3i's Queen remains bearish on 2012 environment

More exits, fewer deals and careful portfolio management in the face of macro uncertainty were the main themes conveyed during 3i's recent earnings call.

After a tempestuous 2011, during which it made significant redundancies, re-shaped its business model and fell out of the FTSE 100 due to a flagging share price, UK-listed 3i Group today signalled that it remained bearish about the market this year in an interim management statement this morning.

Michael Queen, 3i chief executive, said: “We have made a number of important strategic steps to strengthen each of our business lines in the period, including the reorganisation of our private equity business, signing our first investment in Brazil, and the launch of our Credit Opportunities Fund.

We have generated good realisations from the portfolio … although the operating environment is challenging

Michael Queen

“We have also generated good realisations from the portfolio, although, as we said in our November half-year results announcement, the operating environment is challenging given the deterioration in the macroeconomic outlook and continued market uncertainty. Conditions have not improved since then, which has been reflected in a softening in the earnings performance of some of the portfolio over this period.”

3i did not release details of its portfolio companies’ earnings however.

Group finance director Julia Wilson, speaking on a conference call following publication of the statement, warned the environment was unlikely to improve in the near-term. “We expect conditions to remain challenging due to a variety of macroeconomic factors, including the protracted uncertainty over the Eurozone. M&A activity is at an extremely low level, and it’s unclear how long that will continue. That doesn’t mean there aren’t still great businesses out there, but you do need a functioning M&A market to do deals.”

When asked whether the “softening” of portfolio earnings had meant it might need to refinance businesses , Wilson declined to discuss specific companies, but added: “We are always talking to the banks in connection with the leverage levels of our portfolio companies. We are working very closely with our portfolio companies, making sure they take the right steps in this environment.”

We expect conditions to remain challenging

Julia Wilson

3i did however have some cause to celebrate.  Realisations more than tripled in the nine months to 31 December compared to the same period a year earlier, it said in the interim management statement. The £562 million of realisations (up from £168 million in the nine months to 31 December 2010) were almost entirely accounted for by the sale of engine manufacturer MWM Holding, which completed in the final quarter.

Investments in the nine months to 31 December rose slightly to £530 million from £510 in the same period a year earlier, thanks largely to a significant increase in growth capital deals.

The total deployed on new buyout deals fell however, from £436 million to £357 million, in line with Queen’s promise last year to only do deals where the group “could be very sure of what it is buying”.

3i’s cash balance and undrawn commitments rose from £1.68 billion to £1.75 billion as at 31 December, it said, while gross debt from £1.72 billion to £1.66 billion.