3i Slows While U.S. Firms Eye Europe

3i Group’s losses may turn out to be huge gains for U.S. investors.

3i, the European private equity giant, announced recently that its private equity and venture capital investments were going at a slower pace than last year.

The news comes on the heels of a study that shows U.S. investors are more bullish about European investment.

3i, a London-based international private equity firm with over $70 billion under management, said its investment level dropped 45% over the past five months, as the firm invested $310 million between April and September.

“Activity in the private equity and venture capital markets continues at lower levels than last year,” the firm said in a statement last week.

Earlier this year, 3i closed its Dublin office, which opened in July 2001 with a staff of four. 3i also shuttered its office in Tokyo in February. Any further Japanese investments will go through 3i’s Hong Kong division, which oversees Chinese and Korean investments. Irish investments are now made from its London offices.

3i says it wants its investments in continental Europe to make up 30% of its portfolio and the United States to make up 10% of its portfolio.

Additionally, it wants its Asian investments to comprise 5% of its portfolio by 2006 with most of the remainder invested in the United Kingdom.

Founded in 1945, 3i has about 900 employees in 34 offices worldwide. 3i Group announced earlier this year that it expects the value of its portfolio to drop by approximately $565 million, citing a decrease in the value of its technology investments.

Last week, when 3i announced that its private equity and venture capital investment pace was slower than last year, a U.S. law firm reported an increased American interest in European investment.

New York-based Weil, Gotshal & Manges released a study that indicated U.S. private equity firms were interested in moving aggressively to invest in Europe. The study was based on a survey of more than 140 U.S. and European private equity professionals.

“I think the number of opportunities in Europe together with less competition that exists in Europe than it does in the states provides for an attractive marketplace,” says Barry Wolf, an attorney who heads Weil, Gotshal’s Global Private Equity group.

Wolf says that the trend is a unilateral move on the part of U.S. private equity firms with a lot of capital to invest and a more competitive domestic market.

“The difference is the European firms are focusing on Europe, but the American firms are focusing on the U.S. and going into Europe,” he says.

“It’s unlikely you’ll see European firms trying to make a play in the United States,” he adds. “Within their own market they are at least equal to the American firms, but the reverse is not happening.”

While the venture capital market in Europe is not as broad and well established as in the United States, the study bucks the conventional wisdom that Europe is somehow virgin territory for private equity.

“There is an impression that Europe was not as well developed as far as private equity was concerned generally,” says Tom Roberts, chairman of the Corporate Group of Weil, Gotshal. “There may not be as many funds, but Europe is very well developed.”

The survey says that the respondents also expressed confidence that the IPO market will improve substantially at home and abroad and that the M&A market will also improve. In all, nearly two out of three respondents said the economy would improve over the next six months.

Also last week, the European Venture Capital Association and Thomson Venture Economics (publisher of PE Week) released a second quarter report for private equity activity in Europe.

The survey found that European private equity firms increased fund-raising activity by 10% in the second quarter but that overall investments declined by almost 17%.

Buyouts, which comprise 74% of European private equity investment, experienced a 3% decline, though there was an increase in the number of companies getting funding.

Venture capital has been impacted the most, with expansion investment dropping by 26% even though the number of companies and deals rose. Early stage investment saw a 32% drop in investments and a 5% drop in the number of deals done.