Why 3i is offering a piece of Action

The single-asset restructuring on 3i’s 2006-vintage Eurofund V makes perfect sense, provided the absence of an advisor doesn’t cause problems.

3i is pursuing a deal that – given the fund, the asset and the situation – looks like the quintessential single-asset restructuring.

3i, one of the UK’s oldest private equity firms, wants to move discount retailer Action, the sole remaining portfolio company in its 2006-vintage Eurofund V, into a separate vehicle backed by secondaries capital.

Eurofund V was the last closed-end fund 3i raised and the firm has since invested from its balance sheet. Fund V’s final optional extension year ends in November and many limited partners will be expecting the rest of their cash back. The fund has already performed strongly, posting a 2.6x gross money multiple as of June 2018 (the latest data available).

For 3i, however, there is more value in keeping Action than selling it. The company has been described as “an exceptional asset”. It was bought in 2011 from its founders for 8.3x EBITDA. In its results that year, 3i valued its holding in Action at £143 million ($179 million; €162 million). As of June 2019, its carrying value was £3.06 billion – a post-discount run-rate EBITD multiple of 18x.

Eurofund V owns 33.2 percent of Action, with 44.3 percent sitting on 3i’s balance sheet. If the firm made a mint exiting Action via an M&A transaction, it would have to redeploy a lot of balance sheet capital in a high-valuation environment with a possible recession around the corner. As a discount retailer, Action’s countercyclical quality is another reason to keep it.

The firm had considered using its balance sheet to buy the rest of Action from the LPs in Eurofund V, Secondaries Investor understands. Though the firm did not wish to comment on why it opted for a secondaries deal, the desire to avoid a conflict of interest could have played a part. If 3i offered to buy out the LPs in Eurofund V, it would be on both sides of the deal. A single-asset secondaries deal allows it to maintain its exposure to Action while generating a market-tested price for exiting LPs.

If there’s one area of concern, it’s that 3i has chosen to proceed without an advisor. Given the complexity of these deals, if conflicts do come into play, it’s always useful to have a third party involved just so you can say you did. That aside, the strong rationale on the buy and sell-side make it a good advertisement for the secondaries market and for single-asset restructurings in particular.