This FTSE 100 star is quietly beating the US titans — and I believe it may proceed

US non-public fairness companies have taken large hits within the final 12 months, however regardless of falling 15% on Thursday (13 November) shares in FTSE 100 agency 3i Group (LSE:III) are up. This isn’t an accident and I believe it’s set to proceed. 

The corporate has a singular enterprise mannequin that entails utilizing its personal stability sheet as an alternative of out of doors capital. And some great benefits of this are actually exhibiting up this yr.

Personal fairness

Personal fairness normally entails elevating capital from pension funds, insurers, or foundations. That is used to fund investments in corporations with the intention of offering a return in 10-12 years.

The primary 5 years is often spent making investments and the second is spent exiting them and realising beneficial properties. However that’s creating an issue for the time being.

5 years in the past, rates of interest had been near zero because of the Covid-19 pandemic. That meant asset costs had been unusually excessive and funding alternatives had been arduous to search out.

Consequently, Apollo World Administration, Blackstone, and KKR have warned that exits are taking longer than anticipated. And their shares are down round 20% within the final 12 months because of this.

The 3i distinction 

None of this can be a drawback for 3i. Investing its personal capital, fairly than elevating money from exterior sources means it may purchase and promote by itself timeline.

In different phrases, it may sit tight when costs are excessive and it isn’t underneath strain to grasp a return after they’re low. That’s an enormous benefit and it’s a everlasting one.

3i’s most profitable funding has been its stake in a European retailer referred to as Motion. It first invested in 2011, however the funding has nonetheless grown virtually 300% within the final 4 years. 

If the agency operated within the normal approach, it could have been arduous to maintain holding. However not having to return money to exterior buyers in a set timeframe means it doesn’t should promote.

Dangers and alternatives 

A consequence of 3i’s profitable funding in Motion is that the agency’s portfolio has turn out to be closely concentrated. The retailer is round 76% of the FTSE 100 agency’s portfolio.

It’s additionally value noting that 3i values Motion at an EBITDA a number of of 18.5. That’s fairly excessive for a retailer and the corporate nonetheless trades at 125% of its guide worth.

The valuation is a danger for buyers if the agency can’t discover different engaging alternatives to broaden its portfolio. However I believe the focus problem is simpler to cope with.

3i won’t have probably the most diversified portfolio however buyers can obtain this themselves by shopping for different shares. So I don’t see this as a serious problem.

A UK inventory market star

Apollo, Blackstone, and KKR have been terrific investments during the last 5 years and I anticipate them to do effectively in future. However even after this week’s decline, 3i has outperformed all of them.

The agency’s distinctive construction means it may make investments by itself timetable, fairly than being compelled to purchase and promote on the fallacious occasions. And that’s an enormous long-term benefit.

All issues thought-about, I believe 3i is a uncommon instance of a UK firm outperforming its US counterparts. My view is that buyers in search of high quality shares ought to take a critical look.