Earlier this year I noticed that one company on the FTSE 100 had been smashing the market year after year, yet seemed to be overlooked by investors. The stock was private equity specialist 3i Group (LSE: III), and I bought a stake in August and in September.
Since then, 3i Group shares have ticked up slowly but surely, regardless of what the wider market was doing. I’m already up almost 12%.
These are early days but I still feel justified in my decision to buy it, because this appears to continue a long-term trend.
Power of three
3i’s share price chart shows a steady upward sweep over the years. My table below shows just how consistent it’s been. It’s an unbroken sea of blue.
| 1 week | 1 month | 3 months | 6 months | 1 year | 2 years | 3 years | 5 years | |
| 3i Group | 2.03% | 8.46% | 11.37% | 13.48% | 60.18% | 52.49% | 98.35% | 157.7% |
Only Frasers Group (203.48%) and Ashtead Group (177.46%) have beaten it over five years, but their progress has been more stop-start. One reason is that 3i Group knows what it’s doing, having invested in early-stage growth companies since 1945.
It looks to take a stake in companies for three to five years to add value and exit at a profit. As a result, revenues and profits tend to zip around all over the place, depending on the timing of purchases and disposals. In 2020, pre-tax profits were just £216m. In 2023, they hit £4.58bn. Even allowing for the pandemic, that’s a huge difference. Yet it doesn’t seem to faze investors. They know what to expect.
By contrast, its dividend per share growth has gone only one way. It was 35p in both 2019 and 2020, then climbed to 38.5p in 2022, 46.5p in 2022, and 53p in 2023. If the yield looks low at 3.1%, that’s only because the share price has grown so rapidly.
High interest rates and economic uncertainty are usually bad news for private equity and venture capital, but 3i has done just fine. The investment company’s half-year report on 9 November showed its total return up another 10% to £1.67bn.
The Action end of the portfolio
That was lower than last year’s H1 return of £1.77bn, up 14% on the year. The share price ticked up anyway. The market knows what to expect and likes it.
Not every portfolio holding has been doing well, for example. Companies in the discretionary consumer spending and cyclical end-markets have slipped. In contrast, its biggest holding, Benelux-based discount chain Action, has been consistently smashing it. Net sales jumped another 30% to €7.9bn in the nine months ended 1 October.
Action is the fastest growing non-food discounter in Europe with more than 2,300 stores. My worry is that it now makes up a third of the total 3i portfolio, so had better continue bombing along. At some point, there will be a disposal (hopefully a lucrative one). Thereafter, other holdings will have to rise to the challenge.
I’m assuming management has been through similar situations before, and will see this one through. It’s a concern, but not enough to make me rethink my holding. I’ll keep an eye on Action, with a view to buying more shares in 3i Group.
