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The UK stock market has increased by a respectable 8.7% over the past year. Yet within the index, some companies have performed better and some worse. When I spotted one growth stock that has really outperformed over the period, I naturally wanted to get some more information to see if this trend could continue.
The private equity party
I’m referring to 3i Group (LSE:III). The private equity powerhouse invests its own permanent capital (plus some co-investors) into mid-market private companies and infrastructure assets across Europe and North America.
It has a portfolio worth over £21bn, with the business making money from charging management and performance-related fees on this money. Investors who put their money in aim for mid-teen total returns. Gains are realised via sales, dividends, and equity growth in portfolio companies that 3i has exposure to.
It’s not always that easy to get clear-cut examples of success stories from the business. One is the 57.9% stake it took in Dutch discount retailer Action. It had a 29% jump in EBITDA for the latest fiscal year of accounts. Naturally, this provided a multi-billion pound boost for 3i, given the size of its stake in the company.
Reasons for the outperformance
Part of the 36% jump in the share price over the past year has come from the increase in the net asset value (NAV). The companies 3i invest in have done well. Therefore, the 3i stock will follow suit if the portfolio value increases. Yet the share price is trading at a 64% premium to the latest NAV, showing this isn’t the only factor.
Positive investor sentiment is helping to provide this premium. The company has low net debt, strong cash flow and liquidity, and a strong track record of good investments, so I do get the appeal of why investors are happy to snap it up.
Further, the dividends have been rapidly rising in recent years. It totalled 38.50p in 2021, but this has soared to 73p in the last year. Granted, the dividend yield‘s below the FTSE 100 average. But this is mostly due to the rising share price, which is pushing the yield lower.
Looking ahead
I believe the stock can continue outperforming the FTSE 100 over the coming year. Some will indeed flag Action as driving the bulk of the portfolio gains. If it underperforms in the coming year, this could be a risk for 3i as a whole. Yet I feel the company will be able to find new attractive opportunities to help push the NAV higher still. On that basis, I think it’s a stock for investors to consider.
