Struggling 3i fund has 'weeks' left to deploy dry powder

UK-listed private equity group 3i has 'weeks, maybe months' left to turn around its struggling Eurofund V, a challenge many GPs will soon face as investment periods on boom year vintage funds begin to expire.

3i has little breathing room left on its struggling Eurofund V to deploy dry powder and return to profit. 

 The €5 billion Eurofund V has “a few weeks, maybe months” left to complete investments, said a source close to the firm. 

Once the fund's investment period closes this month, 3i will only be allowed to pursue deals currently “in the pipeline”, according to one of 3i's LPs. Limited partnership agreements often include provisions allowing GPs to complete deals in advanced stages of due diligence, even after an investment period expires. 

As funds raised during the industry's golden years creep closer to similar investment deadlines, the challenge will be faced by a growing number of fund managers. 

As of March 2011, the  2006 buyout fund was 71 percent invested, leaving €1.45 billion in dry powder. As of that date, investors had been left with a 0.8 return on their commitments, according to the firm’s annual report.

3i is due to release its half-year results on Thursday this week. Shareholders have expressed displeasure at the group’s flagging share price in recent months – it also fell out of the FTSE 100 in September for the second time in three years. In its results, 3i is expected to announce a dividend in a bid to placate them, although some had instead lobbied the group to announce share buy-backs instead.

Michael Queen, the group’s chief executive, said during a September update call that 3i’s portfolio will be marked down further on 30 September compared to 31 March, because of volatile stock markets. He also said deal activity had been stymied by recent market volatility, with owners reluctant to sell their companies in an uncertain economy – affecting 3i’s ability to put that dry powder to work.

3i’s buyouts division has endured a difficult two years. Star dealmaker Jonathan Russell unexpectedly left the firm in 2010, along with three other senior figures, in the wake of Queen’s decision to consolidate the group’s buyout and growth capital divisions into a single private equity division.

3i declined to comment on current figures, or on how many companies it was allowed to pursue as per the agreement.