LONDON/MUNICH, Germany – 3i Group recently snapped up TH Technologieholding, one of Germany’s oldest independent venture capital houses, for DM 333 million ($170.2 million), making 3i the largest venture capital investor in Germany.
Just over a year ago, 3i launched its unsuccessful hostile bid for Electra Investment Trust, a move that, in the context of real and potential mega-mergers, was widely perceived as a way to secure 3i’s continued presence in the FTSE-100.
The logic behind the Technologieholding acquisition is entirely different. During the last couple of years, 3i has stepped up the pace of its technology investment program, with the aim of increasing its technology-based holdings to around one-third of its portfolio. The group also is seeking to boost its ratio of Continental European assets and had been quietly hunting for suitable venture capital acquisition targets for some time. Although the Technologieholding deal only involves the management company and not its managed funds’ portfolio of more than 100 technology companies, the expertise of Technologieholding’s team will greatly increase 3i’s technology investment capacity both within and beyond the German border.
Falk Strascheg and Gert Khler founded Technologieholding in 1987, and the group now manages or advises funds totalling more than DM 500 million ($248.5 million), including the DFl 300 million ($132.3 million) Strategic European Technologies vehicle and a team of 24 investment professionals operating out of seven offices in Germany. Khler joins 3i as managing director and will be responsible for the development of the group’s early-stage investment business throughout Continental Europe. Falk Strascheg will act as a consultant to the enlarged business in Germany until his retirement later this year. Andrew Richards, who helped set up 3i’s first German office 14 years ago and became sole managing director of its German operation in 1996, will head the combined business, supported by five regional directors. The acquisition of Technologieholding has expanded 3i’s presence to Berlin and Leipzig in addition to its existing locations in Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart, completing 3i’s regional coverage in Germany.
The price 3i was prepared to pay to bolster its technology capacity must surely rank high among the attractions of the deal from the Technologieholding founders’ point of view. As owners of the management company, each of the pair receives a very substantial sum – although under the terms of the deal they have agreed to reinvest DM 166.5 million ($83 million) in 3i shares to be held for at least two years. Outright acquisition by a larger group also provides a mechanism to circumvent any potential succession problems upon a partner’s retirement, while enabling him to realize his entire holding.
Meanwhile, 3i’s international reach offers excellent opportunities for the development of Technologieholding’s existing portfolio and of the business itself. Going forward, once 3i has received DM100 million ($49.7 million) in carried interest payments from Technologieholding and DM80.2 million ($39.9 million) from Strategic European Technologies, the vendors may receive additional performance-related payments.
The German manager’s notable investment successes include Intershop Communications, Adcon Telemetry, BROKAT Infosystems, Poet Software and ricardo.de – five of the 10 Technologieholding investees to have achieved IPOs to date. Technologieholding’s 1990 and 1995 funds have generated compound annual returns of 57% and 146%, respectively, from inception to end June 1990. For 3i, the major variable in the equation is whether the Technologieholding team will be able to replicate this performance within the new structure.
A few days before the Technologieholding deal was announced, 3i confirmed that its asset management subsidiary was taking on the management contract for a successor fund to the Biotechnology Investments Ltd (BIL) investment trust, which is managed by Rothschild Asset Management (RAM). Rothschild decided at the end of 1998 to withdraw from the biotech sector and the highly regarded RAM biotech team later moved to Merlin Ventures, along with the International Biotechnology Trust mandate. Plans to merge BIL with another RAM-managed investment trust, International Biotechnology Trust, foundered last year when terms could not be agreed.
Subject to shareholder approval, BIL, whose net asset value stood at $413 million in late January, will become 3i Bioscience Investment Trust. Under the terms of 3i’s recommended proposals, BIL shareholders will be given the option to realize their holdings for cash – subject to an upper limit of $65 million – via a tender auction or be allotted new shares in 3i Bioscience.