REG - 3i Group PLC - Half-year Report <Origin Href="QuoteRef">III.L</Origin> - Part 4
10/11/2016 07:07
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of investments 2 -
Unrealised profits on the revaluation of investments 13 (18)
Fair value movements on investment entity subsidiaries 1 -
16 (18)
Portfolio income
Dividends 24 14
Income from loans and receivables 3 2
Fees receivable - (1)
Foreign exchange on investments 23 6
Gross investment return from discontinued operations 66 3
Fees receivable from external funds 24 17
Operating expenses (12) (13)
Exchange movements 1 -
Other expense (1) -
Carried interest
Carried interest and performance fees receivable 1 5
Carried interest and performance fees payable - (3)
Acquisition related earn-out charges - (4)
Operating profit before tax from discontinued operations 79 5
Income taxes - -
Profit for the period from discontinued operations 79 5
Other comprehensive income that may be reclassified to the income statement:
Exchange differences on translation of foreign operations 5 -
Other comprehensive income for the period from discontinued operations 5 -
Total comprehensive income for the period from discontinued operations 84 5
Cash flows
Six months to Six months to
30 September 30 September
2016 2015
£m £m
Net cash flows from operating activities 43 63
Total net cash flows from discontinued operations 43 63
Assets and liabilities held for sale
30 September 2016
£m
Assets
Unquoted investments1 311
Investments in investment entity subsidiaries1 8
Carried interest and performance fees receivable 9
Intangible assets 11
Deferred income taxes 3
Other current assets 10
Cash and cash equivalents 14
Assets held for sale 366
Liabilities
Trade and other payables 14
Carried interest and performance fees payable 5
Liabilities directly associated with the assets held for sale 19
1 Classified as Level 3 investments in line with valuation hierarchy as set out in Note 8.
Independent review report to 3i Group plc
Introduction
We have been engaged by 3i Group plc (the 'Company' or the 'Group') to review the Condensed consolidated financial
statements in the Half-yearly report for the six months ended 30 September 2016 which comprise the Condensed consolidated
statement of comprehensive income, the Condensed consolidated statement of financial position, the Condensed consolidated
statement of changes in equity, the Condensed consolidated cash flow statement, Basis of preparation and accounting
policies A to F and the related notes 1 to 11 (together the 'Condensed consolidated financial statements'). We have read
the other information contained in the Half-yearly report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed consolidated set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review
Engagements 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the
Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The Half-yearly report is the responsibility of, and has been approved by, the directors. The directors are responsible for
preparing the Half-yearly report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in the Basis of preparation and accounting policies, the annual financial statements of the Group are prepared
in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The Condensed
consolidated financial statements included in this Half-yearly report have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the Condensed consolidated financial statements in the
Half-yearly report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Condensed consolidated financial
statements in the Half-yearly report for the six months ended 30 September 2016 are not prepared, in all material respects,
in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London, United Kingdom
9 November 2016
Statement of Directors' responsibilities
The Directors, who are required to prepare the financial statements on a going concern basis unless it is not appropriate,
are satisfied that the Group has the resources to continue in business for the foreseeable future.
In making this assessment, the Directors have considered information relating to present and future conditions, including
future projections of profitability and cash flows.
The Directors confirm that to the best of their knowledge:
a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as
adopted by the EU;
b) the Interim Management report includes a fair review of the information required by:
i) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year ending 31 March 2017 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
ii) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being (i) related party transactions that have taken place in the first six months of the financial year ending 31 March 2017 which have materially affected the financial position or performance of 3i Group during that period; and (ii) any changes in the related party transactions described in the Annual report and accounts 2016 that could materially affect the financial position or performance of 3i Group during the first six months of the
financial year ending 31 March 2017.
The Directors of 3i Group plc and their functions are listed below.
The report is authorised for issue by order of the Board.
K J Dunn, Secretary
9 November 2016
Board of Directors
Simon Thompson, Chairman
Simon Borrows, Chief Executive and Executive Director
Julia Wilson, Group Finance Director and Executive Director
Jonathan Asquith, Non-executive Director
Caroline Banszky, Non-executive Director
Stephen Daintith, Non-executive Director
Peter Grosch, Non-executive Director
David Hutchison, Non-executive Director
Martine Verluyten, Non-executive Director
Portfolio and other information
Portfolio valuation - an explanation
Policy
The valuation policy is the responsibility of the Board, with additional oversight and annual review from the Valuations
Committee. Our policy is to value 3i's investment portfolio at fair value and we achieve this by valuing investments on an
appropriate basis, applying a consistent approach across the portfolio. The policy ensures that the portfolio valuation is
compliant with the fair value guidelines under IFRS and, in so doing, is also compliant with the guidelines issued by the
International Private Equity and Venture Capital valuation board (the "IPEV guidelines"). The policy covers the Group's
Private Equity, Infrastructure and Debt Management investment valuations. Valuations of the investment portfolio of the
Group and its subsidiaries are performed at each quarter end.
This section should be read in conjunction with "Portfolio valuation - an explanation" on pages 148 to 149 of the Annual
report and accounts 2016.
The table below outlines in more detail the range of valuation methodologies available to us, as well as the inputs and
adjustments necessary for each. It is prepared under the Investment basis and includes investments within assets held for
sale.
Earnings Most commonly used Private Equity valuation methodology Earnings multiples are applied to the earnings of the Company to determine the enterprise value A liquidity discount is applied to the enterprise value, typically between 5% and 15%, using factors 58%
(Private Equity) used for investments which are profitable and for which we can determine a set of listed companies and precedent transactions, where relevant, with similar characteristics EarningsReported earnings adjusted for non-recurring items, such as restructuring expenses, for significant corporate actions and, in exceptional cases, run-rate adjustments to arrive at maintainable such as our alignment with management and other investors and our investment rights in the deal
earnings structure
Most common measure is earnings before interest, tax, depreciation and amortisation ("EBITDA")
Earnings used are usually from the management accounts for the 12 months to the quarter end preceding the reporting period, unless data from forecasts or the latest audited accounts provides a more
reliable picture of maintainable earnings
Earnings multiplesThe earnings multiple is derived from comparable listed companies or relevant market transaction multiples
We select companies in the same industry and, where possible, with a similar business model and profile in terms of size, products, services and customers, growth rates and geographic focus
We adjust for relative performance in the set of comparables, exit expectations and other company specific factors
Quoted (Infrastructure/ Used for investments in listed companies Closing bid price at balance sheet date No adjustments or discounts applied 17%
Private Equity)
Imminent sale (Infrastructure/ Used where an asset is in a sales process, a price has been agreed but the transaction has not yet settled Contracted proceeds for the transaction, or best estimate of the expected proceeds A discount of typically 2.5% is applied to reflect any uncertain adjustments to expected proceeds 0%
Private Equity)
Fund (Infrastructure/ Used for investments in unlisted funds Net asset value reported by the fund manager Typically no further discount applied in addition to that applied by the fund manager 0%
Private Equity/Debt Management)
Specific industry Used for investments in industries which have well defined metrics as bases for valuation - eg book value for insurance underwriters, or regulated asset bases for utilities We create a set of comparable listed companies and derive the implied values of the relevant metric An appropriate discount is applied, depending on the valuation metric used 2%
metrics (Private Equity) We track and adjust this metric for relative performance, as in the case of earnings multiples
Comparable companies are selected using the same criteria as described for the earnings methodology
Discounted Appropriate for businesses with long-term stable cash flows, typically in infrastructure Long-term cash flows are discounted at a rate which is benchmarked against market data, where possible, or adjusted from the rate at the initial investment based on changes in the risk profile of the Discount already implicit in the discount rate applied to long-term cash flows - no further discounts 11%
cash flow (Private Equity/Infrastructure) investment applied
Broker quotes Used to value traded debt instruments Broker quotes obtained from banks which trade the specific instruments concerned, benchmarked to a range of other data such as DCF, trade data and other quotes No discount is applied 6%
(Debt Management)
Other (Private Equity) Used where elements of a business are valued on different bases Values of separate elements prepared on one of the methodologies listed above Discounts applied to separate elements as above 6%
Other (Private Equity)
Used where elements of a business are valued on different bases
Values of separate elements prepared on one of the methodologies listed above
Discounts applied to separate elements as above
6%
Twenty large investments from continuing operations
The 20 investments listed below account for 89% of the investment portfolio at 30 September 2016 (31 March 2016: 72%),
under the Investment basis. This does not include one investment that has been excluded for commercial reasons.
In accordance with Section 29 of the Alternative Investment Fund Managers Directive ("AIFMD"), 3i Investments plc, as
Alternative Investment Fund Manager ("AIFM"), encourages all controlled portfolio companies to make available to employees
and investors an Annual report which meets the disclosure requirements of the Directive. These are available either on the
portfolio company's website or through filing with the relevant local authorities.
Residual Residual
Business line cost1 cost1 Valuation Valuation
Geography March September March September
Investment First invested in 2016 2016 2016 2016 Relevant transactions
Description of business Valuation basis £m £m £m £m in the period
Action* Private Equity 1 1 902 1,549
Non-food discount retailer Benelux
2011
Earnings
3i Infrastructure plc* Infrastructure 270 399 464 673 Invested £131m to
Quoted investment company, UK maintain our 34%
investing in infrastructure 2007/2016 interest
Quoted
Scandlines* Private Equity 114 114 369 434
Ferry operator between Denmark Denmark/
and Germany Germany
2007/2013
DCF
Basic-Fit Private Equity 99 11 208 195 Listed on Amsterdam
Discount gyms operator Benelux Stock exchange in June
2013 2016. Proceeds of £82m
Quoted repaid shareholder loans
Weener Plastic* Private Equity 151 156 173 187
Supplier of plastic packaging Germany
solutions 2015
Earnings
Audley Travel* Private Equity 161 156 158 162
Provider of experiential tailor UK
made travel 2015
Earnings
Schlemmer* Private Equity - 156 - 157 New investment
Provider of cable management Germany
solutions for the automotive 2016
industry Price of recent
investment
Q Holding* Private Equity 100 100 120 134
Precision engineered US
elastomeric components 2014
manufacturer Earnings
BoConcept* Private Equity - 135 - 133 New investment
Urban living brand Denmark
2016
Price of recent
investment
Christ* Private Equity 99 100 117 121
Distributor and retailer of Germany
jewellery 2014
Earnings
ATESTEO (formerly GIF)* Private Equity 83 38 130 115 Refinancing returned
International transmission Germany £48m of proceeds
testing specialist 2013
Earnings
AES Engineering Private Equity 30 30 92 101
Manufacturer of mechanical UK
seals and support systems 1996
Earnings
Tato Private Equity 2 2 80 93
Manufacture and sale of UK
speciality chemicals 1989
Earnings
Mémora* Private Equity 159 159 83 83
Funeral service provider Spain
2008
Earnings
Euro-Diesel* Private Equity 52 56 59 82
Manufacturer of uninterruptible Benelux
power supply systems 2015
Earnings
Aspen Pumps* Private Equity 70 75 64 78
Manufacturer of pumps and UK
accessories for the air 2015
conditioning, heating and Earnings
refrigeration industry
MKM Private Equity 23 23 53 60
Building materials supplier UK
2006
Earnings
Dynatect* Private Equity 65 65 63 59
Manufacturer of engineered, US
mission critical protective 2014
equipment Earnings
OneMed Group* Private Equity 124 127 60 55
Distributor of consumable Sweden
medical products, 2011
devices and technology Earnings
Refresco Gerber Private Equity 23 23 44 46
European bottler of soft drinks Benelux
and fruit juices for retailers and 2010
branded customers Quoted
1,626 1,926 3,239 4,517
* Controlled in accordance with IFRS.
1 Residual cost includes interest.
Glossary
Alternative Investment Funds ("AIFs") At 30 September 2016, 3i Investments plc as AIFM, managed six AIFs.
Alternative Investment Fund Manager ("AIFM") is the regulated manager of AIFs. Within 3i, this is
3i Investments plc.
Alternative Investment Fund Managers Directive ("AIFMD") became effective from July 2013.
Approved investment trust company This is a particular UK tax status maintained by 3i Group plc, the parent company of 3i
Group. An approved investment trust company is a UK company which meets certain conditions set out in the UK tax rules
which include a requirement for the company to undertake portfolio investment activity that aims to spread investment risk
and for the company's shares to be listed on an approved exchange. The "approved" status for an investment trust must be
agreed by the UK tax authorities and its benefit is that certain profits of the company, principally its capital profits,
are not taxable in the UK.
Assets under management ("AUM") A measure of the total assets that 3i has to invest or manages on behalf of shareholders
and third-party investors for which it receives a fee. Private Equity and Infrastructure AUM is measured at residual cost.
Debt Management AUM is either measured at fair value (CLO equity or non CLO funds) or residual cost.
Board The Board of Directors of the Company.
Capital redemption reserve is established in respect of the redemption of the Company's ordinary shares.
Capital reserve recognises all profits that are capital in nature or have been allocated to capital. Following changes to
the Companies Act, the Company amended its Articles of Association at the 2012 Annual General Meeting to allow these
profits to be distributable by way of a dividend.
Carried interest is accrued on the realised and unrealised profits generated taking relevant performance hurdles into
consideration, assuming all investments were realised at the prevailing book value. Carried interest is only actually paid
or received when the relevant performance hurdles are met and the accrual is discounted to reflect expected payment
periods.
Carried interest receivable is generated on third-party capital over the life of the relevant fund when performance
criteria are met.
We pay carried interest to our investment teams on proprietary capital invested and share a proportion of carried interest
receivable from third-party funds. This total carried interest payable is provided historically by reference to two or
three-year vintages to maximise flexibility in resource planning.
Collateralised Loan Obligation -"CLO" A form of securitisation where payments from multiple loans are pooled together and
passed on to different classes of owners in various tranches.
Company 3i Group plc.
Discounting The reduction in present value at a given date of a future cash transaction at an assumed rate, using a
discount factor reflecting the time value of money.
Disposal Group is comprised of all of the assets and liabilities associated with the Group's Debt Management business.
Dividend income from equity investments and CLO capital is recognised in the Statement of comprehensive income when the
shareholders' rights to receive payment have been established.
Earnings before interest, tax, depreciation and amortisation ("EBITDA") is defined as earnings before interest, taxation,
depreciation and amortisation and is used as the typical measure of portfolio company performance.
EBITDA multiple Calculated as the enterprise value over EBITDA, it is used to determine the value of a company.
Fair value movements on investment entity subsidiaries The movement in the carrying value of Group subsidiaries, classified
as investment entity subsidiaries under IFRS 10, between the start and end of the accounting period converted into sterling
using the exchange rates at the date of the movement.
Fair value through profit or loss ("FVTPL") is an IFRS measurement basis permitted for assets and liabilities which meet
certain criteria. Gains and losses on assets and liabilities measured as FVTPL are recognised directly in the Statement of
comprehensive income.
Fee income is earned directly from investee companies when an investment is first made and through the life of the
investment. Fees that are earned on a financing arrangement are considered to relate to a financial asset measured at fair
value through profit or loss and are recognised when that investment is made. Fees that are earned on the basis of
providing an ongoing service to the investee company are recognised as that service is provided.
Fees receivable from external funds are fees received by the Group, from third parties, for the management of private
equity, infrastructure and debt management funds.
Foreign exchange on investments arises on investments made in currencies that are different from the functional currency of
the Group. Investments are translated at the exchange rate ruling at the date of the transaction. At each subsequent
reporting date investments are translated to sterling at the exchange rate ruling at that date.
Gross investment return ("GIR") includes profit and loss on realisations, increases and decreases in the value of the
investments we hold at the end of a period, any income received from the investments such as interest, dividends and fee
income and foreign exchange movements. GIR is measured as a percentage of the opening portfolio value and is the principal
tool for assessing our Proprietary Capital business.
Income from loans and receivables is recognised as it accrues. When the fair value of an investment is assessed to be below
the principal value of a loan, the Group recognises a provision against any interest accrued from the date of the
assessment going forward until the investment is assessed to have recovered in value.
International Financial Reporting Standards ("IFRS") are accounting standards issued by the International Accounting
Standards Board ("IASB"). The Group's consolidated financial statements are required to be prepared in accordance with
IFRS.
Investment basis Accounts prepared assuming that IFRS 10 had not been introduced. Under this basis, we fair value portfolio
companies at the level we believe provides the most comprehensive financial information.
The commentary in the Interim Management report refers to this basis as we believe it provides a more understandable view
of our performance.
Money multiple is calculated as the cumulative distributions plus any residual value divided by paid-in capital.
Net asset value ("NAV") is a measure of the fair value of our proprietary investments and the net costs of operating the
business.
Operating cash profit is the difference between our cash income (consisting of portfolio interest received, portfolio
dividends received, portfolio fees received and fees received from external funds as per the Investment basis Cash flow
statement) and our operating expenses (as per the Investment basis Consolidated statement of comprehensive income).
Operating profit includes gross investment return, management fee income generated from managing external funds, the cost
of running our business, net interest payable, movements in the fair value of derivatives, other losses and carried
interest.
Portfolio income is that which is directly related to the return from individual investments. It is recognised to the
extent that it is probable that there will be economic benefit and the income can be reliably measured. It is comprised of
dividend income, income from loans and receivables and fee income.
Proprietary capital Shareholders' capital which is available to invest to generate profits.
Public Private Partnership ("PPP") is a government service or private business venture which is funded and operated through
a partnership of government and one or more private sector companies.
Realised profits or losses over value on the disposal of investments The difference between the fair value of the
consideration received, less any directly attributable costs, on the sale of equity and the repayment of loans and
receivables and its carrying value at the start of the accounting period, converted into sterling using the exchange rates
at the date of disposal.
Revenue reserve recognises all profits that are revenue in nature or have been allocated to revenue.
Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the
Chief Executive who is considered to be the Group's chief operating decision maker. All transactions between business
segments are conducted on an arm's length basis, with intra-segment revenue and costs being eliminated on consolidation.
Income and expenses directly associated with each segment are included in determining business segment performance.
Share-based payment reserve is a reserve to recognise those amounts in retained earnings in respect of share-based
payments.
Total return comprises operating profit less tax charge less movement in actuarial valuation of the historic defined
benefit pension scheme.
Total shareholder return ("TSR") is the measure of the overall return to shareholders and includes the movement in the
share price and any dividends paid, assuming that all dividends are reinvested on their ex-dividend date.
Translation reserve comprises all exchange differences arising from the translation of the financial statements of
international operations.
Unrealised profits or losses on the revaluation of investments The movement in the carrying value of investments between
the start and end of the accounting period converted into sterling using the exchange rates at the date of the movement.
Information for shareholders
Note A
The Half-yearly report 2016 will be available as a pdf on our website at www.3i.com.
Note B
The interim dividend is expected to be paid on 4 January 2017 to holders of ordinary shares on the register on
9 December 2016. The ex-dividend date will be 8 December 2016.
Annual reports online
If you would prefer to receive shareholder communications electronically in future, including annual reports and notices of
meetings, please visit our Registrars' website at www.shareview.co.uk/clients/3isignup and follow the instructions there to
register.
More general information on electronic communications is available on our website at
www.3i.com/investor-relations/shareholder-information
Registrars
For shareholder administration enquiries, including changes of address, please contact:
Equiniti
Aspect House,
Spencer Road,
Lancing,
West Sussex BN99 6DA, UK
Telephone 0371 384 2031
Lines are open from 8.30am to 5.30pm, Monday to Friday
(International callers +44 121 415 7183)
3i Group plc
Registered office:
16 Palace Street,
London SW1E 5JD, UK
Registered in England No. 1142830
An investment company as defined by section 833 of the Companies Act 2006.
This information is provided by RNS
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