3i sees upswing amid 'tough decisions'

The listed firm has increased its investment pace, while taking a ‘measured and selective approach’ to new investments, said CEO Michael Queen.

3i reported strong performance for the first half of 2010 due in part to the listed firm’s portfolio companies taking on “tough decisions” in the stagnant markets to find growth and cut costs, the firm’s chief executive Michael Queen said in an earnings report released Thursday.

“The performance in the first half owes much to the quality of the judgments made by these boards and the actions that they have taken in finding growth in developing markets, in cutting costs at the same time as preserving capabilities,” Queen said.

3i reported positive results for the sixth-month period ending 30 September, showing a 3.8 percent total return for the first half of the year, up slightly from the 3.2 percent return for the same time period last year, and an increased investment pace.

The London-listed firm has significantly increased its investment pace in the first half of 2010, deploying £327 million compared to £190 million during the same time period last year. The firm also reported a drop in realisations, reaping £293 million in the first half of 2010 compared to £507 million last year in the same time period last year.

A considerable degree of macroeconomic uncertainty remains in many of the regions in which we operate as governments continue to wrestle with the twin challenges of reducing deficits and stimulating growth.

Sir Adrian Montague

3i has taken a “measured and selective approach” in making investment decisions “in the face of continuing market uncertainty and high pricing”, the firm said.

Performance in the buyout portfolio increased slightly in the first half, generating a £135 million gross portfolio return compared to a £132 million gross return in the same period last year. The growth capital portfolio actually saw a reduced gross portfolio return of £112 million in the first half compared to £159 million last year.

The growth capital portfolio was hit with a “reduction in earnings multiples” in the first half, leading to a £67 million negative value movement, the firm said. Overall, earnings multiples used for valuation reduced by 5 percent, the firm said, “consistent with the movements in comparable sector and geographic market multiples, and leading to a negative value movement of £71 million.

Oriel Securities said 3i's earnings numbers were inline with expectations, including the net asset value over the six month period of £3.30. The impact of multiples was “worse than expected” at negative £71 million. Oriel downgraded 3i to “hold” from “buy” Thursday on valuation grounds, the firm said in statement.

“We are telling clients that we are no longer buyers of the shares at current prices as we think they are now trading at the correct valuation i.e. no longer cheap,” Iain Scouller, a partner with Oriel, told PEO.

The firm will continue to invest in a cautious manner as uncertainty still plagues the markets, Sir Adrian Montague, who became 3i’s chairman in July, said in the report.

“Market conditions and the outlook for our business have improved compared to this time last year. However, a considerable degree of macroeconomic uncertainty remains in many of the regions in which we operate as governments continue to wrestle with the twin challenges of reducing deficits and stimulating growth,” Montague said. “It will therefore be important to continue to take a measured approach as we take advantage of opportunities to invest and grow.”