3i: ‘European valuations higher than in the US’

The London-listed group said it will be selective in making new investments due to the risk of overpaying

Increasing political uncertainty, stagnating growth and high valuations mean it is difficult to find good investment opportunities in Europe, said Simon Borrows, chief executive officer at 3i, during an earnings call on Thursday following the publication of 3i’s half year results.

“We think there’s not a lot on offer generally in Europe of really good quality at the moment. As a result of that, multiples are being squeezed up quite aggressively. We believe that Europe pricing is higher than in North America.”

But, 3i has recently been active on both sides of the Atlantic. Earlier this month, 3i acquired a majority stake in Ohio-headquartered Q Holding, a manufacturer of moulded rubber and silicone components, for $160 million. In October, the group agreed to buy a majority stake in CHRIST, a German jewellery company that was previously part of Advent International-owned Douglas Holdings for approximately €214 million.

“We continue to seek new investment opportunities, but we recognise the increasing political uncertainty and stagnating growth in Europe and are mindful of the risks of over-paying for new investments in this environment,” said Borrows.

With multiples high Borrows said 3i will continue to capitalise on realisation opportunities. During the period up to 30 September 2014, 3i recorded a “robust performance underpinned by good flow of realisations and [a] strong balance sheet”, the group said. Realisations and refinancing proceeds were £324 million (€410 million, $510 million). 3i booked further proceeds of £218 million since the period ended.

Yet, despite delivering on the realisation front, 3i is not thinking about raising a new Europe fund yet, Borrows said. “We are still in the process of rebuilding our track-record. I think we are doing a good job of that; we are getting some nice exit multiples and there’s a meaningful step forward in the returns of Euro Fund V.

“In truth, we are raising a lot more cash from realisations than we see as good investment opportunity so we don’t need third party money. We have a lot more capacity on our balance sheet and we have a lot of realisations to come in the second half. [Fundraising] is not top of the priority list of what we are looking at, at the moment.”

However, 3i made the CHRIST investment using capital from its €5 billion Eurofund V, a vehicle which was approximately 90 percent deployed as of March, a source told PEI at the time. The fund’s investment period had already run out by December 2011, but 3i has been given permission from LPs to use equity from this vehicle.

On Thursday at 10.10 GMT, 3i shares were 407.70 pence up 1.37 percent, giving the group a market capitalisation of £3,963.64 million.