Stephen Anness, fund manager of Invesco Select Trust’s global equity income share portfolio (IVPG ) is delighted that he decided four years ago to invest in 3i Group (III ), the private equity fund that’s been turbocharged by its giant stake in discount retailer Action and is now his biggest holding at 6.9%. ‘The more Action 3i has, the better!’ Anness said. 

This is a third video excerpt from our virtual event with Invesco Select Trust last month. You can watch previous excerpts on Broadcom and Nvidia or view the whole Big Broadcast.

Can’t watch now? Read the transcript

Stephen Anness:

I think this is probably one of the best examples of our process in action. This was a business that we came across in 2020. We felt it was really misunderstood by the market. The reason was, it was seen as a private equity business. Lots of leverage, high beta. Low quality. When we looked at this, we felt actually that was totally wrong and here we had a very high-quality business, driven principally by a key asset within the private equity portfolio, which is Action, a discount retailer in Europe and we felt that Action was growing really nicely and you can see the bar chart there. The total number of stores has moved along very nicely. The return on capital has been very high. To typically, mid-30% return on capital.

Really long runway for growth. Very low payback periods as they expand and generate a lot of cash. Critically for us, in this portfolio, a very nice starting yield. I think at inception, we had around a 3.4%, 3.5% dividend yield on this company. We felt very good visibility for 10%-plus growth in the dividend over the next five years and, actually, I’d probably extend that further, given the runway for growth that the business enjoys.

Gavin Lumsden:

How much further have they both got to go?

Stephen Anness:

Action is about 70% of the NAV of 3i.

Gavin Lumsden:

What do you think about that? Obviously 3i’s not trying to be a diversified fund.

Stephen Anness:

In the same way that you might own Tesco, which is a pure food retailer, pretty much, I think 3i is becoming heavily dominated by Action. I’m okay with that. It’s a wonderful company. Frankly, the more action, the better in my mind. Actually, they are buying more Action in, off some of the other partners. It’s about 70% of the NAV and I think from memory, there’s around 3,500 stores at the moment. We’ve done a lot of work looking at the total potential store growth. We think you can easily do 300 to 400 stores a year for at least ten years, probably more. That’s just in Europe. If you look at it on a per-population basis, what kind of population supports an Action store. That’s without even talking about the US, which I don’t know, I think they’re thinking about the US.

I think there’s a lot on their plate at the moment, rolling out pretty much a store a day, if you think about what I’ve just said. So, there’s a lot of business challenges to doing that. So, I think the US is a longer-term project potentially. What I’m talking about, in the next ten years or so, doesn’t incorporate the US at all.