- 3i’s most successful bet to date has been the acquisition of a stake in Action Chain
There are only 41 investing days left until Christmas, during which time I am determined to maintain one of my 2023 resolutions to be bolder.
That’s why I’m planning a diversification excursion into two trusts. Their holdings include a fast-growing discount retailer and a company that converts methane gas produced by landfills into electricity.
These trusts include the £19.4 billion private equity giant 3i Group, part of the FTSE 100, and its £2.8 billion stable partner, 3i Infrastructure, a member of the FTSE 250.
Diversification: The trusts are the £19.4 billion private equity giant 3i Group, part of the FTSE 100, and its £2.8 billion stable partner, 3i Infrastructure, a member of the FTSE 250
I accept that some will see these as controversial choices, as private equity and infrastructure trusts are both out of favour.
This is the result of the impact of more expensive loans on the trusts themselves and on the companies they support.
Furthermore, when interest rates rise, this pushes up government bond yields, making their returns appear more attractive than cash flows from infrastructure funds.
While Bank of England Governor Andrew Bailey and its chief economist Huw Pill may disagree on the timing of the rate cuts, it now appears that rates will not remain high for as long as feared.
3i’s most successful bet to date has been its 2011 acquisition of a 52.7 percent stake in the fast-growing and profitable Action chain.
Action has 2,456 points of sale in France, Germany, the Netherlands and Spain and eight other European countries, but none in Britain. Today the Action shareholding, described by trust boss Simon Borrows as the ‘most resilient investment’, makes up 61 per cent of 3i’s portfolio.
Critics see this as a dangerous over-concentration. They also argue that Action’s valuation is too optimistic compared to peer retailers such as B&M in the UK and Walmart in the US, despite praise for Action’s CEO Hajir Hajji, who started her career as a shelf stacker.
Others consider Action the jewel in the 3i crown. The shares are up 49 per cent this year from 1993p, yet analysts still rate the shares as a buy, with an average price target of 2387p. This enthusiasm puts the trust at an 8.85 percent premium to its net asset value – at a time when the average private equity trust is at a gaping 34 percent discount, according to data from AJ Bell.
Scandlines, which operates ferries between Denmark and Germany, is another 3i investment, but also owns artisan bread maker European Bakery Group and has a 6.74 percent stake in 3i Infrastructure.
Most infrastructure funds invest money in government-backed projects with indexed returns. But James Dawes, the Chief Financial Officer, explains that 3i Infrastructure prefers companies in areas such as energy transition and digitalization that generate a lot of money.
Dawes gives two examples of the ideal 3i infrastructure investment: ‘There is TCR which provides airline support services in twenty countries, Global Cloud
It sucks methane from 120 UK landfills and converts it into electricity. You cannot build residential areas on this type of land, but you can build battery storage and solar panels.’
The success of this strategy is illustrated by this summer’s sale of the 25 percent tranche of Dutch waste management group Attero, up 31 percent from its March valuation. Analysts at Numis said the deal was “suggestive of conservative valuations” for the rest of the portfolio.
If true, this trust, like its bigger brother 3i, could be a good opportunity for investors to consider this Christmas.