3i has sold its remaining stake in Encon, a leading specialist distributor of insulation products to Wolseley plc, a major provider of heating and plumbing supplies, in a deal worth €210m.

Based in Wetherby, West Yorkshire, Encon is the second largest specialist insulation distributor in the UK, supplying insulation, dry wall and related products to the construction industry. The sale - which involved Encon's distribution and contracting businesses - was a great result for management and 3i. 3i originally invested €27m in the two businesses and made €158m on exit. This represents a money multiple of 5.8x and an IRR of 30% over eight years.

Currently the business operates from 22 depots in 18 locations and has a turnover of €288m. The business has grown substantially in recent years, benefiting from market growth led by government legislation and increased demand for basic insulation products.

Committed to delivering value
3i acquired Encon when it led a secondary management buyout of the business in November 1997. As part of its strategy, 3i worked with the management team to build profits across the group. In December 1999 3i introduced a new chairman through its international network. The appointee, Jim Cooper, had a strong background in manufacturing and had worked with 3i on a number of previous transactions. He was also known to be a highly experienced businessman and had worked with 3i on a number of previous transactions. 3i director Ken Beaty also joined the board as a non-executive director.

In 2000, 3i provided a further €3m investment to fund a major capital expenditure programme. Encon's manufacturing division - Superglass - had identified a gap in the insulation market and wanted to produce a product that could provide home insulation for cavity walls. 3i's funds were used to build a manufacturing facility to produce the product. Since the investment, Superglass has been able to generate an additional €5m of profit prior to exit.

In 2003 Encon contracted to sell the manufacturing division to Knauf Insulation but the transaction was locked by the UK Competition Commission. Subsequently, the division was sold to NBGI Private Equity in August 2005 for approximately €55m.

The right time to exit
3i had intended to hold onto the business for three years before pursuing an exit. In 2002, trading conditions were poor and it decided to retain its stake for another year. Beaty says: "We judged the time of our exit very well. It was a brave decision not to sell in 2002, but it proved to be the right thing to do. By 2004 the market had picked up strongly, as we had predicted, and we were able to get good prices for both parts of the business, particularly distribution. Our decision to delay selling the company paid off for both management and 3i."

Douglas McKerracher, CEO, Encon, said: "3i has been a valued investor over the past eight years and has supported the development of the group. I am delighted that the shareholders have been able to realise their value whilst at the same time we look forward to the next stage of the group's development. There are many exciting market opportunities to pursue under Wolseley's ownership."