What a brilliant day it might have been for 3i to announce half-year results. The listed private equity group is, in some ways, the ultimate hedge against a chaotic Brexit. Its assets are overwhelmingly on the Continent. Britain has been dwindling in importance for years and now accounts for less than 10 per cent of private equity holdings. Alas, for 3i, its results were overshadowed by problems in two of its larger investments.
Action, a Dutch-based discount retailer, has been a phenonemal investment for the group, generating well over £2 billion of value since it was acquired in 2011. But there has been a wobble as it continues its galloping expansion into France, Germany, Poland and Austria. 3i revealed that it had postponed 20 new store openings in France from this quarter because of what it called “supply chain and product availability challenges”.
It seems no huge calamity. The problem is centred on a single, highly unionised distribution centre at Moissy, near Paris. Slower unloading times led to stock shortages and lower basket sizes in the shops. Action is putting in additional staff, boosting training and building extra capacity in other distribution centres. Simon Borrows, chief executive, is confident that this doesn’t herald deeper problems in the growth strategy. The Action investment generated £271 million in extra value for 3i in the first half and is now valued at £2.38 billion, or 33 per cent of the entire private equity portfolio.
Schlemmer, a German maker of gizmos to keep wiring safely installed in cars, has also hit problems. 3i has had to slash its valuation of its stake in the business by £53 million to £107 million because of pressures on profits and cashflow. The chief executive and finance chief have been jettisoned and a new team installed to improve weak controls and processes.
In spite of these setbacks, 3i produced a very respectable first half, generating a total return of £728 million, or 10 per cent on opening shareholders’ funds. Eighty-eight per cent by value of its top 20 assets produced profits growth. This number was slightly flattered, however, because Schlemmer fell out of the top 20. Even so, 3i’s buy-and-build policy of snapping up companies and then expanding them though organic growth and bolt-on acquisition continues to pay off.
While rival private equity funds scramble to find homes for cash already raised from investors and can end up overpaying for assets, 3i, as a closed-end business, can afford to be more discriminating. It still managed to identify a couple of promising new investments in the half. It sank £136 million into Royal Sanders, a lotions and potions manufacturer. It also paid £111 million for a stake in ICE, which devises travel-based reward programmes for brands such as American Express and Hilton Hotels.
The infrastructure division is ticking along nicely, too. 3i manages the listed 3i Infrastructure trust and also owns a 33 per cent stake in it. Its shares rose 14 per cent in the period.
3i has been a class act in recent years. In any portfolio there will always be the occasional turkey, but over the long term, its ratio of winners to losers is reassuringly strong. The shares, after yesterday’s 8 per cent dive to 789¾p, look relatively good value, trading at a premium to net assets of only 2 per cent. In the past that premium has been as high as 25 per cent, reflecting confidence that the company is very conservative in its valuations. And if sterling really is heading seriously south, 3i, whose investee companies make their money in euros, is well insulated.
ADVICE Buy
WHY Disciplined buyer and steward of private companies with strong track record and limited exposure to UK
Learning Technologies
Few things are more dispiriting than receiving an email from your HR manager requesting that you complete an online module on, say, GDPR, or the latest change to the money laundering regime (Simon Duke writes).
Learning Technologies, a software developer that helps companies to educate their staff, aims to put some sparkle into corporate training. As Jonathan Satchell, chief executive, puts it, too many educational tools are “boring and turgid”. In the era of smartphones, people demand the same slick user experience that they enjoy on Netflix, Spotify and other consumer apps.
Based in London, Learning Technologies has ridden this trend to become one of the darlings of the stock market. Its shares have risen ninefold over the past five years, giving it a valuation of more than £750 million. Yesterday it went some way towards justifying the hype after setting itself some punchy targets. It is aiming for revenues of £200 million a year and underlying earnings of £55 million by 2021, compared with a previous goal of £100 million of sales and £25 million in profits by 2020. It also announced that it was buying 70 per cent of Watershed, an open learning analytics platform, for as much as $12 million.
With Andrew Brode, the chairman, Mr Satchell bought and later renamed Epic, a digital training company, in 2007. They listed the company on the stock exchange through a reverse takeover in 2013 and have grown Learning Technologies organically and through acquisitions.
The shares have fallen from an all-time high of 166½p in late September after Mr Satchell and two fellow directors sold more than £40 million of stock. They took some chips off the table for “estate planning and portfolio diversification purposes”. After the sale, Mr Satchell retains an 11.3 per cent stake.
Yesterday Numis upgraded Learning Technologies to “buy” and slapped a 180p price target on the shares, a third above yesterday’s close of 120p. Yet it is rarely a good signal for prospective investors when directors sell shares, even if they have plenty of skin left in the game. For now, it would be better to avoid.
ADVICE Avoid
WHY Recent share sales by directors
