Image source: Getty Images
Global investment manager in private equity and infrastructure Group 3i (LSE:IIII) is the most successful FTSE 100 Index shares in my self-invested personal pension (SIPP).
It is one of the first shares I bought after taking over three inherited company pensions last summer. I invested £2,000 in August, October and November. Today my holding is worth almost £10,000, including reinvested dividends. In 12 months, 3i Group's share price has risen by almost 65%.
It is not a passing phenomenon. It has risen by 193% in five years. Fraser Group (269%) and Diploma (197%) have done better. I'm excited, but now I'm wondering whether to take the money and run. Or, rather, reinvest it.
3i Group is a winner but…
I consider myself a long-term buy-and-hold investor. Selling goes against the grain. It makes even less sense given 3i Group's stellar track record, which stretches back to 1945. It floated in 1994 and now manages assets worth more than £22bn.
3i is an investment fund and a rarity in that it trades at a premium to the underlying net value of the assets it holds. After the volatility of recent years, many funds trade at a discount of 30% or more, but this one has a whopping premium of 43.96%.
This is obviously a sign of success. In 2024, net asset value per share increased by almost 20% to 2,085 pence, despite a foreign exchange loss of 33 pence per share.
Its private equity business delivered a gross return on investment of 25%, at £4.059bn, although that was down from a 40% rise a year earlier. Now, here's my concern. That return was mainly due to the performance of its biggest holding by far, Dutch discount retailer Action Group.
In 2011, 3i acquired a 45% stake for just £134m. Today, Action is Europe’s fastest-growing non-food discount retailer, with over 2,300 stores and €8bn in annual revenue. 2024 was another very strong year, with 3i pocketing £3.61bn of value growth, dividends of £375m and a further £762m through a pro rata share redemption.
I sell my winner
Action's resounding success offset the weaker performance of other holdings in the portfolio, which are “overcoming adverse phases of their market cycles”3i's infrastructure business also faltered. It seems to be a business that only operates with a single objective.
It does not want to give up Action. In fact, in the last first quarter it increased its stake from 54.8% to 57.6%. And why not? First quarter profits rose by another 23% to 843 million euros, although sales growth was 9% compared to 22% year-on-year. It continues to open stores, but inevitably at a slower pace.
Action now represents 72% of 3i's total private equity portfolio. I am making an expensive bet on a single European discount retailer whose growth will inevitably slow.
Also, where is the exit strategy? Private equity firms have struggled to find buyers amid economic uncertainty and higher interest rates. 3i has done a brilliant job with Action. This may continue for a while, but the ceiling is approaching. I am planning to sell half my stake before it hits that limit. However, I can't bear to part with it all. I owe it some loyalty.