Intouch Autumn/Winter 2007-08

QPE set to enliven undervalued companies

As 3i puts the final touches to its groundbreaking Quoted Private Equity (QPE) team, the response from companies, their shareholders and the broader investment community is proving overwhelmingly positive.

The team, which is targeting listed European mid-market firms, will become the first significant investor to take de facto controlling positions in public companies and apply  private equity skills to achieve returns that rank alongside the best in the asset class. What sets the endeavour apart from activist investing is that 3i will work as insiders with a company’s existing management to deliver long-term earnings growth, rather than campaigning for short-term change from the outside and continuing to trade in the company’s stock.

“The market has come to us and we are working hard to respond to all the approaches,” says Alan MacKay, one of the team’s founding partners. “The response from institutional investors has also been very positive: they absolutely want to be involved as counterparties.” 3i’s QPE team emerged from an idea that struck Philip Yea, 3i’s CEO, after he resigned as Finance Director of Diageo to join Investcorp in 1999. “I felt for a long time that there was a gap in the market which could marry private equity techniques with excellent management in public companies” Yea recalls.



Then, 18 months ago and after seven years carrying the idea, he invited MacKay to draw up a blueprint for what would become the Quoted Private Equity team. “We took a clean sheet of paper and built a first class team that was fit for purpose, a balanced fusion of private equity, public company and capital market experience,” says MacKay.

In January 2007, Bruce Carnegie-Brown, the former chief executive of UK insurance broker Marsh, was appointed to lead the team. “There is a great opportunity to create value by helping under-recognised public companies to accelerate their earnings growth,” he says.

Raising companies’ profiles
Across Europe, even the best midmarket businesses are struggling to place shares, raise capital for expansion and offer investors an exit, because of poor stock liquidity and scant coverage by investment analysts. The team plans to work with them by investing in closely held firms that have low liquidity, a market capitalisation of up to €2bn and potential to double earnings in three to four years. At the time of writing, 3i was talking with a number of management teams and shareholders in the UK and continental Europe. In about half the cases, one or more of the key shareholders is seeking to exit. In the remainder, the companies are considering transformational acquisitions and need significant new capital to realise their goals.

“And we also make space in the capital structure for those who want to stay in for the ride.”

When 3i first unveiled the QPE team at the end of 2006, its plans were still taking shape. At the time there were questions over whether 3i could fund acquisitions off its balance sheet and how it would exercise strategic control from what most assumed would be a minority shareholding.

Taking substantial shareholdings Since then, 3i has raised a fund with the capacity to take a controlling position and, where appropriate, to make general offers for a majority of the equity of a company. “It’s not an activist fund that buys 10% and agitates from the sidelines. Neither is it a buyout fund that acquires 100% of the shares. Our aim is to take a de facto controlling position in the company whilst retaining the company’s listing,” says Segal.



3i Quoted Private Equity Ltd, which is advised by 3i, is an independent fund that joined the London Stock Exchange on 29 June 2007. The vehicle is chaired by the highly regarded David Tyler, the former Chief Financial Officer of GUS. 3i opted to list the fund to assure transparency and liquidity to the fund’s investors, according to MacKay: “The whole venture is a genuine fusion of private equity and the public markets.” The fund has raised around €600m in equity, equating to a €1.5bn war chest once borrowing and share issuance capacity are included.

The team plans to generate returns in line with premium pure private equity returns. What’s more, the opportunity has become even more attractive with the recent collapse of credit markets and the decline in values on quoted equity markets. The QPE model is not as dependent on leverage as Buyout funds for its returns and scarcity of credit capital forces mid-market companies to look at issuing equity to support their growth ambitions. Sliding stock prices will not be disastrous, either. “If the shares collapse we will simply buy more because we believe they will have value,” MacKay explains.

Carnegie-Brown expects that the fund will make ten investments in the next18 months. And with a clear first-mover advantage, 3i is ahead of the pack. “It’s quite a complex model and we have a two-year lead time on those who will follow,” says Carnegie-Brown. For now, 3i stands as the pioneer of an original, transparent and mutually benefici

“These are ambitious companies and management teams which are looking for capital and expertise to grow their businesses more rapidly,” Carnegie- Brown says. “Our investment model calls for us to be fully engaged with the board, to perform extensive due diligence on the company and to align our interests with management’s by developing a detailed, shared value-creation plan.”



The model gives existing investors a chance to remain invested alongside the private equity industry and to share in potential earnings growth. In recent years, institutional investors have been criticised for selling stakes in public companies as part of take-private deals, and for failing to benefit as the firms’ values soared in the hands of their new
private equity owners.

“We provide liquidity to investors who want to sell,” says Richard Segal, the former CEO of PartyGaming and another founding partner of QPE.

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