Take3iGroup,Britainslargestpublicly-listedbuyoutvehicle。

LastweekendIwadedthroughits128-pageannualreport,whichisstuffedfullofnumbers,assumptionsandcharts。

Tome,thekeyfiguretolockontoisnotEPSorthedividend,butthenetassetvaluepershare(NAV)of£10。

77asatMarch。

Thisisthebestindicatorof3isintrinsicworthatapointintime,andhasbeencalculatedfromthevalueofitsowninvestments(£6bn),lessitsnetdebtof£1。

6bn。

Thedifficultycomesinanticipatinghowbadlyaneconomicslumpcouldhitthisfigure。

Soheregoes。

TheNewYorkTimesreportsthatthedefaultrateonloanstoleveragedbuyoutshasrecentlyjumpedfrom0。

24%inAugust2007to3。

3%inAugust2008。

Worsestill,Moodysexpectsthistoclimbgloballyto6。

3%overthenext12months,possiblyreaching10%shouldAmericasinkintoasevererecession。

In2002,attheheightoftheEnron/Worldcomscandals,thedefaultratehit10。

4%,whiletheall-timepeakwas11。

9%backin1991。

Nowoneneedstomakeafewassumptionsabout3isinvestmentportfolio。

Firstly,Iestimate–asthisinformationisnotdisclosed–thataroundtwo-thirdsofits£6bnportfoliorelatestoloans,withtherestbeingequityholdings。

Afull85%ofthe£6bnresidesinilliquidassets,withonly15%allocatedtolistedstocks。

Meanwhile,77%oftheinvestmentswerecompletedinthelastthreeyears–mostlyatthetopofthelastmergersandacquisitionsboom,whendebtwascheapandplentiful。

Disturbingly,therefore,Isuspectmuchof3isportfolioconsistsofcompaniesthatwereboughtonracymultiplescomparedtotodaysmorefrugalvaluations,andwhicharealsomorehighlygearedthanbankswouldnowsanction。

Sohowbadwillitgetandwhatimpactmaythiswillhaveon3isNAV?

Thesimpleanswerisnobodyknows。

ButIguessthatan8%corporateloandefaultratewouldmeanafallinthefirmsNAVtobelow£8ashare。

Duringthe2000-2003downturn,3isNAVfellover50%,whileitssharepriceplummeted70%。

Andthatsnotall。

Thereisaremotechance3imayalsohavetoraisefreshequity,ifitneedstoinjectmoremoneyintoitsbusinessesasthecreditcycletightensfurther。

Andwithinvestorappetiteforriskierassetsatrockbottom,thentheinflowofnewmoneyintoitsthird-partyfundscoulddryupaswell,thushittingmanagementfees。

Idavoidthestock,andifyoudoholdtheshares,Idtakeprofitsnow。

Thenexttradingupdateisscheduledfor25September。

Recommendation:SELLat910。

5p