3i Group has warned of deteriorating earnings among its portfolio companies as the UK’s largest listed private equity investor reported quarterly falls in asset sales and investments in the third quarter.
The buy-out, infrastructure and debt investment group said the environment for private equity deals remained challenging given the uncertainties in the market and the poorer economic outlook.
The eurozone crisis has brought deal financing markets almost to a standstill in the last few months of 2011. The value of European private equity transactions has dropped by a third to €11.5bn sequentially in the last quarter, according to data from the Centre for Management Buy-out Research at Imperial College London.
Michael Queen, 3i’s chief executive, said: “Conditions have not improved since [November], which has been reflected in a softening in the earnings performance of some of the portfolio over this period.”
The private equity group did not reveal how this slowdown in company earnings has affected its overall returns, as it only reports profit numbers every six months.
For the first half of the year, it had reported a negative total return – the yardstick it uses to measure the changes in the value of its investments and its fee income – of £523m.
Mr Queen said the group had strengthened its business lines in the last three months of the year with a reorganisation of the buy-out business, the launch of a credit opportunities fund and a move into Brazil.
The private equity group late last year cut another 45 jobs mostly in the buy-out business to reflect the end of the investment period of its €5bn fund.
It aims to use its balance sheet to invest in further deals until it eventually hopes to be able to raise a combined buy-out and growth capital fund next year.
The group invested €82m into deals in the third quarter, after spending €448m on takeovers in the first six months.
The numbers do not yet include a $55m transaction to buy cable television group Blue Interactive in Brazil and an infrastructure investment into Vattenfall’s Finnish assets.
3i made a gross profit of £219m through the sale of companies in the months from October until December, a slowdown from £532m in the first six months.
The realisations were dominated by the £200m sale of German power generation systems provider MWM. The deal had already been agreed in the first quarter.
3i’s pile of gross cash increased further to £1,753bn at the end of the year, while the group reduced its net debt by £136m to £395m.
Mr Queen last November announced a more than doubling of the dividend to counter shareholder anger over the group’s low pay-out ratio despite its large cash mountain.
3i has consistently underperformed the FTSE 250 index in the past few years and its shares are trading at a discount of more than 35 per cent to net asset value.
“We continue to believe 3i is increasingly vulnerable to a major restructuring or bid approach,” Iain Scouller, analyst at Oriel Securities, wrote in a note.
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