Eyes on growth – Winter 2007
Summer 2007 saw turbulent headlines for the UK economy but Steven Nicholls, UK Head of Growth Capital, is clear: the economic fundamentals are strong and 3i remains confident about investing in ambitious, growth-orientated businesses. Here he shares his thoughts on the economic outlook for the UK.
Reading this summer’s press, it is easy to be left with a strong feeling of uncertainty about UK economic prospects. The summer saw the fifth rise in the base rate in twelve months, coupled with further increases in consumer debt. Then, in August, the global credit crunch hit our shores. Queues formed outside branches of Northern Rock and doubts were raised about the appetite of the markets for further vast, highly-leveraged buyouts along the lines of Alliance Boots. More recently, the proposed Qatari bid for Sainsbury’s has been shelved.
Despite these headlines, 3i’s UK Growth Capital remains a confident investor in ambitious UK businesses. Essentially there are two reasons for our continued positive stance: the fundamentals of the UK economy are still strong, and 3i’s investment strategy focuses on businesses that are well-equipped to handle short-term fluctuations in the economic backdrop, and businesses with a strong international dimension.
A continuing track record of UK economic success
It can be easy to forget that the UK economy has now enjoyed continuous growth for 14 years, an unprecedented achievement in modern times. During that period, we’ve weathered a series of international events that have sent fellow OECD economies into reverse, including the Asian crisis and the dotcom bubble.
Northern Rock may have dominated the headlines during August and September but we must not let this overshadow far more positive news about fundamentals: the economy growing at its fastest pace for three years, factory orders reaching a 12 year high, strong retail sales growth and subdued inflation. Most impressively, our export performance was strong, despite sterling’s continued strength.
A focus on strong growth
With the real economy still healthy, 3i’s appetite to invest in medium-sized, growth-orientated UK businesses is undiminished. Typically we aim to partner with businesses that are not simply aiming for ‘me too’ growth in line with the economy but are outpacing general levels of expansion by a factor of two or more. Often these are businesses that are in a sector or sub-sector where the underlying drivers are so strong that above-trend growth can be expected for the foreseeable future. But that isn’t always the case – many of our most successful investments have been in companies that are using unique propositions to deliver rapid growth in well-established industries. In other words, they’re changing the rules of the game.
As a further protection from short-term fluctuations at home, many of the businesses we partner have a strong international dimension. In particular, we’re using 3i’s network in Asia to help a number of companies benefit from the phenomenal growth in the economies of India and China – typically 8% a year compared to 2% for the average Western economy.
Investing in sound fundamentals
Whilst the impact of the credit crunch can’t be written off, its impact on the businesses that our Growth Capital team supports appears entirely manageable. There’s one very clear reason for this: our investments are equity-led rather than debt-led.
This means that we aim to grow the value of companies by focusing on great business strategies, excellent management teams and sound growth prospects. We want to accelerate these prospects through the value we bring as an aligned partner, driven by our unique network and extensive experience. We do not invest where the rationale simply depends on financial engineering or burdening a company with excessive debt. The value of our approach becomes particularly apparent during a credit crunch, because it leaves companies free to continue focusing on their core business, rather than worrying about debt that has become hard to service or refinance.
We do not expect the crunch to have a significant impact on the prices we pay for our portfolio investments. Because these investments are firmly predicated on the outstanding prospects, they will always command prices that reflect long-term value. In other words, we will continue to pay a fair price for our investments and create value by actively supporting business leaders as they grow their companies.
Recognising outstanding achievement
The continual emergence and growth of fresh young businesses plays a huge part in making the UK a vibrant economic success, and we think it’s important to recognise their achievement and dynamism. That’s why we were delighted to sponsor the Growth Strategy Of The Year Award at the National Business Awards ceremony, which took place at the Grosvenor House Hotel in London on 13 November.
The award candidates all embody the spirit of a model 3i investment: ambitious operators achieving high-double-digit growth, using a deep understanding of their customers to create or transform their market – at home and abroad.
This year’s well-deserved winner of the 3i Award was Gü Chocolate Puds, who have reinvented the dessert market through a well-honed strategy delivered with great flair. Their indulgent puddings have achieved stunning sales growth and a sparkling export performance – and put enough smiles on the faces of their customers to counteract even the gloomiest of newspaper headlines!