City: Trusting times

THE CITY doesn't quite know what to make of 3i. The investment group, which plans to come to the stock market next month in a pounds 1.6bn flotation, is a very strange animal. Potential investors are at the tail-wagging, bottom-sniffing stage - distinctly interested, but a bit wary, too.

There's the difficulty of pigeon-holing the company. It's not like any other investment trust. It is huge, with stakes in 3,500 unquoted companies - many more than in the entire portfolios of the institutional investors it is now wooing.

There's the curious state connection: 3i was founded by the Labour Government in 1945 as the Industrial and Commercial Finance Corporation and went through several metamorphoses before emerging as 3i in 1988. The Bank of England is a shareholder and plans to retain a stake after the flotation.

There's the clearing bank connection. The sceptics wonder whether an organisation largely owned and run by the clearers for 50 years can be any good? (The obverse, say the wags, is that if the clearers are selling, it must be a good time to buy.)

There are the botched float plans of the past: 3i seems to have been on the verge of a stock market debut for years and years. And there are the occasional embarrassments which have tarnished an otherwise unexceptionable history: the failed expansion into America, for example, and the pounds 72m thrown down the drain backing Isosceles, the Gateway supermarkets buy-out vehicle.

But these worries aside, 3i's advisers, led by Barings, have a great story to tell and an entire menu of titbits to entice jaded prospective investors. Greatest of these is the rare opportunity to invest painlessly in a great slab of smaller unquoted companies - the Mittelstand as it is known in Germany.

3i gets to hear of the best investment opportunities through its regional branches, an advantage denied to City-based competitors. I know of one rival venture capitalist who plans to fill his boots with the shares.

There are the tax breaks for 3i as it converts to investment trust status, after which it will not pay tax on capital gains. It will be able to write back pounds 150m of deferred taxation on day one. Its accounts are deeply conservative. It only revalues investments upwards on the basis of historic annual accounts.

And, of course, 3i is a candidate for inclusion in the exclusive FTSE-100 club - the one hundred largest quoted companies. If it passes muster, it will become an essential investment for many indexed funds.

Nothing much short of a stock market crash can prevent 3i's arrival on the stock market this time. And investors will probably lap it up. But the cruel truth is that, for all its attractions, 3i has not performed as well as the stock market average over the past 10 years. Barings still has a bit of work to do.