Keeping the talent

Having reorganised its business activities and the way it incentivises its investment teams, 3i is not only holding on to its staff but luring them away from rivals. By Robert Venes.

London-listed private equity firm 3i recently reported interim results showing realisations of £1.04 billion, almost double the £603 million in the like period of 2004, and a rise in diluted net asset value per share from 574p in 2004 to 677p, an increase of almost 18 percent.

According to the firm, this was not just the result of a strong exit market, but may be partially attributable to a reorganisation in both the way the firm works and rewards its staff begun shortly before the departure of its previous CEO, Brian Larcombe.

Today we’re recruiting people from a whole range of other private equity firms across the world.

Patrick Dunne, communications director, 3i

Patrick Dunne, communications director at 3i, says that following weak financial performance in 2001 and 2002, Larcombe began a series of changes, including refocusing along the business lines of buyouts, growth capital and venture capital rather than on geographic lines. The firm also undertook a radical streamlining of its portfolio (“from almost 3000 companies in 2000 to about 1300 today” according to Dunne).
These changes, built upon by new chief executive Philip Yea after he took the reins in July 2004, also included a change to the way 3i rewards its investment professionals in order to stop them leaving for better remuneration elsewhere.
“Around 2000, we were a net giver of talent to the industry,” says Dunne. “People used to describe 3i as the ‘university of venture capital’, as a lot of people at other firms started at 3i.”
Among the more high-profile departures were those of executives Tom Sweet-Escott, Richard Campin, Hugh Richards and Chris Graham. The quartet left in October 2003 to set up their own private equity firm, London-based mid-market investor Exponent Private Equity.
This was the catalyst for a change in the compensation structure, says Dunne, which has not only helped 3i hold on to its talent, but also to lure new talent – including some from the competition. “From that point through to today, there has been a progressive move to change the compensation basis for people who make investments for 3i,” he adds. “Today we’re recruiting people from a whole range of other private equity firms across the world.”
Perhaps the most significant hire – Yea himself – was recruited from Bahrain-based private equity firm Investcorp. It was the first time 3i had appointed a CEO from outside of the organisation.

Dunne: 3i will be fundraising in 2006

Other new recruits followed. In January of this year, former Rothschilds banker Stephan Kruemmer joined as managing director of 3i’s German activities in Frankfurt. The buyout business was bolstered shortly after by the arrivals of Alan Giddins from SG Corporate & Investment Banking; Andrew Golding, former head of the financial sponsors group at Bank of America Securities; and former Terra Firma Capital Partners managing director, Jennifer Dunstan.
3i also managed to attract two senior hires from European buyout firm Permira. It lured Robert van Goethen to its Benelux office in June following a five-year stint at Permira’s Paris office; and in September, hired Fredrik Roth to its Frankfurt office, after nine years working on Permira’s German buyout activities.
Outside Europe, 3i has concentrated its activities on Asia, opening an office in Mumbai and naming JP Morgan’s former head of India, Anil Ahuja, as managing director and head of its India investments in March. In the summer, two vice presidents and two associates were hired to bolster the Hong Kong office.
While the November results provided no breakdown of individual or team-based payments, 3i execs look to have been well rewarded. The amount payable to investment staff under carried interest schemes and investment performance plans during the six-month period was £26 million (€38 million; $44 million).

Although 3i does not expect to include similar exit performance in next year’s reports – Yea said in a webcast that “we will not expect to see a billion pounds coming in from exits every six months from here to eternity” – 2006 is likely to be a busy year.
Recently, a spokesperson told PEO that a growth capital-focused office in the US will “definitely occur”, and Dunne confirmed that 3i is “in good shape to fund raise [for Eurofund IV] next year in quarter two”, although he added that no figures had yet been decided.

Whatever the following year holds for 3i, the firm now appears to be in better shape to hold onto the quality of staff it needs to carry out its ambitions.