Will a bid save 'value trap' 3i?

3i has had a torrid time of late.

What started as the brainchild of the Bank of England's industrial committee in 1945 has become a high profile victim of the private equity bust that hit mid-naughties, with 3i Group unable to pull itself out of its rough patch.

After being stripped of its FTSE 100 billing in September last year, ratings agency Standard & Poor's has now turned negative on the trust, warning that as the euro situation weakens, the value of 3i's portfolio will be dragged down too.

Fragile cash flow and leveraging only add to 3i's difficulties, continued S&P, which said the private equity group will only manage slow income growth if the climate stays difficult.

Some highly regarded investors had put their faith in 3i chief Michael Queen's ability to turn the vehicle around, but after announcing his departure this morning, it seems rejuvenation of 3I will have to come from elsewhere.

Leadership change 'positive'

Queen has been chief of 3I for around three years and over this time he has set up a successful infrastructure business and deleveraged the company's fragile balance sheet.  However over his tenure Queen has been tested, and his decision to leave the £1.9 billion company comes at a time when returns are flat and net asset value (NAV) down significantly on a three-year view.

Before this morning's announcement, analysts at Oriel pointed out that for many reasons an investment in 3i will have felt like a 'value trap'.  Its shares have traded on a discount of around 30% to 40% to estimated NAV for some time and while many have said this substantial discount is not sustainable, catalysts for a turnaround have not had the desired effect.

Oriel's private equity analyst Iain Scouller believes that a change in 3i's top management tier could be just what the company needs, however.

'In [a] recent note we said we though the status quo was not an option at 3i, with some change expected in 2012.  A change of leadership allows some re-assessment of strategy, which we view positively,' Scouller explained.

Shareholders' faith seems to be waning, though, with 3i's investor register in red looking at the balance of transactions between October and January.  Around 28 million shares were let go of during this period, with Royal London and BlackRock among the sellers.