3i gets relegated

Much wailing and gnashing of teeth in London this month as 3i, the UK’s biggest listed alternative asset manager, was dumped unceremoniously out of the FTSE 100. Britain’s biggest listed stocks index is re-adjusted on a six monthly basis, and since 3i’s shares have tumbled from around £3 to less than £2 during that time – wiping about a billion pounds off the company’s value – it failed to make the cut. As of 19 September, it dropped down into the FTSE 250.

3i’s status as a public company in a relatively private industry has always been a mixed blessing. On the one hand, its buyout arm in particular has benefited from a profile and a network and an infrastructure that it would not have had on its own. On the other, it also receives a disproportionate amount of attention when things go wrong. Because of its high profile, it sometimes ends up being a punching bag for the industry as a whole.

Despite the negative coverage, relegation will probably make very little practical difference to 3i, at least as far as its day-to-day operations are concerned. Being in the FTSE 100 might carry more bragging rights and some extra prestige value. And it might force a few tracker funds to buy your shares (though not many are still purely focused on this index alone, and 3i may now become more appealing to funds tracking the junior index). But dropping down to the FTSE 250 won’t change anything fundamental about its business. It likely won’t lose much of its profile, and according to lawyers, there won’t even be any reduction in its regulatory or disclosure requirements. Generally speaking, 3i will just carry on exactly as it was before.

Supporters would also argue that there’s a broader problem here – two problems, in fact. The first is the poor performance of public equities generally, as investors worry about lacklustre economic growth and the possibility of sovereign defaults in Europe. The second is the poor performance of listed private equity specifically. On both sides of the Atlantic, most listed groups are trading at wide discounts to their net asset value, as we discussed in this column last month. Stock market investors seem unconvinced by the attractions of private equity managers and why they need to be public in the first place. Or perhaps they just prefer to bet their money on companies with more liquidity and more transparency over quarterly earnings.

That’s not to say we should dismiss 3i’s fall from grace as a statistical irrelevance, of course. Question marks clearly remain over the company’s performance, particularly on the private equity side. Last year highly-regarded buyout chief Jonathan Russell departed suddenly, soon after an organisational shake-up by chief executive Michael Queen; some of his senior lieutenants soon followed. A year on, some investors and market participants argue that the company – now with its growth capital and buyout teams combined into a single division – has yet to carve out a new, post-Russell identity. And the recent headlines concerning the travails of production company Chorion, whose value 3i has had to write down to zero, won’t have helped sentiment either.

This issue of sentiment is by no means an insignificant one. For 3i CEO Michael Queen, negative stories make it increasingly difficult to convince his shareholders that the company is heading in the right direction. 3i might argue that it’s doing all the right things, and this may even be true. But if your share price is sliding, and investors are losing confidence in your ability to turn things around, there’s a danger of getting caught in a downward spiral. Queen desperately needs some more good news stories – and sooner rather than later.

On the other hand, it would be unwise to read too much into this. After all, it’s not the first time 3i has dropped out of the FTSE 100 in recent years; the same thing happened in 2009, not long after Queen’s appointment, and it didn’t take long for the company bounce back. It’s not impossible this could happen again now – although given the way markets seem to feel about private equity at the moment, perhaps we shouldn’t hold our breath.