Sunday, August 17, 2008

3i vs SVG

After finding that I couldn't invest in the Bear Stearns and Lehman Brothers funds I considered investing in two large UK listed private equity funds - 3i (III.L) and SVG (SVI.L). 3i is a private equity firm that invests on its own account and also manages funds for investors. SVG has the same combination of businesses but does not originate its own private equity investors, investing instead in Permira's funds. SVG was created in the reorganization of Schroder funds which also resulted in the creation of Permira. This adds an extra layer of costs, which is one reason that I think SVG appears to be underperforming 3i.

3i mainly splits its investments between buyout and late stage venture or growth investments, while Permira is primarily a buyout outfit. Both SVG and 3i have some infrastructure investments as well. 3i is mostly invested in Britain and continental Europe with smaller amounts elsewhere. SVG has a large part of its investments in North America. 3i invests in smaller companies than Permira typically does. This is reflected in the commentary from the chairman and CEOs of the two firms in their most recent annual reports. 3i's management dismiss the credit crunch as mainly affecting deals larger than those in their portfolio, while SVG's management are gloomy about prospects.

Compared to conventional stock or fund investments 3i looks very cheap:

  • It trades at a discount to book value. And it is well known that private equity book value is usually conservative. Most realisations of investments yield higher prices than the carrying value - so-called "uplift". Recent book value is £10.60 while the share price is £9.09. A 14% discount. It has traded at a premium in the past.

  • The trailing P/E is only 5.

  • Total investment return after expenses for the 2008 financial year that ended at the end of March was 18.6% on initial shareholders funds. In 2007 3i earned 26.8%. The underlying gross portfolio returns were 23.9% and 34%. From 2004-6 the gross returns were 19.4%, 16.7%, and 24.4%.

The buyout line of business has done even better with a 54% gross rate of return in 2008. The IRR of the different buyout funds has ranged from 35-62%. SVG reports that Permira's underlying buyout funds averaged a 20% IRR while SVG's NAV has grown at an average 14% p.a. since listing. It's not surprising that most analysts that track 3i rate it an buy or outperform. The modal recommendation on SVG is "hold".

I bought 200 shares of 3i for £9.06 each. Commission was £6 plus a 0.5% stamp tax which is a transaction tax on share trades in the UK. No wonder CFDs are so popular in Britain. The stamp tax doesn't apply to them. It'd be hard to day trade with a 0.5% tax on top of commissions.

Next I'll look for a second European private equity investment.

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