The next wave of money printing from the Bank of England is sure to boost stocks. And this private-equity giant is well-placed to benefit, says Paul Hill.
So far this year, the FTSE has been on a sugar rush, thanks to the abundance of central bank liquidity. The last dose of quantitative easing boosted equities back in 2010 and I suspect the next round will provide a similar boost.
One beneficiary should be 3i, Europe's largest listed private-equity house. It owns substantial stakes in numerous firms across Britain, continental Europe and Asia. These include Foster and Partners, architects of London's famous Gherkin' building.
Lately the private-equity industry has been hit by a funding drought as banks have deleveraged to meet strict new capital adequacy rules. This has brought deals to a standstill, knocked valuation multiples and hammered the economy.
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All of this contributed towards a softening in the earnings performance' of some of 3i's investments for the three months up to the end of December. I think this will trigger a small decline in net asset value (NAV) at the end of March, from 294p in September.
However, the recent trading update was by no means all bad news. Net borrowing dropped £136m (25%) to £395m, and with a prospective yield of 4%, the shares are good value on a 30% discount to NAV. What's more, 3i is now spreading its wings further into emerging markets.
In December, it closed its first transaction in Brazil with the $53m acquisition of a stake in Blue Interactive. Blue Interactive is a cable television and broadband provider aiming to tap into the growing middle class, capitalise on local deregulation and expand into smaller cities.
3i is in essence a geared play on the equity markets as it both invests in, and carries, debt at an average value of 4.4 times earnings before interest, tax, depreciation and amortisation (EBITDA). This leverage hits its results during downturns, but offers rich pickings when sentiment ticks up hopefully in 2012. Another risk is its wide selection of non-quoted investments, which reduce overall transparency.
That said, the shares trade at a hefty discount to both my own and Barclays' fair value of 250p a share. At these historically cheap levels, there may even be an outside chance of an opportunistic takeover approach, perhaps from another finance house. The next trading statement is expected in early April.
Paul Hill owns shares in 3i Group
Update: Glencore - Xstrata is in talks with Glencoreover an all-share merger that could create a commodities giant worth $80bn. Its shares now trade about 35% above my tip price of 900p. Glencore's approach could well put Xstrata in play, so my advice is to await developments. I'm sure both Rio Tinto and BHP Billiton will be watching the deal closely.
For information on Paul's weekly share-tipping newsletter, seewww.moneyweek.com/PGIor call 020-7633 3634.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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