Philip Yea is not a man who conforms to the archetype of leaders in his industry - a business recently described as ‘the dark side of capitalism' by one premier-league commentator. As head of one of Europe's largest and most successful private-equity outfits, he should by rights be either a dead-eyed human calculator intent only on the next deal or some kind of shadowy colossus, a ruthless commercial barbarian wielding irresistible financial leverage.
For these, we are led to believe, are the kind of people who succeed in private equity, a force of nature currently sweeping all before it in the City, using cheap debt and an eye for a good deal to buy public companies lock, stock and barrel - either freeing their purchases from the perils of shareholder meddling, or restricting access to the returns they make to a wealthy, privileged few, depending on which side of the fence you choose to perch.
Yea is neither, although he doesn't fare too badly on the dosh front; his salary of nigh-on £2 million for the year to March 2006 is generous by industrial standards, but modest in the mega-money world of private equity. His gaze is direct, his manner engaging and - on the subjects of the business generally and 3i in particular, at least - he is amiable and even a bit of a chatterer.
Given his well-known reticence and extreme dislike of personal exposure, this volubility comes as a surprise. But then, there could hardly be a better time for Yea to break the silence. After a nasty wobble when the dot.com bubble burst, business has been booming in recent years and 3i is doing very nicely indeed. Last year, it made a cool £831 million, which equates to a pretty tasty 22.5% return on new funds invested, and this year it's on track for a broadly similar result. Even a Trappist monk would find it hard to keep mum sitting on a story like that.
His tone may be friendly but he is well aware of the accusations of greed and financial engineering that surround his industry. His words are measured and he downplays the extent of the firm's success, meticulously avoiding any temptation to crow. ‘When 3i came out of the bubble, it spent a lot of time fixing the model,' he says, cautiously. ‘But we're in pretty good shape now, and with such fabulous markets, there are places where we can really grow the business.'
Soon he's in the zone, talking markets and models, differentiators and gearing. He motors off, quick-fire sentences taking the listener on a high-speed tour of the world according to Yea. His speech is liberally scattered with ‘rights?' and ‘yeahs?', tiny pauses to make sure you are keeping up with his breakneck pace. He clearly knows his onions and is concerned that you should get to know them a little, too.
The effect is didactic, disciplined and free from ostentation. A quiet navy suit, shock of steel-grey hair and a whiff of academic zeal complete the package, more schoolmaster than master of the universe. It's easy to imagine his less ambitious alter ego, in a dusty black gown, the go-getting head of an upwardly mobile school - state rather than public: he's definitely a meritocrat. I wonder mischievously if he's ever thrown chalk at an inattentive director during a 3i board meeting, or asked one of them to stay behind for a word ‘after class'.
If Yea isn't your average predatory private- equity beast, then the firm he runs isn't exactly typical of its kind, either. Most private-equity outfits are, well, private. In all senses of the word: privately run, privately owned and operated predominantly for the benefit of their partners and (privately wealthy) key investors. It's an insular and tight-lipped world, where deals are pursued with the utmost discretion and money does the only talking.
In return, big PE firms like CVC, Blackstone, Permira and KKR offer some of the richest pickings to those in pursuit of personal wealth. It's estimated that there are more than 100 private-equity partners worth in excess of £100 million each in the top European concerns alone. That's the kind of money that makes even famously Croesus-like City bonuses look distinctly ordinary. As one industry watcher put it: ‘The people who end up in private equity are typically those for whom investment banking is insufficiently well remunerated.'
By comparison, 3i has a number of distinguishing features that contribute to a slightly cuddlier image that has been described as ‘the acceptable face of private equity'. For a start, it's a mature sexagenarian in a market full of rampantly acquisitive teenagers and twenty-somethings. Founded in 1945 as part of the postwar reconstruction effort by a consortium of British banks, its brief, as well as its name, was Investment In Industry. In 1987, at the height of the Thatcherite privatisation era, it was floated on the London Stock Exchange as 3i. It remains quoted to this day, and a FTSE-100 member, to boot.
The irony of being a public company dealing in private equity is not lost on Yea, but he's proud that being listed makes 3i accessible, and, far from cramping his style, he says, this gives the firm its USP. ‘Yes, I know. It's a paradox, but we reconcile it because offering quoted access to private-equity returns is essentially what our purpose is. We are not saying that all public companies are bad. But we are saying that, in the long term, private equity has consistently outperformed, right?'
He's also keen to stress the transparency and public accountability that FTSE status brings. Most private-equity firms, says Yea, don't explain themselves because they've never had to. But 3i is happy to deal openly with investors and prospects alike. ‘The fact is, we like to be different. If people say we are approachable and easy to deal with, that's something that we nurture.'
3i, he adds, takes a holistic, even paternalistic, view of the firms it invests in. Yes, it runs the slide-rule carefully over the books of any potential acquisitions, but it absolutely does not attempt to squeeze its charges dry. ‘Sometimes, people talk [of companies that have been through private-equity ownership] as if the pips have been completely squeezed and all that is left is a dried-out husk. But, actually, the whole point of what we do is that we have to exit, so we know there has to be a future for the company in order for someone else to take it on.'
In other words, if you want to cash out in five years' time, there's got to be something left for you to sell. That may sound obvious, but in an industry beset by criticism for the crudity of its working methods, it counts as remarkably progressive thinking.
Controversy has dogged private equity ever since it first shot to public prominence back in 1988, with the $31.4 billion takeover of US industrial giant RJR Nabisco by new kid on the block, private equity raider Kohlberg Kravis Roberts. A salutary tale of greed and ego, it became infamous for the no-holds-barred approach with which KKR pursued its quarry, and for the mountain of debt loaded onto Nabisco in order to finance its own sale - the so-called leveraged buyout technique that remains the industry's weapon of choice today.
Critics of the deal - still one of the largest in corporate history - claimed that it was the prospect of extracting as much money as quickly as possible from the gravid cash cow Nabisco that drove the dealmakers, at the expense of any thought as to whether the firm or its thousands of employees would survive the process. Indeed, after pocketing huge sums at the time, when KKR finally disposed of the remnants of its investment 15 years later, it did so at a loss.
The industry has been plagued ever since by allegations that it starves companies of investment and cripples them with debt, and that by taking majority rather than minority holdings in its targets, it subverts the checks and balances provided in listed firms by shareholder scrutiny.
Yea, however, robustly refutes such claims. Nowadays, he says, with the price of potential acquisitions on the rise, old-fashioned bargains are few and far between, so the focus is very much on adding value. ‘Private equity is increasingly seen as the winning formula because it drives an absolutely clear agenda. When the board meets, they don't have to talk about how they are going to explain things to the shareholders because the shareholders are already there, on the board. It's the purest form of capitalism. The interests of shareholders and management are fully aligned and there's a clear measurable journey from start to finish.'
But 3i is listed, so he can't take his own medicine. How does he make sure that his own shareholders are ‘fully aligned'?
‘The job of any CEO is to earn shareholders' trust. One of the challenges is the belief that everything is analysable. I got asked recently by a potential investor to explain the leverage multiples of the deals we did at the beginning of the year versus those we did at the end. I said: "Look, this information will not help you." There comes a point where analysis stops, where what you have to do is believe in your people, their experience and in the systems and processes you have for making decisions. If you tried to analyse everything you would go mad.'
With 750 staff spread across 14 countries and a portfolio value of £4 billion, by private-equity standards 3i is a very substantial player indeed. But you won't see its name on headline-grabbing mega-deals like last year's takeovers of Birds Eye (Eu2.3 billion) and United Biscuits (Eu2.6 billion), or tied up in the more recent speculation over the bid for Sainsbury's, or even BT.
Rather, it focuses on the international mid-market, making 50 or 60 investments annually, worldwide, of typically $10 million-$50 million each. It is here, says Yea, that 3i is best equipped to succeed. ‘What we try to do is to combine the advantages of scope and scale without straying into the top end of the market. It's not that the top end puts us off, it's not a bad market, but our advantages get progressively eroded.'
The companies it invests in are not, on the whole, household names - hands up who's heard of Boxer TV-Access, Jake Holdings, AviaPartner? But they do, by and large, make money.Despite his pledge to avoid the top end of the market, since he took over as CEO in 2004, Yea has shifted the focus of the firm so that it's now as a group making fewer, larger investments. 3i chair Baroness Hogg, who gave him the job in the first place, says Yea possesses a potent combination of ambition and rigour: ‘He has a great ability to create change without creating turbulence.' As the first outsider CEO of 3i for many years, he also, she notes, avoided the temptation to parachute in a cosy group of apparatchiks with which to surround himself. ‘He didn't undervalue the people who were there already; he was able to take them along with him.'
One of 3i's largest punts in recent times was the £555 million National Car Parks deal of 2005. On which they now look set to make a hefty 45% in 18 months if a propsed sale to Macquarie goes through. As well as being an uncharacteristically big-ticket gig for the firm, NCP was also bought not on the public market but from another private-equity operation, Cinven. In the jargon, it was a tertiary buy-out, meaning that the firm had already been previously enjoyed - as they say in the used-car business - by not one but two private-equity owners.
Such deals are often cited by the industry's knockers as evidence of the ultimate sterility of the PE model. The argument goes that feeding off one another's leavings like this locks up capital in a circular and futile chase after ever-decreasing returns for the few, when it would better be utilised as growth capital in the public markets, creating jobs and boosting productivity on a much wider scale.
‘I absolutely reject that,' says Yea. ‘Quite often there's the suggestion that a secondary or tertiary buy-out takes place in a kind of smoke-filled room where I'm swapping my stuff for yours. I have to tell you nothing could be further from the truth. You are buying from a smart seller, which is not always the case. The care we take not to be caught out is a degree more intense because of that.'
He also dismisses the idea that these deals are unproductive or even damaging to the companies involved. ‘The implication that there's only a one-time gain in performance that a company can have [under private-equity ownership] is wrong. It's like saying that a quoted company should only be quoted for three years, because by the time the management has done something it's kind of all over. The best companies are those that keep reinventing themselves.'
But 3i is also a FTSE-100 company, remember, and, compared to its peers, it's a tiddler - albeit, with annual profits of more than £1 million per employee, an enviably productive one. Shell's record £13 billion profit for 2006 equates to about £120,000 per employee. Yea is extremely keen for the firm not to get much bigger - in terms of headcount, at least. ‘There's real value for us in the "one room, one firm" rationale: 750 is no larger than a secondary school,' he says, all teacherly again. ‘At school, you may not have known everyone intimately, but you sort of knew who they were. That's a very important part of our culture - we're large enough to be relevant but small enough to be accessible. People who come to work here from larger firms - investment banks or whatever - are always amazed at how easy it is to get and share information.'
Married to wife Daryl, he has two sons, William and Daniel, and a daughter, Georgina. He took his first steps on the road to career success in time-honoured fashion by becoming a chartered accountant. ‘Accountancy is a great training ground. Originally, I wanted to be a lawyer but I thought that studying law at university would be a waste of a good education. I decided to do something I'd never have the chance to do again, so I chose French and Spanish - mainly for the literature.'
After three years among the dreaming spires of Brasenose College, Oxford, however, he changed his mind about the law. ‘I'd decided that I wanted to work in industry. But as a modern linguist in industry, I had to have something else I could do. I went for cost-of-management accountancy, as it was known then.'
He may only just have got his foot on the bottom rung of the ladder, but he was an ambitious lad who already had his sights set on the top. ‘I chose Perkins because it had a great track record of promoting managers early. For me, it panned out exactly. I was promoted quickly and ended up running its French operation at 25.'
It was at Guinness that he was to have his first taste of boardroom success, rising to become financial director by 1993 and taking a major role in the giant merger between Guinness and GrandMet that created Diageo in 1997. But he didn't quite make it all the way, and left to join Investcorp in 1999 as head of its private-equity business. ‘Look, the merger had my blood all over it, right, but it was quite clear that my role within Diageo would continue to be finance director. That's why I moved on to Investcorp.'
Talking about himself he becomes clipped and slightly abrupt, his supply of good-natured expansiveness running low. As colleagues probably discover quickly for themselves, he is impatient with questions that he doesn't see the point of and guards his privacy assiduously. We met in a pleasant but anonymous conference room at 3i's Victoria headquarters, rather than in his office, for example. Doubtless this is partly to avoid a nosy hack seeing anything that he shouldn't, but one also suspects that an audience in his own lair is a privilege not granted lightly.
He employs similar arm's-length tactics when dealing with the juicier parts of his career, too. In particular, a kind of anti-anecdotal delivery that renders even the most potentially colourful episodes in a frustratingly neutral palette. A non-exec director of Manchester United from 1999 to 2004, he was kicked off the board by Malcolm Glazer after one of the most frantic and emotional takeover battles of recent years. When he was climbing the pole at Guinness in the '80s, the firm was run by ‘Deadly' Ernest Saunders, who later became one of Britain's most notorious corporate criminals. And when he joined 3i in 2004, he did so at the expense of property giant British Land, with whom he had been talking for over a year about taking the top job there.
A rich fund of material for a few war stories, you might think, but that is not Yea's style. ‘Two buses came along at once' is his laconic verdict on the British Land vs 3i cliffhanger. ‘But at the end of the day it has been a win-win and we're all still talking to each other.'
Returning to safer ground, how does he manage the tricky task of getting the most out of his staff? Isn't this classically an industry peopled by cash-fuelled mavericks whose only god is Mammon? Apparently not.
‘We try to be a firm where the egos are a bit lower. You hear stories in this industry, right, about firms where two executives in different offices are trying to get the same deal, each of them telling the outside party not to share the deal with the other. That's called "eat what you kill", and we are absolutely not that kind of firm. You can be confident without being a big ego, and hard-driven without being unpleasant.'
But he is absolutely clear that if 3i is to operate effectively, the potential earnings of its top dealmakers must be uncapped and determined by performance alone. ‘I take great pride in the fact that you don't have to get my job to be the best-paid person at 3i,' he says - not a sentiment often voiced by FTSE chief execs, you have to admit. ‘I don't mind people earning a lot of money, because there is no hiding place. If you buy something for 100x that turns out to be worth 200x in three years' time, it's crystal-clear what's happened. As it is if it's still only worth 100x.'
He's also proud of the way that 3i people keep in touch with the management teams of firms they no longer have any financial interest in. ‘Some of our best ambassadors - and sources of information - are the heads of companies that we've sold. Keeping those relationships alive is just one of the things we do.'
That's all very jolly, of course, but Yea isn't quite as egalitarian as he sounds. He is, after all, a man who has to go up against some of the most powerful and ambitious go-getters on the planet. But you don't have to become something in order to compete with it, he says. ‘We are capitalists. We're in this to make money. But you can be a capitalist without being an animal. We're trying to make companies more valuable, and that is good for society.'
The bell goes for the end of the lesson, and it's time for me to leave.
Yea in a minute
1954 Born 11 December, Carshalton, Surrey. Educated Wallington School, Surrey, and Brasenose College, Oxford
1984 Joins Guinness as a comptroller
1988 Finance director of £250m management buy-in Cope Allman
1993 Financial director, Guinness plc
1997 FD of Diageo, product of the merger between Guinness and GrandMet
1999 Head of private equity, Investcorp International. Appointed non-executive director, Manchester United
2004 Chief executive, 3i. Voted off Man U board by new owner Malcolm Glazer
2005 Non-executive director, Vodafone
Three big challenges facing Yea
1 To strengthen 3i's position as leading provider of quoted access to private equity returns in the face of increasing competition from new listed private-equity vehicles, especially from the US
2 To improve the performance of 3i's VC division, the only one of the firm's three core business lines to miss his 20% target last year
3 To maintain enough juicy deals in the investment pipeline to keep staff and shareholders happy