The best shares to buy today aren’t necessarily those that did well yesterday. I typically target FTSE 100 shares that have underperformed, hoping to pick them up cheaply before they recover. Private equity specialist 3i Group (LSE: III) is a different beast.
I’ve been considering buying 3i for years. Failing to do so is one of my bigger investment mistakes, because it’s been a corker. Over the last decade, it has beaten both the S&P500 and Nasdaq Composite, according to Trustnet, rising 405%. It’s the third-best FTSE 100 performer over five years (after Ashtead Group and Frasers Group), up 106% before dividends.
3i is still smashing it after rocketing another 55% in the last 12 months. So I came to the party worryingly late when I finally bought the stock on 3 August.
I should have bought this years ago
This is a tough time to be a venture capitalist, as borrowing costs soar and the economy flirts with recession. However, 3i does most of its business beyond the UK’s troubled shores, investing across Europe, Asia and the Americas. Also, it has experience of hard times before, as it’s been investing in private equity and infrastructure since 1945.
It makes money by investing in relatively mature quoted and unquoted companies for up to five years, with the aim of realising its stake at a profit. Income should be bumpy as a result, depending on purchases and disposals, and so it’s proved.
| Financial year | Revenues (£m) | Pre-tax profits | EPS growth | Dividend |
| 2019 | £103m | £1.23bn | -15 % | 35p |
| 2020 | £285m | £216m | -83 % | 35p |
| 2021 | £93m | £1.86bn | 771 % | 38.5p |
| 2022 | £331m | £4.02bn | 116 % | 46.5p |
| 2023 | £332m | £4.58bn | 14 % | 53p |
As these figures culled from Sharecast show, 3i’s revenues, profits and earnings per share (EPS) tend to bounce around, although clearly the pandemic has played a part. The last two years have been terrific and may prove hard to beat. While EPS growth plunged in 2023 they still rose a solid 14%.
The dividend has been more stable though, rising steadily from 35p in 2020 to 53p in the year to 31 March 2023.
Analysts expect the growth to continue, with forecast sales of £3.7bn in 2024 and £3.74bn the year after that. The yield is forecast to hit 3.05% in 2024 and 3.45% in 2025. Yet I also have concerns.
I’m in for the long term
3i is an investment trust and it’s not cheap. It currently trades at a premium of 7.4% to the net value of its underlying assets. One year ago, it was at a discount of 10.7%. This adds to my concern that I’ve just overpaid.
My biggest worry is that its portfolio is too highly concentrated. More than half the fund invested in a single business, fast-expanding Dutch discount retailer Action. It did generate £520m of “value growth” from the remainder of its private equity portfolio last year, but that was down from £584m in 2022.
Every stock has risks. I still think 3i offers me a huge long-term opportunity to build wealth throughout the business cycle. Its consistent growth performance makes it one of the best FTSE 100 shares to buy of all, whatever happens to the wider UK economy. If the 3i share price dips at any point, I’ll average down and buy more of it.
