REG - 3i Group PLC - Half Yearly Report <Origin Href="QuoteRef">III.L</Origin> - Part 2
12/11/2015 07:02
- Part 2: For the preceding part double click ID:nRSL4327Fa
Debt Management was offset by negative
mark to market movements on the
portfolio
Key risks§ Investment rate or quality Key risks§ G20 political and economic uncertainty affects 3i's core markets, impacts valuations and increases foreign exchange volatility§ Unplanned increase in cost base, eg due to regulatory changes Key risks§ Lower NAV due to investment under-performance or political and economic uncertainty§ Volatility in equity markets § Appeal of our business model § Regulatory or legal change materially affecting one or more of the Group's businesses
of investments is lower than expected §
Subdued M&A activity or high pricing in
3i's core markets could impact the
timing of exits, cash returns and
investments§ Operational
underperformance of portfolio companies
impacting earnings growth and
valuations§ Failure to invest in people
to support our activities
Key risks§ Investment rate or quality of investments is lower than expected § Subdued M&A activity or high pricing in 3i's
core markets could impact the timing of exits, cash returns and investments§ Operational underperformance of portfolio
companies impacting earnings growth and valuations§ Failure to invest in people to support our activities
Key risks§ G20 political and economic uncertainty affects 3i's core markets, impacts valuations and increases foreign
exchange volatility§ Unplanned increase in cost base, eg due to regulatory changes
Key risks§ Lower NAV due to investment under-performance or political and economic uncertainty§ Volatility in equity
markets § Appeal of our business model § Regulatory or legal change materially affecting one or more of the Group's
businesses
ASSETS UNDER MANAGEMENT UNDERLYING FUND OPERATING CASH
("AUM") MANAGEMENT profit PROFIT
£bn Profit (£m) and Margin (%) £m
Financial year/Half year Financial year/Half year Financial year/Half year
FY2014 HY2015 FY2015 HY2016 FY2014 FY2015 HY2015 HY2016 FY2014 FY2015 HY2015 HY2016
AUM 12.9 12.9 13.5 13.5 Profit 33 33 16 13 5 28 16 17
Proprietary 3.4 3.3 3.3 3.3 Margin 26% 26% 26% 22%
Capital
Third-party 9.5 9.6 10.2 10.2
Capital
AUM forms the basis on which Underlying Fund Management profit allows us to assess the performance of our Fund Management business Covering the annual cost of running our business with the annual cash income eliminates capital return dilution
management fee income is generated.
For funds out of their re-investment
period, this is measured at residual
cost
HY2016 progress § Debt Management HY2016 progress § Underlying Fund Management profit and margin movement reflects Private Equity divestment in managed funds and our decision to focus on proprietary capital rather than third-party funds in Private Equity§ Operating expenses continue to be well managed and were less than 1% of AUM HY2016 progress § Good progress in maintaining a positive operating cash profit§ All three business lines contributed to cash income, which increased to £80 million due to CLO equity distributions and dividends from the Private Equity portfolio§ 3iN special dividend treated as a realisation and not included in operating cash income§ We remain disciplined on operating
raised two new CLOs, as well as a expenses, which were flat at £63 million
US$150 million Global Income Fund
which contributed to the new AUM of
£0.8 billion§ Total AUM was flat at
£13.5 billion following net
divestment in Private Equity and
Infrastructure § Proprietary Capital
AUM was flat at £3.3 billion, as the
good flow of Private Equity
realisations was largely replaced
with new investments
Key risks§ Portfolio performance is Key risks§ G20 political and economic uncertainty affects investment opportunity or fundraising appetite § Adverse fluctuations in financial markets impact our fee-based businesses§ Regulatory change adds to 3i's cost base Key risks§ Portfolio performance, and therefore portfolio income, is weak due to operational underperformance§ Unplanned increase in cost base
weak or impacted by a legal, macro eg due to regulatorychanges
-economic/political and/or
regulatory event§ Regulatory change
limits 3i's ability to raise third
-party capital
INTERIM MANAGEMENT REPORT
Business review
PRIVATE EQUITY
Private Equity delivered a good performance in the first half. Although market volatility was a feature of the period, its
direct impact was limited to a small number of assets and the underlying strength and performance of our larger assets is
demonstrated by the 19% increase in weighted average earnings (including the benefit of portfolio acquisitions) in the last
twelve months. The gross investment return for the period was £246 million, or 8% on the opening portfolio (September 2014:
£282 million, 10%).
Investment activity
The momentum seen in FY2015 continued, as the disposal of a number of our more challenging assets over the last three years
allowed the investment teams to focus more of their activity on origination.
The Private Equity team invested in two new businesses in our core industrial sector in the period: Weener Plastic and
Euro-Diesel. Headquartered in Germany, Weener Plastic designs, develops and manufactures added value caps, closures,
roll-on balls, jars and bottles for a number of markets. We initially invested E251 million of proprietary capital and then
set up a co-investment arrangement with a third-party investor to fund E50 million of our commitment. Euro-Diesel is a
leading provider of diesel rotary uninterruptable power supply systems, based in Belgium, in which we invested E71 million
of proprietary capital.
In both cases we had been working with the management teams and our Business Leaders Network for a significant amount of
time before the respective sales processes started. Having stepped back from both processes, we were able to re-join after
they failed to complete and secured the investments at good prices. 3i will use its network to support both businesses in
the acceleration of their international expansion plans and maximise their operational efficiency. In addition to these new
investments, we also took the opportunity to purchase a minority stake in GIF (2013 investment) from the founding family.
Table 1:Cash investment in the six months to 30 September 2015
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
GIF Further International transmission testing specialist Aug 15 12 11
Other Further n/a n/a (1) 1
Total Private Equity investment 247 208
Realisations activity
Market conditions were favourable in the first half of the 2015 calendar year, enabling us to continue to dispose of a
number of smaller non-core assets through both sales and an IPO.
We took advantage of opportunities to sell down one of our quoted investments. We disposed of two tranches of our holding
in Quintiles, realising proceeds of £53 million. We also completed a successful IPO of UFO Moviez, realising £17 million.
In total we received cash proceeds of £307 million (September 2014: £316 million) at an uplift of 9% over opening portfolio
value (September 2014: 15%). The relatively small uplift reflects the fact that a number of assets were held on an imminent
sales basis at 31 March 2015, or were from the quoted portfolio.
At 30 September 2015, there were 53 assets in the portfolio and 5 stakes in listed companies, down from 61 assets and 4
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:Realisations in the six months to 30 September 2015
31 March 3i Profit/(loss) Uplift on Money
Calendar 2015 realised in the opening Residual multiple
Country/ year value1 proceeds period2 value2 value over
Investment region invested £m £m £m % £m cost3 IRR
Full realisations
Azelis Benelux 2007 62 63 1 2% - 1.1x 1%
Labco France 2008 36 42 6 17% - 0.7x (6)%
Touchtunes USA 2011 39 38 1 3% 2 2.2x 23%
Soyaconcept Nordic 2007 16 17 nil -% - 2.0x 13%
Boomerang Spain 2008 7 11 4 57% - 0.6x (8)%
Inspecta Nordic 2007 6 6 1 20% - 0.1x (40)%
Other investments n/a n/a 4 7 3 n/a - n/a n/a
Partial realisations1,3
Quintiles USA 2008 50 53 3 6% 93 3.1x 24%
Scandlines Denmark/ 2007 38 38 nil -% 257 2.4x 25%
Germany
UFO Moviez India 2007 14 17 3 21% 16 2.8x 16%
Other investments n/a n/a 9 11 2 n/a 104 n/a n/a
Deferred consideration
Other investments n/a n/a 2 4 2 n/a n/a n/a n/a
Total Private Equity realisations 283 307 26 9% 472 1.6x 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.
3 Cash proceeds over cash invested. For partial realisations and recapitalisations, valuations of any remaining investment are included in the multiple.
Assets under management
Total AUM decreased to £3.6 billion during the period (31 March 2015: £3.8 billion). The performance of EFV and the Growth
Capital Fund continued to improve, with money multiples at 30 September 2015 of 1.5x and 1.8x respectively (31 March 2015:
1.4x, 1.7x). The Growth Capital Fund in particular benefited from the realisation of Labco and further quoted disposals of
Quintiles. The investments made in EFV's 2010-2012 investment period, continue to show a particularly strong performance,
with a money multiple of 2.8x at 30 September 2015 (31 March 2015: 2.6x), driven by the strong performance of Action,
Element and Amor/Christ in particular.
Table 3: Assets under management at 30 September 2015
Remaining Gross Fee income
3i % money received
commitment1 invested multiple2 in the
Close Original Original 3i September September September period
Private Equity date fund size commitment 2015 2015 2015 AUM £m
3i Growth Capital Fund Mar 10 E1,192m E800m E346m 53% 1.8x E277m 1
3i Eurofund V Nov 06 E5,000m E2,780m E114m 94% 1.5x E1,968m 5
3i Eurofund IV Jun 04 E3,067m E1,941m E82m 95% 2.3x E487m -
Other Various Various Various n/a n/a n/a £1,332m -
Total Private Equity AUM £3,598m 6
1 All funds are beyond their investment period.
2 Gross money multiple is the cash returned to the fund plus remaining value as at 30 September 2015, as a multiple of cash invested.
outlook
The team made good progress in sourcing and completing new investment opportunities in the first half but will remain
disciplined and selective in their approach. On the divestment side, it is likely that more realisations will come from our
stronger investments, given the significant progress we have made to date in reshaping and streamlining the portfolio.
INFRASTRUCTURE
Infrastructure continued to make good progress and contributed a gross investment return of £23 million, or 4% on the
opening portfolio (September 2014: £22 million, 5%). The performance of the underlying assets underpinned a good level of
cash income to 3i, from both dividends and fee income from 3iN and other infrastructure funds managed by the team.
Investment adviser
In its capacity as investment adviser to 3iN, the team advised on three new investments totalling £187 million in the
mid-market economic infrastructure and low-risk energy sectors. There is a good pipeline of investment opportunities but,
given the competition in the sector, the team remains focused on sourcing assets that can generate returns for 3iN in line
with its return targets.
3iN's underlying European portfolio continues to perform well and it has an attractive collection of economic
infrastructure assets. In particular, the portfolio valuation has benefited from an improved regulatory environment and
performance in Elenia, an electricity distribution and heating company based in Finland.
Under the terms of the advisory agreements, we received an advisory fee of £8 million (September 2014: £7 million).
3iN performance
In addition to its role as investment adviser, 3i holds a 34% (31 March 2015: 34%) stake in 3iN. 3iN continued to perform
well in the period and the share price increased by a respectable 4% to 167 pence at 30 September 2015 (31 March 2015: 160
pence). The underlying uplift in 3iN's performance was driven by value growth across its core economic infrastructure
portfolio, supported by the continued returns compression and the competitive market environment for large economic
infrastructure.
3i's investment in 3iN contributed £19 million of value growth (September 2014: £17 million) and £11 million of dividend
income (September 2014: £10 million). In July 2015, 3iN also paid a £150 million special dividend to shareholders,
generated from 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 remains subject to
economic pressures, with the power and road assets particularly affected. This, together with the ongoing depreciation in
the value of the rupee resulted in a £9 million reduction in the value of 3i's share of the Indian portfolio to £54 million
(31 March 2015: £64 million).
Table 4: Assets under management at 30 September 2015
Remaining Gross Fee income
3i % money received
commitment invested multiple1 in the
Original Original 3i September September September period
Close date fund size commitment 2015 2015 2015 AUM £m
3iN Mar 07 n/a n/a n/a n/a n/a £1,192m2 8
India fund Mar 08 US$1,195m US$250m US$36m 73% 0.5x US$584m3 2
BIIF May 08 £680m n/a n/a 90% n/a £592m 2
BEIF II July 06 £280m n/a n/a 97% 1.1x £98m 1
Other Various Various Various n/a n/a n/a £143m 1
Total Infrastructure AUM £2,377m 14
1 Gross money multiple is the cash returned to the fund plus remaining value as at 30 September 2015, 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.
outlook
The team remains busy as it focuses on new investment opportunities in mid-market infrastructure, greenfield PPP and
low-risk energy projects. We have made a number of senior hires, including a new origination partner, to support the
strategic development and momentum of the business.
DEBT MANAGEMENT
We had another good period of fund-raising, closing two new CLOs and launching a new US$150 million Global Income Fund. AUM
increased to £7.5 billion at 30 September 2015 (31 March 2015: £7.2 billion) as the £773 million of new AUM raised and
favourable foreign exchange movements more than offset the run-off of older funds.
Fundraising activity
Debt Management has made good progress in generating AUM in the first half as the cash yield generated by CLO funds
remained attractive. The team closed one CLO in Europe, Harvest XII, and one in the US, Jamestown VII, raising a total of
£625 million new CLO AUM in the first half. In addition, we continue to operate CLO warehouse vehicles in both Europe and
the US ahead of establishing new CLOs. There was significant volatility in August and September 2015 and, overall, the CLO
market activity is below the peak seen in 2014 in the US in particular and transactions are taking longer to close in
Europe.
In addition to our CLO offerings and 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 30 September 2015, had
US$171 million under management. The US Senior Loan Fund also continued to perform strongly, outperforming its benchmarks,
and AUM increased to US$199 million (31 March 2015: US$157 million).
Table 6 details Debt Management AUM.
Proprietary Capital investment
For regulatory reasons, 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 European risk retention rules, and future US rules, is important as managers who can provide most or all of
the equity to a new CLO, and demonstrate the ability to comply with the regulatory rules, are increasingly at a competitive
advantage.
As long-term holders of CLO equity positions, our returns are driven by the cash flows to maturity. CLO equity
distributions contributed £14 million (September 2014: £6 million) to operating cash profit and the IRRs are attractive.
However, in the interim, our valuations were subject to the market volatility and we recognised a mark to market loss of
£18 million (September 2014: £10 million) in the first half. This was due, in part, to the distributions but also a number
of other factors, such as concerns about interest rate rises and the oil and gas sector.
In addition to the investments 3i makes in the CLOs for regulatory reasons, 3i is also the first loss investor in the
warehouse facilities used to accumulate loans prior to the launch of a CLO. At 30 September 2015 the total invested by 3i
in these facilities was £51 million.
Table 5: Cash investment in the six months to 30 September 2015
Total 3i
investment
Investment Type Date £m
Harvest XII New European CLO Aug 15 15
Jamestown VII New US CLO Aug 15 15
Global Income Fund Open ended senior debt fund Jun 15 48
European warehouses1 Warehouse Various 6
Other n/a Various 2
Total Debt Management investment 86
1 Net of cash received back from warehouses on the successful close of a CLO.
Including the US$75 million seed capital contributed to the Global Income Fund, we had £249 million (31 March 2015: £176
million) of proprietary capital invested in the Debt Management business at 30 September 2015.
outlook
In general, current market volatility is impacting investor appetite for new CLOs. However, our strong relationships mean
we expect to close at least one US CLO and one European CLO before the end of the financial year.
Table 6: Assets under management at 30 September 2015
Realised Annualised
Par value equity equity Fee income
Closing Reinvestment Maturity of fund money cash received in
date period end date at launch multiple1 Yield2,3,4 AUM5 the period
European CLO funds
Harvest CLO XII Aug 15 Aug 19 Aug 29 E413m n/a n/a E401m
Harvest CLO XI Mar 15 Mar 19 Mar 29 E415m 0.0x 9.2% E400m
Harvest CLO X Nov 14 Nov 18 Nov 28 E467m 0.1x 17.2% E451m
Harvest CLO IX Jul 14 Aug 18 Aug 26 E525m 0.2x 19.8% E508m
Harvest CLO VIII Mar 14 Apr 18 Apr 26 E425m 0.2x 16.5% E413m
Harvest CLO VII Sep 13 Oct 17 Oct 25 E310m 0.2x 10.2% E301m
Windmill CLO I Oct 07 Dec 14 Dec 29 E500m 0.7x 9.3% E433m
Axius CLO Oct 07 Nov 13 Nov 23 E350m 0.7x 8.7% E202m
Coniston CLO Aug 07 Jun 13 Jul 24 E409m 1.0x 12.7% E197m
Harvest CLO V Apr 07 May 14 May 24 E632m 0.7x 8.8% E477m
Garda CLO Feb 07 Apr 13 Apr 22 E358m 1.4x 16.8% E134m
Pre 2007 CLOs n/a n/a n/a E3,111m n/a n/a E640m
£3,359m £9m
US CLO funds
Jamestown CLO VII Aug 15 Jul 19 Jul 27 US$511m n/a n/a US$500m
Jamestown CLO VI Feb 15 Feb 19 Feb 27 US$750m 0.1x 13.6% US$749m
Jamestown CLO V Dec 14 Jan 19 Jan 27 US$411m 0.1x 19.6% US$392m
Jamestown CLO IV Jun 14 Jul 18 Jul 26 US$618m 0.3x 20.4% US$589m
COA Summit CLO Mar 14 Apr 15 Apr 23 US$416m 0.4x 27.0% US$362m
Jamestown CLO III Dec 13 Jan 18 Jan 26 US$516m 0.3x 16.8% US$495m
Jamestown CLO II Feb 13 Jan 17 Jan 25 US$510m 0.5x 19.6% US$497m
Jamestown CLO I Nov 12 Nov 16 Nov 24 US$461m 0.5x 19.0% US$444m
Fraser Sullivan CLO VII Apr 12 Apr 15 Apr 23 US$459m 0.7x 20.3% US$442m
COA Caerus CLO Dec 07 Jan 15 Dec 19 US$240m 1.8x 23.8% US$182m
Pre 2007 CLOs n/a n/a n/a US$500m n/a n/a US$136m
£3,158m £6m
Other funds
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