early 2009, when 3i was facing concerns over its future, Mr Queen has focused on cutting net debt, which is down from £2bn to £352m at the end of September.

He said the flow of money from investors had dried up for new private equity funds, but added that the £2.1bn of capital on 3i’s balance sheet could finance investments while it raised fresh money from third-party investors.

Having imposed an almost total freeze on fresh investments last year, 3i has made a cautious return to the dealmaking fray by sinking £327m into new deals in the first half, up from £190m in the same period a year ago.

Realisations slowed from £507m to £293m. Mr Queen said that although this was a good time for disposals – with quality assets attracting high prices – he hoped the group would be a net investor over the next six months.

Iain Scouller, analyst at Oriel Securities, said: “We expect increased activity on the realisations side in the months ahead.”

Shares in 3i fell 7.4p to 317.5p on Wednesday, having risen 40 per cent in a year. The interim dividend rises 20 per cent to 1.2p per share. The net asset value per share of 3i’s portfolio grew from 321p to 330p.

● FT Comment

Since Michael Queen took over as chief executive last year with a debt-cutting mission, 3i shares have almost shed their big discount to the net asset value of its portfolio, helped by a rebound in markets and a string of exits. Mr Queen hopes that by shifting from more volatile and risky activities, such as venture capital, into more stable areas, such as infrastructure and debt investing, it can achieve a consistent 15 per cent return on equity. If it does, it may eventually deserve a premium to NAV.

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