3i Group does not sound like the most exciting company in the world. It is an investment company. It owns private businesses. It invests in infrastructure. It has been around in one form or another since 1945.
Not exactly the sort of thing that makes people jump out of bed in the morning.
But then you look under the bonnet and find the real story: Action.
Action is the European discount retailer that has become the engine of 3i’s success. Think of it as a mix between B&M, Poundland and a treasure hunt. Customers go in for cheap everyday items, but because much of the range changes every week, they often come out with things they never expected to buy.
That is a very powerful retail trick.
People like value. But people also like surprises. Action combines both.
For 3i, Action has become the kind of investment every long-term investor dreams of. It sells simple products at low prices, opens hundreds of new stores each year, and its new stores often pay back their initial investment very quickly. In plain English, it does not need huge amounts of money to keep growing. That is what makes the model so attractive.
Unlike many asset managers that mainly earn fees, 3i uses permanent capital. That means it can take a patient, owner-like view. It does not have to panic because markets are noisy. It can sit with a good business and let time do the heavy lifting.
That is the magic of compounding.
Warren Buffett once compared investing to rolling a snowball down a very long hill. The trick is finding wet snow and a long enough hill. In 3i’s case, Action has been the wet snow.
The numbers tell part of the story. Action now represents the majority of 3i’s portfolio value. 3i also has a strong balance sheet, low gearing, significant liquidity and management with serious skin in the game. CEO Simon Borrows owns a substantial shareholding, which means his personal wealth is closely tied to the long-term success of the business.
In business, incentives are like gravity. They quietly pull behaviour in a certain direction. When management owns a meaningful stake, they tend to think more like owners than employees. They are more careful with capital. They are more focused on the long term. They feel the downside as well as the upside.
But no investment is perfect.
The biggest strength of 3i is also its biggest risk: Action.
When one company accounts for so much of the portfolio, investors need to be comfortable with concentration. If Action keeps expanding successfully across Europe, 3i could continue to create significant value. But if Action slows down, faces stronger competition, or suffers from changing consumer habits, 3i would feel it.
There is also the issue of valuation. Action is privately owned, so investors do not see a live market price every day. They have to trust the valuation process and the judgement of management. That does not make it wrong, but it does require confidence.
And then there is the longer-term question: will younger consumers keep buying more physical goods, or will they spend more on experiences? Will sustainability concerns change shopping habits? Will Chinese platforms such as Temu and AliExpress make discount retail even more competitive?
These are not reasons to dismiss 3i. There are reasons to think clearly.
The best investments often look obvious in hindsight. But in real time, they require patience, judgement and the ability to live with uncertainty.
3i is not just a story about private equity. It is a story about what can happen when a patient owner finds a great business, backs it properly, and lets compounding do its quiet work.
Perhaps the real lesson is this: sometimes the most powerful investment stories are not built around complexity, but around simplicity repeated for a very long time.
Awet Ghirmay, Head of Investment Research
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell.
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
