Unquoted companies inhabit an exciting area, and can deliver outsized returns. But many investors don’t have the opportunity to invest in them and might see them as too risky an area to invest in anyway, as young, growing companies have a higher failure rate.
But you could access the sector by investing in FTSE 100 listed specialist 3i Group (LSE: III), which buys, improves and sells smaller companies, and also makes infrastructure investments, primarily in northern Europe and North America. It has a long-standing track record of picking good prospects and delivering strong gains for shareholders. And momentum is on its side.
3i Group’s Private Equity business currently holds a portfolio of 32 unquoted assets, typically mid-market businesses that want to grow internationally. The aim is to help entrepreneurs and management teams add value to their business, helping them grow over a three-to-five-year period, before exiting its positions at a profit.
Power of III
The £11.3bn group, which has a track record going back to 1945, has posted steady share price growth over recent years, and the 3i Group share price has grown 145% in just five years, massively outperforming the rest of the FTSE 100.Â
That’s impressive, because the nature of its business means that results can swing from one year to the next, depending on factors such as the timing of disposals.
Last month’s third-quarter update showed Private Equity cash proceeds of £189m, mainly from the partial divestment of Basic-Fit and the distributions from Audley Travel and Hans Anders. Similarly, its Infrastructure team celebrated “the highly accretive sale of Wireless Infrastructure Group”.
3i Group continued to grow with fresh acquisitions and bolt-on activity during the period. Net asset value per share grew only modestly by 4p to 877p during the most recent quarter, but that is more impressive than it looks, because it took a £314m hit as sterling strengthened during the quarter. It posted a total return of 10.1% for the nine months to 31 December 2019.
Times are tighter
Its recent report alerted investors to “a tightening macro environment”, but said performance remained “resilient”. Some acquisitions will always do better than others, but as long as 3i continues to back more winners than losers, the long-term trajectory should be upwards.
It typically has a healthy net cash balance as well, which stood at £495m in the 12 months to March last year, giving it a nice cushion.
Although management is primarily looking to generate capital growth, many also admire this stock for its growing dividend, with a current yield of 3.5%, well covered 3.3 times by earnings. The big drawback is that the 3i share price trades at a massive premium of 26.9% to net asset value, although that reflects investor confidence in the operation.
City analysts predict that earnings will grow 11% next year, and 16% the year after, which are healthy projections in uncertain times. I reckon that 3i looks far more solid than many companies on the FTSE 100 right now, yet also more exciting.