View from City Road: 3i right to wait for better times

THE results of the 3i group confirm how sensible it is to postpone its flotation as an investment trust until the economy and the markets are in a better mood. The figures are in fact good, measured against the length of the recession, especially as the bad debt provisions have come tumbling down from pounds 158m to pounds 61m. This is at a time when the clearing banks are poised to report a much less reassuring trend.

But the nub of 3i's problem is that it must convince the City that an investment trust with a large proportion of unquoted companies should not trade at a high discount to asset value. Yesterday's modest tinkering with valuation methods is insignificant in this context.

The 3i record suggests that a discount of more than 15 per cent would be unreasonable, given its unique position, long investment horizons and extensive experience of specialist investment.

Research by the company's brokers shows its investment portfolio correlates well with the Hoare Govett Smaller Companies Index, but its riskiness is less than half the index, measured by the variability of returns. And 41 per cent of the portfolio is either listed or secured.

But it will be an uphill task achieving a low discount in a market growing increasingly suspicious of new issues and conscious of how closely 3i's performance is tied to trends in the economy. Hence the need to wait for better times.

The 3i revenue surplus before tax was down to pounds 40m from pounds 56m, mainly because dividends and interest income from investment declined, and because of an pounds 11m provision against the discontinued property development business. But the total return to shareholders after tax rose from pounds 23.7m to pounds 68.8m. Assets attributable to shareholders rose pounds 44m to pounds 1.268bn, or 538p a share, a 3.2 per cent increase compared with a near 2 per cent fall in the FT All Share Index. 3i must be worth at least pounds 1.1bn.

It would be nice for investors to load up now with 3i stock at a knockdown recessionary price, but the present bank shareholders are well advised to wait before they sell out.