3i targets infrastructure deals with new fund

3i, Europe's largest quoted buyout company, said yesterday it was considering launching a new infrastructure fund to take advantage of a boom in the sector.

Initially the company plans to set up a separate infrastructure division to be headed by Michael Queen, who currently leads the Growth Capital and Infrastructure unit.

However, the company also said it could spin off its infrastructure assets into a separate vehicle, managed or advised by 3i, that could be given a separate quote on the stock market.

Infrastructure projects have become increasingly interesting to private equity companies as governments around the world seek to find ways to finance projects such as hospitals, schools and roads without raising taxes.

Despite 3i's membership of the consortium bidding for water company AWG, the company said that for the most part it was likely to focus on smaller to medium-sized projects rather than the big ticket deals favoured by the likes of Australia's Macquarie and Spain's Ferrovial.

As part of the shake-up resulting from the creation of the infrastructure operation, Guy Zarzavatdjian, who runs 3i's French business, will take over as head of the European Growth Capital business. He will become managing partner of the division in April 2008.

During the six months to 30 September, 3i managed a total return of £374m against £447m over the same period last year. The company will pay an interim dividend of 5.8p against 5.5p.

The return on shareholders' funds fell to 9.3 per cent, but Philip Yea, chief executive, said this would have been ahead of the previous year's figure if a £700m return of capital to shareholders through the issue of bonus b shares was taken into account. He said: "Whether you take that into account depends on whether your glass is half full or half empty."

Mr Yea said he was not concerned over the recent Financial Services Authority report which raised concerns over debt levels used by private equity firms to finance buyouts, and possible market abuse.

"There were also a lot of positives in that paper," he said. "The FSA recognised the importance of our industry."

Over the period 3i invested £589m in 33 companies. 3i now has 500 or so core investments but is likely to cut that to between 300 and 400 over time.