3i's quest for a quick return on investment may not be in a client company's best interest
THE news that easyJet was in talks to buy its arch rival Go came as a bit of a surprise last week. For Go is a profitable airline and its Chief Executive, Barbara Cassani, had made no secret of the fact that they were heading for a stock market listing later this year.
There seemed no urgent reason to sell out at this time - were the management trying to make a quick buck? “Certainly not”, insisted Ms Cassani. The sale was being driven by 3i, the investment company which had financed the buy-out of Go from British Airways only last June. 3i owns a substantial stake in the business and controls the voting power of much of the rest. Whatever the Go management team think about their future as a competitive low-cost independent airline, counts for very little. It’s down to the old golden rule – “he who has the gold makes the rules”.
But it throws into sharp contrast the key role of the venture capitalist (VC) in our modern economy – absolutely vital for the establishment of new and spin-out businesses, but then often threatening to their long term independent development.
3i has a special role in this, and in many many more, of Britain’s growth companies. It is one of the largest VC companies in the world, and one of the most experienced. In a world where 25 years of venture capital activity makes you a veteran, 3i has been around for more than twice that.
It all dates back to the post-war Labour government which was determined to drive the regeneration of the British economy, flattened by a war that had drained our country of many of our resources and infrastructure. The Attlee government was keen on nationalisation. Railways, power companies, coal mines, were all turned into public corporations around this time. So when the government turned its attention to finding the money for the regeneration of the British economy they called in the banks "for a chat".
The big high street banks were told that either they provide the investment capital required or they too were likely to be nationalised. Their response was to set up a new company, Investors in Industry, jointly owned by the major high street English and Scottish banks, which would specialise in providing long-term risk finance in return, mostly, for equity stakes in businesses.
These days they are no longer owned by the banks; they have changed their name to 3i and got a fancy logo, but they are still basically the same business.
And their dominance in the UK’s VC scene has been remarkable. It is still quite unusual to hear of a new UK investment deal in which 3i is not involved, and practically every VC company in the UK is run by management who learned their craft at 3i.
It was the very existence of 3i, and the various businesses set up by their alumni, that has led to the UK having by far the largest VC community in Europe. Venture Capital is a powerful engine for economic development. Without such funds, it is difficult to imagine how it would be possible to create the new businesses that are vital to building a competitive modern economy.
However, there is a weakness in this VC formula, and one that the Go situation highlights. VCs exist to generate a healthy return on their money, and they need to be able to exit from their investments, ideally at a good profit. In an ideal world, this would be achieved by a stock market listing, allowing the VCs to then gradually sell their shares on the open market. Unfortunately, with the recent turbulence on the stock market this has become extremely difficult - witness HMV’s recent float that flopped.
We often read about some promising company being sold to a multi-national, resulting in the question “Why can’t we grow large companies in Scotland ”. The answer lies, partly, in the structure of our risk investment sector, and the inevitably short term behaviour of our VCs. 3i is not the only one looking for “realisations” in their investment portfolio.
There is a systemic fault here. Our ability to generate world class competitive businesses here in the UK is damaged by it.
Maybe it is about time the government called the banks, and the other sources of investment finance, back in for 'another chat'.