After heavy losses, 3i's future is looking a little brighter.
Private equity means investing in privately quoted companies; either by buying a company's shares and/or giving it a loan.
It's an important source of funding for small- and medium-sized businesses, particularly in hard times where weakly capitalised banks are reluctant to make new loans. However, the big problem for some private equity investors is that it can be difficult to get your money out; all too often investors have to take a fire-sale price, or wait until the company eventually floats on a stock exchange or for it to be sold.
The easiest way to invest in private equity is to buy shares in a quoted company which in turn invests in private equity. The largest quoted private equity investor in the UK is 3i Group (LSE: III), a member of the FTSE100 index which is currently valued at around £2.5 billion.
A Bit Of History
3i was formed as the Industrial and Commercial Finance Corporation in 1945 by the Bank of England and a consortium of banks to provide an alternative source of venture capital for small and medium-sized businesses. After several name changes 3i was eventually floated on the London Stock Exchange in 1994.
3i owns sizeable stakes in hundreds of private companies and other private equity funds. 3i also owns many quoted investments; its largest is a shareholding in the separately quoted company 3i Infrastructure (LSE: 3IN). One of its best-known companies is its subsidiary National Car Parks, whose town and city centre car parks are familiar to many of us.
Today 3i is an investment trust which specialises in private company investment and also advises and manages other private equity funds.
The Figures
3i's figures for the last five years are summarised in the table below. Before looking at the figures you might like to bear in mind that 3i's current share price is around 255p and that in recent years its shares have traded at a big discount to its net asset value (NAV).
| Year | 2008-09 | 2007-08 | 2006-07 | 2005-06 | 2004-05 |
|---|
| Diluted earnings per share | (522.2p) | 173.4p | 213.2p | 151.2p | 21.3p |
| Dividend per share | 6.3p | 17.0p | 16.1p | 15.2p | 14.6p |
| Diluted net asset value per share | 496p | 1,077p | 932p | 739p | 603p |
Your eyes are not deceiving you! 3i's accounts show a loss of 522.2p per share for 2008-09, more than twice today's share price. This was caused by the terrible performance of global investment markets during this period which forced 3i to write down the value of its investments by a substantial amount and changes in asset valuations are immediately reflected in 3i's earnings per share.
3i's interim results for 2009-10, for the six months to 30 September, showed that the NAV had fallen further to 286p whilst the interim dividend was reduced to 1p (a 74% cut). Thanks to a rights issue in June 2009 which raised £732 million, 3i has a reasonably strong balance sheet, with £5.6 billion of assets (mostly unquoted investments, loans and almost £1.3 billion in cash) compared to £2.8 billion of liabilities of which some £2.1 billion is debt.
Think Of the Future
It's been a rough ride over the last decade for 3i's shareholders since the shares peaked at over £20 in September 2000. That said, when you buy a share you're investing in the company's future, not its past, although what has happened the past is the reason why the company is in its current position.
Today it's a buyer's market for investors who are looking at private equity firms because the credit crunch has reduced interest in private equity investments, in large part because fewer private equity businesses are being sold or are listing on the stock market. However, it is often said that a good time to buy is when the barbarians are at the gate and what 3i offers is a way into a sector which appears to be "bombed out."
Private equity isn't a magic wand; despite what some might say just because a company isn't quoted on a stock exchange that doesn't make it a better investment. Whilst the stock market is often berated for creating a culture of short-termism, critics ought to ponder the fact that stock markets make it easy for investors to sell their investments and that without the option to sell many would not invest in the first place.
If you're interested in this sector, bear in mind that there are many alternative quoted private equity vehicles such as the F&C Private Equity Trust (LSE: FPER), Electra Private Equity (LSE: ELTA), Northern Investors Company (LSE: NRI) and Standard Life European Private Equity (LSE: SEP), as well as numerous Venture Capital Trusts which invest in more speculative younger private companies, including startups.
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