REG - 3i Group PLC - Results for the year to 31 March 2017 <Origin Href="QuoteRef">III.L</Origin> - Part 3
18/05/2017 07:06
- Part 3: For the preceding part double click ID:nRSR4818Fb
For further information see the Group KPIs in our Annual report. statement.
Cash investment Identifying new opportunities in which to invest proprietary capital is the primary driver of the Group's ability to deliver attractive returns. The cash paid to acquire investments in the year as shown on the Investment basis Consolidated cash flow statement. The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated cash flow statement.
For further information see the Group KPIs in our Annual report.
Operating cash profit By covering the cash cost of running the business with cash income, we reduce the potential dilution of capital returns. The cash income from the portfolio (interest, dividends and fees) together with fees received from external funds less cash The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated cash flow statement.
operating expenses as shown on the Investment basis Consolidated cash flow statement. The calculation is shown in Table 10 of
the Financial review.
Net cash/(net debt) A measure of the financial risk in the Group's balance sheet. Cash and cash equivalents plus deposits less loans and borrowings as shown on the Investment basis Consolidated statement of The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated statement of financial position.
financial position.
Gearing A measure of the financial risk in the Group's balance sheet. Net debt (as defined above) as a % of the Group's net assets under the Investment basis. It cannot be less than zero. The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated statement of financial position.
Risk management
Effective risk management underpins the successful delivery of our strategy. Integrity, rigour and accountability are
central to our values and culture at 3i and are embedded in our approach to risk management.
Understanding our risk appetite and culture
As both an investor and asset manager, 3i is in the business of taking risk in order to seek to achieve its targeted
returns for investors and shareholders. The Board approves the strategic objectives that determine the level and types of
risk that 3i is prepared to accept. The Board reviews 3i's strategic objectives and risk appetite at least annually.
3i's risk appetite policy, which is consistent with previous years, is built on rigorous and comprehensive investment
procedures and conservative capital management.
Risk appetite Our risk appetite is defined by our strategic objectives. We invest capital in investment opportunities that will deliver capital returns and portfolio and fund management cash income to cover our costs, and increase returns to our investors. Investment risk The substantial majority of the Group's capital is invested in Private Equity. Before the Group commits to an investment, we assess the opportunity using the following criteria: · return objective: individually assessed and subject
to a minimum target of 2x money multiple over three to five years;· geographic focus: core markets of northern Europe and North America;· sector expertise: focus on Business Services, Consumer and Industrials; and· vintage: invest up to £750 million per annum in four to seven new investments in companies with an enterprise value range of E100 million to E500 million at investment. Investments made by 3iN need to be consistent with 3iN's overall return target of 8% to 10% over the medium term
and generate a mix of capital and income returns. Other infrastructure investments made by the Group should be capable of delivering capital growth and fund management fees which together generate mid-teens returns. Capital management 3i adopts a conservative approach to managing its capital resources as follows: · There is no appetite for structural gearing at the Group level, but short-term tactical gearing will be used.· The Group does not hedge its currency exposure but it does match currency
realisations with investments where possible and takes out short-term hedges occasionally to hedge investments and realisations between signing and completion.· We have limited appetite for the dilution of capital returns as a result of operating and interest expenses. Both Private Equity and Infrastructure generate cash income to mitigate this risk. 3i Group's Pillar 3 document can be found at www.3i.com
Culture
Integrity, rigour and accountability are central to our values and culture and are embedded in our approach to risk
management. Our Investment Committee, which has oversight of the investment pipeline development and approves new
investments, significant portfolio changes and divestments, is integral to embedding our institutional approach across the
business. It ensures consistency and compliance with 3i's financial and strategic requirements, cultural values and
appropriate investment behaviours. Members of the Executive Committee have responsibility for their own business or
functional areas and the Group expects individual behaviours to meet the Group's high standards of conduct. All employees
share the responsibility for upholding 3i's strong control culture and supporting effective risk management. Senior
managers, typically those who report to Executive Committee members, are required to confirm their individual and business
area compliance annually. In addition, all staff are assessed on how they have demonstrated 3i's values as part of their
annual appraisal.
The following sections explain how we control and manage the risks in our business. They outline the key risks, our
assessment of their potential impact on our business in the context of the current environment and how we seek to mitigate
them.
Approach to risk governance
The Board is responsible for risk assessment, the risk management process and for the protection of the Group's reputation
and brand integrity. It considers the most significant risks facing the Group and uses quantitative analyses, such as the
vintage control which considers the portfolio concentration by revenue, geography and sector, and liquidity reporting,
where appropriate.
Non-executive oversight is also exercised through the Audit and Compliance Committee which focuses on upholding standards
of integrity, financial reporting, risk management, going concern and internal control.
The Board has delegated the responsibility for risk oversight to the Chief Executive. He is assisted by the Group Risk
Committee ("GRC") in managing this responsibility, and guided by the Board's appetite for risk and any specific limits set.
The GRC maintains the Group risk review, which summarises the Group's principal risks, associated mitigating actions and
key risk indicators, and identifies any changes to the Group's risk profile. The risk review is updated quarterly and the
Chief Executive provides quarterly updates to each Audit and Compliance Committee meeting where the Committee members
contribute views and raise questions. The last risk review was completed in May 2017.
The risk framework is augmented by a separate Risk Management Function which has specific responsibilities under the FCA's
Investment Funds Sourcebook. It meets ahead of the GRC meetings to consider the key risks impacting the Group, and any
changes in the relevant period where appropriate. It also considers the separate risk reports for each Alternative
Investment Fund ("AIF") managed by the Group, including areas such as portfolio composition, portfolio valuation,
operational updates and team changes, which are then considered by the GRC.
Assurance over the robustness and effectiveness of the Group's overarching risk management processes and compliance with
relevant policies is provided to the Audit and Compliance Committee through the independent assessment by Internal Audit
and the work of Group Compliance on regulatory risks.
Assurance over the robustness of the Group's valuation policy is provided by the Valuations Committee.
In addition to the above, a number of other committees contribute to the Group's overall risk governance structure.
Risk management framework
The Group's risk management framework is designed to support the delivery of the Group's strategic objectives.
The key principles that underpin risk management in the Group are:
· the Board and the Executive Committee promote a culture in which risks are identified, assessed and reported in an
open, transparent and objective manner;
· the Investment Committee ensures a centralised process-led approach to investment; and
· the over-riding priority is to protect the Group's long-term viability and reputation and produce sustainable,
medium to long-term cash-to-cash returns.
Managing the Group's Environmental, Social and Governance ("ESG") risks is central to how we do business and a key part of
our risk management framework. It also forms part of our half-yearly portfolio company reviews as described in the
Valuations Committee report in our Annual report.
In practice, the Group operates a "three lines of defence" framework for managing and identifying risk. The first line of
defence against outcomes outside our risk appetite is the business function and the respective Managing Partners across
Private Equity and Infrastructure, and Debt Management (until 3 March 2017).
Line management is supported by oversight and control functions such as finance, human resources and legal which constitute
the second line of defence. The compliance function is also in the second line of defence; its duties include reviewing the
effective operation of our processes in meeting regulatory requirements.
Internal audit provides independent assurance over the operation of controls and is the third line of defence. The internal
audit programme includes the review of risk management processes and recommendations to improve the internal control
environment.
Risk review process
The Group risk review process includes the monitoring of key strategic and financial metrics considered to be indicators of
potential changes in the Group's risk profile. The review includes, but is not limited to, the following reference data:
· Group and business line KPIs;
· portfolio analysis;
· risk reports for managed AIFs; and
· quarterly Group risk log.
In addition to the above, the GRC considers the impact of any changes and developments to its risk profile, strategic
delivery and reputation quarterly.
The GRC uses the above to identify its principal risks. It then evaluates the impact and likelihood of each risk, with
reference to associated measures and key performance indicators. The adequacy of the mitigation plans is then assessed and,
if necessary, additional actions are agreed and then reviewed at the subsequent meeting.
A number of focus topics are also agreed in advance of each meeting. In FY2017, the GRC covered the following:
· a preliminary analysis of the potential impact of the UK's decision to leave the EU on the Group;
· a refresh of the Group's risk review process and reporting;
· an update on ESG issues and themes, especially with respect to its portfolio companies;
· a review of the Group's stress tests to support its Internal Capital Adequacy Assessment Process ("ICAAP") and
Viability Statement;
· a review of the Group's IT framework including cyber security;
· the proposed risk disclosures in the 2017 Annual report and accounts; and
· an overview of the main risk management aspects of the Group's remuneration and performance management structures.
There were no significant changes to the Group's approach to risk governance or its operation in FY2017 but we have
continued to refine our framework for risk management where appropriate, including further steps to monitor our investment
in Action.
Further details on 3i's approach as a responsible investor are available at www.3i.com.
Principal risks and mitigations
Aligning risk to our strategic objectives
Review of principal risks
The disclosures on the following pages are not an exhaustive list of risks and uncertainties faced by the Group, but rather
a summary of those principal risks which are under active review by the GRC and Board, and are believed to have the
potential to affect materially the achievement of the Group's strategic objectives and impact its financial performance,
reputation and brand integrity.
Although the business environment over the last 12 months has been challenging, given the political and economic
uncertainty and volatile market conditions, there has been no significant change to our risk management approach or risk
appetite. The sale of our Debt Management business, which completed on 3 March 2017, will allow the Group to focus on
proprietary capital investment, its advisory relationship with 3iN, as well as new fund management initiatives in
Infrastructure. The sale of the Debt Management business has reduced the regulatory complexity of the Group as it is no
longer subject to the CRDIV regime.
The Group believes that its consistent strategy of focusing on core sectors and geographies, its institutional process-led
approach to investment and strong culture will help it to navigate what it expects will be another challenging year for
financial markets.
External
The external environment remains difficult. There has been a significant amount of uncertainty in the Eurozone and the
wider emerging markets economies, fuelled by a challenging global macro-economic context and ongoing geo-political
tensions. There has been a significant amount of uncertainty in the global economy over the last year and in particular
following the result of the US election and the UK's referendum on its membership of the EU. This has been shown by the
significant volatility seen in foreign exchange and quoted markets this year. Our well-funded balance sheet and diverse
portfolio of international companies position us well to address the wider implications of the EU referendum as they
unfold.
Notwithstanding this, large amounts of capital are focused on Private Equity and Infrastructure which requires us to be
diligent and selective in our investment approach.
The Group is subject to a range of regulatory and tax reporting requirements. In particular, as a multinational investment
company, the changes to the tax landscape require careful monitoring as countries begin to consider and adopt the
recommendations made by the OECD's Base Erosion and Profit Shifting ("BEPS") project. The UK has been among the first to
adopt a number of the BEPS recommendations, including the tax deductibility for corporate interest expense, the tax
treatment of hybrid instruments and country-by-country reporting. The Group continues to monitor these tax developments.
Whilst the increased reporting is expected to lead to an increase in the Group's interaction with the tax authorities in
the various jurisdictions in which it operates, it is not currently expected to lead to a significant change in the Group's
overall tax profile.
Managing these requirements is a priority and regular updates are provided to the Executive Committee and the Board. To
date, whilst complex to interpret and implement, they have had limited practical impact on 3i's ability to deliver its
strategy.
Investment
Investment risks are those in respect of specific asset investment decisions and the subsequent performance of an
investment or exposure concentrations across business line portfolios. They could materially impact our ability to achieve
our strategic objectives. To mitigate these risks, we focus on Private Equity and Infrastructure sectors and geographies
where our expertise and network can drive significant outperformance.
Our overarching objectives are to source attractive investment opportunities at the right price and execute their
investment plans successfully.
The investment case presented at the outset includes the expected benefit of operational improvements, growth initiatives
and M&A activity that will be driven by our investment professionals together with the portfolio company's management team.
It will also include a view on the likely exit strategy and timing.
The execution of this investment case is monitored through two key review processes. Our monthly portfolio monitoring
reviews current performance against budget and prior year and a set of traffic light indicators and KPIs. Our semi-annual
reviews focus on the longer term plan for the investment together with any strategic developments.
Finally, we recognise the need to plan and execute a successful exit at the optimum time for the portfolio company's
development, taking consideration of market conditions. This risk is closely linked to the economic environment noted
above. Exit plans are refreshed where appropriate in the semi-annual portfolio reviews and the divestment process is
clearly defined and overseen by the Investment Committee.
The Investment Committee is involved in and approves every step of the investment and realisation process.
In addition, there are a number of risks specific to each business line as follows:
Private Equity
Regular and robust portfolio monitoring procedures remain critical given the volatile economic backdrop and as the
investment portfolio becomes more concentrated. The Private Equity partners' detailed monthly portfolio monitoring meeting
is attended by the Group Chief Executive and the Group Finance Director. In addition, the Valuations Committee reviews the
valuation assumptions of our more material assets quarterly. Individual portfolio company failures could have adverse
reputational consequences for the Group, even though the value impact may not be material. We review our internal processes
and investment decisions in light of actual outcomes on an ongoing basis.
Infrastructure
Infrastructure remains focused on investing selectively within its target sectors and developing both organic and inorganic
growth opportunities. The Infrastructure business was very active in FY2016 and FY2017, where 3iN saw particularly strong
levels of investment, and a £385 million capital raise, in FY2017. In addition, the team has launched three initiatives in
Europe and North America to broaden its coverage of the infrastructure sector in areas of the market complementary to the
core investment focus of 3iN, which remains the primary investment vehicle for the business line. To mitigate risks
associated with managing this strong growth in 3iN and the wider infrastructure business, the team has invested in its
origination and asset management capability through new hires and internal promotions to Partner and Director level in
Europe and an Infrastructure team in the US, and has enhanced its finance, strategy and investor relations teams. Further
hires will be made in FY2018. We also hold monthly portfolio monitoring meetings and bi-annual investment reviews.
Operational
Following an external review of 3i's cyber security capabilities and controls, the Group implemented a number of new
protection and detection tools. This, together with a major upgrade to our IT infrastructure, has delivered a more robust
cyber security framework.
The Board also received regular updates on ESG risks and whether our investors' skill sets and business development
capabilities could support the Group's strategic delivery. Detailed resource plans are in place at the business line level
and the Board conducts an annual review of the Group's organisational capability and succession plans (which include
contingencies against loss of key staff). The last review was conducted in September 2016.
Viability statement The Directors have assessed 3i's viability over a three-year period to March 2020. 3i conducts its strategic planning over a five-year period; this statement is based on the first three years, which provides more certainty over the forecasting assumptions used. 3i's strategic plan, ICAAP and associated principal risks (as set out in the Review of principle risks) are the foundation of the Directors' assessment. The assessment is overseen by the Group Finance Director and is subject to
challenge by the GRC, review by the Audit and Compliance Committee and the Board. Our Group strategic plan projects the performance, net asset value and liquidity of 3i over a five-year period and is presented at the Directors' annual strategy away day and updated throughout the year as appropriate. At the strategy away day, the Directors consider the strategy and opportunities for, and threats to, each business line and the Group as a whole. The outcome of those discussions is included in the next
iteration of the strategic plan which is then used to support the viability assessment. The Group's ICAAP and viability testing considers multiple severe, yet plausible, scenarios including a severe downside economic scenario and the impact of a material single asset event. The severe downside used in FY2017 assumes that the global economy enters a severe recession; global equities fall and long-term interest rates reach new lows. The material single asset event considers the impact of a significant asset
experiencing a severe downturn in performance. We project the amount of capital we need in the business to cover our risks, including financial and operational risks, under such stress scenarios. Our analysis shows that, while there may be a significant impact on the Group's reported performance in the short term under these scenarios, the resilience and quality of our balance sheet is such that solvency is maintained and our business remains viable. Taking the inputs from the strategic planning process,
the ICAAP and its stress scenarios, Directors reviewed an assessment of the potential effects of 3i's principal risks on its current portfolio and forecast investment and realisation activity and the consequent impact on 3i's capital and liquidity. Based on this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet all their liabilities as they fall due up to at least March 2020.
By order of the Board
Simon Borrows
Chief Executive
17 May 2017
Consolidated statement of comprehensive income
for the year to 31 March
2017 20161
Notes £m £m
Realised (losses)/profits over value on the disposal of investments (25) 11
Unrealised profits on the revaluation of investments 262 114
Fair value movements on investment entity subsidiaries 1,041 591
Portfolio income
Dividends 38 36
Interest income from investment portfolio 10 22
Fees receivable 9 9
Foreign exchange on investments 64 29
Gross investment return 1,399 812
Fees receivable from external funds 46 41
Operating expenses (116) (105)
Interest received 2 4
Interest paid (49) (47)
Exchange movements 42 64
Income/(expense) from investment entity subsidiaries 18 (10)
Other income 10 -
Carried interest
Carried interest and performance fees receivable 280 73
Carried interest and performance fees payable (108) (38)
Operating profit before tax 1,524 794
Income taxes 2 3 (2)
Profit for the year from continuing operations 1,527 792
Profit for the year from discontinued operations, net of tax 8 98 25
Profit for the year 1,625 817
Other comprehensive (expense)/income that may be reclassified to the income statement
Exchange differences on translation of foreign operations (4) 11
Other comprehensive expense that will not be reclassified to the income statement
Re-measurements of defined benefit plans (22) (6)
Other comprehensive (expense)/income for the year from continuing operations (26) 5
Other comprehensive (expense)/income for the year from discontinued operations 8 (7) 2
Total comprehensive income for the year ("Total return") 1,592 824
Earnings per share from continuing operations
Basic (pence) 3 159.0 83.0
Diluted (pence) 3 158.3 82.6
Earnings per share
Basic (pence) 3 169.2 85.6
Diluted (pence) 3 168.4 85.2
Dividend per share
Interim dividend per share paid (pence) 4 8.0 6.0
Final dividend per share (pence) 4 18.5 16.0
1 Comparatives for the year ended 31 March 2016 have been re-presented to reflect the classification of the Group's Debt Management business, sold on 3 March 2017, as discontinued operations. See Note 8.
The Notes to the accounts form an integral part of these financial statements.
Consolidated statement of financial position
as at 31 March
2017 2016
Notes £m £m
Assets
Non-current assets
Investments
Quoted investments 390 297
Unquoted investments 1,316 1,243
Investments in investment entity subsidiaries 3,483 2,680
Investment portfolio 5,189 4,220
Carried interest and performance fees receivable 354 89
Other non-current assets 50 37
Intangible assets - 12
Retirement benefit surplus 121 132
Property, plant and equipment 5 5
Deferred income taxes 2 - 3
Total non-current assets 5,719 4,498
Current assets
Carried interest and performance fees receivable 9 28
Other current assets 12 31
Current income tax 2 -
Deposits 40 40
Cash and cash equivalents 931 957
Total current assets 994 1,056
Total assets 6,713 5,554
Liabilities
Non-current liabilities
Trade and other payables (24) (27)
Carried interest and performance fees payable (124) (85)
Loans and borrowings 6 (575) (575)
Retirement benefit deficit (22) (20)
Provisions (2) (1)
Total non-current liabilities (747) (708)
Current liabilities
Trade and other payables (103) (99)
Carried interest and performance fees payable (23) (20)
Acquisition related earn-out charges payable - (1)
Loans and borrowings 6 - (262)
Current income taxes - (2)
Provisions (4) (7)
Total current liabilities (130) (391)
Total liabilities (877) (1,099)
Net assets 5,836 4,455
Equity
Issued capital 719 719
Share premium 785 784
Capital redemption reserve 43 43
Share-based payment reserve 30 32
Translation reserve 218 229
Capital reserve 3,390 2,080
Revenue reserve 689 622
Own shares (38) (54)
Total equity 5,836 4,455
The Notes to the accounts form an integral part of these financial statements.
Simon Thompson
Chairman
17 May 2017
Consolidated statement of changes in equity
for the year to 31 March
Share-
Capital based
Share Share redemption payment Translation Capital Revenue Own Total
capital premium reserve reserve reserve reserve reserve shares equity
2017 £m £m £m £m £m £m £m £m £m
Total equity at the 719 784 43 32 229 2,080 622 (54) 4,455
start of the year
Profit for the year - - - - - 1,489 136 - 1,625
Exchange differences - - - - (4) - - - (4)
on translation of
foreign operations
Re-measurements of - - - - - (22) - - (22)
defined benefit plans
Other comprehensive income from discontinued operations - - - - (7) - - - (7)
Total comprehensive - - - - (11) 1,467 136 - 1,592
income for the year
Share-based payments - - - 18 - - - - 18
Release on exercise / forfeiture of share options - - - (20) - - 20 - -
Exercise of share awards - - - - - (16) - 16 -
Ordinary dividends - - - - - (39) (89) - (128)
Additional dividends - - - - - (102) - - (102)
Issue of ordinary shares - 1 - - - - - - 1
Total equity at the 719 785 43 30 218 3,390 689 (38) 5,836
end of the year
Share-
Capital based
Share Share redemption payment Translation Capital Revenue Own Total
capital premium reserve reserve reserve2 reserve reserve shares equity
20161 £m £m £m £m £m £m £m £m £m
Total equity at the 719 784 43 31 216 1,519 573 (79) 3,806
start of the year
Profit for the year - - - - - 705 112 - 817
Exchange differences - - - - 11 - - - 11
on translation of
foreign operations
Re-measurements of - - - - - (6) - - (6)
defined benefit plans
Other comprehensive income from discontinued operations - - - - 2 - - - 2
Total comprehensive - - - - 13 699 112 - 824
income for the year
Share-based payments - - - 15 - - - - 15
Release on exercise / forfeiture of share options - - - (14) - - 14 - -
Exercise of share awards - - - - - (25) - 25 -
Ordinary dividends - - - - - - (77) - (77)
Additional dividends - - - - - (113) - - (113)
Total equity at the 719 784 43 32 229 2,080 622 (54) 4,455
end of the year
1 2 Comparatives for the year ended 31 March 2016 have been re-presented to reflect the classification of the Group's Debt Management business sold on 3 March 2017, as discontinued operations. See Note 8.Translation reserve balance at 31 March 2016 included £7 million in relation to discontinued operations.
The Notes to the accounts form an integral part of these financial statements.
Consolidated cash flow statement
for the year to 31 March
2017 2016
Notes £m £m
Cash flow from operating activities
Purchase of investments (334) (87)
Proceeds from investments 310 236
Cash inflow from investment entity subsidiaries 246 206
Net cash flow from derivatives - (14)
Portfolio interest received 7 5
Portfolio dividends received 54 58
Portfolio fees received 9 7
Fees received from external funds 71 78
Carried interest and performance fees received 39 52
Carried interest and performance fees paid (27) (13)
Acquisition related earn-out charges paid (1) (30)
Operating expenses paid (131) (134)
Other cash income 2 -
Income taxes paid (2) -
Net cash flow from operating activities 243 364
Cash flow from financing activities
Issue of shares 1 -
Dividend paid 4 (230) (190)
Repayment of short-term borrowings (264) -
Repurchase of short-term borrowings (17) -
Interest received 2 4
Interest paid (51) (51)
Co-investment loans 2 -
Net cash flow from financing activities (557) (237)
Cash flow from investing activities
Proceeds from sale of Debt Management business 8 232 -
Cash held in disposed subsidiaries 8 (4) -
Purchases of property, plant and equipment (1) (1)
Net cash flow from deposits - (40)
Net cash flow from investing activities 227 (41)
Change in cash and cash equivalents (87) 86
Cash and cash equivalents at the start of year 957 861
Effect of exchange rate fluctuations 61 10
Cash and cash equivalents at the end of year 931 957
The Notes to the accounts form an integral part of these financial statements.
Significant accounting policies
Reporting entity
3i Group plc (the "Company") is a public limited company incorporated and domiciled in England and Wales. The Consolidated
financial statements ("the Group accounts") for the year to 31 March 2017 comprise the financial statements of the Company
and its consolidated subsidiaries (collectively, "the Group").
The Group accounts have been prepared and approved by the Directors in accordance with section 395 of the Companies Act
2006 and the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. The Company has taken
advantage of the exemption in section 408 of the Companies Act 2006 not to present its Company statement of comprehensive
income and related Notes.
A number of accounting policies are disclosed below, but where possible, they have been shown as part of the Note to which
they specifically relate in order to assist the reader's understanding.
A Compliance with International Financial Reporting Standards ("IFRS")
The Group and Company accounts have been prepared and approved by the Directors in accordance with all relevant IFRSs as
issued by the International Accounting Standards Board ("IASB"), and interpretations issued by the IFRS Interpretations
Committee, endorsed by the European Union ("EU").
The following standards, amendments and interpretations have been issued with implementation dates, subject to EU
endorsement in some cases, which do not impact on these financial statements:
Effective for annual periods beginning on or after
IAS 7 Disclosure initiative (amendments to IAS 7 - Statement of Cash Flows) 1 January 2017
IFRS 9 Financial instruments 1 January 2018
IFRS 15 Revenue from contracts with customers 1 January 2018
IFRS 16 Leases 1 January 2019
The impact of future standards and amendments on the financial statements is being assessed by the Group and the Company.
The Group does not anticipate that IFRS 9 and IFRS 16 will have a material impact on its results. The detailed assessment
of the extent to which IFRS 15 may affect the carried interest receivable recognition in the Group's financial statements
is ongoing.
B Basis of preparation
The financial statements are prepared on a going concern basis as disclosed in the Directors' report and presented to the
nearest million.
C Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control, as defined by IFRS 10, is achieved when the Group is exposed,
or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. Subsidiaries are fully consolidated from the date on which the Group effectively
obtains control. They are de-consolidated from the date that control ceases.
3i Group plc is an investment entity and, as such, does not consolidate the investment entities it controls. Most of the
Group's interests in subsidiaries are recognised at fair value through profit or loss. Those subsidiaries which provide
investment related services, such as advisory, management or employment services, are not classified at fair value through
profit and loss and continue to be consolidated unless they are deemed investment entities, in which case they are fair
valued.
The acquisition method of accounting is used to account for the acquisition of subsidiaries. Under the acquisition method
of accounting, with some limited exceptions, the assets, liabilities and contingent liabilities of a subsidiary are
measured at their fair values at the date of acquisition. Any non-controlling interest is measured either at fair value or
at the non-controlling interest's proportion of the net assets acquired. Acquisition related costs are accounted for as
expenses when incurred. Any excess of the cost of acquisition over net assets is capitalised as goodwill. All intra-group
balances, transactions, income and expenses are eliminated upon consolidation.
(ii) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and
operating policies. Investments that are held as part of the Group's investment portfolio are carried in the Consolidated
statement of financial position at fair value even though the Group may have significant influence over those companies.
(iii) Composition of the Group
The Group comprises several different types of subsidiaries. The Group re-assesses the function performed by each type of
subsidiary to determine its treatment under the IFRS 10 exception from consolidation on an annual basis. The types of
subsidiaries and their treatment under IFRS 10 are as follows:
General Partners (GPs) - Consolidated
General Partners provide investment management services and do not hold any direct investments in portfolio assets. These
entities are not investment entities.
Investment managers/advisers - Consolidated
These entities provide investment related services through the provision of investment management or advice. They do not
hold any direct investments in portfolio assets. These entities are not investment entities.
Holding companies of investment managers/advisers - Consolidated
These entities provide investment related services through their subsidiaries. Typically they do not hold any direct
investment in portfolio assets and these entities are not investment entities.
Limited Partnerships and other intermediate investment holding structures - Fair valued
The Group makes investments in portfolio assets through its ultimate parent company as well as through other limited
partnerships and corporate subsidiaries which the Group has created to align the interests of the investment teams with the
performance of the assets through the use of various carried interest schemes. The purpose of these limited partnerships
and corporate holding vehicles, many of which also provide investment related services, is to invest for investment income
and capital appreciation. These partnerships meet the definition of an investment entity and are classified at fair value
through profit and loss.
Portfolio investments - Fair valued
Under IFRS 10, the test for accounting subsidiaries takes wider factors of control as well as actual equity ownership into
account. In accordance with the investment entity exception, these entities have been held at fair value with movements in
fair value being recognised in the Consolidated statement of comprehensive income.
Structured entities - Fair valued
The Group has retained interests in a number of unconsolidated structured entities, being CLO equity investments.
D Critical accounting estimates and judgements
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. UK company law and IFRS require the Directors, in preparing the Group's financial
statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are
reasonable and prudent. The Group's estimates and assumptions are based on historical experience and expectation of future
events and are reviewed periodically. The actual outcome may be materially different from that anticipated.
The judgements, assumptions and estimates involved in the Group's accounting policies that are considered by the Board to
be the most important to the portrayal of its financial condition are the following:
(a) The fair valuation of the investment portfolio
The investment portfolio is held 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. A report on the activities
of the Valuations Committee is included in the Governance section of the Annual report.
(b) Assessment as an investment entity
Entities that meet the definition of an investment entity within IFRS 10 are required to account for most investments in
controlled entities, as well as investments in associates and joint ventures, at fair value through profit and loss.
The Board has concluded that the Company continues to meet the definition of an investment entity as its strategic
objective of investing in portfolio investments and providing investment management services to investors for the purpose
of generating returns in the form of investment income and capital appreciation remains unchanged.
The Group 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. Further detail on our review of our application of IFRS 10 can be found in
the Reconciliation of Investment basis to IFRS section.
(c) Valuation of the defined benefit schemes
The Group also considers the valuation of the defined benefit schemes in accordance with IAS 19 to be a significant
estimate. The Group reviews its assumptions annually with its independent actuaries.
E Other accounting policies
(a) Revenue recognition
Gross investment return is equivalent to "revenue" for the purposes of IAS 1. It represents the overall increase in net
assets from the investment portfolio net of deal-related costs and includes foreign exchange movements in respect of the
investment portfolio. Investment income is analysed into the following components:
I. Realised profits or losses over value on the disposal of investments are the difference between the fair value of the
consideration received less any directly attributable costs, on the sale of equity and the repayment of interest income
from investment portfolio, and its carrying value at the start of the accounting period, converted into sterling using the
exchange rates in force at the date of disposal.
II. Unrealised profits or losses on the revaluation of investments are the movement in the fair value of investments
between the start and end of the accounting period converted into sterling using the exchange rates in force at the date of
fair value assessment.
III. Fair value movements on investment entity subsidiaries are the movements in the fair value of Group subsidiaries
which are classified as investment entities under IFRS 10. The Group makes investments in portfolio assets through these
entities which are usually limited partnerships or corporate subsidiaries.
IV. Portfolio income is that portion of income that 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.
The following specific recognition criteria in accordance with IAS 18 must be met before the income is recognised:
· Dividends from equity investments are recognised in the Consolidated statement of comprehensive income when the
shareholders' rights to receive payment have been established. Income received on the investment in the most junior ranked
level of CLO capital is recognised as a dividend. £26 million was received in the year (2016: £31 million) from continuing
and discontinued operations.
· Interest income from investment portfolio is recognised as it accrues by reference to the principal outstanding and
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