Action-packed 3i continues stellar run but warns of tougher times ahead

The ongoing success of Dutch discount retailer Action fuelled a 25% return at 3i Group (III ) over the year to the end of March.

However, Panmure Liberum analyst Shonil Chande warns the private equity fund is unlikely to replicate the stellar growth investors have become used to.

The London market’s largest listed investment company continued its astonishing run of performance over the 12 months to the end of March, growing the net asset value (NAV) by 25%, with NAV per share rising to £25.42 from £20.85 at the end of March last year.

The group paid a total dividend of 73p up from 61p a year ago, and said it would pay a second full-year dividend of 42.5p per share in July.

Gains were once again led by Action, which is by far the largest holding accounting for 65% of the £25bn portfolio. Simon Borrows, 3i’s chief executive, has continuously increased the fund’s stake in the core holding since first committing in 2011.

It generated a ‘gross investment return’ of 32%, equivalent to £4.6bn, as revenues increased 22%, sales rose 10% and earnings were up 29% last year. This was fuelled by a store roll-out, investment in IT and distribution of its non-food goods.

Borrows said Action continued on an ‘impressive growth trajectory’, but the results also flagged a slowdown in sales at the beginning of this year.

Borrows said the fund’s performance was underpinned by the ‘powerful compounding growth’ from long-term holdings in Action and Royal Sanders, as well as several other large portfolio companies.

‘This reinforces our conviction in allocating additional capital to our best performing assets. We remain confident in our ability to compound growth across the portfolio in the years to come,’ he said.

Royal Sanders, a European private label and contract manufacturing producer of personal care products, saw volume growth increase via bolt-on acquisitions. It is the fourth largest position in the fund at 2.7%.

It has made eight acquisitions since 3i invested and ‘these strategic acquisitions, combined with strong operational execution, have contributed significantly to Royal Sanders’ performance and success’, said Borrows.

Key to private equity investment is the market for deal-making. Borrows said the group made ‘steady improvement in 2024, driven by easing debt markets and stabilising interest rates’.

New investments

As well as taking the decision to add to Action, three new investments totalling £318m were made. Of this, £121m was invested in WaterWipes, ‘reinforcing our strategy of backing international branded consumer businesses’.

Around £98m was invested in cybersecurity services group Constellation, to align with Borrows’ focus on IT services, while another £99m was invested in OMS Prüfservice, a provider of electrical testing services.

There were two significant realisations during the 12-month period, generating proceeds of £659m. The group sold optical retailer Nexeye, which has doubled both sales and earnings since 3i acquired it in 2017.

Weener Plastics, which has been held since 2015, was also sold after doubling its earnings. It generated proceeds of £280m, equivalent to an 18% profit over its March 2024 valuation.

Challenges ahead

Looking ahead, Borrows acknowledged the market environment in 2026 will remain complex, with heightened geopolitical uncertainty as major economies respond to changes in US policy. This could result in a slowdown in transaction activity.

While the figures from 3i and Action are impressive, there was murmuring of forecast misses from analysts, as earnings per share came in at 5.21p versus 5.58p market consensus, while gross investment returns were almost 10% less than expected.

Investors moved swiftly to take profits on the stock, which trades at a staggering 70% premium. After rising to an all-time high last week, the shares fell 7% in early trading before moderating to a 4% loss at the end of the day.

The fund still boasts an exceptional track record of growth, with NAV growth of 103% over three years and 264% over five years, while over a decade the value of the portfolio has increased more than 800%.

The shares have been even more impressive, with gains of 245% and 545% over three and five years, respectively, and have risen more than 1,000% over the past 10 years.

Panmure Liberum’s Chande is cautious about 3i’s ability to continue delivering high levels of growth in what is shaping up to be an increasingly difficult economic and political backdrop.

‘The problem seems to us more that after years of exponential growth, analysts and investors have come to expect numbers from Action that are simply not achievable in 2025 and 2026,’ he said.  

‘On the one hand, the company is facing increasingly challenging comps due to its past growth and on the other hand, the economic backdrop in Europe is considerably more challenging in 2024 and 2025 than it was in past years.’