Leaving aside companies that have been acquired or joined the index recently, 3i (LSE:III) has been the FTSE 100’s top performer over the last 10 years. The stock’s up 670% since June 2015.
The underlying business has been going from strength to strength and it isn’t showing any real signs of stopping.
What is 3i?
3i’s a private equity firm with a difference. Since 2015, the company has focused on investing its own cash instead of raising capital from investors – and the result has been transformative.
The big advantage to this is it allows the firm to invest on its own timeline. Rather than having to deploy capital when prices are high, it can wait for opportunities to present themselves.
3i’s largest investment is in a business called Action – a European discount retailer. This makes up around 66% of the FTSE 100 company’s investment portfolio and it’s a key part of its success.
Since 3i invested in the company, Action’s results have been outstanding. And the encouraging thing for investors is it’s not really showing any signs of slowing down.
At its AGM on Thursday (26 June), 3i provided an update on Action. And the retailer is putting up impressive growth numbers, with like-for-like sales up 6.9% in the first 25 weeks of 2025.
The retailer has opened 111 new outlets, increasing its store count by just under 4%. All in all, that means the business is growing well at a time when competitors have been under pressure.
Risks
It’s undeniable that 3i has been a terrific investment over the last 10 years. But there are some important risks to consider with the stock.
One of the most obvious is the fact the firm’s private equity portfolio is heavily concentrated in Action. That brings a risk, but I think it’s one of the easier ones for investors to deal with.
3i’s portfolio is heavily concentrated, but I think I can offset this by diversifying my own investments. In fact, most of the businesses I own shares in are focused on one industry.
The bigger risk, in my view, is valuation. 3i’s current share price represents a 50% premium to the (self-assessed) value of its portfolio – which involves some fairly optimistic assumptions.
In terms of Action, the FTSE 100 firm values the company using a price-to-EBITDA multiple of 18.5. While that isn’t unheard of for a retailer, it’s towards the higher end of things.
In other words, 3i’s share price implies a 50% premium on a portfolio that’s already aggressively valued. If the growth slows or opportunities don’t prevent themselves, this could be a mistake.
Long-term investing
There’s no question 3i’s share price represents an optimistic view of both the overall firm and its largest investment. But it’s a view that has – so far – been justified time and again.
In 2024, the company’s portfolio generated a 26% return. Even factoring in a 50% premium, that’s still an attractive 17% return for investors.
With Action’s latest results showing no real signs of slowing, I think there could be more to come from 3i shares. That’s why I think it’s worth considering and I’ve been buying the stock for my portfolio.
