3i mulls infrastructure fund

3i, Europe’s largest quoted private equity business, is planning to launch a standalone infrastructure business with a separate fund under Michael Queen its former finance director, the company said at its interim results.

Philip Yea: infrastructure opportunity

Philip Yea, 3i’s chief executive, said the overall results for the six months to 30 September were good with a total return of £374 million or 9.3 percent after the payout of £700 million to shareholders in July. Without that payment total return would have been 11.6 percent and closer to the return of 12.1 percent for the same period last year.

Net asset value for the first six months was 792p per share, toward the upper end of analysts’ expectations. At 8.50 GMT, shares in 3i were trading 0.2% up at 983.5p.

Yea said Queen, who heads 3i’s growth capital business, had made great progress in infrastructure and there was now a “good opportunity to establish infrastructure in a separate vehicle” given strong demand from pension funds for exposure and a requirement for finance in infrastructure projects.

He said an infrastructure fund open to external investors could increase the group’s exposure to the sector to 10 to 15 percent of its total balance sheet, or to as much as £600 million ($1.2 billion; €895 million). At the upper end it would be close to double the present exposure to the sector through its growth capital division.

3i earlier this month was part of the winning consortium in a £2.25 billion bid to take AWG, a UK water utility, private.

3i has promoted Guy Zarzavatdijan, the head of its French business, to take responsibility for growth capital in Europe and to succeed Queen as managing partner in April 2008, allowing Queen to concentrate on building the group’s infrastructure capabilities.

3i’s buyouts division drove performance with an “exceptional figure” of 18.9 percent, which compensated for its venture business reporting a sharp decline in its fortunes and negative return of 8.4 percent compared with a positive contribution of 8.2 percent last year.

This hit was largely a result of 3i’s two largest quoted venture assets CSR, a UK electronics business, and Vonage, a US broadband telephony company, falling £38.5 million in value. Both remain, however, successful investments with the group reporting  internal rates of return for Vonage of 39 percent and for CSR of 59 percent.

3i’s Eurofund V, its buyout fund, is scheduled to close later this month on its hard cap of $5 billion, Yea said, which will allow the company to keep up its pace of investment. It has invested £589 million across all its lines in the six-month period. Buyouts accounted for £236 million with a loss rate of 5 percent of investment cost from Eurofunds III and IV.

3i’s growth capital business, which includes its infrastructure activity to date, exceeded expectations to return 14.2 percent for the period. Asia was the highest growth area for investment with five of the 13 new investments. Yea said: “In view of the growing importance of our Asian opportunity, Chris Rowlands, managing partner, will shortly relocate to Singapore.”

Its international portfolio now accounts for 61 percent of its total portfolio value compared to 42 percent three years ago. This along with the fall in the total number of companies in the portfolio to below 1000 compared to more than 2000 three years ago was one of the most visible indicators of the long-term reshaping of the business Yea said.

Yea welcomed the report this week from the UK regulator, the Financial Services Authority, calling it pragmatic and helpful. He said it endorsed 3i’s view of private equity that it offered “a compelling business model to enhance companies.”

However he agreed the regulator was right to recognise excessive leverage as a risk. He said: “Excessive leverage is a risk which is why we avoid situations when it is just about piling on debt.”