3i’s listed status brings with it additional pressures

By Paul Mackintosh - 09/04/12

Pity Michael Queen. Just as Oaktree Capital and the Carlyle Group are dressing themselves up for the IPO catwalk, the CEO of 3i Group has been forced to illustrate in person some of the trickiest aspects of the listed private equity model. He has announced his resignation as head of the UK’s oldest listed private equity firm, after his post-GFC reforms failed to lift 3i’s stock above a 27% discount to NAV. 

“After a difficult period 3i is now well placed to achieve its full potential. Having restored 3i's financial strength the time is right for me to seek a new challenge,” Mr. Queen said in 3i’s official statement.

Investors were hardly mollified. Activist shareholder Laxey Partners immediately submitted notice of special resolutions for the next 3i AGM calling for a halt to new investments, a timely exit from existing assets, and return of the proceeds to investors. 3i and some of its more loyal institutional backers were understandably slow to embrace the effective windup of the company.

3i’s difficulties are not much different from many leading private equity houses: a hangover of richly valued, highly levered assets bought at the peak of the pre-2008 credit boom, when many were pressing then CEO Philip Yea to shift focus to big buyouts. But 3i’s listed status brings additional pressures that an unlisted entity could ignore. Hostage to half-yearly and annual results, answerable to public shareholders, 3i cannot ride out the cyclical effects of the crisis but is forced to follow the shifting fortunes and expectations of the public markets, in the process losing precisely those long-term countercyclical qualities so fundamental to private equity’s investment case.

This is not to defend Mr. Queen’s track record. Critics may have had a point that he would have been better to keep the buyout and growth capital practices separate, and that there was little real synergy in the bolt-on acquisition of Mizuho Corporate Bank’s debt management division. But he was not allowed to get on with it and work out the changes without respect to share performance. It is striking how little respect some of 3i’s investors showed to the guiding principles of the entity they were investing in. But equally, 3i cannot expect to have access to the freely available capital and other benefits of listed status without suffering from the same short-termism that private equity is supposed to circumvent, exactly by taking companies private. Perhaps what 3i needs is a good privatisation...