3i to explore secondaries opportunities

The European venture capital firm wants to exploit its balance sheet and investment management infrastructure by moving into the burgeoning secondaries market.

3i, the European venture capital firm which last week reported a £700m write-down on its own portfolio, is considering plans to move into the potentially lucrative secondaries and portfolio management sectors. Despite reducing its workforce by 17 per cent last year, the firm still has a large, fixed-cost network with the capacity to take on a larger portfolio. The firm would also like to make greater use of its balance sheet, which at the end of September stood at just under £4bn.

 

Plans being mooted by the firm include managing the sale process of private equity portfolios owned by banks and corporates looking to exit from the asset class. The firm is also hoping to explore opportunities in the secondaries market, currently dominated by a handful of leading players such as Coller Capital, Lexington Partners and fund of fund investor HarbourVest Partners which recently said it would acquire secondary portfolios with its recently-closed $2.8bn fund. In a statement accompanying its interim results for the six-month period to September 30, the firm said: “Within the venture capital industry, we expect some consolidation and may, in consequence, see opportunities to manage more investments.”

 

3i aims to use its investment management network, which has seen a 30 per cent decline on investment volume in 2002, to manage portfolios and oversee the sale process on behalf of financial institutions and corporates. In return, the firm will charge a fee and share of the profits. The firm will also offer to acquire portfolios at reduced prices from struggling businesses looking for a rapid sale of their private equity interests.  

 

A number of investment divisions of leading financial groups have recently signalled their intention to wind down or end their activity in private equity and venture capital investment. General Electric, until recently one of the biggest corporate venture capital investors, announced plans to wind down its $3bn GE Equity division in late October. At the time a spokesperson for the firm declined to comment on GE’s disposal strategy, saying only that the firm was “looking to extract maximum value from the divestment process, which could take several years to complete.”

 

Secondary portfolio acquisitions are rarely publicised, although recent deals have included US firm Paul Capital Partners' acquisition of a portfolio of venture capital investments from Inversiones Ibersuizas. In September, Pantheon Ventures, the global fund-of-funds manager completed a secondary acquisition in the US, when it paid $11m for a controlling stake in Quantum Technology Ventures, a Californian corporate venture subsidiary of struggling Quantum Corp.

 

3i chief executive Brian Larcombe had held “some conversations” with companies about the possibility of managing their venture capital holdings, although no mandates have yet been agreed. Speaking to UK newspaper The Times, he said: “A number of companies and financial institutions are finding it difficult to maintain their private equity businesses and are wondering what to do about it. If they decide to cease new investments and sell off their existing portfolio, the process could still take six or seven years. It would make sense for us to manage the investments because we have a very established and comprehensive infrastructure. And some we could buy.”