Shares in 3i (III ), the FTSE 100-listed private equity group, rose 3% today after chief executive Simon Borrows reassured investors it had made a good start to the year and was well positioned for the economic downturn, despite cutting the value of two German online retailers.

Responding to concerns about the consumer weighting of its private equity holdings, 3i Group said it had cut the value of Luqom and GartenHaus in response to big declines in publicly quoted counterparts. 

Luqom, the lighting specialist that is a top 10 investment, was reduced by £102m, or 19%, although 3i invested a further £34m to help it buy rival Brumberg. GartenHaus, the Hamburg-based shed manufacturer in which 3i bought a majority stake two years ago, was slashed by £74m or 55%.

However, the falls were more than offset by further ‘impressive’ growth in Action, the Dutch discount retailer that accounts for nearly half of 3i’s assets, underpinning a 6.6% total investment return for the first quarter to 30 June.

In the six months to 3 July, Action sales grew to €1bn to €3.9bn and saw operating profits jump to €449m from €286m a year ago as it opened 87 new stores and stayed on track to beat last year’s openings of 267.

Sales and profits were 69% and 119% ahead of 2019, before the pandemic struck, with like-for-like sales up 18.6% on footfall ‘significantly ahead’ of last year. 

Using an unchanged multiple of 18.5 times on the last 12 months of earnings of just over €1bn, 3i saw the value of its 52.7% stake in Action rise to £7.8bn from £7.2bn in the three months to 30 June.

There were also strong contributions from the likes of AES Engineering, safety component manufacturer Dynatect and enterprise software developer MAIT, with 3i boasting that 18 of its top 20 private equity companies grew profits in the quarter.

Although a 30% stake in 3i Infrastructure (3IN ) shares fell to £884m from £934m, 3i received £14m of dividends from the fund and saw its stake in Scandlines ferry operator edge £8m to £541m with a £12m dividend.

Three new private equity investments in accounting software, children’s clothing and online security broadly matched one disposal in the period, leaving 3i with £426m in cash and an undrawn £500m credit facility. 

The total £926m amount of liquidity these provide will rise €540m (£788m) when the sale, at a 50% uplift, of French natural health products manufacturer Havea completes. This month further extended its firepower with a cheap two-year overdraft of £400m.

‘We see broader economic conditions deteriorating over the rest of the year but remain confident in the composition of our portfolio. We continue to focus on actively managing our portfolio and making sensibly-priced investments and bolt-on acquisitions. We will also pursue our realisation projects where conditions allow,’ said Borrows (above).

3i’s bet asset value per share rose to £14.06 at 30 June, up from £13.21 at 31 March. This included 34p per share of currency gains as the pound fell against its overseas investments.

Numis analyst Kim Bergo maintained a ‘buy’ recommendation and £19.40 target price, saying the better-than-expected start to the financial year increased confidence in her 2023 estimates when she forecast NAV will rise to £14.92. 

This would put 3i shares on a 30% premium, back at the high rating they enjoyed at the end of last year. At £12.34 today, the shares, which have fallen 15% this year but returned 768% over 10 years, stand 12% below the updated NAV. 

Christopher Brown, analyst at JPMorgan Cazenove, estimates NAV has since dipped to £13.81 per share, which at last night’s close implied a discount of 13.3% that, ‘in our view is a very attractive level and well below the longer-term average [premium] of 17%. We remain “overweight”,’ he said. At the current price that discount slips to 10.6%.

3i’s share price discount remains narrower than other London-listed private equity funds which on average trade 29% below asset value. This reflects investor concerns of forthcoming write downs as a recession bites, although analysts point out that, like 3i, these funds tend to value their investments conservatively and the threat of valuation cuts is more than priced into the depressed share prices.