Image source: Getty Images
Over the last decade, shares of privately held companies Group 3i (LSE:III) have left the rest of the FTSE 100 in the dust. The stock is up a whopping 773%.
That kind of performance over a long period is indicative of an unusually good business. And I think the company will remain in a strong position going forward.
What is Group 3i?
The big difference between 3i and other private equity firms is that it does not raise external funds from investors. Since 2015, the company has exclusively invested its own capital.
It may not seem like a big deal, but I think it's hard to overstate how important it is. In my opinion, it's the key reason the stock has performed so well over the last 10 years.
The challenge for private equity firms is that capital inevitably shows up when things are looking good. Investors want to get in on the action, but that's when it's hardest to find bargains.
On the other hand, no one wants to invest in companies when things get tough. But that's exactly when companies with cash to deploy can find the best opportunities to generate returns.
By managing only your own money, 3i avoids this problem. Having no external investors to answer to means the company can wait for opportunities and be prepared when they appear.
This was not always the case: before 2015, the company operated with external funds. But a look at the company's stock price before and after this point tells investors everything they need to know.
Action (and inaction)
3i's biggest investment (and biggest success story) has been in a company called Action. This is a discount retailer that operates in 12 different countries.
To summarize, 3i invested around £106m in Action in 2011. And it has since received £2.9bn in dividends and values its stake in the company at around £14bn.
However, there are a couple of things to keep in mind. One is that Action has taken on debt while paying dividends, so it hasn't been the ATM it might seem at first glance.
Another is that the company is not publicly traded, so its market value is a little less clear. And 3i has been accused of overstating this on its balance sheet.
That is an important point. The stock represents more than half the net asset value of the FTSE 100 company, so potential investors should understand the reasoning behind that valuation and be comfortable with it.
These issues are important, but the bottom line is that 3i recovers more than its initial investment each year. That means the investment has been a success from any point of view.
More of the same
Whatever Action's growth prospects, 3i still has its key advantage. The ability to wait for the right opportunities sets it apart from other private equity firms.
This is why the stock has been the best performer on the FTSE 100 over the past 10 years. And I think it has every chance of continuing to perform well in the future.
I'd like to take a closer look at the details of 3i's valuation of Action. But subject to this, the stock is on my list of stocks to consider buying.
