3i Eurofund Targets Mid-Market Deals –

LONDON – This year may be remembered as the year when the European private equity pendulum swung away from the mega-deal and toward the middle market. Deterred by brutal levels of competition and the specter of diminishing returns from larger buyouts, private equity fund managers and institutional investors alike are evincing an increased appetite for mid-market vehicles.

Having said that, 3i’s Eurofund III, which already has closed on euro 1.8 billion ($1.93 million) and is expected to reach the euro 2 billion ($2.15 billion) mark, certainly is comparable to the mega-funds in terms of size. However, the vehicle will focus exclusively on the European mid-market, which 3i now defines as transactions valued at between euro 10 million and euro 350 million ($10.7 million and $375.8 million).

Although 3i Eurofund III will include development capital investments, it will focus more strongly on buyouts than either of its predecessors, and has a higher minimum investment level of euro 5 million ($5.37 million). The reason for this, explains Paul Waller, 3i’s director of fund management, is to avoid the “over-diversification” that might otherwise arise because of the group’s rapidly increasing activity levels in continental Europe – 3i deployed GBP241 million ($399 million) in mainland Europe in the year ended March 1999, double the previous year’s figure. The group will continue to undertake smaller continental investments but will finance these solely off its own balance sheet, as in the United Kingdom, rather than through its L.P. vehicles.

3i, which as usual is contributing half the fund’s capital, originally set out to raise around euro 1 billion ($1.07 billion) for Eurofund III. However, an average commitment of more than euro 60 million ($64.4 million) from the third-party investors swelled the fund to almost double the projected total. As a result, 3i has agreed that Eurofund III’s remit will also extend to U.K. mid-market deals once the group’s current GBP1.3 billion ($2.09 billion) U.K. vehicle reaches full investment – probably within the next 18 months. In the future, Waller said, the group is likely to stick with the pan-European model for its mid-market investments, rather than raising separate U.K. vehicles.

Most of Eurofund III was committed by existing 3i clients; roughly equal amounts were drawn from the U.K., continental Europe and the U.S., together with a small proportion from sources in Asia. Two investors new to 3i are also participating in the fund. Of these, one, a U.S. group, is a new entrant to the private equity market, and the other an established continental European player, Waller said.

The second 3i Eurofund, totaling ecu 650 million ($698 million), has completed around 140 deals since 1997. Thirty percent of the capital was deployed in France, while Germany and Spain each absorbed 27% – a figure that reflects a dramatic increase in 3i’s Spanish activities. The balance was split roughly between Italy and the Benelux markets.

For the remainder of this year, 3i will concentrate its fund raising efforts on the 3i Kogin Japan offering, which Waller anticipates will be drawn largely from the group’s existing investor base. Next year, 3i plans to launch its first dedicated technology fund, with a global investment remit.