Investment column: 3i's `partnership' funds rake in an extra pounds 38m

Investment Column
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The Independent Online
3I, THE VENTURE capital group that recently lost a pounds 1.25bn hostile bid for its rival, Electra, is immune to the temptation to fix its strategy by hunting for another acquisition. Judging by the jump in its share price when it lost the takeover battle, the City is in no hurry to see a rapid expansion. But yesterday's results suggest they may get one anyway.

3i's business is picking unquoted stocks with growth potential. The skills and resources required here are rare and command a premium. Brian Larcombe, chief executive, has taken the logical step of developing a string of "partnership funds". These funds mirror 3i's existing investments, but are available to City institutions in exchange for a fee and a share of capital profits.

Until yesterday these funds looked like a sideline. But the annual results showed the fees to be a substantial business - pounds 53m against pounds 15m the previous year.

The strategy extends 3i's traditional role as a liquid, FTSE-100 stock which can benefit from rapid growth in illiquid, unquoted companies. By taking on fund management clients, 3i is boosting income but spending little extra because the research has already been done.

3i is looking undervalued in any case. True, it is one of very few investment trusts which consistently trades at a premium to the value of its investments; yesterday the shares closed up 1.5 per cent at 701.5p, 16 per cent higher than the NAV per share of 601p. But part of the premium comes from 3i's status as a FTSE stock. Now positioned at 76, it is in little danger of falling out of the 100. The valuation seems less stretched, however, after considering 3i's investment management methods. To arrive at its NAV, 3i applies a price/earnings multiple taken from the average of the small- cap index. Last year's small-cap meltdown meant it used a multiple of just 8.8.

Given that 3i's investments are increasingly in technology stocks, this is over-cautious. 3i last year returned pounds 177.1m, or 5.1 per cent - 12 per cent better than the small cap index. And 3i's NAV will have risen since 31 March, the end of the reporting period.

Add to this the fact that the partnership funds business is barely priced in, and 3i looks rather cheap. Taking a conservative multiple of 12, the partnership business could add pounds 1 or more to the valuation, making this a buy up to pounds 8 a shar

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