3i Eurofund V back to break-even

The London-listed group says fund performance has improved, but it won’t be raising a new one in the near term.

3i Group generated over £500 million in private equity proceeds in the first half of 2013, the London-listed group said today, helping its flagship private equity fund recover to a 1x multiple of cost.

3i had a “good first half with solid results on the back of the restructuring last year” and is now “generating some real momentum in the business”, chief executive officer Simon Borrows said in an earnings conference call on Thursday morning, revealing that the firm had also beaten its cost-saving target and further reduced gross debt.

“We have produced an excellent run of realisations, the portfolio is performing well and our network of international offers is delivering interesting deal flow,” he said.

3i generated about £528 million from private equity in the six months to 30 September, which is an uplift of 32 percent over the previous quarter’s total. Strong realisations and relatively low levels of investment meant that as of 30 September, 3i had net cash of £28 million, compared to net debt of £335 million on 31 March 2013, Borrows said.

3i has also reduced its gross debt by 46 percent, from over £1.6 billion to £873 million, since 31 March 2012.

The group also exceeded its operating cost savings target of £60 million by March 2014. It also saw a good progression in NAV per share, which climbed to 322 pence at 30 September 2013, up from 311 pence on 31 March 2013.

As a result, 3i plans to pay out more cash to shareholders. “We intend to propose a dividend of 20 pence per share for the full year until 31 March 2014. This includes the annual base dividend of 8.1 pence per share, with the remainder being distributed by a special dividend,” he said. At 10.30am 3i shares were trading at 358.50 pence, down 14.20 pence. Analysts suggested this was maybe due to activist shareholder Edward Bramsom selling down its stake in 3i. 

3i also saw a “very strong recovery” in the performance of its two private equity funds. Eurofund V and its Growth Capital Fund have now recovered to 1x and 1.2x respectively, as of 30 September 2013.

“A couple of years ago, Eurofund V was standing at [approximately] 0.63x cost. So it has come back a long way to be a 1x. We are now encouraged that it will move significantly above that over the next year or two,” Borrows said. 3i’s Eurofund V has made 32 investments, of which 13 have been exited so far.

Borrows said he was particularly hopeful about the investments made since 2011, “which is the team that now runs private equity at 3i, not the team that made the original Eurofund V problem investments … Those investments have done very well so there’s very good momentum in the improvements of both the buyout fund and the growth fund. Our LPs are beginning to get excited about that performance, which is terrific,” he added.

Yet while 3i’s private equity funds have recovered, it is too early for the group to raise a new fund in “the near term”, he said. “I feel we need a period where the current private equity team, under these current arrangements and stewardship, needs to make investments, manage investments and exit investments. They came together at the end of 2010 and started to do this in 2011 – and I think we need a little longer for them to evidence progress .. .before we go forward to the market.”

3i is “very focused on preparations” to raise a fund, “but it’s not something that’s going to happen in the near term – [not] in this financial year or even in the next financial year,” he said.

3i, which has made three investments since 30 September, plans to do at least one or two deals before the end of the financial year. However, Borrows warned that the environment for doing deals is still subdued. “The pipeline is better and more interesting, but it’s still not what I would call robust. I think the volumes in M&A in Europe are still quite depressed. With our international network [we are] finding some interesting opportunities, but it’s against quite a slow market backdrop.”