REG - 3i Group PLC - Financial results for the year to 31 March 2015 <Origin Href="QuoteRef">III.L</Origin> - Part 2
15/07/2015 17:33
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portfolio companies impacting earnings growth and
valuations§ Failure to invest in people to support
our activities
ASSETS UNDER MANAGEMENT UNDERLYING FUND OPERATING CASH
("AUM") MANAGEMENT PROFIT/(LOSS)
£bnFinancial year Profit (£m) and Margin (%)Financial year £mFinancial year
FY2013 FY2014 FY2015 FY2013 FY2014 FY2015 FY2013 FY2014 FY2015
AUM 12.9 12.9 13.5 Profit £17m £33m £33m (8) 5 28
Proprietary 3.7 3.4 3.3 Margin 13% 26% 26%
Capital
Third-party 9.2 9.5 10.2
Capital
RationaleAUM forms the basis on which management fee income is generated. For funds out of their reinvestment period, this is measured at residual cost RationaleUnderlying Fund Management profit RationaleCovering the annual cost of running our business with the annual cash income eliminates capital return dilution
allows us to assess the performance of our
Fund Management business
2015 progress§ Total AUM grew by 4% to £13.5bn§ Growth in third-party AUM to £10.2bn (75% of total AUM)§ New funds raised in the year included six new CLOs and the first close of a E250m European Middle Market Loan Fund which offset the effect of Private Equity realisations and the normal attrition in Debt Management as funds mature§ Proprietary Capital AUM stable at £3.3bn as the good flow of Private Equity realisations largely replaced with new 2015 progress§ Underlying Fund Management 2015 progress§ Operating cash profit improved significantly to £28m§ Good cash income generated by the Private Equity portfolio and increased AUM in Debt Management and Infrastructure funds§ Further enhanced the Group's operational efficiency following the cost reduction programme initiated in 2012
investments profit remained stable at £33m in the year, as
reduced fees from Private Equity were offset
by growth in fees from Debt Management and
Infrastructure§ Divestment activity led to a
reduction of 8% in Private Equity AUM and a
reduction in total fee income (including
synthetic fee) of 14%§ Infrastructure fee
income increased by 25% as we recognised a
full year of income from the BIFM PPP funds§
Debt Management AUM increased by 12% and fee
income increased by 6%
Key risks§ Portfolio performance is weak or impacted by a legal, macroeconomic/political conditions and/or regulatory event§ Regulatory change limits 3i's ability to raise third-party capital Key risks§ G20 political and economic Key risks§ Portfolio performance, and therefore portfolio income, is weak due to operational underperformance§ Unplanned increase in cost base
uncertainty affects investment opportunity or eg due to regulatorychanges
fundraising appetite § Adverse fluctuations in
financial markets impact our fee-based
businesses§ Regulatory change adds to 3i's
cost base
Business review
This business review reports on the activity of each of our businesses. Financial performance is summarised in the Chief
Executive's review and reported in detail in the Financial review.
Private Equity
Business lines
"A strong performance across all aspects of the business, including £457 million of investment."
Alan Giddins and Menno Antal
Managing Partners and Co-heads of Private Equity
Private Equity is the largest contributor to the Proprietary Capital returns; accounting for 81% of the Proprietary Capital
portfolio at 31 March 2015 (31 March 2014: 82%). The portfolio's performance was strong in the year; driven by growth of
19% in earnings and good realisations, through sales and IPOs as well as refinancings. The gross investment return was £719
million for the year, or 24% on the opening portfolio (2014: £647 million, 24%).
Investment activity
We increased the amount of investment in the year and completed four new transactions. In total £457 million was invested;
including £369 million of 3i's Proprietary Capital (2014: three, £372 million, £276 million).
Each new investment demonstrates our origination and investment execution strengths. We invested in Q Holding and Dynatect,
which are both leading US headquartered industrial businesses with clear strategies to accelerate their growth
internationally. Our sector focus and proven experience in achieving international growth and diversification, recently
demonstrated by Mold-Masters and Hilite, were important as key differentiators against competing US private equity firms
for both investments.
Table 1 : Private Equity cash investment in the year to 31 March 2015
Proprietary
Proprietary capital value
Total capital at 31 March
investment investment 2015
Investment Type Business description Date £m £m £m
Christ New1 Jewellery and watch retailer in Germany December 2014 173 99 165
Q Holding New Manufacturer of specialist moulded rubber and silicone components December 2014 102 100 109
Dynatect New Manufacturer of engineered, mission critical protective equipment September 2014 66 65 71
Aspen New Manufacturer of condensate removal pumps February 2015 65 64 64
EFV stake Further Acquisition of LP stake in Eurofund V June 2014 27 27 n/a
Other2 Further n/a 24 14 n/a
Total 457 369
1 2 Christ was acquired alongside Amor as a follow on investment for Eurofund V and is now recorded as a single investment "Amor/Christ". The value in the table above includes Amor.Other includes further investment to support the portfolio, including acquisition funding or working capital.
We also invested in Christ, a German-based jewellery retailer, and Aspen Pumps, a UK-based specialist manufacturer of
condensate removal pumps. Christ was acquired through Eurofund V, alongside our investment in Amor. We had followed Christ
as a potential target since late 2012. This positioned us well when the process started, allowing us to move quickly and
secure the investment. Similarly, we had followed Aspen since early 2014, allowing us to develop a good understanding of
the business and broader market environment as well as build relationships with management, which gave us good insight when
a sales process was initiated.
In June 2014, we took the opportunity to purchase a small additional stake in Eurofund V at the 31 March 2014 NAV, adjusted
for cash flows, which further increased our exposure to investments we know well.
An important part of building the strategic value of our portfolio companies, including achieving international expansion,
is an active acquisition programme. Our portfolio companies made over 20 acquisitions in the year, with a combined
enterprise value of over E400 million, primarily funded from the companies' own cash and banking facilities.
Realisations activity
Realisations, refinancings and IPOs generated £831 million of proceeds during the year. Excluding refinancings of £155
million, this represented an uplift over opening value of £144 million, or 27% (2014: £190 million, 45%). The uplift was
lower than the prior year due to a number of investments being valued on an imminent sales basis at 31 March 2014. Proceeds
from refinancings are usually recognised primarily as a repayment of shareholder loans with minimal uplifts as a result.
In addition to the number of notable larger exits and IPOs, we continued to sell smaller and non-core assets. At 31 March
2015, there were 65 investments in the Private Equity portfolio, down from 81 at 31 March 2014. In the longer term, we
expect to hold a portfolio of fewer than 40 Private Equity investments.
Table 2 details the Private Equity realisations activity in the year.
Table 2: Private Equity realisations in the year to 31 March 2015
31 March Uplift on Money
Calendar 2014 3i realised Profit/(loss) opening Residual multiple
year value proceeds in the year1 value1 value over
Investment Country invested £m £m £m % £m cost2 IRR
Full realisations
Hilite Germany 2011 133 151 25 20% - 2.1x 31%
Phibro USA 2009 93 122 27 28% - 1.7x 11%
Vedici France 2010 58 83 27 48% - 2.0x 17%
LHI China 2008 33 40 8 25% 2 2.8x 18%
John Hardy Hong Kong 2007 25 25 - -% 2 1.6x 7%
Gain Capital USA 2008 12 10 (2) (17)% - 0.9x (2)%
WFCI France 2011 - 10 10 100% - 0.8x (6)%
Derprocon Spain 2000 5 7 1 17% - 2.0x 7%
Café y Te Spain 2006 4 6 2 50% - 0.5x (7)%
Other investments n/a n/a - 2 2 n/a - n/a n/a
Partial realisations
Eltel Nordic 2007 63 87 24 38% 47 0.9x (1)%
Foster + Partners UK 2007 66 66 - -% 40 1.8x 10%
Quintiles USA 2008 25 29 4 16% 144 3.1x 24%
Refresco Benelux 2010 15 25 10 67% 47 1.6x 11%
Other investments n/a n/a 7 9 2 n/a 150 n/a n/a
Refinancings
Action Benelux 2011 95 113 18 19% 592 7.1x 80%
Element Benelux 2010 22 23 1 5% 145 3.0x 31%
Amor3 Germany 2010 21 19 (2) (10)% 55 1.6x 15%
Deferred consideration
Other investments n/a n/a - 4 4 n/a n/a n/a n/a
Total 677 831 161 24% 1,224 2.0x n/a
1 Cash proceeds in the year over opening value realised.
2 Cash proceeds over cash invested. For partial realisations and refinancings, 31 March 2014 value reflects the element being disposed and valuations of any remaining investment are included in the multiple.
3 Loss on disposal offset by income received.
Assets under management
AUM declined to £3.8 billion at 31 March 2015 (31 March 2014: £4.1 billion) as a result of net divestment activity. AUM is
calculated as the original cost of our managed portfolio and, while this has reduced, the value of the portfolio has
increased to £4.8 billion (2014: £4.6 billion) as a result of strong value growth.
The performance of Eurofund V and the Growth Capital Fund continued to improve with money multiples at 31 March 2015 of
1.4x and 1.7x respectively (31 March 2014: 1.1x, 1.3x). The investments made in the second half of Eurofund V, post 2010,
are showing a particularly strong performance, with a money multiple of 2.6x at 31 March 2015 (31 March 2014: 2.1x).
The Group is well placed to fund the current level of activity from current resources and future realisations.
Consequently we have no plans to initiate a new Private Equity fundraising in the short to medium term, notwithstanding the
success of the team in improving the performance of our most recent funds.
The results of the business have been delivered by an internationally cohesive team, further strengthened by recruitment at
associate level in the year.
Table 3: Assets under management
Fee
Remaining Gross income
3i % money received
commitment invested multiple1 in the
Original Original 3i at March at March at March year
Private Equity Close date fund size commitment 2015 2015 2015 AUM £m
3i Growth Capital Fund Mar 2010 E1,192m E800m E376m 53% 1.7x E472m 2
3i Eurofund V Nov 2006 E5,000m E2,780m E118m 94% 1.4x E2,310m 11
3i Eurofund IV Jun 2004 E3,067m E1,941m E78m 96% 2.3x E471m -
Other Various Various Various n/a n/a n/a £1,098m -
Total Private Equity AUM £3,785m 13
1 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2015, as a multiple of cash invested.
Infrastructure
"The business delivered a strong result, driven by the performance of its investment in 3i Infrastructure plc."
Ben Loomes and Phil White
Managing Partners and Co-heads of Infrastructure
Infrastructure generates returns for Proprietary Capital, primarily through our holding in 3iN, and Fund Management returns
from advisory and management fees from 3iN, PPP funds and the legacy Indian Infrastructure fund. Infrastructure performed
strongly in the year with a gross investment return of £96 million,
or 20% on the opening portfolio (2014: £2 million, 0%). The business generated £30 million (2014: £24 million)
of advisory and management fees across its funds and £10 million of net performance fees (2014: nil).
INVESTMENTS ADVISER TO 3iN
In its capacity as 3iN's investment adviser, 3i advised on six new investments including the acquisition of holdings in two
further oil storage facilities and a number of primary PPP projects. In total, 3iN committed £114 million to new investment
in 2015 (2014: £80 million).
We also advised 3iN on the exit of its holding in Eversholt Rail, one of the three leading rail rolling stock companies in
the UK. Eversholt Rail was acquired by 3iN in December 2010 as part of a consortium. In January 2015, all of the consortium
partners agreed to sell the business. This resulted in proceeds of approximately £381 million for 3iN, inclusive of a £15
million dividend received by 3iN in December 2014. This compares to a 31 March 2014 valuation of £160 million.
In July 2014, 3iN's shareholders approved a number of amendments to its Investment Advisory Agreement with 3i. These
included the extension of the fixed term of the agreement for a period of four years, with one year's rolling notice
thereafter.
Under the terms of the investment advisory agreement, 3i received an advisory fee of £17 million (2014: £16 million) and a
NAV-based performance fee of £45 million (2014: nil), of which £34 million (2014: nil) is accrued as payable to the team.
Actual payments will be made over a number of years. A further £1 million in performance fees payable to the team has been
accrued as a result of performance of other reward schemes.
3iN PERFORMANCE
In addition to its role as investment adviser, 3i holds a 34% (2014: 34%) stake in 3iN. 3iN performed strongly in the year;
the share price increased by 19% to 160 pence at 31 March 2015 (31 March 2014: 135 pence) and it delivered a 25% total
shareholder return in the year, the strongest annual return since the IPO in 2007.
In total, 3i's investment in 3iN contributed £77 million of value growth (2014: £5 million) and £20 million of dividend
income in 2015 (2014: £21 million). This uplift was underpinned by the exit of Eversholt Rail, and value growth across its
Core infrastructure portfolio, supported by the continued returns compression and consequent reduction in discount rates
applied.
ASSETS UNDER MANAGEMENT
Due to the growth in 3iN's NAV, AUM increased to £2.5 billion (31 March 2014: £2.3 billion). 3iN's strong performance
offset a small value reduction in the India Infrastructure Fund following the first realisations of investments in the
Fund, and where the portfolio continues to face a number of challenges. 3i's share of the Indian portfolio is now valued at
£64 million (2014: £75 million).
In line with our strategy to grow Infrastructure's contribution to our Fund Management profits, we continue to explore
opportunities to grow AUM. Our acquisition of BIFM in 2013 broadened the Infrastructure team's skill set and market access
and, as the business grows, we expect to continue to enhance both our investment and support capabilities.
Debt Management
"Six new CLOs and important product diversification added £2.4 billion of new AUM."
Jeremy Ghose
Managing Partner, and CEO, 3i Debt Management
Debt Management is principally a Fund Management business which primarily generates returns through managing third-party
capital through CLOs and other senior debt focused funds. We also generate Proprietary Capital returns from 3i's investment
in funds managed by Debt Management. Such investments are made to support new products or for regulatory purposes and
totalled £105 million during the year (2014: £61 million).
The Debt Management team had a good year of fundraising, closing six new CLOs and a new E250 million European Middle Market
Loan Fund. AUM grew to £7.2 billion at the end of the year (31 March 2014: £6.5 billion) as £2.4 billion of new AUM was
offset by run-off and foreign exchange movements of £1.7 billion of AUM. The business generated £34 million of fee income
in the year (2014: £32 million).
Fundraising activity
In the year the team closed three CLOs in Europe and three in the US, raising a total of £2.2 billion new CLO AUM. We
continue to operate CLO warehouse vehicles in both Europe and the US ahead of establishing new CLO vehicles. We also held a
first close of the European Middle Market Loan Fund at E250 million, entirely with third-party funds. This is a new fund
established to invest in smaller businesses than we typically target in the CLOs and is an important diversification.
The US Senior Loan Fund, an open-ended fund, performed strongly and outperformed its benchmarks in the year. AUM increased
to $157 million at 31 March 2015 (31 March 2014: $79 million).
The team was able to take advantage of strong CLO markets and grow AUM without increasing resource in the year but is
likely to require some incremental additional resource for further AUM growth, particularly as we look to diversify and
grow our non-CLO product offering.
Table 4 details Debt Management AUM.
Regulatory environment
The regulatory environment continues to evolve. European regulation now in force requires CLO sponsors or originators to
retain a 5% minimum stake in each CLO raised. Similar rules are being introduced in the US and many new US CLOs are being
structured to comply with both the European rules and the future US rules. This is concentrating the CLO market to those
managers with access to long-term capital, such as 3i, but it is also giving rise to new business models and vehicles to
support future CLOs, which 3i continues to monitor.
Valuations and income
Debt Management generated a negative gross investment return of £10 million (2014: £16 million profit), primarily as a
result of an unrealised value reduction of £25 million during the year (2014: £10 million gain). As noted above, 3i is
required to hold at least 5% of the European CLOs it manages. We typically invest in the most junior ranked level
subordinated notes, which we account for as equity given its characteristics. During the year, we typically invested at or
near par in the most junior ranked subordinated notes to satisfy the 5% holding requirement. In most cases, third-party
investors have invested at a discount to 3i's investment, which sets an external reference point for valuation. This
resulted in a fair value reduction of £5 million in the year. Value also reduced as a result of strong distributions from
the CLO portfolio; £16 million of income was recognised. Finally, in our older European CLOs and Palace Street 1, there
were a small number of underlying assets that were restructured in the year, contributing to value losses.
The performance of all of the CLOs launched in the last two years is very good, with early performance ahead of plan. There
were no defaults and distributions are providing an annualised yield of between 8% and 20%.
Table 4: Assets under management- Debt Management
Realised Annualised Fee income
Value equity equity received in
Close Reinvestment Maturity of fund money cash the year
date period end date at launch1 Multiple2 Yield3, 4, 5 AUM £m
European CLO funds
Harvest CLO XI Mar-15 Mar-19 Mar-29 E525m n/a n/a E400m -
Harvest CLO X Nov-14 Nov-18 Nov-28 E467m n/a n/a E450m 0.6
Harvest CLO IX July-14 Aug-18 Aug-26 E525m 0.1x 19.6% E508m 1.3
Harvest CLO VIII Mar-14 Apr-18 Apr-26 E425m 0.1x 12.3% E413m 1.4
Harvest CLO VII Sep-13 Oct-17 Oct-25 E310m 0.1x 8.3% E302m 0.7
Windmill CLO I Oct-07 Dec-14 Dec-29 E500m 0.6x 8.6% E479m 2.2
Axius CLO Oct-07 Nov-13 Nov-23 E350m 0.6x 8.3% E234m 1.6
Coniston CLO Aug-07 Jun-13 Jul-24 E409m 1.0x 12.6% E237m 1.1
Harvest CLO V Apr-07 May-14 May-24 E632m 0.6x 8.1% E539m 3.2
Garda CLO Feb-07 Apr-13 Apr-22 E358m 1.3x 16.8% E162m 1.3
Pre 2007 CLOs n/a n/a n/a E3,111m n/a n/a E900m 7.6
£3,354m
US CLO funds
Jamestown CLO VI Feb-15 Mar-19 Mar-27 US$750m n/a n/a US$750m 0.2
Jamestown CLO V Dec-14 Jan-19 Jan-27 US$411m n/a n/a US$402m 0.3
Jamestown CLO IV Jun-14 Jul-18 Jul-26 US$618m 0.1x 16.8% US$599m 1.2
COA Summit CLO Mar-14 Apr-15 Apr-23 US$416m 0.3x 30.5% US$400m 0.6
Jamestown CLO III Dec-13 Jan-18 Jan-26 US$516m 0.1x 14.9% US$499m 1.2
Jamestown CLO II Feb-13 Jan-17 Jan-25 US$510m 0.4x 19.2% US$501m 1.6
Jamestown CLO I Nov-12 Nov-16 Nov-24 US$461m 0.4x 18.8% US$453m 1.4
Fraser Sullivan CLO VII Apr-12 Apr-15 Apr-23 US$459m 0.6x 20.8% US$454m 0.7
COA Caerus CLO Dec-07 Jan-15 Dec-19 US$240m 1.6x 23.7% US$240m n/a
Pre 2007 CLOs n/a n/a n/a US$1,000m n/a n/a US$354m 1.8
£3,145m
Other funds
EMMF Nov-14 Nov-17 Nov-22 n/a n/a n/a E250m 0.1
Vintage II Nov-11 Sept-13 n/a US$400m n/a 1.5x US$201m 0.9
Palace Street I Aug-11 n/a n/a n/a 0.9x 1.9% E3m n/a
Senior Loan Fund Jul-09 n/a n/a n/a n/a 8.0% US$157m 0.3
COA Fund6 Nov-07 n/a n/a n/a n/a 0.4% US$35m 0.3
Vintage I Mar-07 Mar-09 Jan-22 E500m 2.9x 6.2x E327m 2.6
Pre 2007 funds n/a n/a n/a E300m n/a n/a E25m 0.2
European Warehouse vehicles n/a n/a n/a n/a n/a n/a E48m n/a
£740m
Total Debt Management AUM £7,239m
1 Includes cost of assets and principal cash amount.
2 Multiple of total equity distributions over par value of equity at launch.
3 Average annualised returns since inception of CLOs calculated as annualised cash distributions over par value of equity. Excludes unrealised equity remaining in CLO.
4 Vintage I & II returns are shown as gross money multiple which is cash returned to the Fund plus value as at 31 March 2015, as a multiple of cash invested.
5 The annualised returns for the COA fund and Senior Loan Fund are the annualised net returns of the Funds since inception.
6 The COA Fund AUM excludes the market value of investments the fund has made in 3i US Debt Management CLO funds (US$54 million as at 31 March 2015).
Financial review
"All of our three businesses are performing well as demonstrated by these strong results."
Julia Wilson
Group Finance Director
The Group delivered a strong result in the year. The table below summarises our key financial data under the investment
basis.
Table 5: Summary financial data
Year to/as at Year to/as at
31 March 31 March
Investment basis 2015 2014
Group
Total return £659m £478m
Total return on opening shareholders' funds 19.9% 16.3%
Dividend per ordinary share 20.0p 20.0p
Operating expenses £131m £136m
As a percentage of assets under management 1.0% 1.0%
Operating cash profit £28m £5m
Proprietary Capital
Realisation proceeds £841m £677m
Uplift over opening book value1 £145m/27% £191m/45%
Money multiple 2.0x 1.8x
Gross investment return2 £805m £665m
As a percentage of opening 3i portfolio value 22.6% 20.2%
Operating profit 3 £721m £539m
Cash investment £474m £337m
3i portfolio value £3,877m £3,565m
Gross debt £815m £857m
Net cash/(debt) £49m £(160)m
Gearing nil 5%
Liquidity £1,214m £1,197m
Net asset value £3,806m £3,308m
Diluted net asset value per ordinary share 396p 348p
Fund Management
Total assets under management £13,474m £12,911m
Third-party capital £10,140m £9,508m
Proportion of third-party capital 75% 74%
Total fee income £125m £127m
Third-party fee income £80m £76m
Operating profit3 £26m £19m
Underlying Fund Management profit3,4 £33m £33m
Underlying Fund Management margin 26% 26%
1 Uplift over opening book value excludes refinancings. The 2014 balance has been restated from £202 million to £191 million to exclude refinancings.
2 Gross investment return includes portfolio fees of nil (2014: £3 million) allocated to Fund Management.
3 Operating profit for the Proprietary Capital and Fund Management activities excludes carried interest and performance fees payable/ receivable, which is not allocated between these activities.
4 Excludes Fund Management restructuring costs of £1 million and amortisation costs of £6 million (2014: £8 million, £6 million).
Basis
3i adopted IFRS 10 in 2014 as its investment entity exception prevented the risk of investment companies, such as 3i,
having to consolidate their portfolio investments.
However, as described in our 2014 Annual Report and Accounts, we also report using a non-GAAP "Investment basis" as we
believe it aids users of our report to assess the Group's underlying operating performance. Total return and net assets are
the same under the Investment basis and IFRS and we provide more detail on IFRS 10, as well as a reconciliation of our
Investment basis financial statements to the audited IFRS statements, at the end of this section.
Total return
The Group generated a total return of £659 million, or a profit on opening shareholders' funds of 19.9% (2014: £478 million
or 16.3%) in 2015, reflecting further progress and achievement of our strategic priorities. Operating profit before
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