REG - 3i Infrastructure - Half-year Report <Origin Href="QuoteRef">3IN.L</Origin> - Part 2
03/11/2016 07:07
- Part 2: For the preceding part double click ID:nRSC2012Oa
Performance in the first half of the year
· Total return of £74 million in the first six months of the · Declared interim dividend of 3.755 pence per share, or £39 million, in line with the target set out at the beginning of the year· Income generated from the portfolio and cash deposits, including non-income cash distributions from portfolio companies, totalled £49 million for the period. Operational costs and finance costs used to assess dividend coverage totalled £14 million in the period. The resulting dividend coverage shortfall of £4 million is covered by accumulated realised profits · On track to deliver the total dividend target for FY17 of · 88%1 of the portfolio invested in economic infrastructure businesses· Portfolio balance reflects new investment activity in the period· Further portfolio diversification achieved during the year through new investment activity· Further progress in realising the India Fund's portfolio through the sale of the majority of the remaining investment in Adani Power in the period, alongside the receipt of proceeds from the sale of Ind-Barath Energy
year, or 5.0% on opening net asset value, adjusted for the new 7.55 pence per share
equity raised· The return was driven by the good performance of
the portfolio, including strong distributions from Elenia and a
valuation uplift from XLT where 14 trains have been accepted by
the franchise holder· The decline in sterling against the euro
has benefited the Company, net of the impact of the hedging
programme which continues to reduce the volatility in net asset
value from exchange rates· Costs were managed in line with
expectations
1 For the purpose of this analysis, the portfolio is measured
as the underlying portfolio asset value for each asset and does
not include investment commitments until they are drawn.
Including investment commitments, the percentage for economic
infrastructure is 85%.
Investment Adviser's review
"The portfolio has performed well in the first half of FY17, with strong NAV growth and continuing good progression in
portfolio income. We have successfully converted four of the opportunities that we had identified prior to raising equity,
meaning that the majority of the equity issue proceeds have now been deployed. These investments will provide further
income and diversification to the portfolio, and underscore our ability to secure attractive opportunities in this
competitive market.
Whilst we continue to see a good flow of new investment opportunities, we remain disciplined and focused on maintaining a
balanced and attractive portfolio for shareholders."
Phil White and Ben Loomes
Managing Partners and Co-heads, Infrastructure, 3i Investments plc
2 November 2016
About the Investment Adviser
3i Investments plc ("3i Investments"), a wholly-owned subsidiary of 3i Group plc ("3i Group"), acts as the investment
adviser (the "Investment Adviser") to the Company through its infrastructure investment team (the "investment advisory
team"). The investment advisory team provides advice to the Company on the origination and execution of new investments,
on the management of the portfolio and on realisations, as well as on funding requirements. 3i Group was among the
subscribers to the Company's Initial Public Offering in 2007 and subsequent offer in 2008 and, most recently, the £385m
capital raise completed on 8 June 2016. 3i Group owns approximately 34% of the equity in the Company.
The investment advisory team is managed as a separate business line within 3i Group and operates from offices across 3i
Group's European network, focusing on both origination and portfolio management. The Investment Adviser also has a
dedicated team in Mumbai to manage the assets in the India Fund. The team of investment professionals has significant
experience of investing in, and managing, infrastructure assets. The investment advisory team can also draw on 3i Group's
broader network of investment professionals and relationships to originate infrastructure investment opportunities.
Our investment approach
The Investment Adviser aims to provide the Company with access to attractive investment opportunities focusing selectively
on transactions that are value enhancing to the portfolio. We implement our investment approach through the Investment
Adviser's team of approximately 25 dedicated investment professionals based in London and Paris, as well as through its
broader European network of offices.
This platform provides us with a comprehensive coverage of our target markets, as well as the asset management skills to
drive value from our investment portfolio.
The Investment Adviser will:
· engage with portfolio company management at board level to define the strategic direction and business plan;
· access its network of industry specialists and senior management to bring in expertise and/or bolster management
teams;
· invest in the underlying asset base to support profitable growth over the longer term;
· assess acquisitions if suitable opportunities arise;
· implement an efficient and prudent capital structure to optimise funding costs and which is appropriate for the
business's risk profile;
· drive operational performance and disciplined cash management to support both income yield and capital growth; and
· apply a clear and comprehensive Responsible Investment policy which is embedded into its investment and portfolio
monitoring processes.
Changes to the Investment Adviser's team
During the first half of the year the Investment Adviser announced the promotions of John Cavill to Partner and Antoine
Matton to Director, and the appointment of Daniel von der Schulenburg as Director in its Infrastructure business. John has
responsibility for the asset management of greenfield and operational infrastructure projects. Antoine and Daniel have
responsibility for origination and execution of investments across projects and economic infrastructure businesses, with
Antoine focusing on social infrastructure and France, Benelux and southern Europe and Daniel having a focus on the energy
sector and German speaking region. Daniel was most recently a Principal at Hudson Clean Energy Partners.
The profiles of the key members of the investment advisory team are included further on in this document.
Case study: Valorem
Valorem and its market
On 12 September 2016, the Company invested E57 million in Valorem, acquiring an economic interest of 28.5% from Omnes
Capital and other minority shareholders. Joining the founders and the existing management team as cornerstone shareholder,
the Company committed to provide E12 million of further capital to support Valorem in its growth strategy.
Founded in 1994 and headquartered in Bègles, France, Valorem is a leading independent renewable energy development and
operating company. It is one of the largest onshore wind developers in France, having developed over 480MW of capacity
over the last 10 years.
The French power market is experiencing a major transition as it looks to reduce its reliance on nuclear generation and to
increase generation from renewable sources of energy such as wind and solar. The energy transition has been continuously
supported by the French governments over the past decade. With in-house capabilities across the entire project cycle
(development, construction and operation) combined with a significant development pipeline and a strong local footprint,
Valorem is well positioned to benefit from this shift in energy mix.
Platform for further growth
Valorem has a significant pipeline of onshore wind and solar projects at an advanced stage of development that it expects
to convert into operating assets, with further projects at earlier stages to bring through the development process.
3i Infrastructure is well positioned to support Valorem's growth strategy through its long term capital model and the
Investment Adviser's engaged asset management approach.
A strong investment case
This investment diversifies the Company's portfolio with exposure to a growing renewables business in one of the most
attractive European markets, and access to recurring, inflation-linked cash flows underpinned by a robust regulatory
regime:
· the French wind power generation market offers strong attractions, with abundant wind resources, low population
density, continuous political support and ambitious objectives set out for renewable energy generation, the French national
plan forecasting total capacity of 19 GW in 2020 and 26 GW in 2023;
· the regulatory regime in place offers an attractive and stable framework to invest in, with long term indexed
feed-in-tariffs embedded in offtake agreements with EDF, offering stable inflation-linked cash flows with low correlation
to market power prices;
· led by its experienced management team, Valorem is a best-in-class developer, being the fourth largest French wind
developer and the largest independent one; and
· Valorem has a significant operating asset base which enables the investment to deliver an immediate yield to the
Company, combined with an attractive pipeline to deliver further growth.
Implementation of our investment approach
In highly competitive markets, and in line with the Company's strategic priorities, the Board and the Investment Adviser
focused on:
Broadening the Company's portfolio with complementary investments in the Company's key target markets, investing the
majority of the proceeds from the recent capital raise
Competition for large Core economic infrastructure businesses remains strong. In response to this competition the
Investment Adviser has continued to target more attractive risk-adjusted returns in other areas of the infrastructure
market, such as mid-market economic infrastructure businesses as well as greenfield projects, consistent with the Company's
investment focus. Where possible the Investment Adviser seeks to secure investments on a bilateral basis, minimising the
transaction costs for the Company.
During the six months to 30 September 2016 the Company invested or committed £287 million of the proceeds from the capital
raise into the previously identified pipeline. The majority of the investment in the period was into mid-market economic
infrastructure including £75 million into theindependent communications infrastructure provider Wireless Infrastructure
Group ("WIG"), E204 million into Europe's largest independent owner of airport ground support equipment TCR and E57 million
into the renewable energy development and operating company Valorem. The Company has committed a further E12 million of
funding to support future growth in Valorem.
The Company also announced that it has committed to invest approximately E5 million to acquire a significant majority stake
in Coeur du Sud B.V., a vehicle created for the Hart van Zuid greenfield project in Rotterdam, Netherlands.
On 29 June 2016, 3Angle, a consortium comprising the Company, Fluor and Heijmans, was named as the preferred bidder for the
design, build, management, maintenance and financing of the existing and new infrastructure of the A27 and A1 roads in the
Netherlands. The transaction reached commercial close in September 2016, with the Company announcing its commitment to
invest E7 million in the project shortly after the period end on 5 October 2016.
Most recently, on 31 October 2016, the Company announced that it has signed an agreement to invest approximately £185
million to acquire the whole of Infinis, the leading generator of electricity from landfill gas in the UK. On completion
of this acquisition, the Company will have invested all of the cash from the recent capital raise. Completion of the
investment is anticipated to take place by the end of November 2016.
Driving value from the economic infrastructure portfolio
The Company's portfolio continues to perform in line with expectations. Consistent with the strategic priorities outlined
in the "Clear and strategic priorities" section above, the Investment Adviser has continued to engage with portfolio
company management teams to deliver against a range of opportunities to enhance the portfolio's value.
In June 2016, ESVAGT, a leading provider of offshore safety and support at sea, signed a binding agreement with Hess, a
prominent independent energy company, to provide safety and support services at the South Arne field in the Danish sector
of the North Sea for a period of 12 years, continuing a successful 17 year partnership at the field. ESVAGT's services
will be performed by a new, purpose-built vessel, scheduled for delivery in 2018. The 'ESVAGT Connector' vessel will
provide support to Hess until the new vessel is delivered.
On XLT the Investment Adviser has continued to work closely with XLT management, Siemens and GTR to overcome the initial
delays in the acceptance programme. The acceptance of units by GTR has continued throughout the period, reaching a
significant milestone of 14 trains accepted by the franchise holder by the end of September 2016. The delivery programme
is scheduled to complete in 2018.
The Investment Adviser continues to work with the Company's portfolio companies to assess new investment and capital
expenditure programmes, as well as value accretive acquisitions.
Building the investment advisory team's capabilities to broaden the Company's access to attractive investment
opportunities
The investment advisory team was expanded during the period through the recruitment of a number of investment
professionals, focused principally on the origination and execution of investment opportunities. The new hires include a
new Director, as well as an additional hire at the Senior Associate level, to expand the coverage of the Company's key
target markets.
Continuing to manage the assets in the India Fund
The Investment Adviser aims to realise value from the assets in the India Fund over the next few years and is making
progress towards that objective. Proceeds were received from the sale of Ind-Barath Energy in the period. The majority of
the remaining holding in Adani Power has been sold in the period, at an average price of 31 rupees per share compared to a
value of 34 rupees per share on 31 March 2016. Since the period end, the rest of the Adani Power shares have been
realised.
Outlook
The Company delivered a good return over the first half of the year, underpinned by the performance of the portfolio and
favourable exchange rate movements.
Although the full implications of the result of the EU Referendum are unclear, increased market uncertainty is driving
capital towards investments in both UK and Continental European infrastructure assets. With interest rates remaining at
all-time lows, demand for large Core economic infrastructure investments, in Europe particularly, continues to be very
strong with recent transactions providing further evidence of low projected returns. This has continued to benefit the
valuation of the Company's existing portfolio of economic infrastructure investments. At the same time, these market
dynamics have shaped our investment focus towards areas of the infrastructure market which offer more attractive
risk-adjusted returns, such as mid-market economic infrastructure businesses, as well as primary PPP and low-risk energy
projects.
The new investments completed by the Company in the period demonstrate our ability to continue to access attractive
investments in our target markets. By successfully investing the majority of the proceeds from the recent capital raise,
the Company has increased its geographical and sector diversification. These new investments are expected to contribute to
portfolio income from the second half of the financial year.
Whilst we continue to see a good flow of new investment opportunities, we remain disciplined and focused on maintaining a
balanced and attractive portfolio for shareholders.
Profiles of senior members of the investment advisory infrastructure team
Ben LoomesManaging Partner and Co-headBen is Managing Partner and Co-head of 3i's Infrastructure business. Ben is a member of 3i's Executive Committee Phil WhiteManaging Partner and Co-headPhil joined 3i in 2007 and is Managing Partner and Co-head of 3i's Infrastructure business and a member of 3i's Executive Committee and Investment Committee. Prior to joining 3i, he was Division Director in Macquarie's Infrastructure Funds business where he managed investments in the transport sector. Phil has over 20 years of infrastructure investment, advisory and finance experience from earlier roles at Barclays and WestLB. Phil leads asset management for 3i's Infrastructure business and holds board positions at Anglian Water Group, Elenia and the Oiltanking companies. James DawesCFO James is Chief Financial Officer for
and Investment Committee and has experience across all of 3i's business lines. Ben is responsible for leading the management of origination and the strategic development 3i Group's Infrastructure business and joined in January 2016. He manages
of 3i's Infrastructure business and leads the relationship with the Board of 3i Infrastructure plc. Ben led the sale of Eversholt Rail and is currently a board director the operational, financial and reporting requirements for the Infrastructure business within 3i Group, as well as performing CFO duties for 3i Infrastructure plc. Prior to joining 3i, James was with Legal & General Investment Management where he held a number of senior finance roles, including Finance Director of LGV Capital from 2007 to 2015.
of ESVAGT, TCR and WIG. Ben has over 15 years of experience in investment, advisory and finance, including from earlier roles at Goldman Sachs, Greenhill and Morgan
Stanley.
John CavillPartnerJohn joined 3i in November 2013, following 3i's acquisition of BIFM. He joined BIFM in 2009. He leads the portfolio management activity for 3i Stéphane GrandguillaumePartner Stéphane is a Partner in 3i's Infrastructure team in Paris and joined Nigel MiddletonPartnerNigel is a Partner in 3i's Infrastructure team in London and joined 3i in November 2013, following 3i's acquisition of Barclays Infrastructure Funds Management Limited. He joined that business in 2002, having previously been head of PFI/PPP Advisory Services at PwC. Nigel led the involvement of that business in the formation and management of Infrastructure Investors (I2), a pioneering secondary market infrastructure fund, in which Barclays Infrastructure Funds Management had a joint venture interest alongside Société Générale and 3i. He was also instrumental in establishing, and continues to manage, BIIF, a long-term "buy and hold" PPP fund
infrastructure's projects and is responsible for: setting the strategy for asset management activities; overseeing implementation of value protection and enhancement 3i in November 2013, following 3i's acquisition of Barclays Infrastructure Funds Management Limited, which he joined in 2006. Stéphane leads 3i's Infrastructure team in Paris and is involved in the origination and execution of investment opportunities in PPP and low-risk energy projects across Europe. Stéphane led the recent investment in Valorem. Previously, Stéphane was head of Egis Investment Partners. which acquired I2 in 2009.
activities; and overseeing fund performance reporting. He works closely with investee company non-executive directors and Infrastructure Managers Limited, the business'
main SPV management services provider. Previously John was a Director at St Modwen Properties PLC, Land Securities Trillium and Vinci Investments where he led PPP/PFI
bidding activity.
Scott MoseleyPartnerScott joined 3i in 2007 and is a Partner in the Infrastructure team, with co-management responsibility for the team's new investment origination and Bernardo SottomayorPartnerBernardo is a Partner in 3i's Infrastructure team in London and joined 3i in October 2015, with a focus on originating and executing investments in economic infrastructure. He was a senior deal team member on the recent investment by 3i Infrastructure in TCR. Bernardo was most recently a Partner at Antin Infrastructure, which manages funds investing in infrastructure opportunities across Europe. Prior to Antin, Bernardo was Managing Director, Head of Acquisitions for Deutsche Bank's European infrastructure fund. His prior experience was in utilities, as Head of M&A at Energias de Portugal, and in infrastructure advisory with UBS and
execution platform. He has 15 years experience in European Infrastructure, spanning utilities, transportation and social infrastructure. Whilst at 3i, Scott has led the Citigroup.
investments in ESVAGT, Elenia and Cross London Trains, as well as being a senior deal team member on Eversholt. He was also responsible for the successfully exited
junior debt investments in Arqiva, Associated British Ports, Telediffusion de France, Thames Water and Viridian. He is currently a Director on the board of ESVAGT and
Cross London Trains.
Portfolio
Table 1 summarises the valuation and movements in the portfolio, as well as the return for each investment, for the period.
In accordance with accounting standards, "Investments at fair value through profit or loss" as reported in the
Consolidated balance sheet includes, in addition to the portfolio asset valuation, the cash and other net assets held
within intermediate unconsolidated holding companies. These amounts are set out at the foot of the table below, to provide
a reconciliation between the Directors' valuation of the portfolio assets and "Investments at fair value through profit or
loss" reported in the Consolidated financial statements. The basis of the portfolio information set out below is
consistent with analyses in previous periods.
Table 1: Portfolio summary (30 September 2016, £m)
Directors' Directors' Underlying Allocated Asset
valuation Investment Divestment Foreign valuation Profit/ portfolio foreign total
31 March in the in the Value exchange 30 September (loss) on income in exchange return in
Portfolio assets 2016 period period movement translation 2016 disposal the period hedging the period
Economic infrastructure businesses
Elenia 362.4 - (13.5) 1 15.6 31.8 396.3 - 9.8 (29.8) 27.4
Anglian Water Group 255.0 - - 5.6 - 260.6 - 3.5 - 9.1
Oystercatcher 186.9 - - 3.9 17.7 208.5 - 6.5 (16.6) 11.5
TCR - 150.9 - (1.1) 12.3 162.1 - 1.9 (7.3) 5.8
ESVAGT 121.6 - - 1.1 11.1 133.8 - 5.4 (10.5) 7.1
XLT 108.7 - - 14.0 - 122.7 - 2.4 - 16.4
WIG - 74.7 - 0.5 - 75.2 - 1.6 - 2.1
Valorem - 47.9 - 0.2 0.8 48.9 - 0.1 (0.8) 0.3
1,034.6 273.5 (13.5) 39.8 73.7 1,408.1 - 31.2 (65.0) 79.7
Projects
Primary projects2 0.1 - - - - 0.1 - - - -
Operational projects
Elgin 45.7 - - 0.8 - 46.5 - 1.0 - 1.8
Octagon 42.0 - - (1.5) - 40.5 - 1.6 - 0.1
WODS 22.4 - (0.9)1 - - 21.5 - 0.7 - 0.7
Dalmore 18.3 - - (0.3) - 18.0 - 0.5 - 0.2
NMM 6.1 - - 1.4 0.6 8.1 - 0.1 (0.5) 1.6
Ayrshire College - 4.64 - - - 4.6 - - - -
A12 - 4.54 - - 0.1 4.6 - 0.1 - 0.2
134.6 9.1 (0.9) 0.4 0.7 143.9 - 4.0 (0.5) 4.6
India Fund
3i India Infrastructure Fund 52.9 - (12.0) (4.3) 4.1 40.7 (0.5) - - (0.7)
Total portfolio 1,222.1 282.6 (26.4) 35.9 78.5 1,592.7 (0.5) 35.2 (65.5) 83.6
Balance sheet adjustments related to unconsolidated subsidiaries3 6.7 - - 1.5 - 8.2 - - - -
Income statement adjustments related to unconsolidated subsidiaries3 - - - - - - - (2.3) (1.2) (2.0)
Reported in the Consolidated financial statements 1,228.8 282.6 (26.4) 115.9 - 1,600.9 (0.5) 32.9 (66.7) 81.6
1 Capitalised income and shareholder loan repaid in the period.
2 Investments in the Mersey Gateway Bridge, A9, La Santé, RIVM, Condorcet Campus and Hart van Zuid primary projects.
3 Income statement adjustments explained in Table 12 and Balance sheet adjustments explained in Table 13 in the Financial review.
4 Drawdown of commitment.
Investment and realisation activity
The Company invested £273.5 million during the period in three mid-market economic infrastructure businesses. In a market
which remains competitive, the investments are a strong endorsement of the Company's investment strategy and the Investment
Adviser's ability to source investment opportunities that are capable of delivering attractive risk-adjusted returns, in
line with the Company's objectives.
During the period, the 3i India Infrastructure Fund sold the majority of the remaining investment in Adani Power, and
received the proceeds from the sale of Ind-Barath Energy in the previous year. These transactions generated proceeds of
£11.5 million to the Company, slightly below the carrying value at 31 March 2016 of £12.0 million.
Economic infrastructure businesses
On 9 June 2016, the Company completed the acquisition of a 36% economic interest in WIG, investing approximately £75
million. WIG is an independent communications infrastructure provider headquartered in Scotland. The business builds and
operates communication towers and other wireless infrastructure to enable the connection between networks and the
communities that rely on their services. For more information on this investment, please refer to the investment review.
On 27 July 2016, the Company completed an investment of approximately E200 million in TCR. Headquartered in Brussels, TCR
is Europe's largest independent owner of airport ground support equipment and operates in over 100 airports. The equipment
that TCR provides to its clients is critical infrastructure, without which some of Europe's busiest airports could not
operate. For more information on this investment, please refer to the investment review.
On 12 September 2016, the Company completed a E57 million investment in the renewable development and operating company
Valorem. Headquartered in Bègles, France, Valorem is a leading independent renewable energy development and operating
company, having developed over 480MW of capacity over the last 10 years. Valorem benefits from a critical mass of
operating assets and a strong pipeline of further projects at a well advanced development stage. The Company has committed
to provide E12 million of further capital to support Valorem's growth strategy. For more information on this investment,
please refer to the new investment case study on Valorem above.
Greenfield projects
The Company announced on 29 April 2016 that it has committed to invest approximately E5 million to acquire a significant
majority stake in Coeur du Sud B.V., a vehicle created for the Hart van Zuid greenfield project in Rotterdam, Netherlands.
The E200 million project involves the renewal and revitalisation of the area surrounding the Zuidplein and Ahoy centres in
Rotterdam.
Since the period end, the Company announced on 5 October 2016 that it has committed to invest approximately E7 million in
the A27/A1 primary PPP project in the Netherlands. This is a E220 million project for the reconstruction of the A27
motorway between Utrecht North and the Eemnes junction, as well as of the A1 motorway between the Eemnes junction and the
Bunschoten-Spakenburg interchange.
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