3i shifts to third party money

The listed firm’s own balance sheet has until now provided most of its investment capital. This is set to change as the firm looks to raise more third party capital, producing less volatile returns for shareholders.

Listed private equity firm 3i Group is set to change the way it raises funds, committing a smaller portion of capital from its own balance sheet and raising more money from third party investors, the firm said in its latest annual report.

3i has been managing external money since the mid-1990s alongside capital from its own balance sheet. At the moment 51 percent of its investment assets are accounted for by its group balance sheet with the remainder having been raised from third parties.

Michael Queen

For example, 3i’s 2006 mid-market buyout fund, the €5 billion Eurofund V, received €2.8 billion from the firm’s balance sheet.

Over “the next few years” the firm will seek to increase the proportion of third party managed money with the goal of reducing 3i’s commitments to between 25 percent and 33 percent of fund size. Currently the group has outstanding commitments of £1.4 billion (€1.7 billion; $2.3 billion) to its own funds.

This will give 3i “significant advantages in broadening the potential pool of capital available for investment”, said Michael Queen, 3i chief executive, in his annual report introduction. “It will also provide shareholders with less volatile returns as a higher proportion of returns will be in the form of asset management and performance fees,” he added.

3i, which is listed on the London Stock Exchange, recently raised over £730 million via a rights issue, the proceeds of which are to be used to reduce the group’s debt pile.

The firm has also cancelled bonuses for executive directors for 2008 and frozen management salaries, according to the annual report, which also details the fact that 3i laid off 132 employees – around 18 percent of its workforce – and closed a number of smaller offices, resulting in a predicted reduction of around 9 percent to its cost base.