3i dividend increase fails to mask loss

UK-listed 3i attempted to placate investors by announcing a substantially increased dividend during its half year results presentation Thursday morning, as it revealed its portfolio had fallen in value by £523m.

3i's half year results showed the group's gross portfolio return fell to -8.3 percent in the six months to 30 September. 3i chief executive Michael Queen laid the blame for the fall in value of the group's portfolio squarely at the foot of market conditions – “We have not been immune to the broader market turmoil and the challenging environment has had a direct impact on our results,” he said in a statement.

Later, during a results presentation, he added: “Concerns over the Eurozone, political turmoil and deleveraging pressures on the banking system is likely to lead to increased risk and lower growth. It's hard to think of another period that's been so uncertain or volatile. However, this kind of environment does throw up some very interesting opportunities.”

Queen said 3i had cut back costs significantly, and had earmarked a further £15 million of savings to be made. A spokesman said that one of the measures to be taken is a further reduction in headcount at the group, with 10 percent of staff set to be made redundant, principally in 3i's UK offices.

Realisations, which included the sales of its stake in German engineering business Norma Group, totalled £532 million (€624 million; $847 million) in the six month period. It invested £448 million over that time. Due to the uncertain economic environment, Queen said 3i did not anticipate significant exit activity in the next six months.

In announcing a 125 percent increase in the group's dividend, from 3.6p per share to 8.1p, Queen sought to appease dismayed investors, some of whom have grown increasingly vociferous in their criticism of the group's performance. The group's falling share price – it has plummeted 38 percent this year bringing its market capitalisation to £1.9 billion – caused it to fall out of the FTSE 100 in September. The increased dividend will also help the group meet its five year return on equity target of 15 percent.

3i's total return on shareholders' funds was -15.6 percent, it said, posting a loss of £523 million. That compared to a positive return of £117 million in the same period last year. Its portfolio value fell from £3.7 billion in the same six month period last year to £3.4 billion in the most recent half year, while net asset value slipped from £3.2 billion to £2.8 billion.

Net debt on the group's balance sheet rose from £352 million to £531 million.

Queen said the group's infrastructure and debt management units had performed well however. 3i has seeded its new credit opportunity fund with £50 million of capital, and Queen said the group would seek to raise external capital at a later date “if it gains traction in the market.” He said that as far as 3i's debt management business was concerned, it would look to make new platform acquisitions (such as the debt investment arm of Mizuho bank in September 2010) as well as launching its own new initiatives.