REG - 3i Group PLC - Full year results to 31 March 2016 <Origin Href="QuoteRef">III.L</Origin> - Part 2
19/05/2016 07:10
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and the dividends paid during the year.
2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016
£(8)m £5m £28m £37m 311 348 396 463 TSR 54% 30% 27% (2)%
Share price 50% 26% 22% (6)%
Dividend 4% 4% 5% 4%
2016 progress- Continued improvement in operating cash profit to £37m driven by increase in operating cash income across the business lines- Good levels of dividend income in Private Equity more than offset reduced levels of fee income from managed funds- Increased AUM and CLO equity in Debt Management- Disciplined approach to costs, which remain at 1% of 2016 progress- Good progression in NAV per share to 463p, up 17% in the year- Strong gross investment return contribution from Private Equity- Due in part to concerns over a potential Brexit, sterling materially weakened against the euro 2016 progress- TSR of (2)% as the
AUM final FY2015 dividend of 14.0p paid in
July 2015 and the interim FY2016
dividend of 6.0p paid in January 2016
were offset by the fall in the share
price to 456p at 31 March 2016 (31
March 2015: 482p)- Our continued net
divestment activity and strong balance
sheet, including a closing net cash
position, supported a full year
dividend of 22.0p per share (2015:
20.0p)
Key risks- Portfolio performance, and therefore portfolio income, is weak- Unplanned increase in the cost base; for example legal, regulatory or compliance costs- Reduction in assets under management in Debt Management- Ability to generate interest and dividends in a Private Equity structure- Investor appetite in a volatile macro-economic environment Key risks- Brexit creates uncertainty and further dampens investor sentiment- Wider G20 political and economic uncertainty impacts 3i's portfolio companies and valuations Key risks- Lower NAV due to investment
underperformance or political and
economic uncertainty- Investor
appetite in a volatile macro-economic
environment
Link to strategic objectives: 3,5 Link to strategic objectives: 1, 2, 3 Link to strategic objectives: 5
Business review
Private Equity
"An excellent year with a gross investment return of 32%, good progress on realisations and three important new
investments."
Alan Giddins and Menno Antal
Managing Partners and Co-heads of Private Equity
Business performance
Private Equity, the largest contributor to the Group's returns, delivered a strong performance in the year. The gross
investment return of £1,011 million, or 32% on the opening portfolio (2015: £719 million, 24%), reflected the robust
performance of our largest investments. The portfolio proved its resilience against a backdrop of volatile markets and
difficult macro-economic conditions due to its strength and diversified nature. We continue to have no direct exposure to
the energy and commodity sectors. The impact of the weak oil and commodity prices remains limited to a small number of
assets with indirect exposure, such as JMJ and Dynatect. Weighted average earnings (including the benefit of portfolio
acquisitions) increased by 17% in the last 12 months (2015: 19%) reflecting the continued strong growth trajectory in
Action, as well as encouraging performance in a number of our newer investments.
Investment activity
The investment activity seen in FY2015 continued throughout FY2016. Although levels of M&A activity have moderated,
particularly in the first quarter of the calendar year 2016, valuations remain high as there is still a substantial amount
of capital searching for new investment opportunities. Importantly, we maintained our pricing discipline and invested £406
million, of which £365 million was proprietary capital.
We invested in three new businesses in the year; Weener Plastic, Euro-Diesel and Audley Travel. Alongside a co-investor who
contributed E50 million, we invested E201 million in Weener Plastic, a manufacturer of plastic packaging systems
headquartered in Germany. Euro-Diesel is a leading provider of stand-by diesel power supply systems, based in Belgium, in
which we invested E71 million of proprietary capital. In December 2015, we invested £156 million in Audley Travel, a luxury
provider of tailor-made travel experiences based in the UK. The initial investment included a £85 million bridging loan
whilst Audley's existing facility was refinanced. The loan was repaid in full in January 2016; an excellent example of how
our strong balance sheet can facilitate good investments in more volatile debt markets. In addition to these new
investments, we also took the opportunity to purchase a minority stake in a 2013 investment, ATESTEO (formerly known as
GIF) from the founding family.
Table 1: Private Equity cash investment in the year to 31 March 2016
Proprietary
Total capital
investment investment
Investment Type Business description Date £m £m
Weener Plastic New Manufacturer of innovative plastic packaging systems Aug 15 183 144
Euro-Diesel New Manufacturer of uninterruptible power supply systems Sep 15 53 52
Audley Travel New Provider of tailor-made experiential travel Dec 15 159 156
ATESTEO Further International transmission testing specialist Aug 15 12 11
Other Further n/a n/a (1) 2
Total Private Equity investment 406 365
Realisations activity
Market conditions were favourable for realisations in the first half of the 2015 calendar year, which enabled us to
continue to divest 11 of our smaller or older assets. As we continue to reshape the portfolio, we expect more of our future
realisations will be driven by our larger, stronger assets. In December 2015, we announced the disposal of Element at a
euro money multiple of 4.5x (3.9x in sterling).
Realisations and refinancings generated aggregate proceeds of £743 million (2015: £831 million) in the year. Excluding
refinancings of £185 million, which are usually recognised primarily as a repayment of shareholder loans or capital and
therefore do not generate a material increase in value, this represented an uplift over opening value of £67 million, or
14% (2015: £144 million, 27%). The lower uplift reflects the fact that the majority of disposals were smaller or non-core
assets, held on an imminent sales basis at 31 March 2015, or were from the quoted portfolio.
At 31 March 2016, there were 47 assets and five quoted stakes in the portfolio, down from 61 assets and four quoted stakes
at 31 March 2015, and we remain on track to meet our longer-term objective of holding fewer than 40 Private Equity
investments.
Table 2: Private Equity realisations in the year to 31 March 2016
31 March 3i Profit/(loss) Uplift on Money
Calendar 2015 realised in the opening Residual multiple
Country/ year value1 proceeds year2 value2 value over
Investment region invested £m £m £m % £m cost3 IRR
Full realisations
Element Benelux 2010 145 179 36 25% - 3.9x 31%
Azelis Benelux 2007 62 63 1 2% - 1.1x 1%
Labco France 2008 36 42 6 17% - 0.7x (6)%
Touchtunes USA 2011 39 40 1 3% - 2.2x 23%
Soyaconcept Nordic 2007 16 17 - -% - 2.0x 13%
Blue Interactive Brazil 2012 14 12 1 9% - 0.4x (22)%
Boomerang Spain 2008 7 11 4 57% - 0.6x (8)%
Consultim France 2007 12 10 (2) (17)% - 1.5x 6%
Inspecta Nordic 2007 6 6 1 20% - 0.1x (40)%
Other investments n/a n/a 4 11 6 n/a - n/a n/a
Partial realisations1,3
Quintiles USA 2008 50 53 3 6% 92 3.1x 23%
Scandlines Denmark/Germany 2007/2013 38 38 - -% 369 3.2x 29%
Eltel Nordic 2007 31 30 (1) (3)% 20 1.0x (1)%
UFO Moviez India 2007 14 17 3 21% 12 2.6x 14%
Refresco Gerber Benelux 2010 9 11 2 22% 44 1.8x 12%
Other investments n/a n/a 10 11 1 n/a 63 n/a n/a
Refinancings
Action Benelux 2011 168 168 - -% 902 11.6x 80%
Geka Germany 2012 15 17 2 13% 55 1.3x 6%
Deferred consideration
Other investments n/a n/a 2 7 5 n/a n/a n/a n/a
Total Private Equity realisations 678 743 69 10% 1,557 2.6x n/a
1 For partial realisations, 31 March 2015 value represents value of stake sold.
2 Cash proceeds in the period over opening value realised inclusive of foreign exchange.
3 Cash proceeds over cash invested. For partial realisations and refinancings, valuations of any remaining investment are included in the multiple. The sterling multiple includes the impact of foreign exchange, where appropriate.
Assets under management
Total AUM decreased to £3.5 billion in the year (31 March 2015: £3.8 billion), principally due to the continued net
divestment activity. Encouragingly, the performance of Eurofund V ("EFV") and the Growth Capital Fund continued to improve,
with gross money multiples at 31 March 2016 of 1.7x and 1.8x respectively (31 March 2015: 1.4x, 1.7x). The investments made
in EFV's 2010-2012 investment period continue to show very strong performance, with a money multiple of 3.4x at 31 March
2016 (31 March 2015: 2.6x). The Growth Capital Fund benefited from the realisation of Labco and further disposals of
Quintiles, a quoted holding. The value of 3i's Proprietary Capital increased to £3.7 billion in the year (31 March 2015:
£3.1 billion) and, inclusive of third-party funds, increased to E6.8 billion (31 March 2015: E6.3 billion).
We concluded a review of our resources and investment opportunities during the year. As a result, we are planning for a
reduction in our Nordic team while we seek to increase the size of the investment teams in some of our key geographies in
Europe and the US.
Outlook
We remain focused on the investment pipeline for FY2017, sourcing attractive opportunities through our international team
andnetwork of advisers and business leaders, whilst maintaining price discipline. Conditions for M&A are expected to remain
volatile and, whilst our portfolio companies cannot be immune to macro-economic pressures, our rigorous investment process
and active portfolio management approach allows us to address such issues promptly.
Table 3: Private Equity assets under management at 31 March 2016
Gross Fee income
Remaining 3i % money received
commitment1 invested multiple2 in the
Close Original Original 3i at March at March at March year
Private Equity date fund size commitment 2016 2016 2016 AUM £m
3i Growth Capital Fund Mar 10 E1,192m E800m E346m 53% 1.8x E266m 2
3i Eurofund V Nov 06 E5,000m E2,780m E116m 94% 1.7x E1,809m 9
3i Eurofund IV Jun 04 E3,067m E1,941m E82m 95% 2.3x E533m -
Other Various Various Various n/a n/a n/a £1,370m 2
Total Private Equity AUM £3,512m 13
1 All funds are beyond their investment period.
2 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2016, as a multiple of cash invested.
Infrastructure
"Infrastructure had a busy year in terms of business activity, demonstrating our ability to access attractive investment
opportunities in a competitive market."
Ben Loomes and Phil White
Managing Partners and Co-heads of Infrastructure
The Infrastructure business performed well in the year, building on the strong result in FY2015 driven by the sale of 3iN's
holding in Eversholt Rail. Infrastructure delivered a gross investment return of £47 million, or 8% on the opening
portfolio (2015: £96 million, 20%). The business generated cash income of £49 million through its fund advisory and
management activities and dividends received from 3iN (2015: £47 million). In addition, 3i received a £51 million special
dividend from 3iN (2015: nil) following 3iN's sale of Eversholt Rail.
Investment Adviser to 3iN
To reflect the compression in market returns and the evolution of the composition of 3iN's underlying investment portfolio,
3iN's total return target was updated to between 8% and 10% to be delivered over the medium term (previously a 10% annual
target) in May 2015. Given the competition for large core assets in the global infrastructure sector, the team has focused
on sourcing mid-market economic infrastructure and greenfield projects across Europe. The team made good progress against
these revised objectives and advised 3iN on four new investments in its target markets totalling £193 million (2015: £114
million) as well as the £75 million investment in Wireless Infrastructure Group, the c.£154 million investment in TCR and
the c.£4 million investment in Hart van Zuid announced in April 2016. On 12 May 2016, 3iN announced its intention to raise
new equity of up to £350 million to fund new investments and its future pipeline.
3iN has built an attractive portfolio of economic infrastructure assets across Europe which performed well and generated a
strong total return of 14% in FY2016. In particular, the portfolio valuation benefited from positive regulatory
developments for Elenia, an electricity distribution and district heating company based in Finland. This performance builds
on the strong long-term performance of 3iN, which has delivered an annualised total shareholder return of 11.3% since its
IPO in 2007.
Under the terms of the advisory agreement, 3i received an advisory fee of £16 million (2015: £16 million) and a NAV based
performance fee of £20 million (2015: £45 million) from 3iN, of which £15 million (2015: £34 million) was accrued as
payable to the team.
Business performance
3iN performance
In addition to being its investment adviser, 3i holds a 34% (31 March 2015: 34%) stake in 3iN. Reflecting its strong
positioning, 3iN's share price continued to perform well in a year of equity market volatility and generated a total
shareholder return of 13%.
3i's investment in 3iN contributed £33 million of unrealised value (2015: £77 million) and £21 million of dividend income
(2015: £20 million). In July 2015, 3iN also paid a £150 million special dividend to shareholders, following its sale of
Eversholt Rail. 3i's share of the special dividend, £51 million, was treated as realised proceeds.
Assets under management
The Infrastructure AUM decreased to £2.4 billion (31 March 2015: £2.5 billion) principally due to the payment of the
special dividend from 3iN. In addition, the performance of the assets in the India Infrastructure Fund remained weak; the
economic environment and ongoing depreciation of the rupee against the US dollar, in which the fund is denominated,
resulted in a £11 million reduction in the value of 3i's direct share of the 3i India Infrastructure Fund to £53 million
(31 March 2015: £64 million).
Outlook
The team's focus on origination and asset management capabilities together with a healthy pipeline of attractive investment
opportunities across our target markets means that the business remains well placed to continue its current good
performance and to grow its assets under management through selective investment.
Table 4: Infrastructure assets under management at 31 March 2016
Gross Fee income
Remaining 3i % money received
commitment invested multiple1 in the
Original Original 3i at March at March at March year
Close date fund size commitment 2016 2016 2016 AUM £m
3iN Mar 07 n/a n/a n/a n/a n/a £1,248m2 16
BIIF May 08 £680m n/a n/a 90% n/a £580m 5
BEIF II Jul 06 £280m n/a n/a 97% 1.1x £80m 2
India fund Mar 08 US$1,195m US$250m US$35m 73% 0.5x US$584m3 4
Other Various Various Various n/a n/a n/a £145m 1
Total Infrastructure AUM £2,406m 28
1 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2016, as a multiple of cash invested.
2 Based on latest published NAV (ex-dividend).
3 Adjusted to reflect 3iN's US$250 million share of the fund.
Debt Management
"A solid year with four new CLOs and a new fund launch, despite volatility in the credit markets."
Jeremy Ghose
Managing Partner and CEO, 3i Debt Management
Business performance
The Debt Management team continued to make good progress in fund raising despite more volatile conditions for CLO issuance.
AUM increased to £8.1 billion (31 March 2015: £7.2 billion) as good levels of fund raising activity and favourable foreign
exchange rates more than offset the impact of the run off of older funds. An important source of operating cash income, the
business generated £38 million of fee income in the year (2015: £34 million) and portfolio income of £35 million (2015: £21
million).
The pricing of debt instruments has been subject to significant volatility since the middle of 2015, particularly in the
US, due to increased credit concerns about specific sectors such as oil and gas, metals and mining, energy and utilities.
The European market, which generally has more limited exposure to oil and gas and metals and mining, experienced less
volatility. As long-term holders of CLO equity positions, our returns are ultimately driven by the cash flows and the
realised default and loss rates in the portfolio, rather than short-term unrealised fair value movements, but we remain
subject to the impact of mark-to-market volatility.
Fund raising activity
Debt Management made good progress, particularly in the first half of our financial year, in generating new AUM.
The team closed two CLOs in Europe, Harvest XII and Harvest XIV, and two in the US, Jamestown VII and Jamestown VIII,
raising a total of £1.3 billion new CLO AUM. CLO issuance slowed significantly in the second half of our financial year. US
CLO issuance in the three months to 31 March 2016 was 25% of the prior year CLO volumes. However, following an improvement
in sentiment from March 2016, prices are recovering and our latest European CLO, Harvest XV, priced at the end of March and
closed on 12 May 2016. We also had an open CLO warehouse vehicle in the US in anticipation of launching the first US CLO of
FY2017.
Following on from the successful launch of the European Middle Market Loan Fund, we continued to diversify our product
offering and launched a new Global Income Fund with US$75 million of seed capital from 3i. The fund is an open-ended senior
debt fund that invests across the US and Europe and, as at 31 March 2016, had AUM of US$188 million. The US Senior Loan
Fund also continued to perform strongly, outperforming its benchmarks, and AUM increased to US$178 million (31 March 2015:
US$157 million).
Proprietary Capital investment
Including the US$75 million seed capital contributed to the Global Income Fund, we had £229 million (31 March 2015: £176
million)of proprietary capital invested in the Debt Management business at 31 March 2016. 3i is required to hold a minimum
5% stake in the European CLOs it manages. We also structure our US CLOs in anticipation of the implementation of similar
risk retention rules in the US in December 2016. Our ability to comply with the risk retention rules is important as it is
now a prerequisite for managers, even in the US, to demonstrate compliance with the regulatory rules.
In addition to the investments 3i makes in the CLOs for regulatory reasons, 3i is also the first loss investor in the
majority of the warehouse facilities used to accumulate loans prior to the launch of a CLO. At 31 March 2016, the total
invested by 3i in these facilities was £17 million (31 March 2015: £43 million).
Table 5 details cash investment in the year.
Table 5: Debt Management cash investment in the year to 31 March 2016
Total 3i
investment
Investment Type Date £m
Global Income Fund Open-ended senior debt fund Jun 15 48
Harvest XII New European CLO Aug 15 15
Jamestown VII New US CLO Aug 15 15
Harvest XIV New European CLO Nov 15 28
Jamestown VIII New US CLO Dec 15 5
Jamestown III Further investment in US CLO Mar 16 4
European warehouses1 Warehouse Various (39)
US warehouse Warehouse Various 10
Other n/a Various 2
Total Debt Management investment 88
1 Net cash received back from warehouses on the successful close of the European CLOs.
Outlook
The underlying credit performance of the portfolios underpinning our CLOs and other funds remains sound, with metrics
outperforming market benchmarks despite the challenging year. Given our strong relationships with investors and ability to
meet current and future fund risk retention requirements, we are in a good position to continue launching new CLOs and
raising funds, if market conditions permit and returns are sufficiently attractive.
Risk management
Effective risk management underpins the successful delivery of our strategy. Integrity, rigour and accountability are
central to our values and culture at 3i and are embedded in our approach to risk management.
Understanding our risk appetite and culture
As both an investor and asset manager, 3i is in the business of taking risk in order to seek to achieve its targeted
returns for investors and shareholders. The Board approves the strategic objectives that determine the level and types of
risk that 3i is prepared to accept. The Board reviews 3i's strategic objectives and risk appetite at least annually.
In order to support its institutional asset management capability, 3i's risk appetite policy is built on rigorous and
comprehensive investment procedures and conservative capital management.
Culture
Integrity, rigour and accountability are central to our values and culture and are embedded in our approach to risk
management. Our Investment Committee which has oversight of the investment pipeline development and approves new
investments, significant portfolio changes and divestments, is integral to embedding our institutional approach across the
business. It ensures consistency and compliance with 3i's financial and strategic requirements, cultural values and
appropriate investment behaviours. Members of the Executive Committee have responsibility for their own business or
functional areas and the Group expects individual behaviours to meet the Group's high standards of conduct. All employees
share the responsibility for upholding 3i's strong control culture and supporting effective risk management. Senior
managers, typically those who report to Executive Committee members, are required to confirm their individual and business
area compliance. In addition, all staff are assessed on their compliance with the Group values as part of their annual
appraisal.
The following sections explain how we control and manage the risks in our business. It outlines the key risks, our
assessment of their potential impact on our business in the context of the current environment and how we seek to mitigate
them.
Risk appetite 3i's risk appetite is defined by its objective to invest proprietary capital in assets that generate sufficient proceeds to fund new opportunities and allow material shareholder distributions as well as good levels of cash income. Investment risk The substantial majority of the Group's capital is invested in Private Equity. Private Equity investments are subject to a range of factors which include: - Return objective: individually assessed but subject to a target 2x money multiple over
three to five years- Geographic focus: core markets of northern Europe and North America- Sector expertise: focus on Business Services, Consumer and Industrials- Vintage: invest c.E500 million-E750 million per annum in four to seven new investments in companies with an enterprise value range of E100 million-E500 million at investment Our other two businesses are more modest users of proprietary capital but each investment is subject to rigorous review. Capital management3i adopts a conservative
approach to managing its capital resources. There is no appetite for significant structural gearing at the Group level although short-term tactical gearing will be used. In addition, we have a limited appetite for the dilution of capital returns as a result of operating and interest expenses. All three of our business lines, Private Equity, Infrastructure and Debt Management also generate cash income to mitigate this risk. 3i Group's Pillar 3 document can be found at www.3i.com
Risk management
Approach to risk governance
The Board is responsible for risk assessment, the risk management process and for the protection of the Group's reputation
and brand integrity. It considers the most significant risks facing the Group and uses quantitative analyses, such as the
vintage control which considers the portfolio concentration by revenue, geography and sector, and liquidity reporting,
where appropriate.
Non-executive oversight is also exercised through the Audit and Compliance Committee which focuses on upholding standards
of integrity, financial reporting, risk management, going concern and internal control.
The Board has delegated the responsibility for risk oversight to the Chief Executive. He is assisted by the Group Risk
Committee ("GRC") in managing this responsibility, guided by the Board's appetite for risk and any specific limits set. The
GRC maintains the Group risk review, which summarises the Group's principal risks, associated mitigating actions and key
risk indicators, and identifies any changes to the Group's risk profile. The risk review is updated quarterly and the Chief
Executive provides quarterly updates to each Audit and Compliance Committee meeting where the Committee members contribute
views and raise questions. The last risk review was completed in May 2016.
The risk framework is further augmented by a separate Risk Management Function which has specific responsibilities under
the European Alternative Investment Fund Managers Directive ("AIFMD"). It meets ahead of the GRC meetings to consider the
key risks impacting the Group, and any changes in the relevant period where appropriate. It also considers the separate
risk reports for each AIF managed by the Group, including areas such as portfolio composition, portfolio valuation,
operational updates and team changes, which are then considered by the GRC.
Assurance over the robustness and effectiveness of the Group's overarching risk management processes and compliance with
relevant policies is provided to the Audit and Compliance Committee through the independent assessment by Internal Audit
and the work of Group Compliance on regulatory risks.
Assurance over the robustness of the Group's valuation policy is provided by the Valuations Committee.
Risk management framework
The Group's risk management framework is designed to support the delivery of the Group's strategic objectives.
The key principles that underpin risk management in the Group are:
- The Board and the Executive Committee promote a culture in which risks are identified, assessed and reported in an
open, transparent and objective manner; and
- The over-riding priority is to protect the Group's long-term viability and reputation and produce sustainable, medium
to long-term cash-to-cash returns.
Managing the Group's Environmental, Social and Governance ("ESG") risks is central to how we do business and a key part of
our risk management framework. It also forms part of our half-yearly portfolio company reviews as described in the
Valuations Committee report in the Annual report 2016.
In practice, the Group operates a "three lines of defence" framework for managing and identifying risk. The first line of
defence against outcomes outside our risk appetite is the business function and the respective Managing Partners across
Private Equity, Infrastructure and Debt Management.
Line management is supported by oversight and control functions such as finance, human resources and legal which constitute
the second line of defence. The Compliance function is also in the second line of defence; its duties include reviewing the
effective operation of our processes in meeting regulatory requirements.
Internal Audit provides independent assurance over the operation of controls and is the third line of defence. The internal
audit programme includes the review of risk management processes and recommendations to improve the internal control
environment.
Risk review process
The Group risk review process includes the monitoring of key strategic and financial metrics considered to be indicators of
potential changes in the Group's risk profile. The review includes, but is not limited to, the following reference data:
- Financial performance and strategic dashboards
- Vintage control and asset allocation analysis
- Macro-economic and M&A market overview
- Liquidity management
- Capital adequacy, including stress testing
- Operating expenses
- Portfolio performance reports for Private Equity, Infrastructure and Debt Management
- Risk reports for managed AIFs
- Quarterly Group risk log
In addition to the above, the GRC considers the impact of any changes and developments in its risk profile, strategic
delivery and reputation quarterly.
The GRC uses the above to identify a number of key risks. It then evaluates the impact and likelihood of each key risk,
with reference to associated measures and key performance indicators. The adequacy of the mitigation plans is then assessed
and, if necessary, additional actions are agreed and then reviewed at the subsequent meeting.
A number of focus topics are also agreed in advance of each meeting. In FY2016, the GRC covered the update to the Group's
IT strategy; 3i's approach to ESG especially with respect to its portfolio companies; business continuity and cyber
security; an update on the implementation of Infrastructure's revised strategy, as well as the changes to the UK Corporate
Governance Code and relevant risks for 3i associated with the UK EU referendum.
There were no significant changes to the Group's approach to risk governance or its operation in FY2016 but we have
continued to refine our framework for risk management and reporting where appropriate.
Further details on 3i's approach as a responsible investor are available at www.3i.com
Review of principal risks
The disclosures on the following pages are not an exhaustive list of risks and uncertainties faced by the Group, but rather
a summary of those principal risks which are under active review by the GRC and Board, and are believed to have the
potential to affect materially the achievement of the Group's strategic objectives and impact its financial performance,
reputation and brand integrity.
The Group's risk profile and appetite remain broadly stable. Although the economic outlook deteriorated and market
volatility and uncertainty increased in the second half of our financial year, the Group's overall risk profile has not
changed significantly. The Group believes that its consistent strategy of focusing on core sectors and geographies, its
institutional process-led approach to investment and strong culture have helped it to maintain its stable risk profile.
External
The external environment remains difficult. There has been a significant amount of uncertainty in the Eurozone and the
wider emerging markets' economies fuelled by a challenging global macro-economic context and ongoing geo-political
tensions, including the UK referendum on EU membership. In addition, there is also some evidence of softening of US and
Eurozone growth rates. The Group continues to monitor all of these events closely.
The Group is subject to a range of regulatory and tax reporting requirements which continue to evolve. These include the
AIFMD, regulations under the European Market Infrastructure Regulation ("EMIR"), Capital Requirements Directive IV
("CRDIV"), the FCA's Client Asset rules ("CASS"), the Foreign Account Tax Compliance Act ("FATCA") and the OECD's Common
Reporting Standard. These developments have resulted in increased reporting requirements, operational complexity and
operational cost to the business. Managing these regulatory requirements is a key priority and they are the subject of
regular updates to Executive Committee and the Board. To date, they have had limited practical impact on 3i's ability to
deliver its strategy.
Looking forward, although the Base Erosion and Profit Shifting ("BEPS") proposals have now been published, it is not clear
how individual countries will implement these proposals and the timing and extent of implementation as they do. The UK is
already in the process of changing its domestic tax rules and implementing certain BEPS actions such as country-by-country
reporting and limiting the tax deductibility for interest expense. The OECD has indicated that further detail on some of
the proposals will be published in 2016. The Group continues to monitor developments carefully and intends to comply with
new rules as and when they are implemented.
Investment
Being an investment company, there are a number of significant risks that impact our ability to achieve our strategic
objectives. Firstly our ability to source attractive investment opportunities at the right price is critical. The
investment case presented at the outset will include the expected benefit of operational improvements, growth initiatives
and M&A activity that will be driven by our active management approach, together with the portfolio company's management
team. It will also include a view on the likely exit strategy and timing. The execution of this investment case is
monitored through our monthly portfolio monitoring and our semi-annual reviews which focus on longer term and strategic
developments. Alongside this we need to recognise the need to plan and execute a successful exit at the optimum time for
the portfolio company's development after taking account of market conditions. These risks are closely linked to the
economic environment noted above. To mitigate these risks, we focus on sectors and geographies where our expertise and
network can drive significant outperformance.
In addition, there are a number of risks specific to each business line as follows:
Private Equity
Regular and robust portfolio monitoring procedures remain critical given the volatile economic backdrop and as the
investment portfolio becomes more concentrated. The Private Equity partners hold a detailed monthly portfolio monitoring
meeting that is attended by the Group Chief Executive and the Group Finance Director. In addition, the Valuations Committee
review the valuation assumptions of our more material assets quarterly. Individual portfolio company failures could have
adverse reputational consequences for the Group, even though the value impact may not be material.
Infrastructure
3iN announced an amended total return target of 8% - 10% per annum over the medium term in May 2015 (previously a 10%
annual target) as strong investor demand for yield was impacting the business' ability to maintain investment rates in
quality assets. Infrastructure remains focused on investing selectively within its target sectors and developing both
organic and inorganic growth opportunities. In addition, its engaged asset management approach supports many of the
investments in the economic infrastructure and project portfolios.
Debt Management
The principal risks are the ability to grow AUM profitably in line with its business plan and to mitigate negative impact
on returns. The business is exposed to volatility in the credit markets and the challenging market conditions in the US
have negatively impacted valuations of our CLO equity in FY2016. Our teams manage the underlying credit portfolios very
actively which, in some cases, might include taking early losses in volatile markets, if appropriate. Due to the
introduction of risk retention rules in Europe (effective 2011) and the US (effective December 2016), we are required, as
managers, to take minimum positions in the CLO funds we manage. In addition, during the warehouse phase of establishing
CLOs, the Group is exposed to market volatilities and the potential for further capital calls.
Operational
One of the key areas of increased potential operational risk is cyber security. In response to this growing threat,
management engaged KPMG to conduct an independent review on the adequacy of the Group's ability to prevent, detect and
respond to cyber security threats. In addition, the Group rolled out a cyber security training course for all staff and
refreshed information security policies and incident management processes. The Group also conducted a wider review of its
business continuity and resilience capabilities. The findings and proposed enhancements from these various workstreams were
discussed at GRC and are being implemented across the Group.
The Board also received regular updates on ESG risks and whether our investors' skill sets and business development
capabilities could support the Group's strategic delivery. Detailed resource plans are in place at the business line level
and the Board conducts an annual review of the Group's organisational capability and succession plans (which include
contingencies against loss of key staff). The last review was conducted in September 2015.
Financial review
"Another year of robust results with each business continuing to perform well."
Julia Wilson
Group Finance Director
The table below summarises our key financial data under the Investment basis.
Table 6: Summary financial data
Year to/as at Year to/as at
31 March 31 March
Investment basis 2016 2015
Group
Total return £824m £659m
Total return on opening shareholders' funds 21.7% 19.9%
Dividend per ordinary share 22.0p 20.0p
Operating expenses £134m £131m
As a percentage of assets under management 1.0% 1.0%
Operating cash profit £37m £28m
Proprietary Capital Return
Realisation proceeds £796m £841m
Uplift over opening book value1 £70m/13% £145m/27%
Money multiple 2.4x 2.0x
Gross investment return £1,069m £805m
As a percentage of opening 3i portfolio value 27.6% 22.6%
Operating profit2 £920m £721m
Proprietary Capital Balance Sheet
Cash investment3 £453m £474m
3i portfolio value £4,497m £3,877m
Gross debt £837m £815m
Net cash £165m £49m
Gearing4 nil nil
Liquidity £1,352m £1,214m
Net asset value £4,455m £3,806m
Diluted net asset value per ordinary share 463p 396p
Fund Management
Total assets under management £13,999m £13,474m
Third-party capital £10,703m £10,140m
Proportion of third-party capital 76% 75%
1 Uplift over opening book value excludes refinancings.
2 Operating profit for the proprietary capital activities excludes performance fees payable/receivable.
3 Cash investment includes £4 million of Debt Management investment awaiting settlement at 31 March 2016 (31 March 2015: nil).
4 Gearing is net debt as a percentage of net assets.
Basis
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