If you have a spare £1,000 to invest and get the most from your money, it may pay to search for bargains off the beaten track.
Today I’m looking at two companies that meet this criterion and have a record of generating outstanding returns for investors.
Private equity profits
For most investors, the private equity industry is off-limits because initial investment requirements for the best funds often run into the tens of millions of dollars.
However, regular investors are not entirely shut out of this sector, which has produced market-beating returns over the past two decades.
Indeed, FTSE 100 leader 3i Group (LSE: III) is a private equity company at heart. Set up after the Second World War to invest in the devastated UK industry, 3i has a rich history of making money in the private sector.
Last year was a particularly impressive year for the group. For the year to 31 March, 3i produced a total return of 24% on shareholder funds, pushing the net asset value (NAV) per share from 604p at the beginning of the year, to 724p.
There are several different parts to the 3i group. The company is predominantly a private equity business, investing in private enterprises, improving them and then selling them on. Last year, this strategy generated over £1bn in profits — or to use the proper term, realisations. Of this total, £587m was reinvested in the portfolio. On top of its private equity business, 3i also manages infrastructure funds. It takes a fee for looking after investors’ money and managing fund portfolios.
With demand for private equity and infrastructure investments only increasing, I reckon the demand for 3i’s services from investors is only going to get stronger. This is excellent news for shareholders.
While I believe 3i’s future’s bright, it’s a bit difficult to tell whether or not the shares are attractively valued. As profits are linked to asset realisations, I reckon the best metric to use is NAV. On this basis, the company is trading at a price to NAV of 1.3. Considering the NAV grew by nearly 30% last year, I believe this is a price worth paying.
Cheap diversification
Another play on the private equity industry is the F&C Private Equity Trust (LSE: FPEO).
F&C is cheaper than 3i, but the company’s returns are not as good. According to its results for the first six months of 2018, published this morning, shares in F&C are currently trading at a discount to NAV of 3.4%. Unfortunately, the NAV only increased 1.7% during the period.
Still, F&C is investing for growth. Throughout the first six months of 2018, the firm deployed around £41m of capital. Realisations totalled just under £30m.
The biggest advantage of buying F&C over 3i, however, is diversification. The bulk of 3i’s private equity portfolio is just one company, retailer Action. Meanwhile, F&C has a broad variety of investments in funds and companies around the world. Spread across various sectors and industries, F&C’s portfolio is much less likely to suffer from a significant loss if one business fails to live up to expectations. The best solution, in this case, may be to include both companies in your portfolio.
