3i cost-cutting drive £11m ahead of schedule

During a conference call 3i's chief executive Simon Borrows said it had been an ‘excellent year for realisations’ - but blamed 'pretty fruity' prices for 3i's lack of investment activity.

3i Group reduced its debt by 44 percent in its last financial year, after successfully cutting more than £50 million in costs as part of its ongoing restructuring efforts.

Simon
Borrows.

In a conference call following the publication of its annual results on Thursday, chief executive Simon Borrows said 3i had exceeded its cost and debt reduction target during 2012. “We targeted annualised cost savings of £40 million but we actually cut £51 million, which is 28 percent ahead of our target,” he said. 

The London-listed group also cut its gross debt to £917 million as of 30 April 2013, which is a 44 percent reduction from the £1.6 billion figure at 31 March 2012, it stated in its results announcement. 

“Our balance sheet today is a lot stronger, with gross debt substantially reduced and gearing down to 11 percent. Our NAV of 311 pence is up 11 percent over the period,” he added. 

3i has been busy on the exit front in recent months, having divested seven businesses since the start of 2013. “It has been an excellent year for realisations. We have generated £565 million from private equity, [with] an uplift of 49 percent over book value and a money multiple of 2.1x,” Borrows said. 

In recent months, we came close to two transactions in Europe – in both cases the prices got pretty fruity, and we decided we would pass.

Simon Borrows

On the acquisition side, however, it has been a very quiet year for 3i. Borrows put this down to “a quiet M&A market”, adding: “In recent months, we came close to two transactions in Europe – in both cases the prices got pretty fruity, and we decided we would pass. The number and quality of potential investments is growing, but pricing is still an issue in Europe; there are lots of people with cash in private equity and lots of corporates with cash,” he said. 

In the coming year, 3i plans to “realise fully the benefits of our private equity asset management initiatives, continue to grow debt management and infrastructure third party business [and] look for new investments in private equity using both our proprietary capital and third party co-investments,” Borrows said. 

The firm also said that it has set up a number of co-investment agreements with LPs across Northern Europe. “One of these is with a large sovereign wealth fund and the other is with a major UK institution, both of which have been long-term investors with 3i in the past and are keen to continue investing through our core team,” he said, indicating that similar co-investment agreements with other LPs may be added to that. In these structures, “deal fees, management fees and carry to the team [are] very close to the investment economics that you would receive in a fund. It’s a good interim step for us,” he said.  

Borrows has admitted in recent months he doesn’t see the firm raising a fund for several years. 3i’s Eurofund V, a €5 billion 2006 vintage is currently valued below cost, according to LP sources. 

It is nearly a year since Simon Borrows became chief executive at 3i and announced a major restructuring process. Since then, the firm has cut headcount by 168 people and has closed six offices.   

At 17.30 GMT, 3i shares were trading at 345.80p, down 17.6p, giving the company a market capitalisation of £3.36 billion. It continues to be one of the few listed private equity stocks trading at a premium to net asset value, currently 311p per share.