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No FTSE 100 growth share can match the stellar recent performance of private equity giant 3i Group (LSE: III).
Over the past five years, its share price has soared 253%. It’s even beaten Rolls-Royce, which grew 165% over that period (although Rolls smashes it over three years, rising 430%).
That means a £10,000 investment in 3i Group five years ago would now be worth £35,300, with dividends on top.
Can this share price continue to fly?
I’m thrilled I bought the shares about 18 months ago, and I’m already close to doubling my money. Yet I missed the best bit, with the shares up a relatively modest 57% over the last 12 months. Still, who’s complaining?
So much for past performance. As ever the all-important question is this: are 3i Group shares still a buy for me today? Or should I bank some profits?
Unlike many private equity firms, 3i has solely invested its own capital since 2015, avoiding the volatility of external funding. This strategy has proved incredibly successful, although mostly thanks to its star asset: European discount retailer Action.
Action is the jewel in 3i’s crown. In its latest trading update, published on 30 January, 3i reported that Action’s net sales and operating EBITDA for 2024 were up 22% and 29%, respectively.
The retailer added a record 352 new stores in the year, driving its expansion.
That success has directly benefited 3i shareholders, as it paid a £215m dividend in December. But it still left Action with an €814m cash balance.
My worry is that it now accounts for more than 70% of 3i’s private equity portfolio. This level of concentration risk is rare in private equity and leaves 3i heavily reliant on just one company for future growth, which is very risky.
Like-for-like sales growth remained strong in 2024 at 10.3%, but that’s down from 16.7% the previous year. I’m concerned the retailer’s best growth years may be behind it.
I’m sticking with it
Beyond Action, 3i has a diverse private equity portfolio that has been resilient in tough economic conditions.
The company has been able to secure new investments, such as its recent £121m acquisition of WaterWipes. It also realised £280m from the sale of Weener Plastics (WP), achieving an 18% premium on its March 2024 valuation.
From a financial standpoint, 3i remains strong with £792m in gross cash and an undrawn £900m credit facility. This should allow it to continue making strategic investments.
Despite my concerns, I have no intention of selling my 3i shares. But I’m hesitant to buy more.
With Action’s growth slowing and its valuation making up such a huge portion of 3i’s portfolio, I believe the risks have increased.
Also, thanks to its success, 3i now makes up a meaty chunk of my portfolio. A bit of diversification is called for. I’ve decided to let my winnings roll, even though I don’t expect 3i to repeat the astronomical gains of the past five years.
