REG - 3i Group PLC - Half Yearly Report <Origin Href="QuoteRef">III.L</Origin> - Part 3
12/11/2015 07:02
- Part 3: For the preceding part double click ID:nRSL4327Fb
Global Income Fund Jul 15 n/a n/a n/a n/a n/a US$171m
EMMF Nov 14 Nov 17 Nov 22 n/a n/a n/a E259m
Vintage II Nov 11 Sep 13 n/a US$400m 0.4x 1.6x US$192m
Palace Street I Aug 11 n/a n/a n/a n/a n/a E15m
Senior Loan Fund Jul 09 n/a n/a n/a n/a 7.3% US$199m
COA Fund6 Nov 07 n/a n/a n/a n/a (0.1)% US$46m
Vintage I Mar 07 Mar 09 Jan 22 E500m 4.2x 6.7x E282m
European warehouse vehicles n/a n/a n/a n/a n/a n/a E223m
£977m £2m
Total Debt Management AUM £7,494m £17m
1 Multiple of total equity distributions over par value of equity at launch.
2 Average annualised returns since inception of CLOs calculated as annualised cash distributions over par value of equity. Excludes unrealised equity remaining in CLO.
3 Vintage I & II returns are shown as gross money multiple which is cash returned to the Fund plus residual value as at 30 September 2015, as a multiple of cash invested.
4 The annualised returns for the COA Fund and Senior Loan Fund are the annualised net returns of the Funds since inception.
5 Includes par value of assets and principal cash amount.
6 The COA Fund AUM excludes the market value of investments the fund has made in 3i US Debt Management CLO funds (US$39 million as at 30 September 2015).
Financial review
Against a volatile market backdrop, the Group delivered a solid result in the first half.
Table 7: Summary financial data under the Investment basis
Six months to/as Six months to/as 12 months to/as
at 30 September at 30 September at 31 March
Investment basis 2015 2014 2015
Total return £168m £234m £659m
Total return on opening shareholders' funds 4.4% 7.1% 19.9%
Dividend per ordinary share 6.0p 6.0p 20.0p
Operating expenses £63m £63m £131m
As a percentage of assets under management1 0.9% 1.0% 1.0%
Operating cash profit £17m £16m £28m
Proprietary Capital
Realisation proceeds £359m £324m £841m
Uplift over opening book value2 £29m/9% £36m/15% £145m/27%
Money multiple 1.7x 1.8x 2.0x
Gross investment return £272m £297m £805m
As a percentage of opening 3i portfolio value 7.0% 8.3% 22.6%
Operating profit 3 £204m £262m £721m
Cash investment £294m £199m £474m
3i Portfolio value £4,037m £3,672m £3,877m
Gross debt £819m £831m £815m
Net (debt)/cash £(12)m £(161)m £49m
Gearing 0.3% 5% nil
Liquidity £1,157m £1,020m £1,214m
Net asset value £3,851m £3,426m £3,806m
Diluted net asset value per ordinary share 401p 358p 396p
Fund Management
Total assets under management £13,469m £12,923m £13,474m
Third-party capital £10,143m £9,566m £10,140m
Proportion of third-party capital 75% 74% 75%
Total fee income £58m £63m £125m
Third-party fee income £37m £41m £80m
Operating profit3 £10m £13m £26m
Underlying Fund Management profit3,4 £13m £16m £33m
Underlying Fund Management margin 22% 26% 26%
1 Annualised actual operating expenses, excluding restructuring costs of nil (September 2014: nil, March 2015: £1 million), as a percentage of weighted average assets under management.
2 Uplift over opening book value excludes refinancings. The September 2014 balance has been restated from £35 million to £36 million to exclude refinancings.
3 Operating profit for the Proprietary Capital and Fund Management activities excludes carried interest and performance fees payable/ receivable, which is not allocated between these activities.
4 Excludes Fund Management restructuring costs of nil (September 2014: nil, March 2015: £1 million) and amortisation costs of £3 million (September 2014: £3 million, March 2015: £6 million).
Basis
3i prepares its 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 eliminated the risk of having to consolidate
portfolio investments. However, as described in our Annual report and accounts 2015, 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 statements.
Total return
3i generated a total return of £168 million, or a profit on opening shareholders' funds of 4.4% (September 2014: £234
million or 7.1%) in the first half, despite challenging market conditions, demonstrating the financial and commercial
resilience of the business after the completion of its three-year transformation programme. The Proprietary Capital
business delivered a gross investment return of £272 million (September 2014: £297 million) and an operating profit before
carry of £204 million (September 2014: £262 million) due to a robust performance in the underlying portfolio companies.
Underlying Fund Management operating profit before carry was £13 million (September 2014: £16 million).
Table 8: Total return for the six months to 30 September 2015
Six months to Six months to 12 months to
30 September 30 September 31 March
2015 2014 2015
Investment basis £m £m £m
Realised profits over value on disposal of investments 29 35 162
Unrealised profits on revaluation of investments 167 307 684
Portfolio income
Dividends 36 21 45
Income from loans and receivables 28 30 62
Fees receivable 5 2 6
Foreign exchange on investments 7 (98) (154)
Gross investment return 272 297 805
Fees receivable from external funds 37 41 80
Operating expenses (63) (63) (131)
Interest receivable 2 1 3
Interest payable (24) (26) (49)
Movement in the fair value of derivatives - (1) (1)
Exchange movements (10) 25 40
Other income - 1 -
Operating profit before carry 214 275 747
Carried interest
Carried interest and performance fees receivable from external funds (3) 19 80
Carried interest and performance fees payable (39) (45) (142)
Acquisition related earn-out charges (4) (5) (8)
Operating profit 168 244 677
Income taxes 1 (3) (4)
Re-measurements of defined benefit plans (1) (7) (14)
Total comprehensive income ("Total return") 168 234 659
Total return on opening shareholders' funds 4.4% 7.1% 19.9%
Proprietary capital returns
The Proprietary Capital business delivered an operating profit before carry of £204 million (September 2014: £262 million)
principally due to strong weighted average earnings growth, including portfolio acquisitions, of 19% (31 March 2015: 19%)
in the Private Equity portfolio and positive contributions from the Infrastructure and Debt Management businesses.
By business line, the gross investment return on the opening portfolio was 8% from Private Equity (September 2014: 10%), 4%
from Infrastructure (September 2014: 5%) and 2% from Debt Management (September 2014: loss of 5%). Private Equity accounted
for 81% of the proprietary capital portfolio at 30 September 2015 (31 March 2015: 81%) and remains the primary driver of
Proprietary Capital returns.
Realised profits
Continued exit momentum in the first half resulted in 3i realising profits on disposal of £29 million (September 2014: £35
million) and proceeds totalling £359 million (September 2014: £324 million). Realisations were achieved at an uplift over
opening value of 9%, which was lower than prior periods due to a number of assets being valued on an imminent sales basis
at the beginning of the year.
As in previous periods, the majority of the realisations were from the Private Equity portfolio, which contributed proceeds
of £307 million (September 2014: £316 million), including £71 million from the sale of quoted assets (September 2014: £68
million). The Private Equity realisations completed in the period generated an average money multiple of 1.6x over their
investment life. Further detail is provided in Table 2 of the Private Equity section.
3iN returned £51 million via a special dividend during the period, following the completion of its sale of Eversholt Rail,
and this was treated as realised proceeds. This generated a realised profit of £3 million due to the increase in the 3iN
share price up until the date the dividend was paid.
Unrealised value movements
The unrealised value movement of £167 million (September 2014: £307 million) was due predominantly to strong earnings
growth in a number of our key Private Equity assets.
Table 9:Unrealised profits/(losses) on revaluation of investments for the six months to 30 September
2015 2014
£m £m
Private Equity
Earnings based valuations
Performance 171 209
Multiple movements (24) 13
Other bases
Uplift to imminent sale - 34
Discounted Cash Flow 28 33
Other movements on unquoted investments 1 7
Quoted portfolio (2) 12
Infrastructure
Quoted portfolio 15 15
Discounted Cash Flow (4) (6)
Debt Management1 (18) (10)
Total 167 307
1 Debt Management includes value movements on the subordinated debt stakes in CLOs and our fund vehicles.
Private Equity unrealised value growth
Performance
The performance category measures the impact of earnings and net debt movements for the portfolio companies valued on an
earnings basis. In general, when valuing a portfolio investment on an earnings basis, the earnings used in the September
valuations are the last 12 months' management accounts data to June, unless the current year forecast indicates a lower
maintainable earnings level. Where appropriate, adjustments are made to earnings on a pro forma basis for acquisitions,
disposals and non-recurring items. In the case of Action, which is continuing to experience significant growth due to its
store roll-out programme, a run-rate adjustment is made to its earnings for valuation purposes to reflect the profitability
of recently opened stores.
Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £171
million (September 2014: £209 million). Value weighted last 12 months earnings, including portfolio acquisitions, increased
by 19% (31 March 2015: 19%), demonstrating that the portfolio's largest assets are delivering strong improvements in
performance. Excluding Action, value weighted last 12 months earnings grew by 14% (31 March 2015: 16%).
The number of investments valued using forecast earnings increased to five at 30 September 2015 from two at 31 March 2015,
representing 10% of the portfolio by value (31 March 2015: 3%).
Table 10: Portfolio earnings growth weighted by September 2015 carrying values1
3i carrying value 3i carrying value
at 30 September 2015 at 31 March 2015
Last 12 months' (LTM) earnings growth £m £m
<(20)% 9 32
(20) - (11)% 46 -
(10) - (1)% 87 131
0 - 9% 755 753
10 - 19% 292 88
20 - 30% 995 387
>30% 194 868
1 Includes all companies valued on an earnings basis where comparable earnings data is available. This represents 73% of the Private Equity portfolio by value (31 March 2015: 72%).
Net debt in the portfolio decreased to 2.8x EBITDA (31 March 2015: 3.1x).
Table 11: Ratio of debt to EBITDA weighted by September 2015 carrying values1
3i carrying value 3i carrying value
at 30 September 2015 at 31 March 2015
Ratio of net debt to EBITDA £m £m
<1x 411 490
1 - 2x 193 483
2 - 3x 564 86
3 - 4x 1,136 428
4 - 5x 765 1,450
5 - 6x - 62
>6x - 6
1 This represents 94% of the Private Equity portfolio by value (31 March 2015: 95%).
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 11.4x at 30 September 2015 before marketability discount, and from 10.5x to 10.7x after
marketability discount. The multiple used to value Action, the largest asset by value, remained unchanged at 13.5x post
discount. Excluding Action, the weighted average EBITDA multiple remained flat at 10.1x before marketability discount (31
March 2015: 10.1x) and was 9.4x after marketability discount (31 March 2015: 9.3x).
We increased the multiple used to value Basic-Fit from 9.5x at 31 March 2015 to 10.5x post discount to recognise the growth
potential of this asset as it both upgrades its existing gyms and opens new ones.
Stock market multiples declined sharply in our second quarter but, as noted in the Annual report and accounts 2015, we
consider other factors such as exit plans, relative performance and investment size when setting the multiples we use. As a
result, we adjusted multiples down, when compared to the market, throughout 2014 as equity markets increased. In the first
half we continued to adjust multiples in 19 out of the 30 companies (31 March 2015: 22 out of 33) valued on an earnings
basis. However the valuation multiples declined for 10 companies and the net effect was a decrease in value of £24 million
in the period (September 2014: £13 million increase).
Imminent sale
Portfolio companies which are well advanced in a negotiated sales process are valued on an imminent sale basis. No
companies were valued on this basis at 30 September 2015.
Discounted Cash Flow
The Discounted Cash Flow (DCF) valuation basis is used to value portfolio companies with predictable and stable cash flows.
As at 30 September 2015, the largest portfolio company valued on this basis was Scandlines, valued at £257 million. Its
value increased by £30 million largely due to strong trading and the expectation of further delays in the opening of the
proposed competing fixed link.
Quoted portfolio
The Private Equity quoted portfolio, including the UFO Moviez IPO that completed in the period, generated an unrealised
value loss of £2 million (September 2014: £12 million gain) which is detailed in Table 12.
Table 12: Quoted portfolio movement for the six months to 30 September 2015
Opening Closing Total gross
value Disposals Unrealised value at investment
at 1 April at opening value Other 30 September return during
20151 book value movement movements 2015 the period
Investment IPO date £m £m £m £m2 £m £m
Quintiles May 13 144 (50) 3 (4) 93 1
Dphone Jul 14 35 - (11) (2) 22 (13)
Eltel Feb 15 47 - 4 - 51 4
Refresco Mar 15 47 (1) (1) 2 47 -
UFO Moviez May 15 27 (15) 3 - 15 4
300 (66) (2) (4) 228 (4)
1 For UFO which IPO'd during the period, this is the value pre-IPO.
2 Other movements includes foreign exchange.
Infrastructure unrealised value movement
The direct Infrastructure portfolio primarily consists of our 34% holding in 3iN. The 4% increase in 3iN's share price to
167 pence (31 March 2015: 160 pence) led to a value uplift of £19 million in the period (September 2014: £17 million). This
positive performance was partially offset by a further decline in value of the India Infrastructure Fund which recorded an
unrealised value reduction of £9 million (September 2014: £8 million reduction). The fund's investments continued to face a
number of challenges together with the ongoing depreciation of the rupee.
Debt Management unrealised value movement
The Debt Management unrealised value reduction of £18 million in the first half (September 2014: £10 million) relates
principally to the mark to market valuation of the CLO equity portfolio, and there are a number of factors that contribute
to this movement. We received £14 million of cash distributions (September 2014: £6 million), included in portfolio income,
that result in a corresponding value reduction. Broker quotes, which are used to support CLO valuations, also reflected
general market concerns about liquidity and investor risk appetite. In the US in particular, potential interest rate rises
and oil and gas sector concerns impacted this sentiment. The underlying cash flows of the CLOs remain sound, and our longer
term view of returns remains positive.
Portfolio income
The portfolio generated income of £69 million in the period (September 2014: £53 million). The increase compared to the
prior period was driven by dividends, with notable receipts including £14 million from Debt Management CLO distributions,
£8 million from Scandlines and the £11 million ordinary distribution from 3iN. Income from loans and receivables was
broadly stable at £28 million (September 2014: £30 million) and predominantly related to Private Equity assets.
A further £5 million in net fees from the new investments in Weener Plastic and Euro-Diesel, as well as portfolio
monitoring fees, were also recognised in the period (September 2014: £2 million).
Net foreign exchange movements
The Group recorded a total net foreign exchange loss of £3 million (September 2014: £73 million) during the period with the
strengthening of sterling against the US dollar (2.4%) being partially offset by the weakening of sterling against the euro
(1.6%). The net foreign exchange loss also reflects the translation of non-portfolio net assets, including non-sterling
cash held at the balance sheet date.
Based on the portfolio as at 30 September 2015, a 1% movement in the euro and US dollar would give rise to a £20 million
and £7 million movement in total return respectively.
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 include 100% of costs in relation to the CEO and Group Finance
Director and elements of finance, IT, property and compliance. Proprietary Capital operating expenses continued to be well
managed and were £15 million (September 2014: £13 million).
Synthetic fees, which are calculated on cost rather than value of assets, were marginally lower at £21 million (September
2014: £22 million) and reflect the lower level of proprietary capital being managed as a result of net divestment during
the period.
Net interest payable
Gross interest payable declined to £24 million (September 2014: £26 million) due to the reduced costs associated with the
2016 revolving credit facility which was refinanced in September 2014. This facility was extended by one year to September
2020 at no extra cost, following an agreement with the participating banks in September 2015. The current gross debt
position is detailed further in this Financial review and in Note 9 of the accounts.
Interest receivable increased marginally to £2 million (September 2014: £1 million) and reflected the higher cash balances
held throughout the period.
FUND MANAGEMENT RETURNS
Table 13:Fund Management operating profit for the six months to 30 September
2015 2014
£m £m
Fees receivable from external funds 37 41
Synthetic fee from Proprietary Capital 21 22
Operating expenses (48) (50)
Operating profit before carry 10 13
Amortisation costs 3 3
Underlying Fund Management profit 13 16
The Group's Fund Management income is driven by total AUM. At 30 September 2015, AUM was stable at £13.5 billion (31 March
2015: £13.5 billion) as the launch of two CLOs and the Global Income Fund within Debt Management were offset by a fall in
AUM from the net divestment activity in Private Equity.
The Fund Management business generated an operating profit before carry of £10 million for the period (September 2014: £13
million). The reduction in profitability was driven principally by lower third-party fee income, which declined by 10% to
£37 million (September 2014: £41 million) as a result of the ongoing divestment of older Private Equity assets that were
partially funded with external capital. This was partially offset by continued cost discipline but the operating profit
margin decreased to 17% (September 2014: 21%). On an underlying basis, excluding amortisation costs, operating profit was
£13 million (September 2014: £16 million) at a margin of 22% (September 2014: 26%).
Total return
Table 14: Summarised total return for the 6 months to 30 September
2015 2014
£m £m
Proprietary Capital operating profit before carry 204 262
Fund Management operating profit before carry 10 13
Operating profit before carry 214 275
Carried interest and performance fees receivable from external funds (3) 19
Carried interest and performance fees payable (39) (45)
Acquisition related earn-out charges (4) (5)
Operating profit 168 244
Tax 1 (3)
Re-measurements of defined benefit plans (1) (7)
Total comprehensive income ("Total return") 168 234
Total return on opening shareholders' funds 4.4% 7.1%
Net carried interest and performance fees payable
We pay carried interest to our investment teams on proprietary capital invested and receive carried interest from
third-party funds.
In Private Equity, we typically accrue carried interest 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 30 September 2015 valuation. We accrued carried
interest payable of £36 million (September 2014: £36 million) in the period.
We also accrued £3 million of carried interest payable to the Debt Management team (September 2014: £2 million) and nil to
the Infrastructure team (September 2014: £7 million) as 3iN did not go through its performance hurdle in the first half. In
total, we accrued for £39 million of carry payable in September 2015 (September 2014: £45 million).
The £(3) million carried interest receivable includes an £8 million one-off adjustment to the balance due from the Growth
Capital Fund, which offsets the £5 million from Debt Management (September 2014: £4 million). Notwithstanding the recovery
in fund performance, we are yet to accrue carried interest receivable from EFV, our largest third-party Private Equity
fund.
Pension
There was a re-measurement loss on the Group's pension scheme of £1 million (30 September 2014: £7 million loss) during the
period. The liability of the Group's UK defined benefit pension scheme declined in the period following an increase in the
discount rate. However, this was offset by a fall in asset valuations, which were impacted by volatile financial markets.
We have launched a programme to offer our members flexibility in how they take their pension benefits following the
Government's "Freedom and choice in pensions" changes announced in April 2014. This includes the provision of independent
financial advice and a range of options for deferred and pensioner members.
Operating cash profit
Table 15:Operating cash profit for the six months to 30 September
2015 2014
£m £m
Third-party capital fees 37 37
Cash portfolio fees 4 4
Cash portfolio dividends and interest 39 38
Cash income 80 79
Operating expenses1 (63) (63)
Operating cash profit 17 16
1 Operating expenses are calculated on an accruals basis rather than cash.
3i made an operating cash profit of £17 million in the period (September 2014: £16 million). Cash income increased modestly
to £80 million (September 2014: £79 million) principally due to increased dividends. Our Debt Management business generated
good fund fee cash income of £18 million (September 2014: £17 million) which almost offset the reduced Private Equity fund
management income. Cash fee income from our managed Private Equity funds and third parties decreased to £5 million
(September 2014: £9 million).
Operating expenses incurred during the period were stable at £63 million (September 2014: £63 million), and decreased to
0.9% (September 2014: 1.0%) of AUM. We have recruited to support our investment teams, as detailed in the Chief Executive's
statement, but remain focused on costs being 1% of AUM as an appropriate benchmark.
INVESTMENT CASH FLOWS
Investment and realisations
Table 16:Investment activity - Proprietary Capital and Third-party Capital for the six months to 30 September
Proprietary Capital Proprietary and Third-party Capital1
September 2015 September 2014 September 2015 September 2014
£m £m £m £m
Realisations 359 324 583 463
Cash investment (294) (199) (333) (180)
Net cash divestment 65 125 250 283
Non-cash investment (44) (55) (57) (69)
Net divestment 21 70 193 214
1 Third-party capital relates to Private Equity activity only.
Further detail on investment and realisations is included in the relevant business line sections.
BALANCE SHEET
Table 17: Simplified balance sheetand gearing
30 September 2015 31 March 2015
£m £m
Investment portfolio value 4,037 3,877
Gross debt (819) (815)
Cash and deposits 807 864
Net (debt)/cash (12) 49
Other net liabilities (174) (120)
Net assets 3,851 3,806
Gearing1 0.3% nil
1 Gearing is net debt as a percentage of net assets.
The Proprietary Capital portfolio increased to £4,037 million at 30 September 2015 (31 March 2015: £3,877 million) as cash
investment of £294 million and unrealised value growth of £167 million offset the realisations in the period.
The mix of the portfolio was broadly stable. Private Equity remained at 81% of the total portfolio (31 March 2015: 81%)
while an increase in the Debt Management portfolio to 6% (31 March 2015: 5%) was offset by a fall in the Infrastructure
portfolio to 13% (31 March 2015: 14%).The final FY2015 dividend payment, partially offset by operating cash inflows and net
divestment, led to cash and deposits on the balance sheet decreasing to £807 million (31 March 2015: £864 million). We
recognised a small increase in the sterling equivalent of the 2017 euro denominated bond and, as a result, the Group was in
a net debt position of £12 million at 30 September 2015 (31 March 2015: £49 million net cash) and had gearing of 0.3% (31
March 2015: nil).
Liquidity
Liquidity remained strong at £1,157 million (31 March 2015: £1,214 million) and comprised cash and deposits of £807 million
(31 March 2015: £864 million) and undrawn facilities of £350 million (31 March 2015: £350 million).
Foreign exchange
At 30 September 2015, 30% of the Group's net assets were denominated in sterling, 43% in euro, 25% in US dollar and 2% in
other currencies. Although we do not implement structured hedging of the NAV, we may implement specific short-term hedging
on entry or exit cash flows of an investment if appropriate.
Diluted NAV
The diluted NAV per share at 30 September 2015 was 401 pence (31 March 2015: 396 pence). The increase was driven by the
total return in the period of £168 million (September 2014: £234 million), partially offset by the payment of the final
FY2015 dividend of £133 million, or 14.0 pence per share (September 2014: £126 million, 13.3 pence per share).
Dividend
The Board has announced an interim dividend of 6.0p (September 2014: 6.0p). This comprises of a 2.7p base dividend and a
3.3p additional dividend and reflects our robust balance sheet and confidence in our longer term prospects. The interim
dividend is expected to be paid on 6 January 2016 to those shareholders on the register at 11 December 2015.
Principal risks and uncertainties
The main elements of 3i's approach to risk management, its risk management process and governance structure are set out in
the Risk section of the 3i Group Annual report and accounts 2015 which can be accessed via the link on the Investor
Relations home page of the Group's website at www.3i.com.
In delivering the Group's strategy we face a number of risks. These are monitored continuously and managed by:
§ adhering to our clearly defined and established business model;
§ following an integrated risk management approach; and
§ maintaining our clearly defined risk appetites and key risk indicators.
During the six months to 30 September 2015, there was no significant change to our business model, risk management approach
or risk appetite.
The principal risks and uncertainties for the remaining six months of the financial year are unchanged and summarised
below. This is not a comprehensive list of all potential risks and uncertainties faced by the Group, but rather a summary
of the risks which it currently believes may have a significant impact on its performance and future prospects.
External - Risks arising from external factors including political, legal, regulatory, economic and competitor changes
which affect the Group's operations. There has been a significant amount of uncertainty in the Eurozone and the wider
emerging markets' economies in 2015 and the Group continues to monitor these events closely. On 5 October 2015, the OECD
published the final reports arising from its work on the Base Erosion and Profit Shifting ("BEPS") project. It is not clear
which countries will implement these proposals and the timing and extent of implementation by those that do. The OECD has
indicated that further detail on some of the proposals will be published during 2016. 3i will continue to monitor the
impact of these proposals on its business and operations.
Investment - Risks in respect of specific asset investment decisions, the subsequent performance of an investment or
exposure concentrations across business line portfolios.
Treasury and funding - Risks in relation to changes in market prices and rates, access to capital markets and third-party
funds, and the Group's capital structure.
Operational - Risks arising from inadequate or failed processes, people and systems or from external factors affecting
these. In the Group's ongoing assessment of operational risks in FY2016, which is informed by an analysis of its risk
factors, the Group has paid particular attention to the increasingly sophisticated threat of cyber crime. We continue to
review and improve our governance and controls to protect our information and infrastructure.
The Group Risk Committee meets quarterly. The risk review process includes the monitoring of dashboards which track the
Group's financial performance and progress against its strategic objectives at a Group level and for each of the Group's
business lines. This assists the Committee in its assessment of the key risks affecting the achievement of the Group's
objectives and the effectiveness of current risk mitigation plans.
The Committee also has a number of focus areas, which are agreed in advance of each meeting. Topics discussed in the period
included a review of cyber crime and a review of the changes to the UK Corporate Governance code.
This Half-yearly report provides an update on 3i's strategy and business performance, as well as market conditions, which
are relevant to the Group's overall risk profile and should be viewed in the context of the Group's risk management
framework and principal inherent risk factors as disclosed in the Annual report and accounts 2015.
Reconciliation of the Investment basis to IFRS
Background to investment basis NUMBERS USED IN THE INTERIM MANAGEMENT REPORT
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 Investment entity subsidiaries
that were previously consolidated line by line. This fair value approach, applied at the Investment entity subsidiary
level, effectively obscures the performance of our proprietary capital investments and associated transactions occurring in
the Investment entity subsidiaries. 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 Annual report and accounts 2014 to aid understanding of our results. The Interim management 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 the same 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 after Principal risks and uncertainties.
Reconciliation of Statement of comprehensive income
Six months to 30 September 2015 Six months to 30 September 2014
Investment IFRS IFRS Investment IFRS IFRS
basis adjustments basis basis adjustments basis
(unaudited) (unaudited)
(restated)1
Note £m £m £m £m £m £m
Realised profits over value 3 29 (17) 12 35 (29) 6
on the disposal of investments
Unrealised profits 3 167 (166) 1 307 (203) 104
on the revaluation of investments
Fair value movements 2 - 207 207 - 219 219
on Investment entity subsidiaries
Portfolio income
Dividends 2 36 (4) 32 21 (6) 15
Income from loans and receivables 2 28 (15) 13 30 (12) 18
Fees receivable 5 - 5 2 1 3
Foreign exchange on investments 5 7 (8) (1) (98) 67 (31)
Gross investment return 272 (3) 269 297 37 334
Fees receivable from external funds 4 37 - 37 41 1 42
Operating expenses 4 (63) - (63) (63) - (63)
Interest receivable 4 2 - 2 1 - 1
Interest payable (24) - (24) (26) - (26)
Movement in the fair value of derivatives - - - (1) - (1)
Exchange movements 5 (10) 6 (4) 25 (58) (33)
Income/(expense) from fair value subsidiaries - (31) (31) - 10 10
Other income - - - 1 - 1
Operating profit before carry 214 (28) 186 275 (10) 265
Carried interest and performance fees
Receivable from external funds 4 (3) (7) (10) 19 - 19
Payable 4 (39) 22 (17) (45) 23 (22)
Acquisition related earn-out charges (4) - (4) (5) - (5)
Operating profit 168 (13) 155 244 13 257
Income taxes 4 1 (1) - (3) - (3)
Profit for the period 169 (14) 155 241 13 254
Other comprehensive income
Exchange differences 5 - 14 14 - (13) (13)
on translation of foreign operations
Re-measurements of defined benefit plans (1) - (1) (7) - (7)
Total comprehensive income for the period ("Total return") 2 168 - 168 234 - 234
Notes:
1 See Note 12 of the IFRS financial statements.
2 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 periods. 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.
3 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.
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 On the Investment basis, the impact of the translation of foreign subsidiaries is included within the line items foreign exchange on investments and exchange movements rather than as a separate line item as required under IFRS. On an IFRS basis, the
revaluation of assets and liabilities held by Investment entity subsidiaries is reflected in the fair value movements on Investment entity subsidiaries rather than being reflected as exchange movements.
Reconciliation of Statement of financial position
As at 30 September 2015 As at 31 March 2015
Investment IFRS IFRS Investment IFRS IFRS
basis adjustments basis basis adjustments basis
(unaudited) (audited)
Note £m £m £m £m £m £m
Assets
Non-current assets
Investments
Quoted investments 1 682 (363) 319 763 (364) 399
Unquoted investments 1 3,355 (2,219) 1,136 3,114 (1,842) 1,272
Investments in Investment entities 1,3 - 2,417 2,417 - 2,079 2,079
Investment portfolio 4,037 (165) 3,872 3,877 (127) 3,750
Carried interest and performance 1 36 (8) 28 43 - 43
fees receivable
Intangible assets 16 - 16 19 - 19
Retirement benefit surplus 137 - 137 136 - 136
Property, plant and equipment 4 - 4 4 - 4
Deferred income taxes 1 3 - 3 3 - 3
Total non-current assets 4,233 (173) 4,060 4,082 (127) 3,955
Current assets
Carried interest and performance - - - 45 - 45
fees receivable
Other current assets 1 64 (5) 59 85 (31) 54
Deposits 140 - 140 - - -
Cash and cash equivalents 1,2 667 (5) 662 864 (3) 861
Total current assets 871 (10) 861 994 (34) 960
Total assets 5,104 (183) 4,921 5,076 (161) 4,915
Liabilities
Non-current
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