According to Financial Times News, UK private equity firm 3i saw its shares slump 14.5% on Thursday after revealing slowing growth at discount retailer Action, its key investment that has driven the firm’s performance transformation. The FTSE 100 group reported that Action’s sales growth weakened in October, particularly in France which accounts for one-third of its total revenue. 3i warned that Action’s full-year like-for-like sales growth could fall below its earlier 6.1% guidance, with growth for the first 10 months of the year at 5.7% compared to 6.3% in the nine months to September. The company’s shares had more than tripled over the past five years, making the sudden drop particularly dramatic as investors reacted to the news about Action, which now makes up almost 80% of 3i’s private equity portfolio.
The Action Problem
Here’s the thing about putting all your eggs in one basket – when that basket starts showing cracks, everyone notices. 3i has basically become a proxy for Action’s performance, and that’s a dangerous position for any investment firm. The retailer’s value grew by £2.1 billion to £21.5 billion in just six months ending September, which is insane growth by any measure. But now we’re seeing what happens when that growth engine sputters. The fact that 3i actually increased its stake in Action to over 60% in September, right before this slowdown became apparent? That timing looks pretty rough in hindsight.
Short Seller Worries
Remember when ShadowFall Capital, the same firm that bet against Wirecard, took a short position against 3i last year? They argued Action was overvalued, and suddenly that doesn’t look so crazy. The October slowdown in France is particularly concerning because France represents a third of Action’s revenue. If growth is stalling in their core markets, where exactly is the next wave of expansion coming from? Action already operates over 3,000 stores across continental Europe – how much more room do they really have to grow without saturating the market?
Christmas Crunch Time
Now 3i says Action’s full-year performance rests on the crucial Christmas season. But here’s my question: if October seasonal sales were already “softer” than expected, what makes them so confident about November and December? One analyst quoted in the report put it perfectly – “people are trying to work out how much we extrapolate the October result as indicator for November, December or next year.” Basically, is this just a temporary blip or the beginning of a longer-term slowdown? The holiday season will tell us everything, but investors clearly aren’t waiting around to find out.
Bigger Picture Risks
Look, private equity firms thrive on diversification and managing risk across multiple investments. But when nearly 80% of your private equity portfolio is tied to one company, you’re not really a private equity firm anymore – you’re basically a holding company for that single asset. And while Action has been an incredible success story, today’s reaction shows how vulnerable 3i has become to any sign of weakness in that one investment. The 14.5% drop isn’t just about one bad month – it’s about investors realizing that 3i’s entire transformation story might be more fragile than anyone wanted to admit.
