There are only 41 investing days until Christmas, during which I am determined to fulfill one of my 2023 resolutions, which was to be bolder.
That’s why I’m planning a diversification excursion into two trusts. Its holdings include a rapidly expanding discount retailer and a company that converts methane gas produced in landfills into electricity.
These trusts are £19.4bn private equity giant 3i Group, a member of the FTSE 100, and its £2.8bn stablemate, 3i Infrastructure, a member of the FTSE 250.
I accept that some will see these as controversial options as both private equity and infrastructure trusts are out of favour.
This is the result of the impact of more expensive debt on the trusts themselves and the companies they support.
Diversification: The trusts are £19.4bn private equity giant FTSE 100 member 3i Group and its £2.8bn stablemate FTSE 250 member 3i Infrastructure.
Furthermore, when interest rates rise, yields on government bonds rise, making their returns look more attractive than cash flows from infrastructure trusts.
However, while Bank of England Governor Andrew Bailey and his chief economist Huw Pill may not agree on the timing of rate cuts, it now looks like rates will not stay high for that long. as feared.
3i’s most successful bet to date is the 2011 acquisition of a 52.7 percent stake in the profitable and rapidly expanding Action Chain.
Action has 2,456 outlets in France, Germany, Holland and Spain and eight other European countries, but none in the UK. Today Action’s shareholding, described by the trust’s boss Simon Borrows as its “most resilient investment”, represents 61 per cent of 3i’s portfolio.
Critics consider this a dangerous excess of concentration. They also argue that Action’s valuation is too optimistic relative to comparable retailers such as B&M in the UK and Walmart in the US, despite praise for Action’s chief executive, Hajir Hajji, who began her career as a stocker. of shelves.
Others perceive Action as the jewel in 3i’s crown. The shares have risen 49 per cent to 1,993p this year, but analysts still rate it a buy, with an average price target of 2,387p. Thanks to this enthusiasm, the trust is at a premium of 8.85 per cent to its net asset value, at a time when the average private equity trust is at a massive 34 per cent discount, according to data from AJ Bell.
Scandlines, which operates ferries between Denmark and Germany, is another 3i investment, but it also owns artisan bread maker European Bakery Group and has a 6.74 per cent stake in 3i Infrastructure.
Most infrastructure trusts invest money in government-backed projects with returns linked to indexes. But James Dawes, chief financial officer, explains that 3i Infrastructure prefers companies in fields such as energy transition and digitalization that generate a lot of cash.
Dawes cites two examples of 3i’s ideal infrastructure investment: ‘There’s TCR, which provides support services to airlines in 20 countries, Global Cloud Xchange, which manages submarine fiber optic networks, and Infinis, our methane extraction company. It siphons methane from 120 UK landfills and converts it into electricity. Housing developments cannot be built on this type of land, but batteries and solar panels can be installed.’
The success of this strategy is illustrated by the sale this summer of the 25 percent tranche of Dutch waste management group Attero, up 31 percent from its March valuation. Analysts at Numis said the deal “suggested conservative valuations” for the rest of the portfolio.
If true, this trust, like its big brother 3i, could be a good opportunity for investors to consider this Christmas.