The 3i (LSE:III) share price is up 4% after the company’s half-year report on Thursday (14 November). And there’s a lot for investors to pay attention to.
Keeping up with the FTSE 100 private equity firm involves looking at a number of different metrics. And I thought these were generally positive in the latest update.
The headline return
As a private equity firm, the most important news for 3i is the performance of its investments. And the latest update reported a total return of 10% for the first half of the year.
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That’s not bad at all. But investors thinking of buying the stock today to try and achieve that return should think carefully and be clear on the significance of that number.
The headline 10% is a return on shareholders’ funds from the start of the period. And that’s not the same as the market cap, which is around 1.5 times higher.
That means 3i’s result represents a 6.3% return on an investment at today’s prices. That’s still more than respectable, but investors shouldn’t be distracted by the headline number.
Action
Around 75% of 3i’s private equity portfolio is its stake in Action – a European retailer. So investors thinking of buying the FTSE 100 stock had better keep a close eye on this business.
In the first 10 months of 2024, Action grew revenues 21% compared to 30% growth during the same period in 2023. And operating EBITDA grew 26%.
One company accounting for that much of a firm’s investment base can be a risk. If the business struggles, it’s likely to have a big effect on the firm’s overall returns.
It’s worth noting that 3i is looking for opportunities to make other investments. But these have been slow to materialise in recent years and the result is a heavily focused portfolio.
Growth opportunities
Unlike other private equity firms, 3i invests its own capital from its balance sheet. Its aim is to deploy £750m per year into attractive opportunities.
The company hasn’t been able to hit this target for a good few years. But the latest update showed £888m in cash investments.
Most of this came from a big investment in Action. While this doesn’t diversify the portfolio, I think its encouraging that management is finding opportunities.
While investing at the wrong time is the worst thing it can do, sooner or later the company has to find uses for its cash to keep growing and generating higher returns. So I see this as encouraging.
Warren Buffett
Comparing 3i with Berkshire Hathaway is overly simplistic. But I think there are important similarities between the FTSE 100 firm and the way Warren Buffett does business.
Being patient when good opportunities are in short supply is key to the success of any investment firm. And I think 3i does this better than most.
