Does 3i Offer Value?

One of the companies i have looked at over the years is 3i, a listed British private equity firm. Its shares have performed appallingly over the past years but I've occasionally looked at it with a view to seeing whether it's shares have been so hammered that it has become a classic value stock; one that sells at a discount to its intrinsic value with a nice margin of safety.
Each time I've looked at it I have held back mainly because it is difficult to assess the value of its underlying investments. The problem is as follows: You may think that the market value of the stock is at a decent discount to it its net asset value (NAV) but in fact the market valuation of the share may simply be an accurate forecast of the likely fall in asset values.
It was mainly for this reason that I have held off from buying 3i.
So I was interested to see this post looking at the firm by Neil Collins on FT Alphaville.

Morningstar shows the shares underperforming their benchmark over one month, three months, one year, three years and five years, and awards 3i its bottom rating. The current management is fobbing off the shareholders by raising the (unearned) dividend, but as Winterflood notes: “the fund’s strategy appears to be shifting on an anual basis”. The shares sell on a discount of 32 per cent to net asset value – assuming the NAV of a private equity house can be measured that accurately.
The raiders from Laxey Partners have noticed, and want shares in 3i infrastructure, a big part of 3i’s assets (and which, perversely, stands at a premium to NAV) to be distributed to the shareholders. Citiwire has an analysis here. The admirable Jim Grant has also noticed that the converse of a 32 per cent discount is the possibility of a 50 per cent gain if the £800m gap between price and NAV could be closed, by the management deciding that the shareholders could use the money better than it can. As he points out: “It would not be a characteristic move on the front office’s part, but it would be a profitable one for the stockholders.” Laxey’s idea would probably signal the end of 3i, but it beats anything that the management has come up with for more than a decade. Oddly, though, I don’t feel any urge to buy back the shares I sold two years ago.

Although Mr Collins feels no particular urge to buy the shares, I think the logic of his full post suggests that they may be worth looking at. There could well be value waiting to be unlocked.