FD Interview - Queen and company

3i is the UK's leading venture capital firm. Michael Queen, finance director, spoke to Jenny Hirschkorn about the secrets of the company's success

'The year I joined 3i, we had more than 2,500 applications from chartered accountants,' recalls Michael Queen, who has been finance director of the country's premier venture capital firm for the past four years. 'It was 1987 and the venture capital industry was just beginning to appear on people's radar screens as a potentially interesting career.'

Four years earlier, the softly-spoken Queen had returned to his Yorkshire roots by joining the Leeds office of Coopers & Lybrand, after graduating from Nottingham University. Soon after qualifying, he thought he'd take a break from professional practice and joined 3i, for what he expected would be a two-year stint. Instead, after 18 months in the Leeds office, he was sent to open a new branch in Hull and 10 years after joining the firm, he was appointed to the executive committee.

So what had attracted him to 3i in particular? 'It was one of the few venture capitalists that had activity in the regions and I had also noticed that they were involved with some very innovative companies. Many of the most interesting companies I had been dealing with at Coopers had a 3i investment.'

Queen was also drawn by the company's entrepreneurial spirit. 'Many of the attributes they were looking for in their people were very similar to those you'd look for in an entrepreneur.'

3i was founded in 1945 as a result of pressure that the government of the day put on the major clearing banks to set up an organisation that would provide long-term capital to private companies. The banks formed a consortium that was known, until the mid-1980s, as the Industrial and Commercial Finance Corporation. As the business grew rapidly, the banks realised they had a very valuable asset on their hands and they decided that the right thing to do was to float the company. 3i achieved its own IPO in 1994 and the banks sold their shares shortly afterwards.

Within a matter of months, 3i began its climb up the FTSE100 and it now stands at around 40th. 'Quite remarkable,' Queen points out, 'in view of the fact that we haven't issued any shares.'

High-performance portfolio

Today, 3i has a huge portfolio of almost 3,000 companies across all industrial sectors. In the previous financial year alone, it invested £2bn in more than 700 companies. Although the group showed a negative return of £142m on opening shareholders' funds for the year to 31 March, Queen points out that in a highly volatile year it was a result that considerably outperformed the other benchmark indices such as the FTSE and, in particular, the technology markets.

Does this mean that 3i's exposure to technology companies is limited? 'Not at all,' replies Queen. 'Some 40% of our portfolio is in technology. However, what we look for in a technology enterprise is the same as we would look for in any other type of venture - strong management and a business model that will be sufficiently robust to create competitive advantage in the medium term.' In fact, this means that 3i's investment in e-commerce has, indeed, been restrained. 'With many e-businesses it is very unlikely that they will be able to generate the competitive advantage that will allow them to be in business for the four or five years that it will take to allow them to produce profits and a positive cash flow.'

Two companies that have recently received the 3i stamp of approval are in entirely different sectors but are perfect examples, says Queen, of what they look for in an investment. After months of speculation, it was confirmed that 3i has backed Barbara Cassani, chief executive of Go, the high-profile, low-cost arm of British Airways, in a £100m management buyout, and has also injected £5m into dentistry group James Hull.

'When we are looking at any particular company, what we are looking for are long-term growth prospects for that sector and whether the applicant company can grab a slice of that growth. In the case of Go, there is huge potential for the low-cost airlines model to be rolled out in Europe. The company has a competent management team and an airline fleet that is of a very low average age.

'Similarly, dentistry has enormous potential for growth. Until now, the sector has been largely a cottage industry, but the management team at James Hull can see that, by using a normal corporate management approach, they can provide a much more consistent, high-quality service, probably at a lower cost. Their team is aggressively taking that concept forward.'

But will the recent market jitters affect 3i's approach to investment? 'What happens in stock markets is secondary to us, because the companies we are investing in today are not going to be ready for sale until three or five years down the line. So what is happening in stock markets now is largely irrelevant. What is really important is what is happening in the economy.'

On that subject, Queen is more optimistic about the global outlook than a lot of media pundits. 'Our anticipation is that the US economy is probably going to show something like 1.7% growth in GDP in 2001 and actually recover quite strongly in 2002. Conversely, we believe that the continental European market will have quite high levels of growth this year, with the risk of a slowdown in 2002. I don't think there is any evidence that we will experience a full-blown recession in the next few years.'

Full steam ahead

Meanwhile, it is full steam ahead for 3i to achieve its strategic objective of being the leading international venture capital company with a strong position in all of the major venture capital markets. Within the next five years, the company expects to have about half of its total portfolio outside the UK, with at least 30% in continental Europe, at least 10% in the US and around 5% in Asia Pacific.

'We already have a huge network of offices,' says Queen. 'In addition to our 15 UK branches, we have offices in all the major continental European countries, as well as offices on both coasts of the States, in Japan, in Singapore and in Hong Kong. There is no other venture capital firm in the world that has that kind of network. VC is a highly fragmented industry, with most firms relatively small partnerships. So we immediately have an important differentiator.

'So if, for example, we are talking to a company in Silicon Valley and they want to build a European customer base, or they want access to a Japanese distributor, we can help them with that. We are able to add value to the companies in which we invest.

'The other huge advantage gained from our international presence is the ability to share knowledge. So we might be approached by, say, a firm offering the best software for a given application in France, but if there are three others in the US and there's only room for a total of three in the world market, we would know that we should not be investing in that business.'

It is no small measure of 3i's success that it has brought almost 1,000 companies to IPO. When you consider that there are only 2,500 quoted companies on the stock market, you get some idea of the scale of 3i's operation.

But, of course, venture capital is by its very nature a risk business, and you can't run a risk business without a certain degree of failure. 'We see about 100 companies fail a year,' Queen explains. 'It is something we have to live with, and the sort of fall-out rate I would expect. People often ask me how you stop making mistakes, but I say, "actually one of my big concerns is, do we make enough mistakes?" If we are not seeing enough failures, we are not taking enough risk and that means we might be missing out on some really special opportunities.'

Strategic role

Surrounded by chartered accountants (there are 120 people in the firm's finance function), Queen's own role is, in his own words, 'slightly unusual'. 'There are probably three or four other people on the board who could do my job equally well,' he confesses, 'and, conversely, I could just as easily be doing theirs. I just happen to be the FD, but we work as an executive committee.'

In the four years since he took up the post there has been a reduced emphasis on traditional financial control and much greater stress on converting strategic ideas into operational funds and on investor relations. 'Although the ultimate responsibility for financial control still remains with me, I make sure that the people reporting to me are of extremely high calibre, so that frankly there is little I am going to be able to add to what, for instance, my director of tax has to say.'

Instead, Queen spends 20%-25% of his time on external relationships with the City, the media, and other parties who are interested in 3i: 'It is the strategic issues that take up my time.'

He is also deputy chairman of the British Venture Capital Association (and will be taking over as chairman in June 2002), the industry-wide body representing all the VCs in the UK. This involves a good deal of political lobbying, talking to government and promoting the industry in general.

So what would Queen be looking for in a finance director of a company 3i was investing in? Picking his words with obvious care, he says: 'Well, what you are not looking for is a glorified financial controller. You need someone with vision. There are lots of chartered accountants around - and don't misunderstand me, I am a passionate believer that the chartered accountant's qualification is a genuinely strong general business qualification. It's just that it isn't the be all and end all - it's complementary.

'The businesses we invest in are expected to grow rapidly - not the usual 5% a year, which is a nice, manageable rate of change. So we need people who can cope with the level of turmoil that a huge rate of change generates. The FD will not just need to have all that under control, but also be able to take the strategic overview.'

But to those who do have what it takes, Queen has this advice. 'Go for it. Do it. Building a successful business is hugely satisfying.'

Be the first to vote

Rate this article

Related Articles