It's rare to find a private equity firm applying the same operational measures that it would use to streamline a portfolio company to its own organisation, but that's exactly what 3i Group plans to do, according to its chief executive Simon Borrows.
Speaking ahead of the group's annual general meeting on Friday, Borrows said the group was “too decentralised and lacks focus and consistency”. He announced plans to create a leaner organisation with a cost base more closely aligned with 3i's income and investment strategy.
We will put our house in order, focus on increasing the flow of realisations… and in time, return to raising third party funds for our private equity business
This will involve 160 redundancies – more than a third of its overall 435-strong employee base. A third of the cuts will affect investment personnel in the private equity business, with the remainder focused on support staff. There are also likely to be a couple of people within the infrastructure division leaving.
It will close offices in Hong Kong, Shanghai, Copenhagen, Milan, Birmingham and Barcelona, and significantly reduce headcount in its Beijing, Madrid, Mumbai, New York and Singapore offices, the group said.
3i acknowledged that while its infrastructure and debt management arms have continued to perform well, the performance of its core private equity operation has been “disappointing”.
The cuts, most of which should be completed by September, are part of a raft of measure designed to “put our house in order”, Borrows said.
3i's share price has tumbled by 30 percent from 271.70p a year ago to 191.30p at the start of trading on Friday morning. The market greeted Borrows' announcement with cautious optimism, with 3i's share price rising 2.6 percent to 196.30p by 1000 GMT.
Simon Borrows, 3i Group
Borrows too struck a note of optimism, saying: “I strongly believe that [3i] has some real competitive strengths that we can build on to deliver long-term value for shareholders and fund investors. At the same time, we face clear challenges. The operating cost base has lagged changes to the investment business and is currently not aligned with the group’s income.
He promised 3i would be “a fitter and more focused organisation capable of delivering top quartile cash investment returns” once the new strategy had been put in place.
“We will re-focus the group’s resources and capital in the regions and sectors where we have demonstrable competitive advantage and see the greatest opportunity. We will ensure a highly selective and consistent approach to new investments. Critically, our focus will be on improving the consistency and discipline of our asset management approach to drive value from our existing portfolio,” he explained.
The cost reduction programme would chop more than £40 million ($62 million; €50 million) from 3i's operating costs, he said.
“However, it is not just about cost reduction,” he continued. “It is also about removing complexity from the organisational structure and changing the culture of the business to be more dynamic and focused on lower volume, higher value-driven business. A leaner organisation will remove bureaucracy and enable faster and more consistent decision making.
We will re-focus the group’s resources and capital in the regions and sectors where we have demonstrable competitive advantage
“While the macro-economic environment remains challenging, I have great confidence in 3i’s people and the intrinsic strengths of the business. We will put our house in order, focus on increasing the flow of realisations at premiums to book value, and in time, return to raising third party funds for our private equity business.”
In the meantime, it will make any new investments (likely to be next year) on a deal-by-deal basis, using its balance sheet supplemented where necessary with co-investors' capital.
3i will focus its private equity efforts on the core northern European markets of Benelux, France, Germany, the Nordic region and the UK, as well as Brazil. The business will be supported by its Asian and US teams, the firm said. It has however suspended new private equity investment in Spain and Asia.
It also plans to reduce its gross debt, a process which has already begun. Since March 31 this year, it has cut debt from £1.62 billion to £1.25 billion. It aims to cut that figure to less than £1 billion by June next year.
Most significantly for investors, 3i has promised to give shareholders a “direct share in the success of the group's realisation activities”. In practice, this means it will provide an aggregate distribution to shareholders, including its annual dividend, of between 15 and 20 percent of gross cash realisation proceeds.