Investors who bought shares in 3i (LSE:III) during the last 10 years have done extremely well for themselves. The stock is up 600%, making it one of the FTSE 100‘s top performers.
This morning (24 July) the firm released its Q1 earnings (but as its largest subsidiary has a different financial calendar, some of the results confusingly cover the first six months of 2025). The stock is largely stable as a result, so what should investors do?
What is 3i?
Despite its success over the last decade, 3i is a name some investors might not be familiar with. So it’s probably worth a quick overview of what the company actually does.
In short, it’s a private equity firm. But it invests its own capital (rather than raising cash from external investors) and has a somewhat unique portfolio.
Around 75% of 3i’s portfolio consists of a 58% stake in European discount retailer Action. As a result, the FTSE 100 firm’s returns are heavily driven by how the business fares.
Investors therefore pay close attention to the retailer’s progress. And this is especially the case with the private equity firm’s stock trading at a 70% premium to the value of its portfolio.
Results
That’s the background dealt with, now for the results. The headline news is that the value of 3i’s portfolio increased to £27.11 per share, up from £25.42.
In terms of Action, like-for-like sales grew 6.8%, which exactly matches the 6.8% the business achieved between January and May. Adding 125 more stores meant total revenues climbed 18%.
The rest of the private equity portfolio achieved steady returns. But new opportunities were harder to come by, with the firm completing just £11m in total investments.
Management had previously flagged reduced opportunities due to difficult geopolitical and macroeconomic situations. Given this, reduced activity is unsurprising, if slightly disappointing.
Risks
When it comes to 3i, risks aren’t hard to find. The fact Action takes up more than 70% of the firm’s portfolio is one example, but there’s a lot more to it than this.
The private equity firm also values its stake in the retailer at quite an aggressive multiple. This means there are some optimistic assumptions built into the current valuation.
Investors considering 3i shares are therefore looking at paying a 70% premium for a portfolio that’s heavily concentrated and valued aggressively. That’s a risky proposition.
Yet I think there are things investors can do to offset this risk. And one of them is building a diversified portfolio of their own.
Buy?
3i’s portfolio is heavily concentrated. But that’s true of a lot of businesses – nobody objects that Rightmove only runs a property platform and doesn’t also make medical devices or run a bank.
Investors concerned about concentration can build their own diversified portfolio with other stocks. That way, a problem with Action might be a big issue for 3i, but it needn’t be one for them.
There isn’t much to excite investors in 3i’s latest results, but what matters over the long term isn’t the first six months of 2025. It’s the company’s unique structure.
This is what allows the firm to wait for the right opportunities, instead of having to buy when prices are high. That’s firmly intact, so I still think investors should consider buying the stock.
