I
f 3i is the cautious public face of private equity, then the prospects for the more buccaneering end of the buy-out business cannot be good.
The listed British investment group took a fearful beating when the dotcom bubble deflated. Its shares lost roughly three quarters of their value, peak to trough, between 2000 and 2002 and net asset value per share almost halved.
Since then, however, as Philip Yea, chief executive, was keen to stress on Thursday, approach and portfolio has changed: 3i owns fewer companies, its investments are generally larger (though it has always eschewed the biggest buy-outs) and its geographic spread is broader.
Still, having just produced its first negative return for five years, 3i needs to keep all its conservative and defensive wits about it. Mr Yea made no bones yesterday about the challenges ahead. 3i was assessing the earnings potential of its investments in early October, just as the storm unleashed by the collapse of Lehman Brothers was raging. No wonder it increased its provisions and impairments for unrealised losses to £248m, nearly four times the figure a year earlier.
The group realised enough from disposals during the good times to be able to afford to pull in its horns and wait for portfolio companies’ performance to recover. For reference, its buy-out investments run on a ratio of weighted average debt to earnings before interest, tax, depreciation and amortisation of 5.4 times. Only 5 per cent of leverage is repayable before December 2009. That must provide the sort of buffer against disaster that some buy-out firms – which loaded their portfolio investments with debt up to 8 or 10 times ebitda – can only dream of.
That leaves the conundrum of 3i’s share price. It fell 15 per cent in the six months to September 30, while net asset value dropped by only 5 per cent. Since then, the stock has lost another quarter, underperforming the FTSE 100. The shares closed yesterday at 515p. Investors must believe 3i’s portfolio is worth much less than 3i says it is, or that its value will drop substantially in the coming months, or a combination of the two. That’s harsh, but while buyers continue to believe that today’s assets will be worth less tomorrow, it’s understandable.