REG - 3i Group PLC - Full year results to 31 March 2016 <Origin Href="QuoteRef">III.L</Origin> - Part 3
19/05/2016 07:10
- Part 3: For the preceding part double click ID:nRSS6700Yb
statutory financial statements in accordance with IFRS. The introduction of IFRS 10 in 2014 was important
for investment companies such as 3i, as the investment entity exception it contained eliminated the risk of having to
consolidate portfolio investments. However, consistent with previous years, 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 IFRS financial statements.
Total return
The Group generated a total return of £824 million, or a profit on opening shareholders' funds of 21.7% (2015: £659 million
or 19.9%) in the year as the robust performance of its underlying portfolio more than offset the impact of volatile market
conditions. The Proprietary Capital business delivered a gross investment return of £1,069 million (2015: £805 million) and
an operating profit before carry of £920 million (2015: £721 million), underpinned by the strong performance of its
portfolio companies as well as by the strengthening of the euro and US dollar against sterling. Fund Management operating
profit before carry was £20 million (2015: £26 million). Further detail regarding the performance during the year is
provided below.
Table 7: Total return for the year to 31 March
2016 2016 2015 2015
Proprietary Fund 2016 Proprietary Fund 2015
Capital Management Total Capital Management Total
Investment basis £m £m £m £m £m £m
Realised profits over value on disposal of investments 72 - 72 162 - 162
Unrealised profits on revaluation of investments 669 - 669 684 - 684
Portfolio income
Dividends 71 - 71 45 - 45
Income from loans and receivables 63 - 63 62 - 62
Fees receivable 6 - 6 6 - 6
Foreign exchange on investments 188 - 188 (154) - (154)
Gross investment return 1,069 - 1,069 805 - 805
Fees receivable from external funds - 79 79 - 80 80
Synthetic fees (44) 44 - (45) 45 -
Operating expenses1 (31) (103) (134) (32) (99) (131)
Interest receivable 4 - 4 3 - 3
Interest payable (47) - (47) (49) - (49)
Movement in the fair value of derivatives - - - (1) - (1)
Exchange movements (31) - (31) 40 - 40
Operating profit before carry 920 20 940 721 26 747
Carried interest and performance fees receivable 83 80
Carried interest and performance fees payable (188) (142)
Acquisition related earn-out charges (5) (8)
Operating profit 830 677
Income taxes - (4)
Re-measurements of defined benefit plans (6) (14)
Total comprehensive income ("Total return") 824 659
Total return on opening shareholders' funds 21.7% 19.9%
1 Includes restructuring costs of nil (2015: nil) and £5 million (2015: £1 million) for Proprietary Capital and Fund
Management respectively.
Proprietary capital returns
Operating profit before carry on our Proprietary Capital was £920 million (2015: £721 million) and was underpinned by
strong value growth in the portfolio and positive foreign exchange movements which partly reversed negative foreign
exchange movements incurred in 2014 and 2015.
By business line, gross investment return on opening portfolio value was 32% for Private Equity (2015: 24%), 8% for
Infrastructure (2015: 20%) and 6% for Debt Management (2015: loss of 7%). Private Equity accounted for 83% of the
Proprietary Capital portfolio at 31 March 2016 (31 March 2015: 81%) and remains the primary driver of Proprietary Capital
returns.
Realised profits
Exit momentum continued in the year to 31 March 2016 with realisation proceeds of £796 million (2015: £841 million)
generating realised profits of £72 million (2015: £162 million). Realisations, excluding refinancings, were achieved at an
uplift over opening value of 13%, (2015: 27%), due to a number of assets being valued on an imminent sales basis at the
beginning of the year and the sale of quoted stakes.
The majority of the realisations were from the Private Equity portfolio, which contributed £743 million (2015: £831
million) of this, including £185 million of refinancing proceeds (2015: £155 million). Refinancing proceeds of £168 million
were generated by Action, whose strong cash generation meant it had delevered rapidly since its refinancing in January
2015. Private Equity proceeds also included the sale of Element for £179 million and £111 million from sales of our quoted
stakes. 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, including refinancings and partial disposals completed in the year, have generated a money multiple of 2.6x
over their investment life.
Proceeds of £51 million were received from 3iN, via a special dividend, following the completion of the sale of its holding
in Eversholt Rail, and these were treated as realised proceeds.
Unrealised value movements
The unrealised value movement of £669 million (2015: £684 million) was driven by the continued strong performance of a
number of our key assets, which more than offset market-driven weakness in a small number of portfolio companies. Table 8
summarises the revaluation movement by category and each category is discussed further below.
Table 8: Unrealised profits/(losses) on revaluation of investments for the year to 31 March
2016 2015
£m £m
Private Equity
Earnings based valuations
Performance 460 417
Multiple movements 95 64
Other bases
Uplift to imminent sale 13 22
Discounted cash flow 124 89
Other movements on unquoted investments 5 3
Quoted portfolio (7) 46
Infrastructure
Quoted portfolio 31 77
Discounted cash flow (9) (9)
Debt Management (43) (25)
Total 669 684
Private Equity unrealised value growth
The Private Equity portfolio performed strongly with value growth of £690 million in the year (2015: £641 million). This
was underpinned by good value weighted earnings growth of 17% (2015: 19%) and a weighted multiple increase of 10% (2015:
6%), following the re-rating of a small number of our assets. Net debt declined to 2.9x EBITDA (31 March 2015: 3.1x)
notwithstanding the fact that Action took advantage of its strong cash generation capability to take on additional debt at
favourable terms. The majority of the portfolio (84% by value, 2015: 93%) grew its earnings in the year and our larger and
more recent investments continue to perform very well.
Performance
Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £460
million (2015: £417 million). Value weighted earnings increased by 17% in the year (2015: 19%). Action, our largest asset
with over 30% earnings growth in the 12 months to December 2015, is the biggest contributor to this measure. Excluding
Action, the value weighted earnings growth was lower at 7% (2015: 16%) principally due to the sale of Element, one of our
largest assets with high growth supported by its buy and build strategy and the impact of macro-economic challenges, such
as the oil and commodity price pressure, seen in a small number of portfolio companies (JMJ, Dynatect, Agent Provocateur,
AES and Etanco). In addition, acquisitions by our portfolio companies were fewer this year and therefore the contribution
from acquisitions to earnings growth in 2016 was lower (2015: 2% of the 19% growth).
Table 9: Portfolio earnings growth weighted by March 2016 carrying values1
3i carrying value
at 31 March 2016
Last 12 months' (LTM) earnings growth (£m)
<(20)% 35
(20) - (11)% 70
(10) - (1)% 373
0 - 9% 832
10 - 19% 302
20 - 30% 421
>30% 942
1 Includes all companies valued on an earnings basis where comparable earnings data is available. This represents 80% of the Private Equity portfolio by value.
Table 10: Ratio of debt to EBITDA - Private Equity portfolio weighted by March 2016 carrying values1 (£m)
3i carrying value
at 31 March 2016
Ratio of net debt to EBITDA (£m)
<1x 550
1 - 2x 406
2 - 3x 339
3 - 4x 691
4 - 5x 1,724
5 - 6x 5
>6x -
1 This represents 99% of the Private Equity portfolio by value.
The value of a small number of investments was impacted by company and geography specific issues. In total, value
reductions of £64 million, in relation to seven assets, offset the otherwise strong performance (2015: £44 million, seven
assets). The largest single negative movement related to JMJ, a leading safety management consultancy with a particular
focus on major capital projects for the oil and gas industry. We recognised a £19 million value reduction on this
investment in the year.
Forecast earnings, used when the outlook is lower than the last 12 months' data, were used for only two investments at 31
March 2016, representing 7% of the portfolio by number and 3% by value (31 March 2015: two, 6% by number and 3% by value).
Table 9 shows the earnings growth rates across the portfolio.
In the case of Action, EBITDA for valuation purposes is adjusted to reflect its run-rate performance. Action is growing
strongly due, in part, to its successful store roll-out programme. We consider that this run-rate methodology reflects
fairly the high growth characteristics of this business, and therefore its maintainable earnings. At £902 million (31 March
2015: £592 million), net of the £168 million refinancing in January 2016, Action is the largest Private Equity investment
by value, representing 24% of the Private Equity portfolio (31 March 2015: 19%).
We took the opportunity to refinance the debt of Action and Geka, both increasing and extending the maturity of portfolio
debt, with 82% of the overall portfolio debt now repayable in 2018 or later (31 March 2015: 81% in 2017 or later). Table 10
shows the ratio of net debt to EBITDA weighted by portfolio value.
Multiple movements
The weighted average EBITDA multiple of the Private Equity portfolio assets valued on an earnings basis increased from
11.2x at 31 March 2015 to 12.3x at 31 March 2016 before liquidity discount, and from 10.5x to 11.5x after liquidity
discount, resulting in a positive movement in the year of £95 million (2015: £64 million). Due to another year of strong
performance against its comparable set, we reviewed Action's EBITDA multiple and increased it by 0.5x to 14.7x
pre-liquidity discount and 14.0x post discount (31 March 2015: 14.2x, 13.5x). Based on the run-rate earnings and capital
structure at 31 March 2016, a 1.0x movement in the EBITDA multiple applied would increase or decrease Action's value by £86
million. Excluding Action, the weighted average EBITDA multiple increased to 10.8x before liquidity discount (31 March
2015: 10.1x) and was 10.1x after liquidity discount (31 March 2015: 9.3x). We also increased the multiple used to value
Basic-Fit to reflect its strong performance, significant capital investment programme and a positive market environment for
discount gym operators more generally.
We continued to adjust multiples lower in 17 out of the 29 companies (31 March 2015: 22 out of 33) valued on an earnings
basis. 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 volatile market backdrop, we continued to apply a
relatively high level of adjustments to reflect our caution about longer-term and sector multiple trends rather than taking
an average of the quoted comparable sets.
The pre-discount multiples used to value the portfolio ranged between 6.5x and 14.7x and post-discount multiples ranged
from 5.5x to 14.0x.
Imminent sale
The exit processes for Amor and Mayborn were sufficiently progressed to value on an imminent sales basis at 31 March 2016.
The uplift to imminent sale was £13 million (2015: £22 million). Both sales were announced post year end and are expected
to complete by the end of June 2016.
Discounted cash flow
The largest investment valued using DCF in the Private Equity portfolio is Scandlines, the Danish/German ferry group, which
increased in value by £122 million (2015: £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 and developments around expected potential delays to the opening of this new tunnel, we revised our assumption
as to the tunnel opening date by three years since 31 March 2015 and two years since 30 September 2015. This change,
combined with a reduction in the Weighted Average Cost of Capital ("WACC"), were the primary drivers of the increase in the
value of our investment in Scandlines in the year.
Quoted portfolio
The Private Equity quoted portfolio, including IPOs completed in the year, generated an unrealised value reduction of £7
million (2015: £46 million gain) principally driven by our holding in Hong Kong listed Dphone. Table 11 details the
movement in the year andclosing quoted portfolio.
Infrastructure unrealised value movement
The Infrastructure portfolio consists primarily of our 34% holding in 3iN. 3iN continued to perform well during the year,
as it has an attractive portfolio of core European assets. 3iN generated value growth of £33 million (2015: £77 million)
for 3i Group in the year, driven by an 8% increase in the share price to 173 pence (2015: 160 pence, 19% increase) and a
total shareholder return of 13%. This was offset by further modest falls in the value of the Indian Infrastructure
portfolio of £12 million (2015: £9 million) as the investments continued to face a number of challenges.
Debt Management unrealised value movement
The Debt Management Proprietary Capital portfolio consists principally of CLO equity and at 31 March 2016, 3i had invested
£151 million of proprietary capital in CLO equity (31 March 2015: £117 million). The remaining Debt Management portfolio is
comprised of direct investments in CLO warehouses, the Global Income Fund and the Senior Loan fund.
The mark-to-market valuation of the CLO equity portfolio reduced by £43 million (2015: £25 million) and there were a number
of other factors which contributed to this movement. We received £31 million (2015: £16 million) of cash distributions from
CLO equity, which is included in portfolio income, resulting in an associated value reduction. Broker quotes, which are
used to support CLO valuations, reflected general market concerns about liquidity and investor risk appetite. In the US in
particular, negative investor sentiment around the oil and gas, commodities and utilities sectors impacted valuations
significantly. The underlying cash flows of the CLOs remain sound, and our longer-term view of returns remains positive.
Table 11: Quoted portfolio movement for the year to 31 March 2016
Total gross
Closing investment
Opening Disposals Unrealised value return
value at at opening value Other at 31 March during
1 April 2015 book value growth movements 2016 the year
Investment IPO date £m1 £m £m £m2 £m £m3
Quintiles May 2013 144 (50) (3) 1 92 -
Dphone July 2014 35 - (9) (1) 25 (10)
Eltel February 2015 47 (31) 1 3 20 3
Refresco Gerber March 2015 47 (9) 5 1 44 9
UFO Moviez May 2015 27 (15) (1) 1 12 1
300 (105) (7) 5 193 3
1 For UFO Moviez, which IPOd during the year, this is the value pre-IPO.
2 Other movements relate to foreign exchange.
3 Includes realised profit/loss.
Portfolio income
Portfolio income increased by 24% to £140 million (2015: £113 million) of which £93 million was received in cash (2015: £80
million). Dividends of £71 million were received (2015: £45 million), including £31 million from CLO investments (2015: £16
million), £21 million from 3iN (2015: £20 million) and £18 million from Private Equity (2015: £9 million). Interest income
totalled £63 million (2015: £62 million), with £59 million (2015: £56 million) generated from Private Equity investments
and £4 million (2015: £6 million) generated from investments held in Debt Management warehouses.
Net portfolio fees of £6 million were recognised during the year (2015: £6 million) from new Private Equity investments and
monitoring fees.
Net foreign exchange movements
The net foreign exchange gain of £157 million in the year (2015: £114 million loss) reflects the translation of
non-sterling denominated portfolio assets and non-portfolio net assets, including cash and gross debt held at the balance
sheet date. This movement reflects the strengthening of the euro (9.1%) against sterling over the year.
The net assets of the Group by currency and the sensitivity for further currency movements are shown in Table 12 below.
Table 12: Net assets of the Group by currency and sensitivity at 31 March 2016
£m % 1% sensitivity
Sterling 1,364 31 n/a
Euro 2,169 49 22
US dollar 726 16 7
Swedish krona 106 2 1
Other 90 2 n/a
Proprietary Capital costs
A proportion of the Group's operating expenses that are assessed as having been incurred in running a regulated and listed
investment trust are allocated to Proprietary Capital. These costs include 100% of costs in relation to the CEO and Group
FinanceDirector and elements of finance, IT, property and compliance. Operating expenses were broadly stable at £31 million
(2015: £32 million) as the Group continued to manage costs closely.
Synthetic fees, the internal fee payable to the Fund Management business for managing the Group's Proprietary Capital, of
£44 million (2015: £45 million) reflect the lower level of Proprietary Capital being managed as a result of net divestment
activity, predominantly in Private Equity.
Net interest payable
Gross interest payable declined to £47 million (2015: £49 million) due to the reduced costs associated with the revolving
credit facility which was refinanced in September 2014.
The current gross debt position is detailed further in the Balance sheet section of this Financial review and in Note 7 of
the financial statements.
Cash interest received increased marginally to £4 million (2015: £3 million).
Fund Management returns
This year the Board agreed to remove Fund Management profitability as a KPI. While Fund Management profitability is still
monitored when managing the individual business lines to ensure cost discipline, our decision not to raise a new Private
Equity fund means that it is no longer expected to be a material driver of the Group's performance.
The Group's Fund Management income is driven by total AUM, which was £14.0 billion at 31 March 2016 (31 March 2015: £13.5
billion). The closing of four CLOs and the launch of the Global Income Fund, and further commitments to the European Middle
Market Fund and US Senior Loan Fund in the Debt Management business offset a fall in AUM arising from net divestment
activity in Private Equity and the special dividend from 3iN. The proportion of third-party assets under management
increased marginally to 76% (31 March 2015: 75%).
The Fund Management business generated an operating profit before carry of £20 million and an operating profit margin of
16% (2015: £26 million, 21%). Fee income declined marginally to £123 million (2015: £125 million) due to reduced
third-party Private Equity AUM. Operating expenses increased marginally to £103 million (2015: £99 million), principally
due to the redundancy costs noted in the Private Equity business line section.
Table 13: Fund Management profit for the year to 31 March
2016 2015
£m £m
Fees receivable from external funds
Private Equity 13 16
Infrastructure 28 30
Debt Management 38 34
Synthetic fees
Private Equity 41 42
Infrastructure 3 3
Debt Management - -
Total fee income 123 125
Fund Management operating expenses (103) (99)
Operating profit before carry 20 26
Table 14: Carried interest and performance fees by business line for the year to 31 March
2016 2015
£m £m
Carried interest and performance fees receivable
Private Equity 58 28
Infrastructure 20 45
Debt Management 5 7
Total 83 80
Carried interest and performance fees payable
Private Equity (171) (103)
Infrastructure (15) (35)
Debt Management (2) (4)
Total (188) (142)
Carried interest and performance fees payable
Our largest Private Equity fund, Eurofund V, which includes investments made in 2007-12, reached its performance hurdle on
a valuation basis in FY2016. We have seen a strong recovery in the fund's multiple to 1.7x (31 March 2015: 1.4x)
principally due to the performance of Action and Scandlines, as well as the realisations of Element and Amor. As a result,
we are now accruing carried interest receivable from this fund for the first time and £63 million was recognised in the
year (2015: nil). This is calculated assuming that the portfolio was realised at the 31 March 2016 valuation.
We pay carried interest to our investment teams on proprietary capital invested and share a proportion of carried interest
receivable from third-party funds. In Private Equity, we typically accrue carried interest payable at between 10-15% of
gross investment return. The improved performance over the last 12 months means that the majority of assets by value are
now held in schemes that would have met their performance hurdles, assuming that the portfolio was realised at the 31 March
2016 valuation. We accrued carried interest payable of £171 million (2015: £103 million) for Private Equity in the year, of
which £48 million relates to the team's share of carry receivable from Eurofund V (2015: nil).
3iN pays a performance fee based on 3iN's NAV on an annual basis, subject to a hurdle rate of return and a high-water mark.
The continued good performance of the European assets held by 3iN resulted in the recognition of £20 million of performance
fees receivable in the year (2015: £45 million). Carry payable to the Infrastructure team of £15 million (2015: £35
million) has been accrued.
Carry is only paid once the hurdles are passed in cash terms and the cash proceeds are actually received following a
realisation or refinancing event. During the year, £15 million was paid (2015: £7 million).
In total at 31 March 2016, balance sheet carried interest and performance fees payable increased to £404 million (31 March
2015: £227 million) and the receivable increased to £122 million (31 March 2015: £88 million).
Pension
The valuation of assets of the Group's defined benefit pension schemes was impacted by the volatility in financial markets
during the year. The liability of the Group's defined benefit pension scheme declined in the year following an increase in
the discount rate. On a net basis, these movements resulted in a re-measurement loss of £6 million (2015: £14 million loss)
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. The next
triennial valuation will be based on the pension scheme's funding position at 30 June 2016.
We launched a programme to offer our members flexibility in how they take their pension benefits following the
implementation of HM Treasury's "Freedom and Choice in Pensions" changes. This included providing financial advice and a
range of options for deferred and pensioner members.
Tax
The Group's parent company is an approved investment trust company for UK tax purposes. Approved investment trust companies
are used as investment fund vehicles. The tax exemption for capital profits from which they benefit ensures that investors
do not suffer double taxation of their investment returns. The majority of our returns are capital returns for tax purposes
(realised profits, fair value adjustments and impairment losses) and are substantially non-taxable. As a result, the
Group's tax charge in the year was nil (2015: £4 million).
Operating cash profit
Table 15: Operating cash profit for the year to 31 March
2016 2015
£m £m
Third-party capital fees 78 78
Cash portfolio fees 7 10
Cash portfolio dividends and interest 86 70
Cash income 171 158
Total operating expenses1 134 131
Less: Restructuring costs2 - (1)
Operating expenses excluding restructuring costs 134 130
Operating cash profit 37 28
1 Operating expenses are stated on an accrual basis.
2 Operating cash profit in FY16 has not been adjusted for restructuring costs.
Third-party fees received remained broadly flat during the year, as the launch of four Debt Management CLOs and the Global
Income Fund largely offset the reduction in fees from our Private Equity funds. Increased investment into cash yielding
Debt Management funds has generated good income and the Private Equity portfolio generated a higher level of dividend
income. Consequently, the Group was able materially to improve its operating cash income to £171 million (2015: £158
million) despite the net divestment activity in Private Equity.
Total operating expenses increased by 2% to £134 million (2015: £131 million), while restructuring costs, which comprise
redundancy, office closures and organisational changes, increased to £5 million (2015: £1 million). Excluding restructuring
and redundancy costs, operating expenses were stable at £129 million (2015: £130 million) despite some strategic
recruitment into our investment teams in the second half of the year. Operating expenses as a percentage of weighted
average AUM remained stable at 1.0% (2015: 1.0%), as a result of the continuing cost focus. We expect costs to rise
marginally as we continue to grow the business, increase activity and deal with increased regulation, but we expect costs
to remain at c.1.0% of AUM.
In total, the operating cash profit position, including this year's restructuring costs, increased significantly to £37
million (2015: £28 million).
Cash flow
Investment and realisations
Proceeds from realisations were £796 million (2015: £841 million), of which £25 million was receivable at 31 March 2016.
Cash proceeds of £771 million were offset partly by cash investment of £453 million (2015: £474 million) and resulted in
net cash inflow of £318 million (2015: £367 million). A further £99 million of investment was non-cash due to capitalised
interest (2015: £140 million) and total investment was £552 million (2015: £614 million).
Further detail on investment and realisations is included in the relevant business line sections.
Table 16: Investment activity - Proprietary Capital and Third-party Capital for the year to 31 March
Proprietary Capital Proprietary and Third-party Capital
2016 2015 2016 2015
£m £m £m £m
Realisations 771 841 1,327 1,363
Cash investment (453) (474) (494) (562)
Net cash divestment 318 367 833 801
Non-cash investment (99) (140) (133) (191)
Net divestment 219 227 700 610
Balance sheet
Table 17: Simplified balance sheet as at 31 March
2016 2015
£m £m
Investment portfolio value 4,497 3,877
Gross debt (837) (815)
Cash and deposits 1,002 864
Net cash 165 49
Other net liabilities (207) (120)
Net assets 4,455 3,806
Gearing nil nil
The proprietary capital portfolio increased to £4,497 million at 31 March 2016 (31 March 2015: £3,877 million) as cash
investment of £453 million, unrealised value growth of £669 million and foreign exchange movements of £188 million
outweighed the good level of realisations.
Gross debt includes a euro denominated bond of £262 million (31 March 2015: £240 million) which matures on 17 March 2017.
We expect to repay that bond out of cash resources.
Net divestment activity and an operating cash profit led to cash and deposits on the balance sheet increasing to £1,002
million (31 March 2015: £864 million). After allowing for an increase in the sterling equivalent of the 2017 euro
denominated bond, the Group was in a net cash position of £165 million at 31 March 2016 (31 March 2015: £49 million net
cash). Gearing remained at nil at 31 March 2016 (31 March 2015: nil).
Liquidity
Liquidity remained strong at £1,352 million (31 March 2015: £1,214 million) and comprised cash and deposits of £1,002
million (31 March 2015: £864 million) and undrawn facilities of £350 million (31 March 2015: £350 million).
Foreign exchange hedging
Although derivatives are not used to hedge currency movements on a portfolio basis, we do hedge individual investment
acquisitions or divestments where appropriate. Foreign exchange risk is considered an integral part of the investment
process.
Diluted NAV
The diluted NAV per share at 31 March 2016 was 463 pence (31 March 2015: 396 pence). This was driven by the total return in
the year of £824 million (2015: £659 million) and partially offset by dividend payments in the year of £190 million, or
20.0 pence per share (2015: £183 million, 19.3 pence per share).
Dividend
The Board has declared a total dividend of 22 pence (2015: 20.0 pence) for 2016. This comprises an 8.1 pence base dividend
and a 13.9 pence 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, that will result in the total dividend for 2016
being 27% of gross cash realised proceeds. Following payment of an interim dividend of 6.0 pence per share in January 2016,
and subject to shareholder approval, we will pay the final dividend of 16.0 pence (2015: 14.0 pence) on 22 July 2016 to
shareholders on the register at 17 June 2016.
Key accounting judgements and estimates In preparing these accounts, the key accounting judgement estimate 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 2016, 85% of the investment assets were non-quoted (31 March 2015: 80%). 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
2016 2015
£m £m
Realised profits over value on the disposal of investments 72 162
Unrealised profits on the revaluation of investments 669 684
Portfolio income
Dividends 71 45
Income from loans and receivables 63 62
Fees receivable 6 6
Foreign exchange gain/(loss) on investments 188 (154)
Gross investment return 1,069 805
Fees receivable from external funds 79 80
Operating expenses (134) (131)
Interest receivable 4 3
Interest payable (47) (49)
Movement in the fair value of derivatives - (1)
Foreign exchange (loss)/gain (31) 40
Operating profit before carry 940 747
Carried interest
Carried interest and performance fees receivable 83 80
Carried interest and performance fees payable (188) (142)
Acquisition related earn-out charges (5) (8)
Operating profit 830 677
Income taxes - (4)
Profit for the year 830 673
Other comprehensive income
Re-measurements of defined benefit plans (6) (14)
Total comprehensive income for the year ("Total return") 824 659
Investment basis
Consolidated statement of financial position
Total Total
2016 2015
£m £m
Assets
Non-current assets
Investments
Quoted investments 658 763
Unquoted investments 3,839 3,114
Investment portfolio 4,497 3,877
Carried interest and performance fees receivable 94 43
Other non-current assets 37 21
Intangible assets 12 19
Retirement benefit surplus 132 136
Property, plant and equipment 5 4
Deferred income taxes 3 3
Total non-current assets 4,780 4,103
Current assets
Carried interest and performance fees receivable 28 45
Other current assets 53 64
Deposits 40 -
Cash and cash equivalents 962 864
Total current assets 1,083 973
Total assets 5,863 5,076
Liabilities
Non-current liabilities
Trade and other payables (27) (25)
Carried interest and performance fees payable (290) (214)
Acquisition related earn-out charges payable - (10)
Loans and borrowings (575) (815)
Retirement benefit deficit (20) (19)
Deferred income taxes (2) (3)
Provisions (1) (5)
Total non-current liabilities (915) (1,091)
Current liabilities
Trade and other payables (107) (144)
Carried interest and performance fees payable (114) (13)
Acquisition related earn-out charges payable (1) (17)
Loans and borrowings (262) -
Current income taxes (2) (2)
Provisions (7) (3)
Total current liabilities (493) (179)
Total liabilities (1,408) (1,270)
Net assets 4,455 3,806
Equity
Issued capital 719 719
Share premium 784 784
Other reserves 3,006 2,382
Own shares (54) (79)
Total equity 4,455 3,806
Investment basis
Consolidated cash flow statement
2016 2015
£m £m
Cash flow from operating activities
Purchase of investments (449) (474)
Proceeds from investments 771 841
Cash divestment from traded portfolio - 21
Net cash flow from derivatives (14) 9
Portfolio interest received 15 26
Portfolio dividends received 71 44
Portfolio fees received 7 10
Fees received from external funds 78 78
Carried interest and performance fees received 52 6
Carried interest and performance fees paid (15) (13)
Acquisition related earn-out charges paid (30) (10)
Operating expenses (134) (117)
Income taxes paid - (5)
Net cash flow from operating activities 352 416
Cash flow from financing activities
Issue of shares - 3
Repurchase of B shares - (6)
Dividend paid (190) (183)
Interest received 4 3
Interest paid (51) (54)
Net cash flow from financing activities (237) (237)
Cash flow from investing activities
Purchase of property, plant and equipment (1) -
Net cash flow from deposits (40) -
Net cash flow from investing activities (41) -
Change in cash and cash equivalents 74 179
Cash and cash equivalents at the start of year 864 697
Effect of exchange rate fluctuations 24 (12)
Cash and cash equivalents at the end of year 962 864
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.
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
Investment IFRS IFRS Investment IFRS IFRS
basis adjustments basis basis adjustments basis
2016 2016 2016 2015 2015 2015
Notes £m £m £m £m £m £m
Realised profits over value 1,2 72 (61) 11 162 (108) 54
on the disposal of investments
Unrealised profits on the 1,2 669 (577) 92 684 (448) 236
revaluation of investments
Fair value movements on 1 - 591 591 - 530 530
investment entity subsidiaries
Portfolio income
Dividends 1,2 71 (13) 58 45 (9) 36
Income from loans and 1,2 63 (37) 26 62 (24) 38
receivables
Fees receivable 1,2 6 2 8 6 - 6
Foreign exchange on investments 1,3 188 (147) 41 (154) 105 (49)
Gross investment return 1,069 (242) 827 805 46 851
Fees receivable from 1,4 79 - 79 80 - 80
external funds
Operating expenses 1,4 (134) 2 (132) (131) 9 (122)
Interest receivable 4 - 4 3 - 3
Interest payable (47) - (47) (49) - (49)
Movement in the fair value of - - - (1) - (1)
derivatives
Exchange movements 1,3 (31) 96 65 40 (101) (61)
(Expense)/income from investment entity subsidiaries 1 - (10) (10) - 1 1
Operating profit before carry 940 (154) 786 747 (45) 702
Carried interest
Carried interest and performance 1,4 83 (5) 78 80 - 80
fees receivable
Carried interest and performance 1,4 (188) 148 (40) (142) 70 (72)
fees payable
Acquisition related earn-out charges (5) - (5) (8) - (8)
Operating profit 830 (11) 819 677 25 702
Income taxes 1,4 - (2) (2) (4) 2 (2)
Profit for the year 830 (13) 817 673 27 700
Other comprehensive income
Exchange differences on 1,3 - 13 13 - (27) (27)
translation of foreign operations
Re-measurements of defined (6) - (6) (14) - (14)
benefit plans
Total comprehensive income for 824 - 824 659 - 659
the year ("Total return")
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 held directly 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 aggregated into the single "Fair value movement on investment entity subsidiaries" line. This is the most significant reduction of
information in our IFRS accounts.
3 Foreign exchange movements have been reclassified under the Investment basis as foreign currency asset and liability movements. Movements within the Investment entity subsidiaries are included within "Fair value movements on investment entities".
4 Other items also aggregated into the "Fair value movements on investment entity subsidiaries" line include fees receivable from external funds, audit fees, custodian fees, bank charges, other general and administration expenses, carried interest and tax.
5 The IFRS basis is audited and the Investment basis is unaudited.
Reconciliation of consolidated statement of financial position
Investment IFRS IFRS Investment IFRS IFRS
basis
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