3i, the limited partner

The global private equity firm is demonstrating a penchant for investing in other firms’ funds. But don’t expect it to launch a fund of funds operation just yet, reports Andy Thomson.

Since Philip Yea was appointed its first external CEO just over a year ago, London-listed global private equity firm 3i has seemingly embraced an “out with the old, in with the new” philosophy in many different ways. Through the refining of its investment strategy, the opening of new offices and the drafting in of new talent to its senior management ranks, the firm has forced people – both inside and outside the organisation – to re-evaluate the 3i brand. But one easily overlooked aspect of this transformation is 3i’s emergence as a limited partner.

In fact, the firm has made three strategic investments in private equity funds over the last year. In the second half of 2004, it invested around $50 million in a Y50 billion ($468 million) fundraising by Japanese mid-market buyout firm MKS Partners. Chris Rowlands, 3i’s head of group markets, told PEO this investment was a “great way to maintain a window into the Japanese market”. To understand this statement a little better one needs to turn the clock back to 2003, when 3i closed its Japanese operations in the face of disappointing deal flow after being resident in the country for a decade. 3i has co-investment rights in the MKS fund which means it can remain active in the country while placing deal sourcing in the hands of an experienced local investor.

We have an office in Shanghai, but we were eager to learn more about investing in China

Chris Rowlands, head of group markets, 3i

In April 2005, the firm made its second commitment as a limited partner when investing $45 million in the second fund being raised by Beijing-based growth capital firm CDH China. The fund, which achieved a first closing on $162 million, is aiming for a final closing on $310 million. Here, says Rowlands, the idea is to supplement 3i’s existing direct investment activities in the country. “We have an office in Shanghai, but we were eager to learn more about investing in China and CDH has a terrific track record,” said Rowlands. “There are mutual advantages to the arrangement for both firms given our strong base and contacts in Europe and CDH’s in China.”

The third investment came when 3i accounted for the entire €100 million raised by Central European investor 3TS Capital Partners for its second fund in May. In this case, the investment arose from a five-year relationship with 3TS, which 3i inherited as part of its acquisition of German venture capital firm Technologieholding in 2000, and which it now runs as a joint venture with Finnish research and development agency SITRA. Rowlands says 3i has been impressed with 3TS’ performance over the years and that the commitment is designed to “beef up” the relationship. It is also designed to strengthen 3i’s presence in the Central and Eastern European region. 3TS has offices in Budapest, Prague and Warsaw.

In each of the three cases, 3i has had quite distinctive reasons for investing and no-one should expect the firm to become a regular addition to the LP ranks: “there’s no plan to be a fund of funds investor,” in Rowlands’ words.  Nor will it be the firm’s standard approach to entering emerging markets. Rowlands points out that in India, the firm has chosen to build its presence solely through direct investments because “we have a great brand awareness there and identified some great people”. He adds that there are no plans at present for any further fund commitments, but neither does he rule out such moves in future should they make strategic sense. In any event, making assumptions about what 3i will or will not do is a dangerous game these days.