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3i to liquidate quoted fund

Following in the footsteps of American Capital and KKR, 3i will de-list its quoted private equity fund. The exercise values the vehicle at £355m, 33% above last week’s closing share price.

Publicly traded private equity firm 3i will acquire the assets of its London-listed fund, 3i Quoted Private Equity (3i QPE), in a scheme that values the vehicle at approximately £355 million (€400 million; $517 million) and will result in a £110 million net cash inflow for 3i.

It is the latest in a series of defensive moves by 3i, whose share price, like many publicly listed private equity firms, has fallen drastically in recent months. The stock has collapsed from peaks of £10.05 in January 2008 and £9.56 in August last year, to £2.22 in mid-morning trading today.

3i floated its 3i QPE fund in June 2007, raising approximately £400 million to invest in listed European small and mid-sized companies without taking them private. The aim was to apply private equity-style shareholder activism to public markets companies.

“Since the onset of the dislocation to the credit markets in autumn 2007, 3i QPE’s share price has traded at a significant discount to its net asset value,” 3i said in a statement.

Last week the firm raised £60 million from selling a 10 percent stake in its listed infrastructure fund, which is also trading at a discount to net asset value.

3i said the scheme to absorb the quoted fund will benefit 3i QPE’s shareholders by paying a premium over their shares’ current market value and giving them exposure to a more diverse portfolio. It will also eliminate the “double discount” they suffer on 3i QPE’s underlying assets, which 3i is required to carry at quoted value, the firm added.

Under terms of the deal, each 3i QPE share is valued at 88.8 pence, equivalent to the fund’s net asset vale as of Friday, 19 February. The quoted vehicle’s closing share price on Friday was 66.5 pence per share, representing a 25 percent discount to NAV. The scheme values 3i QPE at £355.2 million, a 32.6 percent premium over Friday’s closing share price.

For the 55.1 percent of 3i QPE not owned by 3i, investors will receive 50 pence per share in cash plus 0.1706 of a newly issued 3i share, equivalent to a total cash consideration of £110 million plus 37.6 million of newly issued 3i shares. The newly issued shares will represent 8.9 percent of 3i’s post-transaction outstanding shares.

The difference between the quoted vehicle’s cash balance and the cash consideration being paid to shareholders is expected to result in a net cash inflow for 3i of roughly £110 million.

The deal, expected to complete around 17 April, is subject to various regulatory approvals and must be approved by roughly 66.7 percent of 3i QPE shareholders. Certain shareholders have already agreed to the scheme. Coupled with 3i’s stake, this means holders of more than 64 percent of the vehicle’s shares will vote in favour of the deal.

“There’s already substantial support,” a 3i spokeswoman said.

3i is the third global private equity group in four months to decide to pull a publicly traded affiliate. Both American Capital and Kohlberg Kravis Roberts were so disheartened by their Euronext-quoted vehicles’ performance that they opted to de-list them.

3i’s disclosure to liquidate the fund sent 3i QPE’s share price soaring during morning trading. At press time shares had jumped 18 percent to 85 pence per share.

The dire performance of 3i Group’s share price, which lost 42 percent of its value from mid-November to mid-December, is down to high leverage, scepticism over the portfolio valuation and concerns about funding, according to analyst research.

JPMorgan Cazenove analyst Chris Brown said in December that in order to increase its stock’s rating, 3i should realise assets “where it can at good prices” and avoid making any new investments “no matter how tempting”. Estimated at around 56 percent of net asset value, 3i’s leverage is “high relative to the listed private equity sector, where most companies are holding net cash”, said Brown.

3i has said its investment portfolio lost 53 percent in the nine months ended December 31. Its top 50 investments, which accounted for 61 percent of the £5.9 billion portfolio value at 30 September, lost an estimated 21 percent, or £682 million, during the period.

Amid these developments, the firm reduced its global staff by 15 percent and chief executive Philip Yea stepped down from his post after less than four years. He was replaced by 3i infrastructure head Michael Queen, who in turn was replaced by 3i veteran Cressida Hogg.