3i CEO says outlook challenging, capital precious

By Megan Davies

PHILADELPHIA, Jan 23 (Reuters) - The CEO of British private equity firm 3i Group Plc (III.L) said on Friday the outlook for the economy and credit markets remains extremely challenging, and capital is king.

"In the next couple of years, capital is the most precious thing around," Chief Executive Philip Yea told a conference in Philadelphia organized by Wharton University. "So how we use our own capital strategically is extremely important."

3i, which owns companies as diverse as lingerie brand Agent Provocateur and laser eye correction business Ultralase, said in November that first-half revenue from company disposals were down 43 percent as the credit crunch had made it more difficult to sell companies in which it had invested.

"At the moment, our core priority is the portfolio, and will be for some period," Yea told the conference.

Significant challenges lie ahead, but it is "not the right time to write off private equity," he said.

"The economic outlook is extremely challenging; credit markets continue to be extraordinarily challenging. One hears of many corporates that have to face significant refinancing in the next six to nine months, and that's one of the biggest near-term challenges for the credit and equity markets."

He expressed concern that one reaction to the crisis might be to regulate leverage.

"If you start to regulate financial structures, you're missing the point of financial markets," Yea said on the sidelines of the conference.

3i has laid more bets coming into this period in the non-leveraged areas of growth capital and infrastructure, he said.

Yea sees big opportunities to invest in those areas still, and sees the opportunity at some point to raise a growth capital fund. That could be attractive to limited partners, the powerful investors that put money in private equity, he said.

Along with other private equity firms, 3i has been cutting costs. The company said in December it would cut headcount by about 15 percent, or 100 people, in response to tough market conditions. (Editing by John Wallace)