Taking advantage of market disruption

In the aftermath of the financial crisis, there were some ill-timed financial services investments. What's changed now?
Firstly, asset values of financial services businesses are far more reasonable than before the crisis. Inflated multiples and overpriced asset values have adjusted to more normal levels as a result of market disruption, providing a much better entry point for investors. 3i can team up with existing business owners to help them consolidate and lead their industry, expanding into new products and geographies, acquiring new technology or services to improve their competitiveness. Secondly, the financial crisis and increased regulatory scrutiny have generated some motivated sellers of companies or, more likely, divisions of existing businesses which are viewed to be too capital-intensive or non-core to their main operations. This trend will also generate good deal opportunities for smart investors looking to buy these divisions or to partner with the incumbent shareholders to drive them forward.

What do you see as the most promising areas within the sector, and why?
Asset, wealth management, and insurance remain of interest, but one particular focus is the financial technology sector, where 3i has made investments such as Gain Capital, the FX trading platform. Technology has become increasingly important to reduce cost, streamline operations and meet more stringent regulatory frameworks. Outsourcing to independent service providers is also a theme. For example, proposed reporting requirements have pushed numerous hedge funds towards independent specialists such as Butterfield Fulcrum Group, also a 3i investment, to ensure adequate segregation of investing and reporting. We see this overall trend in financial technology and outsourcing continuing.

What's the key to successful investing in this sector?
Successful investing in financial services requires more than just funding. It is a complicated and global market. You need to understand the sub-sector you are investing in, and you need an international footprint to support your portfolio's growth. Moreover, investors should focus on selecting businesses where they can add significant support and value. I cannot emphasise enough how important it is to work in partnership – i.e. be fully aligned with strong and ambitious management teams – to enhance long-term value.

Adopting the appropriate funding structure is also key. 3i recognises that many business owners would rather find a minority investor to help grow their companies as a strategic partner than sell a controlling position.

With the lack of leverage, is the focus solely on growth investments?
With credit more difficult to come by, private equity providers need to structure deals somewhat differently. Growth capital as an equity-led solution will continue to be an important part of the private equity landscape for some time, and it is in this area that we see the largest opportunity in the near term. As the upturn materialises, we are likely to see financial services corporations divest non-core businesses, undoubtedly creating interesting buyout investment opportunities as well.

3i and most other private equity firms are currently focused on supporting portfolio companies to protect value and take advantage of opportunities to further strengthen their businesses in the current climate. For instance, Hyperion, the international insurance group 3i invested in last year, is successfully consolidating its market position through the agreed acquisition of Germany's leading specialist directors and officers (D&O) and commercial legal expenses broker.