The Investment Column: Grab a slice of 3i as it benefits from the rise and rise of private equity

Biofuels Corp; Asos
Click to follow
The Independent Online

Our view: Buy

Share price: 967.5p (+2p)

The inexorable rise of private-equity has been one of the key trends in global finance over the past decade.

An avaricious industry's insatiable appetite for deals has underpinned burgeoning merger and acquisitions activity on both sides of the Atlantic, and prompted a re-rating of previously fusty sectors such as pubs and utilities.

Borrowing heavily to buy public companies, before restructuring or revitalising the business in the private arena, their eye-watering returns on equity have put traditional long-only fund managers to shame.

Pension funds and the very rich are now tripping over themselves to commit cash to "alternative assets".

And there's the rub. With private-equity houses asking investors to stump up a minimum of about $25m (£13.5m) to buy into their funds, it is light years beyond the means of most to harvest those thumping returns.

Private investors with more modest means, but a fancy for private equity, should cast their eye over 3i Group. Shares in Europe's biggest publicly traded buyout specialist change hands on the London Stock Market and are available to all for 967.5p each.

It is a broad-based venture-capital group, running a string of big funds, hunting for bargains among established companies, backing management buyouts and contributing capital early on to technology ventures and growing companies.

Already geographically diverse, it emerged yesterday that 3i wants to deepen its presence in Asia and China by committing up to $200m to oil, gas and power companies there to exploit surging demand.

The company appears in rude health. It raised £627m in the five months to August by sales and flotations, and is poised to close a new €5bn fund. A specialised infrastructure fund may also be in the offing.

Its net asset value - a key measure of whether the shares are cheap or expensive - stands at about 709p per share. With a slew of lucrative exits expected in the coming months, 3i is a buy.

Biofuels Corp

Our view: Avoid

Share price: 79p (+13.5p)

Biofuels Corporation saw its shares soar 20 per cent yesterday as investors responded to two recent bits of positive news from the company. First, it has fixed a problem which meant that the biodiesel the group was producing fell below the specifications required by its customers. Second, it plans to build to new plants on Teeside which can each produce an extra 200,000 tonnes of biodiesel.

The news marks the latest twist in what has been a roller-coaster ride for shareholders. Biofuels floated on AIM in 2004 at 75p and raised £13m. Although the business was a virtual start-up, investors lapped up the issue. The group turns vegetable oil into diesel, which can then be used either as a pure substitute for conventional diesel or, more commonly, it is blended with regular diesel. Given the concern about global warming and carbon emissions, Biofuels is in a very sexy market.

Amid the optimism, the stock hit a high of more than 300p last year, but soon came crashing down to earth after the group suffered a series of delays in building its plant. A rights issue followed at 230p, raising £30m of new money. Since then, the stock has struggled to stay anywhere near this level.

The two new plants will take Biofuels' capacity from 250,000 tonnes per year to 650,000. This would make it a major player in the sector. It is not yet clear how the company will finance the new facilities. It carries a significant debt burden - £85m against a market capitalisation of about £40m - and when added to the cost of building the new plants means the whole group will soon have to be refinanced.

What form this will take is unclear, making Biofuels a risky investment and best avoided for now.

Asos

Our view: Buy

Share price: 93p (+0.25p)

The internet fashion retailer Asos delivered a 93 per cent rise in first-half sales yesterday. This followed growth of 86 per cent for the same period last year, which itself came against a comparative figure of 72 per cent.

Clearly, Asos, which targets fashion driven 18- to 34- year-olds, is growing a breakneck speed. By the end of this year, its revenues are forecast to hit £35m and pre-tax profits £3.2m.

Why is the group doing so well? Yesterday's results were helped by the fact that the number of items the group has for sale on its website doubled to 4,000. Also, it enjoyed a 60 per cent rise in the number of people registered on its site to 1.07 million.

Management are convinced that they came improve on this figure as awareness of what the group has on offer grows. To this end, it recently launched a glossy magazine.

Asos operates in the fastest-growing segment of the UK retail arena - according to industry data, the amount of money spent online by Britons soared 40 per cent to £13.5bn in the first six months of this year. This trend will not change any time soon, and makes the stock worth tucking away.

Comments