REG - 3i Group PLC - Financial results for the year to 31 March 2015 <Origin Href="QuoteRef">III.L</Origin> - Part 3
15/07/2015 17:33
- Part 3: For the preceding part double click ID:nRSN1280Nb
carry
for the Proprietary Capital business was £721 million (2014: £539 million). Strong underlying portfolio performance
generated a gross investment return of £805 million, despite negative foreign exchange movements on the portfolio of £154
million (2014: £665 million and negative £113 million). Fund Management operating profit before carry was £26 million
(2014: £19 million). Further details regarding the performance during the year is provided below.
Table 6: Total return for the year to 31 March
2015 2015 2015 2014 2014 2014
Proprietary Fund Proprietary Fund
Capital Management Total Capital Management Total
Investment basis £m £m £m £m £m £m
Realised profits over value on disposal of investments 162 - 162 202 - 202
Unrealised profits on revaluation of investments 684 - 684 475 - 475
Portfolio income
Dividends 45 - 45 44 - 44
Income from loans and receivables 62 - 62 50 - 50
Fees receivable 6 - 6 4 3 7
Foreign exchange on investments (154) - (154) (113) - (113)
Gross investment return 805 - 805 662 3 665
Fees receivable from external funds - 80 80 - 73 73
Synthetic fees (45) 45 - (51) 51 -
Operating expenses1 (32) (99) (131) (28) (108) (136)
Interest receivable 3 - 3 3 - 3
Interest payable (49) - (49) (54) - (54)
Movement in the fair value of derivatives (1) - (1) 10 - 10
Exchange movements 40 - 40 (3) - (3)
Other (loss)/income - - - - - -
Operating profit before carry 721 26 747 539 19 558
Carried interest and performance fees receivable 80 3
Carried interest and performance fees payable (142) (85)
Acquisition related earn-out charges (8) (6)
Operating profit 677 470
Income taxes (4) (3)
Re-measurements of defined benefit plans (14) 11
Total comprehensive income("Total return") 659 478
Total return on opening shareholders' funds 19.9% 16.3%
1 Includes restructuring costs of nil (2014: £1 million) and £1 million (2014: £8 million) for Proprietary Capital and Fund Management respectively.
Proprietary capital returns
Operating profit before carry on our Proprietary Capital increased by 34% to £721 million (2014: £539 million) due to
strong value growth in the portfolio and good uplifts on realisations. This performance is despite foreign exchange losses
of £114 million (2014: £116 million) which have principally resulted from the weakening of the euro against sterling.
By business line, the gross investment return on the opening portfolio was 24% from Private Equity (2014: 24%) and 20% from
Infrastructure (2014: 0%) while Debt Management recorded a loss of 7% (2014: profit of 20%) as a result of mark to market
movements which reduced CLO equity valuations. Private Equity accounts for 81% of the Proprietary Capital portfolio at 31
March 2015 (31 March 2014: 82%) and remains the primary driver of Proprietary Capital returns.
Realised profits
Realised profits of £162 million in the year to 31 March 2015 (2014: £202 million) were driven by another year of strong
exits, with realisation proceeds totalling £841 million (2014: £677 million). Realisations, excluding refinancings, were
achieved at an uplift over opening value of 27%, which was lower than the 45% achieved in 2014 due to a number of assets
being valued on an imminent sales basis at the beginning of the year. This past year also saw a higher level of refinancing
activity, which results in cash proceeds with limited realised profit but concentrates value in the remaining investment.
We continue to pursue realisations through careful exit planning, and in the current environment of high prices, will take
advantage of opportunities to divest should they arise.
The majority of the realisations were from the Private Equity portfolio, which contributed £831 million (2014: £669
million), including £155 million of refinancing proceeds (2014: £59 million). Table 2, in the Private Equity section,
details the Private Equity realisations in the year and sets out the accounting uplift reflected in this year's total
return and the longer-term cash-to-cash results. The Private Equity realisations completed in the year have generated a
money multiple of 2.0x over their investment life.
We also made our first realisation from our Indian Infrastructure portfolio, with the partial sale of the quoted shares
held in Adani Power. This generated £10 million of proceeds at an uplift over the opening value of £1 million.
Unrealised value movements
Unrealised value movement was very positive in the year, predominantly due to strong value growth from the Private Equity
portfolio. The table below summarises the revaluation movement by category and each category is discussed further below.
Table 7: Unrealised profits/(losses) on revaluation of investments for the year to 31 March
2015 2014
£m £m
Private Equity
Earnings based valuations
Performance 417 182
Multiple movements 64 216
Other bases
Provisions - -
Uplift to imminent sale 22 9
Discounted cash flow 89 11
Other movements on unquoted investments 3 (10)
Quoted portfolio 46 70
Infrastructure
Quoted portfolio 77 6
Discounted Cash Flow (9) (19)
Debt Management (25) 10
Total 684 475
Private Equity unrealised value growth
The Private Equity portfolio performed strongly with value growth of £641 million in the year (2014: £478 million). This
was underpinned by good value weighted earnings growth of 19% (2014: 19%) and a multiple increase of 6% (2014: 20%),
following rises in quoted comparable multiples during the year and the re-rating of a small number of assets. Net debt
remained stable at 3.1x EBITDA notwithstanding the fact that we took advantage of favourable debt conditions to refinance a
number of our high quality companies (2014: 3.1x). The majority of the portfolio (93% by value, 2014: 87%) grew its
earnings in the year and the larger investments continue to perform very well.
Consistent with good performance and strong equity markets, our opening quoted portfolio and the successful IPOs of Phibro,
Eltel, Dphone and Refresco during the year, resulted in unrealised value growth of £46 million in addition to realised
profits of £63 million in the year.
Performance
Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £417
million (2014: £182 million). Value weighted earnings, the most relevant measure of NAV impact, increased by 19% (2014:
19%) in the year. Action, as our largest asset, with over 30% earnings growth in the 12 months, is a big contributor to
this measure. Excluding Action, the earnings growth is still a very robust 16% and now includes all our recent investments.
Acquisitions, principally funded from portfolio companies' balance sheets, contributed 2% of the 19% growth.
Table 8: Portfolio earnings growth weighted by March 2015 carrying values1
3i carrying value
at 31 March 2015
Last 12 months' (LTM) earnings growth (£m)
<(20)% 32
(20) - (11)% -
(10) - (1)% 131
0 - 9% 753
10 - 19% 88
20 - 30% 387
>30% 868
1 Includes all companies valued on an earnings basis where comparable earnings data is available. This represents 72% of the Private Equity portfolio by value.
Although performance overall was good, there were a small number of investments where company and geography specific issues
impacted value. In total, value reductions of £44 million, in relation to seven assets, offset the general improvement. The
largest single negative movement related to Inspecta where performance was impacted by the economic environment in Finland
and Russia. Inspecta reduced in value from £34 million at 31 March 2014 to £6 million at 31 March 2015. After the year end,
we agreed an exit for this investment which is in line with the year-end valuation.
Forecast earnings, used when the forecast EBITDA outlook is lower than the last 12 months' data, were used for only two
investments at 31 March 2015, representing 6% of the portfolio by number and 3% by value (2014: four, 9% by number and 3%
by value). Table 8 shows the earnings growth rates across the portfolio.
In the case of Action, the Dutch headquartered discount retailer, EBITDA for valuation purposes is adjusted to reflect a
run-rate basis. Action is growing strongly due, in part, to its successful store roll-out programme. We believe this
run-rate methodology fairly reflects the high growth characteristics of this business, and therefore its maintainable
earnings. Following a number of IPOs by more directly comparable businesses in the discount retail sector in the last 18
months, we have also reviewed the valuation comparable set for Action. We have increased the EBITDA multiple applied to
Action's run-rate earnings to 14.2x pre-liquidity discount and 13.5x post-discount (2014: 13.2x, 12.5x). Based on the
run-rate earnings and capital structure at 31 March 2015, a 1x movement in the EBITDA multiple applied would increase or
decrease Action's value by £56 million. At £592 million (2014: £501 million), Action is the largest Private Equity
investment by value, representing 19% of the Private Equity portfolio (2014: 17%).
We took the opportunity to refinance a number of high quality companies, both increasing and extending the maturity of
portfolio debt, with 88% of the debt now repayable in 2017 or later (2014: 65%). Table 9 shows the ratio of net debt to
EBITDA weighted by portfolio value.
Table 9: Ratio of debt to EBITDA - Private Equity portfolio weighted by March 2015 carrying values1
3i carrying value at 31 March 2015
Ratio of net debt to EBITDA (£m)
<1x 610
1 - 2x 483
2 - 3x 86
3 - 4x 428
4 - 5x 1,450
5 - 6x 62
>6x 6
1 This represents 99% of the Private Equity portfolio by value.
Multiple movements
Equity markets performed strongly throughout the year and the average EBITDA multiple in the FTSE 250 increased by 10% to
14.6x in the year (source: Capital IQ, excluding investment companies and banks). As a matter of policy, we select an
appropriate multiple for each investment based on a comparable set of quoted companies and adjust these comparable multiple
sets with discounts and occasionally premiums to take account of relevant size, sector, growth and cycle considerations as
appropriate. Against a strong market backdrop, we have continued to apply a high level of adjustments to reflect our
caution about realistic valuation uplifts.
The average EBITDA multiple used to value the Private Equity portfolio increased by 6% to 11.2x before liquidity discount
(2014: 10.6x) and 10.5x after liquidity discount (2014: 9.9x). This translated into a positive movement in the year of £64
million (2014: £216 million), including £45 million relating to the Action multiple change. Excluding Action, the average
EBITDA multiple increased by 3% to 10.1x pre discount (2014: 9.8x) and 9.3x (2014: 9.0x) post discount.
Imminent sale
Four exit processes were sufficiently progressed to value on an imminent sales basis at 31 March 2015 and the uplift to
imminent sale was £22 million (2014: £9 million). All four have been announced since 31 March 2015 and are: Azelis,
Inspecta, Touchtunes and Soyaconcept.
Discounted cash flow
The largest investment valued using DCF in the Private Equity portfolio is the Danish/German ferry group, Scandlines, which
recorded value growth of £94 million. Scandlines' largest ferry route, Rødby-Puttgarden, is expected to have direct
competition from a new tunnel (the Fehmarn Belt project) at some point in the future. In light of recent public commentary
around expected potential delays to the opening of this new tunnel, we have moved back our assumption for the likely tunnel
opening date in the latest 31 March 2015 DCF valuation of Scandlines. This change, combined with the profitable sale of a
JV route in the year, were the primary drivers of the increase in the value of our investment in Scandlines in the period.
Quoted portfolio
The Private Equity quoted portfolio, including IPOs in the year, generated unrealised value growth of £46 million (2014:
£70 million). The investments in Gain and Phibro were fully divested in the year and are noted in the realisations table .
Table 10 details the movement in the year and closing quoted portfolio.
Table 10: Quoted portfolio movement for the year to 31 March 2015
Total gross
Opening Disposals Unrealised Closing value investment
value at at opening value Other at 31 March return during
1 April 2014 book value growth movements 2015 the year
Investment IPO date £m1 £m £m £m2 £m £m
Quintiles Pre 31 March 2014 122 (26) 30 18 144 52
Eltel February 2015 99 (62) 9 1 47 63
Phibro April 2014 93 (95) - 2 - 30
Refresco March 2015 57 (15) 4 1 47 31
Dphone July 2014 34 - 3 (2) 35 11
Gain Capital Pre 31 March 2014 12 (13) - 1 - (1)
417 (211) 46 21 273 186
1 For portfolio companies with an IPO during the year, this is the value pre-IPO.
2 Other movements include dividends and foreign exchange.
Infrastructure unrealised value movement
The Infrastructure portfolio primarily consists of our 34% holding in 3iN. 3iN grew strongly in value during the year, as a
result of the divestment of Eversholt Rail and a re-rating of a number of the remaining Core infrastructure investments
following a year of returns compression in the market. 3iN generated value growth of £77 million for 3i Group in the year,
driven by a 19% increase in the share price to 160 pence (2014: 135 pence). This was slightly offset by further modest
falls in value of the Indian Infrastructure portfolio as the investments continued to face a number of challenges.
Debt Management unrealised value movement
The unrealised value movement in Debt Management comprises mark-to-market valuations on both the CLO equity and the direct
investments held through warehouses, the US Senior Loan Fund and Palace Street I. Of the unrealised loss of £25 million in
the year (2014: £10 million gain), £22 million has been recognised on CLO equity. Three factors have driven the CLO prices.
Firstly, as funds make distributions, they effectively convert value to portfolio income; £16 million of distributions were
received by 3i in the year. Secondly, new investments into European CLOs have typically been made by 3i, as sponsor, at par
value but other investors often invest at a discount. This can result in a fall in value in the short term as the
independent market prices we source typically trend towards the non-sponsor trades. This resulted in a fair value reduction
of £5 million in the year. Long-term cash returns remain unaffected (ie the valuation volatility at the time of issue is
not considered to be an indicator of long-term cash returns of the CLO). Finally, a number of the older CLOs had exposure
to two poorer performing pre-crisis assets, which were restructured in the year and further reduced value.
The remaining £3 million value loss related principally to the wind down of Palace Street I, which had exposure to the same
two restructured assets.
Portfolio income
Income from the portfolio increased by 15% and was £113 million in the year to 31 March 2015 (2014: £98 million) of which
£80 million was received in cash (2014: £57 million). Dividends of £45 million were received (2014: £44 million), including
£20 million from 3iN (2014: £21 million) and £16 million from Debt Management CLO investments (2014: £10 million). Interest
income totalled £62 million (2014: £50 million), with £56 million (2014: £46 million) generated from Private Equity
investments and £6 million (2014: £4 million) generated from Debt Management investments. Approximately 75% of Private
Equity interest income is capitalised and received on exit, although activity in the portfolio during the year resulted in
a higher element of interest being received as cash.
Net foreign exchange movements
The total net foreign exchange loss of £114 million (2014: £116 million) was driven by the strengthening of sterling
against the euro (12.5%), Brazilian real (20.9%) and Swedish krona (15.7%) resulting in losses of £175 million, £6 million
and £13 million respectively. Sterling weakened against the US dollar (12.4%) and Indian rupee (7.8%) during the year,
resulting in gains of £76 million and £5 million respectively. The net foreign exchange loss reflects losses on
non-sterling denominated portfolio assets, as well as the translation of non-portfolio net assets, including non-sterling
cash held at the balance sheet date and gross debt.
As at 31 March 2015, a 1% movement in the euro, US dollar and the Swedish Krona would give rise to a £16 million, £8
million and £1 million movement in total return respectively.
The net assets of the Group by currency are shown in Table 11 below.
Table 11: Net asset of the Group by currency at 31 March 2015
£m %
Sterling 1,271 33
Euro 1,367 36
US dollar 990 26
Swedish krona 20 1
Other 158 4
Proprietary Capital costs
Proprietary Capital costs include 100% of costs in relation to the CEO, Group Finance Director and General Counsel and
elements of finance, IT, property, legal and regulatory, strategy and human resources. Operating expenses increased by 14%
to £32 million (2014: £28 million) as the Group recognised the costs of regulatory changes.
Synthetic fees, as defined in the glossary, of £45 million (2014: £51 million) reflect the lower level of Proprietary
Capital being managed as a result of net divestment activity, predominantly in Private Equity.
Net interest payable
The gross interest paid was £49 million (2014: £54 million) and 18% below the target set in 2012 to reduce interest paid to
£60 million per annum. Included within this year's expense is £1.5 million of arrangement fees in relation to the Group's
Revolving Credit Facility ("RCF") which were written off when it was replaced with a new £350 million facility. The new
facility will reduce ongoing financing costs by £1.5 million per year.
The current gross debt position is detailed further in the Balance Sheet section of this Financial Review and in
Note 16 of the Accounts (Note 7 in this document).
Cash interest received remained stable at £3 million (2014: £3 million).
Fund Management returns
The Group's Fund Management income is driven by total AUM, which was £13.5 billion at 31 March 2015 (31 March 2014: £12.9
billion). The launch of six CLOs, the European Middle Market Loan Fund and further commitments to the US Senior Loan Fund
in the Debt Management business offset a fall in AUM arising from net divestment activity in Private Equity. The proportion
of third-party assets under management grew marginally to 75% (2014: 74%).
An increase in third-party fee income and a fall in operating expenses were offset by a fall in synthetic fees applied from
the Proprietary Capital business as a result of net divestment in Private Equity.
As a result of the completion of our transformation plan, Fund Management improved both its absolute profit and profit
margin to £26 million and 21% respectively (2014: £19 million, 15%). Excluding restructuring and amortisation costs,
underlying operating profit and margin remained stable at £33 million (2014: £33 million) and 26% (2014: 26%).
Table 12: Fund Management underlying profit for the year to 31 March
2015 2014
£m £m
Fees receivable from external funds1
Private Equity 16 20
Infrastructure 30 24
Debt Management 34 32
Synthetic fees
Private Equity 42 47
Infrastructure 3 3
Debt Management - 1
Total fee income 125 127
Fund Management operating expenses (99) (108)
Operating profit before carry 26 19
Restructuring costs 1 8
Amortisation costs 6 6
Underlying Fund Management profit 33 33
1 Includes nil portfolio related income in 2015 (2014: £3 million).
Total return
Table 13: Summarised total return for the year to 31 March
2015 2014
£m £m
Proprietary Capital operating profit before carry 721 539
Fund Management operating profit before carry 26 19
Operating profit before carry 747 558
Carried interest and performance fees receivable from external funds 80 3
Carried interest and performance fees payable (142) (85)
Acquisition related earn-out charges (8) (6)
Operating profit 677 470
Tax (4) (3)
Re-measurement of defined benefit plans (14) 11
Total comprehensive income ("Total return") 659 478
Total return on opening shareholders' funds 19.9% 16.3%
Net carried interest and performance fees payable
Net carried interest and performance fees payable decreased in the year, with a net payable of £62 million (31 March 2014:
£82 million payable). On a gross basis, carried interest and performance fees payable increased to £142 million (2014: £85
million) and the receivable increased to £80 million (2014: £3 million).
Our largest Private Equity fund, Eurofund V, which includes assets purchased in 2007-12, has not yet met the performance
hurdle due to the performance of the 2007-09 vintages. Although we have seen a strong recovery in that fund's multiple to
1.4x (March 2014: 1.1x)invested capital, with 2010-12 investments valued at 2.6x (March 2014: 2.1x), the drag from these
earlier investments means that we have not yet recognised carry receivable from this fund.
Assets in the Growth Capital Fund include Quintiles, Refresco-Gerber, Touchtunes and BVG and, as a result of their strong
performance, its multiple on invested capital is now 1.7x (March 2014: 1.3x). We are now recognising carry receivable on an
accruals basis and £25 million was recognised in the year (31 March 2014: nil).
We pay carry to our Private Equity investment teams on proprietary capital invested and share a proportion of carry
receivable from third-party funds. This total carry payable is provided through schemes which have been structured
historically over two or three year vintages to maximise flexibility in resource planning. The improved performance of the
Private Equity portfolio over the last two years means that the majority of assets by value are now held in carry payable
schemes that have met their performance hurdles, assuming the portfolio was realised at its 31 March 2015 valuation. Carry
payable typically will increase or decrease in line with the gross investment return at rates between 10% and 15%. The
gross investment return in Private Equity of £719 million (2014: £647 million) resulted in an accrual of £103 million carry
payable in the year, or 14% of gross investment return (31 March 2014: £82 million, 13%). Carry is usually only paid once
the hurdles are passed in cash terms and, during the year, £7 million was paid (2014: £19 million).
3iN pays a performance fee on an annual basis, subject to a hurdle rate of return and a high-water mark based on net asset
value. The strong performance of the European assets held by 3iN, including the exit of Eversholt Rail, resulted in an
accrual of £45 million of performance fees receivable in the year (31 March 2014: nil). Our Infrastructure investment team
shares in the performance fee receivable from 3iN, with the majority of individual payments deferred over a number of
years. Carry payable to the Infrastructure team of £35 million has been accrued (2014: nil) including £34 million in
relation to the 3iN performance fee.
Pension
The IAS19 liabilities of the Group's defined benefit pension schemes have been impacted by decreases in their discount
rates, driven by the AA corporate bond yields. This resulted in a re-measurement loss of £14 million (2014: £11 million
gain) for the year. On an IAS19 basis the pension scheme remains in a significant surplus.
The 2013 triennial valuation of the UK defined benefit pension scheme was completed in March 2014. It resulted in a very
small surplus and consequently no further contributions were made, or are planned, as a result of this valuation.
Operating cash profit
Table 14: Operating cash profit for the year to 31 March
2015 2014
£m £m
Third-party capital fees 78 75
Cash portfolio fees 10 4
Cash portfolio dividends and interest 70 53
Cash income 158 132
Total operating expenses1 131 136
Less: Restructuring costs (1) (9)
Operating expenses excluding restructuring costs 130 127
Operating cash profit 28 5
1 Operating expenses are calculated on an accrual basis.
Third-party fees increased during the year following the launch of six Debt Management CLOs and the European Middle Market
Loan Fund. Alongside growth in third-party fees we have focused on generating cash income from the portfolio. Increased
investment into cash yielding Debt Management funds has generated good income and the Private Equity portfolio has
benefited from increased deal fees on higher levels of activity. Consequently, the Group has been able to materially
improve its operating cash income to £158 million (2014: £132 million) despite the net divestment activity in Private
Equity.
Total operating expenses declined by 4% to £131 million (2014: £136 million) as restructuring costs, which comprise
redundancy, office closures and organisational changes, reduced to £1 million (2014: £9 million) as we reached the end of
our transformation plan. Excluding restructuring costs, operating expenses increased by 2% to £130 million (2014: £127
million) principally due to an increase in variable compensation resulting from share based payments. Operating expenses as
a percentage of weighted average AUM remained stable at 1.0% (2014: 1.0%), as a result of the continuing cost focus
combined with the new CLO fund launches in the year. We expect costs to rise marginally as we look to grow the business,
increase activity and deal with increased regulation but we expect costs to remain at c1.0% of AUM.
In total, the operating cash profit position increased strongly to £28 million (2014: £5 million).
Cash flow
Investment and realisations
Cash proceeds from realisations of £841 million (2014: £677 million) were partly offset by cash investment of £474 million
(2014: £337 million) and resulted in net cash inflow of £367 million (2014: £340 million). A further £140 million of
investment was in non-cash form (2014: £167 million) and total investment was £614 million (2014: £504 million).
Further detail on investment and realisations is included in the relevant business line sections.
Table 15: Investment activity - Proprietary Capital and third-party capital for the year to 31 March
Proprietary Capital Proprietary and Third-party Capital
2015 2014 2015 2014
£m £m £m £m
Realisations 841 677 1,363 1,129
Cash investment (474) (337) (562) (517)
Net cash divestment 367 340 801 612
Non-cash investment (140) (167) (191) (279)
Net divestment 227 173 610 333
Balance sheet
Table16: Simplified balance sheet as at 31 March
2015 2014
£m £m
Investment portfolio value 3,877 3,565
Gross debt (815) (857)
Cash 864 697
Net cash / (debt) 49 (160)
Other net liabilities (120) (97)
Net assets 3,806 3,308
The Proprietary Capital portfolio increased to £3,877 million at 31 March 2015 (31 March 2014: £3,565 million) as cash
investment of £474 million and unrealised value growth of £684 million offset the good realisations and the negative impact
of foreign exchange movements.
The mix of the portfolio remained broadly stable. The marginal decline in Private Equity to 81% (31 March 2014: 82%) was
offset by a 1% increase in Debt Management to 5% (31 March 2014: 4%). The weighting of the Infrastructure portfolio
remained stable at 14% (31 March 2014: 14%).
Net divestment activity and an operating cash profit led to cash on the balance sheet increasing to £864 million (31 March
2014: £697 million). Combined with a reduction in the sterling equivalent of the 2017 euro denominated bond, the Group was
in a net cash position of £49 million at 31 March 2015 (31 March 2014: £160 million net debt) ahead of paying the final
dividend for FY2015.
Gearing and borrowings
Table 17: Gearing and borrowings as at 31 March
2015 2014
Gross debt £815m £857m
Net cash/(debt) £49m £(160)m
Gearing nil 5%
Gearing reduced to nil at 31 March 2015 (31 March 2014: 5%) as the Group ended the year in a net cash position. Overall
shareholders' funds increased to £3,806 million (31 March 2014: £3,308 million) following the total return of £659 million
in the year to 31 March 2015.
Liquidity
Total liquidity was substantially unchanged at 31 March 2015 compared to 31 March 2014 at £1,214 million (31 March 2014:
£1,197 million). Cash and deposits increased to £864 million (31 March 2014: £697 million) as a result of net divestment
and undrawn facilities reduced to £350 million (31 March 2014: £500 million) following the RCF refinancing.
Foreign exchange hedging
As a result of the reduction in non-sterling gross debt, and the increased concentration of the portfolio into a smaller
number of individually significant assets, the use of derivatives for portfolio value hedging purposes is less effective.
As a result, derivatives are no longer used to hedge currency movements on a portfolio basis and foreign exchange risk is
considered as an integral part of the investment process. Specific short-term hedging on entry or exit of an investment may
be used as appropriate.
Diluted NAV
The diluted NAV per share at 31 March 2015 was 396 pence (31 March 2014: 348 pence). This was driven by the total return in
the year of £659 million (2014: £478 million), and partially offset by dividend payments in the year of £183 million (2014:
£114 million).
Dividend
The Board has declared a total dividend of 20.0p (2014: 20.0p) for 2015. This is made up of a 8.1p base dividend and an
11.9p additional dividend. Due to our current net divestment activity and robust balance sheet, we have proposed an
additional dividend above the top end of our 15%-20% distribution range, equivalent to 23% of gross realised proceeds.
Subject to shareholder approval, we will pay the final dividend of 14.0p (2014: 13.3p) on 24 July 2015 to shareholders on
the register at 19 June 2015.
Key accounting judgements
In preparing these accounts, the key accounting judgement relates to the carrying value of our investment assets which are
stated at fair value.
Given the importance of this area, the Board has a separate Valuations Committee to review the valuations policies, process
and application to individual investments. However, asset valuations for non-quoted investments are inherently subjective,
as they are made on the basis of assumptions which may not prove to be accurate. At 31 March 2015 80% of the investment
assets were non-quoted (31 March 2014: 84%).
Accounting for investment entities: an assessment is required to determine the degree of control or influence the Group
exercises and the form of any control to ensure that the financial treatment is accurate. IFRS 10 has resulted in a number
of intermediate holding companies being presented at fair value which has led to reduced transparency of the underlying
investment performance. As a result the Group continues to present an alternative non-GAAP investment basis set of
financial statements to ensure that the commentary in the Strategic report remains fair, balanced and understandable.
Investment basis
CONSOLIDATED Statement of comprehensive income
Total Total
2015 2014
£m £m
Realised profits over value on the disposal of investments 162 202
Unrealised profits on the revaluation of investments 684 475
Portfolio income
Dividends 45 44
Income from loans and receivables 62 50
Fees receivable 6 7
Foreign exchange (loss) on investments (154) (113)
Gross investment return 805 665
Fees receivable from external funds 80 73
Operating expenses (131) (136)
Interest receivable 3 3
Interest payable (49) (54)
Movement in the fair value of derivatives (1) 10
Foreign exchange gain/(loss) 40 (3)
Operating profit before carry 747 558
Carried interest
Carried interest and performance fees receivable 80 3
Carried interest and performance fees payable (142) (85)
Acquisition related earn-out charges (8) (6)
Operating profit 677 470
Income taxes (4) (3)
Profit for the year 673 467
Other comprehensive income
Re-measurements of defined benefit plans (14) 11
Total comprehensive income for the year ("Total return") 659 478
Investment basis
CONSOLIDATED Statement of financial position
Total Total
2015 2014
£m £m
Assets
Non-current assets
Investments
Quoted investments 763 554
Unquoted investments 3,114 3,011
Investment portfolio 3,877 3,565
Carried interest and performance fees receivable 43 17
Intangible assets 19 26
Retirement benefit surplus 136 137
Property, plant and equipment 4 5
Deferred income taxes 3 3
Total non-current assets 4,082 3,753
Current assets
Carried interest and performance fees receivable 45 -
Other current assets 85 92
Derivative financial instruments - 2
Cash and cash equivalents 864 697
Total current assets 994 791
Total assets 5,076 4,544
Liabilities
Non-current liabilities
Carried interest and performance fees payable (214) (106)
Acquisition related earn-out charges payable (10) (18)
Loans and borrowings (815) (849)
B shares - (6)
Retirement benefit deficit (19) (14)
Deferred income taxes (3) (2)
Provisions (5) (5)
Total non-current liabilities (1,066) (1,000)
Current liabilities
Trade and other payables (169) (198)
Carried interest and performance fees payable (13) (11)
Acquisition related earn-out charges payable (17) (10)
Derivative financial instruments - (4)
Current income taxes (2) (4)
Deferred income taxes - (1)
Provisions (3) (8)
Total current liabilities (204) (236)
Total liabilities (1,270) (1,236)
Net assets 3,806 3,308
Equity
Issued capital 719 718
Share premium 784 782
Other reserves 2,382 1,897
Own shares (79) (89)
Total equity 3,806 3,308
Investment basis
CONSOLIDATED Cash flow statement
2015 2014
£m £m
Cash flow from operating activities
Purchase of investments (474) (337)
Proceeds from investments 841 677
Cash divestment from traded portfolio 21 14
Portfolio interest received 26 9
Portfolio dividends received 44 44
Portfolio fees received 10 4
Fees received from external funds 78 75
Carried interest received 6 5
Carried interest and performance fees paid (13) (25)
Acquisition related earn-out charges paid (10) -
Operating expenses (117) (128)
Interest received 3 3
Interest paid (54) (57)
Income taxes paid (5) (7)
Net cash flow from operating activities 356 277
Cash flow from financing activities
Issue of shares 3 -
Repurchase of B shares (6) -
Dividend paid (183) (114)
Repayment of short-term borrowings - (164)
Net cash flow from derivatives 9 (32)
Net cash flow from financing activities (177) (310)
Cash flow from investing activities
Acquisition of management contracts - 2
Net cash flow from deposits - 90
Net cash flow from investing activities - 92
Change in cash and cash equivalents 179 59
Cash and cash equivalents at the start of year 697 656
Effect of exchange rate fluctuations (12) (18)
Cash and cash equivalents at the end of year 864 697
Reconciliation of Investment basis to IFRS
Background to investment basis financial statements
The Group makes investments in portfolio companies directly, held by 3i Group plc, and indirectly, held through
intermediate holding company and partnership structures ("Investment entity subsidiaries"). It also has other operational
subsidiaries which provide services and other activities such as employment, regulatory activities, management and advice
("Trading subsidiaries"). The application of IFRS 10 requires us to fair value a number of intermediate holding companies
that were previously consolidated line by line. This fair value approach, applied at the intermediate holding company
level, effectively obscures the performance of our proprietary capital investments and associated transactions occurring in
the intermediate holding companies. The financial effect of the underlying portfolio companies and fee income, operating
expenses and carried interest transactions occurring in Investment entity subsidiaries are aggregated into a single value.
Other items which were previously eliminated on consolidation are now included separately.
As a result we introduced separate non-GAAP "Investment basis" Statements of comprehensive income, financial position and
cash flow in our 2014 Annual Report and Accounts to aid understanding of our results. The Strategic report is also prepared
using the Investment basis as we believe it provides a more understandable view of our performance. Total return and net
assets are equal under the Investment basis and IFRS; the Investment basis is simply a "look through" of IFRS 10 to present
the underlying performance. The two diagrams below illustrate these changes, together with an illustrative example to show
how information can be aggregated.
Recent IFRS 10 developments
The IASB issued a narrow scope amendment to IFRS 10 in December 2014, and subsequently the Group has revisited its initial
assessment of all of its subsidiaries, resulting in a small number of entities now being consolidated rather than fair
valued in the IFRS financial statements. The Group has chosen to adopt the changes provided in the narrow scope amendment,
and has accounted for the change in treatment retrospectively. The change has no effect on total return or net asset value
as reported in the Group's IFRS financial statements. The Investment basis statements are unchanged, as the entities now
being consolidated in the IFRS statements have always been consolidated in the Investment basis. Given the judgement
involved in interpreting the standard, and ongoing discussion amongst the IASB and practitioners, similar changes in future
years remain possible.
Reconciliation between investment basis and IFRS
A detailed reconciliation from the Investment basis to IFRS basis of the Statement of comprehensive income, Statement of
financial position and Cash flow statement is shown below.
Reconciliation of CONSOLIDATED Statement
of comprehensive income
IFRS IFRS
Investment IFRS IFRS Investment adjustments basis
basis adjustments basis basis (restated) (restated)
2015 2015 2015 2014 2014 2014
Note £m £m £m £m £m £m
Realised profits over value 1,2 162 (108) 54 202 (56) 146
on the disposal of investments
Unrealised profits on the 1,2 684 (448) 236 475 (394) 81
revaluation of investments
Fair value movements on 1 - 530 530 - 433 433
investment entity subsidiaries
Portfolio income
Dividends 1,2 45 (9) 36 44 (19) 25
Income from loans and receivables 1,2 62 (24) 38 50 (21) 29
Fees receivable 6 - 6 7 - 7
Foreign exchange on investments 1,3 (154) 105 (49) (113) 68 (45)
Gross investment return 805 46 851 665 11 676
Fees receivable from external funds 1 80 - 80 73 2 75
Operating expenses 1 (131) 9 (122) (136) - (136)
Interest receivable 3 - 3 3 - 3
Interest payable (49) - (49) (54) - (54)
Movement in the fair value of derivatives (1) - (1) 10 - 10
Exchange movements 1,3 40 (101) (61) (3) (39) (42)
Income from fair value subsidiaries 1 - 1 1 - 8 8
Operating profit before carry 747 (45) 702 558 (18) 540
Carried interest
Carried interest and performance 80 - 80 3 - 3
fees receivable
Carried interest and performance 1 (142) 70 (72) (85) 68 (17)
fees payable
Acquisition related earn-out charges (8) - (8) (6) - (6)
Operating profit 677 25 702 470 50 520
Income taxes 1 (4) 2 (2) (3) - (3)
Profit for the year 673 27 700 467 50 517
Other comprehensive income
Exchange differences 1,3 - (27) (27) - (50) (50)
on translation of foreign operations
Re-measurements of defined (14) - (14) 11 - 11
benefit plans
Total comprehensive income for the year ("Total return") 659 - 659 478 - 478
Notes:
1 Applying IFRS 10 to the Statement of comprehensive income consolidates the line items of a number of previously consolidated subsidiaries into a single line item "Fair value movements on investment entity subsidiaries". In the "Investment basis" accounts
we have disaggregated these line items to analyse our total return as if these investment entity subsidiaries were fully consolidated, consistent with prior years. The adjustments simply reclassify the Statement of comprehensive income of the Group, and
the total return is equal under the Investment basis and the IFRS basis.
2 Realised profits, unrealised profits, and portfolio income shown in the IFRS accounts only relate to portfolio companies that are helddirectly by 3i Group plc and not those portfolio companies held through investment entity subsidiaries. Realised profits,
unrealised profits,and portfolio income in relation to portfolio companies held through investment entity subsidiaries are
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