Page 3: Investment
In essence, 3i helps the small and medium sized business sector to play a more dynamic role in the economy by providing the finance that this sector needs to grow more smoothly. Individuals and organisations are able to obtain the finance to become more entrepreneurial, to take appropriate risks and to do the sorts of things they should be able to do in a dynamic economy. Most of the investments 3i makes are between £100,000 and £30 million. In 1996, 3i invested around £3 million every working day. In early 1997, 3i had investments in approximately 3,200 businesses in the UK and continental Europe. Before making investments, 3i examines each business individually and in depth. The ability and integrity of the management and the growth potential of the business are the key factors 3i considers when deciding whether or not to invest.
For most businesses, growth is an essential part of their development. There are two main types of growth:
- Organic growth. This involves growing a business from within. Most businesses grow by ‘ploughing back’ or re-investing, their profits, taking on more staff, opening new outlets, buying more equipment etc. However, sometimes they need a more substantial injection of funds than they are able to generate in the short term. 3i enables organisations to grow organically at a faster rate than would otherwise be the case. For example, an organisation may recognise that by investing in new technology they will be able to leapfrog the competition and achieve higher than average profits. However, it may not be able to fund this technology solely from retained profits and this is where 3i comes in.
- Growth by acquisition. The alternative way of growing is to join together with other companies by means of a take-over, or merging two or more businesses. To acquire other businesses it is usually necessary to have access to additional finance. This is another situation where 3i can be of assistance.
There are a number of categories of investment in which 3i is involved:
- Growth capital. This is a very important type of finance or ‘capital’ as it is often called. When businesses want to finance a new area of growth they may need additional longer term finance. Prior to this, a business may have been growing successfully with the support of a bank. However, the business is aware that an overdraft is a short-term facility, which can make it vulnerable. The alternative that will enable businesses to climb up a step involves raising capital on a long-term basis.
- Emerging businesses. These are typically businesses of less than three years old, which aredeveloping a potentially valuable product or service. These companies often require funding to meet research and development costs and to launch the product on the market.
- Management Buy-Outs (MBOs). An MBO occurs when the management team of a business, usually with the backing of institutional investors, takes over ownership of the business where they are employed. MBOs emerged during the ‘enterprise’ years of the 1980s as a major factor in restructuring British industry. Often, these involve a large company disposing of one of its subsidiaries by selling it to its management team. An MBO can also occur in family businesses when the owners retire. MBOs can be relatively small, where the managers may own the majority of the shares, or large, where 3i and other investors are, together, likely to own the majority of the shares. Having played a significant role in the restructuring of British industry, MBOs are now starting to do the same in continental Europe.
- Management Buy-Ins (MBIs). Since the late 1980s, MBIs have developed as another means of changing the ownership of a business. In this case, an incoming management team acquires the business with backing from institutional investors (as opposed to incumbent managers, who acquire it in the case of an MBO).
- Share purchases. This is where a proportion of the shares in a private company are bought by 3i, when someone wishes to sell all or part of his or her shareholding. In other words, 3i purchases shares directly from an individual shareholder. This is sometimes an alternative to selling a company or floating it on the stock market.