The Global Economic Impact of Private Equity Report 2008 - World ...

3i Group plc and Little Sheep*Lily FanginseadRoger LeedsSchool of Advanced International Studies, Johns Hopkins University“Many people grow a company like raising a pig. The pig gets fat, you kill it and make money. I grow my company like raisinga son. The average life of a restaurant is less than three years in China. I want Little Sheep to last a century.”– Zhang Gang, Founder, Little Sheep Catering Chain Co.“Helping a great business to realize its potential takes a lot more than just capital. It is ultimately about the people, thus yourrelationship with the management team and the sort of support you can provide, such as introductions to key industryexpertise and relevant operational best practice, is very important.”– Anna Cheung, 3i Partner, ChinaExecutive SummaryIn 2004, a large, well‐established global private equity firminvested in a rapidly growing Chinese restaurant chain thatoriginated in Inner Mongolia, one of the country’s mostremote regions. This case describes how and why an unlikelyyet productive relationship was forged between these twofirms, and the result of their collaboration. 3i, a highlyrespected global private equity firm with a 60‐year trackrecord, first established an Asian presence in Hong Kong in2001. Three years later, a rapidly growing restaurant chaincalled “Little Sheep” came to the firm’s attention. Due to itsmeteoric growth and national brand name recognition, LittleSheep was very attractive to some prestigious internationalinvestors, who made offers of financing. The founder,however, favoured 3i over other prospective investors dueto a strong belief that, in addition to its financing capability,the firm had the expertise and commitment to add valueon a number of fronts that would strengthen the overallcompetitiveness and profitability of his growing company.This story of 3i’s value‐creating contribution to Little Sheep isconsistent with much of the private equity reality in China today.As one of the most sought‐after destinations for capital in theworld, there is no scarcity of domestic or foreign investmentcapital for high‐growth private companies, especially thoserun by the new generation of talented entrepreneurs. As thiscase demonstrates, the truly scarce resource for many privatefirms striving to grow their businesses in an increasinglycompetitive market is industry and management expertisethat will help entrepreneurs make the transition to professionalbusiness practices, in areas such as marketing strategy,operational efficiency and corporate governance standards.The relationship that evolved between 3i and Little Sheep isemblematic of value created by an experienced private equityinvestor with deep industry expertise and a Chineseentrepreneur who was able to first recognize and then capitalizeon the value-enhancement services offered by an investorwhose interests were closely aligned with his own.3i Group Plc3i Group plc is one of the oldest private equity firms in theworld, with a track record dating back to 1945 when theBritish government and a consortium of banks foundedtwo organizations – the Industrial and Commercial FinanceCorporation (ICFC) and the Finance Corporation for Industry(FCI) – to bridge the financing gap afflicting small andmedium‐sized enterprises (SMEs) in the aftermath of theSecond World War. 1 In 1975, these two corporationsmerged, and in 1983 the combined entity was re‐named3i – “investors in industry”. In 1994, 3i was listed on theLondon Stock Exchange, becoming the first large privateequity fund to go public and have access to permanentcapital. 3i invests in a wide variety of businesses throughits five lines: buyouts, growth capital, venture capital,infrastructure and quoted private equity. 2 (See Exhibit 1for a summary of 3i’s business lines for fiscal year 2007.)Expanding its geographic footprint beyond the UK andEurope, 3i today has offices in 14 countries across Europe,Asia and the US, and has made investments in more than30 countries. The firm opened its first Asia office in Singaporein 1997, followed by a second office in Hong Kong four yearslater, and offices in Shanghai, Mumbai and Beijingsubsequently. During fiscal year 2006, 16% of the group’snew investments were in Asia. Alongside the geographicshift, 3i’s investment strategy has also evolved, with anemphasis on making fewer, larger, and more sector‐focusedinvestments. In Asia, the group’s average investment size hasbeen about $40‐50 million, and sectors in focus includedconsumer‐related goods and services, healthcare, and energy.These changes in investment strategy were consistentwith a decision to become more actively involved in itsportfolio companies, returning to the firm’s original modusoperandi as an “investor in industry”. To better serve itsportfolio companies, 3i developed two unique programmes:People Programmes and Business Development Practice.People Programmes is a highly sophisticated approach tocultivating relationships internationally with seasoned* The authors express their appreciation for the research and editing support provided by Brian DeLacey.1The perceived funding gap – the “Macmillan gap” – was scrutinized back in 1929 in a report by a committee under the chairmanship of LordMacmillan. The founding of ICFC, predecessor of 3i, was closely linked to one suggestion in the Macmillan Report.23i’s growth capital and venture capital investments are made from its balance sheet, while the group invests in buyouts through its €5.0bn Eurofund V.During 2007, both the infrastructure and quoted private equity business lines raised new funds that are listed on the London Stock Exchange.The Global Economic Impact of Private Equity Report 2008 Case studies: 3i Group plc and Little Sheep 131