Last year I loaded up on a top UK stock with a brilliant track record of smashing the FTSE 100, and it’s been my best purchase of the year. That says a lot, because I bought almost 30 stocks to fill up a self-invested personal pension (SIPP) after transferring some legacy company schemes.
The company in question is private equity and infrastructure specialist 3i Group (LSE: III). It sounds risky and I suppose it is, but it has a solid track record since being formed in 1945 with £15m of capital. Today, it manages a portfolio of £19.6bn.
3i is an international investment manager giving ordinary people access to quoted and unquoted equity and debt investments in Europe, Asia and the Americas. Recent years have been volatile for private equity, as the global economy slows while interest rates drive up the cost of capital, but you wouldn’t know by looking at the red hot 3i Group share price.
Three cheers for this one
It’s the fourth-best performer on the entire FTSE 100 over five years, up 183.03%. Over 12 months, it’s shot up 47.6%. Dividends are on top. The trailing yield is 3.3%.
3i makes its money by buying into mid-market companies valued with international growth potential. It raises the funds via its own balance sheet and external capital, and aims to hold for between three and five years. The plan is to generate growth, exit at a profit and reinvest the money. And it’s done it all jolly well.
Yet there are risks too. Not every bet will play pay off, inevitably. And even when they do, 3i still has to find a buyer, which can be tricky in a downturn. The trust also uses gearing, which can boost returns but ramps up the risk.
There are more specific dangers. Much of its recent market-busting performance has been driven by Dutch non-food discounter Action, which is booming with 2,300 stores across 11 countries in Europe. Action makes up almost a third of the total portfolio, which makes it a little top heavy for my liking.
FTSE 100 growth stock
3i generated a “strong” total return of £3.839bn in the year to 31 March 2024, a return of 23% on shareholders’ funds. That was down on the 2023 growth rate though, when shareholder returns jumped 36% to £4.585bn.
While Action roared, a number of portfolio companies struggled, notably in the discretionary consumer sector. Others are “working through adverse phases of their market cycles”. Its US infrastructure portfolio did well but I’m wondering if that will continue as the US economy slows.
Over the year, 3i received more than £1.4bn of cash from its portfolio. It ended the year with liquidity of £1.296bn, net debt of £806m and modest gearing of 4%.
It upped the total 2024 dividend 15% from 53p to 61p per share. I’ll get my share on 26 July. CEO Simon Borrows warned that “challenging conditions” may slow short-term returns and the share price has calmed a little lately. I’m now worried.
There’s one more concern. 3i is an investment trust and currently trades at a whopping 42.91% premium to underlying net asset value. I’m taking a gamble but so far it’s paid off and I’d expect that to continue. No guarantees though.
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Harvey Jones has positions in 3i Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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