Little Sheep Case

3i Group plc and Little Sheep* Lily Fang Roger Leeds insead School of Advanced International Studies, Johns Hopkins University “Many people grow a company like raising a pig. The pig gets fat, you kill it and make money. I grow my company like raising a son. The average life of a restaurant is less than three years in China.

I want Little Sheep to last a century. ” – Zhang Gang, Founder, Little Sheep Catering Chain Co. “Helping a great business to realize its potential takes a lot more than Just capital.

It is ultimately about the people, thus your relationship with the management team nd the sort of support you can provide, such as introductions to key industry expertise and relevant operational best practice, is very important. ” – Anna Cheung, 3i Partner, China Executive Summary In 2004, a large, well-established global private equity firm invested in a rapidly growing Chinese restaurant chain that originated in Inner Mongolia, one of the countrys most remote regions.

This case describes how and why an unlikely yet productive relationship was forged between these two firms, and the result of their collaboration. 31, a highly respected global private equity firm with a 60-year track ecord, first established an Asian presence in Hong Kong in 2001. Three years later, a rapidly growing restaurant chain called “Little Sheep” came to the firm’s attention. Due to its meteoric growth and national brand name recognition, Little Sheep was very attractive to some prestigious international investors, who made offers of financing.

The founder, however, favoured 3i over other prospective investors due to a strong belief that, in addition to its financing capability, the firm had the expertise and commitment to add value on a number of fronts that would strengthen the overall ompetitiveness and profitability of his growing company.

This story of 3i’s value-creating contribution to Little Sheep is consistent with much of the private equity reality in China today.

As one of the most sought-after destinations for capital in the world, there is no scarcity of domestic or foreign investment capital for high-growth private companies, especially those run by the new generation of talented entrepreneurs. As this case demonstrates, the truly scarce resource for many private tirms striving to grow their businesses in an increasingly competitive market is industry and management expertise hat will help entrepreneurs make the transition to professional business practices, in areas such as marketing strategy, operational efficiency and corporate governance standards.

The relationship that evolved between 3i and Little Sheep is emblematic of value created by an experienced private equity investor with deep industry expertise and a Chinese entrepreneur who was able to first recognize and then capitalize on the value- enhancement services offered by an investor whose interests were closely aligned with his own. i Group Plc 3i Group plc is one of the oldest private equity firms in the world, with a track record ating back to 1945 when the British government and a consortium of banks founded two organizations – the Industrial and Commercial Finance Corporation (ICFC) and the Finance Corporation for Industry (FCI) – to bridge the financing gap afflicting small and medium-sized enterprises (SMEs) in the aftermath of the Second World War. l In 1975, these two corporations merged, and in 1983 the combined entity was re-named 3i – “investors in industry’.

In 1994, 3i was listed on the London Stock Exchange, becoming the first large private equity fund to go public and have access to permanent capital. 3i invests in a wide variety of businesses through ts five lines: buyouts, growth capital, venture capital, infrastructure and quoted private equity. 2 (See Exhibit 1 for a summary of 3i’s business lines for fiscal year 2007. ) Expanding its geographic footprint beyond the UK and Europe, 3i today has offices in 14 countries across Europe, Asia and the US, and has made investments in more than 30 countries.

The firm opened its first Asia office in Singapore in 1997, followed by a second office in Hong Kong four years later, and offices in Shanghai, Mumbai and Beijing subsequently.

During fiscal year 2006, 16% of the group’s new investments were in Asia. Alongside the geographic hift, 3i’s investment strategy has also evolved, with an emphasis on making fewer, larger, and more sector-focused investments. In Asia, the group’s average investment size has been about million, and sectors in focus included consumer-related goods and services, healthcare, and energy.