BusinessWeek

JULY 1, 2002

INTERNATIONAL -- FINANCE

Q&A: This Risk-Taker Is Ready to Roll the Dice

The chief of 3i says it's a good time to back new companies

Brian P. Larcombe, 47, started at venture-capital firm 3i Group in 1974 as an executive trainee and has been chief executive since 1997. The industry has been through two tough years--London-based 3i, the grandfather of the European venture-capital industry, lost $1.4 billion in the year ended Mar. 31. But now Larcombe sees things turning around, and, in May, 3i scored one of its biggest coups ever when it sold its share of British discount airline Go. BusinessWeek London correspondent Kerry Capell spoke to Larcombe about 3i and the outlook for the industry.

Q: How does Britain's venture-capital industry stack up with Europe's?
A: Europe didn't see a private-equity industry until one began in Brit- ain in the early 1980s, and Britain's remains the most developed venture-capital industry in Europe. Venture-capital investment as a percentage of gross domestic product is 0.8% in Britain, 0.4% in Germany, and around 0.5% in France. Last year, for the first time, more than half of 3i's investment was made outside Britain, with $646 million invested on the Continent and $218 million in the U.S. and Asia.

Q: After a rough patch for the industry, do you see a turnaround?
A: Three years ago, there were 80 to 100 venture-capital firms just in Britain. Today, there are maybe 10 active ones. Few people have been prepared to start companies, and even fewer venture capitalists have been prepared to back them. But some of the best investment years--we call them investment vintages--we had at 3i were right after a time of uncertainty and low confidence. Today feels similar to 1994, which indicates that it's a good time for us to be investing. Indeed, since September, there are signs of greater business confidence. And we will see the positive trend continuing.

Q: With the big tech crash, what has been the return on your technology portfolio?
A: We made about $1.8 billion from our technology businesses during 1999 and 2000, and we've given up most of that in the last two years. Today, we have 20% of our portfolio in early-stage technology and another 10% in late-stage technology. With hindsight, it's clear we overinvested in some previously fast-growing sectors, such as equipment supply to the telecommunications industry, that have suffered from a collapse in demand. The amount invested in early-stage technology has been cut by more than 50% from 2001.

Q: In May, you pulled off the most successful buyout in Europe this year with the $553 million sale of Go.
A: We made $341 million on the sale to rival discount airline easyJet. When we bought it in June, 2001, we liked that it had a strong business model, a great management team, and good growth. It showed us that within the airline industry there are different sectors, and the discounters will continue to grow fast, probably at rates of 30%-plus.

Q: Which countries, or sectors, look attractive over the next year?
A: In Britain, we're seeing the strongest level of confidence we've had in the last five quarters. There are higher levels of corporate activity and more mergers and acquisitions among smaller companies. Confidence in southern European countries, such as Italy and Spain, also is strong. But it's not as strong in Germany, where there is still weakness in the economy. We try not to focus on sectors, as there are always good and bad investments to be found in each one. Go is a good illustration. It's difficult for anyone to make profits in the airline industry, and that has been the case for decades.

Q: Are there opportunities in Japan?
A: In the last three years, Japan has been developing a buyout business, as the need for extensive restructuring is perhaps greater than anywhere else in the world. The Japanese market will be very large, and it is quite an interesting time to be there.

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