I’ve flirted with the idea of buying investment company 3i Group (LSE: III) without ever committing. Every time I check the share price seems to be flying, yet the company rarely attracts much attention from investors.
Worried that I’m missing something, I’ve moved onto other stocks, and now I regret it.
3i Group has been giving shareholders access to private equity and infrastructure since 1945, with a focus on businesses in Europe, Asia and the Americas. Its portfolio is worth £22.9bn, with a typical business size of between €100m and €500m.
Investment success
It aims to invest in companies for three to five years to add value and exit at a profit, and it’s been a successful strategy. 3i is one of the best-performing stocks on the entire FTSE 100 over three years, beaten only by Centrica, Glencore and Frasers Group.
If I’d invested £5,000 three years ago I’d have enjoyed growth of 131.35%, which would have turned my stake into an impressive £11,568. Its share price has continued to perform well despite today’s challenging conditions, up 66.49% over the past 12 months.
This should be a tough time for private equity, as higher interest rates drive up funding costs, customers feel poorer and inflation erodes the value of future earnings. But there’s no sign of that here.
3i made a total return of £4.59bn on opening shareholders’ funds in 2023, up 36% on 2022, while net asset value per share climbed from 1,321p to 1,745p. The firm’s private equity business delivered a gross investment return of £4.97bn, or 40%.
However, this was driven by the very strong performance of one holding, Dutch discounter Action. Others suffered amid lower customer demand and inflationary pressures, particularly those exposed to discretionary consumer spending.
The company also received more than £1.3bn in cash, primarily through portfolio company realisations and income. So it ended the year with liquidity of £1.3bn, net debt of £363m, and a gearing ratio of just 2%. It’s a healthy picture.
Private equity is a high-risk sector, but 3i Group has avoided the afflictions of another FTSE 100 investment company that has exposure to the sector, such as the Scottish Mortgage Investment Trust, which crashed by half in 2022.
A long-term investment
3i Group’s dividend per share has climbed steadily from 35p to 53p over the past four years, and its forecast yield is 2.96% for 2024 and 3.41% in 2025. There are bigger dividend payers out there, but few can match its share price success. Yet 3i Group doesn’t look expensive, trading at just 6.45 times forecast earnings.
Investing in 3i is an act of faith. It’s impossible for me to examine its portfolio and see whether it looks promising, as private equity investments are notoriously difficult to value. Trying to value long-term infrastructure projects isn’t easy, either. Shareholder returns can vary from year to year, depending on variables such as disposals, so I would only buy this fund with a minimum 10-year view.
The inherent risks of private equity are actually an argument for accessing the sector via an experienced fund like this one. 3i Group can give me access to a sector I’m in no position to explore myself. I’ll add it to my portfolio when I have the cash, and about time too.
