3i, which formed the unit in February 2011 after the acquisition of Mizuho Investment Management, said in an October 25 statement it is to sell the business to InvestCorp, earning it £222 million in cash and an exceptional profit of £36 million.
Closure of the deal is expected by the end of March 2017, with the proceeds to be reinvested in 3i’s other divisions – private equity and infrastructure.
Simon Borrows, 3i chief executive, said in the statement: “Our debt management business has produced strong cash income for the group since our strategic review in 2012. However, the division fits less well with the 3i of today as we focus on our growing Infrastructure business and a proprietary capital approach in private equity.”
The deal will more than double Investcorp’s assets under management, which stood at $ 10.8 billion at the end of June.
3i has made a number of add-ons to the unit since its launch, including the acquisition of WCAS Fraser Sullivan Investment Management, a US debt manager in 2012 and the purchase of five European CLO management contracts from Invesco.
The decision to sell the business is evidence of a marked change in strategy at 3i. Borrows had previously voiced his commitment to growing 3i’s debt management platform back in 2012, following the firm’s acquisition of Fraser Sullivan.
He said at the time: “This strategic transaction demonstrates our stated commitment to grow 3i’s debt management business and third-party income over time.”
A note from analysts at Numis said that although 3i’s debt management business represents more than half of its total assets under management, the sale of the business “comes as little surprise as the division was relatively low margin and appeared increasingly peripheral to the company’s strategy”.
Analysts at JP Morgan Cazenove said the main motivation for the sale was the “tougher regulatory environment that requires 3i to invest an increasing proportion of its balance sheet in external funds raised”.
The note added: “Clearly 3i believes that there is a better return for the risk available in the PE and Infrastructure business lines.”
While 3i has taken the decision to streamline its business, Investcorp’s purchase shows it is moving in the other direction and, like a number of other private equity firms, is looking to diversify.
The firm said in a statement the acquisition was a “strategic move” that will “add to Investcorp’s existing menu of product offerings across private equity, real estate and alternative investment solutions”.
Mohammed Al Ardhi, executive chairman of Investcorp, added: “This is a milestone deal which will bring together two complementary businesses and broadens product diversity for existing clients of both Investcorp and 3iDM while deepening the geographical reach of the enlarged business.”