My father was a long-standing shareholder in 3i.When he died in 2009, I immediately sold his holding. It proved to be one of my better investment decisions, having been one of his worst. On flotation in 1994, 3i looked attractive. Set up after the war to offer permanent capital to small businesses, it was a good idea then, and would be a good idea today if ICFC (as it was called before changing to a name you couldn’t find in the phone book) had stuck to the knitting. It demanded tough terms, but promised to hold the shares as long as the management wanted.
Over time, 3i accumulated its share of dud investments. The boys and girl at 3i craved excitement, so the unfortunate minnows were tipped into the drink, and the proceeds recycled into tech stocks, perfectly timed for the dot-com boom. When that bust, the share price went with it. Not content with this epic strategic blunder, in 2007 3i geared up to re-invent itself as a private equity house, perfectly timed for the pre-bust excesses. In the desperate days of 2009, 3i achieved another baleful distinction, as an investment company forced into a rescue rights issue. The cash was needed to pay off a convertible loan (the conversion price was far over the horizon).
This story has no happy ending. Morningstar shows the shares underperforming their benchmark over one month, three months, one year, three years and five years, and awards 3i its bottom rating. The current management is fobbing off the shareholders by raising the (unearned) dividend, but as Winterflood notes: “the fund’s strategy appears to be shifting on an anual basis”. The shares sell on a discount of 32% to net asset value – assuming the NAV of a private equity house can be measured that accurately.
The raiders from Laxey Partners have noticed, and want shares in 3i infrastructure, a big part of 3i’s assets (and which, perversely, stands at a premium to NAV) to be distributed to the shareholders. Citiwire has an analysis here. The admirable Jim Grant has also noticed that the converse of a 32% discount is the possibility of a 50% gain if the £800m gap between price and NAV could be closed, by the management deciding that the shareholders could use the money better than it can. As he points out: “It would not be a characteristic move on the front office’s part, but it would be a profitable one for the stockholders.” Laxey’s idea would probably signal the end of 3i, but it beats anything that the management has come up with for more than a decade. Oddly, though, I don’t feel any urge to buy back the shares I sold two years ago.