3i Group PLC

91 Waterloo Road
London SE1 8XP
United Kingdom
Telephone: +44 20 7928 3131
Fax: +44 20 7928 0058
Web site: http://www.3i.com

Public Company
Incorporated: 1945 as Industrial and Commercial Finance Corporation Limited
Employees: 833
Sales: $480.20 million (2004)
Stock Exchanges: London
Ticker Symbol: III
NAIC: 523999 Miscellaneous Financial Investment Activities

3i Group PLC is one of the leading venture capital groups in Europe and one of only a handful of publicly listed private equity and investment groups in the United Kingdom. Founded in 1945 as a government-inspired initiative to provide investment funding for the United Kingdom's SME (small and medium enterprise) market, 3i has distinguished itself by establishing operations across all major funding areas, ranging from early-stage venture capital to growth capital investment, and including buyouts. Into the mid-2000s, the company's investments average EUR 1.3 billion ($1.6 billion) across 200 or more deals per year. Unlike many of its competitors, which operate small firms of ten people or less, 3i boasts a team of more than 250 investment professionals, backed by a support staff of more than 600 worldwide. The company operates offices in 13 countries. The United Kingdom represents its core market; in the 2000s, however, 3i's European investments topped its U.K. investments for the first time. The United States is also a strategic market, and the company has established a target of boosting its Asian investment portfolio to 5 percent of its overall investments by 2006. As part of this effort, the company began building an investment team in India in 2005, while also beginning preparations to open its first office in China, in Shanghai. 3i Group is listed on the London Stock Exchange and is led by CEO Philip Yea and non-Executive Chairman Baroness Sarah Hogg, who also serves as chairperson of the BBC.

Filling the Capital Gap in the 1940s

Prior to the 1940s, there existed no true venture capital market. As early as the 1930s, in Britain, this situation led to the recognition of a gap in corporate financing among British businesses struggling to cope with the effects of the global depression. While larger companies were able to turn to the country's banks or to the public market for investment capital, the country's smaller and midsized companies faced the banks' reluctance, or even unwillingness, to provide capital. At the same time, these businesses, especially the many small family-owned companies, were too small and unprepared to turn to the public market for funding.

The British government launched a commission, known as the Macmillan committee after its chairman, to investigate the situation. The lack in access to capital funding became known as the Macmillan gap. In the 1940s, the government began working on a proposal to fill the gap, with the Board of Trade and the Treasury coordinating the effort with the Bank of England and the country's clearing banks. If the Board of Trade favored a government-sponsored institution, the Treasury, in conjunction with the Bank of England, insisted on the formation of a body that raised its capital in the private sector. The Bank of England went further, suggesting the new institution be created by the country's five clearing banks, and thus entirely removed from the government. As for the clearing banks, they remained hostile to the idea altogether.

Nonetheless, the discussion led to the creation of two new corporate financing companies in 1945. The first was the Finance Corporation for Industry (FCI), which was set up to provide long-term financing for large-scale businesses. The second, called the Industrial and Commercial Finance Corporation (ICFC), was more directly aimed at filling the MacMillan gap. The ICFC in particular was marked by the disagreements among the various founding members, resulting in the new corporation's independence from the government as well as from the Bank of England and the clearing banks.

The ICFC's mission was to provide funding to small and midsized businesses on a national scale. Despite the corporation's independence, it was nonetheless subjected to funding limits, set at a range between £5,000 and £200,000. The ICFC's independence, however, placed it in a competing situation with the clearing banks, which, with the Bank of England, were also the company's shareholders. Although the clearing banks were expected to support the ICFC's development by providing operational support and by passing on investment opportunities that fell outside of their own sphere of operations, in practice the banks did little to help the ICFC. Indeed, the banks attempted to hamper the company's growth, sending it only hopeless investment cases, and even wooing potential ICFC clients with their own funding offers. The clearing banks also attempted to restrict the ICFC's access to capital and, when loaning to the ICFC, attempted to do so at high interest rates.

The result of the hostility of its own shareholders was that the ICFC gained a strong sense of self-reliance. The need to maintain its own commercial viability obliged the company to build its own risk assessment and evaluation methods, with expertise in evaluating all levels of a potential investment. The ICFC was also adept at attracting business. Two important factors played a role in many customers' decisions. The first was that the ICFC, unlike the banks, did not usually take an active role in its investee companies, including not placing its staff on their boards of directors. The second factor was ICFC's ability to play off small firms' reluctance to turn over an equity stake in their business in exchange for capital funding from a bank. Instead, these firms preferred to turn over equity to the ICFC. In this way, as well, the ICFC was able to share in the successful growth of the companies it supported, which helped to minimize the losses from less successful investments.

Through the 1950s and into the 1960s, the ICFC expanded on a national scale, launching a network of branch offices that eventually reached 14 in number. This network gave the group greater access to local and regional markets. The company's expansion became especially strong after 1959, when it received permission from its bank shareholders to begin raising capital externally. At the same time, the company began adding subsidiary operations, such as the Estate Duties Investment Trust (EDITH), which placed institutional investors in companies faced with the loss of major shareholders.

In 1962, the company, acting on government fears of a growing "technology gap," joined in the creation of Technical Develop Capital (TDC), which targeted technology-based investments. In this way, the ICFC took on the characteristics more commonly associated with the American version of venture capital (which coupled technology investments with handson investment management) then providing financial foundation for the first boom in the U.S. technology market.

Broadening Scope in the 1980s

Yet the vast majority of the ICFC's business lay in less glamorous investments with the nation's small business sector. Many of these relationships were extremely long-term, and the ICFC was credited with laying the foundation for the growth of a strong percentage of the United Kingdom's industry. Yet, as Business Week described the firm, the ICFC "grew into a sprawling bureaucracy with 14 offices responsible for lending in their regions. These regional groups gained a reputation for small, cookie-cutter deals, relying on legions of relatively junior managers to make decisions according to strict guidelines."

The ICFC began broadening its scope in the 1970s. An important moment came when the company acquired its sister corporation, FCI. Unlike ICFC, which had made thousands of deals by the early 1970s, the FCI's long-term, large-scale lending operations had rarely been used. The merged company, now called Finance for Industry (FFI), combined not only the ICFC's focus on the SME market, but also extended its brief to include investment in large corporations as well.

The arrival to power of the Conservative government led by Margaret Thatcher sparked a new era for FFI. The British economy began to grow again in the early 1980s after nearly a decade of economic recession. The resurgent economy, combined with the Thatcher government's support of entrepreneurism, stimulated a boom in the investment market. In response, FFI restructured its operations, adopting a division structure, and changed its name to Investors in Industry (or 3i) in 1983.

By then, 3i had expanded its range of operations to include an important and fast-growing segment of venture capitalism—the buyout market. The company also launched itself onto the increasingly international buyout market by adding its own international operations. In 1982, for example, the company opened an office in Boston. The following year, 3i moved into France, with the opening of its Paris office. By 1986, 3i had added an office in Frankfurt, Germany. The company's international growth culminated in its entry into Italy (Milan) and Spain (Madrid) in 1990.

3i also prepared to launch its own public offering—a rare move among venture capitalists—at the start of the 1990s. As the global economy slipped into recession, however, the company was forced to put off its listing. At the same time, 3i also launched a streamlining of its operations in order to maintain its profitability in the difficult market climate. This led the company to close its U.S. offices.

Company Perspectives:

Our purpose: to provide quoted access to private equity returns.

Our vision: to be the private equity firm of choice; operating on a world-wide scale; producing consistent market-beating returns; acknowledged for our partnership style; and winning through our unparalleled resources.

Global Ambitions in the 2000s

3i at last came to market in 1994, with a listing on the London Stock Exchange. Just two months after its initial public offering, the company joined the prestigious FTSE 100 index. By then, the company had adopted an increasingly international strategy. In 1994, for example, the company launched its first foray into external fund management, launching a £225 million fund in partnership with a number of British, Swiss, U.S., and Pacific Rim investors, targeting the continental European growth businesses market.

By the late 1990s, 3i's interest in continental Europe had become a key part of its aim to transform itself into a leading globally active venture capital group. Part of the company's strategy came through the lack of growth prospects in the United Kingdom. Indeed, in 1999, 3i had attempted to acquire new scale at home when it launched a takeover bid for its chief rival, Electra Investment Trust. That bid was rejected, however, after 3i's CEO publicly acknowledged that its interest in Electra was for its assets, and not its people.

Instead, 3i turned to the overseas market. The company stepped up its investment activities in continental Europe. It also returned to the United States in 1999, establishing new offices on the East and West Coasts. By 2000, the company's portfolio in the United States topped $300 million. The company also made its first entry into the Asian market, opening offices in Hong Kong and Japan.

3i next went on something of a spending spree in order to establish a solid presence on the European continent. In late 2000 and into 2001, the company completed four strategic acquisitions. In Germany, the company acquired Technologieholding, that country's leading specialist in early-stage technology ventures. In Sweden, 3i bought Atle, one of the Scandinavian market's oldest and largest private equity specialists. The company added venture capital and fund management operations in Austria, through the purchase of Bank Austrai TFV High Tech Unternehmens Beteiligung. Then the company returned to Scandinavia, picking up Finland's SFK Finance, which specialized in telecommunications, IT, and environmental technology investments.

Having secured a dominant position in the European venture capital market, 3i turned to the next phase in its global strategy, that of boosting its operations in the Asian region. 3i's strategy called for its Asian investments to top 5 percent of its total portfolio by 2006. The company's Hong Kong office, overseeing the Korean and fast-growing Chinese markets, soon became the focal point for the company's regional growth. In 2003, the company closed its less active Japanese office.

By 2005, 3i began preparation for the next phase in its Asian region expansion, initiating recruiting for personnel to back the launch of an office in India. At the same time, the company announced its intention to open its first office on the Chinese mainland, in Shanghai, at mid-decade. After 60 years in business, 3i remained one of the world's largest venture capital groups.

Principal Subsidiaries

3i Asia Pacific PLC; 3i Corporation (U.S.A.); 3i Deutschland Gesellschaft für Industriebeteiligungen GmbH; 3i Europe PLC; 3i Gestion S.A. (France); 3i Holdings PLC; 3i International Holdings; 3i Investments PLC; 3i Nordic PLC; 3i PLC; Gardens Pension Trustees Limited; Ship Mortgage Finance Company.

Principal Competitors

Candover Investments PLC; CVC Capital Partners Limited; Investcorp S.A.; Electra Investment Trust.

Key Dates:

1945:

The Industrial and Commercial Finance Corporation (ICFC) and the Finance Corporation for Industry (FCI) are established.

1959:

ICFC gains the right to raise capital externally, sparking national growth.

1962:

ICFC enters the technology ventures market with a stake in Technical Develop Capital.

1975:

ICFC and FCI merge and form Finance for Industry.

1982:

The company opens an office in the United States.

1983:

The company changes its name to Investing in Industry (3i) and broadens its scope to include buyouts.

1985:

The company name is formally changed to 3i.

1986:

The company opens an office in Germany.

1990:

The company opens offices in Italy and Spain.

1991:

The U.S. operations are closed.

1994:

A public offering is made on the London Stock Exchange.

1999:

Offices are opened in Japan and Hong Kong and the company re-enters the U.S. market.

2001:

The company completes an acquisition spree, adding four companies in Germany, Austria, Finland, and Sweden

2003:

The company closes the Japanese office.

2005:

The company announces plans to open offices in India and in Shanghai, China.

Further Reading

Bradley, Sandrine, "Private Equity Growth Capital, a New Path for Mid-Caps?," Acquisitions Monthly, July 2003, p. 50.

Campbell, Katharine, "3i Looking for European Buy," Financial Times, May 28, 1999, p. 19.

Coopey, Richard, and Donald Clarke, 3i: Fifty Years of Investing in Industry, Oxford, n.p., 1995.

"More Exits for 3i," Acquisitions Monthly, August 2003, p. 55.

Paisner, Guy, "Compromise," Red Herring, September 15, 2001, p. 50.

Sheahan, Mathew, "3i Says Sayonara to Tokyo Office," Private Equity Week, February 24, 2003, p. 10.

Smart, Victor, "Retooling 3i," Institutional Investor International Edition, October 2002, p. 43.

"This Risk-Taker Is Ready to Roll the Dice," Business Week, July 1, 2002, p. 50.

—M.L. Cohen