Last month 3i invested US$20m in Quadriga Capital Russia Private Equity Fund II and in so doing becomes the largest single private investor in the fund. 3i is not typically in the business of making investments in funds in order to gain entry to a country or market, but this is the second such investment it has made, following as it does in the footsteps of the May 2005 investment of US$45m (out of a total fund raising target of US$310m) in CDH China Growth Capital Fund II, based in Beijing.
Ere Kariola, managing director of 3i in Finland, who will manage the investment in Quadriga, by means of taking up a seat on the fund’s investment committee and on its advisory board, says the long term strategic goal of this investment is undecided for 3i at this stage. Lisa Bushrod reports.
Although for the meantime, in the case of Quadriga, the emphasis is on a mixture of gaining access to and knowledge of the Russian market for a number of 3i portfolio companies, many of which are managed out of the Helsinki, Finland office. Helsinki is, as Kariola points out, just 300kms from St Petersburg, which equates to a half hour flight. The main interest from 3i portfolio companies is in setting up plants, offices and factories in Russia. In addition, Russia, with its population of 140 million, has the fastest growing economy in Europe, currently averaging around 6% to 7% a year, and while the excesses of the Russian uber rich are well documented in the press, Russia actually has a growing middle class that many companies are keen to tap into. Kariola notes one of the portfolio companies in Quadriga Capital Russia Private Equity Fund II is a tour operator selling holidays to middle class Russians, and it already has an annual turnover of US$100m. The importance of this growing middle class means consumer product and service sales are currently experiencing annual growth rates of between 40% to 70% a year. For its part, probably 3i’s main immediate impact on Quadriga Capital will be to offer it access to exit routes in Europe and experience of the exit process.
While it’s too early for 3i to commit on its long-term strategy for making these investments, it’s easy to speculate that this could be a less blunt and risky route for acquiring established private equity firms some way down the road. Post floating on the London Stock Exchange, 3i got into acquisitive mode, first trying, unsuccessfully, in 1999 to buy the listed Electra Investment Trust. But things came together the following year when in February it bought Germany’s oldest technology venture capital firm Technologieholding, in May it bought SFK Finance, the Finnish venture capital firm and in November it bought Bank Austria TFV High Tech-Unternehmens Beteiligung, a Vienna-based venture capital fund. 3i was also reported to be looking for a venture capital fund to buy in Sweden but that never came to fruition and probably looked distinctly less appealing as valuations collapsed post Easter 2001 as the dot.com bubble burst.
Both Russia and China can only be described as hot, and this is a description that pretty much applies across the institutional investor and multinational corporate spectrum. But both countries are considered to be high risk still so giving itself a footprint by the relatively cheap route of a capital commitment as opposed to building teams on the ground seems a sensible route for 3i currently. That said, the CDH investment has been made in tandem with a 3i office opening in Shanghai (CDH is located in Beijing) and the firm has also gone the office route in Mumbai, India, another country that is considered hot across the investor spectrum, not just the private equity asset class.
Whether Quadriga and CDH will become part of the 3i network, operating under the 3i brand, time will tell.