3i’s Queen: Capital overhang to last 18 months

3i will use a ‘very conservative funding model’ from now on, said 3i’s Michael Queen, as the firm gears up to start making new investments.

The stockpile of unspent private equity capital waiting to be invested will take 18 months to “burn off” according to Michael Queen, chief executive officer of listed private equity firm 3i Group.

The stack of “dry powder” awaiting deployment is estimated to total around $490 billion globally, says fund administration firm State Street. As many private equity funds’ investment periods draw to their end, this large pool of private equity capital needs to be spent and this is resulting in highly motivated private equity buyers and competitive auction processes.

Michael Queen

“A lot of deals are so brutally competitive that unless you have real insight into the company before it comes to market, you haven’t got a prayer. And if you do win it, you had better worry,” said Queen.

Queen was talking at a press lunch Thursday following the release of the London-listed group’s annual results.

3i reported an increased net asset value of 321 pence per share – up 15 percent, reduced operational expenses and a strong cash position. Over the past 12 months the group, which is the UK’s oldest private equity firm, has been working to strengthen its balance sheet. A series of measures including cost cutting, a rights issue and asset sales have reduced the group’s net debt to £258 million from £1.9 billion in 2009.

“Looking forward we will operate a very conservative funding model,” said Queen, adding that future returns will come from underlying returns from portfolio company improvement rather than balance sheet leverage.

Looking forward we will operate a very conservative funding model.

Michael Queen

Following a period of vastly reduced investment activity – the firm invested £386 million and realised £1.4 billion of sales in the last year – the firm is now preparing once more to invest. “We can now go out and be very active,” said Queen, referring to the firms £2.7 billion of liquidity and additional dry powder in its buyout and growth capital funds.

He also, however, sounded a note of caution on the investment environment. As well as the intense competition for assets, there is uncertainty surrounding the macro environment as governments tackle fiscal deficits and unwind quantitative easing programmes.

And while the debt markets are slowly coming back, said Queen, there is a risk they could weaken given the capital pressures on the banks. “Banking may become more difficult. We are working on the basis that the market for refinancing won’t be there for some time,” he said.

3i is also looking to expand its operations in Mumbai and Beijing, said Queen.

3i’s share price rose 6 percent on Thursday to 284 pence from 267 pence. It has since dropped to 277 pence at press time.