3i: A Major Player In Midsize Deals

The British private equity firm is on a lucrative run -- and it's looking further afield

With its cryptic name and founding by the British government in 1945, 3i Group sounds like a branch of Britain's secret service. It's actually a private equity firm that is credited with closing some of the savviest deals in Europe. A recent coup: the sale in May of Netherlands-based phone-directory distributor YBR Group for a tidy $700 million return -- more than four times what it cost 3i. "We had to put a huge amount of effort and resources into delivering that," says Jonathan Russell, 3i's global buyouts head. "But it was well worth it."

That type of deal has all but put to rest 3i's reputation from a few years ago as being little more than a training ground for bigger private equity players. In fact, these days the company is luring talent from larger competitors such as Permira, KKR, and Guy Hands's Terra Firma. That has helped turn 3i -- the name stands for "Investors in Industry" -- into a force to be reckoned with in Europe and allowed it to dabble in overseas markets such as Asia and the U.S. And it comes at a time when global private equity coffers are overflowing. Fund-raising for private equity buyouts worldwide is at a record $116.2 billion this year, according to Private Equity Intelligence in London. That's more than double last year.

3i's bread-and-butter business is midmarket buyouts. Recent deals, most of which involve British and other Western European companies, include the $1.9 billion sale of London-based currency specialist Travelex. That netted 3i, which still retains a 7% share of the company, over $450 million, or 10 times its initial investment. Buyouts like that now account for more than a third of the company's $7.6 billion portfolio, which generates gross returns of nearly 20% a year. Along with buyouts, the company also has lucrative venture investments, such as its $8 million bet on Chinese outdoor advertiser Focus Media Holding Ltd., which just went public on NASDAQ.


But while 3i has an impressive track record of late, industry officials say it will be hard to match in the future. Returns could erode as more private equity money chases fewer deals. "In the current market, their challenge is not to be overpaying for assets and rather to secure investments through innovative thinking," says Warren Scott, private equity partner at KPMG Corporate Finance in London.

3i is no stranger to the pain of boom-and-bust cycles. Like many private equity firms, it suffered after the tech bubble popped five years ago, causing the value of its assets to fall by some $250 million in 2001 and to continue dropping until 2004. But for the year ended in March, 3i reported a 16% return on equity, marking a second year of gains.

What helped kick 3i into overdrive was the arrival of Philip Yea as CEO in July, 2004. Yea, the first outsider to run 3i in at least 20 years, declined to be interviewed. But he is credited with refocusing the company on profitable midsize deals and attracting high-caliber staff with fatter pay packages. Recent additions include four investment bankers in Asia hired away from rivals such as Goldman Sachs Group Inc. and Merrill Lynch & Co. (MER ).

Investors in 3i stock -- it is one of the few private equity firms to be publicly listed -- couldn't be happier. Its shares are up 11.9% this year, better than the 8.2% gain of the FTSE 100 index of large-cap British stocks. 3i is now seeking to widen its footprint in Asia. One of its biggest commitments to date is a $45 million investment in Bombay-based media and entertainment company Nimbus Communications in August (MER ). It's up to Yea's crew of well-compensated dealmakers to prove they can deliver in such far-flung markets as well as at home.

By Laura Cohn in London

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