REG - 3i Infrastructure - Results for the year to 31 March 2023
10/05/2023 07:00
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RNS Number : 8596Y 3i Infrastructure PLC 10 May 2023
10 May 2023
Results for the year to 31 March 2023
3i Infrastructure plc ('3i Infrastructure' or the 'Company') today announces a
14.7% return for the year, delivery of the FY23 dividend target of 11.15 pence
and a 6.7% increase in the target dividend for FY24 to 11.90 pence per share.
Richard Laing, Chair of 3i Infrastructure plc, said:
"3i Infrastructure continues to deliver long-term sustainable returns. I am
delighted to report that we achieved another year of outperformance, with a
total return of 14.7% in the year ended 31 March 2023, well ahead of our
target. We have increased the dividend per share in every year of the
Company's existence."
Scott Moseley and Bernardo Sottomayor, Managing Partners, Co-Heads of European
Infrastructure, 3i Investments plc, added:
"This was another strong year for the Company, materially exceeding its target
return. We have carefully selected our portfolio, identifying infrastructure
companies that benefit from long-term structural growth trends in their
underlying markets. 3i Infrastructure is well positioned to continue to
deliver attractive shareholder returns."
Performance highlights
Well ahead of our target return of 8-10% p.a. 14.7%
Total return on opening NAV
£394m
Total return for the year
£3,101m
NAV
336.2p
NAV per share
Delivered FY23 dividend target, fully covered 11.15p
Full year dividend per share for FY23
Setting higher target for FY24 dividend, up 6.7% year-on-year 11.90p
Target dividend per share for FY24
For further information, please contact:
Richard Laing, Chair, 3i Infrastructure plc Tel: 037 1664 0445
Thomas Fodor, investor enquiries Tel: 020 7975 3469
Kathryn van der Kroft, press enquiries Tel: 020 7975 3021
For further information regarding the announcement of the results for 3i
Infrastructure plc, please visit www.3i-infrastructure.com. A recording of the
analyst presentation will be made available on this website during the day.
Notes to the preliminary announcement
Note 1
The statutory accounts for the year to 31 March 2023 have not yet been
delivered to the Jersey Financial Services Commission. The statutory accounts
for the year to 31 March 2022 have been delivered to the Jersey Financial
Services Commission. The auditor's reports on the statutory accounts for these
years are unqualified. This announcement does not constitute statutory
accounts. The preliminary announcement is prepared on the same basis as set
out in the statutory accounts for the year to 31 March 2022.
Note 2
Subject to shareholder approval, the proposed final dividend is expected to be
paid on 10 July 2023 to holders of ordinary shares on the register on 16 June
2023. The ex-dividend date for the final dividend will be on 15 June 2023.
Note 3
This report contains Alternative Performance Measures ('APMs'), which are
financial measures not defined in International Financial Reporting Standards
('IFRS'). More information relating to APMs, including why we use them and the
relevant definitions, can be found in the Company's 2023 Annual report and
accounts and in the Financial review section.
Note 4
The preliminary announcement has been extracted from the Annual report and
accounts 2023. The Annual report and accounts 2023 will be available on the
Company's website today. Printed copies of the Annual report and accounts 2023
will be distributed to shareholders who have elected to receive printed copy
communications on or soon after 22 May 2023.
Notes to editors
About 3i Infrastructure plc
3i Infrastructure plc is a Jersey-incorporated, closed-ended investment
company, an approved UK Investment Trust, listed on the London Stock Exchange
and regulated by the Jersey Financial Services Commission. The Company's
purpose is to invest responsibly in infrastructure, delivering long-term
sustainable returns to shareholders and having a positive influence on our
portfolio companies and their stakeholders.
3i Investments plc, a wholly-owned subsidiary of 3i Group plc, is authorised
and regulated in the UK by the Financial Conduct Authority and is the
investment manager of 3i Infrastructure plc.
This statement has been prepared solely to provide information to
shareholders. It should not be relied on by any other party or for any other
purpose. It and the Company's Annual report and accounts may contain
statements about the future, including certain statements about the future
outlook for 3i Infrastructure plc. These are not guarantees of future
performance and will not be updated. Although we believe our expectations are
based on reasonable assumptions, any statements about the future outlook are
subject to a number of risks and uncertainties and could change. Factors which
could cause or contribute to such differences include, but are not limited to,
general economic and market conditions and specific factors affecting the
financial prospects or performance of individual investments within the
portfolio of 3i Infrastructure plc.
This press release is not for distribution (directly or indirectly) in or to
the United States, Canada, Australia or Japan and is not an offer of
securities for sale in or into the United States, Canada, Australia or Japan.
Securities may not be offered or sold in the United States absent registration
under the U.S. Securities Act of 1933, as amended (the "Securities Act"), or
an exemption from registration under the Securities Act. Any public offering
to be made in the United States will be made by means of a prospectus that may
be obtained from the issuer or selling security holder and will contain
detailed information about 3i Group plc, 3i Infrastructure plc and management,
as applicable, as well as financial statements. No public offering in the
United States is currently contemplated.
Our purpose
We invest responsibly in infrastructure, delivering long-term sustainable
returns to shareholders and having a positive influence on our portfolio
companies and their stakeholders.
Chair's statement
"Another excellent year, with confidence in the future."
Richard Laing
Chair, 3i Infrastructure
3i Infrastructure continues to deliver long-term sustainable returns, with
another year of outperformance.
I am delighted to report that we achieved another year of outperformance, with
a total return of 14.7% in the year ended 31 March 2023. That return is well
ahead of our target to provide shareholders with a total return of 8% to 10%
per annum, to be achieved over the medium term. Our total return for the three
years since March 2020, the Covid-19 and post-Covid period, was an impressive
13.7% per annum.
We have built a unique portfolio, which benefits from inflation linkage and is
aligned with long-term megatrends. Our companies, supported by the engaged
asset management approach of 3i, our Investment Manager, are generating
attractive and accretive growth investment opportunities.
We made another step forward with our sustainability objectives this year,
supported by the establishment of a dedicated environmental, social and
governance ('ESG') team at the Investment Manager bringing greater focus and
increased engagement with our portfolio companies.
I am grateful to shareholders and the Board of Directors for their support
during the year, including during our equity raise in February 2023, as well
as to the Investment Manager's team for their continued hard work under the
leadership of Scott Moseley and Bernardo Sottomayor.
Our purpose
Our purpose, is to invest responsibly in infrastructure, delivering long-term
sustainable returns to shareholders and having a positive influence on our
portfolio companies and their stakeholders.
We invest across a broad range of infrastructure investment themes and
highlight the strong growth prospects of our portfolio companies in this
report. Our portfolio companies invest in, develop and actively manage
essential infrastructure. Examples of how our portfolio companies have a
positive influence are included in the Sustainability report in the Annual
report and accounts 2023.
Performance
The Company generated a total return of £394 million in the year ended 31
March 2023, or 14.7% on opening NAV, ahead of our target of 8% to 10% per
annum to be achieved over the medium term. This is discussed in more detail in
the Review from the Managing Partners.
The NAV per share increased to 336.2 pence. Our share price has not kept pace
with the growth in our NAV, which resulted in a Total Shareholder Return
('TSR') of negative 6.9% in the year, ahead of the FTSE 250, which returned
negative 7.9% in the same period. Since IPO, the Company's annualised TSR is
11.7%, comparing favourably with the broader market (FTSE 250: 6.1% annualised
over the same period).
Dividend
Following the payment of the interim dividend of 5.575 pence per share in
January 2023, the Board is recommending a final dividend for the year of 5.575
pence per share, meeting our target for the year of 11.15 pence per share,
6.7% above last year's total dividend. We expect the final dividend to be paid
on 10 July 2023.
Consistent with our progressive dividend policy, we are announcing a total
dividend target for the year ending 31 March 2024 of 11.90 pence per share,
representing an increase of 6.7%.
Corporate governance
The Company's 2022 Annual General Meeting ('AGM') was held on 7 July 2022. All
resolutions were approved by shareholders, including the re-election of the
existing Directors.
This year's AGM will be held on 6 July 2023. Further details are provided in
the Notice of Meeting and on the Company's website, www.3i-infrastructure.com.
In September, we were delighted to welcome Stephanie Hazell as a non-executive
Director. Stephanie brings a broad strategic experience in the infrastructure
sector from her previous roles at National Grid, Orange and Virgin Group.
Directors' duties
The Directors have a duty to act honestly and in good faith with a view to the
best interests of the Company and to exercise the care, diligence and skill
that a reasonably prudent person would exercise in comparable circumstances.
In accordance with the AIC Code of Corporate Governance 2019 (the 'AIC Code'),
the Board does this through understanding the views of the Company's key
stakeholders and carefully considering how their interests and the matters set
out in section 172 of the Companies Act 2006 of England and Wales have been
considered in Board discussions and decision making. More detail can be found
in the Directors' duties and Section 172 statement sections later in this
document.
Capital raise and liquidity
We were pleased with the results of our capital raise and would like to thank
our shareholders for their continued support. The equity raise proceeds of
£100 million were used to pay down part of the drawings on the revolving
credit facility ('RCF') and partly used to fund the £28 million acquisition
of Future Biogas. This provides additional flexibility to fund attractive
discretionary growth opportunities in our portfolio.
We manage our balance sheet actively, seeking efficiency through low levels of
uninvested cash with a range of funding options available to the Company for
further investment as described in the Financial review.
Outlook
The past year has seen significant volatility in both equity and credit
markets and in energy and power prices. Against this backdrop, the Company has
remained disciplined in its investment approach, maintaining adequate
liquidity and an appropriate level of gearing in the Company's portfolio.
Our portfolio consists of resilient businesses providing essential services to
their customers and the communities they serve, often benefitting from
long-term sustainable trends. These businesses are generating discretionary
growth opportunities that are accretive to our investment cases, leaving us
well positioned to continue to build on our strong performance.
Richard Laing
Chair, 3i Infrastructure plc
9 May 2023
2007 to 2023
In the 16 years since the initial public offering ('IPO')
the Company has delivered a total
shareholder return of
11.7%
per annum
Review from the Managing Partners
"The Company's top quartile track record is the result of our deliberate
strategy."
Scott Moseley and Bernardo Sottomayor
Managing Partners, Co-Heads of European Infrastructure
3i Investments plc
This was another strong year for the Company, materially exceeding its target
return.
We delivered another strong total return of 14.7% this year.
Since 2015, when we adopted our current strategy of focusing on core-plus
infrastructure investments, NAV per share including dividends has grown by 19%
per annum. Since 3iN's inception in 2007, we have grown NAV per share
including dividends by 14% per annum.
The Company's top quartile track record is the result of our deliberate
strategy.
We have carefully selected our portfolio, identifying infrastructure companies
that benefit from long-term structural growth trends in their underlying
markets.
We work actively with the management teams at our portfolio companies to
define and execute plans to capitalise on those growth dynamics. Growing
markets provide the catalyst for us to continue to reinvest in our portfolio
companies at returns that are likely to outperform 3iN's portfolio target.
Our portfolio companies' earnings are also typically positively correlated to
inflation, as well as growing in real terms.
The resulting compounding growth dynamics, together with the resilience that
our portfolio companies have displayed throughout the cycle, including during
the recent Covid-19 pandemic, demonstrate that the Company offers shareholders
very high quality risk-adjusted returns.
Our active management approach also ensured that we locked in attractive debt
financing across the portfolio before the recent increases in financing costs.
The average level of gearing within our portfolio companies is a relatively
modest 33% of enterprise value and there are no material refinancing
requirements within the portfolio before 2026.
These conservative levels of gearing within our portfolio companies, combined
with strong operational cash generation, available credit in the RCF and the
recent £100 million equity raise, ensures that our portfolio companies are
well placed to finance these growth investment opportunities as they arise.
Sustainability
The importance of sustainability and meeting ESG standards continues to
increase. This year we created a new team to lead ESG and sustainability
initiatives across the portfolio. The additional focus that this new team
brings helps us to engage on ESG topics in a more meaningful way, to maintain
appropriate oversight over new and developing ESG legislation and to collate
relevant data regarding the performance of the portfolio companies against
certain sustainability indicators. Our companies are now reporting Scope 1 and
2 greenhouse gas ('GHG') emissions and considering opportunities to reduce
these.
In the year ahead we plan to build on this progress by working with portfolio
companies to measure Scope 3 GHG emissions, further develop Paris-aligned
decarbonisation plans and where possible set science-based targets.
Investment and divestment activity
During the year we completed a number of transactions as shown in the table
below:
Date Activity
May 2022 Syndication of a 17% stake in ESVAGT for proceeds of £87 million
June 2022 Sale of the European Projects portfolio for £106 million
September 2022 Closing of the acquisition of c.100% stake in GCX for £318 million
October 2022 Further investment in TCR, acquiring the 48% stake owned by funds managed by
DWS for £338 million
November 2022 Syndication of 28% of 3iN's stake in TCR for proceeds of £190 million
December 2022 Investment of a further £15 million to fund DNS:NET's fibre roll-out
programme
February 2023 Investment of £28 million to acquire Future Biogas
March 2023 Investment of a further £30 million in Infinis to fund the development of its
solar roll-out programme
Outlook
Our portfolio is generating strong earnings growth which we are confident is
set to continue. Additionally, we continue to see strong demand for high
quality infrastructure investments, such as those held by 3iN, amongst private
market investors. Our active management strategy includes planning selectively
to divest our portfolio companies at an optimal moment in time. The scarcity
value of our assets and favourable growth positioning provide confidence in
the outlook for continued value creation.
Scott Moseley and Bernardo Sottomayor
Managing Partners and Co-Heads of European Infrastructure, 3i Investments plc
9 May 2023
Our business model
An active investor
Unique offering for shareholders
The Company remains unique, providing public market investors with access to
private infrastructure businesses across a variety of megatrends, sectors and
geographies.
Origination approach
We remain a disciplined investor and, where possible, seek opportunities to
transact off-market, only participating in competitive processes where we
believe we have a distinct advantage.
We have a large and focused investment team, with a broad network and access
across the geographies in which we invest. Our reputation, local presence and
the relationships we develop with management teams provide us with competitive
advantages. This allowed us to be successful in signing our new investment
this year in Future Biogas on attractive terms.
Asset management
We maintain a significant focus on active asset management and investment
stewardship. We identify high calibre management teams and look to implement a
clear business strategy. We help identify accretive growth opportunities to
the portfolio companies, and actively help them to convert those, including
executing add-on M&A opportunities and putting in place adequate capital
structures and capex facilities to fund the associated investments.
We actively look to enhance the infrastructure characteristics of the
businesses we acquire, ensuring that, where possible, capex is focused on
immediate contracted revenue-generating assets, improving the infrastructure
characteristics of the business to attract competitive financing, adding
elements of service that create customer stickiness, and often implementing
operational efficiency programmes to optimise EBITDA margins. All of this
helps us position our businesses into the core infrastructure space, thus
maximising the potential exit value.
We execute all of the above through ownership control, effective board
presence and governance and by being involved directly in the companies' key
workstreams.
Competition for new investment primarily comes from private infrastructure
funds. Most other UK listed infrastructure funds typically target smaller
investments in finite life contracted assets like operational and greenfield
Public Private Partnership ('PPP') projects or operational renewable
portfolios, which are outside our investment focus.
Our primary investment focus remains mid-market core-plus infrastructure with
controlling majority or significant minority positions and strong governance
rights, whilst adhering to a set of core investment characteristics and risk
factors. More information on our business model can be found below.
We invest responsibly in infrastructure to create long-term value for
stakeholders.
Enablers Investment characteristics How we create value Value created
Financial Non-financial
Investment Asset-intensive business Buy well 14.7% 2
Manager's team
Total return on time-weighted opening net asset value Further investments in portfolio companies to fund growth
Asset bases that are
3i Group network
hard to replicate
Strong governance
11.15p
Ordinary dividend
Engaged asset management
Provide essential
per share +9%
services
Optimise strategy
Increase in installed renewable energy capacity
Reputation
19%
and brand
Established market
position
Execute plan Asset IRR
High ESG
(since inception) 12
standards
Good visibility of future
Portfolio companies reporting on greenhouse gas emissions
cash flows
Realisation
Robust policies
and procedures
An acceptable element of demand or market risk
Efficient balance
Opportunities for
sheet
further growth
Sustainability
Characteristics we look for in new investments
We look to build and maintain a diversified portfolio of assets, across a
range of geographies and sectors, whilst adhering to a set of core investment
characteristics and risk factors.
The Investment Manager has a rigorous process for identifying, screening and
selecting investments to pursue. We look for businesses that combine a base of
strong cash flow resilience (eg. contracted revenues) with high through-cycle
underlying market growth fundamentals and operational improvements and M&A
opportunities, which allows us to deliver above target returns. Although
investments may be made into a range of sectors, the Investment Manager
typically focuses on identifying investments that meet most or all of the
following criteria and are aligned with identified megatrends:
Asset-intensive business Good visibility of future cash flows
Owning or having exclusive access under long-term contracts to assets that are Long-term contracts or sustainable demand that allow us to forecast future
essential to deliver the service performance with a reasonable degree of confidence
Asset bases that are hard to replicate An acceptable element of demand or market risk
Assets that require time and significant capital or technical expertise to
Businesses that have downside protection, but the opportunity for
develop, with low risk of technological disruption outperformance
Provide essential services Opportunities for further growth
Services that are an integral part of a customer's business or operating
Opportunities to grow or to develop the business into new markets, either
requirements, or are essential to everyday life organically or through targeted M&A
Established market position Sustainability
Businesses that have a long-standing position, reputation and relationship
Businesses that meet our Responsible Investing criteria, with opportunities to
with their customers - leading to high renewal and retention rates improve sustainability and ESG standards
How we create value
We have a rigorous approach to identify the best investment opportunities and
then actively manage our portfolio companies to drive sustainable growth and
value creation.
Buy well Strong governance Optimise strategy
· Effective use of 3i's network · Make immediate improvements · Agree strategic direction
· Comprehensive due diligence · Appropriate board representation and composition · Develop action plan
· Consistent with return/yield targets · Incentivised and align management teams · Right capital structure to fund growth plan
· Fits risk appetite
Execute plan Realisation What we do is framed
by our strategic priorities
· Ongoing support · (Re)position business and enhance infrastructure characteristics to
maximise exit value
· Monitor performance
· Long-term view but will sell to maximise shareholder value
· Review further investment opportunities
· Facilitate and execute M&A
What enables us to create value
Investment Manager's team
The Company is managed by an experienced and well-resourced team. The European
infrastructure team was established by 3i Group plc ('3i Group') in 2005 and
now comprises over 50 people, including over 30 investment professionals.
This is one of the largest and most experienced groups of infrastructure
investment professionals in Europe, supported by dedicated finance, tax,
legal, operations, sustainability and strategy teams.
3i Group's network
3i Group has a network of offices, advisers and business relationships across
Europe. The investment management team leverages this network to identify,
access and assess opportunities to invest in businesses, on a bilateral basis
where possible, and to position the Company favourably in auction processes.
Engaged asset management
We create value from our investments through the Investment Manager's engaged
asset management approach. Through this approach, the Investment Manager
partners with our portfolio companies' management teams to develop and execute
a strategy to create long-term value in a sustainable way. Examples of this
partnership include developing strategies that support investment in the
portfolio company's asset base over the long term; continued improvements in
operational performance; and establishing governance models that promote an
alignment of interests between management and stakeholders.
We develop and supplement management teams, often bringing in a non-executive
chair early in our ownership.
Examples of this engaged asset management approach can be found on our
website, www.3i-infrastructure.com.
Strengthen portfolio company management teams Invest in and develop companies to support a sustainable future Grow our platform businesses through further investments
Reputation and brand
The Investment Manager and the Company have built a strong reputation and
track record as investors by investing responsibly, managing their business
and portfolio sustainably, and by carrying out activities according to high
standards of conduct and behaviour. This has been achieved through upholding
the highest standards of governance, at the Investment Manager, the Company
and in investee companies. This in turn has earned the trust of shareholders,
other investors and investee companies, and has enabled the Investment Manager
to recruit and develop employees who share those values and ambitions for the
future.
The Board seeks to maintain this strong reputation through a transparent
approach to corporate reporting, including on our progress on driving
sustainability through our operations and portfolio. We are committed to
communicating in a clear, open and comprehensive manner and to maintaining an
open dialogue with stakeholders.
Dedicated ESG team
In FY23, the Investment Manager created a new team to lead ESG and
sustainability initiatives across the portfolio. This will enable an
acceleration of the delivery of the Company's ambitions around sustainability.
The new team's role is to ensure the Company's approach is right for the
portfolio and to drive genuine ambition and progress at portfolio company
level. Dedicated ESG resource enables us to identify, monitor and realise the
value creation opportunities linked to sustainability for each portfolio
company more effectively.
The team supports each portfolio company on its respective sustainability
journey and consideration of the Company's objectives at portfolio company
level. The team also leads ESG reporting for the Company and delivers the
annual ESG review of the portfolio.
By interfacing with the Company's strategy, the team supports the Board to set
the Sustainability strategy and objectives for the Company, and aligns with
key stakeholders such as 3i Group, particularly on climate-related risks and
opportunities.
Sustainability and ESG standards are discussed throughout this report. Please
refer to Our approach, the Sustainability report in the Annual report and
accounts 2023 and the Risk report.
"There is a strong link between companies that have high ESG standards and
those that are able to achieve long-term sustainable business growth."
Anna Dellis
Partner, 3i Investments plc
Robust policies and procedures
Established investment and asset management processes are supported by the
Investment Manager's comprehensive set of best practice policies, including
governance, conduct, cyber security and anti-bribery.
Efficient balance sheet
The Company's flexible funding model seeks to maintain an efficient balance
sheet with sufficient liquidity to make new investments. In order to
capitalise on discretionary growth opportunities in the portfolio, during the
year we raised new equity of £100 million.
Since FY15 the Company has raised equity three times and returned capital to
shareholders twice following successful realisations.
Our approach
The infrastructure market
Competitive landscape
2022 was another very strong year for fundraising in the unlisted
infrastructure space, with over US$300 billion raised in the core, core-plus
and value added segments. Fundraising has become more concentrated around
successful managers, with fewer funds being raised but the average fund size
rising. This makes competition for suitable larger equity investments more
intense.
Macro environment
The past year has seen a structural shift in the macroeconomic environment
with significant inflation, increases in interest rates and volatile equity
markets. This has slowed down M&A activity and impacted stock market
performance.
In this environment, demand for infrastructure assets typically increases due
to the essential nature of the services they provide and downside protection
as they can act as a hedge with revenues directly or indirectly linked to
inflation.
Our portfolio companies benefit from direct contract indexation and strong
market positions providing pricing power. This is partially offset by the
increase in operational costs experienced by a number of those companies.
Central banks raised interest rates in response to rising inflation. The
impact on our portfolio has been limited, with over 95% of our portfolio
company debt either fixed rate or hedged at 31 March 2023, and with no
material refinancing due before 2026.
These trends, and our response to them, are discussed in more detail within
the Risk report.
Interest rates Credit Inflation Power prices
· Over 95% of portfolio company debt is fixed rate or hedged at 31 March · No material near-term refinancing risk in the portfolio · Portfolio returns positively correlated to inflation · Energy generating assets benefitted from the high and volatile power
2023
price environment
· Nearly 90% of portfolio company debt matures beyond the next three · Balanced mix of direct indexation and strong market positions provide
financial years pricing power
Megatrends
Megatrends are shaping the world around us, influencing decision making and
changing the demands placed on our economy and services. Identifying the
potential for change is a key driver of our investment decision making - from
the businesses, sectors and countries we invest in, to the way we go about
finding opportunities.
As the Company's portfolio continues to grow, we seek to diversify our
investments across a range of megatrends that will provide a supportive
environment for long-term sustainable returns to shareholders. We also
continually assess underlying risk factors, both when considering new
investment opportunities and in managing the existing portfolio and its
exposure to certain risks, such as commodity prices and foreseeable
technological disruptions.
Investment themes
Renewable energy generation
There is increasing demand for energy generated from renewable sources such as
wind and solar to support the energy transition. Our investments in Infinis,
Attero, and Valorem all generate energy from a variety of renewable sources
and their combined installed capacity has grown significantly during our
ownership.
Electrification/energy transition
The transition towards a low-carbon economy is gathering pace. Rising
electricity consumption is increasing the demand for related equipment and
services such as those provided by Joulz, which has expanded its offering to
include solar and EV charging products.
Shared resources
Developed economies are experiencing a shift towards a shared resources model.
This can lead to significant cost savings for users of capital intensive
assets and also reduce overall GHG emissions. In the case of TCR, which
provides pooled ground support equipment at airports, this has reduced the
amount of equipment required.
Waste treatment and recycling
There is a trend towards increasing levels of recycling driven by regulatory
requirements and consumer preferences. Attero is one of the largest waste
treatment and disposal companies in the Netherlands and is benefitting from
this increased demand for its services.
Automation, digital operations and increasing connectivity
Technology is developing rapidly, changing operating models and digitalising
industrial processes. Business is increasingly mobile and data driven, which
requires increasing levels of connectivity through digital infrastructure. Our
communications infrastructure investments, Tampnet, GCX and DNS:NET, are
benefitting from this increased demand.
Demand for healthcare
Increasing life expectancy and an ageing population are increasing the demand
for healthcare-related services and infrastructure. Our investment in Ionisos,
which provides cold sterilisation services to the medical and pharmaceutical
industries, is aligned to this trend.
Global trade and transport
Businesses are seeking to increase supply resilience and achieve long-term
price stability by establishing deeper, more diversified supplier bases for
goods and services. This can help mitigate disruptions from extreme weather
events and other localised situations. Advario Singapore (Oystercatcher)
supports its customers storing and blending the gasoline used to transport
these goods.
Urbanisation and smart cities
Technology is increasingly being used to enhance the efficiency and safety of
urban areas. SRL's products allow for greater control of traffic flows, which
in turn reduces congestion around roadworks and improves safety.
We have a positive influence on our portfolio companies.
Our influence
As active owners we seek to ensure that our investee companies are run
responsibly and that they can make a positive contribution to their employees,
customers, suppliers and the local communities in which they operate. This
includes supporting and empowering management teams to develop resilient
business strategies.
We create a culture at our portfolio companies where the Company's expectation
that management teams embed sustainability into their strategy is well known.
We facilitate and encourage the exchange of best practices by portfolio
companies by connecting companies that are more advanced in certain
sustainability initiatives with others who can benefit from their expertise.
We seek to manage material ESG risks and opportunities during the period of
the Company's investment. This includes enhancing portfolio companies'
corporate governance and reporting, and encouraging them to improve their
performance over time on sustainability issues that are material to them, with
a particular focus on health and safety, and climate change.
We require all our portfolio companies to measure their GHG emissions. We
encourage them to identify decarbonisation strategies. This year, we asked an
initial subset of our portfolio companies to develop GHG emission reduction
targets that are aligned with the objectives of the Paris Agreement.
Our portfolio
Many infrastructure businesses have sustainability at their core, providing or
enabling the provision of essential services to society, interconnectivity and
the appropriate management of resources.
Whilst the Company does not pursue a sustainability-driven investment
strategy, it does use its influence in the investments it makes, where
appropriate, to seek to contribute positively to environmental and social
sustainability objectives, such as transitioning to a low carbon and circular
economy, enabling a healthy and safe society and fostering inclusive growth.
We believe such contributions, alongside good ESG performance of our
portfolio, can protect and potentially enhance value for the Company's
shareholders.
Sustainability in action
Examples of our portfolio companies' sustainability strategies
Contributing to a low-carbon future
· Invest in the production of clean energy
· Engage with suppliers on low-carbon innovation
· Support customers to decarbonise their operations
· Develop GHG emissions reduction strategies
Supporting safety and good health
· Adhere to high health and safety standards that protect employees
· Enable safe operations for customers
· Embed a safety culture across the organisation
· Contribute to high quality healthcare through Ionisos
Fostering inclusive growth
· Adhere to high governance and ethical work standards
· Be an employer of choice supported by a diverse and inclusive culture
· Create job opportunities and engage with local communities
· Support local and international connectivity through our
telecommunication businesses
Our strategy
Our strategy is to maintain a balanced portfolio of infrastructure investments
delivering an attractive mix of income yield and capital appreciation for
shareholders.
Strategic priorities
Maintaining a balanced portfolio Delivering an attractive mix of income yield and capital growth for 15%
shareholders.
Largest single investment by value
Investing in a diversified portfolio in developed markets, with a focus on the
UK and Europe.
Disciplined approach to new investment Focusing selectively on investments that are value-enhancing to the Company's £452m
portfolio and with returns consistent with our objectives.
New investments less amounts syndicated in the financial year
Managing the portfolio intensively Driving value from our portfolio through our engaged asset-management 2
approach.
Follow-on investments in portfolio companies
Delivering growth through platform investments.
2
Portfolio companies refinanced
Maintaining an efficient Minimising return dilution to shareholders from holding excessive cash, while £404m
balance sheet retaining a good level of liquidity for future investment.
Total liquidity
Sustainability a key Ensuring that our investment decisions and asset-management approach consider 979MW, +9%
driver of performance both the risks and opportunities presented by sustainability.
Installed renewable energy capacity, increase in year
Our objectives and KPIs
Our objectives are to provide shareholders with: Our KPIs Rationale and definition Performance over the year
· Total return is how we measure the overall financial performance · Total return of £394 million in the year, or 14.7% on
of the Company time-weighted opening NAV and equity issued
· Total return comprises the investment return from the portfolio · The portfolio showed good resilience overall with strong
and income from any cash balances, net of management and performance fees and performance in particular from TCR, Infinis and Tampnet
operating and finance costs. It also includes foreign exchange movement and
movement in the fair value of derivatives and taxes · The hedging programme continues to reduce the volatility in NAV
from exchange rate movements
· Total return, measured as a percentage, is calculated against the
opening NAV, net of the final dividend for the previous year, and adjusted (on · Costs were managed in line with expectations
a time-weighted average basis) to take into account any equity issued and
capital returned in the year
Total return (% on opening NAV)
a total return of 8% to 10% per annum, 2019 15.4%
to be achieved over the medium term
2020 11.4%
2021 9.2%
2022 17.2%
2023 14.7%
Target 8-10%
Target
To provide shareholders with a total return of 8% to 10% per annum, to be
achieved over the medium term.
Met or exceeded target for 2023 and every prior year shown
a progressive annual dividend per share Annual distribution Rationale and definition Performance over the year
(pence per share)
· This measure reflects the dividends distributed to shareholders · Proposed total dividend of 11.15 pence per share, or £101
each year million, is in line with the target set at the beginning of the year
· The Company's business model is to generate returns from · Income generated from the portfolio and cash deposits, including
portfolio income and capital returns (through value growth and realised non-income cash distributions and other income from portfolio companies,
capital profits). Income, other portfolio company cash distributions and totalled £202 million for the year
realised capital profits generated are used to meet the operating costs of the
Company and to make distributions to shareholders · Operating costs and finance costs used to assess dividend
coverage totalled £66 million in the year
· The dividend is measured on a pence per share basis, and is
targeted to be progressive · The dividend was fully covered for the year
· Setting a total dividend target for FY24 of 11.90 pence per
share, 6.7% higher than for FY23
2019 8.65p
2020 9.20p
2021 9.80p
2022 10.45p
2023 11.15p
2024 Target 11.90p
Target
Progressive dividend per share policy.
FY24 dividend target of 11.90 pence per share.
Dividend per share increased every year since IPO
Our portfolio
New investment
Future Biogas
Investment rationale
· Future Biogas is one of the largest anaerobic digestion ('AD') plant
developers and biogas producers in the UK, operating 11 AD plants on behalf of
institutional investors under long-term contracts
· There is strong political support and growing corporate demand for
domestically-produced biomethane, which, as a direct substitute for fossil
natural gas, has an essential role to play in decarbonising some of the UK's
gas-dependent sectors such as heat, transport and manufacturing
· On a national scale, the use of biomethane (vs. natural gas) allows the
existing gas infrastructure to help meet the UK government's net zero and
energy security targets without any change to the existing system
· Future Biogas will develop a new generation of unsubsidised AD plants and
sell the resulting biomethane under long-term offtake agreements to corporate
buyers
· In the longer term, Future Biogas intends to enter the nascent but high
potential voluntary carbon offset market through carbon capture and storage
· Future Biogas has a highly experienced management team with a strong
track record in the sector
Characteristics
Essential role in the UK's decarbonisation agenda
Biomethane from AD is a ready-to-use and commercially viable solution for hard
to decarbonise industrial sectors. It does not require any upgrade to the
existing UK gas infrastructure. Energy produced by AD plants is carbon
neutral, as the CO(2) released during the process matches the CO(2) absorbed
from the atmosphere by the feedstock. In the future, carbon capture and
storage could be introduced to make the process carbon negative.
Established market position
Future Biogas is one of the largest producers of biomethane in the nascent UK
market and a highly experienced developer and operator of AD plants, with
full-service capabilities in development, construction and operations.
Supply/demand of biomethane
The challenge to decarbonise industrial and manufacturing sectors, and the
disparity in biomethane supply and demand, is expected to sustain a very
strong market for green gas in the long term.
Acceptable element of gas price risk
Future Biogas is exposed to a degree of gas price volatility through its
existing management contracts. However, new AD plants are core to our
investment thesis and will be underpinned by long-term offtake agreements with
corporates.
Sustainable farming practices
By promoting a regenerative farming approach, feedstock from energy crops can
be sustainably integrated into agricultural systems. The circular process of
returning digestate back to land can help replenish soil nutrients and carbon,
and displaces demand for carbon-intensive artificial fertilisers.
Opportunities for growth
The investment in Future Biogas, whilst modest today, creates an opportunity
for significant follow-on investment in new AD plant at attractive returns.
Portfolio review
The portfolio is generating strong growth momentum supported by long-term
tailwinds. We are confident that it will continue to generate attractive
further investment opportunities and is well positioned to deliver our target
returns.
The Company's portfolio was valued at £3,641 million at 31 March 2023 (2022:
£2,873 million) and delivered a total portfolio return in the year of £501
million, including income and allocated foreign exchange hedging (2022: £509
million).
Table 1 summarises the valuations and movements in the portfolio, as well as
the return for each investment, for the year.
Table 1: Portfolio summary (31 March 2023, £m)
Portfolio
Directors' Directors' Allocated Underlying total
valuation Investment Accrued Foreign valuation foreign portfolio return
31 March in the Divestment income Value exchange 31 March exchange income in in the
Portfolio assets 2022 year in the year movement movement translation 2023 hedging the year year(1)
TCR 279 352(2,4) (190)(3) 4 86 6 537 (2) 18 108
ESVAGT 548 44(2) (87)(3) (2) 7 (25) 485 22 46 50
Infinis 332 30(5) (9)(6) 2 52 - 407 - 16 68
GCX - 318(4) - 19 - (14) 323 15 18 19
Ionisos 237 - - 9 43 9 298 (7) 9 54
Tampnet 241 6(2) - - 52 (7) 292 13 6 64
Joulz 241 6(2) - - 30 10 287 (7) 6 39
Oystercatcher 230 - (12)(6) - 17 19 254 (14) 4 26
SRL 200 18(2) (1)(6) - 2 - 219 - 19 21
Valorem 144 - - - 38 6 188 (4) 4 44
DNS:NET 202 22(2,5) - - (54) 9 179 (6) 8 (43)
Attero 116 - (23)(6) - 47 4 144 (3) 1 49
Future Biogas - 28(4) - - - - 28 - - -
Economic infrastructure portfolio 2,770 824 (322) 32 320 17 3,641 7 155 499
Projects 103 - (104) (1) - 2 - (1) 1 2
Total portfolio reported in the Financial statements 2,873 824 (426) 31 320 19 3,641 6 156 501
1 This comprises the aggregate of value movement, foreign exchange translation,
allocated foreign exchange hedging and underlying portfolio income in the
year.
2 Capitalised interest totalling £95 million across the portfolio.
3 Syndication of investments in ESVAGT (£87 million) and TCR (£190 million).
4 New acquisitions of GCX (£318 million), Future Biogas (£28 million) and
further stake in TCR (£338 million).
5 Follow-on investments in Infinis (£30 million) and DNS:NET (£15 million).
6 Shareholder loan/share premium repayment (non-income cash).
The total portfolio return in the year of £501 million was 15.1% (2022: £509
million, 19.8%) of the aggregate of the opening value of the portfolio and
investments less amounts syndicated in the year (excluding capitalised
interest), which totalled £3,325 million.
Performance was strong across the portfolio, driven by outperformance from a
number of portfolio companies, but particularly TCR, Tampnet, Ionisos, Attero
and Valorem, each of which continues to benefit from positive underlying
growth trends. The other portfolio companies performed in line with
expectations, with the exception of DNS:NET, which continues to face
challenges with its fibre network roll out.
Table 2 shows the portfolio return in the year for each asset as a percentage
of the aggregate of the opening value of the asset and investments in, and
syndication of, the asset in the year (excluding capitalised interest). Note
that this measure does not time-weight for investments and syndications in the
year and includes foreign exchange movements net of hedging.
Table 2: Portfolio return by asset (year to 31 March 2023, %)
Total portfolio return 15.1
TCR 25.3
ESVAGT 10.9
Infinis 18.9
GCX* 6.0
Ionisos 22.8
Tampnet 26.4
Joulz 16.4
Oystercatcher 11.1
SRL 10.3
DNS:NET (19.6)
Valorem 30.5
Attero 42.1
Future Biogas* 0.6
Projects** 1.9
* GCX acquired in August 2022 and Future Biogas acquired in February 2023
and return not annualised.
** Divested in June 2022 and return not annualised.
Movements in portfolio value
The movements in portfolio value were driven principally by the delivery of
planned cash flows and other asset outperformance as well as new and follow-on
investments and syndications made during the year. A reconciliation of the
movement in portfolio value is shown in Table 3 below. The portfolio summary
shown in Table 1 details the analysis of these movements by asset. Changes to
portfolio valuations arise due to several factors, as shown in Table 4.
The portfolio generated a value gain of £320 million in the year, alongside
income of £156 million.
Table 3: Reconciliation of the movement in portfolio value (year to 31 March
2023, £m)
Opening portfolio value at 1 April 2022 2,873
Investment(1) 824
Divestment/capital repaid (426)
Value movement 320
Exchange movement(2) 19
Accrued income movement 31
Closing portfolio value at 31 March 2023 3,641
1 Includes capitalised interest.
2 Excludes movement in the foreign exchange hedging programme (see Table 12 in
the Financial review).
Portfolio activity
Our renewable energy generating companies, Infinis, Valorem and Attero,
performed strongly in the year and have made substantial progress in
developing their pipelines of new projects towards and into operation. This is
reflected in an overall increase in installed capacity from 898MW to 979MW
over the year, as shown in the Sustainability report in the Annual report and
accounts 2023.
Infinis had a very strong year, generating a value gain of £52 million driven
by higher forecast future power prices and price volatility which benefitted
the power response assets in particular. Its power response assets experienced
higher running hours driven by the UK's power generation capacity constraints.
Infinis made significant progress in further establishing a 1.5GW solar energy
generation and battery storage pipeline across various stages of development.
In March 2023, we invested a further £30 million of equity to support the
development of this pipeline, with the remainder of the funding coming from
the company's own cash generation and debt facilities.
Valorem materially outperformed the prior year despite the French government's
90% windfall tax. Its closed capacity now totals 778MW of wind and solar
projects including new projects in France and Finland and its first project in
Greece. It has a healthy 5.7GW pipeline of wind and solar projects in Europe
as well as long-term feed-in tariffs unaffected by the windfall tax. The
market fundamentals in France and the EU for renewable developers remains
strong, particularly due to recent availability issues experienced by the
French nuclear power sector and France's renewables development targets.
French solar and wind auction tariffs increased by c.25% in 2022 versus 2021.
Attero also benefitted from high power prices although its hedging strategy
insulates it from short-term price volatility. Despite waste supply volumes
being slightly lower than expectations due to lower economic activity, the
company outperformed the prior year due to the higher electricity price
outlook and good availability at its EfW plants.
The £47 million value increase in Attero is due to several waste supply
contracts recontracted at increased gate fees and for longer periods, as well
as the higher longer-term electricity price outlook.
Preparations for a potential divestment of Attero are at an advanced stage.
Any sale proceeds are expected to contribute towards partially repaying
drawings on the Company's RCF.
TCR materially outperformed expectations, increasing in value by £86 million,
due to a number of significant contract wins and extensions, higher
utilisation rates of the fleet, and stronger than expected repair and
maintenance activity.
This outperformance reflects a sustained rebound of air traffic levels as well
as an increased post-pandemic demand for its full-service rental model
globally. TCR added over 35 airports to its portfolio in 2022 and its
off-lease rate has reverted to pre-Covid-19 levels.
In November 2022, TCR completed the bolt-on acquisition of Adaptalift, an
Australian-headquartered ground service equipment lessor, adding incremental
contracted EBITDA at an attractive valuation with strong expected synergies.
TCR successfully raised additional debt from existing and new lenders to
support its next growth phase.
ESVAGT and Joulz, which indirectly contribute to the energy transition, have
performed well and are benefitting from the tailwinds in this sector.
ESVAGT had a good year, benefitting from contract rates in excess of our
expectations and high utilisation levels. Inflation is generally positive for
ESVAGT due to its index-linked contracts, although cost inflation, in
particular fuel costs, accelerated in the year.
In January 2023, ESVAGT's joint venture in the United States, CREST, won its
first SOV contract in the US offshore wind market. The 15-year SOV contract is
with Siemens Gamesa, servicing the Coastal Virginia Offshore Windfarm, the
largest offshore wind project in the US (2.6GW), and was an important
milestone in ESVAGT's growth ambitions, representing an incremental step up in
earnings.
The pipeline for further new SOVs in the North Sea and the rapidly
accelerating US wind market is strong and we expect a number of tenders will
take place over the next 12 months.
ESVAGT's ERRV segment continued to see good momentum due to the improved oil
and gas markets, attractive supply/demand dynamics and an increased focus on
security of supply in Europe.
Joulz performed ahead of expectations due to strong growth in the order book,
including for its large integrated Energy Transition Solutions. The business
made considerable progress diversifying its supplier base to mitigate the risk
of delays previously experienced in completing new installations, primarily
due to key hardware suppliers struggling to keep up with rising demand.
The company's long-term contracts are directly linked to inflation, and this
provided good protection for higher operating and capital costs.
In December 2022, Joulz successfully raised debt financing, which was utilised
to replenish its revolving credit facility, supporting the funding of further
growth opportunities. As part of a planned transition, a new CEO joined the
business in March 2023.
Our communications infrastructure investments, Tampnet, GCX and DNS:NET, are
taking advantage of the acceleration in digitalisation trends.
Tampnet performed well in the year, increasing in value by £52 million,
driven by higher forecast revenues due to the signing of new private network
contracts, identification of new potential growth opportunities and extended
life assumptions resulting from higher energy prices and the increased focus
on security of energy supply by governments in Europe and the US. It exceeded
budgeted revenue and EBITDA targets due to increased offshore activity on the
back of improved sentiment in the energy markets and stronger demand for
bandwidth upgrades.
Tampnet is progressing a number of new fibre projects in the North Sea and the
Gulf of Mexico and signed a number of important new contracts in both regions.
The company is also in discussions with several carbon capture and storage
projects in the North Sea which are located within Tampnet's existing network.
The digitisation proposition offered by Tampnet (combining low-latency
connectivity with services such as Private Networks) is continuing to prove
popular with customers, and we expect to see an acceleration of the short-term
penetration of digitisation projects.
GCX had a good year with strong growth in lease revenues, although
indefeasible right of use sales are behind schedule. The business secured a
significant managed services contract during the year and is experiencing
increasing demand for bandwidth capacity across its network. The business is
evaluating a number of opportunities to expand its subsea network as well as
the development of terrestrial assets. GCX and Tampnet announced a
strategically important partnership which supports the increasing network
connectivity demands of the data centre market in the Nordics.
DNS:NET continues to experience delays in the roll out of its fibre network in
the Berlin area and specifically in connecting and activating customers. We
have updated the forecasts to reflect more conservative roll-out assumptions,
which has led to a £54 million value decrease in the year.
Operational performance was below expectations as delays to connect and
activate new homes persist, which we see as an industry-wide challenge. The
delivery of a network built by a local authority to be transferred to DNS:NET
under concession contract is also running behind schedule.
During the year, we invested a further £15 million to support the business's
roll out and have worked with the company to optimise its business model and
strengthen the management team in order to minimise and recover the roll out
delays. A new CFO was appointed in January 2023. He is overseeing the
implementation of a new ERP system and other initiatives. Hiring to further
strengthen the management team is also underway, aimed at providing the
bandwidth and experience to accelerate the network roll out.
Ionisos delivered meaningful growth against prior year due to strong volume
growth, notably in the medical and pharmaceutical segments, resulting in a
£43 million gain in value.
In order to meet growing demand, Ionisos progressed various expansion
opportunities, including extending existing sterilisation facilities,
acquiring the Daniken E-Beam plant in Switzerland, and a new greenfield EO
plant in Kleve, Germany, which became operational in January 2023. In a
capacity constrained market, these initiatives will increase Ionisos's ability
to address and meet strong underlying demand growth for sterilisation, whilst
diversifying its technology mix and expanding the geographic footprint from
which it will service its medical and pharmaceutical client base.
Oystercatcher performed well in the year. Advario Singapore Limited's ('ADS')
customer activity levels were high and all available capacity was let. This
was despite a backdrop of a backwardation market structure for petroleum
products. Our positive medium-term outlook remains unchanged given the
terminal is the premier gasoline blending terminal in Singapore and the wider
region.
A strategic transition to some green fuel storage is progressing well. In
2022, a first agreement was signed with a customer to start storing and
blending sustainable aviation fuel ('SAF') at ADS. The project to convert
existing storage to accommodate SAF is on track and is expected to be
operational in mid-2023. We believe this gives ADS a first mover advantage for
SAF-related business in Singapore.
SRL performed broadly in line with plan during the financial year. Whilst
higher than in the previous year, activity levels were slightly lower than
expected due to delays in capital expenditure programmes in the public sector
and construction sectors resulting in fewer days on hire than forecast. The
Investment Manager is working closely with management to professionalise
account management processes and optimise fleet utilisation and build.
Summary of portfolio valuation methodology
Investment valuations are calculated at the half-year and at the financial
year end by the Investment Manager and then reviewed by the Board. Investments
are reported at the Directors' estimate of fair value at the relevant
reporting date.
The valuation principles used are based on International Private Equity and
Venture Capital ('IPEV') valuation guidelines, generally using a discounted
cash flow ('DCF') methodology (except where a market quote is available),
which the Investment Manager considers to be the most appropriate valuation
methodology for unquoted infrastructure equity investments.
Where the DCF methodology is used, the resulting valuation is checked against
other valuation benchmarks relevant to the particular investment, including,
for example:
· earnings multiples;
· recent transactions; and
· quoted market comparables.
In determining a DCF valuation, we consider and reflect changes to the two
principal inputs, being forecast cash flows from the investment and discount
rates.
We consider both the macroeconomic environment and investment-specific value
drivers when deriving a balanced base case of cash flows and selecting an
appropriate discount rate.
Inflation in the UK and Europe has risen sharply which has put pressure on
supply chain and employee costs.
The portfolio is positively correlated to inflation, but the ability to pass
cost inflation to customers varies by portfolio company so we take a granular
approach to modelling the effects of inflation.
Higher longer-term power prices have positively affected the valuation of our
energy generating portfolio companies, although the majority of our power
price exposure was hedged in the short to medium term.
Future power price projections are taken from independent forecasters and
changes in these assumptions will affect the future value of these
investments. Recently introduced taxes on renewable electricity generators
vary in their applicability and we have considered their impact on each
company individually, based on their circumstances.
Table 4: Components of value movement (year to 31 March 2023, £m)
Value movement component Value movement Description
in the year
Planned growth 175 Net value movement resulting from the passage of time, consistent with the
discount rate and cash flow assumptions at the beginning of the year less
distributions received and capitalised interest in the year.
Other asset performance 99 Net value movement arising from actual performance in the year and changes to
future cash flow projections, including financing assumptions and changes to
regulatory assumptions.
Discount rate movement (6) Value movement relating to changes in the discount rate applied to the
portfolio cash flows.
Macroeconomic assumptions 52 Value movement relating to changes to macroeconomic out-turn or assumptions,
eg. power prices, inflation, interest rates and taxation rates. This includes
changes to regulatory returns that are directly linked to macroeconomic
variables.
Total value movement before exchange 320
Foreign exchange retranslation 19 Movement in value due to currency translation to year-end date.
Total value movement 339
TCR operates in the aviation sector, which has been severely affected by
travel restrictions over the past three years.
The value of TCR assumes a full recovery in air traffic to pre-Covid-19 levels
in 2024, consistent with the assumptions made in the prior year.
As a 'through-the-cycle' investor with a strong balance sheet, we consider
valuations in the context of the longer-term value of the investments. This
includes consideration of climate change risk and stranded asset risk. Factors
considered include physical risk, litigation risk linked to climate change and
transition risk (for example, assumptions on the timing and extent of
decommissioning of North Sea oil fields, which affects Tampnet and ESVAGT).
We take a granular approach to these risks, for example each relevant offshore
oil and gas field has been assessed individually to forecast the market over
the long term and a low terminal value has been assumed at the end of the
forecast period.
In the case of stranded asset risk, we consider long-term threats that may
impact value materially over our investment horizon, for example,
technological evolution, climate change, or societal change.
For ESVAGT, which operates ERRVs in the North Sea servicing sectors, including
the oil and gas market, we do not assume any new vessels or replacement
vessels in our valuation for that segment of the business.
A number of our portfolio companies are set to benefit from these long-term
megatrends and, in the base case for each of our valuations, we take a
balanced view of potential factors that we estimate are as likely to result in
underperformance as outperformance.
Discount rate
Table 5 shows the movement in the weighted average discount rate applied to
the portfolio at the end of each year since the Company's inception and the
position as at March 2023. The weighted average discount rate increased over
the course of FY23 due to the evolution of the portfolio mix following the
realisation of the European Projects portfolio and the completion of the GCX
and Future Biogas acquisitions.
The range of discount rates used in individual valuations at 31 March 2023 is
also shown, which is broadly consistent with the prior year.
During the year, we witnessed an increase in risk-free rates across Europe as
central banks took action in response to higher inflation. Given the
significant risk premium included in our long-term discount rates and the
continued appetite for high-quality infrastructure businesses, rising
risk-free rates did not impact the discount rates used to value our portfolio
companies at 31 March 2023.
Table 5: Portfolio weighted average discount rate (31 March, %)
March 08 12.4
March 09 13.8
March 10 12.5
March 11 13.2
March 12 12.6
March 13 12.0
March 14 11.8
March 15 10.2
March 16 9.9
March 17 10.0
March 18 10.5
March 19 10.8
March 20 11.3
March 21 10.8
March 22 10.9
March 23 11.3
March 23 range 10.0 to 13.2
Portfolio company debt
Our portfolio companies are funded by long-term senior-secured debt alongside
equity from the Company and other shareholders. Valorem also uses project
financing in its portfolio of renewable energy projects. There were no
mezzanine or junior debt structures within our portfolio at 31 March 2023
(2022: none).
In recent years, the Investment Manager proactively refinanced facilities
across the portfolio, extending the term of the debt and securing low fixed
rates or hedged interest rates.
When considering the appropriate quantum of debt for a portfolio company, we
typically look for an investment grade level of risk. Some portfolio companies
have an investment grade credit rating from a credit rating agency. Table 6
below shows the average loan-to-value ('LTV') ratio across the portfolio as
well as the portfolio value analysed across a range of loan-to-value levels.
The average loan-to-value ratio is 33% (2022: 34%) with all portfolio
companies below a ratio of 40% at 31 March 2023 (2022: below 45%).
Table 6: Portfolio company leverage* (3iN value at 31 March 2023)
Net debt/Enterprise value ('LTV') 3iN value
<25% £473m
26-30% £907m
31-35% £1,089m
36-40% £956m
Average LTV(1) 33%
1 LTV is calculated as the aggregate Net Debt to Enterprise Value ratio of the
individual portfolio companies.
* This analysis excludes Future Biogas, which was acquired in February 2023, and
Valorem, which is financed at the project level. Project financing typically
employs higher levels of gearing.
Investment track record
As shown in Table 7, since its launch in 2007, 3i Infrastructure has built a
portfolio that has provided:
· significant income, supporting the delivery of a progressive annual
dividend;
· consistent capital growth; and
· strong capital profits from realisations.
These have contributed to a 19% annualised asset Internal Rate of Return
('IRR') since the Company's inception. The European portfolio has generated
strong returns, in line with, or in many cases ahead of, expectations.
These returns were underpinned by substantial cash generation in the form of
income or capital profits.
The value created through this robust investment performance has been
crystallised in a number of instances through well-managed realisations, shown
as 'Realised assets' in Table 7.
While the Company is structured to hold investments over the long term, it has
sold assets where compelling offers will generate additional shareholder
value.
Portfolio asset returns in Table 7 include an allocation of foreign exchange
hedging where applicable.
Table 7: Portfolio asset returns throughout holding period (since inception,
£m)
Value Proceeds on
including disposals/
Money Total accrued capital Cash
multiple IRR cost income returns income
Existing portfolio (Total return)
ESVAGT 1.5x 329 485 - -
Infinis 1.7x 352 407 88 99
TCR 1.9x 304 537 4 24
Tampnet 1.6x 187 292 - 13
Joulz 1.6x 195 287 2 24
Ionisos 1.7x 186 298 - 10
Oystercatcher 3.2x 139 254 47 146
DNS:NET 0.9x 205 179 - 6
SRL 1.2x 191 219 1 2
Valorem 2.6x 81 188 - 22
Attero 2.2x 88 144 25 28
Future Biogas 1.0x 28 28 - -
GCX 1.0x 318 323 - -
Realised assets (Total return)
WIG (realised December 2019) 1.7x 27% 265 - 431 21
XLT (realised March 2019) 5.9x 40% 63 - 332 38
Elenia (realised February 2018) 4.5x 31% 195 - 766 106
AWG (realised February 2018) 3.3x 16% 173 - 410 154
Eversholt (realised April 2015) 3.3x 41% 151 - 391 114
Projects (realised assets) 1.9x 22% 289 - 446 103
Others(1) 1.2x 8% 138 - 145 24
India Fund 0.6x (6%) 108 - 61 -
Portfolio asset returns include allocation of foreign exchange hedging where
applicable. Dates of asset realisations refer to completion dates.
1 Others includes junior debt portfolio, T2C and Novera.
Asset IRR to 31 March 2023
19%
Since inception
Financial review
James Dawes
CFO, Infrastructure
The Company delivered strong NAV growth and continues to grow its dividend per
share.
Key financial measures (year to 31 March) 2023 2022
Total return(1) £394m £404m
NAV £3,101m £2,704m
NAV per share 336.2p 303.3p
Total income £158m £133m
Total income and non-income cash £202m £143m
Portfolio asset value £3,641m £2,873m
Cash balances £5m £17m
Total liquidity(2) £404m £786m
1 IFRS Total comprehensive income for the year.
2 Includes cash balances of £5 million (2022: £17 million) and £399 million
(2022: £769 million) undrawn balances available under the Company's total
revolving credit facility of £900 million.
The Company delivered another year of outperformance, with the portfolio
generating strong capital growth and income materially higher than the prior
year. The dividend was well covered by net income this year. The target
dividend for FY24 of 11.90 pence per share is an increase of 6.7% over FY23.
Total net investment in the year was £452 million, including the closing of
the investments in GCX, TCR and Future Biogas, the syndication of a portion of
the investments in ESVAGT and TCR and further investments in DNS:NET and
Infinis. The Company maintained low levels of uninvested cash throughout the
year and actively managed its liquidity position through its £900 million RCF
facility and a £100 million capital raise in February 2023.
Returns
Total return
The Company generated a total return for the year of £394 million,
representing a 14.7% return on time-weighted opening NAV and equity issued net
of the prior year final dividend (2022: £404 million, 17.2%). This
performance is significantly ahead of the target return of 8% to 10% per annum
to be achieved over the medium term.
This outperformance was driven by strong performance across the portfolio,
particularly from TCR, Tampnet, Valorem, Attero and Ionisos, partially offset
by underperformance from DNS:NET. Changes in the valuation of the Company's
portfolio assets are described in the Movements in portfolio value section of
the Portfolio review. The investment cases of our portfolio companies
reflected in the valuations at 31 March 2023 are fully funded, with the
exception of the DNS:NET fibre roll out. Our companies continue to generate
discretionary growth opportunities that are accretive to our investment cases.
Total income and non-income cash of £202 million in the year was
significantly higher than last year, due to income from new investments in
GCX, ESVAGT, TCR and SRL (2022: £143 million).
Non-income cash receipts reflect distributions from underlying portfolio
companies, which would usually be income to the Company, but which are
distributed as a repayment of investment for a variety of reasons. Whilst
non-income cash does not form part of the total return shown in Table 8, it is
included when considering dividend coverage.
An analysis of the elements of the total return for the year is shown in Table
8.
Table 8: Summary total return (year to 31 March, £m)
2023 2022
Capital return (excluding exchange) 320 375
Foreign exchange movement in portfolio 19 9
Capital return (including exchange) 339 384
Movement in fair value of derivatives and exchange on EUR borrowings 6 (2)
Net capital return 345 382
Total income 158 133
Costs(1) (109) (111)
Total return 394 404
1 Includes non-portfolio related exchange gain of £2 million (2022: loss of £3
million).
Table 9: Reconciliation of the movement in NAV (year to 31 March 2023, £m)
Opening NAV at 1 April 2022(1) 2,657
Equity raised in February 2023 100
Adjusted opening NAV 2,757
Capital return 320
Net foreign exchange movement(2) 25
Total income 158
Net costs including management fees(3) (109)
NAV before distributions 3,151
Distribution to shareholders (50)
Closing NAV at 31 March 2023 3,101
1 Opening NAV of £2,704 million net of final dividend of £47 million for the
prior year.
2 Foreign exchange movements are described in Table 12.
3 Includes non-portfolio related exchange gain of £2 million.
Capital return
The capital return is the largest element of the total return. The portfolio
generated a value gain of £320 million in the year to 31 March 2023 (2022:
£375 million), as shown in Table 9. There was a positive contribution across
the majority of the portfolio and the largest contributors were TCR (£86
million), Infinis (£52 million) and Tampnet (£52 million). The only negative
contribution was from DNS:NET (£54 million). These value movements are
described in the Portfolio review section.
Income
The portfolio generated income of £156 million in the year (2022: £127
million). Of this amount, £1 million was through dividends (2022: £24
million) and £155 million through interest on shareholder loans (2022: £103
million). An additional £2 million of interest was accrued on the vendor loan
notes issued in lieu of WIG proceeds (2022: £6 million) together with a
further £0.5 million of interest receivable on deposits (2022: £0.1
million).
Total income and non-income cash is shown in Table 10.
Table 10: Total income and non-income cash (year to 31 March, £m)
2023 2022
Total income 158 133
Non-income cash 44 10
Total 202 143
A strong income contribution from the new investments in GCX and SRL and
higher non-income cash receipts, particularly from Attero, offset the
reduction in income from the divestment of the European Projects portfolio. A
breakdown of portfolio income is provided in Table 13, together with an
explanation of the change from prior year.
Interest income from the portfolio was significantly higher than prior year
due to the new investments in GCX, SRL, TCR and ESVAGT. Dividend income was
lower than prior year due to a high level of dividend income from Tampnet in
the prior year as liquidity preserved during the pandemic was released.
Foreign exchange impact
The portfolio is diversified by currency as shown in Table 11. We aim to
deliver steady NAV growth for shareholders, and the foreign exchange hedging
programme helps us to do this by reducing our exposure to fluctuations in the
foreign exchange markets.
Portfolio foreign exchange movements, after accounting for the hedging
programme, increased the net capital return by £25 million (2022: increased
by £7 million).
Table 11: Portfolio value by currency (at 31 March 2023)
EUR 52%
GBP 18%
DKK 13%
USD 9%
NOK 8%
As shown in Table 12, the reported foreign exchange gain on investments
of £19 million (2022: £9 million) included a gain of £13 million from the
Company's exposure to the US dollar, largely through Tampnet, which was not
hedged in the first half of the year. This was accompanied by a £6 million
gain on the hedging programme (2022: loss of £2 million). The positive hedge
benefit resulted from favourable interest rate differentials on the euro
hedging programme.
Table 12: Impact of foreign exchange ('FX') movements on portfolio value
(year to 31 March 2023, £m)
Hedged assets Unhedged assets for part of the year
(EUR/SGD/DKK/NOK/USD)
(USD)
FX gain before hedging 6 13
FX gain after hedging 12 13
Table 13: Breakdown of portfolio income (year to 31 March, £m)
Dividend Interest Dividend Interest Comments
(FY23) (FY23) (FY22) (FY22)
ESVAGT - 46 - 28 Further investment in FY22
Tampnet - 6 17 5 FY22 release of liquidity retained
Infinis - 16 - 17
TCR - 18 - 13 Further investment in October 2022
Ionisos - 9 - 9
SRL - 19 - 7 Full year of ownership
Joulz - 6 - 6
Oystercatcher - 4 - 5
Attero - 1 4 1 Additional non-income cash of £23m
DNS:NET - 8 - 4 Further investment in FY22 and FY23
Valorem 1 3 1 3
GCX - 18 - - New investment in FY23
Projects Portfolio - 1 2 5 Divestment in June 2022
Costs
Management and performance fees
During the year to 31 March 2023, the Company incurred management fees of £47
million (2022: £43 million), including transaction fees of £3 million (2022:
£10 million). The fees, payable to 3i plc, consist of a tiered management
fee, and a one-off transaction fee of 1.2% payable in respect of new
investments. The management fee tiers range from 1.4%, reducing to 1.2% for
any proportion of gross investment value above £2.25 billion.
An annual performance fee is also payable by the Company, amounting to 20% of
returns above a hurdle of 8% of the total return. This performance fee is
payable in three equal annual instalments, with the second and third
instalments only payable if certain future performance conditions are met.
This hurdle was exceeded for the year ended 31 March 2023, resulting in a
performance fee payable to 3i plc in respect of the year ended 31 March 2023
of £45 million (2022: £54 million).
The first instalment, of £15 million, will be paid in May 2023 along with the
second instalment of £18 million relating to the previous year's performance
fee and the third instalment of £2 million relating to the FY21 performance
fee.
For a more detailed explanation of how management and performance fees are
calculated, please refer to Note 18 of the accounts.
Fees payable
Fees payable on investment activities include costs for transactions that did
not reach, or have yet to reach, completion and the reversal of costs for
transactions that have successfully reached completion and were subsequently
borne by the portfolio company. For the year to 31 March 2023, fees payable
totalled less than £1 million (2022: £3 million).
Other operating and finance costs
Operating expenses, comprising Directors' fees, service provider costs and
other professional fees, totalled £3 million in the year (2022: £3 million).
Finance costs of £16 million (2022: £5 million) in the year comprised
arrangement and commitment fees for the Company's £900 million RCF and
interest on drawings. Finance costs were higher than in FY22 due to an
increase in interest rates and a greater average drawn balance.
Ongoing charges ratio
The ongoing charges ratio measures annual operating costs, as disclosed in
Table 14 below, against the average NAV over the reporting period.
The Company's ongoing charges ratio is calculated in accordance with the
Association of Investment Companies ('AIC') recommended methodology and was
1.64% for the year to 31 March 2023 (2022: 1.41%). The ongoing charges ratio
is higher in periods where new investment levels are high and new equity is
raised or capital is returned to shareholders. Realisation of assets reduces
the ongoing charges ratio. The cost items that contributed to the ongoing
charges ratio are shown below.
The AIC methodology does not include transaction fees, performance fees or
finance costs. However, the AIC recommends that the impact of performance fees
on the ongoing charges ratio is noted, where performance fees are payable. The
ratio including the performance fee was 3.19% (2022: 3.52%). The total return
of 14.7% for the year is after deducting this performance fee and ongoing
charges.
Table 14: Ongoing charges (year to 31 March, £m)
2023 2022
Investment Manager's fee 44.6 32.6
Auditor's fee 0.8 0.6
Directors' fees and expenses 0.5 0.5
Other ongoing costs 1.9 2.4
Total ongoing charges 47.7 36.1
Ongoing charges ratio 1.64% 1.41%
Balance sheet
The NAV at 31 March 2023 was £3,101 million (2022: £2,704 million). The
principal components of the NAV are the portfolio assets, cash holdings, the
fair value of derivative financial instruments, borrowings under the RCF and
other net assets and liabilities. A summary balance sheet is shown in Table
15.
At 31 March 2023, the Company's net assets after the deduction of the proposed
final dividend were £3,050 million (2022: £2,657 million).
Table 15: Summary balance sheet (at 31 March, £m)
2023 2022
Portfolio assets 3,641 2,873
Cash balances 5 17
Derivative financial instruments 39 8
Borrowings (501) (231)
Other net (liabilities)/assets (83) 37
NAV 3,101 2,704
Cash and other assets
Cash balances at 31 March 2023 totalled £5 million (2022: £17 million).
Cash on deposit was managed actively by the Investment Manager and there are
regular reviews of counterparties and their limits. Cash is principally held
in AAA-rated money market funds.
Other net assets and liabilities predominantly comprise a performance fee
accrual of £83 million (2022: £64 million), including amounts relating to
prior year fees.
The movement from March 2022 is due to an increase in the performance fee
payable of £45 million, following the outperformance in the period. £26
million of prior year performance fees were paid during the period. The vendor
loan note of £98 million, included as an asset within other net assets at
March 2022, was redeemed in July 2022.
Borrowings
The Company increased the commitments under its RCF in July 2022 from £700
million to £900 million in order to maintain a good level and maturity of
liquidity for further investment whilst minimising returns dilution from
holding excessive cash balances. This is a three-year facility, with a
maturity date of November 2025. A further one-year extension option is
available under the facility agreement. At 31 March 2023, the total amount
drawn was £501 million.
An additional credit facility of £300 million available at the beginning of
this financial year, with a maturity of less than one year, was cancelled in
July 2022 at the same time as the commitments under the RCF were increased.
Capital raise
In February 2023, the Company successfully completed a capital raise, with net
proceeds of £100 million, by way of a placing of ordinary shares in the
capital of the Company at 330 pence per share. The placing price represented a
discount of approximately 3.4% to the share price immediately prior to the
announcement of the placing. A total of 30,915,990 new ordinary shares were
admitted to trading on the London Stock Exchange main market for listed
securities on 14 February 2023. The Company now has a total of 922,350,000
shares in issue, an increase of 3.5%. Soft pre-emption was followed where
possible in allocating the shares.
NAV per share
The total NAV per share at 31 March 2023 was 336.2 pence (2022: 303.3 pence).
This reduces to 330.6 pence (2022: 298.1 pence) after the payment of the final
dividend of 5.575 pence (2022: 5.225 pence). There are no dilutive securities
in issue.
Dividend and dividend cover
The Board has proposed a dividend for the year of 11.15 pence per share, or
£101 million in aggregate (2022: 10.45 pence; £93 million). This is in line
with the Company's target announced in May last year.
When considering the coverage of the proposed dividend, the Board assesses the
income earned from the portfolio, interest received on cash balances and any
additional non-income cash distributions from portfolio assets which do not
follow from a disposal of the underlying assets, as well as the level of
ongoing operational costs incurred in the year. The Board also takes into
account any surpluses retained from previous years, and net capital profits
generated through asset realisations, which it considers available as dividend
reserves for distribution.
Table 16 shows the calculation of dividend coverage and dividend reserves. The
dividend was fully covered for the year with a surplus of £35 million (2022:
no surplus).
The retained amount available for distribution, following the payment of the
final dividend, the realised profit over cost relating to the sale of the
European Projects portfolio and the performance fee will be £814 million
(2022: £794 million). This is a substantial surplus, which is available to
support the Company's progressive dividend policy, particularly should
dividends not be fully covered by income in a future year.
A shortfall could arise, for example, due to holding substantial uninvested
cash or through lower distributions being received from portfolio companies in
order to preserve liquidity.
Table 16: Dividend cover (year to 31 March, £m)
2023 2022
Total income, other income and non-income cash 202 143
Operating costs, including management fees (66) (50)
Dividends paid and proposed (101) (93)
Dividend surplus for the year 35 -
Dividend reserves brought forward from prior year 794 868
Realised gain/(loss) over cost on disposed assets 30 (20)
Performance fees (45) (54)
Dividend reserves carried forward 814 794
Table 17 shows that the Company has consistently covered the dividend over the
last five years.
Table 17: Dividend cover (five years to 31 March 2023, £m)
Net Dividend
income(1)
Mar 2019 165 70
Mar 2020 105 82
Mar 2021 87 87
Mar 2022 93 93
Mar 2023 136 101
1 Net income is Total income, other income and non-income cash less operating
costs.
Sensitivities
The sensitivity of the portfolio to key inputs to our valuations is shown in
Table 18 and described in more detail in Note 7 to the accounts. The portfolio
valuations are positively correlated to inflation. The longer-term inflation
assumptions beyond two years remain consistent with central bank targets, eg.
UK CPI at 2%.
The sensitivities shown in Table 18 are indicative and are considered in
isolation, holding all other assumptions constant. Timing and quantum of price
increases will vary across the portfolio and the sensitivity may differ from
that modelled. Changing the inflation rate assumption may necessitate
consequential changes to other assumptions used in the valuation of each
asset.
Table 18: Portfolio sensitivities (year to 31 March 2023)
Sensitivity -1% (£m) -1% (%) +1% (£m) +1% (%)
Discount rate 343 9.4 (296) (8.1)
Inflation (for two years) (52) (1.4) 47 1.3
Interest rate 175 4.8 (182) (5.0)
Alternative Performance Measures ('APMs')
We assess our performance using a variety of measures that are not
specifically defined under IFRS and are therefore termed APMs. The APMs that
we use may not be directly comparable with those used by other companies.
These APMs provide additional information of how the Company has performed
over the year and are all financial measures of historical performance.
The APMs are consistent with those disclosed in prior years but this year we
have added two new APMs, Total liquidity and Portfolio debt to enterprise
value. The Directors monitor total liquidity to assess the Company's ability
to make further investments, the efficiency of the balance sheet, and
short-term viability. Portfolio debt to enterprise value is monitored to
assess the underlying gearing of portfolio companies, the consequential risk
in the forecast cashflows of those companies and the ability of portfolio
companies to fund capital expenditure from their own resources.
· Total return on opening NAV reflects the performance of the capital
deployed by the Company during the year. This measure is not influenced by
movements in share price or ordinary dividends to shareholders. This is a
common APM used by investment companies
· The NAV per share is a measure of the underlying asset base attributable
to each ordinary share of the Company and is a useful comparator to the share
price. This is a common APM used by investment companies
· Total income and non-income cash is used to assess dividend coverage
based on distributions received and accrued from the investment portfolio
· Investment value including commitments measures the total value of
shareholders' capital deployed by the Company
· Total portfolio return percentage reflects the performance of the
portfolio assets during the year
· Total liquidity is a measure of the Company's ability to make further
investments and meet its short-term obligations
· Portfolio debt to enterprise value is a measure of underlying
indebtedness of the portfolio companies
The definition and reconciliation to IFRS of the APMs is shown below.
APM Purpose Calculation Reconciliation to IFRS
Total return on A measure of the overall financial performance of the Company. It is calculated as the total return of £394 million, as shown in the The calculation uses IFRS measures.
opening NAV
Statement of comprehensive income, as a percentage of the opening NAV of
£2,704 million net of the final dividend for the previous year of £47
million, adjusted on a time-weighted basis for the receipt of the £100
million capital raise on 14 February 2023. An adjustment to increase the
opening NAV by £13 million is required for this time weighting.
For further information see the KPI section.
NAV per share A measure of the NAV per share in the Company. It is calculated as the NAV divided by the total number of shares in issue at The calculation uses IFRS measures and is set out in Note 14 to the accounts.
the balance sheet date.
Total income and A measure of the income and other cash receipts by the Company which support It is calculated as the total income from the underlying portfolio and other Total income uses the IFRS measures Investment income and Interest receivable.
non-income cash the payment of expenses and dividends. assets plus non-income cash being the repayment of shareholder loans not The non-income cash, being the proceeds from partial realisations of
resulting from the disposal of an underlying portfolio asset. investments, are shown in the Cash flow statement. The realisation proceeds
which result from a partial sale of an underlying portfolio asset are not
included within non-income cash.
Investment A measure of the size of the investment portfolio including the value of It is calculated as the portfolio asset value plus the amount of the The portfolio asset value is the 'Investments at fair value through profit or
value including further contracted future investments committed by the Company. contracted commitment. At 31 March 2023, the Company had no investment loss' reported under IFRS. The value of future commitments is set out in Note
commitments commitments. 16 to the accounts.
Total portfolio A measure of the financial performance of the portfolio. It is calculated as the total portfolio return in the year of £501 million, The calculation uses capital return (including exchange), movement in fair
return percentage as shown in Table 1, as a percentage of the sum of the opening value of the value of derivatives, underlying portfolio income, opening portfolio value and
portfolio and investments less amounts syndicated in the year (excluding investment in the year. The reconciliation of all these items to IFRS is shown
capitalised interest) of £3,325 million. in Table 1, including in the footnotes.
Total liquidity A measure of the Company's ability to make further investments and meet its It is calculated as the cash balance of £5 million plus the undrawn balance The calculation uses the cash balance, which is an IFRS measure and undrawn
short-term obligations. available under the Company's revolving credit facility of £399 million. balances available under the Company's revolving credit facility, which are
described in Note 11 to the accounts.
Portfolio debt to enterprise value A measure of underlying indebtedness of the portfolio companies. It is calculated as total debt as a percentage of the enterprise value of the The calculation is a portfolio company measure and therefore cannot be
portfolio companies, and does not include indebtedness of the Company. reconciled to the Company's accounts under IFRS.
Risk report
"Thoughtful risk management is a cornerstone of our risk governance
framework."
Wendy Dorman
Chair, Audit and Risk Committee
This was the second year of a three-year cycle of risk reviews, whereby the
Audit and Risk Committee (the 'Committee'), alongside the Investment Manager,
conducted a thorough review to identify and consider the impact and likelihood
of the key, principal and emerging risks facing the Company today.
Against the backdrop of the current geopolitical and macroeconomic
environment, the Company has continued to perform strongly, supported by our
risk management framework and process, which enables appropriate and
responsive decision making.
The following sections explain how we identify and manage risks to the
Company. We outline the key risks, our assessment of their potential impact on
the Company and our portfolio in the context of the current environment and
how we seek to mitigate them.
Our risk review process follows a three-year cycle, whereby once every three
years we carry out a detailed review involving each Director independently
assessing the risks facing the Company, then collating and comparing the
results, which we refer to as the 'blank sheet of paper exercise'. This was
performed last year as it was the first year of the cycle.
This year, a number of risks were reassessed to reflect developments in the
year, and the list of emerging risks was refreshed. The Committee updated the
risk register and risk matrix as a result of the analysis conducted during the
year, and considered the alignment of the principal risks identified to the
Company's strategic objectives.
Approach to risk governance
The Board is ultimately responsible for the risk management of the Company. It
seeks to achieve an appropriate balance between mitigating risk and generating
long-term sustainable risk-adjusted returns for shareholders. Integrity,
objectivity and accountability are embedded in the Company's approach to risk
management.
The Board exercises oversight of the risk framework, methodology and process
through the Committee. The risk framework is designed to provide a structured
and consistent process for identifying, assessing and responding to risks. The
Committee ensures that there is a consistent approach to risk across the
Company's strategy, business objectives, policies and procedures.
The Company is also reliant on the risk management frameworks of the
Investment Manager and other key service providers, as well as on the risk
management operations of each portfolio company.
The Board manages risks through reports from the Investment Manager and other
service providers and through representation on all portfolio companies'
boards by the Investment Manager's team members.
There were no significant changes to the overall approach to risk governance
or its operation in FY23, but we continued to refine our framework for risk
management where appropriate.
Risk framework
Risk-related reporting
Internal External - Annual report
· Monthly management accounts · Risk appetite
· Internal and external audit reports · Viability statement
· Service provider control reports · Resilience statement
· Risk logs · Internal controls
· Compliance reports · Going concern
· Risk-related reporting · Statutory/accounting disclosures
Risk appetite
The Committee discusses the Company's risk appetite annually and this year
concluded that it remained broadly stable. As an investment company, the
Company seeks to take investment risk. The appetite for investment risk is
described previously in the Our business model section, and in the Investment
policy towards the end of this document. Investments are made subject to the
Investment Manager's Responsible Investment policy, which addresses an
important element of our appetite for investment risk. Given the strong
competition for new investments, investment discipline remains a key
consideration.
The target risk-adjusted objective of delivering 8% to 10% return per annum
over the medium term remains consistent with our current portfolio investment
cases, including our recent new investments. It is expected that, as the
portfolio expands, the range of expected returns in individual investment
cases may also expand to include higher risk/return 'value add' cases and
lower risk/return 'core' investments. We recognise that this has the potential
to result in greater volatility in returns on an individual asset basis.
The benefits of diversification across sectors, countries and types of
underlying economic risk will mitigate this volatility, and the Company has
sought to build a diverse portfolio while considering carefully the underlying
risks to which our portfolio companies are exposed. The Committee concluded
that the risk appetite of the Company for core-plus infrastructure investments
has not changed, and remains appropriate for our investment mandate and target
returns. The Covid-19 pandemic provided a severe test of the appropriateness
of the Company's risk appetite, and its attractiveness to investors. The
portfolio overall has been resilient, and benefitted from diversification
across infrastructure subsectors and types of underlying risks.
The key tools used by the Committee to define the Company's risk appetite and
to determine the appetite for key risks are the risk register and the risk
matrix.
The process of creating and reviewing the risk register and risk matrix is
described below, together with a discussion of the Company's appetite for each
of the key risks. Beyond the appetite for investment risk discussed above, the
Company seeks to limit or manage exposure to other risks to acceptable levels.
Risk review process
The Company's risk review process includes the monitoring of key strategic and
financial metrics considered to be indicators of potential changes in its risk
profile. The review takes place three times a year, with the last review in
April 2023, and includes, but is not limited to, the following:
· infrastructure and broader market overviews;
· key macroeconomic indicators and their impact on the performance and
valuation of portfolio companies;
· regular updates on the operational and financial performance of portfolio
companies;
· experience of investment and divestment processes;
· compliance with regulatory obligations, including climate-related
regulations;
· analysis of new and emerging regulatory initiatives;
· liquidity management;
· assessment of climate risks to the portfolio, including physical,
transition and litigation risks;
· consideration of scenarios that may impact the viability of the Company;
· assessment of emerging risks; and
· review of the Company's risk log.
The Committee uses the risk framework to identify emerging and key risks, and
to evaluate changes in risks over time. The framework is designed to manage
rather than eliminate the risk of failure to achieve objectives and breaches
of risk appetite. Developments during the year in the more significant key
risks or 'principal risks' are discussed later in this document. These are
risks that the Committee considers to have the potential to materially impact
the delivery of our strategic objectives.
Risk categorisation
The Committee uses the following categorisation to describe risks that are
identified during the risk review process.
Emerging risks Key risks Principal risks
An emerging risk is one that may A key risk is considered currently to pose the risk of a material impact on The Committee maintains a risk matrix, onto which the key risks are mapped by
in future be likely to have a material impact on the performance of the the Company. Risks may be identified as emerging risks and subsequently impact and likelihood. The principal risks are identified on the risk matrix
Company and the achievement of our long-term objectives, but that is not yet become key risks. Identified key risks may cease to be considered key risks as those with the highest combination of impact and likelihood scores.
considered to be a key risk and is subject to uncertainty as to nature, impact over time.
and timing.
The Committee evaluates the probability of each identified risk materialising
and the impact it may have, with reference to the Company's strategy and
business model.
The review process assesses the likelihood and impact of each risk over two
timeframes, within three years and beyond three years. The evaluation of these
key risks is then presented on a risk matrix. Mitigating controls have been
developed for each risk and the adequacy of the mitigation is then assessed
and, if necessary, additional controls are implemented and reviewed by the
Committee at a subsequent meeting.
The Committee considers the identified principal risks in greater detail in
the assessment of the Company's viability.
A number of scenarios have been developed to reflect plausible outcomes should
the principal risks be experienced, as well as consideration of stressed
scenarios that could result in the Company ceasing to be viable.
As the Company is an investment company, the stressed scenarios reflect
reduced cash flows from the Company's investment portfolio, such that debt
covenants are breached and liabilities not met.
The Investment Manager models the impact of these scenarios on the Company and
reports the results to the Committee. The resulting assessment of viability is
included in this Risk report.
Review during the year
In October 2022, the Committee reassessed the identified key risks and
considered any update to the list of emerging risks currently facing the
Company. This involved a 'blank sheet of paper' exercise where each Director,
and several members of the Investment Manager's team, identified the top
emerging risks facing the Company, and discussed changes to the impact and
likelihood of the principal risks.
In December 2022, the Investment Manager analysed the data collected and
identified the emerging and principal risks facing the Company, scoring the
principal risks for impact and likelihood (within a three-year period and
beyond a three-year period). In January 2023, the results of the principal
risk scoring were considered and assessed by the Committee and additional
changes made. In April 2023, the Committee reviewed the updated risk register
and risk matrix and the Company's appetite for each of the key risks.
We have a relatively diverse spread of assets in the portfolio and it is
important that risk diversity is maintained as we evolve the portfolio through
new investments, realisations and syndications.
Future realisations and syndications may continue the evolution of risk in the
portfolio in line with our strategy and allow the Company to manage its
exposure to more sensitive assets, or to take account of where the risk
profile of an asset has changed over time.
We are confident that the portfolio remains defensive and resilient, and in a
position to benefit from accretive but discretionary growth opportunities as
highlighted in the Investment Manager's review. We believe the current
appetite for risk is appropriate.
Risk register review process
October 2022
Directors identify potential emerging or new key risks facing the Company
December 2022
Analysis and interpretation of responses
January 2023
Impact and likelihood of the identified risks considered
April 2023
Risk register and risk matrix updated
Emerging risks
The Company is a long-term investor and therefore needs to consider the impact
of both identified key risks, as detailed below, and risks that are considered
emerging or longer-term. Risk categorisation, including the definition of
emerging risk, is shown above.
The Board and the Investment Manager consider these factors when reviewing the
performance of the portfolio and when evaluating new investments, seeking to
identify which factors present a potential risk and can either be mitigated or
converted into opportunities.
As part of the ongoing risk identification and management of the Company, the
Committee considers whether these emerging risks should be added to the
Company's risk register. The risk register is a 'live' document that is
reviewed and updated regularly by the Committee as new risks emerge and
existing risks change. Examples of emerging risks that were considered during
the year include the impact of energy price caps, UK political change,
escalation of the conflict in Ukraine, divergence between the UK and the EU
regulation increasing friction over trade in goods and services, and
escalating regulatory reporting requirements, including climate-related
reporting requirements. In some cases, emerging risks may already be
considered within a broader identified key risk, such as market and economic
risk.
Key risks
Key risks are mapped by impact and likelihood on a risk matrix. During the
year, the Committee considered the development of all the key risks in detail.
Within the category of key risks, the principal risks identified by the
Committee in the financial year are set out in the Principal risks and
mitigation table below alongside how the Company seeks to mitigate these
risks.
The risk review showed a high level of consistency with the prior year, with a
small number of changes in the key risks identified. The assessment of
likelihood and impact of the key risks resulted in some changes to the
principal risks facing the Company.
Market and economic risk was considered the top risk facing the Company and
was considered to have increased during the year. This includes the
consequences of sanctions on Russia and Russian companies, increased commodity
and energy prices, rising inflation and interest rates, supply chain
constraints and a heightened risk of recession.
Following the high level of new investment, the management of liquidity risk
is considered to have increased.
The risk of an inappropriate rate of investment and loss of senior Investment
Manager staff is considered to have increased this year, given this liquidity
risk.
These changes are reflected in the Principal risks and mitigations table.
Fraud and cyber risk
We remain vigilant to cyber- and other IT-related issues which could result in
disruption to the Company, loss of data and/or reputational damage. The
Investment Manager has a robust fraud risk assessment and anti-fraud programme
in place. The latter includes fraud prevention work by their Internal Audit
team, mandatory training to maintain vigilance and awareness, and provision of
an independent reporting service or 'hotline' accessible by all staff. The
Investment Manager's cyber security programme also aims to identify and
mitigate the risks of third-party frauds, for example ransomware and phishing
attacks, through the use of IT security tools and regular staff training.
There is also a detailed business continuity and disaster recovery plan,
should a significant event occur. The Company asks its service providers to
inform it of any significant cyber events that they experience.
Environmental sustainability and climate risk
Environmental sustainability and ESG are an increasingly important focus
amongst our shareholders and in the wider market.
Climate risk includes the short- to medium-term impacts, including
transitional changes (for example, regulation and financial) as well as the
long-term emerging risk of climate change (for example, flooding events).
Failure to identify and mitigate risks at this stage could result in a
reduction in the attractiveness of our assets, reputational damage and a
reduction in value of our portfolio in the future.
Although there is still much uncertainty around the extent and timing of the
impact of climate change, government and societal action, and future
regulations, we recognise that climate-related risk is a key risk as well as
an investment theme for the Company. We have separated climate-related risk
into two distinct but related risks.
Climate regulation risk addresses the regulatory risk to the Company and the
portfolio associated with the transition to a low-carbon economy. Climate risk
addresses the physical and transition risks from climate change on the
portfolio.
ESG and sustainability is increasingly important in the context of our
strategic and investment objectives. Further information on work done in
relation to ESG reporting, including climate-related disclosures, and our
approach to climate-related risk and opportunities can be found in our
Sustainability report. All of the companies in our portfolio recognise the
importance of considering climate change and of evolving a sustainable
business model. As discussed in the Sustainability report, the physical and
transition climate-related risks are also seen as opportunities for all
companies in our portfolio.
There are no acute physical nor transition risks identified in the portfolio
that would suggest that climate risk is a principal risk, although an example
of the impact of a transition risk is the introduction of a tax on imported
waste or a carbon tax in the Netherlands, which impacts Attero, and the risk
of early decommissioning of oil and gas assets, which impacts some customers
of Tampnet and ESVAGT.
We consider that the mitigating controls at the Company and the Investment
Manager over climate regulation risk prevent this from being a principal risk
at the moment.
Principal risks and mitigations
External
Principal risk Risk description Risk mitigation
Market/economic · Macroeconomic or market volatility, such as may arise from the · Resources and experience of the Investment Manager on deal-making,
consequences of the conflict in Ukraine and from the effects on economies of asset management and hedging solutions to market volatility
Risk exposure post-pandemic demand and supply imbalances, flows through to pricing,
movement in the year valuations and portfolio performance · Periodic legal and regulatory updates on the Company's markets and
Increased
in-depth market and sector research from the Investment Manager and other
· Fiscal tightening impacts market environment advisers
Link to Strategic
priorities · Risk of sovereign default lowers market sentiment and increases · Portfolio diversification to mitigate the impact of a downturn in any
volatility geography or sector or portfolio company-specific effects
Manage portfolio intensively
· Misjudgement of inflation and/or interest rate outlook · The permanent capital nature of an investment trust allows us to look
through market volatility and the economic cycle
Competition · Increased competition for the acquisition of · Continual review of market data and review of Company return target
assets in the Company's strategic focus areas compared to market returns
Risk exposure
movement in the year · Deal processes become more competitive and prices increase · Ongoing analysis of the competitor landscape
No significant change
· New entrants compete with a lower cost · Origination experience and disciplined approach of Investment Manager
Link to Strategic
of capital
priorities · Strong track record and strength of the 3i Infrastructure brand
Disciplined approach
Debt markets · Debt becomes increasingly expensive, eroding returns · The Investment Manager maintains close relationships with a number of
deteriorate
banks and monitors the market through transactions and advice
· Debt availability is restricted
Risk exposure
· Regular reporting of Company liquidity and portfolio company
movement in the year · The Company's RCF or portfolio company debt cannot be refinanced due refinancing requirements
No significant change to lack of appetite from banks
· Investment Manager has extensive experience in raising debt finance for
Link to Strategic priorities portfolio companies, alongside an in-house Treasury team to provide advice on
treasury issues
Manage portfolio intensively
· Active management of portfolio company debt facilities, with fixed
rates and long duration of debt
Operational
Principal risk Risk description Risk mitigation
Loss of senior Investment · Members of the deal team at the Investment Manager leave, and · Performance-linked compensation packages, including an element of
Manager staff 'deal-doing' and portfolio management capability in the short to medium term deferred remuneration
is restricted
Risk exposure · Notice periods within employment contracts
movement in the year
Increased · Strength and depth of the senior team and strength of the 3i Group
brand
Link to Strategic
priorities · Careful management and robust planning of senior management transition
Maintain balanced portfolio
Sustainability key driver
Strategic
Principal risk Risk description Risk mitigation
Management of liquidity · Failure to manage the Company's liquidity, including cash and available · Regular reporting of current and projected liquidity
credit facilities
Risk exposure
· Investment and planning processes consider sources of liquidity
movement in the year · Insufficient liquidity to pay dividends and operating expenses or to
Increased make new investments · Flexible funding model, where liquidity can be sought from available
cash balances including reinvestment of proceeds from realisations, committed
Link to Strategic · Hold excessive cash balances, introducing cash drag on the Company's credit facilities which can be increased with approval from our lenders, and
priorities returns the issue of new share capital
Disciplined approach
· Growth opportunities can be part or fully funded by portfolio company
cash balances and/or available debt facilities
Deliverability of · Failure to ensure the investment strategy can deliver the return target · Market returns are reviewed regularly
return target and dividend policy of the Company
· The Investment Manager and other advisers to the Company report on
Risk exposure · Failure to adapt the strategy of the Company to changing market market positioning
movement in the year conditions
No significant change · Investment process addresses expected return on new investments and the
impact on the portfolio
Link to Strategic
priorities · Consideration of megatrends in the investment process
Maintain balanced portfolio
· Consideration of risks, including ESG and climate risks, in the
Sustainability key driver investment process
Investment
Principal risk Risk description Risk mitigation
Security of assets · An incident, such as a cyber or terrorist attack · Regular review of the Company and key service providers
Risk exposure · Unauthorised access to information and operating systems · Regular review and update of cyber due diligence for potential
movement in the year
investments
No significant change · Regulatory and legal risks from failure to comply with cyber-related
laws and regulations, including data protection · Review of portfolio companies for cyber risk management and incident
Link to Strategic readiness
priorities
Maintain balanced portfolio
Sustainability key driver
Poor investment performance · Misjudgement of the risk and return attributes of a new investment · Robust investment process with thorough challenge of the investment
case supported by detailed due diligence
Risk exposure · Material issues at a portfolio company
movement in the year
· Investment Manager's active asset management approach, including
No significant change · Poor judgement in the realisation of an asset proactive management of issues arising at portfolio company level
· Experience of the Investment Manager's team in preparing for and
executing realisations of investments
Link to Strategic
priorities
Maintain balanced portfolio
Sustainability key driver
Development of significant key risks in the year
The disclosures in the Risk report are not an exhaustive list of risks and
uncertainties faced by the Company, but rather a summary of significant key
risks which are under active review by the Board. These significant key risks
have the potential to affect materially the achievement of the Company's
strategic objectives and impact its financial performance. This disclosure
shows developments in these significant key risks for the year. The risks that
have been identified as principal risks are described in more detail in the
Principal risks and mitigations table.
External risks - market and competition
In the face of rising interest rates and macroeconomic uncertainty,
infrastructure assets have proven relatively resilient when compared to the
dislocation in other markets, but a difficult GDP environment remains a key
risk for the Company. Infrastructure's fundamental characteristics as an asset
class anchored by predictable, long-term revenue streams that are often linked
to inflation have positioned the sector well to withstand recessionary risk
and volatile markets.
The urgency of tackling climate change has also made investment in some
sectors, such as those with a focus on energy transition, relatively insulated
from macro headwinds. As a result, the European infrastructure market
continues to experience strong demand for new investments. Private funds with
a core-plus infrastructure focused mandate have significant amounts of dry
powder and these are the Company's primary competition for new investment.
Fundraising has increased at a faster pace than the number of funds raised,
resulting in larger fund sizes creating intense competition for suitable
infrastructure targets. There remains a risk that pricing does change for
core-plus infrastructure in the medium term, but at this point we are not
seeing any upward pressure on discount rates for core-plus infrastructure
investments as these tend to have greater discount rate headroom to risk-free
rates and strong inflation protection features. In this environment, the
Investment Manager continues to leverage its network and skills to look for
investments that can deliver attractive and sustainable risk-adjusted returns
to the Company's shareholders.
Inflation in the UK and Europe has risen sharply in the year, driven by rising
energy costs, supply chain bottlenecks, labour and raw material shortages and
the reopening of economies from pandemic-related lockdowns. The portfolio is
positively correlated to inflation as most portfolio companies have revenues
at least partially linked to inflation, although higher inflation may also
result in increased costs and supply chain disruption and, should it persist,
is generally bad for economies as a whole. Sensitivities to macroeconomic
assumptions are discussed in the Financial review and in Note 7 to the
accounts.
Central bank base rates increased during the year in response to higher
inflation and, although there is evidence, particularly in Europe, that this
is bringing inflation back towards target levels, there is a risk that
inflation will return to a level either above or below our long-term
assumptions. There are no material refinancing requirements in the portfolio
until 2026 and over 95% of long-term debt facilities are either hedged or
fixed rate at 31 March 2023. This mitigates the risk from further near-term
interest rate rises.
The Company is exposed to movements in sterling exchange rates against a
number of currencies, most significantly the euro.
The Company operates a hedging programme which substantially offsets
volatility in returns from exchange rate movements. The Board monitors the
effectiveness of the Company's hedging policy on a regular basis.
The valuation of our portfolio companies that generate electricity is affected
by the evolution of long-term power price forecasts and by fluctuations in the
spot power price. Medium-term power price forecasts have also increased
considerably during the year, driven by gas supply concerns, record carbon
prices, low wind levels and higher commodity prices, particularly for gas.
This has benefitted those portfolio companies that generate electricity and
typically sell it on a forward basis in order to avoid spot market volatility:
Infinis, Attero and Valorem.
Sanctions on Russia and Russian companies, together with the recovery from the
Covid-19 pandemic, led to an increase in oil prices, peaking in June 2022.
Since then prices have come down, due to a softer economic environment and
reduced trans-shipment volumes, but the market continues to be backwardated.
For Oystercatcher, this may maintain some short-term downward pressure on
pricing of contract renewals.
Ionisos is a provider of cold sterilisation and ionising radiation treatment
services to the medical, pharmaceutical, plastics and cosmetics industries.
Gamma radiation, one of the three methods of cold sterilisation used, relies
on the radioactive decay of Cobalt-60, a scarce resource. Although a worldwide
shortage of Cobalt-60 is expected until 2028, resulting from increased demand
and the permanent closure of a large Russian reactor, Ionisos is in a good
position to maintain its capacity as it has recently expanded its supplier
base and is in advanced discussions with one supplier for a five-year supply
agreement.
During the past three years, TCR was affected by air traffic movements and
passenger numbers being substantially below the levels seen before the
Covid-19 pandemic.
We are pleased with the performance of TCR over the duration of the pandemic
and the strong performance this year and we have maintained our assumption of
a return to pre-pandemic levels of air travel by 2024.
DNS:NET is being affected by the industry-wide challenge of rolling out a FTTH
network in Germany due to the complexity of the construction process and
difficulty in obtaining permits for construction, alongside cost inflation.
The German government is planning to accelerate the roll out through a simpler
and digitalised approval process.
External risks - regulatory and tax
The Company's investments in Infinis, Valorem and Attero are exposed to
electricity market regulation risk in their respective countries. On 1 January
2023, the UK government introduced a levy or price cap on extraordinary
returns from electricity generation (the 'EGL').
The EGL is an exceptional and time-limited measure that is due to expire in
2028.
The French and Dutch governments introduced taxes on merchant revenues above a
price cap for 2023. The effect of current and proposed legislation is
reflected in the valuations of these portfolio companies.
Strategic risks
The Company manages its balance sheet and liquidity position actively, seeking
to maintain adequate liquidity to pursue new investment opportunities, while
not diluting shareholder returns by holding surplus cash balances. At 31 March
2023 there was £5 million available in cash, with drawings of £501 million
under the RCF. During the year the Company raised a further £100 million
through an equity placing and extended the maturity of its RCF facility to
November 2025.
The portfolio is diversified across sector and geography, with no investment
above 15% of portfolio value.
Investment risks
As part of our investment due diligence and active portfolio management, the
Investment Manager uses specialist cyber security advisers to ensure that our
companies remain vigilant and continue to focus on effective operations of
controls against possible cyber-attacks. Some of our portfolio companies do
experience fraud attempts, some of which are successful, but none have had a
material impact on any of our companies.
Operational risks
The key areas of operational risk include attracting and retaining key
personnel at the Investment Manager, and whether the Investment Manager's team
can continue to support the delivery of the Company's objectives. The team has
strength and depth, and the transition in senior management has been carefully
managed. The Board monitors the performance of the Investment Manager through
the Management Engagement Committee. It also monitors the performance of key
service providers, receiving reports of any significant control breaches.
Resilience statement
Our resilience comes from the effective implementation of our business model.
Key elements of our business model relating to resilience include the
Investment Manager's disciplined approach to new investment and engaged asset
management, the defensive characteristics of our portfolio of investments,
high ESG standards, our flexible funding model and efficient balance sheet,
and the capability of the Investment Manager's team.
This is underpinned by the strong institutional culture and values of our
Investment Manager, high standards of corporate governance, and effective risk
management.
Over the life of the Company, the Investment Manager has built a resilient and
diversified portfolio with good growth potential and downside protection that
delivers an attractive mix of income yield and capital appreciation for
shareholders. This has been achieved through consistent delivery of our
strategic priorities.
Short-term resilience
The Directors assess the Company's short-term resilience through monitoring
portfolio, pipeline and finance reports. These are prepared monthly, and
discussed at quarterly scheduled board meetings and board update calls held
between scheduled meetings. Six-monthly detailed investment reviews are
prepared by the Investment Manager and discussed with the Board, as part of
the half-yearly and annual valuation and reporting processes. These reviews
describe sources of risk at portfolio company level, and mitigating actions
being taken or considered.
The resilience of key suppliers, including the Investment Manager, is
considered annually or more frequently if appropriate. The Audit and Risk
Committee is provided with relevant extracts of reports from the Investment
Manager's internal audit team, which includes an annual report on the
Investment Manager's European infrastructure investment team. Further detail
is included in the Governance section of the Annual report and accounts 2023.
The Directors manage the Company's liquidity actively, reviewing reports on
current and forecast liquidity from the Investment Manager, alongside
recommendations for seeking additional liquidity when appropriate. The
Directors approved the issue of new equity during the year, raising £100
million net of issue costs, and the extension of the RCF to £900 million of
commitments. Further discussion on the RCF can be found in the Financial
review.
The identification of material uncertainties that could cast significant doubt
over the ability of the Company to continue as a going concern forms the basis
of the Going concern statement below.
Going concern
The Company's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Strategic
report and in the Financial statements and related Notes to our Annual report
and accounts to 31 March 2023. The financial position of the Company, its
cash flows, liquidity position and borrowing facilities are also described in
the Financial statements and related Notes to the accounts.
In addition, Note 9 to the accounts includes the Company's objectives,
policies and processes for managing its capital, its financial risk
management objectives, details of its financial instruments and hedging
activities, and its exposures to credit risk and liquidity risk.
The Directors have made an assessment of going concern, taking into account
the Company's cash and liquidity position, current performance and outlook,
which considered the impact of the higher inflationary and interest rate
environment, using the information available up to the date of issue of these
Financial statements.
The Company has liquid financial resources and a strong investment portfolio
providing a predictable income yield and an expectation of medium-term capital
growth.
The Company manages and monitors liquidity regularly, ensuring that it is
sufficient.
At 31 March 2023, liquidity remained strong at £404 million (2022: £786
million). Liquidity comprised cash and deposits of £5 million (2022: £17
million) and undrawn facilities of £399 million (2022: £769 million). The
£900 million revolving credit facility matures beyond 12 months of the date
of this report.
The Company had no contracted investment commitment at 31 March 2023. However,
the Company expects to make follow-on investments in portfolio companies to
fund growth opportunities.
The Company had ongoing charges of £48 million in the year to 31 March 2023,
detailed in Table 14 in the Financial review, which are indicative of the
ongoing run rate in the short term. In addition, the FY23 performance fee of
£45 million (2022: £54 million) is due in three equal instalments with the
first instalment payable in the next 12 months along with the second
instalment of FY22's performance fee and the third instalment of FY21's
performance fee, and a proposed final dividend for FY23 of £51 million which
is expected to be paid in July.
Although not a commitment, the Company has announced a dividend target for
FY24 of 11.90 pence per share. Income and non-income cash is expected to be
received from the portfolio investments during the coming year, some of which
will be required to support the payment of this dividend target and the
Company's other financial commitments.
The Directors have acknowledged their responsibilities in relation to the
Financial statements for the year to 31 March 2023. After making the
assessment on going concern, the Directors considered it appropriate to
prepare the Financial statements of the Company on a going concern basis.
The Company has sufficient financial resources and liquidity and is
well-positioned to manage business risks in the current economic environment
and can continue operations for a period of at least 12 months from the date
of this report. This is supported by the scenario analysis and stress testing
described in the medium-term resilience section and the Viability statement.
Accordingly, the Directors continue to adopt the going concern basis in
preparing the Annual report and accounts.
Medium-term resilience
The assessment of medium-term resilience, which includes modelling of stressed
scenarios and reverse stress tests, considers the viability and performance of
the Company in the event of specific stressed scenarios which are assumed to
occur over a three-year horizon. This stress testing forms the basis of the
Viability statement.
The Directors consider that a three-year period to March 2026 is an
appropriate period to review for assessing the Company's viability. This
reflects greater predictability of the Company's cash flows over that time
period and increased uncertainty surrounding economic, political and
regulatory changes over the longer term.
The stress testing focuses on the principal risks, but also reflects those new
and emerging risks that are considered to be of sufficient importance to
require active monitoring by the Audit and Risk Committee. The scenarios used
are described in the Viability statement. The medium-term resilience of the
Company is assessed through analysing the impact of these scenarios on key
metrics such as total return, income yield, net asset value, covenants on the
RCF and available liquidity.
Viability statement
The Directors consider the medium-term prospects of the Company to be
favourable. The Company has a diverse portfolio of infrastructure investments,
producing good and reasonably predictable levels of income which cover the
dividend and costs. The defensive nature of the portfolio and of the essential
services that the businesses in which we invest provide to their customers are
being demonstrated in the current climate. The Investment Manager has a strong
track record of investing in carefully selected businesses and projects and of
driving value through an engaged asset management approach. The Directors
consider that this portfolio can continue to meet the Company's objectives.
The Directors have assessed the viability of the Company over a three-year
period to March 2026. The Directors have taken account of the current position
of the Company, including its liquidity position, with £5 million of cash and
£399 million of undrawn credit facilities, and the principal risks it faces,
which are documented in this Risk report.
The Directors have considered the potential impact on the Company of a number
of scenarios in addition to the Company's business plan and recent forecasts,
which quantify the financial impact of the principal risks occurring. These
scenarios represent severe yet plausible circumstances that the Company could
experience, including a significant impairment in the value of the portfolio
and a reduction in the cash flows available from portfolio companies from a
variety of causes.
The assessment was conducted over several months, during which the proposed
scenarios were evaluated by the Board, the assumptions set, and the analysis
produced and reviewed. Analysis included the impact of an escalation of the
conflict in Ukraine on our portfolio companies and the impact of a resulting
economic downturn. Other considerations included the possible impact of
climate-related events and transition risks, widespread economic turmoil, a
reduction in cash distributions from portfolio companies to the Company, a
tightening of debt markets and the failure of a large investment.
The assumptions used to model these scenarios included a fall in value of some
or all of the portfolio companies, a reduction in cash flows from portfolio
companies, a reduction in the level of new investment and/or realisations, the
imposition of additional taxes on distributions from, or transactions in, the
portfolio companies, an increase in the cost of debt and restriction in debt
availability, and an inability for the Company to raise equity. The
implications of changes in the inflation, interest rate and foreign exchange
environment were also considered, separately and in combination.
The results of this assessment showed that the Company would be able to
withstand the impact of these scenarios occurring over the three-year period.
The Directors also considered scenarios that would represent a serious threat
to its liquidity and viability in that time period. These scenarios were
considered to be remote, such as a fall in equity value of the portfolio of
materially more than 50% whilst being fully drawn on the RCF including the
accordion, or an equivalent fall in income.
Based on this assessment, the Directors have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the three-year period to March 2026.
Long-term resilience
As described above, the long-term resilience of the Company, beyond the
Viability statement period, comes from the effective implementation of our
business model and consistent delivery of our strategic objectives.
Our approach to origination and portfolio construction, focus on price
discipline and engaged asset management approach enable us to adapt in
response to new and emerging risks and challenges, including climate change
and developments in megatrends.
The characteristics that we look for in infrastructure investments, support
the long-term resilience of the Company. The performance of the portfolio
through the Covid-19 pandemic provided good evidence of this.
The underlying megatrends supporting the longer-term resilience of each
portfolio company are identified in the Our approach section.
We have a long-term investment time horizon made possible by our permanent
capital base that is unconstrained by the fixed investment period and
fundraising cycle seen in private limited partnership funds.
Although the scenarios and stress testing to support the Viability statement
are modelled over a three-year time horizon, the resilience shown by the
Company, and its ability to recover from these stressed situations, supports
the assessment of our resilience over a longer term than three years.
Directors' duties
Section 172 statement
The Company adheres to the AIC Code of Corporate Governance (the 'AIC Code')
and it is the intention of the AIC Code that the matters set out in section
172 of the Companies Act 2006 ('s172') are reported on to the extent they do
not conflict with Jersey law.
We recognise that our business can only grow and prosper by acting in the
long-term interests of our key stakeholders and that a good understanding of
the key issues affecting stakeholders should be an integral part of the
Board's decision-making process. The insights that the Board gains through the
stakeholder engagement mechanisms it has in place form an important part of
the context for all the Board's discussions and decision-making processes.
As an externally managed investment trust, the Company has no employees or
customers and its key stakeholders are its shareholders, third-party
professional advisers and service providers (most notably the Investment
Manager), portfolio companies, communities in which the Company operates,
lenders, and government and regulatory bodies.
Day-to-day engagement with our stakeholders is principally managed by the
Investment Manager although, where appropriate, the Directors have direct
touchpoints with stakeholders during the year.
Throughout this Annual report we provide examples of how the Directors promote
the success of the Company for the benefit of its members in line with our
purpose and our strategy, while taking into account the likely consequences of
decisions in the long term, the need to build relationships with stakeholders,
and ensuring that business is conducted responsibly. The governance section of
the Annual report and accounts 2023, sets out the Company's stakeholders and
how the Board considered matters under s172 during its deliberations.
Under Jersey Law, the Directors are obliged to act honestly and in good faith
with a view to the best interests of the Company; and to exercise the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
Pursuant to s172, a Director of a company must act in the way they consider,
in good faith, would most likely promote the success of the company for the
benefit of its members, and in doing so have regard (amongst other matters)
to:
The likely consequences of any decisions in the long term
Our purpose and strategy, combined with the responsible investment approach of
the Investment Manager, focus on sustainable returns and outcomes.
The impact of the Company's operations on the community and environment
We use our influence to promote a commitment in our portfolio companies to
mitigate any adverse environmental and social impacts, and to enhance positive
effects on their communities and the environment.
The interests of the Company's employees
Whilst we do not have any employees, our purpose includes the intention to
have a positive influence on our portfolio companies and their stakeholders,
which includes the employees of those portfolio companies.
The desirability of the Company maintaining a reputation for high standards of
business conduct
Our success relies on maintaining a strong reputation, and our values and
ethics are aligned to our purpose, our strategy and our ways of working.
The need to foster the Company's business relationships with suppliers,
customers and others
We engage with all our stakeholders either directly or through the Investment
Manager.
The need to act fairly between members of the Company
The Board actively engages with its shareholders and considers their interests
when implementing our strategy.
Read more in our Annual report and accounts 2023, available on our website
Accounts and other information
Statement of comprehensive income
For the year to 31 March
Year to Year to
31 March 31 March
2023 2022
Notes £m £m
Net gains on investments 7 339 384
Investment income 7 156 127
Fees payable on investment activities - (3)
Interest receivable 2 6
Investment return 497 514
Movement in the fair value of derivative financial instruments 5 18 (2)
Management and performance fees payable 2 (92) (97)
Operating expenses 3 (3) (3)
Finance costs 4 (16) (5)
Exchange movements (10) (3)
Profit before tax 394 404
Income taxes 6 - -
Profit after tax and profit for the year 394 404
Total comprehensive income for the year 394 404
Earnings per share
Basic and diluted (pence) 14 44.0 45.3
Statement of changes in equity
For the year to 31 March
Stated Total
capital Retained Capital Revenue shareholders'
account reserves(1) reserve(1) reserve(1) equity
For the year to 31 March 2023 Notes £m £m £m £m £m
Opening balance at 1 April 2022 779 1,282 643 - 2,704
Issue of shares 100 - - - 100
Total comprehensive income for the year - - 316 78 394
Dividends paid to shareholders of the Company during the year 15 - - (97)
(19) (78)
Closing balance at 31 March 2023 879 1,282 940 - 3,101
Stated Total
capital Retained Capital Revenue shareholders'
account reserves(1) reserve(1) reserve(1) equity
For the year to 31 March 2022 Notes £m £m £m £m £m
Opening balance at 1 April 2021 779 1,282 330 (1) 2,390
Total comprehensive income for the year - - 324 80 404
Dividends paid to shareholders of the Company during the year 15 - - (11) (79) (90)
Closing balance at 31 March 2022 779 1,282 643 - 2,704
1 The Retained reserves, Capital reserve and Revenue reserve are distributable
reserves. Retained reserves relate to the period prior to 15 October 2018.
Further information can be found in Accounting policy H.
Balance sheet
As at 31 March
2023 2022
Notes £m £m
Assets
Non-current assets
Investments at fair value through profit or loss 7 3,641 2,873
Derivative financial instruments 10 29 6
Total non-current assets 3,670 2,879
Current assets
Derivative financial instruments 10 28 20
Trade and other receivables 8 4 104
Cash and cash equivalents 5 17
Total current assets 37 141
Total assets 3,707 3,020
Liabilities
Non-current liabilities
Derivative financial instruments 10 (10) (6)
Trade and other payables 12 (48) (38)
Loans and borrowings 11 (501) (231)
Total non-current liabilities (559) (275)
Current liabilities
Derivative financial instruments 10 (8) (12)
Trade and other payables 12 (39) (29)
Total current liabilities (47) (41)
Total liabilities (606) (316)
Net assets 3,101 2,704
Equity
Stated capital account 13 879 779
Retained reserves 1,282 1,282
Capital reserve 940 643
Revenue reserve - -
Total equity 3,101 2,704
Net asset value per share
Basic and diluted (pence) 14 336.2 303.3
The Financial statements and related Notes were approved and authorised for
issue by the Board of Directors on 9 May 2023 and signed on its behalf by:
Richard Laing
Chair
Cash flow statement
For the year to 31 March
Year to Year to
31 March 31 March
2023 2022
£m £m
Cash flow from operating activities
Purchase of investments (729) (761)
Proceeds from other financial assets 98 12
Proceeds from partial realisations of investments 322 140
Proceeds from full realisations of investments 104 8
Investment income1 30 54
Fees rebated/(paid) on investment activities 1 (4)
Operating expenses paid (3) (4)
Interest received 3 -
Management and performance fees paid (72) (50)
Amounts (paid)/received on the settlement of derivative contracts (13) 27
Net cash flow from operating activities (259) (578)
Cash flow from financing activities
Fees and interest paid on financing activities (16) (6)
Proceeds from issue of share capital 102 -
Share issue expenses (2) -
Dividends paid (97) (90)
Drawdown of revolving credit facility 2,188 955
Repayment of revolving credit facility (1,918) (724)
Net cash flow from financing activities 257 135
Change in cash and cash equivalents (2) (443)
Cash and cash equivalents at the beginning of the year 17 462
Effect of exchange rate movement (10) (2)
Cash and cash equivalents at the end of the year 5 17
1 Investment income includes dividends of £1 million (2022: £24
million) and interest of £29 million (2022: £30 million).
Reconciliation of net cash flow to movement in net debt
For the year to 31 March
Year to Year to
31 March 31 March
2023 2022
Notes £m £m
Change in cash and cash equivalents (2) (443)
Drawdown of revolving credit facility 11 (2,188) (955)
Repayment of revolving credit facility 11 1,918 724
Change in net debt resulting from cash flows (272) (674)
Movement in net debt (272) (674)
Net (debt)/cash at the beginning of the year (214) 462
Effect of exchange rate movement (10) (2)
Net debt at the end of the year (496) (214)
In the above reconciliation there were no non-cash movements.
Significant accounting policies
Corporate information
3i Infrastructure plc (the 'Company') is a company incorporated in Jersey,
Channel Islands. The Financial statements for the year to 31 March 2023
comprise the Financial statements of the Company as defined in IFRS 10
Consolidated Financial Statements.
The Financial statements were authorised for issue by the Board of Directors
on 9 May 2023.
Statement of compliance
These Financial statements have been prepared in accordance with United
Kingdom adopted International Financial Reporting Standards ('IFRS') and
International Accounting Standards.
These Financial statements have also been prepared in accordance with and in
compliance with the Companies (Jersey) Law 1991.
Basis of preparation
In accordance with IFRS 10 (as amended), entities that meet the definition of
an investment entity are required to fair value certain subsidiaries through
profit or loss in accordance with IFRS 9 Financial Instruments, rather than
consolidate their results. The Company does not have any consolidated
subsidiaries, which would include subsidiaries that are not themselves
investment entities and provide investment-related services to the Company.
The Financial statements of the Company are presented in sterling, the
functional currency of the Company, rounded to the nearest million except
where otherwise indicated.
The preparation of financial statements in conformity with IFRS requires the
Board to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on experience
and other factors that are believed to be reasonable under the circumstances,
the results of which form the basis of determining the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
Going concern
The Financial statements are prepared on a going concern basis as disclosed in
the Risk report, as the Directors are satisfied that the Company has the
resources to continue in business for the foreseeable future. The Directors
have made an assessment of going concern, taking into account a wide range of
information relating to present and future conditions, including the Company's
cash and liquidity position, current performance and outlook, which considered
the impact of the higher inflationary and interest rate environment, ongoing
geopolitical uncertainties and current and expected financial commitments,
using the information available up to the date of issue of these Financial
statements. As part of this assessment the Directors considered:
· the analysis of the adequacy of the Company's liquidity, solvency and
capital position. The Company manages and monitors liquidity regularly,
ensuring it is adequate and sufficient. At 31 March 2023, liquidity remained
strong at £404 million (2022: £786 million). Liquidity comprised cash and
deposits of £5 million (2022: £17 million) and undrawn revolving credit
facilities of £399 million (2022: £769 million) with a maturity date of
November 2025. Income and non-income cash is expected to be received from the
portfolio investments during the coming year, a portion of which will be
required to support the payment of the dividend target and the Company's other
financial commitments;
· uncertainty around the valuation of the Company's assets as set out in
the Key sources of estimation uncertainties section. The valuation policy and
process was consistent with prior years. This year a key focus of the
portfolio valuations at 31 March 2023 was an assessment of the impact of the
macroeconomic environment on the operational and financial performance of each
portfolio company. In particular this focused on increasing inflationary
pressures, rising interest rates and the impact on the cost of debt,
volatility in power prices and ongoing geopolitical uncertainties. We have
incorporated into our cash flow forecasts a balanced view of future income
receipts and expenses; and
· the Company's financial commitments. The Company had no investment
commitments at 31 March 2023. The Company had ongoing charges of £48 million
in the year to 31 March 2023, detailed in Table 14 in the Financial review,
which are indicative of the ongoing run rate in the short term. The Company
has a FY23 performance fee accrual of £45 million, a third of which is
payable within the next 12 months. The Company has a FY22 performance fee
accrual of £36 million relating to the second and third instalments of the
FY22 fee, the second instalment being due within the next 12 months, an
accrual of £2 million relating to the third instalment of the FY21 fee due
within the next 12 months and a proposed final dividend for FY23 of £51
million. In addition, while not a commitment at 31 March 2023, the Company has
a dividend target for FY24 of 11.90 pence per share.
In addition to the considerations listed above there are a number of actions
within management control to enhance available liquidity. These include the
timing of certain income receipts from the portfolio and the level and timing
of new investments or realisations.
Having performed the assessment of going concern, the Directors considered it
appropriate to prepare the Financial statements of the Company on a going
concern basis. The Company has sufficient financial resources and liquidity
and is well placed to manage business risks in the current economic
environment and can continue operations for a period of at least 12 months
from the date of approval of these Financial statements.
Key judgements
The preparation of financial statements in accordance with IFRS requires the
Directors to exercise judgement in the process of applying the accounting
policies defined below. The following policies are areas where a higher degree
of judgement has been applied in the preparation of the Financial statements.
(i) Assessment as investment entity - Entities that meet the definition of an
investment entity within IFRS 10 are required to measure their subsidiaries at
fair value through profit or loss rather than consolidate them unless they
provided investment-related services to the Company. To determine that the
Company continues to meet the definition of an investment entity, the Company
is required to satisfy the following three criteria:
(a) the Company obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services;
(b) the Company commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both; and
(c) the Company measures and evaluates the performance of substantially all of
its investments on a fair value basis.
The Company meets the criteria as follows:
· the stated strategy of the Company is to deliver stable returns to
shareholders through a mix of income yield and capital appreciation;
· the Company provides investment management services and has several
investors who pool their funds to gain access to infrastructure-related
investment opportunities that they might not have had access to individually;
and
· the Company has elected to measure and evaluate the performance of all of
its investments on a fair value basis. The fair value method is used to
represent the Company's performance in its communication to the market,
including investor presentations. In addition, the Company reports fair value
information internally to Directors, who use fair value as the primary
measurement attribute to evaluate performance.
The Directors are of the opinion that the Company has all the typical
characteristics of an investment entity and continues to meet the definition
in the standard. This conclusion will be reassessed on an annual basis.
(ii) Assessment of investments as structured entities - A structured entity is
an entity that has been designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity. Additional disclosures
are required by IFRS 12 for interests in structured entities, whether they are
consolidated or not. The Directors have assessed whether the entities in which
the Company invests should be classified as structured entities and have
concluded that none of the entities should be classified as structured
entities as voting rights are the dominant factor in deciding who controls
these entities.
(iii) Assessment of consolidation requirements - The Company holds significant
stakes in the majority of its investee companies and must exercise judgement
in the level of control of the underlying investee company that is obtained in
order to assess whether the Company should be classified as a subsidiary.
The Company must also exercise judgement in whether a subsidiary provides
investment-related services or activities and therefore should be consolidated
or held at fair value through profit or loss. Further details are shown in
significant accounting policy 'A Classification' below.
During the year, the Company set up three wholly owned subsidiary entities for
the new investment in Future Biogas. The Directors have assessed whether any
of these entities provide investment-related services and have concluded that
they should not be consolidated and that they should all be held at fair value
through profit or loss.
The adoption of certain accounting policies by the Company also requires the
use of certain critical accounting estimates in determining the information to
be disclosed in the Financial statements.
Key sources of estimation uncertainties
Valuation of the investment portfolio
The key area where estimates are significant to the Financial statements and
have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year is in the
valuation of the investment portfolio. The portfolio is well-diversified by
sector, geography and underlying risk exposures. The key risks to the
portfolio are discussed in further detail in the Risk report.
The majority of assets in the investment portfolio are valued on a discounted
cash flow basis which requires assumptions to be made regarding future cash
flows, terminal value and the discount rate to be applied to these cash flows.
The methodology for deriving the fair value of the investment portfolio,
including the key estimates, is set out in the Portfolio valuation methodology
section. Refer to Note 7 for further details of the valuation techniques,
significant inputs to those techniques and sensitivity of the fair value of
these investments to the assumptions that have been made.
The discount rate applied to the cash flows in each investment portfolio
company is a key source of estimation uncertainty. The acquisition discount
rate is adjusted to reflect changes in company-specific risks to the
deliverability of future cash flows and is calibrated against secondary market
information and other available data points, including comparable
transactions. The discount rates applied to the investment portfolio at 31
March 2023 range from 10.0% to 13.2% (2022: 10.0% to 13.2%) and the weighted
average discount rate applied to the investment portfolio is 11.3% (2022:
10.9%). The increase in the year is due to the evolution of the portfolio mix
following the realisation of the European Projects portfolio and the
completion of the GCX and Future Biogas acquisitions. In the prior year, the
Projects portfolio was valued on a sales basis and was removed from the
discount rate range.
The cash flows on which the discounted cash flow valuation is based are
derived from detailed financial models. These incorporate a number of
assumptions with respect to individual portfolio companies, including:
forecast new business wins or new orders; cost-cutting initiatives; liquidity
and timing of debtor payments; timing of non-committed capital expenditure and
construction activity; the terms of future debt refinancing; and macroeconomic
assumptions such as inflation and energy prices. Future power price
projections are taken from independent forecasters, and changes in these
assumptions will affect the future value of our energy-generating portfolio
companies.
The Summary of portfolio valuation methodology section provides further
details on some of the assumptions that have been made in deriving a balanced
base case of cash flows.
The terminal value attributes a residual value to the portfolio company at the
end of the projected discrete cash flow period based on market comparables.
The terminal value assumptions consider climate change risk and stranded asset
risk. The valuation of each asset has significant estimation in relation to
asset specific items but there is also consideration given to the impact of
wider megatrends such as the transition to a lower-carbon economy and climate
change.
The effects of climate change, including extreme weather patterns or rising
sea levels in the longer term could impact the valuation of the assets in the
portfolio in different ways. The Summary of portfolio valuation methodology
section earlier in this document provides further details on some of the
assumptions that have been made in deriving terminal values and some of the
risk factors considered in the cash flow forecasts.
New and amended standards adopted for the current year
Standards and amendments to standards applicable to the Company that became
effective during the year and were adopted by the Company on 1 April 2022 are
listed below:
Amendments to IFRS 17 Insurance contracts (1 January 2023)
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice
Statement 2) (1 January 2023)
Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12) (1 January 2023)
Annual Improvement to IFRS Standards 2018-2020 Cycle - Amendments to IFRS 1
First-time Adoption of International Financial Reporting Standards, IFRS 9
Financial Instruments, IFRS 16 Leases and IAS 41 Agriculture
Amendments to IAS 1 Classification of Liabilities as Current or Non-current (1
January 2023)
Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors (1 January 2023)
Amendments to IAS 16 Property, Plant and Equipment - Proceeds before Intended
Use (1 January 2022)
Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets
- Onerous Contracts (1 January 2022)
Amendments to IFRS 3 Business Combinations (1 January 2022)
Standards and amendments issued but not yet effective
As at 31 March 2023, the following new or amended standards, which have not
been applied in these Financial statements, had been issued by the
International Accounting Standards Board ('IASB') but are yet to become
effective:
Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
(1 January 2024)
Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) (1 January
2024)
Non-current Liabilities with Covenants (Amendments to IAS 1) (1 January 2024)
The Company intends to adopt these standards when they become effective, but
does not currently anticipate the standards will have a significant impact on
the Company's Financial statements. Current assumptions regarding the impact
of future standards will remain under consideration in light of interpretation
notes as and when they are issued.
A Classification
(i) Subsidiaries - Subsidiaries are entities controlled by the Company.
Control exists when the Company is exposed, or has rights, to variable returns
from its involvement with the subsidiary entity and has the ability to affect
those returns through its power over the subsidiary entity. In accordance with
the exception under IFRS 10 Consolidated Financial Statements, the Company
only consolidates subsidiaries in the Financial statements if they are deemed
to perform investment-related services and do not meet the definition of an
investment entity. Investments in subsidiaries that do not meet this
definition are accounted for as Investments at fair value through profit or
loss with changes in fair value recognised in the Statement of comprehensive
income in the year. The Directors have assessed all entities within the
structure and concluded that there are no subsidiaries of the Company that
provide investment-related services or activities.
(ii) Associates - Associates are those entities in which the Company has
significant influence, but not control, over the financial and operating
policies. Investments that are held as part of the Company's investment
portfolio are carried in the Balance sheet at fair value even though the
Company may have significant influence over those entities.
(iii) Joint ventures - Interests in joint ventures that are held as part of
the Company's investment portfolio are carried in the Balance sheet at fair
value. This treatment is permitted by IFRS 11 and IAS 28, which allows
interests held by venture capital organisations where those investments are
designated, upon initial recognition, as at fair value through profit or loss
and accounted for in accordance with IFRS 9 with changes in fair value
recognised in the Statement of comprehensive income in the year.
B Exchange differences
Transactions entered into by the Company in a currency other than its
functional currency are recorded at the rates ruling when the transactions
occur. Foreign currency monetary assets and liabilities are translated to the
functional currency at the exchange rate ruling at the balance sheet date.
Foreign exchange differences arising on translation to the functional currency
are recognised in the Statement of comprehensive income. Foreign exchange
differences relating to investments held at fair value through profit or loss
are shown within the line Net gains on investments. Foreign exchange
differences relating to other assets and liabilities are shown within the line
Exchange movements.
Non-monetary assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate at the date
of the transactions. Non-monetary assets and liabilities denominated in
foreign currencies that are stated at fair value are translated to the
functional currency using exchange rates ruling at the date the fair value was
determined with the associated foreign exchange difference being recognised
within the unrealised gain or loss on revaluation of the asset or liability.
C Investment portfolio
Recognition and measurement - Investments are recognised and de-recognised on
a date where the purchase or sale of an investment is under a contract whose
terms require the delivery or settlement of the investment.
The Company manages its investments with a view to profiting from the receipt
of investment income and obtaining capital appreciation from changes in the
fair value of investments. Therefore, all unquoted investments are measured at
fair value through profit or loss upon initial recognition and subsequently
carried in the Balance sheet at fair value, applying the Company's valuation
policy. Acquisition-related costs are accounted for as expenses when incurred.
Net gains or losses on investments are the movement in the fair value of
investments between the start and end of the accounting period, or investment
disposal date, or the investment acquisition date and the end of the
accounting period, including divestment-related costs where applicable,
converted into sterling using the exchange rates in force at the end of the
period; and are recognised in the Statement of comprehensive income.
Income
Investment 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 an economic benefit and the income can be reliably
measured.
The following specific recognition criteria must be met before the income is
recognised:
· dividends from equity investments are recognised in the Statement of
comprehensive income when the Company's rights to receive payment have been
established. Special dividends are credited to capital or revenue according to
their circumstances;
· interest income from loans that are measured at fair value through profit
or loss is recognised as it accrues by reference to the principal outstanding
and the effective interest rate applicable, which is the rate that exactly
discounts the estimated future cash flows through the expected life of the
financial asset to the asset's carrying value or principal amount. The
remaining changes in the fair value movement of the loans are recognised
separately in the line Net gains on investments in the Statement of
comprehensive income;
· distributions from investments in Limited Partnerships are recognised in
the Statement of comprehensive income when the Company's rights as a Limited
Partner to receive payment have been established; and
· fees receivable represent amounts earned from investee companies on
completion of underlying investment transactions and are recognised on an
accruals basis once entitlement to the revenue has been established.
D Fees
(i) Fees - Fees payable represent fees incurred in the process of acquiring an
investment and are measured on the accruals basis.
(ii) Management fees - A management fee is payable to 3i plc, calculated as a
tiered fee based on the Gross Investment Value of the Company and is accrued
in the period it is incurred. Further details on how this fee is calculated
are provided in Note 18.
(iii) Performance fee - The Investment Manager is entitled to a performance
fee based on the total return generated in the period in excess of a
performance hurdle of 8%. The fee is payable in three equal annual instalments
and is accrued in full in the period it is incurred. Further details are
provided in Note 18.
(iv) Finance costs - Finance costs associated with loans and borrowings are
recognised on an accruals basis using the effective interest method.
E Treasury assets and liabilities
Short-term treasury assets and short- and long-term treasury liabilities are
used to manage cash flows and the overall costs of borrowing. Financial assets
and liabilities are recognised in the Balance sheet when the relevant company
entity becomes a party to the contractual provisions of the instrument.
(i) Cash and cash equivalents - Cash and cash equivalents in the Balance sheet
and Cash flow statement comprise cash at bank, short-term deposits with an
original maturity of three months or less and AAA-rated money market funds.
Money market funds are accounted for at amortised cost under IFRS 9. However,
due to their short-term and liquid nature, this is the same as fair value.
Interest receivable or payable on cash and cash equivalents is recognised on
an accruals basis.
(ii) Bank loans, loan notes and borrowings - Loans and borrowings are
initially recognised at the fair value of the consideration received, net of
issue costs associated with the borrowings. Where issue costs are incurred in
relation to arranging debt finance facilities these are capitalised and
disclosed within Trade and other receivables and amortised over the life of
the loan.
After initial recognition, loans and borrowings are subsequently measured at
amortised cost using the effective interest method, which is the rate that
exactly discounts the estimated future cash flows through the expected life of
the liabilities. Amortised cost is calculated by taking into account any issue
costs and any discount or premium on settlement.
(iii) Derivative financial instruments - Derivative financial instruments are
used to manage the risk associated with foreign currency fluctuations in the
valuation of the investment portfolio. This is achieved by the use of forward
foreign currency contracts. Such instruments are used for the sole purpose of
efficient portfolio management. All derivative financial instruments are held
at fair value through profit or loss.
Derivative financial instruments are recognised initially at fair value on the
contract date and subsequently remeasured to the fair value at each reporting
date. All changes in the fair value of derivative financial instruments are
taken to the Statement of comprehensive income.
The maturity profile of derivative contracts is measured relative to the
financial contract settlement date of each contract and the derivative
contracts are disclosed in the Financial statements as either current or
non-current accordingly.
F Other assets
Assets, other than those specifically accounted for under a separate policy,
are stated at their consideration receivable less impairment losses. Such
assets are short-term in nature and the carrying value of these assets is
considered to be approximate to their fair value. Assets are reviewed for
recoverability and impairment using the expected credit loss model simplified
approach. The Company will recognise the asset's lifetime expected credit
losses at each reporting period where applicable in the Statement of
comprehensive income. An impairment loss is reversed at subsequent financial
reporting dates to the extent that the asset's carrying amount does not exceed
its carrying value, had no impairment been recognised.
Assets with maturities less than 12 months are included in current assets,
assets with maturities greater than 12 months after the Balance sheet date are
classified as non-current assets.
G Other liabilities
Liabilities, other than those specifically accounted for under a separate
policy, are stated based on the amounts which are considered to be payable in
respect of goods or services received up to the financial reporting date. Such
liabilities are short-term in nature, the carrying value of these liabilities
is considered to be approximate to their fair value.
H Equity and reserves
(i) Share capital - Share capital issued by the Company is recognised at the
fair value of proceeds received and is credited to the Stated capital account.
Direct issue costs net of tax are deducted from the fair value of the proceeds
received.
(ii) Equity and reserves - The Stated capital account of the Company
represents the cumulative proceeds recognised from share issues or new equity
issued on the conversion of warrants made by the Company net of issue costs
and reduced by any amount that has been transferred to Retained reserves, in
accordance with Jersey Company Law, in previous years. Share capital is
treated as an equity instrument, on the basis that no contractual obligation
exists for the Company to deliver cash or other financial assets to the holder
of the instrument.
On 15 October 2018, the Company became UK tax domiciled and, with effect from
that date, was granted UK approved investment trust status. Financial
statements prepared under IFRS are not strictly required to apply the
provisions of the Statements of Recommended Practice issued by the UK
Association of Investment Companies for the financial statements of Investment
Trust Companies (the 'AIC SORP'). However, where relevant and appropriate, the
Directors have looked to follow the recommendations of the SORP. From this
date, the retained profits of the Company have been applied to two new
reserves, being the Capital reserve and the Revenue reserve. These are in
addition to the existing Retained reserves which incorporate the cumulative
retained profits of the Company (after the payment of dividends) plus any
amounts that have been transferred from the Stated capital account of the
Company to 15 October 2018.
The Directors have exercised their judgement in applying the AIC SORP and a
summary of these judgements are as follows:
· Net gains on investments are applied wholly to the Capital reserve as
they relate to the revaluation or disposal of investments;
· Dividends are applied to the Revenue reserve except under specific
circumstances where a dividend arises from a return of capital or proceeds
from a refinancing, when they are applied to the Capital reserve;
· Fees payable are applied to the Capital reserve where the service
provided is, in substance, an intrinsic part of an intention to acquire or
dispose of an investment;
· Movement in the fair value of derivative financial instruments is applied
to the Capital reserve as the derivative hedging programme is specifically
designed to reduce the volatility of sterling valuations of the non-sterling
denominated investments;
· Management fees are applied to the Revenue reserve as they reflect
ongoing asset management. Where a transaction fee element is due on the
acquisition of an investment it is applied to the Capital reserve;
· Performance fees are applied wholly to the Capital reserve as they arise
mainly from capital returns on the investment portfolio;
· Operating costs are applied wholly to the Revenue reserve as there is no
clear connection between the operating expenses of the Company and the
purchase and sale of an investment;
· Finance costs are applied wholly to the Revenue reserve as the existing
borrowing is not directly linked to an investment; and
· Exchange movements are applied to the Revenue reserve where they relate
to exchange on non-portfolio assets.
(iii) Dividends payable - Dividends on ordinary shares are recognised in the
period in which the Company's obligation to make the dividend payment arises.
For the period to 15 October 2018, dividends were deducted from Retained
reserves. For subsequent periods, dividends are deducted first from the
Revenue reserve and then from the Capital reserve if required.
I Income taxes
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the Statement of
comprehensive income, except where it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year. This
may differ from the profit included in the Statement of comprehensive income
because it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable or
deductible.
To enable the tax charge to be based on the profit for the year, deferred tax
is provided in full on temporary timing differences, at the rates of tax
expected to apply when these differences crystallise. Deferred tax assets are
recognised only to the extent that it is probable that sufficient taxable
profits will be available against which temporary differences can be set off.
In practice, some assets that are likely to give rise to timing differences
will be treated as capital for tax purposes. Given capital items are exempt
from tax under the Investment Trust Company rules, deferred tax is not
expected to be recognised on these balances. All deferred tax liabilities are
offset against deferred tax assets, where appropriate, in accordance with the
provisions of IAS 12.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Notes to the accounts
1 Operating segments
The Directors review information on a regular basis that is analysed by
portfolio segment; being Economic infrastructure businesses, the Projects
portfolio and the India Fund. In prior years they also analysed the portfolio
by geography. Since the India Fund reached the end of its life and moved into
liquidation and because some of the investments such as GCX, TCR, ESVAGT and
Tampnet operate in multiple jurisdictions, this geographic distinction is no
longer relevant and is therefore no longer reported. These segments are
reviewed for the purpose of resource allocation and the assessment of their
performance. In accordance with IFRS 8, the segmental information provided
below uses these segments for the analysis of results as it is the most
closely aligned with IFRS reporting requirements. The Company is an investment
holding company and does not consider itself to have any customers.
The following is an analysis of the Company's investment return, profit before
tax, assets, liabilities and net assets by portfolio segment:
Economic
infrastructure Projects India
businesses portfolio Fund Unallocated1 Total
For the year to 31 March 2023 £m £m £m £m £m
Investment return 492 3 - 2 497
Profit/(loss) before tax 511 2 - (119) 394
For the year to 31 March 2022
Investment return 486 18 5 5 514
Profit/(loss) before tax 483 19 5 (103) 404
As at 31 March 2023
Assets 3,698 - - 9 3,707
Liabilities (18) - - (588) (606)
Net assets/(liabilities) 3,680 - - (579) 3,101
As at 31 March 2022
Assets 2,796 105 - 119 3,020
Liabilities (18) (1) - (297) (316)
Net assets/(liabilities) 2,778 104 - (178) 2,704
1 Unallocated includes cash, management and performance fees payable, RCF drawn
and other payables and receivables (including vendor loan notes) which are not
directly attributable to the investment portfolio.
During the year, the Company generated 99% (2022: 95%) of its investment
return from investments in Economic infrastructure businesses, 1% (2022: 4%)
from investments in Projects and none (2021: 1%) from its investment in the
India Fund. Given the nature of the Company's operations, the Company is not
considered to be exposed to any operational seasonality or cyclicality that
would impact the financial results of the Company during the year or the
financial position of the Company at 31 March 2023.
2 Management and performance fees payable
Year to Year to
31 March 31 March
2023 2022
£m £m
Management fee 47 43
Performance fee 45 54
92 97
Total management and performance fees payable by the Company for the year to
31 March 2023 were £92 million (2022: £97 million). Note 18 provides further
details on the calculation of the management fee and performance fee.
3 Operating expenses
Operating expenses include the following amounts:
Year to Year to
31 March 31 March
2023 2022
£m £m
Audit fees 0.6 0.6
Directors' fees and expenses 0.5 0.5
In addition to the fees described above, audit fees of £0.05 million (2022:
£0.05 million) are payable by unconsolidated subsidiary entities for the year
to 31 March 2023 to the Company's auditor.
Services provided by the Company's auditor
During the year, the Company obtained the following services from the
Company's auditor.
Year to Year to
31 March 31 March
2023 2022
Audit services £m £m
Statutory audit1 Company 0.52 0.40
UK and Jersey unconsolidated subsidiaries2 0.05 0.05
0.57 0.45
1 Amounts exclude VAT.
2 These amounts are payable from unconsolidated subsidiary entities and do not
form part of operating expenses but are included in the net gains on
investments.
Non-audit services
Deloitte LLP and their associates provided non-audit services for fees
totalling £95,891 for the year to 31 March 2023 (2022: £104,635). This
related to agreed-upon procedures work in respect of the management and
performance fees £8,316 (2022: £7,560), agreed-upon procedures work in
respect of Sustainability KPIs for the RCF reporting £27,000 (2022: £27,000)
and the review of the interim financial statements £60,575 (2022: £55,575).
In line with the Company's policy, Deloitte LLP provided non-audit services to
certain investee companies. The fees for these services are ordinarily borne
by the underlying investee companies or unconsolidated subsidiaries, and
therefore are not included in the expenses of the Company. Details on how such
non-audit services are monitored and approved can be found in the Governance
section of the Annual report and accounts 2023.
4 Finance costs
Year to Year to
31 March 31 March
2023 2022
£m £m
Finance costs associated with the debt facilities 14 3
Professional fees payable associated with the arrangement of debt financing 2 2
16 5
The finance costs associated with the debt facilities have increased for the
year to 31 March 2023 as a result of higher average drawings, increased SONIA
and EURIBOR rates and increases in the total available facilities. The average
monthly drawn position during the year was £368 million (2022: £80 million)
and the average monthly total available facilities was £562 million (2022:
£508 million).
5 Movement in the fair value of derivative financial instruments
Year to Year to
31 March 31 March
2023 2022
£m £m
Movement in the fair value of forward foreign exchange contracts 18 (2)
The movement in the fair value of derivative financial instruments is included
within profit before tax but not included within investment return.
6 Income taxes
Year to Year to
31 March 31 March
2023 2022
£m £m
Current taxes
Current year - -
Total income tax charge in the Statement of comprehensive income - -
Reconciliation of income taxes in the Statement of comprehensive income
The tax charge for the year is different from the standard rate of corporation
tax in the UK, currently 19% (2022: 19%), and the differences are explained
below:
Year to Year to
31 March 31 March
2023 2022
£m £m
Profit before tax 394 404
Profit before tax multiplied by rate of corporation tax in the UK of 19% 75 77
(2022: 19%)
Effects of:
Non-taxable capital profits due to UK approved investment trust company status (67) (70)
Non-taxable dividend income - (5)
Dividends designated as interest distributions (9) (3)
Temporary differences on which deferred tax is not recognised 1 1
Total income tax charge in the Statement of comprehensive income - -
The Company's affairs are directed so as to allow it to meet the requisite
conditions to continue to operate as an approved investment trust company for
UK tax purposes. The approved investment trust status allows certain capital
profits of the Company to be exempt from tax in the UK and also permits the
Company to designate the dividends it pays, wholly or partly, as interest
distributions. These features enable approved investment trust companies to
ensure that their investors do not ultimately suffer double taxation of their
investment returns, ie once at the level of the investment fund vehicle and
then again in the hands of the investors.
Under the UK Finance Act 2021, the UK corporation tax rate will increase for
large companies from the current rate of 19% to 25% with effect from 1 April
2023. Should the Company recognise any deferred tax assets and liabilities, a
rate of 19% or 25% would be used depending on when the assets and liabilities
are expected to be crystallised.
7 Investments at fair value through profit or loss and financial instruments
All financial instruments for which fair value is recognised or disclosed are
categorised within the fair value hierarchy, described as follows, based on
the lowest level input that is significant to the fair value measurement as a
whole:
Level Fair value input description Financial instruments
Level 1 Quoted prices (unadjusted and in active markets) Quoted equity investments
Level 2 Inputs other than quoted prices included in Level 1 that are observable in the Derivative financial instruments held at fair value
market either directly (ie as prices) or indirectly (ie derived from prices)
Level 3 Inputs that are not based on observable market data Unquoted investments and unlisted funds
For assets and liabilities that are recognised in the Financial statements on
a recurring basis, the Company determines whether transfers have occurred
between levels in the hierarchy by reassessing the categorisation (based on
the lowest level input that is significant to the fair value measurement as a
whole) for each reporting period.
The table below shows the classification of financial instruments held at fair
value into the fair value hierarchy at 31 March 2023. For all other assets and
liabilities, their carrying value approximates to fair value. During the year
ended 31 March 2023, there were no transfers of financial instruments between
levels of the fair value hierarchy (2022: none).
Trade and other receivables in the Balance sheet includes £4 million of
deferred finance costs relating to the arrangement fee for the revolving
credit facility and additional facilities (2022: £2 million). This has been
excluded from the table below as it is not categorised as a financial
instrument.
Financial instruments classification
As at 31 March 2023
Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets
Investments at fair value through profit or loss - - 3,641 3,641
Trade and other receivables - - - -
Derivative financial instruments - 57 - 57
- 57 3,641 3,698
Financial liabilities
Derivative financial instruments - (18) - (18)
- (18) - (18)
As at 31 March 2022
Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets
Investments at fair value through profit or loss - - 2,873 2,873
Trade and other receivables - 102 - 102
Derivative financial instruments - 26 - 26
- 128 2,873 3,001
Financial liabilities
Derivative financial instruments - (18) - (18)
- (18) - (18)
Reconciliation of financial instruments categorised within Level 3 of fair value hierarchy
As at As at
31 March 31 March
2023 2022
Level 3 fair value reconciliation £m £m
Opening fair value 2,873 1,804
Additions 824 816
Disposal proceeds and repayment (426) (148)
Movement in accrued income 31 17
Fair value movement (including exchange movements) 339 384
Closing fair value 3,641 2,873
The fair value movement (including exchange movements) is equal to the Net
gains on investments showing in the Statement of comprehensive income. All
unrealised movements on investments and foreign exchange movements are
recognised in profit or loss in the Statement of comprehensive income during
the year and are attributable to investments held at the end of the year.
The holding period of the investments in the portfolio is expected to be
greater than one year. Therefore, investments are classified as non-current
unless there is an agreement to dispose of the investment within one year and
all relevant regulatory or other third-party approvals have been received. It
is not possible to identify with certainty whether any investments may be sold
within one year.
Investment income of £156 million (2022: £127 million) comprises dividend
income of £1 million (2022: £24 million) and interest of £155 million
(2022: £103 million).
Unquoted investments
The Company invests in private companies which are not quoted on an active
market. These are measured in accordance with the International Private Equity
Valuation guidelines with reference to the most appropriate information
available at the time of measurement. Further information regarding the
valuation of unquoted investments can be found in the Portfolio valuation
methodology section.
The Company's policy is to fair value both the equity and shareholder debt
investments in infrastructure assets together where they will be managed and
valued as a single investment, were invested at the same time and cannot be
realised separately. The Directors consider that equity and debt share the
same characteristics and risks and they are therefore treated as a single unit
of account for valuation purposes and a single class for disclosure purposes.
As at 31 March 2023, the fair value of unquoted investments was £3,641
million (2022: £2,873 million). Individual portfolio asset valuations are
shown in the Portfolio summary.
The fair value of the investments is sensitive to changes in the macroeconomic
assumptions used as part of the portfolio valuation process. As part of its
analysis, the Board has considered the potential impact of a change in a
number of the macroeconomic assumptions used in the valuation process. By
considering these potential scenarios, the Board is well positioned to assess
how the Company is likely to perform if affected by variables and events that
are inherently outside of the control of the Board and the Investment Manager.
The majority of the assets held within Level 3 are valued on a discounted cash
flow basis, hence the valuations are sensitive to the discount rate assumed in
the valuation of each asset. Other significant unobservable inputs include the
inflation rate assumption, the interest rates assumption used to project the
future cash flows, and the forecast cash flows themselves. The sensitivity to
the inflation rate and interest rates is described below and the sensitivity
to the forecast cash flows is captured in the Market risk section in Note 9.
A discussion of discount rates applied can be found in the Summary of
portfolio valuation methodology section. Increasing the discount rate used in
the valuation of each asset by 1% would reduce the value of the portfolio by
£296 million (2022: £258 million). Decreasing the discount rate used in the
valuation of each asset by 1% would increase the value of the portfolio by
£343 million (2022: £297 million).
The majority of assets held within Level 3 have revenues that are linked,
partially linked or in some way correlated to inflation. The long-term CPI
inflation rate assumption across all jurisdictions is 2.0% (2022: 2.0%). The
long-term RPI assumption for the UK is 2.5% (2022: 2.5%). The impact of
increasing the short-term inflation rate assumption by 1% for the next two
years would increase the value of the portfolio by £47 million (2022: £43
million). Decreasing the inflation rate assumption used in the valuation of
each asset by 1% for the next two years would decrease the value of the
portfolio by £52 million (2022: £46 million). The timing and quantum of
price increases will vary across the portfolio and the sensitivity may differ
from that modelled. Changing the inflation rate assumption may result in
consequential changes to other assumptions used in the valuation of each
asset.
The valuations are sensitive to changes in interest rates, which may result
from: (i) unhedged existing borrowings within portfolio companies; (ii)
interest rates on uncommitted future borrowings assumed within the asset
valuations; and (iii) cash deposits held by portfolio companies. These
comprise a wide range of interest rates from short-term deposit rates to
longer-term borrowing rates across a broad range of debt products. Increasing
the cost of borrowing assumption for unhedged borrowings and any future
uncommitted borrowing and the cash deposit rates used in the valuation of each
asset by 1% would reduce the value of the portfolio by £182 million (2022:
£158 million). Decreasing the interest rate assumption for unhedged
borrowings used in the valuation of each asset by 1% would increase the value
of the portfolio by £175 million (2022: £156 million). This calculation does
not take account of any offsetting variances which may be expected to prevail
if interest rates changed, including the impact of inflation discussed above.
Over-the-counter derivatives
The Company uses over-the-counter foreign currency derivatives to hedge
foreign currency movements. The derivatives are held at fair value which
represents the price that would be received to sell or transfer the
instruments at the balance sheet date. The valuation technique incorporates
various inputs, including foreign exchange spot and forward rates, and uses
present value calculations. For these financial instruments, significant
inputs into models are market observable and are included within Level 2.
Valuation process for Level 3 valuations
The valuations on the Balance sheet are the responsibility of the Board of
Directors of the Company. The Investment Manager provides a valuation of
unquoted investments, debt and unlisted funds held by the Company on a
half-yearly basis. This is performed by the valuation team of the Investment
Manager and reviewed by the valuation committee of the Investment Manager. The
valuations are also subject to quality assurance procedures performed within
the valuation team. The valuation team verifies the major inputs applied in
the latest valuation by agreeing the information in the valuation computation
to relevant documents and market information. The valuation committee of the
Investment Manager considers the appropriateness of the valuation methods and
inputs, and may request that alternative valuation methods are applied to
support the valuation arising from the method chosen. On a half-yearly basis,
the Investment Manager presents the valuations to the Board. This includes a
discussion of the major assumptions used in the valuations, with an emphasis
on the more significant investments and investments with significant fair
value changes. Any changes in valuation methods are discussed and agreed with
the Audit and Risk Committee before the valuations on the Balance sheet are
approved by the Board.
8 Trade and other receivables
Year to Year to
31 March 31 March
2023 2022
£m £m
Current assets
Vendor loan notes - 100
Other receivables including prepayments - 2
Capitalised finance costs 4 2
4 104
9 Financial risk management
A full review of the Company's objectives, policies and processes for managing
and monitoring risk is set out in the Risk report. This Note provides further
detail on financial risk management, cross-referring to the Risk report where
applicable and providing further quantitative data on specific financial
risks.
Each investment made by the Company is subject to a full risk assessment
through a consistent investment approval process. The Board's Management
Engagement Committee, Audit and Risk Committee and the Investment Manager's
investment process are part of the overall risk management framework of the
Company.
The funding objective of the Company is that each category of investment ought
to be broadly matched with liabilities and shareholders' funds according to
the risk and maturity characteristics of the assets, and that funding needs
are to be met ahead of planned investment.
Capital structure
The Company has a continuing commitment to capital efficiency. The capital
structure of the Company consists of cash held on deposit and in AAA-rated
money market funds, borrowing facilities and shareholders' equity. The
Company's Articles require its outstanding borrowings, including any financial
guarantees to support subsequent obligations, to be limited to 50% of the
gross assets of the Company. The type and maturity of the Company's borrowings
are analysed in Note 11 and the Company's equity is analysed into its various
components in the Statement of changes in equity. Capital is managed so as to
maximise the return to shareholders, while maintaining a strong capital base
that ensures that the Company can operate effectively in the marketplace and
sustain future development of the business. The Board is responsible for
regularly monitoring capital requirements to ensure that the Company is
maintaining sufficient capital to meet its future investment needs.
The Company is regulated by the Jersey Financial Services Commission under the
provisions of the Collective Investment Funds (Jersey) Law 1988 as a listed
closed-ended collective investment fund and is not required as a result of
such regulation to maintain a minimum level of capital.
Capital is allocated for investment in infrastructure across the UK and
continental Europe. As set out in the Company's investment policy, the maximum
exposure to any one investment is 25% of gross assets (including cash
holdings) at the time of investment.
Credit risk
The Company is subject to credit risk on the debt component of its unquoted
investments, cash, deposits, derivative contracts and receivables. The maximum
exposure to credit risk as a result of counterparty default equates to the
current carrying value of these financial assets. Throughout the year and the
prior year, the Company's cash and deposits were held with a variety of
counterparties, principally in AAA-rated money market funds. The
counterparties selected for the derivative financial instruments were all
banks with a minimum of a BBB+ credit rating with at least one major rating
agency.
The credit quality of unquoted investments, which are held at fair value and
include debt and equity elements, is based on the financial performance of the
individual portfolio companies. The credit risk relating to these assets is
based on their enterprise value and is reflected through fair value movements.
This incorporates the impact from macroeconomic factors such as inflation and
interest rate rises and the volatility in energy prices. The performance of
underlying investments is monitored by the Board to assess future
recoverability.
For those assets and income entitlements that are not past due, it is believed
that the risk of default is small and capital repayments and interest payments
will be made in accordance with the agreed terms and conditions of the
investment. If the portfolio company has failed and there is no expectation to
recover any residual value from the investment, the Company's policy is to
record an impairment for the full amount of the loan. When the net present
value of the future cash flows predicted to arise from the asset, discounted
using the effective interest rate method, implies non-recovery of all or part
of the Company's investment, a fair value movement is recorded equal to the
valuation shortfall.
As at 31 March 2023, the Company had no loans or receivables or debt
investments considered past due (2022: nil).
The Company actively manages counterparty risk. Counterparty limits are set
and closely monitored by the Board and a regular review of counterparties is
undertaken by the Investment Manager and reported to the Board. As at 31 March
2023, the Company did not consider itself to have a significant exposure to
any one counterparty and held deposits and derivative contracts with a number
of different counterparties to reduce counterparty risk (2022: same).
Due to the size and nature of the investment portfolio there is the potential
for concentration risk. This risk is managed by diversifying the portfolio by
sector and geography.
Liquidity risk
Further information on how liquidity risk is managed is provided in the Risk
report. The table below analyses the maturity of the Company's contractual
liabilities.
Payable Due within Due between Due between
on demand 1 year 1 and 2 years 2 and 5 years Total
2023 £m £m £m £m £m
Liabilities
Loans and borrowings(1) - (26) (26) (517) (569)
Trade and other payables (4) (35) (33) (15) (87)
Derivative contracts - (4) (6) (8) (18)
Financial commitments(2) - - - - -
Total undiscounted financial liabilities (4) (65) (65) (540) (674)
1 Loans and borrowings relate to undrawn commitment fees and interest payable on
the RCF referred to in Note 11.
2 Financial commitments are described in Note 16 and are not recognised in the
Balance sheet.
Payable Due within Due between Due between
on demand 1 year 1 and 2 years 2 and 5 years Total
2022 £m £m £m £m £m
Liabilities
Loans and borrowings(1) - (7) (5) (234) (246)
Trade and other payables (4) (26) (20) (18) (68)
Derivative contracts - (12) (3) (3) (18)
Financial commitments(2) (302) - - - (302)
Total undiscounted financial liabilities (306) (45) (28) (255) (634)
1 Loans and borrowings relate to undrawn commitment fees and interest payable on
the RCF and additional facilities referred to in Note 11.
2 Financial commitments are described in Note 16 and are not recognised in the
Balance sheet.
The derivative contracts liability shown is the net cash flow expected to be
paid on settlement. In order to manage the contractual liquidity risk the
Company has free cash and debt facilities in place.
Market risk
The valuation of the Company's investment portfolio is largely dependent on
the underlying trading performance of the companies within the portfolio, but
the valuation of the portfolio and the carrying value of other items in the
Financial statements can also be affected by interest rate, currency and
market price fluctuations. The Company's sensitivities to these fluctuations
are set out below.
(i) Interest rate risk
Further information on how interest rate risk is managed is provided in the
Risk report.
An increase of 100 basis points in interest rates over 12 months (2022: 100
basis points) would lead to an approximate decrease in net assets and net
profit of the Company of £5 million (2022: £2 million). This exposure
relates principally to changes in interest payable on the drawn RCF balance at
the year end. The average cash balance of the Company, which is more
representative of the cash balance during the year, was £29 million (2022:
£269 million) and the weighted-average interest earned was 1.62% (2022:
0.04%).
In addition, the Company has indirect exposure to interest rates through
changes to the financial performance of portfolio companies caused by interest
rate fluctuations as disclosed in Note 7. This risk is considered a component
of market risk described in section (iii). The Company does not hold any fixed
rate debt investments or borrowings and is therefore not exposed to fair value
interest rate risk.
(ii) Currency risk
Further information on how currency risk is managed is provided in the Risk
report. The currency denominations of the Company's net assets are shown in
the table below. The sensitivity analysis demonstrates the exposure of the
Company's net assets to movements in foreign currency exchange rates. The
hedging strategy is discussed in the Financial review.
As at 31 March 2023
Sterling(1) Euro NOK DKK US dollar Total
£m £m £m £m £m £m
Net assets 506 1,486 293 489 327 3,101
Sensitivity analysis
Assuming a 10% appreciation in sterling against the euro, NOK, DKK and US
dollar exchange rates:
Impact of exchange movements on net profit and net assets 159 (135) (27) (44) (30) (77)
1 Sterling impact relates to the impact of fair value movement in derivatives
held by the Company to hedge foreign currency fluctuations in the valuation of
the investment portfolio. The notional amount of the derivatives is disclosed
in Note 10.
As at 31 March 2022
Sterling(1) Euro NOK DKK US dollar Total
£m £m £m £m £m £m
Net assets 456 1,457 243 548 - 2,704
Sensitivity analysis
Assuming a 10% appreciation in sterling against the euro, NOK, DKK and US
dollar exchange rates:
Impact of exchange movements on net profit and net assets 139 (132) (22) (50) - (65)
1 Sterling impact relates to the impact of fair value movement in derivatives
held by the Company to hedge foreign currency fluctuations in the valuation of
the investment portfolio. The notional amount of the derivatives is disclosed
in Note 10.
The impact of an equivalent depreciation in sterling against the euro, NOK,
DKK and US dollar exchange rates has the inverse impact on net profit and net
assets from that shown above. The risk exposure at the year end is considered
to be representative of this year as a whole.
(iii) Market risk
Further information about the management of external market risk and its
impact on price or valuation, which arises principally from unquoted
investments, is provided in the Risk report. A 10% increase in the fair value
of those investments would have the following direct impact on net profit and
net assets. The impact of a change in all cash flows has an equivalent impact
on the fair value, as set out below.
As at As at
31 March 31 March
2023 2022
Investments Investments
at fair value at fair value
£m £m
Increase in net profit and net assets 364 287
The impact of a 10% decrease in the fair value of those investments would have
the inverse impact on net profit and net assets from that shown above. The
risk exposure at the year end is considered to be representative of this year
as a whole.
By the nature of the Company's activities, it has large exposures to
individual assets that are susceptible to movements in price. This risk
concentration is managed within the Company's investment strategy as discussed
in the Risk report.
(iv) Fair values
The fair value of the investment portfolio is described in detail in the
Portfolio valuation methodology section and in Note 7. The fair values of the
remaining financial assets and liabilities approximate to their carrying
values (2022: same).
The sensitivity analysis in respect of the interest rate, currency and market
price risks is considered to be representative of the Company's exposure to
financial risks throughout the period to which they relate (2022: same).
10 Derivative financial instruments
As at As at
31 March 31 March
2023 2022
£m £m
Non-current assets
Forward foreign exchange contracts 29 6
Current assets
Forward foreign exchange contracts 28 20
Non-current liabilities
Forward foreign exchange contracts (10) (6)
Current liabilities
Forward foreign exchange contracts (8) (12)
Forward foreign exchange contracts
The Company uses forward foreign exchange contracts to minimise the effect of
fluctuations in the investment portfolio from movements in exchange rates and
also to fix the value of certain expected future cash flows arising from
distributions made by investee companies.
The fair value of these contracts is recorded in the Balance sheet. No
contracts are designated as hedging instruments and consequently all changes
in fair value are taken through profit or loss.
As at 31 March 2023, the notional amount of the forward foreign exchange
contracts held by the Company was £1,982 million (2022: £1,555 million).
11 Loans and borrowings
The Company increased the commitments under its revolving credit facility
('RCF') in July 2022 from £700 million to £900 million. An additional
facility of £300 million available at the beginning of the financial year,
with a maturity of less than one year, was cancelled in July 2022. In
September 2022, the maturity of the RCF was extended to 3 November 2025. The
Company has the right to extend the RCF by a further year provided that
existing lenders consent.
The RCF is secured by a floating charge over the bank accounts of the Company.
Interest is payable at SONIA or EURIBOR plus a fixed margin on the drawn
amount. This fixed margin is subject to a small adjustment annually based upon
performance against agreed sustainability metrics. As at 31 March 2023, the
Company had £501 million of drawings under the RCF (March 2022: £231
million). The RCF has one financial covenant, a loan-to-value ratio.
There was no change in total financing liabilities for the Company during the
period as the cash flows relating to the financing liabilities were equal to
the income statement expense. Accordingly, no reconciliation between the
movement in financing liabilities and the cash flow statement has been
presented.
12 Trade and other payables
As at As at
31 March 31 March
2023 2022
£m £m
Non-current liabilities
Performance fee 48 38
Current liabilities
Management and performance fees 37 27
Accruals and other creditors 2 2
87 67
The carrying value of all liabilities is representative of fair value (2022:
same).
13 Issued capital
As at 31 March 2023 As at 31 March 2022
Number £m Number £m
Authorised, issued and fully paid
Opening balance 891,434,010 1,496 891,434,010 1,496
Issue of ordinary shares 30,915,990 102 - -
Closing balance 922,350,000 1,598 891,434,010 1,496
Reconciliation to Stated capital account
As at 31 March 2023 As at 31 March 2022
£m £m
Proceeds from issue of ordinary shares 1,598 1,496
Transfer to retained reserves on 20 December 2007 (693) (693)
Cost of issue of ordinary shares (26) (24)
Stated capital account closing balance 879 779
On 14 February 2023, 30.9 million shares were admitted for trading further to
the equity placing at an issue price of 330.0 pence per share or an aggregate
amount of £102 million. Issue costs of £2 million arising from this offer
have been offset against the stated capital account. Therefore, as at 31 March
2023, the residual value on the stated capital account was £879 million
(2022: £779 million).
14 Per share information
The earnings and net asset value per share attributable to the equity holders
of the Company are based on the following data:
Year to Year to
31 March 31 March
2023 2022
Earnings per share (pence)
Basic and diluted 44.0 45.3
Earnings (£m)
Profit after tax for the year 394 404
Number of shares (million)
Weighted average number of shares in issue 895.2
Number of shares at the end of the year 922.4 891.4
As at As at
31 March 31 March
2023 2022
Net assets per share (pence)
Basic and diluted 336.2 303.3
Net assets (£m)
Net assets 3,101 2,704
15 Dividends
Declared and paid during the year Year to 31 March 2023 Year to 31 March 2022
Pence per share £m Pence per £m
share
Interim dividend paid on ordinary shares 5.575 50 5.225 46
Prior year final dividend paid on ordinary shares 5.225 47 4.900 44
10.800 97 10.125 90
The Company proposes paying a final dividend of 5.575 pence per share (2022:
5.225 pence) which will be payable to those shareholders that are on the
register on 16 June 2023. On the basis of the shares in issue at year end,
this would equate to a total final dividend of £51 million (2022: £47
million).
The final dividend is subject to approval by shareholders at the AGM in July
2023 and has therefore not been accrued in these Financial statements.
16 Commitments
As at As at
31 March 31 March
2023 2022
£m £m
Unquoted investments - 302
During the year, the Company invested in GCX and, as a result, the prior year
commitment of US$398 million (£302 million) was extinguished.
17 Contingent liabilities
As at 31 March 2023, the Company had no contingent liabilities (2022: nil).
18 Related parties
Transactions between 3i Infrastructure and 3i Group
3i Group plc ('3i Group') holds 29.2% (2022: 30.2%) of the ordinary shares of
the Company. This classifies 3i Group as a 'substantial shareholder' of the
Company as defined by the Listing Rules. During the year, 3i Group received
dividends of £29 million (2022: £27 million) from the Company.
In 2007 the Company committed US$250 million to the India Fund to invest in
the Indian infrastructure market. 3i Group also committed US$250 million to
the India Fund. The India Fund has reached the end of its life and moved into
liquidation and the outstanding commitment is no longer callable. Therefore,
no commitments were drawn down by the India Fund from the Company during the
year (2022: nil).
3i Investments plc, a subsidiary of 3i Group, is the Company's Alternative
Investment Fund Manager and provides its services under an Investment
Management Agreement ('IMA'). 3i Investments plc also acts as the investment
manager of the India Fund. 3i plc, another subsidiary of 3i Group, together
with 3i Investments plc, provides support services to the Company (which are
ancillary and related to the investment management service), which it is doing
pursuant to the terms of the IMA.
Fees under the IMA consist of a tiered management fee and time weighting of
the management fee calculation and a one-off transaction fee of 1.2% payable
in respect of new investments. The applicable tiered rates are shown in the
table below. The management fee is payable quarterly in advance.
Gross investment value Applicable tier rate
Up to £1.25bn 1.4%
£1.25bn to £2.25bn 1.3%
Above £2.25bn 1.2%
For the year to 31 March 2023, £47 million (2022: £43 million) was payable,
including one-off transaction fees payable in respect of new investments, and
advance payments of £45 million were made resulting in an amount due to 3i
plc of £2 million at 31 March 2023 (2022: £1 million). In consideration of
the provision of support services under the IMA, the Company pays the
Investment Manager an annual fixed fee. The cost for the support services
incurred for the year to 31 March 2023 was £1 million (2022: £1 million).
There was no outstanding balance payable as at 31 March 2023 (2022: nil).
Under the IMA, a performance fee is payable to the Investment Manager equal to
20% of the Company's total return in excess of 8%, payable in three equal
annual instalments. The second and third instalments will only be payable if
either (a) the Company's performance in the year in which that instalment is
paid also triggers payment of a performance fee in respect of that year, or
(b) if the Company's performance over the three years starting with the year
in which the performance fee is earned exceeds the 8% hurdle on an annual
basis. There is no high water mark requirement.
The performance hurdle requirement was exceeded for the year to 31 March 2023
and therefore a performance fee of £45 million was recognised (2022: £54
million). The outstanding balance payable as at 31 March 2023 was £83 million
(2022: £64 million), which includes the second instalment of the FY22 fee and
the third instalment of the FY21 fee.
Year Performance fee Outstanding balance at Payable in FY24
31 March (£m)
(£m) (£m)
FY23 45 45 15
FY22 54 36 18
FY21 7 2 2
Under the IMA, the Investment Manager's appointment may be terminated by
either the Company or the Investment Manager giving the other not less than 12
months' notice in writing, but subject to a minimum term of four years from 15
October 2018, unless 3i Investments plc has previously ceased to be a member
of 3i Group, or with immediate effect by either party giving the other written
notice in the event of insolvency or material or persistent breach by the
other party. The Investment Manager may also terminate the agreement on two
months' notice given within two months of a change of control of the Company.
Regulatory information relating to fees
3i Investments plc acts as the Alternative Investment Fund Manager ('AIFM') to
the Company. In performing the activities and functions of the AIFM, the AIFM
or another 3i company may pay or receive fees, commissions or non-monetary
benefits to or from third parties of the following nature:
· Payments for third-party services: The Company may retain the services of
third-party consultants; typically this is for an independent director or
other investment management specialist expertise. The amount paid varies in
accordance with the nature of the service and the length of the service period
and is usually, but not always, paid or reimbursed by the portfolio companies.
The payment may involve a flat fee, retainer or success fee. Such payments,
where borne by the Company, are included within Operating expenses. In some
circumstances, the AIFM may retain the services of third-party consultants
which are paid for by the AIFM and not recharged to the Company.
· Payments for services from 3i companies: Other 3i companies may provide
investment advisory and other services to the AIFM or other 3i companies and
receive payment for such service.
19 Unconsolidated subsidiaries and related undertakings
Name Place of incorporation and operation Ownership interest
Investment holding companies:
3i Tampnet Holdings Limited UK 100%
3iN Attero Holdco Limited UK 100%
3i Amalthea Topco Limited UK 100%
3i Green Gas Limited (formerly 3i LFG Topco Limited) Jersey 100%
3i Infrastructure (Luxembourg) S.à r.l. Luxembourg 100%
3i Infrastructure (Luxembourg) Holdings S.à r.l. Luxembourg 100%
3i India Infrastructure Fund A LP UK 100%
3i ERRV Denmark Limited (Dissolved in the year) Jersey 100%
ERRV Luxembourg Holdings S.à r.l. (Dissolved in the year) Luxembourg 100%
DNS:NET Group:
DNS Holdings GmbH Germany 64%
DNS Bidco GmbH Germany 64%
DNS:NET Internet Service GmbH Germany 64%
DNS:NET Netzgesellschaft I Verwalkungs GmbH Germany 64%
DNS:NET Netzgesellschaft I GmbH & Co. KG Germany 64%
DNS:NET Breitband Internet GmbH Germany 64%
Antennen-Schulze GmbH Germany 64%
ESVAGT Group:
ERRV Holdings ApS Denmark 83%
ERRV ApS Denmark 83%
ESVAGT A/S Denmark 83%
ESVAGT Holdings Inc USA 83%
ESVAGT Norge AS Norway 83%
ESVAGT Holdings Ltd UK 83%
ESVAGT UK Ltd UK 83%
Future Biogas Group:
Future Biogas Holdco Limited UK 81%
Future Biogas Midco Limited UK 81%
Future Biogas Bidco Limited UK 81%
Future Biogas Group Limited UK 81%
Future Biogas Limited UK 81%
Future Biogas Systems Limited UK 81%
F3B Limited UK 81%
Moor Bio-Energy Limited UK 81%
Fern Farming Limited UK 81%
FB Feedstocks Limited UK 81%
GCX Group:
GCX Topco Limited UK 98%
GCX Midco Limited UK 98%
GCX Bidco Limited UK 98%
GCX Holdings Limited Bermuda 98%
GCX Global Limited Bermuda 98%
FLAG Telecom Limited Bermuda 98%
FLAG Telecom Asia Limited Hong Kong 98%
FLAG Telecom UK Limited UK 98%
GCX India Services Limited India 98%
FLAG Atlantic France SAS France 98%
FLAG Telecom Deutschland GmbH Germany 98%
FLAG Atlantic UK Limited UK 98%
FLAG Telecom Nederland B.V. The Netherlands 98%
FLAG Telecom Singapore Pte Limited Singapore 98%
GCXG India Private Limited India 98%
FLAG Telecom Taiwan Limited Taiwan 59%
FLAG Telecom Development Limited Bermuda 98%
FLAG Telecom Hellas AE Greece 98%
FLAG Telecom Development Services Company LLC Egypt 98%
FLAG Telecom Network Services DAC Ireland 98%
FLAG Telecom Ireland DAC Ireland 98%
FLAG Telecom Ireland Network DAC Ireland 98%
FLAG Telecom Network USA Limited USA 98%
FLAG Telecom Espana Network SAU Spain 98%
FLAG Telecom Japan Limited Japan 98%
GCX Managed Services Limited Bermuda 98%
Vanco Group Limited UK 98%
Vanco UK Limited UK 98%
Vanco Global Limited UK 98%
Vanco International Limited UK 98%
Vanco ROW Limited UK 98%
Vanco GmbH Germany 98%
Vanco SAS France 98%
Vanco (Asia Pacific) Pte Limited Singapore 98%
Vanco SpZoo Poland 98%
Vanco NV Belgium 98%
Euronet Spain SA Spain 98%
Vanco Switzerland A.G. Switzerland 98%
Vanco Sweden AB Sweden 98%
Vanco Srl Italy 98%
Net Direct SA (Proprietary) Limited South Africa 98%
Vanco (Shanghai) Co. Ltd China 98%
Vanco Japan KK Japan 98%
Vanco Australasia Pty Limited Australia 98%
Vanco BV The Netherlands 98%
Vanco Deutschland GmbH Germany 98%
VNO Direct Limited UK 98%
Vanco US, LLC USA 98%
Vanco Solutions Inc. USA 98%
Yipes Holdings, Inc. USA 98%
Reliance Globalcom Services Inc. USA 98%
YTV Inc. USA 98%
Infinis Group:
Infinis Energy Group Holdings Limited UK 100%
Infinis Energy Management Limited UK 100%
Infinis Limited UK 100%
Infinis (Re-Gen) Limited UK 100%
Novera Energy (Holdings 2) Limited UK 100%
Novera Energy Generation No. 1 Limited UK 100%
Novera Energy Operating Services Limited UK 100%
Gengas Limited UK 100%
Bidston Methane Limited UK 100%
Novera Energy Generation No. 2 Limited UK 100%
Renewable Power Generation Limited UK 100%
Novera Energy Generation No. 3 Limited UK 100%
Mayton Wood Energy Limited UK 100%
Costessey Energy Limited UK 100%
Infinis Alternative Energies Limited UK 100%
Infinis Energy Services Limited UK 100%
Novera Energy Services UK Limited UK 100%
Infinis China (Investments) Limited UK 100%
Infinis Energy Storage Limited UK 100%
Infinis (Shoreside) Limited UK 100%
Barbican Holdco Limited UK 100%
Barbican Bidco Limited UK 100%
Alkane Energy Limited UK 100%
Alkane Energy UK Limited UK 100%
Seven Star Natural Gas Limited UK 100%
Regent Park Energy Limited UK 100%
Leven Power Limited UK 100%
Rhymney Power Limited UK 100%
Alkane Energy CM Holdings Limited UK 100%
Alkane Energy CM Limited UK 100%
Infinis Solar Holdings Limited UK 100%
Infinis Solar Developments Limited UK 100%
Durham Solar 1 Limited UK 100%
Infinis Solar Limited UK 100%
ND Solar Enterprise Limited UK 100%
Aura Power Solar UK6 Limited UK 100%
Ionisos Group:
Epione Holdco SAS France 96%
Epione Bidco SAS France 96%
Financière 3TA SAS France 96%
Financière 3TB SAS France 96%
Ionisos Holdco SAS France 96%
Ionisos Bidco SAS France 96%
Ionisos Mutual Services SAS France 96%
Ionisos SAS France 96%
Ionisos GmbH Germany 96%
Ionmed Esterilizacion SA Spain 96%
Scandinavian Clinics Estonia OÜ Estonia 96%
Steril Milano Srl Italy 96%
Joulz Group:
Joulz Holdco B.V. The Netherlands 99%
Joulz Manco B.V. The Netherlands 83%
Joulz Bidco B.V. The Netherlands 99%
Joulz Diensten B.V. The Netherlands 99%
Joulz Meetbedrijf B.V. The Netherlands 99%
Joulz Infradiensten B.V. The Netherlands 99%
Joulz Laadoplossingen B.V. The Netherlands 99%
Zonel Energy Group Holding B.V. The Netherlands 99%
Zonel Energy Systems B.V. The Netherlands 99%
Zonel Energy West B.V. The Netherlands 99%
Zonel Energy Services B.V. The Netherlands 99%
ZonWind Administration and Development Company B.V. The Netherlands 99%
Dutch Durables Energy 2 B.V. The Netherlands 99%
Dutch Durables Energy 5 B.V. The Netherlands 99%
Dutch Durables Energy 6 B.V. The Netherlands 99%
Oystercatcher Group:
Oystercatcher Holdco Limited UK 100%
Oystercatcher Luxco 1 S.à r.l. Luxembourg 100%
Oystercatcher Luxco 2 S.à r.l. Luxembourg 100%
SRL Traffic Systems Group:
Amalthea Holdco Limited UK 92%
Amalthea Midco Limited UK 92%
Amalthea Bidco Limited UK 92%
Jupiter Bidco Limited UK 92%
SRL Traffic Systems Limited UK 92%
SRL GmbH Germany 92%
SRL Traffic Systems Limited Ireland 92%
TCR Group:
3i Envol Limited Jersey 72%
Envol Holdings Limited Jersey 69%
Envol Midco Limited UK 69%
Envol Investments Limited UK 69%
TCR Group Shared Services SDN, BHD. Malaysia 69%
TCR New Zealand Limited New Zealand 69%
TCR APAC (Singapore) Pte Limited Singapore 69%
TCR Ground Support Equipment Canada Inc. Canada 69%
DCL Aviation Group Inc. Canada 69%
TCR GSE Singapore Pte Limited Singapore 69%
TCR AD LLC UAE 69%
TCR Middle East LLC Saudi Arabia 69%
TCR CapVest S.A. Belgium 69%
TCR GSE Australia PLY Limited Australia 69%
EEM Solution PLY Limited Australia 69%
Adaptalift GSE Pty Limited Australia 69%
Adaptalift GSE Singapore Pte Limited Singapore 69%
TCR Solution SDN, BHD. Malaysia 69%
TCR International USA, Inc. USA 69%
TCR Americas LLC USA 69%
TCR International N.V. Belgium 69%
Trailer Construction & Repairing Netherland (TCR) B.V. Netherlands 69%
TCR Belgium N.V. Belgium 69%
TCR France SAS France 69%
Aerobatterie SAS France 69%
Aerolima IMMS Sarl Luxembourg 69%
Aerolima Ingénerie SAS France 69%
TCR UK Limited UK 69%
Technical Maintenance Solutions UK Limited UK 69%
TCR-GmbH Trailer, Construction, Repairing and Equipment Rental Germany 69%
Trailer Construction & Repairing Ireland Limited Ireland 69%
TCR Italia S.p.A. Italy 69%
TCR Norway AS Norway 69%
TCR Sweden AB Sweden 69%
TCR Denmark ApS Denmark 69%
TCR Finland OY Finland 69%
Trailer Construction and Repairing Iberica S.A.U. Spain 69%
Dormant entities:
3i WIG Limited Jersey 100%
3i Osprey LP UK 69%
The list above comprises the unconsolidated subsidiary undertakings of the
Company as at 31 March 2023.
There are no current commitments or intentions to provide financial or other
support to any of the unconsolidated subsidiaries, including commitments or
intentions to assist the subsidiaries in obtaining financial support except
for those disclosed in Note 16 (2022: none). No such financial or other
support was provided during the year (2022: none).
Investment policy (unaudited)
The Company aims to build a diversified portfolio of equity investments in
entities owning infrastructure businesses and assets. The Company seeks
investment opportunities globally, but with a focus on Europe, North America
and Asia.
The Company's equity investments will often comprise share capital and related
shareholder loans (or other financial instruments that are not shares but
that, in combination with shares, are similar in substance). The Company may
also invest in junior or mezzanine debt in infrastructure businesses or
assets.
Most of the Company's investments are in unquoted companies. However, the
Company may also invest in entities owning infrastructure businesses and
assets whose shares or other instruments are listed on any stock exchange,
irrespective of whether they cease to be listed after completion of the
investment, if the Directors judge that such an investment is consistent with
the Company's investment objectives.
The Company will, in any case, invest no more than 15% of its total gross
assets in other investment companies or investment trusts which are listed on
the Official List.
The Company may also consider investing in other fund structures (in the event
that it considers, on receipt of advice from the Investment Manager, that that
is the most appropriate and effective means of investing), which may be
advised or managed either by the Investment Manager or a third party. If the
Company invests in another fund advised or managed by 3i Group, the relevant
proportion of any advisory or management fees payable by the investee fund to
3i plc will be deducted from the annual management fee payable under the
Investment Management Agreement and the relevant proportion of any performance
fee will be deducted from the annual performance fee, if payable, under the
Investment Management Agreement.
For the avoidance of doubt, there will be no similar set-off arrangement where
any such fund is advised or managed by a third party.
For most investments, the Company seeks to obtain representation on the board
of directors of the investee company (or equivalent governing body) and in
cases where it acquires a majority equity interest in a business, that
interest may also be a controlling interest.
No investment made by the Company will represent more than 25% of the
Company's gross assets, including cash holdings, at the time of making the
investment. It is expected that most individual investments will exceed £50
million. In some cases, the total amount required for an individual
transaction may exceed the maximum amount that the Company is permitted to
commit to a single investment. In such circumstances, the Company may consider
entering into co-investment arrangements with 3i Group (or other investors who
may also be significant shareholders), pursuant to which 3i Group and its
subsidiaries (or such other investors) may co-invest on the same financial and
economic terms as the Company. The suitability of any such co-investment
arrangements will be assessed on a transaction-by-transaction basis.
Depending on the size of the relevant investment and the identity of the
relevant co-investor, such a co-investment arrangement may be subject to the
related party transaction provisions contained in the Listing Rules and may
therefore require shareholder consent.
The Company's Articles require its outstanding borrowings, including any
financial guarantees to support subsequent obligations, to be limited to 50%
of the gross assets of the Company (valuing investments on the basis included
in the Company's accounts).
In accordance with Listing Rules requirements, the Company will only make a
material change to its investment policy with the approval of shareholders.
Statement of Directors' responsibilities
In accordance with the FCA's Disclosure Guidance and Transparency Rules, the
Directors confirm to the best of their knowledge that:
a) the Financial statements, prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company taken as a whole; and
b) the Annual report and accounts include a fair review of the
development and performance of the business and the position of the Company
taken as a whole, together with a description of the principal risks and
uncertainties faced by the Company.
The Directors of the Company and their functions are listed below. The
Directors have acknowledged their responsibilities in relation to the
Financial statements for the year to 31 March 2023.
Richard Laing
Chair
9 May 2023
Board of Directors and their functions
Richard Laing
Non-executive Chair and Chair of the Nominations Committee and the Management
Engagement Committee.
Doug Bannister
Non-executive Director.
Wendy Dorman
Non-executive Director and Chair of the Audit and Risk Committee.
Stephanie Hazell
Non-executive Director.
Samantha Hoe-Richardson
Non-executive Director.
Ian Lobley
Non-executive Director.
Paul Masterton
Senior Independent Director and Chair of the Remuneration Committee.
Portfolio valuation methodology (unaudited)
A description of the methodology used to value the investment portfolio of the
Company is set out below in order to provide more detailed information than is
included within the accounting policies and the Investment Manager's review
for the valuation of the portfolio. The methodology complies in all material
aspects with the International Private Equity and Venture Capital valuation
guidelines which are endorsed by the British Private Equity and Venture
Capital Association and Invest Europe.
Basis of valuation
Investments are reported at the Directors' estimate of fair value at the
reporting date in compliance with IFRS 13 Fair Value Measurement. Fair value
is defined as 'the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date'.
General
In estimating fair value, the Directors seek to use a methodology that is
appropriate in light of the nature, facts and circumstances of the investment
and its materiality in the context of the overall portfolio. The methodology
that is the most appropriate may consequently include adjustments based on
informed and experience-based judgements, and will also consider the nature of
the industry and market practice. Methodologies are applied consistently from
period to period except where a change would result in a better estimation of
fair value. Given the uncertainties inherent in estimating fair value, a
degree of caution is applied in exercising judgements and making necessary
estimates.
Investments may include portfolio assets and other net assets/liabilities
balances. The methodology for valuing portfolio assets is set out below. Any
net assets/liabilities within intermediate holding companies are valued in
line with the Company accounting policy and held at fair value or approximate
to fair value.
Quoted investments
Quoted equity investments are valued at the closing bid price at the reporting
date. In accordance with International Financial Reporting Standards, no
discount is applied for liquidity of the stock or any dealing restrictions.
Quoted debt investments will be valued using quoted prices provided by
third-party broker information where reliable or will be held at cost less
fair value adjustments.
Unquoted investments
Unquoted investments are valued using one of the following methodologies:
· Discounted Cash Flow ('DCF');
· Proportionate share of net assets;
· Sales basis; and
· Cost less any fair value adjustments required.
DCF
DCF is the primary basis for valuation. In using the DCF basis, fair value is
estimated by deriving the present value of the investment using reasonable
assumptions and estimation of expected future cash flows, including contracted
and uncontracted revenues, expenses, capital expenditure, financing and
taxation, and the terminal value and date, and the appropriate risk-adjusted
discount rate that quantifies the risk inherent to the investment. The
terminal value attributes a residual value to the investee company at the end
of the projected discrete cash flow period. The discount rate will be
estimated for each investment derived from the market risk-free rate, a
risk-adjusted premium and information specific to the investment or market
sector.
Proportionate share of net assets
Where the Company has made investments into other infrastructure funds, the
value of the investment will be derived from the Company's share of net assets
of the fund based on the most recent reliable financial information available
from the fund. Where the underlying investments within a fund are valued on a
DCF basis, the discount rate applied may be adjusted by the Company to reflect
its assessment of the most appropriate discount rate for the nature of assets
held in the fund. In measuring the fair value, the net asset value of the fund
is adjusted, as necessary, to reflect restrictions on redemptions, future
commitments, illiquid nature of the investments and other specific factors of
the fund.
Sales basis
The expected sale proceeds will be used to assign a fair value to an asset in
cases where offers have been received as part of an investment sales process.
This may either support the value derived from another methodology or may be
used as the primary valuation basis. A marketability discount is applied to
the expected sale proceeds to derive the valuation where appropriate.
Cost less fair value adjustment
Any investment in a company that has failed or, in the view of the Board, is
expected to fail within the next 12 months, has the equity shares valued at
nil and the fixed income shares and loan instruments valued at the lower of
cost and net recoverable amount.
Glossary
Alternative Investment Fund ('AIF') 3i Infrastructure plc is an AIF managed by
3i Investments plc.
Alternative Investment Fund Manager ('AIFM') is the regulated manager of an
AIF. For 3i Infrastructure plc, this is 3i Investments plc.
Approved Investment Trust Company This is a particular UK tax status
maintained by 3i Infrastructure plc. An approved Investment Trust company is a
UK tax resident company which meets certain conditions set out in the UK tax
rules, which include a requirement for the company to undertake portfolio
investment activity that aims to spread investment risk and for the company's
shares to be listed on an approved exchange. The 'approved' status for an
investment trust must be agreed by the UK tax authorities and its benefit is
that certain profits of the company, principally its capital profits, are not
taxable in the UK.
Asset IRR refers to the internal rate of return of the existing and realised
portfolio since the inception of the Company. The asset IRR to 31 March 2023
is 19% (2022: 19%). This calculation incorporates the cost of each investment,
cash income, proceeds on disposal, capital returns, valuation as at 31 March
2023, including accrued income and an allocation of foreign exchange hedging.
Association of Investment Companies ('AIC') The Association of Investment
Companies is a UK trade body for closed-ended investment companies.
Board The Board of Directors of the Company.
Capex refers to capital expenditure which is money a company uses to acquire,
upgrade, and maintain physical assets such as property, plants, buildings,
technology, or equipment. Capex is often used to undertake new projects or
investments by a company which add some future economic benefit to the
operation.
Capital reserve recognises all profits that are capital in nature or have been
allocated to capital. These profits are distributable by way of a dividend.
Company 3i Infrastructure plc.
Discounting The reduction in present value at a given date of a future cash
transaction at an assumed rate, using a discount factor reflecting the time
value of money.
E-Beam refers to electron beams, a method of sterilisation used by Ionisos.
EO refers to ethylene oxide, a method of sterilisation used by Ionisos.
ERRV is an Emergency Rescue and Response Vessel.
ESG refers to environmental, social and governance.
External auditor The independent auditor, Deloitte LLP.
Fair value through profit or loss ('FVTPL') is an IFRS measurement basis
permitted for assets and liabilities which meet certain criteria. Gains and
losses on assets and liabilities measured as FVTPL are recognised directly in
the Statement of comprehensive income.
FTTC refers to fibre-to-the-cabinet. This describes the fibre-optic cable in
place from the local telephone exchange to a distribution point, commonly
called a roadside cabinet.
FTTH refers to fibre-to-the-home. This describes the fibre-optic connection to
individual homes or buildings.
FY15, FY18, FY19, FY21, FY22, FY23, FY24 refers to the financial years to 31
March 2015, 31 March 2018, 31 March 2019, 31 March 2021, 31 March 2022, 31
March 2023 and 31 March 2024, respectively.
Initial Public Offering ('IPO') is the mechanism by which a company admits its
stock to trading on a public stock exchange. 3i Infrastructure plc completed
its IPO in March 2007.
International Financial Reporting Standards ('IFRS') are accounting standards
issued by the International Accounting Standards Board ('IASB'). The Company's
Financial statements are required to be prepared in accordance with IFRS, as
adopted by the UK.
Investment income is that portion of income that is directly related to the
return from individual investments and is recognised as it accrues. It is
comprised of dividend income, income from loans and receivables, and fee
income. It is recognised to the extent that it is probable that there will be
an economic benefit and the income can be reliably measured.
IRR refers to the internal rate of retrun and is a metric used to estimate the
profitability of investments.
Key Performance Indicator ('KPI') is a measure by reference to which the
development, performance or position of the Company can be measured
effectively.
Money multiple is calculated as the cumulative distributions or realisation
proceeds plus any residual value divided by invested or paid-in capital.
Net annualised return is the annualised growth rate in NAV per share to 31
March 2023, including ordinary and special dividends paid. The net annualised
return since the inception of the Company to 31 March 2023 was 14% (2022: 14%)
and since the change in strategy in FY16 to 31 March 2023 was 19% (2022: 19%).
Net asset value ('NAV') is a measure of the fair value of all the Company's
assets less liabilities.
Net assets per share ('NAV per share') is the NAV divided by the total number
of shares in issue.
Net gains on investments is the movement in the fair value of investments
between the start and end of the accounting period, or investment disposal
date, or the investment acquisition date and the end of the accounting period,
including divestment related costs where applicable, converted into sterling
using the exchange rates in force at the end of the period.
Ongoing charges A measure of the annual recurring operating costs of the
Company, expressed as a percentage of average NAV over the reporting period.
Paris Agreement is an international treaty on climate change, adopted in 2015
Public Private Partnership ('PPP') is a government service or private business
venture which is funded and operated through a partnership of government and
one or more private sector companies.
Retained reserves recognise the cumulative profits to 15 October 2018,
together with amounts transferred from the Stated capital account.
Revenue reserve recognises all profits that are revenue in nature or have been
allocated to revenue.
Revolving credit facility ('RCF') A £900 million facility provided by the
Company's lenders with a maturity date in November 2025.
SORP means the Statement of Recommended Practice: Financial Statements of
Investment Trust Companies and Venture Capital Trusts.
SOV is a service operation vessel.
Stated capital account The Stated capital account of the Company represents
the cumulative proceeds recognised from share issues or new equity issued on
the conversion of warrants made by the Company net of issue costs and reduced
by any amount that has been transferred to Retained reserves, in accordance
with Jersey Company Law, in previous years.
Sustainability KPIs Sustainability metrics in relation to the
sustainability-linked revolving credit facility. The facility includes targets
across ESG themes aligned with our purpose.
TCFD is the Task Force on Climate-related Financial Disclosures.
Total return measured as a percentage, is calculated against the opening NAV,
net of the final dividend for the previous year, and adjusted (on a time
weighted average basis) to take into account any equity issued and capital
returned in the year.
Total shareholder return ('TSR') is the measure of the overall return to
shareholders and includes the movement in the share price and any dividends
paid, assuming that all dividends are reinvested on their ex-dividend date.
For further information see our website
www.3i-infrastructure.com
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. END FR FLFIAEDIAIIVRecent news on 3i Infrastructure
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