Information Services Group, Inc. Annual Report 2006

FY2006 Annual Report · Information Services Group, Inc.

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3i Group plc
Report and accounts 2006

3i is a world leader in private equity and venture capital.
We focus on buyouts, growth capital and venture capital and
invest across Europe, the US and Asia.
Our competitive advantage comes from our international network
and the strength and breadth of our relationships in business.
These underpin the value that we deliver to our portfolio and to
our shareholders.

Contents
02 Group financial highlights
03 Our business lines
04 Chairman’s statement
06 Chief Executive’s statement
08 Our vision
12 Business review
36 Corporate responsibility

Governance
42 Board of Directors and

Management Committee

44 Directors’ report
51 Directors’ remuneration report
60 Independent auditors’ report to the

members of 3i Group plc

Additional financial information
89 Portfolio valuation methodology
90 Ten largest investments
91 Forty other large investments
92 New investment analysis
93 Portfolio analysis
95 Realisations analysis
96 Portfolio and investment analysis including

co-investment funds
96 Funds under management
97 Private equity and venture capital –

a lexicon

98 Returns and IRRs – an explanation
100 Information for shareholders
101 Investor relations and general enquiries

Financial statements
61 Consolidated income statement
61 Statement of recognised income and expense
62 Reconciliation of movements in equity
63 Balance sheet
64 Cash flow statement
65 Significant accounting policies
70 Notes to the financial statements

This Annual report and accounts may contain
certain statements about the future outlook for 3i.
Although we believe our expectations are based on
reasonable assumptions, any statements about the
future outlook may be influenced by factors that
could cause actual outcomes and results to be
materially different.

Front cover
Hong Kong, one of the cities from which
we operate.

3i Report and accounts 2006 01

Our purpose:
to provide quoted access to private equity returns.

Our vision:
to be the private equity firm of choice:
– operating on a world-wide scale;
– producing consistent market-beating returns;
– acknowledged for our partnership style; and
– winning through our unparalleled resources.

Our strategy:
– to invest in high-return assets;
– to grow our assets and those we manage on behalf

of third parties;

– to extend our international reach, directly and through

investing in funds;

– to use our balance sheet and resources to develop

existing and new business lines; and

– to continue to build our strong culture of operating
as one company across business lines, geographies
and sectors.

02 3i Report and accounts 2006

Financial highlights
for the year to 31 March

Gross portfolio return
on opening portfolio value

Return on opening shareholders’ funds

Group financial highlights
22.5%
£2,207m
£831m
15.2p

Realisation proceeds

Total return

Dividend per share

Dividend per share†
Realised profits over opening valuation
on disposal of investments

Diluted net asset value per share

New investment

Realisation proceeds

2006

2005
(as restated)*

24.4%

16.7%

15.2p†

14.6p

£576m £250m

739p

614p

£1,110m £755m

£2,207m £1,302m

Total return on opening shareholders’ funds 22.5%

15.2%

Total portfolio value

£4,139m £4,317m

*Restated comparatives reflect the adoption of International Financial Reporting Standards (“IFRS”).
†In addition, a special dividend of 40.7p per share was paid in the year.

Portfolio value (%)
as at 31 March 2006

Buyouts
Growth Capital
Venture Capital
SMI

Trend in international portfolio value (%)
as at 31 March

£1,465m
£1,284m
£826m
£564m

International

3i Report and accounts 2006 03

Our business lines

29%Buyouts: Gross portfolio return
26%Growth Capital: Gross portfolio return
17%Venture Capital: Gross portfolio return

Buyouts
Focusing on mid-market transactions in Europe, targeting
15 investments per year, each with a value of up to ¤1bn.

Growth Capital
Making minority investments in established and profitable
businesses across Europe, Asia and now the US, investing
¤10m to ¤150m per transaction.

Venture Capital
Investing in early and late-stage technology companies, typically
in the ¤2m to ¤50m range in Europe and the US. We focus on the
software, communications, healthcare and electronics sectors.

Gross portfolio return
for the year to 31 March

Buyouts
Growth Capital
Venture Capital
The relationship between 3i’s measures of return is explained in detail on pages 98 and 99.

2006
%

29
26
17

2005
%

20
23
11

Financial performance by business line (£m)
for the year to 31 March 2006

Gross portfolio return

New investment

Realisation proceeds

£1,053m

£1,110m

£2,207m

447

451

341

128

137

497

156 6

877

855

207

268

Realised profit

£576m

208

232

72 64

Unrealised value movement

£245m

124

60 51 10

Portfolio income

£232m

115 49 63 5

Buyouts

Growth Capital

Venture Capital

SMI

SMI
3i’s Smaller Minority Investments (“SMI”) initiative, established in 2001, generates returns from some of our older investments. It is our objective to realise this
portfolio in the near term. As at 31 March 2006, we held 526 SMI investments valued at £564 million, representing 14% by value and 48% by number of 3i’s total
portfolio (2005: 807 investments valued at £756 million).

04 3i Report and accounts 2006

Chairman’s statement

“A strong position in a buoyant market enabled the Group
to deliver a return of £831 million for the year. In addition,
good progress has been made towards achieving our vision.
Another year of strong cash flow enables us to make further
substantial returns of capital to shareholders.”

Baroness Hogg
Chairman
10 May 2006

3i entered the financial year with strong momentum and buoyant
market conditions, which continued throughout the period.
Our market position enabled the Group to take advantage of
these factors and to deliver a return of £831 million for the year
to 31 March 2006. This was substantially up from £501 million
last year and represented a return of 22.5% on opening
shareholders’ funds.

Having invested in and developed companies of strategic value
to others, 3i was well placed to sell into receptive markets.
Realisations totalled £2.2 billion and were made at a profit of
35% over opening value.

The Board is recommending a final ordinary dividend of 9.7p,
making a total ordinary dividend for the year of 15.2p, up 4.1%
on last year. Meanwhile, the £500 million return of capital
approved by shareholders at our Extraordinary General Meeting
last year has essentially been completed. The Board intends to
return a further £700 million to shareholders by way of a bonus
issue of listed B shares, which is currently expected to take place
in July. Resolutions relating to the return of capital proposals will
be put to shareholders at an EGM.

High quality new investment is a key driver of future value.
Despite remaining highly selective, we were able to increase
investment by 47% to £1.1 billion, drawing on our in-depth
sector knowledge and local relationships in a range of different
markets. The international proportion of our investment rose in
the year to 63% and our widening international reach is
illustrated by the fact that over half of our assets are now
outside the UK.

In Asia we established teams in Shanghai and Mumbai during the
year, and made ground-breaking investments in both China and
India. 3i’s Growth Capital business has also recently entered the
US market and, in addition, our Infrastructure team is now in
place and has made a number of investments.

We have been planning for some time to establish an Advisory
Board for our business in Germany. I am delighted to report that
Dr Peter Mihatsch, who has been on the Group Board since
2004, has agreed to become Chairman of this new Advisory
Board. However, as he would then no longer be categorised as an
independent non-executive Director, this means he will be
stepping off the 3i Group Board at the end of July. I would like to
thank him for the contribution he has made as well as the still
greater one he will be making to 3i in the future.

3i Report and accounts 2006 Chairman’s statement 05

I would also like to thank Danny Rosenkranz, who is Chairman of
the Remuneration Committee and has been on the Board for six
years. Danny has agreed to stand for re-election for a further
year to support Sir Robert Smith, who will be taking on the
chairmanship of the Remuneration Committee in August.

Underpinning this year’s performance is a high level of staff
engagement. A survey of our staff during the year, conducted
by Ipsos MORI, showed high commitment, and that 3i’s level of
staff engagement exceeded that of many other leading
companies.

This commitment also characterises our approach to corporate
responsibility. For a company like 3i, our direct impact on the
community and the environment will be much less significant
than that of the companies in which we invest. We nevertheless
are refining measurement of our own impact, while continuing
to review our standards for these issues in portfolio selection
and management.

I would like to thank all our staff for their skill, effort and
teamwork in achieving these good results and also pay tribute
to the management teams and the advisers of our portfolio
companies.

So, in summary, this has been a good year for 3i shareholders,
with the Group taking advantage of favourable market
conditions, delivering a high level of return on shareholders’
funds, growing investment levels and improving the strategic
position of the business. In developing our strategy we will
continue to combine ambition with rigour in pursuit of value
for our investors.

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06 3i Report and accounts 2006

Chief Executive’s statement

“With another very good set of results behind us, a detailed
strategy for the future, and confidence high within the
organisation, we remain determined to accelerate the
development of 3i to deliver further shareholder value.”

Philip Yea
Chief Executive
10 May 2006

3i Report and accounts 2006 Chief Executive’s statement 07

I am pleased to report a very good set of full year financial results
and further progress in implementing the plans we set for the
business over the past 18 months. In particular, these results
provide tangible evidence of the continued success of our Buyout
business and the benefits of the recent strategic changes made
to the models for our Growth Capital and Venture Capital
business lines.

Financing markets continue to be favourable, with the private
equity markets giving high valuations to good assets. These
conditions have provided the opportunity for us to achieve a
record level of realisations and also realised profits. All of our
business lines have been active sellers into these markets.
Yet, at the same time, each of our three core business lines has
increased its level of new investment. The most notable increase
was within the Growth Capital business, reflecting its focus on
larger deal sizes when compared to a year ago and the growing
importance of Asia within our strategy.

The rate of growth in private equity markets over the last
decade has, for many people, raised genuine questions as to
the sustainability of returns and the relative advantages of
this ownership model as the asset class becomes more
mainstream. We continue to believe that there is more than
ample opportunity and that the key issue for the Group is to
leverage its competitive advantage in those particular markets
which provide greatest returns over the mid term.

Our teams in Asia have been strengthened, our teams in the
US are being reinforced and, more indirectly, we have made
a number of investments in selected funds which can bring
exposure to specific geographies or asset classes that we cannot
achieve on our own.

We have recently completed a comprehensive strategic review
of both our current and future business areas within the private
equity field and, where appropriate, will continue to use our
balance sheet to develop new business lines, and our
knowledge-sharing culture and market access to attract new
people to join us.

As part of this review, we have also looked in detail at the
opportunities and structure of each of our current business lines.
We have concluded that we should increase the mix of late-stage
investment within our Venture Capital business, an area which
particularly plays to our international differentiation. As a result of
this change we have amended our cash-to-cash IRR target for
this business line to 25%, with vintage year volatility of plus or
minus 15%. We have also confirmed the opportunity for both
this business and our Growth Capital business within the US, and
are building our local teams accordingly.

I am very pleased with the further steps we have taken on our
people agenda.

In a rapidly growing industry where experience is critical and
personal compensation at the most senior levels is performance
related and uncapped, it is critical to ensure that both the
financial and non-financial elements of our people proposition are
as competitive as they can be. To supplement the carry schemes
which we have implemented across our business lines, we have
also introduced market aligned co-investment schemes whereby
members of our investing team make personal investments
alongside 3i and third-party investors’ capital.

We have also made further changes to our internal organisation
to ensure that we give our investing teams maximum flexibility to
operate as self-standing partnerships with the same operational
flexibility as their competitors, yet enable them to be both the
beneficiaries of and contributors to the network of knowledge
sharing that differentiates 3i from most firms within our field.
Our Business review which follows, contains a number of
examples showing this culture of cross-geography cross-
business line co-operation at its very best.

To reflect the ambitious nature of our agenda, we have also
created a Group Partnership, which brings together those senior
business leaders who can make the broadest contribution to the
further development and expansion of the firm.

The recent move of our London office to more modern premises
has had a significant impact in terms of communications and
produced an enhanced experience for visitors to 3i, as well as an
improved working environment.

We have also reviewed our capital requirements over the coming
period and, notwithstanding the significant level of opportunity
we have identified, we believe it is appropriate to make a further
return of cash to shareholders. Although accounting for the
equity option within the Convertible Bond issued in 2003 has,
under IFRS, reduced reported profits (and will continue to do
so if we are successful in delivering shareholder value through an
increase in the share price), the flexibility to satisfy the Bond
redemption in 2008 in either cash or shares provides a significant
equity cushion should realisation markets slow for any reason.

Markets remain favourable and, although we expect our levels
of realisations in the new financial year to be below last year’s
exceptional levels, we expect to increase our level of investment
again if the present economic conditions continue.

With another very good set of results behind us, a detailed
strategy for the future, and confidence high within the
organisation, we remain determined to accelerate the
development of 3i to deliver further shareholder value.

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08 3i Report and accounts 2006 Our vision

Operating on a world-wide scale

3i in Europe
From our roots in the UK, over the last two decades 3i has
developed a network of teams throughout Europe. Our local
teams, based in 10 European countries, draw on the resources
within the region and elsewhere in the world to win business and
create value.

Extending our reach
Building on 3i’s strong position in Europe, we have been growing
our presence in Asia and the US with new 3i teams in Mumbai,
Shanghai and New York. Additionally, through investing in funds,
we are gaining experience of markets in eastern Europe, the
Middle East, Russia and Japan.

The right culture
3i is located in many markets but operates as a “one room
company”, with a strong culture of working across borders,
harnessing knowledge and skills from across the world.
Operating with an “international mindset” requires constant
investment in our people and in our communications.

Our financial strength, local presence, global access and ability
to deliver complex transactions are sources of competitive
advantage, as is our culture.

3i in Asia
Since 1997 3i has been developing a business in Asia.
Today, we have teams in Singapore, Hong Kong, Mumbai and
Shanghai and are in the process of establishing a presence in
Beijing. We also have investments in the CDH China Growth
Capital Fund II and the MKS Japan Fund IV buyout fund.
Our business in Asia delivers considerable value to our
portfolio companies elsewhere in the world.

3i in the US
Our teams in the US in Silicon Valley, California and Waltham,
Massachusetts are focused on venture capital, investing in
early and late-stage technology. 3i’s ability to benchmark
opportunities globally and be a truly international syndicate
partner is attractive to those in the US market with
international ambition.

3i’s recently established New York team provides a growth capital
investing capability. It also increases 3i’s market access in a key
economy and enhances our ability to add additional value to
portfolio companies in Europe and Asia.

3i Report and accounts 2006 Our vision 09

Producing consistent market-beating returns

Performance culture
From the setting of objectives for individuals to the development
of value creation plans for specific investments, 3i’s culture is one
of ambition. Setting ambitious goals, measuring progress and
facing up to issues and dealing with them are key aspects of this.

Clear targets
Having clear targets for our own business, as well as for each
investment, is an essential component of delivering value.
3i’s published targets for each of our business lines, using the
standard industry measure, cash-to-cash returns, are shown in
the table below. Also shown, is the variability that we consider
appropriate to reflect our risk profile in terms of cyclical and
vintage volatility. The transparency of these targets and the
focus that they bring is healthy for 3i and reinforces our
straightforward approach to doing business.

Also shown is the cyclical and vintage volatility that we consider
appropriate to reflect our risk profile.

Targets

Cash-to-cash
return pa
%

Cycle
volatility
%

Vintage year
volatility
%

Aligned interests
An important aspect of creating value is aligning our interests
with the interests of other shareholders and key stakeholders in
the businesses in which we invest. This is especially important in
minority equity investing. Establishing the right investment
agreements at the outset, clarity on roles and responsibilities and
what is expected of each party in delivering a plan for creating
value, are essential.

Focus
To invest in the highest quality businesses, and to grow
3i returns, requires focus. Focus on identifying the right
opportunities, focus on the key areas which will create value and
then focus on delivering that value. Since 2002 3i has become a
much more focused business, as the charts below demonstrate.

Buyouts
Growth Capital
Venture Capital
Note: For an explanation of cash-to-cash returns and volatilities, please see pages 98 to 99.

+/-5 +/- 10
+/-3 +/- 7
+/-7 +/- 15

20
20
25

A more focused business since 2002

Number of new investments
year to 31 March
y
291

Number of portfolio companies
at 31 March

2,759

2,606

194

2,162

1,878

1,502

1,087

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10 3i Report and accounts 2006 Our vision

Acknowledged for our partnership style

With staff
Compelling employment propositions are just the start of
attracting and retaining high-calibre staff around the world.
3i also offers a development culture and an organisation which is
challenging, enjoyable and rewarding and where teamwork and a
spirit of partnership are real.

With partners
There are many other people who contribute to making our
business successful. These include professional advisers, vendors
of businesses and buyers of our portfolio companies as well as
suppliers to the Group. We aim to treat people with respect and
to be a valued partner to them.

Long-term relationships
3i’s reputation is critically dependent upon the relationships that
we have built with business leaders around the world. We know
that years of good work can be undone with one poorly handled
interaction. In highly charged business situations, where views
can easily differ, being able to put an alternative view in a
straightforward and engaging way can go a long way to building
good relationships. The importance attached to long-term
relationships is a significant feature of 3i’s culture.

With shareholders
As an investor ourselves, we appreciate the importance of
good communications with our shareholders and providing
opportunities for shareholders to express their views.
Our investor relations website www.3igroup.com embodies
our open approach.

With the teams we back
At 3i we recognise that our success depends upon the success
of the management teams we back. We recognise that aligning
interests, motivating the leaders of our portfolio companies to
achieve exceptional performance and adding value to their
boards and businesses is not just in 3i’s short-term interests,
but also central to our reputation.

3i Report and accounts 2006 Our vision 11

Winning through our unparalleled resources

A knowledge culture
3i’s culture is one of sharing information, where good
communications are valued, and where looking at a piece of
information in a different way is seen as key to harnessing 3i’s
capability. There is acknowledgement for those who deliver
knowledge to others.

The best team for the job
Key to leveraging 3i’s scale is our “best team for the job”
approach. This applies to projects within 3i as much as to making
and managing investments. We achieve this through drawing on
the most relevant internal and external resources from across
the world.

Combining capabilities
3i’s ability to combine the capabilities of highly experienced
specialist investors with sector knowledge, and people who
can operate skilfully at a local level, is a considerable source of
competitive advantage. It also adds significant value to asset
management and underpins our ability to source the right team.

Sector strength
Sixty years of investing in a broad range of sectors has provided
a wealth of knowledge and considerable experience and
relationships. Sector-based marketing is increasingly relevant and
3i has built sector-based communities of investee companies as
a powerful source of added value. Our most developed sector
teams are in Oil, Gas and Power, in Media and in Healthcare.
The benefits which can be derived across business lines and
geographies are considerable.

People programmes
3i operates well-established programmes for chairmen, chief
executives, chief financial officers and non-executive directors.
These are designed to offer participants access to 3i’s deal
flow and priority consideration for appointments in our
portfolio as well as high-quality and experienced peer groups.
The programmes also provide 3i with privileged access to high-
quality business leaders around the world and across the many
sectors in which we invest. Additionally, they provide further
knowledge and network benefit and a centre of excellence and
best practice to a key driver of investment success - “talent”.

Business line
expertise

Creating
value

Sector
knowledge

Local
knowledge

12 3i Report and accounts 2006

Business review

Introduction
This Business review provides
an overview of our:
– Group strategy;
– main business activities;
– principal markets;
– our Group and business line

performance; and

– principal risks.
It also describes our key financial
measures and our performance
against them.

The key financial performance measures are:

Group measures
– Total return
– Gross portfolio return
– Gearing
– Net asset value growth

Business line measures
– Gross portfolio return
– Portfolio health
– Long-term IRRs by vintage

Non-financial performance measures are considered in the
Corporate responsibility segment of this Report and accounts.
They include measures of employee engagement and
environmental performance.

Group strategy
Our strategy is to grow our assets and those the Group manages
on behalf of third parties by using our relationships and knowledge
to identify and invest in opportunities that can deliver high returns.
Change provides opportunity, and as 3i operates across Europe,
Asia and the US, the rapid rate of change in the global economy
provides a significant number of investment opportunities where
our knowledge and relationships, when combined with active
management, can deliver real financial value.

We are constantly reviewing developments in the private
equity markets, the competitiveness of our existing business
lines and the potential to expand our access to good
opportunities. Where appropriate, we use our capital to fund
additional resources, to seed new proprietary business lines and
to build relations with other investment managers who can give
us exposure to an attractive market.

Our people are organised in self-standing teams whose structure is
market-adapted, whose compensation is results-oriented, and
which have as their principal objective the selection of the very best
opportunities within our chosen asset classes. We seek to maximise
our performance by the delivery of our collective knowledge and
relationships to each investment opportunity. Our teams are
both the contributors to, and the beneficiaries of, this culture of
knowledge sharing.

Key to our strategy is attracting and developing people who can
combine the requisite investment and professional experience
with our cultural fit. Part of this culture is an active approach to
managing development.

Our financial and risk management processes are focused on
delivering targeted returns on asset specific pools of capital,
whilst optimising the mix between returns on proprietary
invested capital, income received from fees on third-party funds
and setting appropriate leverage ratios.

3i Report and accounts 2006 Business review 13

Our business
Group
The Group’s investment focus is on buyouts, growth capital and
venture capital. At 31 March 2006: Buyouts represented 35% of
our portfolio; Growth Capital 31%; and Venture Capital 20%.

Additionally, we have a portfolio of Smaller Minority Investments,
which accounts for 14% of the portfolio. It is our objective to
realise this portfolio progressively in the near term.

We are a knowledge-based company providing market access,
insight for investment decision making and the ability to add
significant value to the companies in which we invest.

We use our international network to identify and assess a wide
range of investment opportunities, selecting only those that
meet our return and quality criteria. Having made an investment,
we then work in active partnership with the boards of our
portfolio companies to create value through to the ultimate
realisation of our investment.

We operate through a network of teams located in Europe, Asia
and the US. Europe is our principal region with some 90% of the
investment portfolio by value based in this market. We continue
to increase our presence in new markets. During the year, teams
were formed in Shanghai and Mumbai and, most recently, in
New York to extend our Growth Capital business.

Consistent with our strategy of investing in third-party private
equity funds to gain market access and additional opportunities
to add value to our portfolio, we made investments in Israel and
Russia during the year. These accompany existing investments in
funds in China, eastern Europe and Japan.

The benefits of having access to permanent capital from our own
balance sheet also enable us to take a more flexible and longer-
term approach to the structuring of individual investments.

Buyouts
This business line invests in European mid-market buyout
transactions with a value of up to c1billion and targets around
15 investments per year. These investments typically involve
3i investing with co-investment funds managed by 3i.
Investments are in businesses with development potential where
we can work with an incentivised management team to grow
value through operational improvements and by exploiting
market opportunities. These businesses are generally sold by
large corporates disposing of non-core activities, private groups
with succession issues or, in the case of a secondary buyout,
other private equity investors.

A key to our success is our international network, which enables
us to access markets as a “local” participant and to apply to each
opportunity the knowledge, skills and sector experience of our
much larger pan-European resource. An intimate understanding
of the economic model that drives the companies that we
invest in is critical, as is the value creation plan that supports
each investment decision.

Competition in the European buyout market is intense and
the high level of historic returns achieved has continued to
attract new entrants, including some non-traditional competitors,
such as hedge funds.

Despite the strong competition, we are confident that through
a combination of our scale, local knowledge and sector insight,
we can build on our position as the leading European mid-market
buyout house.

We will also actively review the opportunities to expand our
Buyout business beyond Europe, particularly as we build Group-
wide experience in Asia.

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14 3i Report and accounts 2006 Business review

Growth Capital
Our Growth Capital business targets investments of between
c10 million and c150 million, across a broad range of sectors,
business sizes and funding needs. We aim to invest in between
20 and 30 such transactions per year and it is our strategy to
continue to grow the average size of investment.

Venture Capital
Our Venture Capital business is focused on early and late-stage
technology investing and targets investments in the range of
c2 million to c50 million. The four main sub-sectors are:
healthcare, communications, software and ESAT (Electronics,
Semiconductors and Advanced Technologies).

The main geographic focus continues to be Europe and the US,
though we have made venture investments in Asia. As venture
businesses typically compete globally, each investment
opportunity is reviewed by reference to the relevant global
sub-sector’s competitive landscape.

We work closely with each company we invest in to create a
route map to becoming a scalable, successful business. We are a
selective, active investor and we sit on the boards of the majority
of companies in which we invest. We work in partnership with
our investee management teams to add value by utilising 3i’s
global network of relationships. Through these relationships,
we will often introduce new partners, customers and suppliers,
and because our network is international, we can help young
businesses to bridge the gap to new markets.

Our Venture Capital business has a prominent position in Europe
with a strong track record of investment and divestment.
Competition is strong in markets such as the UK, where many
US firms are active. However, we continue to be well placed
here and in other European venture markets. The US market is
highly competitive but our global network, sector focus and
international offering position 3i well alongside local firms.

Growth capital investments typically involve 3i acquiring
substantial minority stakes in privately-owned businesses at key
points of change. Growth capital can be invested to accelerate
organic growth, to fund acquisitions or to acquire shares from
existing shareholders to resolve a succession or other ownership
issue. With such minority positions, we seek to ensure a high level
of influence to create value for shareholders.

Success in growth capital is increasingly driven by deep sector
knowledge and the ability to add value to companies expanding
internationally, through giving them access to 3i’s network.
These factors, combined with 3i’s traditional strength in
managing relationships with regional businesses and
intermediaries, give 3i significant competitive advantage.

To date, our Growth Capital business has focused on the
European and Asian markets where we have strong networks and
relationships and see good opportunities to invest. During the
year, we extended our reach by entering the US market.

The competitive environment in the growth capital market is
more attractive than in the buyout market. Additionally, not all
private equity funds’ mandates provide the freedom to make
minority investments. Our permanent capital differentiates us
from other private equity investors, enabling us to make not only
minority investments, but provide more flexible longer-term
funding.

A dedicated infrastructure team has also been created within this
business line with the goal of building a high-quality portfolio
in this asset class. Our investment strategy here is threefold:
direct investment in infrastructure projects; investment in
infrastructure funds; and creating portfolios of infrastructure
assets to bring to the market.

3i Report and accounts 2006 Business review 15

In 2005 the Asian private equity industry saw a very significant
increase in incoming funds compared to 2004, with India leading
the way. Investment increased 29%, with growth capital
returning to prominence. Japan accounted for the largest
proportion of capital returned to investors, followed by India and
China. IPOs were the most preferred exit route, making up 50%
of divestments, although trade sales remained the dominant exit
route in Japan.

The US
Venture capital has been our focus in the US, where we have
invested in both early and late-stage technology companies.
During the year, we recruited a Growth Capital team to take
advantage of the opportunities in this market and complement
our investment teams in Europe and Asia.

The US continues to be the largest and most attractive venture
capital market in the world. The market is characterised by a
high level of competitiveness, access to technology and clusters
of innovation, combined with significant numbers of serial
entrepreneurs. Our leading competitors are typically niche
partnerships operating domestically.

US venture capital investing in 2005 rose to its highest level
since 2001. Market activity was based on the strong fundraising
environment of 2004 and 2005, which contributed to increased
investment levels. Improved exit markets, particularly for
venture-backed companies, was another important contributor.

Our markets
Europe
Europe is our principal geographic market, with the majority of
our assets and investment activity being conducted in this region.
Our business strategy is focused on harnessing our strong
regional presence and deep sector experience.

2005 was a record year for the market, with the level of
fundraising being twice that of the previous year and total
investment increasing by 39%. A number of substantial buyout
deals in the UK and across continental Europe were a major
contributor to this record level of activity.

European buyout investment increased by 44%, driven by
increased M&A and secondary market activity, the return of
trade buyers and improved IPO markets.

Activity levels in the growth capital market in 2005 were similar
to 2004, although this market presents an excellent opportunity
as the economy continues to restructure, sectors consolidate and
companies seek to expand internationally.

The venture market is showing increased levels of investment
and capital market activity.

The year also saw divestments in Europe at record highs as
favourable exit conditions were prevalent. The return of trade
buyers, improved IPO markets, secondary sales and increased
M&A activity were all strong sources of exits.

Asia
This region comprises a number of stand-alone markets and
each market has very different characteristics. Asian markets
are in the growth phase and forecast macroeconomic growth
rates make this a particularly attractive region for private
equity investment.

At the present time, Asia is predominantly a growth capital
market for 3i. However, we expect to develop Buyout and
Venture Capital teams in the longer term.

Currently, India and China represent the highest potential private
equity markets, although we will seek opportunities to develop
our business in Japan, South Korea, and South East Asia.

16 3i Report and accounts 2006 Business review

Group financial review
Total return
3i achieved a total return for the year to 31 March 2006 of
£831 million, which equates to a 22.5% return on restated
opening shareholders’ funds (2005: 15.2%). A key feature of this
return is the very strong level of realised profits on disposal of
investments where, throughout the year, we have benefited from
good market conditions for sales.

As indicated in table 2, we have generated a very good level of
gross portfolio return of £1,053 million (2005: £727 million),
representing 24.4% on opening portfolio value (2005: 16.7%).
Each of our core business lines has generated higher returns,
with Venture Capital showing the most improved result over last
year. Buyouts and Growth Capital are operating at the top end
of their long-term target ranges, with returns of 29% and
26% respectively.

Table 1:
Total return

Realised profits on disposal of investments

Unrealised profits on revaluation of investments

Portfolio income

Gross portfolio return

Net carried interest

Fund management fees

Operating expenses

Net portfolio return

Net interest payable

Exchange movements

Movements in the fair value of derivatives

Other

Profit after tax

Reserve movements (pension, property and currency translation)

Total recognised income and expense (“Total return”)

*As restated for the adoption of IFRS.

2006

£m

576

245

232

1,053

(211)

881

(17)

(78)

852

(21)

831

2005
(as restated)*
£m

250

245

232

727

(64)

(177)

516

(42)

(2)

498

501

Table 2:
Return by business line (£m)
Growth
Capital

Buyouts

Venture
Capital

SMI

Total

2006

2005 2006

2005
(as restated)*

447 301 341 285 128

76 137

65 1,053 727

29% 20% 26% 23% 17% 11% 18%

7% 24% 17%

Gross portfolio
return
Return as % of
opening portfolio

Net portfolio return
Return as % of
opening portfolio

Total return

881 516

20% 12%

831 501

22% 15%

Total return as % on opening shareholders’ funds

*As restated for the adoption of IFRS.

The Group’s gross portfolio return of 24% compares with 17% in
2005. After costs and carried interest, the net portfolio return is
20% (2005: 12%). The reduction of 4% from the gross level is
below our anticipated range of 5% to 6%, as net carried interest
benefited from significant carry receivable in the year.

Total return comprises the total
recognised income and expense as
stated as a percentage of opening
shareholders’ funds.

Total return by year (%)
to 31 March

18.8

15.2

Through gearing the balance sheet to an appropriate level, we
would expect to enhance total return on opening shareholders’
funds by some 4% from the net level. However, given the low
level of gearing in our opening balance sheet, the benefit from
leverage was below our long-term expectation.

22.5

*As restated for the adoption of IFRS.

05*

21.0

16.7

24.4

In continental Europe realisations totalled £891 million
(2005: £365 million), reflecting the maturity of the portfolio
which we have built up in this region.

3i Report and accounts 2006 Business review 17

Realisations and realised profits
Realisation proceeds for the year were £2,207 million, an
increase of 70% over 2005. The favourable market conditions
experienced in the first six months continued throughout the
second half, enabling strong realisations across all business lines
(shown in table 4). We also made further progress in selling down
the SMI portfolio, realising £268 million from 278 investments.
In total, 38% of our opening portfolio value was realised during
the year.

Realisations were made at a profit over opening carrying value of
£576 million (2005: £250 million), representing an uplift on
sale of 35%, and are stated net of write-offs of £66 million
(2005: £37 million).

During the year, 15 of our portfolio companies achieved
IPOs across nine different markets and £229 million of realisation
proceeds were raised through sales at the time of flotation or
subsequently. Sales from other quoted portfolio companies
generated proceeds of £143 million.

Cash proceeds have also been generated through refinancing
portfolio businesses where we have realised £168 million and
through secondary buyouts, where we have sold 10 assets for
£404 million.

Table 4:
Realisation proceeds by business line and geography (£m)

Continental
Europe

Asia

Total

2006

2005 2006

2005

Buyouts

406 354 471 148

Growth Capital

453 327 293 103

Venture Capital

225 134

1,173 897 891 365

SMI

Total

–

– 877 505

6 855 443

– 207 156

– 268 198

6 2,207 1,302

Gross portfolio return
The chart below sets out the gross portfolio return for the
Group for the past three financial years. This continued good
performance reflects both the focus and discipline of our
investment teams and favourable market conditions through
the year.

Gross portfolio return by year (%)
to 31 March

Gross portfolio return comprises
the income and capital return (both
realised and unrealised value
movement) generated from the
portfolio and is expressed as a
percentage of opening portfolio value.

2004 has been restated as unrealised
currency movements are no longer
included within gross portfolio return.

*As restated for the adoption of IFRS.

05*

Investment
3i invested a total of £1,110 million in the year, significantly
up on the £755 million invested in 2005. Having entered the
year with a very strong pipeline of new opportunities, some
significant individual investments were made in the first half,
including NCP (£96 million) and Giochi Preziosi (£61 million).
The split of investment across our regions reflected our
increasingly international focus, with 63% invested outside the
UK. Investment, including co-investment funds, totalled
£1,322 million. Consistent with our strategy, the most notable
increase by business line was within Growth Capital.

Across the Group we invested in 58 new assets in the year
(2005: 67). We also increased our investment in established
funds to gain exposure to new or emerging markets.
We invested a total of £111 million (2005: £26 million),
10% of our total outlay, into these externally managed funds.
This included five new funds into which we committed
£242 million (of which £97 million was invested during the
year), the largest of these being the I2 infrastructure fund
(£79 million invested).

The average investment size in the other 53 new assets was
£15 million (2005: £8 million), in line with our strategy of
increasing deal size within the “mid-cap market” segment.

Table 3:
Investment by business line and geography (£m)

Continental
Europe

Asia

Total

2006

2005 2006

2005

Buyouts

203 193 248 145

Growth Capital

172

83 234 149

Venture Capital

SMI

Total

409 334 540 341

–

– 451 338

28 497 263

1 156 143

–

29 1,110 755

18 3i Report and accounts 2006 Business review

Unrealised value movement
The unrealised profit on revaluation of investments was
£245 million (2005: £245 million). An analysis of the
components of this return is given in table 5.

Table 5:
Unrealised profits/(losses) on revaluation of investments

Earnings multiples1

Earnings

First-time uplifts2

Provisions3

Up rounds

Uplift to imminent sale

Other movements on unquoted investments

Quoted portfolio

Total

*As restated for the adoption of IFRS.

2006

£m

(62)

(29)

245

2005
(as restated)*
£m

149

(66)

101

(45)

245

1 The weighted average earnings multiple applied to investments valued on an earnings basis increased

from 12.0 to 12.2 over the year.

2 The net valuation impact arising on investments being valued on a basis other than cost for the first time.
3 Provisions against the carrying value of investments in businesses which may fail.

The aggregate attributable earnings of investments valued on
an earnings basis at both the start and end of the year increased
by 5%, giving rise to a value increase of £95 million (2005:
£20 million).

Assets which were revalued on an imminent sale basis generated
value uplifts of £97 million, reflecting the good realisations
pipeline at the year end.

Portfolio income
Portfolio income of £232 million (2005: £232 million) includes
reduced depreciatory dividends (arising on the sale of more
mature assets), offset by increased interest income from a
number of new higher-yielding investments. Negotiation fees for
new investments have risen with increased investment levels.

Net carried interest
Carried interest payable for the year was £64 million, which is
offset by carry receivable of £79 million.

Carried interest payable is broadly in line with last year’s level,
despite the increase in proceeds, as a number of realisations were
from early vintages with no associated carry schemes, or from
carry schemes which have yet to reach the hurdle at which carry
payable is accrued.

Carry receivable of £79 million relates primarily to Eurofund III,
3i’s 1999 pan-European fund, whose cumulative performance
in the first half passed through the point at which carried
interest receivable within 3i’s financial statements is triggered.
The accrual at 31 March 2006 has been calculated on a fair
value basis and includes carry receivable relating to realised and
unrealised value increases arising on assets in more recent
vintages, including Eurofund IV.

Costs
Operating expenses totalled £211 million (2005:
£177 million). The increase over last year reflects higher
variable remuneration costs arising on the improvement in
total returns and costs associated with implementing new
strategic initiatives. Operating expenses include a charge in
respect of share-based payments, to reflect the fair value of
options and other share-related rewards granted to employees,
of £8 million (2005: £6 million).

Net interest payable for the year was £17 million, reflecting
the considerable fall in net borrowings resulting from our net
realisation proceeds and an increase in the proportion of
borrowing in non-sterling currencies for which interest rates
were more favourable during the year.

3i Report and accounts 2006 Business review 19

Gearing
3i’s listed status and permanent capital structure enables the
Group to enhance returns to shareholders through leveraging
our equity. The Board’s view is that a gearing ratio of debt to
shareholders’ funds set between 30% and 40% is appropriate
across the cycle, given the current investment profile.

Despite growing our investment by 47% and returning
£467 million of capital to shareholders, during the year the
exceptionally high level of realisations caused gearing at
31 March 2006 to fall to 1% (2005: 15%).

Taking account of future cashflow projections and the
development plans of the business, the Board has proposed
a further return of £700 million by means of a bonus issue of
listed B shares accompanied by a share consolidation designed
to maintain comparability of share price and earnings per share.
This is currently expected to take place in July 2006.

Growth in diluted net asset value
Diluted net asset value (“NAV”) per share was 739p at 31 March
2006, which compares with 614p at 31 March 2005, an
increase of 125p, reflecting the strong results for the year.

Diluted NAV shows the net assets
attributable to each share in issue
after adjusting for the effect of
share options and other instruments
convertible into shares.

Diluted NAV per share by year
(pence) to 31 March

739

535

614

*As restated for the adoption of IFRS.

05*

Other movements
Unrealised value movements in the fair value of derivatives of
£(78) million were recognised in the income statement for the
first time, having adopted IFRS. £(75) million of this movement
relates to the valuation of the equity derivative embedded in the
¤550 million 2008 Convertible Bond. The movement is the
product of a number of factors, the most significant of which was
the increase in the Company’s share price of 40% in the year.

Exchange movements of £47 million arose in respect of the
US dollar denominated investment portfolio. As the dollar
strengthened relative to sterling, the currency risk relating to this
portfolio is now substantially hedged.

Cash flows
Net cash inflow for the year was £550 million, reducing net
borrowings, including the Convertible Bond, to £56 million at
31 March 2006 (2005: £545 million).

During the year, capital was returned to shareholders through
the payment of £245 million by way of a special dividend of
40.7p per share and a further £222 million of on-market share
buy-backs, as approved by shareholders at an Extraordinary
General Meeting following the 2005 Annual General Meeting.

Capital structure
3i’s capital structure comprises a combination of shareholders’
funds, long-term borrowing, short-term borrowing and liquid
treasury assets and cash. In managing our capital structure, we
seek to balance the current needs of the business with our ability
to support new business growth. Total shareholders’ funds at
31 March 2006 were £4,006 million (2005: £3,699 million),
the main components being capital reserves of £3,110 million,
revenue reserves of £263 million and share capital and share
premium of £668 million.

Total Group borrowings at 31 March 2006 were £1,474 million,
which is repayable as follows: £231 million, less than one year;
£643 million, between one and five years; and £600 million,
greater than five years. At the year end, 3i had committed and
undrawn borrowing facilities of £488 million, and cash and liquid
assets totalling £1,955 million. Additionally, as noted above, in
2003, 3i issued a ¤550 million Convertible Bond due in 2008.

20 3i Report and accounts 2006 Business review

Portfolio
The value of the portfolio at 31 March 2006 was £4,139 million
(2005: £4,317 million). As shown in table 6, the reduction in
portfolio value resulted from the high level of realisations in the year.
Other movements include transfers of assets into the portfolio
previously held through joint ventures and the currency movement
in the year.

Table 6:
Summary of changes to investment portfolio

Opening portfolio

Investment

Realisation proceeds

Realised profits on disposal of investments

Unrealised profits on revaluation of investments

Other movements

Closing portfolio

*As restated for the adoption of IFRS.

2006

£m

4,317

1,110

2005
(as restated)*
£m

4,362

755

(2,207)

(1,302)

576

245

250

245

4,139

4,317

Charts A and B show the portfolio value analysed by business line
and geography. Chart C shows the age profile of the portfolio.

At 31 March 2006, 6% of the portfolio value was held in
investments in quoted companies (2005: 5%).

The number of investments in the portfolio continues to fall,
reflecting the high number of realisations in the year, our policy
to seek investment opportunities in fewer larger deals and our
strategy to reduce portfolio numbers within SMI. At 31 March
2006, the number of investments stood at 1,087 (excluding
SMI: 561), down from 1,502 (excluding SMI: 695) at the
beginning of the year.

Chart A: Portfolio value by business line (%)
as at 31 March 2006

Buyouts

Growth Capital
Venture Capital
SMI

£1,465m
£1,284m
£826m
£564m

Chart B: Portfolio value by geography (%)
as at 31 March 2006

Continental Europe
US
Asia

£1,740m
£1,925m
£307m
£167m

Chart C: Portfolio value by age (£m)
as at 31 March 2006

1,088

26%

1,204

29%

674

17%

336

837

20%

Up to1 yr

1-3 yrs

3-5 yrs

5-7 yrs

Over 7 yrs

Buyouts

Growth Capital

Venture Capital

SMI

4,139

100%

Total

3i Report and accounts 2006 Business review 21

Accounting policies
As a result of the Group’s adoption of IFRS, certain accounting
policies have been amended. Prior year figures have been
restated so as to provide meaningful comparison with the
results for the year to 31 March 2006.

The major changes are as follows:

– derivative financial instruments are now held at fair value and
any movements in value taken to the income statement;

– a charge is made in the income statement in respect of
share-based payments based on the intrinsic value of
awards at grant date;

– foreign currency items in the Group’s income statement are
converted at the actual exchange rate and not the year
end rate;

– dividends declared after the balance sheet date are not

recognised as a liability at the balance sheet date.

There have been no significant changes to 3i’s valuation policy
in the year. However, to comply with IFRS, discounts are
no longer applied to market prices and quoted investments are
valued at bid price rather than mid price.

22 3i Report and accounts 2006 Business review: Buyouts

Buyouts

“The Buyout business has delivered
another successful year, with a
gross portfolio return of 29%
and record levels of realisations.
We face a highly competitive
market but the strength of our
deal flow and execution capabilities
enable us to find exciting
investment opportunities
across Europe.”

Jonathan Russell Managing Partner

29%Gross portfolio return on opening portfolio value
£447m

Gross portfolio return

Realised profits of £208 million
contributed strongly to the
achievement of a gross portfolio
return of £447 million. Portfolio health
is good with unrealised value growth
of £124 million.

We have remained highly selective
with respect to new investment,
which at £451 million demonstrates
again 3i’s market access across Europe.

Financial highlights (£m)
for the year to 31 March 2006

Gross portfolio return

Investment

Realisation proceeds

Realised profit

Unrealised value movement

Portfolio income

447

451

877

208

124

115

3i Report and accounts 2006 Business review: Buyouts 23

Gross portfolio return
The Buyout business generated a gross portfolio return of 29%
for the year to 31 March 2006 (2005: 20%), which is at the
top end of our target return range across the economic cycle.
The business has now achieved or exceeded its target in each of
the last three financial years through a combination of
investment discipline and a favourable market environment.

Investment and realisations
Investment (excluding third party co-investment funds)
for the 12 months to 31 March 2006 was £451 million
(2005: £338 million). Investment levels were good, particularly
in the first six months of the year, when the pipeline for new
investment was exceptional. The lower level of investment in the
second half reflects the continued competitive conditions in the
European buyout market. Despite these competitive conditions,
the business generated significant deal flow through its pan-
European origination capability.

Realisations (excluding third party co-investment funds) for the
same period were very strong with £877 million of realisation
proceeds being generated (2005: £505 million). This reflected
the underlying quality of the assets in the portfolio and the
continued buoyant financial markets.

Portfolio health
The underlying health of our Buyout portfolio has been
good since the new business model was introduced in 2001.
The strong performance of the portfolio is underpinned by the
low loss rate that we have seen on our investments in Eurofunds
III and IV, which at the year end stood at 3% of investment cost.

Fund management
The third party co-investment funds that 3i raises are
co-invested alongside our own capital when financing buyouts.
In the year to 31 March 2006, 3i earned fee income of
£24 million (2005: £27 million) from the management of private
equity funds. In addition, 3i receives carried interest in respect of
the performance of these funds. During the year, 3i recognised
£79 million of carry receivable which relates primarily to
Eurofund III, 3i’s 1999 pan-European Buyout fund.

Our Buyout business is currently investing Eurofund IV, the
c3.0 billion fund that was raised in 2003. The fund was 75%
committed at 31 March 2006 and, consistent with industry fund
raising practices, 3i intends to raise its Eurofund V mid-market
buyout fund during the financial year ending 31 March 2007.

Long-term IRRs
The strong IRRs achieved on investments in the last five Buyout
vintages reflect our commitment to high-quality investment.
Favourable exit conditions and the health of our ongoing portfolio
have seen recent vintages performing well ahead of our long-
term targets for the business. The most notable successes from
the last five vintages were the sales of Yellow Brick Road,
Go-Fly, Westminster Healthcare and Betapharm.

Gross portfolio return by year (%)
to 31 March

Long-term IRRs (£m)
years to 31 March

Buyouts

2006

2005

2004

2003

2002

Note: For an explanation of IRRs, please see pages 98 to 99.

Total investment

Return flow

Value remaining

IRR to date

370

321

289

256

186

292

419

402

374

363

192

190

38%

32%

49%

61%

04*

05†
*Restated to exclude unrealised currency movements.
†Restated for the adoption of IFRS.

s
t
u
o
y
u
B

w
e
v
e
r

s
s
e
n
s
u
B

24 3i Report and accounts 2006 Business review: Buyouts

NCP

New investment – UK – support services

In September 2005 3i and funds
completed the £555 million buyout of
NCP, the UK’s leading parking services and
traffic management company.

With over 800 sites and more than 5,000
employees, NCP provides services ranging
from city centre car park management
and airport parking through to providing
outsourced traffic management services
for local and central government.

3i’s knowledge of the business and
relationship with the management team
were critical in enabling it to win the
auction process for this secondary
buyout.

Long-term growth in car usage and
increased local authority outsourcing
are key drivers of NCP’s growth.
NCP’s brand, synonymous with parking in
the UK, reinforces the credibility of the
business in winning contracts and aids
diversification into new services.

3i has utilised its sector experience in
support services and outsourcing –
through investments in companies such
as Keolis – to work closely with NCP.
3i also identified Mike Jeffries, former
Chief Executive Officer and Chairman of
WS Atkins, as Chairman for NCP.

NCP has a very high success rate in
winning new contracts and, since the
buyout, has been awarded all the major
contracts it has tendered for. Revenue for
the year ending December 2005 was
£439 million.

Carema

New investment – Nordic – healthcare

3i and funds invested c70 million in the
buyout of Carema Vård och Omsorg AB,
a leading Nordic healthcare services
company in July 2005. Carema provides
primary, specialist, disabled and elderly
care as well as staffing and, from its
formation in 1996, grew to a
c300 million business in 2005.

Ageing populations and rising patient
expectations, combined with technological
advances and pressures on government
funding, are creating opportunities for
private entrepreneurs to work in
partnership with governments to deliver
capacity, efficiency and high-quality care.

The Carema investment case was to back
a highly responsible, growth-oriented
team in a growing market.

3i’s in-depth experience and track record
in the healthcare sector was not only
convincing to management but has been
key in adding value post investment.
3i previously backed Westminster Health
Care, one of the largest UK high-quality
care home operators.

Carema has recently strengthened its
position further with two acquisitions.
Medihem, a high-quality nursing home
operator in the Stockholm area, was
acquired in December 2005.

In March 2006, with 3i’s support,
Carema acquired Finland’s largest private
healthcare provider, Mehiläinen. Together
the two companies, which continue to
operate under separate brands, will create
one of the largest community healthcare
entities in Europe with combined revenue
of around c490 million.

3i Report and accounts 2006 Business review: Buyouts 25

SR Technics

Buy-and-build – Switzerland – aviation services

3i led the c425 million MBO of Zurich
based SR Technics (“SRT”) in late 2002.
SRT was originally the maintenance and
engineering division of Swissair, and was
put up for sale when its parent company
went into administration. Despite a
challenging market environment, 3i
recognised significant potential for SRT’s
management to capitalise on its leading
industry reputation and extend the
customer base.

3i’s local presence in Zurich, successful
track record in the aviation sector, and its
ability to source a highly experienced
chairman, Frank Turner, were all key in
securing this investment.

Post completion, 3i and management
have pursued a buy-and-build
programme, transforming SRT into the
world-leading independent provider of
integrated technical and fleet management
services for commercial aircraft. This was
achieved through the acquisition of its
major competitor, FLS Aerospace, in a
c140 million transaction in June 2004.

SRT subsequently refinanced the business
with a US$325 million asset based debt
facility in June 2005 and signed up
easyJet in a US$1 billion, 10 year
contract. 3i’s long-standing relationship
and credibility with easyJet was a
contributing factor.

The company has also built up a significant
presence in the high growth areas of
Asia and the Middle East. It has recently
signed a joint venture with Shanghai
Airport and won contracts with China
Eastern, Vietnam Airlines and signed a
MOU for a five year, US$750 million total
fleet management contract with Gulf Air,
the national carrier of Bahrain and Oman.

With over 5,000 employees, SRT
reported total sales of c850 million and
EBITDA of c95 million in 2005 and has
enjoyed a normalised organic annual
turnover growth of 15% since the
buyout – more than double the sector
growth rate.

26 3i Report and accounts 2006 Business review: Growth Capital

Growth Capital

“An excellent year for our Growth
Capital business. Operating on an
integrated basis across the world
enabled us to grow investment and
returns as well as increase the value
that we add to our portfolio.
We were also able to raise our
average size of investment.

The further development of our
business in Asia and the recent
establishment of our infrastructure
and US teams provide additional
stimulus for the coming year.”

Michael Queen Managing Partner

26%Gross portfolio return on opening portfolio value
£341m

Gross portfolio return

A tripling of our investment in Asia,
strong growth in our investment in
continental Europe and a good start
from our infrastructure team enabled
us to grow investment by 89% overall.

The healthy market for realisations
and the quality of our portfolio
enabled us to almost double realisation
proceeds and increase gross portfolio
return to 26%.

Financial highlights (£m)
for the year to 31 March 2006

Gross portfolio return

Investment

Realisation proceeds

Realised profit

Unrealised value movement

Portfolio income

341

497

855

232

3i Report and accounts 2006 Business review: Growth Capital 27

Gross portfolio return
The Growth Capital business generated a gross portfolio return
of 26% to 31 March 2006 (2005: 23%). This is the third
consecutive year that the Growth Capital business has generated
returns at the higher end of its return objectives.

Investment and realisations
Investment for the 12 months to 31 March 2006 was
£497 million (2005: £263 million). The increase in investment
was driven by several factors, including a focus on larger
investments and a good contribution from our new infrastructure
team. During the year, 22 new investments were made at an
average of £20 million (2005: £6 million).

Included in the investment total were investments of
£108 million made in other funds including I2, the UK
infrastructure fund, and CDH China Growth Capital Fund II.

Realisation proceeds of £855 million were very strong and
significantly higher than last year (2005: £443 million).
This strong performance reflects the underlying quality of
the assets in the Growth Capital portfolio and the continued
buoyant financial markets.

Regionally, the UK accounted for 53% of Growth Capital
realisations, continental Europe accounting for 34% at
£293 million was up from £103 million in 2005. Asia delivered
£66 million of Growth Capital realisations (2005: £6 million).

Portfolio health
The underlying health of our Growth Capital portfolio is good.
At 31 March 2006, 84% of our investments were classified as
healthy, against a three year rolling average of 74%. This reflects
improved investment disciplines combined with investing in larger
and more established businesses in our recent vintages.

Long-term IRRs
Since the new business model was implemented, we have seen
good progress against our IRR targets for Growth Capital. IRRs in
the three vintages from 2003 to 2005 have produced returns
that exceed our annual vintage targets, while the 2006 vintage
will need time to show its full potential. Petrofac, Focus Media
and Williams Lea have produced excellent results and helped to
underline the quality of our recent investment performance.

Gross portfolio return by year (%)
to 31 March

Long-term IRRs (£m)
years to 31 March

Growth Capital

Total investment

Return flow

Value remaining

IRR to date

2006

2005

2004

2003

2002

Note: for an explanation of IRRs, please see pages 98 to 99.

430

170

312

220

421

270

256

400

404

198

159

103

110

32%

21%

22%

04*

05†
*Restated to exclude unrealised currency movements.
†Restated for the adoption of IFRS.

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28 3i Report and accounts 2006 Business review: Growth Capital

Soflog

New investment – France – logistics

In October 2005 3i invested c23 million
in Soflog, the French industrial logistics
specialist. 3i initiated the opportunity
through a direct marketing approach to
Nicolas Nonon, Soflog’s Managing
Director, two years beforehand.

This 50-year old family company has
expertise in industrial logistics for
international equipment manufacturers
and operates a network of 27 sites
in France.

As an active minority shareholder, 3i has
utilised its in-depth knowledge of the
European logistics sector to add value to
Soflog in a number of areas, including the
recruitment of a chairman and chief
financial officer.

3i also supported Soflog in its acquisition
in March 2006 of Télis, enabling Soflog
to double its size immediately with a
combined global turnover of c140 million
per annum from 50 local sites.

Infrastructure Investors LLP

New investment – UK & Europe – infrastructure

In June 2005 3i committed £150 million
to Infrastructure Investors LLP (“I2”),
alongside I2’s original founding investors,
Barclays Private Equity and Société
Générale. This brought total fund
commitments to £450 million.

Established in November 2003, I2 has
built up a portfolio of 31 operating
infrastructure projects in the health,
education, transport and Ministry of
Defence sectors. Assets include stakes in
the DLR Lewisham extension, extensions
to both King’s College and St George’s
hospitals in London and several waste
water treatment facilities in the north
of Scotland.

3i was attracted to I2’s portfolio,
experienced management team, deal flow
and excellent relationships in the PFI
market. In addition, the underlying asset
base of the I2 portfolio is operationally
robust and cash generative, with cash
flows supported principally by long-term
quasi-government covenants.

3i is an active investor in the
infrastructure market in its own right,
with an in-house team of seven sector
specialist investors, and recently invested
in Alpha Schools Highland, a project to
deliver 10 new schools in the Scottish
Highlands.

Investing in I2 provides a platform for 3i
to increase its participation in a growing
portfolio of PFI assets in parallel with its
increasing direct investment activity.

3i Report and accounts 2006 Business review: Growth Capital 29

Petrofac

Realisation – UK – oil, gas and power

In October 2005 3i realised over
£115 million through the IPO on the
London Stock Exchange of Petrofac, the
international oil and gas facilities service
provider, at a market capitalisation of
£742 million.

3i originally invested £22 million for a
16% stake in May 2002. The realisation
delivered a money multiple of 5.2 times
and an IRR of 64%.

3i’s funding supported the company
during a period of rapid growth, helping
Petrofac transform itself from an
engineering procurement construction
contractor into a total integrated facilities
management solutions provider.

In addition, 3i introduced Michael Press as
an independent non-executive director and
Keith Roberts, the Chief Financial Officer.

3i funded 36% of all European oil and gas
private equity deals from 2003 to 2005
and manages an investment portfolio of
18 companies in the exploration and
production and service sectors. Actively
utilising this sector knowledge, 3i was able
to introduce another 3i-backed company,
training business RGIT Montrose, to
Petrofac, which it subsequently acquired
in February 2004.

Nimbus

New investment – Asia – media

In August 2005 3i entered the
Indian market with a US$45 million
investment in Nimbus Communications.
This was the largest private equity
investment to date in India’s fast-growing
media and entertainment industry.

Founded by Executive Chairman Harish
Thawani in 1987, Nimbus is recognised as
one of the world’s leading producers and
managers of media rights for cricket.
Nimbus is also a leading Indian language
TV and movie producer and has interests
in digital content and film distribution.

Headquartered in Mumbai, the company
has operations in India, Singapore, UK,
South Africa and the Caribbean.

3i’s global media expertise and its local
execution skills were key to winning the
mandate for this investment.

3i’s extensive media sector knowledge
will enable it to add strategic value to a
business with an excellent position in a
high-growth market and ambitious
organic expansion and acquisition plans.

30 3i Report and accounts 2006 Business review: Venture Capital

Venture Capital

“Operating as a single global team,
sharing knowledge and experience,
and working actively with our
colleagues in other parts of the
Group continues to provide 3i’s
Venture Capital business with
significant competitive advantage.
This advantage has supported
a growth in returns, in new
investment and, I believe, has
helped to further strengthen our
reputation and recognition in the
key venture markets in Europe
and the US.”

Jo Taylor Managing Partner

17%Gross portfolio return on opening portfolio value
£128m

Gross portfolio return

Financial highlights (£m)
for the year to 31 March 2006

Gross portfolio return

Investment

Realisation proceeds

Realised profit

Unrealised value movement

Portfolio income

128

156

207

An improved gross portfolio return of
17% was driven by increased
realisation profits arising from healthy
M&A and IPO markets for young
technology businesses, and the
attractiveness of our portfolio to
those markets.

The growth in new investment
from £143 million to £156 million
was encouraging and further
demonstration of the attractiveness of
our approach to serial entrepreneurs,
high-growth companies and their large
corporate partners.

3i Report and accounts 2006

Business review: Venture Capital 31

Gross portfolio return
The Venture Capital business generated a gross portfolio return
of 17% to 31 March 2006 (2005: 11%). This improvement
in performance was driven by a number of factors, most
importantly organisational changes made to integrate the team
into a truly international partnership across Europe and the US
and enhanced portfolio management disciplines.

Realisation proceeds of £207 million were 33% higher than last
year (2005: £156 million). The increase in realisations reflects an
increased appetite of corporate buyers and, to a degree, the
public markets for venture capital companies. Six Venture Capital
portfolio companies achieved a flotation during the year, with the
healthcare, drug discovery and software sectors being
particularly active.

As returns have improved in our Venture business, so has the
amount of investment in late-stage technology increased.
When compared with early-stage technology, late-stage has
lower return characteristics, but considerably less volatility. In the
year to 31 March 2006, 44% of our Venture Capital investment
was in late-stage and we anticipate that this percentage could
rise to as much as 70% in the near term.

We have therefore reviewed the return objectives for our
Venture Capital business in the light of this changing mix, and
adjusted both the volatility and the overall return objectives as
a consequence. The new gross portfolio return objective for
the business remains higher than that for Buyouts and Growth
Capital at 25%, and vintage year and cyclical volatilities have
been set at 15% and 7% respectively.

Investment and realisations
Investment for the 12 months to 31 March 2006 was
£156 million (2005: £143 million). It is the team’s objective
to invest between £175 million and £225 million per annum.

Portfolio health
At 31 March 2006, 67% of our Venture investments were
classified as healthy, against a three year rolling average of 65%.
These levels are consistent with the higher risk return profile of
venture capital investing.

Long-term IRRs
As previously noted, our Venture Capital business has increased
its focus on late-stage investment and we have correspondingly
adjusted our target for this business line’s cash-to-cash IRRs
to 25%.

The 2002 and 2003 vintages are behind target and we continue
to manage this portfolio actively to improve returns. The 2004
vintage is the best performing recent vintage with strong value
growth contributing to its success.

Gross portfolio return by year (%)
to 31 March

Long-term IRRs (£m)
years to 31 March

Venture Capital

Total investment

Return flow

Value remaining

IRR to date

2006

2005

2004

2003

2002

Note: for an explanation of IRRs, please see pages 98 to 99.

132

107

315

–

181

131

–

36%

(19)%

(12)%

04*

05†
*Restated to exclude unrealised currency movements.
†Restated for the adoption of IFRS.

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TransMedics

Further investment – US – healthcare

3i led a US$30 million series C round and
contributed US$14 million of funding for
Massachusetts based TransMedics Inc in
February 2006. Having invested in the
series B round in 2003, 3i’s position grew
to a 24.6% equity stake as a result.

Founded in 1998, TransMedics is a medical
devices company which has developed
a unique system enabling a first in
transplantation - a “living organ transplant”.

By maintaining organs in a warm,
functioning state outside of the body,
TransMedics’ Organ Care System is
designed to optimise organ health and
reduce the risk of organ failure. It also
allows continuous clinical evaluation, and
increases the amount of time an organ
can survive outside the body over
traditional cold preservation techniques.

3i has been an active investor in
TransMedics, working in partnership
with the management team and its
scientific advisers and using its European
relationships to support TransMedics’
work with leading transplant centres in
the UK and Germany.

TransMedics’ technology improves organ
availability for the growing population of
patients with end-stage organ failure.
Recently it enabled a new milestone to
be reached in transplant medicine when
the world’s first beating heart transplant
was successfully performed at the
Bad Oeynhausen Clinic in Germany.

UbiNetics

Realisation – UK – electronics, semiconductor and advanced technologies

In July 2005 3i sold its remaining
investment in UbiNetics to Cambridge
Silicon Radio (“CSR”), the leading global
provider of Bluetooth technology, which
3i had backed in 1999 and helped float on
the London Stock Exchange in April 2004.

The deal at US$48 million, together with
the sale in May 2005 of UbiNetics’ test
and measurement business to Aeroflex for
US$84 million, delivered a total 2.4 times
money multiple and an IRR of greater than
75% for 3i in less than 18 months.

UbiNetics, a global supplier of the
software and silicon IP for wireless
terminals, which drives 3G mobile wireless
technology, was founded by PA Consulting
Group in 1999. The company grew from
just 16 employees at its formation to over
400 employees and a £24 million
turnover prior to the disposal.

3i’s investment in UbiNetics was part
of an ongoing collaboration with PA.

3i invested in the company in 2004,
attracted by the huge potential of the
3G market. Laurence Garrett of 3i joined
the board as a non-executive director
together with John Scarisbrick, who 3i
introduced. 3i subsequently helped
UbiNetics to recruit a chief financial
officer.

Working closely with the board on
strategy, 3i was able to identify that
the UbiNetics’ handset business would
be an excellent strategic fit for CSR, in
which 3i remains a substantial investor.
3i made the initial introductions
between the two companies, actively
demonstrating both the value of 3i’s
network and its sector experience.

3i Report and accounts 2006

Business review: Venture Capital 33

Interhyp

Realisation – Germany – financial services

Believing that Interhyp AG possessed
the key criteria that 3i seeks in venture
investing: a disruptive technology,
excellent management and a significant
market opportunity, 3i invested
c7.2 million for a 17.7% stake in 2000.

When Interhyp successfully floated
on the Frankfurt Stock Exchange in
September 2005, 3i sold 40% of its
equity in the IPO, realising a profit
of c14.4 million. 3i made further
realisations of c19 million to 31 March
2006 and had a residual stake valued
at c38 million.

Founded in 1999, Interhyp has grown
to become the leading online (and
subsequently offline) mortgage broker in
Germany, the largest mortgage market
in Europe. It has redefined this highly
fragmented industry by combining the
benefits of the internet with independent
consultancy, providing borrowers with
rates which are on average 0.5% below
those of traditional branch-based
retail banks.

Interhyp’s management team has grown
revenues since inception in 2000 to
c40 million with a 33% EBIT margin.
In 2005 new residential mortgage volume
exceeded c3 billion.

34 3i Report and accounts 2006 Business review

Risk management
3i has a comprehensive risk management framework which
provides a structured and consistent process for identifying,
assessing and responding to risks in relation to the Group’s
strategy and business objectives.

As part of this process, risks are considered across the following
broad categories:

External

Strategic

Investment

Treasury and funding

Operational

Risks arising from political, legal,
regulatory, economic policy and
competitor changes
Risks arising from the analysis,
design and implementation of the
Group’s business model, and key
decisions on investment levels and
capital allocations
Risks in respect of specific
asset investment decisions,
the subsequent performance
of an investment or exposure
concentrations across business
line portfolios
Risks arising from (i) uncertainty
in market prices and rates, (ii) an
inability to raise adequate funds to
meet investment needs or meet
obligations as they fall due, or
(iii) inappropriate capital structure
Risks arising from inadequate or
failed processes, people and
systems or from external factors
affecting these

Risk management operates at all levels throughout the Group,
across business lines, geographies and professional functions.
It is monitored by a combination of the Board, the Audit and
Compliance Committee, Management Committee and Risk
Committee, supported by the Group Risk Assurance and Audit,
and Group Compliance functions. The roles of the Board, Audit
and Compliance Committee and Management Committee are
described in the Directors’ report. The Risk Committee meets
four times a year to oversee movements in risk exposures
across the Group and recommends appropriate responses.
Its membership includes senior representatives from investment
and professional services functions.

Given their fundamental significance to the Group, investment
and treasury and funding risks are managed by specific processes
which are described below.

Investment risk
3i’s investment appraisal is undertaken in a rigorous manner.
This includes approval by the relevant business line partnerships,
and where appropriate, peer review by executives from other
business lines, and our international network of industry and
sector specialists. Investments over £5 million are presented to
an Investment Committee chaired by one of our Group Partners
and comprising some of our senior investment executives.

Having made our investment decision, a rigorous process is put in
place for managing the relationship with the investee company
for the period through to realisation. This can include board
representation by a 3i investment executive and regular internal
asset review processes.

3i invests across a range of economic sectors. The portfolio is
subject to periodic reviews at both the business line and Group
levels to ensure that there is no undue exposure to any one
sector. The valuation of 3i’s unquoted portfolio and opportunities
for realisation depend to some extent on stock market conditions
and the buoyancy of the wider mergers and acquisitions market.

3i Report and accounts 2006

Business review 35

Treasury and funding risk
3i’s funding objective is that each category of investment asset is
broadly matched with liabilities and shareholders’ funds according
to the risk and maturity characteristics of the assets, and that
funding needs are met ahead of planned investment.

Credit risk 3i’s financial assets are predominantly unsecured
investments in unquoted companies, in which the Board
considers the maximum credit risk to be the carrying value of the
asset. The portfolio is well diversified and, for this reason, credit
risk exposure is managed on an asset-specific basis by individual
investment managers.

Liquidity risk During the financial year, 3i generated a cash
surplus of £1,089 million (2005: £562 million) from its investing
activities and cash resources at the end of the period amounted
to £1,955 million (2005: £1,199 million). In addition, the Group
had available to it undrawn committed facilities of £488 million
at 31 March 2006 (2005: £764 million).

Price risk The valuation of unquoted investments depends upon
a combination of market factors and the performance of the
underlying asset. 3i does not hedge the market risk inherent in
the portfolio but manages asset performance risk on an asset
specific basis.

Foreign exchange risk 3i reports in sterling and pays dividends
from its sterling profits. The Board seeks to reduce structural
currency exposures by matching assets denominated in foreign
currency with borrowings in the same currency. The Group
makes some use of derivative financial instruments to effect
foreign exchange management.

Interest rate risk 3i has a mixture of fixed and floating rate
assets. The assets are funded with a mixture of shareholders’
funds and borrowings according to the risk characteristics of the
assets. The Board seeks to minimise interest rate exposure by
matching the type and maturity of the borrowings to those of
the corresponding assets. Some derivative financial instruments
are used to achieve this objective.

36 3i Report and accounts 2006

Corporate responsibility

Core values:
We believe that the highest
standard of integrity is essential
in business. In all our activities,
we aim to:
– be commercial and fair;
– respect the needs of our

shareholders, our staff, our
suppliers, the local community
and the businesses in which
we invest;

– maintain our integrity and

professionalism; and

– strive for continual improvement

and innovation.

Our approach
Philosophy As an international business operating in
14 countries with over 700 employees world-wide, 3i aims
to conduct its business in a socially responsible manner.
It is committed to being a responsible member of the
communities in which it operates and recognises the mutual
benefits of engaging and building relationships with those
communities. 3i believes that respect for human rights is
central to good corporate citizenship.

In everything 3i does, it aims to be commercial and fair, to
maintain its integrity and professionalism and to respect the
needs of shareholders, staff, suppliers, the local community
and the businesses in which it invests.

3i endeavours to comply with the laws, regulations and rules
applicable to its business and to conduct its business in
accordance with established best practice in each of the
countries in which it operates. Environmental, ethical and
social responsibility issues and standards are also taken into
consideration in every aspect of the business.

3i aims to be a responsible employer and has adopted corporate
values and standards designed to help guide its employees in
their conduct and business relationships. These values and
standards are an integral part of 3i’s culture.

Responsibilities and accountabilities The Board as a whole is
responsible for ethical standards. The executive Directors are
responsible for ensuring compliance with 3i’s corporate values
and standards.

The Corporate Responsibility Committee (“the Committee”)
considers and reviews environmental, ethical and social issues
relevant to 3i’s business. It promotes awareness of these issues
across the business through training and communication.
It promotes the development of corporate responsibility
policies, procedures and initiatives and monitors and reviews
their operation.

3i is a constituent of the 2006
Dow Jones Sustainability Index.

Tony Brierley, Chairman of 3i’s
Corporate Responsibility Committee, is
also a member of the Leadership Team
of Business in the Environment, the
environment programme of Business in
the Community, a business-led charity
whose purpose is to engage and
support companies to improve the
impact they have on society.

3i Report and accounts 2006 Corporate responsibility 37

The Committee, on behalf of the Board, identifies and assesses
the significant risks and opportunities for 3i arising from social,
ethical and environmental issues. A risk matrix methodology is
used to identify new risks, monitor developing trends and best
practice, and consider changes in 3i’s business and culture.
This risk matrix and a log of identified risks is reviewed and
updated at meetings of the Committee and significant risks
are reported to 3i’s Risk Committee. The Committee reports
regularly to the Board.

As Chairman of the Committee, Tony Brierley, has specific
responsibility for 3i’s environmental policies, leading the
development of new initiatives and targets and reporting to
the Board.

All employees have a responsibility to be aware of, and to abide
by, 3i’s policies and procedures which have been developed to
guide staff and regulate the conduct of the day to day operations
of the business. These policies and procedures include 3i’s
environmental, ethical and social policies, and are available to all
employees through 3i’s portal, a web-based knowledge system.
Employees are encouraged to make suggestions to improve
these policies and procedures.

As an investor
Investment policy 3i has a portfolio of over 1,000 investments
in businesses across Europe, Asia and the US. As an investor,
corporate governance is a priority and account is taken of
environmental, ethical and social issues when making investment
decisions. 3i believes it is important to invest in companies whose
owners and managers act responsibly on environmental, ethical
and social matters.

3i aims to invest in companies which:

– respect human rights;

– comply with current environmental, ethical and

social legislation;

– have proposals to address defined future legislation; and

– seek to comply with their industry standards and

best practice.

3i recognises that the most significant risks to 3i’s short-term
and long-term value from environmental, ethical and social
matters arise from its investment business. If a company
in which 3i has an investment acts irresponsibly on corporate
responsibility issues, this may affect the monetary value of
that investment and, as a shareholder in that company, raise
reputational issues for 3i.

Although 3i does not have operational control over the
companies in which it invests, it does have the opportunity to
influence the behaviour of these businesses and encourages
the development and adoption of good corporate governance.
This is achieved through the training of investment staff and
non-executive Directors who are appointed to the boards
of investee companies and the raising of awareness within
investee companies of social, environmental and ethical issues.
3i is also active in promoting good governance in the private
equity industry through the provision of tutors for courses
run by the BVCA and the EVCA.

Investment procedures 3i has policies and procedures to
reduce the risks of 3i investing in businesses which operate in
an environmentally, ethically or socially unacceptable manner.
Details of these policies and procedures may be found on
3i’s website at www.3igroup.com. When reviewing businesses
for potential investment, investment executives are required to
consider whether any corporate responsibility risks arise and,
if any risks are identified, to follow 3i’s corporate responsibility
investment procedures. Depending on the nature of the risk
identified and its seriousness, a condition precedent or post
completion undertaking requiring that the situation be
remedied may be required from the investee company or its
management. Alternatively, it may be decided not to proceed
with the investment.

Over the year more than 1,600 potential investments were
considered and 58 new investments were completed.
Over 1,500 potential investments did not proceed for
financial or commercial reasons (including, in some cases,
for social, ethical or environmental considerations).

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38 3i Report and accounts 2006 Corporate responsibility

Where, after an investment has been made, 3i becomes aware
that an investee company is not operating in an acceptable way,
3i will seek to use its influence to encourage improvement.
Where that is not possible, 3i will seek to divest itself of
the investment.

During the year, processes were put in place to monitor more
closely the number of potential investments in respect of which
detailed due diligence was undertaken, and the number of
investments in the portfolio reviewed as part of 3i’s portfolio
management processes, where environmental, social or ethical
issues were identified, the nature of the issues identified and
action taken as a result. A summary of the results of this
monitoring for the year to 31 March 2007 will be reported
in the 2007 Corporate responsibility report.

Relationship management 3i’s key relationships are with the
companies in which it invests, together with the intermediaries,
advisers and consultants used to facilitate investment and
portfolio management. 3i actively engages with these groups
to benchmark its performance and improve its investment
procedures and skills.

During the year to 31 March 2006, market perception studies
were undertaken in the UK, France, Germany, Spain and Sweden.
As part of these studies, interviews were conducted with
companies in which 3i has invested, potential companies for
investment and with intermediaries and advisers with whom
3i deals as part of the investment process. The results of these
studies have been used to refine the way 3i interfaces with the
companies in which it invests and the markets in which it
operates, and to develop further the training of 3i’s investment
executives.

3i supports the European
Venture Philanthropy
Association and was a founding
sponsor in 2004.

As a corporate
As an employer 3i’s staff are fundamental to the success of its
business. Accordingly, one of 3i’s core values is to respect its
staff and their needs.

Employees are organised in small teams and an environment of
co-operation is encouraged to ensure the highest standards of
integrity and professionalism.

In accordance with 3i’s core values, individual consultation
with employees on matters affecting them, and fair and
open communication, are a high priority. During the year, a
confidential survey of all staff world-wide was undertaken by
Ipsos MORI to ascertain the attitudes of staff towards 3i. 91% of
staff participated in this survey. The survey revealed that 3i
compared favourably with other leading companies, exceeding
the “Ipsos MORI norm” (a database maintained by Ipsos MORI
recording average scores achieved by companies against a range
of frequently asked questions) in 15 of 21 categories. A high
level of employee engagement was disclosed with an overall
score of 84%. The survey also revealed high levels of satisfaction,
with 90% of staff indicating that they had interesting work, 89%
of staff referring to the good working atmosphere at 3i, and high
levels of staff morale at 22 points above the Ipsos MORI Top Ten
norm. The results of the survey were considered by the Board
and senior management and subsequently shared and discussed
with individual teams within the business and actions agreed as
relevant and appropriate.

3i has comprehensive behaviour policies to help ensure that
employees treat their colleagues and others with courtesy
and respect.

3i also has a whistle blowing policy setting out procedures
for staff to raise in confidence matters of concern, for an
appropriate and independent investigation of such matters
and, where necessary, for follow-up action.

Our people
Employee engagement is the extent to which employees are
committed to their role, their team and the Group and its objectives.
How effectively they work as a result of this commitment and levels
of retention are indicators of engagement.

3i Report and accounts 2006 Corporate responsibility 39

Training and development 3i is committed to encouraging
the continuous development of the skills of its staff with the
objective of maximising the overall performance of the business.
Emphasis is placed on work-based learning, with the provision of
development opportunities supported by appropriate coaching
and mentoring. This is supplemented by more formal training
programmes, such as workshops to enhance the board
management skills of 3i’s investment staff. In addition,
investment staff are required to complete an investment training
programme on joining 3i, and professional services staff are
supported in developing their functional specialisms through
external courses, networks and forums. During the year, 185
employees attended internal training and development courses.

It is a legal and regulatory requirement that all executives
involved in making or managing investment transactions
receive anti-money laundering training and periodic refresher
training. A programme of training is in place to discharge these
obligations.

A programme of role-play-based workshops across the business
and regular articles in 3i’s staff magazine are used to raise
awareness of corporate responsibility issues, to stimulate debate
and provide employee training. During the year, a programme of
20 staff workshops, covering all locations world-wide where
3i operates was completed. To follow up on this programme of
employee engagement and training, sector-based workshops
and training courses have now been developed for investment
staff. The objectives of these workshops are to ensure that staff
remain fully informed of 3i’s corporate responsibility policies, to
identify and raise awareness to specific sector or geographical
issues and to gain input to the formulation of policy. During the
year, two such workshops were held for investment executives
in 3i’s Oil and Gas and Healthcare sector teams respectively and
further workshops are planned.

Training for Directors on corporate responsibility issues is
achieved through a system of regular Board reporting and by
Board presentations on relevant corporate responsibility issues.

Health and safety 3i recognises that the promotion of
health and safety at work is an essential function of staff and
management at all levels. In an endeavour to achieve high
standards, appropriate policies and procedures have been put
in place. Details of these policies and procedures can be found
on 3i’s website at www.3igroup.com. A Health and Safety
Committee has been established to oversee the application of
3i’s health and safety policies and procedures and to consider
health and safety risks across the business.

The purpose of 3i’s health and safety policy is to enable all
members of 3i’s staff to go about their everyday business at
3i’s offices in the expectation that they can do so safely and
without risk to their health. High standards of health and safety
are applied to staff and sub-contractors and 3i endeavours to
ensure that the health, safety and welfare of its employees,
visitors, customers, sub-contractors’ staff and the general public
are not compromised.

3i’s objective is not to have any reportable accidents or incidents.
During the year to 31 March 2006, one minor reportable
accident occurred under UK Health and Safety regulations.
No reportable accidents or incidents occurred under similar
regulations outside the UK.

As a member of Tommy’s Pregnancy Accreditation Programme,
3i complies with criteria for pregnancy management, geared
towards creating a positive environment for parents-to-be
in the workplace.

Procurement 3i has developed policies and procedures relating
to the purchasing of goods and services for use by the business.
These policies and procedures must be followed by all staff.
As far as possible, 3i will work only with suppliers who support
3i’s aim to source products responsibly. Suppliers that exploit
child or “sweated labour”, that disregard social legislation and
basic health and safety provision, that “pirate” the intellectual
property of others or that wilfully and avoidably damage the
environment will be avoided. Details of 3i’s procurement policies
may be found on 3i’s website at www.3igroup.com.

3i aims to have a collaborative relationship with its suppliers
and, wherever possible, when problems arise with a supplier’s
performance or behaviour, will work with the supplier concerned
to help them meet 3i’s requirements.

3i helped to found
businessdynamics almost
30 years ago and has continued
its support throughout this
time. In 2005, over 86,000
students benefited from
businessdynamics’ programmes.

3i has continued its financial
support to InKinddirect,
a charity distributing
manufacturers’ surplus goods
to voluntary organisations.
InKinddirect not only helps
reduce costs for charities but
also helps the environment.

40 3i Report and accounts 2006 Corporate responsibility

Environment As a financial services business employing
approximately 740 employees world-wide, 3i’s direct
environmental impact is relatively low. However, 3i measures its
own energy and resource usage where practicable and sets
targets to achieve improvement. A benchmark against which 3i
measures its performance is for CO2 emissions associated with its
office accommodation. During the year, steps were taken to
improve the collection and accuracy of data used in support of
this measure. As a result, office related CO2 emissions generated
in the year to 31 March 2005 have been reassessed at
approximately 6,964 tonnes. Over the two years to 31 March
2007, 3i aims to reduce this total by 6%. In the year to
31 March 2006, CO2 emissions attributable to office
accommodation of approximately 6,763 tonnes were generated.
Although this was only a small reduction, the year included only
one month of 3i’s occupation of new, more energy-efficient
offices in London, expected to generate significant savings.
3i also aims to reduce the amount of waste generated per person
per week and, where possible, to recycle paper and other office
materials. This measure was also distorted by the move of 3i’s
head office, which generated a temporary increase in waste.
Office items and equipment no longer required as a result of this
move were, where possible and practical, either donated to
charity via InKinddirect or recycled.

3i assesses the environmental standards of suppliers and,
through its procurement policy and its purchasing choices, will
favour products showing clear environmental advantages unless
there are significant reasons for not so doing.

Corporate responsibility issues and the environment
The principal benchmarks against which 3i measures its direct impact
on the environment are for CO2 emissions; and recycling of paper
and other materials.

Charity and community 3i’s charitable policy aims to support:

– causes based in the communities in which 3i has offices;

– charitable activities of staff. 3i matches donations made
by UK staff under the Give As You Earn scheme (“GAYE”)
and the proceeds of staff fundraising efforts. In the year
to 31 March 2006, approximately 26% of 3i’s charitable
donations were matching GAYE donations;

– charities relevant to its corporate activity. For example,

3i founded and supports businessdynamics, a charity which
aims to inspire young people to become involved in, and
understand business.

Charitable donations made in the UK in the year to 31 March
2006 amounted to £390,570, supporting a variety of different
charities with donations up to £35,000.

3i supports Community Links,
an innovative inner-city charity
running community-based
projects in London. Founded in
1977, it now helps over 50,000
vulnerable people a year.

3i Report and accounts 2006 Corporate responsibility 41

Performance and measurement
The Committee has overseen the formulation and
implementation of corporate responsibility investment
procedures, implemented appropriate risk management
procedures and set strategic targets and objectives for corporate
responsibility.

3i’s performance is measured against two indices:

– the Dow Jones Sustainability World Index (“DJSI”), a global
index which tracks the financial performance of leading
companies in terms of corporate sustainability; and

– the Business in the Community (“BitC”) Corporate

Responsibility Index, which aims to benchmark environmental,
ethical and social performance and encourage sustainable
development.

3i has again been selected as a constituent of the DJSI during
the year and was placed in the top of its industry group on
a global basis. 3i was also recognised as one of the best
companies on a global basis in respect of its codes of conduct,
compliance and anti-crime measures. 3i aims to continue to be
included within this Index.

In 2005 3i again participated in the annual BitC Corporate
Responsibility Index. 3i was included in the BitC’s “Top 100
Companies that Count” and was recognised for its outstanding
performance in the area of marketplace management. 3i aims
to continue to be included within this Index.

Each of 3i’s business unit and department heads is required
to confirm on an annual basis that their operating procedures,
including investment procedures, are consistent with 3i’s
standards and controls and that these procedures are operating
in practice.

3i’s performance management appraisal process reviews the
performance of individual members of staff against agreed
objectives and the knowledge, skills and behaviours expected by
3i. This process includes 360 degree feedback for all employees.

All 3i’s offices are the subject of health and safety audits to
ensure high standards are adopted on a consistent basis
world-wide. 3i’s health and safety procedures are also
independently audited by the British Safety Council to evaluate
the health and safety management system. 3i maintains a
four star rating as a result of this evaluation process.

Audit and verification
The Committee is responsible for monitoring the operation of 3i’s
corporate responsibility policies and procedures. The identification
and management of corporate responsibility risks is integral to
the ongoing operational processes of 3i’s business units and
functions. 3i’s internal audit function carries out periodic
independent reviews of risks and related controls in this area,
including compliance with 3i’s corporate responsibility investment
procedures.

The Committee may also supplement internal review processes
with external reviews where necessary. The Committee is not
aware of any material breaches in the application of 3i’s internal
policies and procedures for managing risks from corporate
responsibility issues.

The disclosures in this Corporate responsibility report are
the subject of a process requiring each statement made to
be verified.

The Corporate Responsibility Committee The Corporate
Responsibility Committee comprises Tony Brierley, Company
Secretary and Chairman of the Committee, Denise Collis, Group
Human Resources Director, Patrick Dunne, Group Communications
Director, Douwe Cosijn, Head of Investor Relations, Albert Xu, an
Investment Director in 3i’s Asia investment business, Hans
Middelthon, an investment executive in 3i’s Oil and Gas team,
Ben Gales, an Associate in 3i’s UK Venture Capital team and Michael
Robinson, a Director responsible for 3i’s SMI portfolio.

42 3i Report and accounts 2006

Board of Directors and Management Committee

Baroness Hogg

Philip Yea

Christine Morin-Postel

Oliver Stocken

Simon Ball

Michael Queen

Dr Peter Mihatsch

Danny Rosenkranz

Baroness Hogg
Chairman since 2002 and a non-executive Director since 1997. Chairman of the
Nominations Committee and the Valuations Committee. Chairman of Frontier
Economics Limited. A director of BG Group plc and Carnival Corporation and plc.
Deputy Chairman of GKN plc until 12 May 2006. A Governor of the London
Business School and a member of the Financial Reporting Council. From 1995 to
2002 Chairman of Foreign & Colonial Smaller Companies PLC. Formerly Head of
the Prime Minister’s Policy Unit. Aged 59.

Oliver Stocken
Deputy Chairman and Senior Independent Director since 2002 and a non-executive
Director since 1999. Chairman of the Audit and Compliance Committee and of the
trustees of the 3i Group Pension Plan. A member of the Nominations Committee,
the Remuneration Committee and the Valuations Committee. Chairman of Rutland
Trust plc and Stanhope Group Holdings Limited. A director of GUS plc, Pilkington plc
and Standard Chartered plc. Formerly Finance Director of Barclays plc. Aged 64.

Philip Yea
Chief Executive and executive Director since joining the Company in 2004.
A member of the Nominations Committee and the Valuations Committee.
A member of the Group’s Investment Committee since 2004. A non-executive
director of Vodafone Group plc. Formerly Managing Director within the private
equity business of Investcorp. A former Finance Director of Diageo plc and former
non-executive director of HBOS plc and Manchester United PLC. Aged 51.

Dr Peter Mihatsch
Non-executive Director since 2004. A member of the Nominations Committee
and the Valuations Committee. Chairman of the supervisory board of Giesecke
and Devrient GmbH. A member of the supervisory boards of Vodafone GmbH,
Vodafone D2 GmbH, Arcor AG, Alcatel SA and Rheinmetall AG. Formerly Chairman
of Mannesmann Mobilfunk GmbH and a member of the management boards of
Mannesmann AG and Mannesmann Kienzle GmbH. Aged 65.

Christine Morin-Postel
Non-executive Director since 2002. A member of the Audit and Compliance
Committee, the Remuneration Committee and the Nominations Committee.
A director of Alcan, Inc, Pilkington plc and Royal Dutch Shell PLC. Formerly Chief
Executive of Société Générale de Belgique, executive Vice-President and member of
the executive committee of Suez and a director of Tractabel and Fortis. Aged 59.

Michael Queen
Executive Director since 1997. Managing Partner, Growth Capital. Responsible for
Growth Capital since April 2005. Joined 3i in 1987. From 1994 to 1996 seconded
to HM Treasury. Appointed Group Financial Controller in 1996 and Finance Director
in 1997. A member of the Management Committee and the Group’s Investment
Committee since 1997. Ceased to be Finance Director on assuming responsibility
for Growth Capital investment. A director of Gardens Pension Trustees Limited, a
corporate trustee of the 3i Group Pension Plan, and a non-executive director of
Northern Rock plc. Past Chairman of the British Venture Capital Association.
Aged 44.

Simon Ball
Finance Director since April 2005 and member of the Management Committee since
joining the Company in February 2005. A member of the Valuations Committee.
A non-executive director of Cable & Wireless plc. Formerly, Director General Finance
at the Department for Constitutional Affairs, Group Finance Director of Robert
Fleming and Chief Operating Officer (UK) of Dresdner Kleinwort Benson. Aged 46.

Danny Rosenkranz
Non-executive Director since 2000. Chairman of the Remuneration Committee and
a member of the Audit and Compliance Committee and the Nominations Committee.
Chairman of Foseco plc and Pecaso Limited. Formerly Chief Executive of The BOC
Group plc. Aged 60.

3i Report and accounts 2006

Board of Directors and Management Committee 43

Sir Robert Smith

Tony Brierley

Jonathan Russell

Fred Steingraber

Denise Collis

Jo Taylor

Chris Rowlands

Paul Waller

Sir Robert Smith
Non-executive Director since 2004. A member of the Audit and Compliance
Committee, the Remuneration Committee and the Nominations Committee.
Chairman of Weir Group plc and Scottish & Southern Energy plc. A non-executive
director of Aegon UK plc and Standard Bank Group Limited. Formerly a
non-executive director of the Financial Services Authority and Bank of Scotland plc,
Chief Executive of Morgan Grenfell Asset Management and a member of the
Financial Reporting Council. Aged 61.

Fred Steingraber
Non-executive Director since 2002. A member of the Nominations Committee and
the Remuneration Committee. A director of Elkay Manufacturing and John Hancock
Financial Trends Fund. A member of the supervisory board of Continental AG.
Formerly, Chairman and Chief Executive of AT Kearney, Inc, and a director of
Maytag Corporation, Lawter International, Inc, and Mercury Finance, Inc. Aged 67.

Other members of Management Committee

Tony Brierley
Company Secretary since 1996. Responsible for the Group’s legal, compliance,
internal audit and company secretarial functions. Chairman of the Corporate
Responsibility Committee. Joined 3i in 1983. Appointed to the Management
Committee in 1996. Aged 56.

Denise Collis
Group HR Director. A member of the Management Committee since joining the
Company in 2004. Previously employed by HSBC and Standard Chartered plc.
Before joining 3i was HR Partner at Ernst & Young. Aged 48.

Chris Rowlands
Managing Partner, Group Markets. A member of the Management Committee
and the Group’s Investment Committee since re-joining the Company in 2002.
Previously employed by 3i from 1984 to 1996. A non-executive director of
Principality Building Society. Formerly a Partner of Andersen. Aged 49.

Jonathan Russell
Managing Partner, Buyouts. A member of the Management Committee and the
Group’s Investment Committee since 1999. Joined 3i in 1986. Formerly Chairman
of the European Private Equity and Venture Capital Association Buyout Committee.
Aged 45.

Jo Taylor
Managing Partner, Venture Capital. A member of the Management Committee and
the Group’s Investment Committee since July 2005. Joined 3i in 1984. Responsible
for 3i’s UK Venture Capital business and has helped co-ordinate 3i’s global venture
activities since 1999. Chairman of the British Venture Capital Association High
Technology Committee and a British Venture Capital Association Council member.
Aged 45.

Paul Waller
Managing Partner, Funds. A member of the Management Committee since 1999.
A member of the Group’s Investment Committee since 1997. Joined 3i in 1978.
Past Chairman of the European Private Equity and Venture Capital Association.
Aged 51.

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44 3i Report and accounts 2006

Directors’ report

This is the Directors’ report of 3i Group plc for the year to 31 March 2006 (“the year”).

Principal activity 3i Group plc is a world leader in private equity and venture capital. The principal activity of the Company and its subsidiaries (“the Group”) is investment.
It invests in a wide range of growing independent businesses. Its objective is to maximise shareholder value through growth in total return.

Tax and investment company status The Company is an investment company as defined by section 266 of the Companies Act 1985 and carries on business as an
investment trust.

HM Revenue & Customs has approved the Company as an investment trust under section 842 of the Income and Corporation Taxes Act 1988 for the financial period to
31 March 2005. Since that date the Company has directed its affairs to enable it to continue to be so approved.

Regulation The Company was authorised and regulated by the Financial Services Authority (“FSA”) until 27 May 2005, when it relinquished its deposit taking status.
3i Investments plc, a wholly owned subsidiary of the Company, is authorised and regulated by the FSA under the Financial Services and Markets Act 2000. Where applicable,
certain Group subsidiaries’ businesses outside the United Kingdom are regulated locally by relevant authorities.

Results and dividends The financial statements of the Company and the Group for the year to 31 March 2006 appear on pages 61 to 88.

Total recognised income and expense for the year was £831 million (2005: £501 million, as restated for IFRS). As part of the arrangements approved by shareholders to
return value to shareholders, a special dividend of 40.7p per share was paid on 22 July 2005 in respect of the year to 31 March 2006. A further interim dividend of 5.5p
per share in respect of that year was paid on 4 January 2006. The Directors recommend a final dividend of 9.7p per share be paid in respect of the year to 31 March 2006
to shareholders on the register at the close of business on 23 June 2006.

By a deed of waiver dated 9 June 1994, Mourant & Co. Trustees Limited in its capacity as trustee of The 3i Group Employee Trust (“the Employee Trust”) waived
(subject to certain minor exceptions) all dividends declared by the Company after 26 May 1994 in respect of shares from time to time held by the Employee Trust
(currently 11,311,280 shares).

Operations The Group operates through a network of offices in Europe, Asia and the US. The Group also manages a number of funds established with major institutions and
pension funds to make equity and equity-related investments in unquoted businesses in Europe and Asia.

Management arrangements 3i Investments plc acts as investment manager to the Company and certain of its subsidiaries. Contracts for these investment management
and other services, for which regulatory authorisation is required, provide for fees based on the work done and costs incurred in providing such services. These contracts may
be terminated by either party on reasonable notice.

3i plc provides the Group with certain corporate and administrative services, for which no regulatory authorisation is required, under contracts which provide for fees based
on the work done and costs incurred in providing such services. The administrative services contract between 3i plc and 3i Investments plc may be terminated by either
party on three months’ notice. The administrative services contracts between 3i plc and other Group companies may be terminated by either party on reasonable notice.

Business review The Chairman’s statement on pages 4 and 5, the Chief Executive’s statement on pages 6 and 7, the “Our vision” section on pages 8 to 11 and the Business
review on pages 12 to 35 report on the Group’s development during the year to 31 March 2006, its position at that date and the Group’s likely future development.
Information fulfilling the requirements of the Business Review can be found in the Business review on pages 12 to 35 and in the Corporate responsibility section on pages 36
to 41, which are incorporated in this report by reference.

Share capital

Pre-consolidation share capital movements The issued share capital of the Company as at 1 April 2005 was 614,409,167 ordinary shares of 50p each. This increased by
268,792 shares to 614,677,959 ordinary shares of 50p each in the period from 1 April 2005 to 10 July 2005 on the issue of shares to the trustee of The 3i Group Share
Incentive Plan and on the exercise of options under the Group’s executive share option plans and The 3i Group Sharesave Scheme.

Consolidation of share capital Pursuant to resolutions passed at an Extraordinary General Meeting (“EGM “) of the Company, on 11 July 2005 the issued share capital of
the Company, of 614,677,959 ordinary shares of 50p each, was consolidated into 578,520,432 ordinary shares of 531⁄8p each.

Post-consolidation share capital movements At the EGM in July 2005, the Directors were authorised to repurchase up to 57,800,000 shares of 531⁄8p each in the
Company (representing approximately 10% of the Company’s issued share capital as at 10 May 2005) until the Company’s Annual General Meeting in 2006 or 5 October
2006, if earlier. The Board indicated that it would only use this authority to repurchase Company shares with an aggregate value of approximately £250 million. In the year to
31 March 2006, the Company cancelled 30,186,896 ordinary shares of 531⁄8p each which had been purchased pursuant to this authority.

In the period from 11 July 2005 to 31 March 2006, a total of 2,222,966 ordinary shares of 531⁄8p were issued (to the trustee of The 3i Group Share Incentive Plan and on
the exercise of options under the Group’s executive share option plans and The 3i Group Sharesave Scheme).

Accordingly, between 11 July 2005 and 31 March 2006, the consolidated share capital of the Company decreased by 27,963,930 ordinary shares to 550,556,502 ordinary
shares of 531⁄8p each.

Major interests in shares As at 3 May 2006, the Company had been notified of the following interests in the Company’s shares in accordance with sections 198 to 208 of
the Companies Act 1985.

Prudential plc and subsidiary companies
FMR Corporation and Fidelity International Limited and their subsidiary companies
Legal & General Group

%
6.14
4.95
3.85

Number of shares
34,716,123
27,255,702
21,844,391

Directors’ interests Details of the Directors’ interests in the Company’s shares are shown in note 39 to the financial statements on page 88. Save as shown in note 39, no
Director had any disclosable interest in the shares, debentures or loan stock of the Company or in the shares, debentures or loan stock of its subsidiaries during the period
and there have been no changes in the above interests between 1 April 2006 and 3 May 2006.

3i Report and accounts 2006 Directors’ report 45

Corporate governance Throughout the year, the Company complied with the provisions of section 1 of the Combined Code on corporate governance published by the
Financial Reporting Council in July 2003.

The Company’s approach to corporate governance The Company has a policy of seeking to comply with established best practice in the field of corporate governance.
The Board has adopted core values and Group standards which set out the behaviour expected of staff in their dealings with shareholders, customers, colleagues, suppliers
and other stakeholders of the Company. One of the core values communicated within the Group is a belief that the highest standard of integrity is essential in business.

The Board’s responsibilities and processes The Board is responsible to shareholders for the overall management of the Group. It determines matters including financial
strategy and planning and takes major business decisions. The Board has put in place an organisational structure. This is further described under the heading “internal control”.
The Board has approved a formal schedule of matters reserved to it and its duly authorised Committees for decision. These include:

– approval of the Group’s overall strategy, strategic plan and annual operating budget;

– approval of the Company’s interim and annual financial statements and changes in the Group’s accounting policies or practices;

– changes relating to the capital structure of the Company or its regulated status;

– major capital projects;

– major changes in the nature of business operations;

– investments and divestments in the ordinary course of business above certain limits set by the Board from time to time;

– adequacy of internal control systems;

– appointments to the Board and Management Committee;

– principal terms and conditions of employment of members of Management Committee; and

– changes in employee share schemes and other long-term incentive schemes.

Matters delegated to management include implementation of the Board approved strategy, day-to-day operation of the business, the appointment of all executives below
Management Committee and the formulation and execution of risk management policies and practices.

A Group succession and contingency plan is prepared by management and reviewed periodically by the Board. The purpose of this plan is to identify suitable candidates for
succession to key senior management positions, agree their training and development needs, and ensure the necessary human resources are in place for the Company to
meet its objectives.

During the year, the principal matters considered by the Board included:

– the Group strategic plan, budget and financial resources;

– the Group’s capital structure, balance sheet efficiency and the return of capital to shareholders;

– regular reports from the Chief Executive;

– the recommendations of the Valuations Committee on valuations of investments;

– the Company’s share price performance and findings from a shareholder perception study;

– organisational capability, succession planning and findings from a staff survey;

– the establishment of a European Commercial Paper programme;

– establishing a further European Buyout Fund;

– risk management;

– requirements for operating and financial reviews and key performance indicators;

– independence of non-executive Directors; and

– funding of the 3i Group Pension Plan.

Information Reports and papers are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by
information specifically requested by the Directors from time to time.

During the year, there were six meetings of the Board of Directors. The Directors who served throughout the year attended all six meetings save for Mr O H J Stocken who
attended five meetings. Mr R W Perry attended the one meeting held before his retirement as a Director on 6 July 2005.

Performance evaluation During the year, the Board conducted its annual review of performance of the Board as a whole and of individual contributions. The Chairman led the
process with the aid of the Board’s external consultant. All Board members completed a questionnaire and gave personal views to the Chairman, who also sought views from
all members of the Management Committee. The Chairman gave feedback to the Board and to individual Directors. The Senior Independent Director conducted a parallel
process to review the performance of the Chairman. These processes also involved evaluation by members of Board Committees of their performance.

The Board concluded that the changes that had been made in the schedule to allow for more strategic discussion had been beneficial and should be continued, including the
introduction of a second awayday during the year. Having reviewed the remit and functioning of Committees, the Board decided to continue to maintain the existence of the
Valuations Committee, as well as the Audit and Compliance Committee, in order to provide a twice-yearly opportunity to focus on valuation methodology and judgments
in advance of the audit of results. The average size of the Company’s investments had risen, and changes in the valuation guidelines published by the British Venture Capital
Association required a more tailored approach. The Board and the Audit and Compliance Committee also reviewed the functions and membership of the management Risk
Committee and supported the broadening of its remit. The Remuneration Committee reviewed policy and decided to consult major shareholders on developments designed
to align the Company’s systems more closely with the private equity industry and to clarify the framework for share-based awards. Directors concluded that the extra Board
time that had been given to consideration of human resource management, career development and succession planning was extremely valuable and should be continued.
The Board decided to continue the practice of holding at least one meeting a year away from the Company’s head office, in order to enable members to spend time with the
executives responsible for building the Company’s global capability. It was also decided to continue the process of adding external capability to the Board to match changes in
the business and in financial markets.

46 3i Report and accounts 2006 Directors’ report

The roles of the Chairman and the Chief Executive The division of responsibilities between the Chairman of the Board and the Chief Executive is clearly defined and has
been approved by the Board.

The Chairman The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives. The Chairman is responsible for organising the
business of the Board, ensuring its effectiveness and setting its agenda. The Chairman has no involvement in the day-to-day business of the Group. The Chairman facilitates
the effective contribution of non-executive Directors and constructive relations between executive and non-executive Directors. The Chairman ensures that regular reports
from the Company’s brokers are circulated to the non-executive Directors to enable non-executive Directors to remain aware of shareholders’ views. The Chairman ensures
effective communication with the Company’s shareholders.

The Chief Executive The Chief Executive has direct charge of the Group on a day-to-day basis and is accountable to the Board for the financial and operational performance
of the Group. The Chief Executive has formed a committee called Management Committee to enable him to carry out the responsibilities delegated to him by the Board.
The Committee comprises the executive Directors, the Company Secretary, Ms D R Collis, Mr C P Rowlands, Mr J B C Russell, Mr A J M Taylor and Mr P Waller.
The Committee meets on a regular basis to consider operational matters and the implementation of the Group’s strategy.

Senior Independent Director The Board has appointed Mr O H J Stocken as Senior Independent Director, to whom, in accordance with the Combined Code, concerns
can be conveyed.

Directors The Board comprises the Chairman, six other independent non-executive Directors and three executive Directors. Biographical details for each of the
Directors are set out on pages 42 and 43. Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Mr S P Ball, Dr P Mihatsch, Mme C J M Morin-Postel, Mr M J Queen,
Mr F D Rosenkranz, Sir Robert Smith and Mr F G Steingraber served throughout the period under review. Mr R W Perry served as a Director until 6 July 2005.

In addition to fulfilling their legal responsibilities as Directors, non-executive Directors are expected to bring an independent judgment to bear on issues of strategy,
performance, resources and standards of conduct, and to help the Board provide the Company with effective leadership. They are also expected to ensure high standards
of financial probity on the part of the Company and to monitor the effectiveness of the executive Directors.

The Board’s discussions, and its approval of the Group’s strategic plan and annual budget, provide the non-executive Directors with the opportunity to contribute to and
validate management’s plans and assist in the development of strategy. The non-executive Directors receive regular management accounts, reports and information which
enable them to scrutinise the Company’s and management’s performance against agreed objectives.

Directors’ independence All the non-executive Directors, including the Chairman, are considered by the Board to be independent for the purposes of the Combined Code.
The Board assesses and reviews the independence of each of the non-executive Directors at least annually having regard to the potential relevance and materiality of a
Director’s interests and relationships rather than applying rigid criteria in a mechanistic manner. The Board has considered Mr O H J Stocken and Mme C J M Morin-Postel’s
common non-executive directorship of Pilkington plc and concluded that it did not affect their independence. The Board has also considered Dr P Mihatsch’s non-executive
directorships within the Vodafone Group plc group of companies and Mr P E Yea’s non-executive directorship of Vodafone Group plc and concluded that this did not affect
Dr P Mihatsch’s independence.

No Director was materially interested in any contract or arrangement subsisting during or at the end of the financial period that was significant in relation to the business of
the Company.

Directors’ service contracts Details of Directors’ employment contracts are set out in the Directors’ remuneration report on page 58.

Training and development The Company has developed a training policy which provides a framework within which training for Directors is planned with the objective
of ensuring Directors understand the duties and responsibilities of being a Director of a listed company. All Directors are required to update their skills and maintain their
familiarity with the Company and its business continually. Presentations on different aspects of the Company’s business are made regularly to the Board. On appointment, all
non-executive Directors have discussions with the Chairman and the Chief Executive following which appropriate briefings on the responsibilities of Directors, the Company’s
business and the Company’s procedures are arranged. The Company provides opportunities for non-executive Directors to obtain a thorough understanding of the Company’s
business by meeting members of the senior management team who in turn arrange, as required, visits to investment offices and support departments.

During the year the Directors received training on Directors’ responsibilities for the operating and financial review, the new Listing Rules, the Market Abuse Regime and the
Company Law Reform Bill. In addition, the non-executive Directors received presentations on the Company’s Nordic investment business and on technology investment.

The Company has procedures for Directors to take independent legal or other professional advice about the performance of their duties.

Re-election Subject to the Company’s Articles of Association, the Companies Acts and satisfactory performance evaluation, non-executive Directors are appointed for an
initial period of three years. Before the third and sixth anniversaries of a non-executive Director’s first appointment, the Director discusses with the Board whether it is
appropriate for a further three year term to be served. The reappointment of non-executive Directors who have served for more than nine years is subject to annual review.

The Company’s Articles of Association provide for:

a) Directors to retire at the first Annual General Meeting (“AGM”) after their appointment by the Board and for the number nearest to, but not exceeding, one-third of the

remaining Directors to retire by rotation at each AGM;

b) all Directors to retire at least every three years; and

c) any Director aged 70 or over at the date of the AGM to retire.

Subject to the Articles of Association, retiring Directors are eligible for reappointment.

In accordance with the Articles of Association, at the AGM to be held on 12 July 2006, Mme C J M Morin-Postel, Mr M J Queen and Mr F D Rosenkranz will retire by
rotation and, being eligible, offer themselves for reappointment. The Board’s recommendation for the reappointment of Directors is set out in the Notice of AGM.

3i Report and accounts 2006 Directors’ report 47

Directors’ indemnities The Company’s Articles of Association provide that, subject to the provisions of the Companies Acts, the Directors shall be indemnified against
liabilities incurred by them as Directors in defending any proceedings in which judgment is given in their favour, or where they have been acquitted or been granted relief
by the court. Pursuant to the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Company’s Articles of Association, during the year the
Company put in place Qualifying Third Party Indemnity Provisions (as defined under section 309B of the Companies Act 1985) for the benefit of the Company’s Directors
and the Company Secretary. These provisions remain in force.

Under the rules of the 3i Group Pension Plan (“the Plan”), the Company has granted an indemnity to the directors of Gardens Pension Trustees Limited (a corporate trustee
of the Plan and a wholly owned subsidiary of the Company) against liabilities incurred as directors of that corporate trustee.

The Board’s committees The Board is assisted by various standing committees of the Board which report regularly to the Board. The membership of these committees
is regularly reviewed by the Board. When considering committee membership and chairmanship, the Board aims to ensure that undue reliance is not placed on
particular Directors.

These committees all have clearly defined terms of reference which are available at www.3igroup.com. The terms of reference of the Audit and Compliance Committee, the
Remuneration Committee and the Nominations Committee provide that no one other than the particular Committee chairman and members may attend a meeting unless
invited to attend by the Committee.

Audit and Compliance Committee The Audit and Compliance Committee comprises Mr O H J Stocken (Chairman), Mme C J M Morin-Postel, Mr F D Rosenkranz and
Sir Robert Smith, all of whom served throughout the period. All the members of the Committee are independent non-executive Directors. The Board is satisfied that the
Committee Chairman, Mr O H J Stocken, has recent and relevant financial experience. During the year, there were five meetings of the Committee all of which were attended
by all members of the Committee save for one meeting which was not attended by Mme C J M Morin-Postel.

During the year, the Committee:

– reviewed the effectiveness of the internal control environment of the Group and the Group’s compliance with its regulatory requirements and received reports on bank

covenants, third party liabilities and off-balance sheet liabilities;

– reviewed and recommended to the Board the accounting disclosures comprised in the interim and annual financial statements of the Company and reviewed the scope of

the annual audit plan and the audit findings;

– reviewed matters relating to the Group’s key performance indicators, the introduction of International Financial Reporting Standards and proposals for operating and

financial reviews and enhanced business reviews;

– received regular reports from the internal audit function, monitored its activities and effectiveness, and agreed the annual internal audit plan;

– received regular reports from the regulatory compliance function and Risk Committee, and monitored their activities and effectiveness;

– oversaw the Company’s relations with its external auditors including assessing auditor performance and independence, recommending the auditors’ reappointment

and approving the auditors’ fees;

– met with the external auditors and the heads of the internal audit and compliance functions individually, all in the absence of management;

– reviewed the Company’s “whistle blowing” policy to ensure that arrangements were in place for staff to raise, in confidence, matters of concern; and

– considered whether matters existed which could give rise to conflicts of interests between Directors and the Company.

Remuneration Committee The Remuneration Committee comprises Mr F D Rosenkranz (Chairman), Mme C J M Morin-Postel, Sir Robert Smith, Mr F G Steingraber
and Mr O H J Stocken all of whom served throughout the period. All the members of the Committee are independent non-executive Directors. During the year, there were
six meetings of the Remuneration Committee. Mr F D Rosenkranz and Mme C J M Morin-Postel attended all of these meetings, Sir Robert Smith and Mr F G Steingraber
attended five meetings and Mr O H J Stocken attended four meetings.

Details of the work of the Remuneration Committee are set out in the Directors’ remuneration report.

Nominations Committee The Nominations Committee comprises Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Dr P Mihatsch, Mme C J M Morin-Postel,
Mr F D Rosenkranz, Sir Robert Smith and Mr F G Steingraber, all of whom served throughout the period. During the year, there was one meeting of the Nominations
Committee which was attended by all members other than Dr P Mihatsch. The terms of reference of the Nominations Committee provide that the Chairman of the Board
shall not chair the Committee when dealing with the appointment of the Chairman’s successor.

During the year, the Nominations Committee, together with the Board, reviewed the composition of the Board to ensure that the balance of its membership, as between
executive and non-executive Directors, and that its profile, in terms of size and length of service and experience of individual Directors, remained appropriate.

A formal, rigorous and transparent process for the appointment of Directors has been established with the objective of identifying the skills and experience profile required
of new Directors and identifying suitable candidates. The procedure includes the appraisal and selection of potential candidates, including (in the case of non-executive
Directors) whether they have sufficient time to fulfil their roles. Specialist recruitment consultants assist the Committee to identify suitable candidates for appointment.
The Committee’s recommendations for appointment are put to the full Board for approval.

The Company’s major shareholders are offered the opportunity to meet newly-appointed non-executive Directors.

48 3i Report and accounts 2006 Directors’ report

Valuations Committee The Valuations Committee comprises Baroness Hogg (Chairman), Mr O H J Stocken, Mr P E Yea, Mr S P Ball and Dr P Mihatsch, all of whom served
throughout the period. Mr M J Queen served as a member of the Committee until 11 May 2005. There were two meetings of the Valuations Committee during the year.
The members who served throughout the year attended both meetings, save for Dr P Mihatsch who attended one meeting. Mr M J Queen attended the one meeting held
before he ceased to be a Committee member.

During the year, the Valuations Committee considered and made recommendations to the Board on valuations of the Group’s investments to be included in the interim and
annual financial statements of the Group and reviewed the valuations policy and methodology.

The Company Secretary All Directors have access to the advice and services of the Company Secretary. The Company Secretary is responsible for advising the Board,
through the Chairman, on governance matters. The Company’s Articles of Association and the schedule of matters reserved to the Board or its duly authorised Committees
for decision provide that the appointment and removal of the Company Secretary is a matter for the full Board.

Relations with shareholders The Board recognises the importance of maintaining a purposeful relationship with all its shareholders. The Chief Executive and the
Finance Director, together with the Group Communications Director, meet with the Company’s principal institutional shareholders to discuss relevant issues as they arise.
The Chairman maintains a dialogue with shareholders on strategy, corporate governance and Directors’ remuneration as required.

The Board receives reports from the Company’s brokers on shareholder issues and non-executive Directors are invited to attend the Company’s presentation to analysts and
are offered the opportunity to meet shareholders.

The Company also uses its AGM as an opportunity to communicate with its shareholders. At the Meeting, business presentations are made by the Chief Executive and
the Finance Director. The Chairmen of the Remuneration, Audit and Compliance, and Nominations Committees are available to answer shareholders’ questions.

During the year, at the invitation of the Chairman, the Company’s major shareholders met with the Chairman, the Chairmen of the Audit and Compliance Committee and the
Remuneration Committee, the Company Secretary and the Finance Director to discuss matters of corporate governance and corporate responsibility relevant to the Company
and its shareholders. In addition, a formal survey of the perceptions of the Company’s major shareholders was carried out by independent consultants on behalf of the
Company. The results of this survey were considered by the Board.

The Notice of the AGM held on 6 July 2005 was dispatched to shareholders not less than 20 working days before the Meeting. At that Meeting, details of proxy votes
received (including the number of abstentions) were disclosed in accordance with the Combined Code. These details were subsequently made available on the Company’s
website. In accordance with the Company’s Articles of Association, on a poll every member who is present in person or by proxy has one vote for each share held.

Portfolio management and voting policy In relation to unquoted investments, the Group’s approach is to seek to add value to the businesses in which the Group invests
through the Group’s extensive experience, resources and contacts. In relation to quoted investments, the Group’s policy is to exercise voting rights on matters affecting the
interests of the Group.

Internal control The Board is responsible for the Group’s system of internal control and reviews its effectiveness at least annually. Such a system is designed to manage
rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

Through the regular meetings of the Board and the schedule of matters reserved to the Board or its duly authorised Committees for decision, the Board aims to maintain full
and effective control over appropriate strategic, financial, operational and compliance issues. The Board has put in place an organisational structure with clearly defined lines
of responsibility and delegation of authority. Each year, the Board considers and approves a strategic plan and an annual budget. In addition, there are established procedures
and processes for planning and controlling expenditure and the making of investments. There are also information and reporting systems for monitoring the Group’s
businesses and their performance.

Risk Committee is a management committee formed by the Chief Executive whose purpose is to review the business of the Group in order to ensure that business risk is
considered, assessed and managed as an integral part of the business. There is an ongoing process for identifying, evaluating and managing the Group’s significant risks.
This process was in place for the year to 31 March 2006 and up to the date of this report. The process is regularly reviewed by the Board and the Audit and Compliance
Committee and complies with the internal control guidance for Directors on the Combined Code issued by the Turnbull Committee. The process established for the Group
includes:

Policies
– core values, Group standards and Group controls together comprising the Group’s high level principles and controls, with which all staff are expected to comply;

– manuals of policies and procedures, applicable to all business units, with procedures for reporting weaknesses and for monitoring corrective action;

– a code of business conduct, with procedures for reporting compliance therewith;

Processes
– appointment of experienced and professional staff, both by recruitment and promotion, of the necessary calibre to fulfil their allotted responsibilities;

– a planning framework which incorporates a Board approved strategic plan, with objectives for each business unit;

– formal business risk reviews performed by management which evaluate the potential financial impact and likelihood of identified risks and possible new risk areas,

set control, mitigation and monitoring procedures and review actual occurrences identifying lessons to be learnt;

– a comprehensive system of financial reporting to the Board, based on an annual budget with monthly reports against actual results, analysis of variances, scrutiny of

key performance indicators and regular re-forecasting;

– regular treasury reports to the Board, which analyse the funding requirements of each class of assets, track the generation and use of capital and the volume of

liquidity, measure the Group’s exposure to interest and exchange rate movements and record the level of compliance with the Group’s funding objectives;

– a compliance function whose role is to integrate regulatory compliance procedures into the Group’s systems;

– well defined procedures governing the appraisal and approval of investments including detailed investment and divestment approval procedures incorporating appropriate

levels of authority and regular post investment reviews;

3i Report and accounts 2006 Directors’ report 49

Verification
– an internal audit function which undertakes periodic examination of business units and processes and recommends improvements in controls to management;

– the external auditors who are engaged to express an opinion on the annual financial statements;

– an Audit and Compliance Committee which considers significant control matters and receives reports from the internal and external auditors and the regulatory compliance

function on a regular basis.

The internal control system is monitored and supported by an internal audit function which operates on an international basis and reports to management and the
Audit and Compliance Committee on the Group’s operations. The work of the internal auditors is focused on the areas of greatest risk to the Group determined on the
basis of the Group’s risk management process. The external auditors independently and objectively review the approach of management to reporting operating results
and financial condition. In co-ordination with the internal auditors, they also review and test the system of internal financial control and the information contained in the
annual financial statements to the extent necessary for expressing their opinion.

Employment The Group’s policy is one of equal opportunity in the selection, training, career development and promotion of employees, regardless of gender, orientation,
ethnic origin, religion and whether disabled or otherwise.

The Group treats applicants and employees with disabilities equally and fairly and provides facilities, equipment and training to assist disabled employees to do their jobs.
Should an employee become disabled during their employment, efforts are made to retain them in their current employment or to explore the opportunities for their
retraining or redeployment within the Group. The Group also provides financial support, through a Company Disability Scheme, to disabled employees who are unable
to work.

The Group’s principal means of keeping in touch with the views of its employees are through employee appraisals, informal consultations, team briefings, and staff
conferences and surveys. Managers throughout the Group have a continuing responsibility to keep their staff fully informed of developments and to communicate financial
results and other matters of interest. This is achieved by structured communication including regular meetings of employees.

The Group has clear grievance and disciplinary procedures in place, which include comprehensive procedures on discrimination and the Group’s equal opportunities policy.
The Group also has an employee assistance programme which provides a confidential, free and independent counselling service and is available to all staff and their families
in the UK.

There are clearly defined staff policies for pay and working conditions. The Group’s employment policies are designed to provide a competitive reward package which will
attract and retain high quality staff, whilst ensuring that the cost element of these rewards remains at an appropriate level.

The Group’s remuneration policy is influenced by market conditions and practices in the countries in which it operates. All employees receive a base salary and are eligible
for a performance related bonus and to participate in Group share schemes (except in the US) to encourage employees’ involvement in the performance of the Group.
Investment executives may also participate in investment performance plans, co-investment plans and carried interest schemes, which allow executives to share directly in
the future profits on investments. Further details of these plans are set out in the Directors’ remuneration report. Employees participate in local state or company pension
schemes as appropriate to local market conditions.

Charitable and political donations Charitable donations made by the Group in the year to 31 March 2006 amounted to £390,570. Excluding the Company’s matching of
Give As You Earn contributions by staff, charitable donations amounted to £290,028, of which approximately 58% were to causes which aim to relieve poverty or benefit
the community, or both, approximately 23% were to charities which advance education, and approximately 6% were to medical charities. Further details of charitable
donations are set out in the Corporate responsibility section on pages 36 to 41.

In line with Group policy, no donations were made to political parties during the year. Under the Companies Act 1985, as amended, the Company is required to disclose
particulars of any donation to any EU political organisation and EU political expenditure incurred during the year. During the period, 3i plc, the main operating company of
the Group, made a payment to one organisation, detailed below, which may fall within the definition of donations to EU political organisations. This payment was an annual
subscription to the Industry Forum of £3,084.

Policy for paying creditors The Group’s policy is to pay creditors in accordance with the CBI Prompt Payers Code of Good Practice, copies of which can be obtained from
the Confederation of British Industry at Centre Point, 103 New Oxford Street, London WC1A 1DU. The Company had no trade creditors during the year. 3i plc had trade
creditors outstanding at the year end representing on average 15 days purchases.

Statement of Directors’ responsibilities The Directors are required by UK company law to prepare financial statements which give a true and fair view of the state of
affairs of the Company and the Group as at the end of the period and of the profit for the period. The Directors have responsibility for ensuring that proper accounting
records are kept which disclose with reasonable accuracy the financial position of the Group and enable them to ensure that the financial statements comply with the
Companies Act 1985. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities. Suitable accounting policies, which follow generally accepted accounting practice and are explained in the notes to the financial statements,
have been applied consistently and applicable accounting standards have been followed. In addition, these financial statements comply with International Financial Reporting
Standards as adopted by the European Union and reasonable and prudent judgments and estimates have been used in their preparation.

Going concern The Directors are satisfied that the Company and the Group have adequate resources to continue to operate for the foreseeable future. For this reason, they
continue to adopt the “going concern” basis for preparing the financial statements.

50 3i Report and accounts 2006 Directors’ report

Auditors’ independence and objectivity Subject to annual appointment by shareholders, auditor performance is monitored on an ongoing basis and formally reviewed
every five years, the next review being scheduled for 2008. The Audit and Compliance Committee reviewed auditor performance during the year and concluded that
Ernst & Young LLP’s appointment as the Company’s auditors should be continued.

The Committee recognises the importance of ensuring the independence and objectivity of the Company’s auditors. It reviews the nature and extent of the services
provided by them, the level of their fees and the element comprising non-audit fees. The Audit and Compliance Committee Chairman is notified of all assignments allocated
to Ernst & Young over a set threshold, other than those related to due diligence within the Group’s investment process where the team engaged would be independent of the
audit team. Safeguards have been put in place to reduce the likelihood of compromising auditor independence, including the following principles which are applied in respect of
services provided by the auditors and other accounting firms and monitored by the Audit and Compliance Committee:

– services required to be undertaken by the auditors, which include regulatory returns, formalities relating to borrowings, shareholder and other circulars. This work is

normally allocated directly to the auditors;

– services which it is most efficient for the auditors to provide. In this case, information relating to the service is largely derived from the Company’s audited financial records;

for example, corporate tax services. This work is normally allocated to the auditors subject to consideration of any impact on their independence;

– services that could be provided by a number of firms including general consultancy work. All significant consultancy projects are normally put out to tender and work would
be allocated to the auditors only if it did not present a potential threat to the independence of the audit team. Included in this category is due diligence work relating to the
investment process. If this service were to be provided by the auditors, the specific team engaged would be independent of the audit team.

Details of the fees paid to the auditors are disclosed in note 6 to the financial statements on page 72.

Audit information Pursuant to section 234ZA (2) of the Companies Act 1985, each of the Directors confirms that: (a) so far as they are aware, there is no relevant audit
information of which the Company’s auditors are unaware; and (b) they have taken all steps they ought to have taken to make themselves aware of any relevant audit
information and to establish that the Company’s auditors are aware of such information.

Appointment of auditors In accordance with section 384 of the Companies Act 1985, a resolution proposing the reappointment of Ernst & Young LLP as the Company’s
auditors will be put to members at the forthcoming Annual General Meeting.

By order of the Board

A W W Brierley
Secretary

10 May 2006

Registered Office
16 Palace Street
London SW1E 5JD

3i Report and accounts 2006 51

Directors’ remuneration report

Remuneration Committee
Composition and terms of reference The Remuneration Committee (the “Committee”) comprises only independent non-executive Directors. Its members during
the year to 31 March 2006 (the “year”) were Mr F D Rosenkranz (the Committee Chairman), Mme C J M Morin-Postel, Sir Robert Smith, Mr F G Steingraber and
Mr O H J Stocken. None of the Committee members sits with any executive Director on the board of any other quoted company. The Committee’s terms of reference take
into account the provisions of the Combined Code on corporate governance and are available on the Company’s website.

Activities during the year The Committee met six times during the year to consider remuneration policy and to determine, on behalf of the Board, the specific
remuneration packages for each of the executive Directors and the other members of the Management Committee. The Committee also determined the fees payable to the
Chairman of the Board.

During the year the Committee considered and, where appropriate, made recommendations to the Board on the Company’s framework of executive remuneration and its
costs to ensure that remuneration policy continued to support the Group’s strategy.

The Committee considered performance for the period against key performance indicators in assessing executive Director performance for bonus awards and reviewed the
key performance indicators to be used for remuneration purposes for periods from 1 April 2006.

The Committee reviewed the long-term incentives available to executives. It agreed to the renewal of carried interest arrangements for a further period of two years from
1 April 2006 and approved the introduction of new co-investment arrangements for investment executives from the same date.

The Committee considered the impact of the adoption of International Financial Reporting Standards on performance conditions attached to outstanding share awards and
determined appropriate adjustments to be made to awards and performance conditions as a result of the Company’s return of capital and share consolidation. In each case,
the aim of the Committee was to achieve neutrality of treatment, neither advantaging nor disadvantaging participants.

The Committee considered the impact on the Company’s pension arrangements of the changes to taxation arrangements which came into force on 6 April 2006 and also
reviewed pension arrangements generally in the light of recent legislative changes and other factors. The Company decided that the defined benefit contributory pension
scheme operated in the UK would not be offered to new entrants from 1 April 2006.

Further details of these matters are set out below. Details of Committee members’ attendance at the Committee’s meetings are set out in the Directors’ report.

Assistance to the Committee Persons who materially assisted the Committee with advice on Directors’ remuneration in the year were: PricewaterhouseCoopers LLP
(“PwC”), an external remuneration consultant appointed by the Committee; the Chairman of the Board, Baroness Hogg; the Chief Executive, Mr P E Yea; and the Group’s
Human Resources Director, Ms D R Collis (Ms D R Collis was not appointed by the Committee). Baroness Hogg, Mr P E Yea and Ms D R Collis did not advise the Committee on
their own remuneration. During the year, PwC also provided the Group’s businesses with taxation advice, HR services, due diligence services and services of an employee on
secondment.

Background The Company operates in the private equity and venture capital sector and is a constituent of the FTSE 100 Index. The majority of the Company’s competitors
are either partnerships of individuals managing funds for investment on behalf of third parties or unquoted subsidiaries of larger banking or financial services groups.
The private equity and venture capital sector continues to be well funded and the ability of trained and experienced executives to gain substantial rewards in the industry
remains. Maintaining a remuneration structure to support the recruitment and retention of senior executives continues to be critical. In addition to cash bonuses,
it is market practice for investment executives in the private equity and venture capital sector to be given the opportunity to participate in carried interest schemes which
allow executives to share directly in the future profits on investments, subject normally to a variety of conditions relating to the performance of those investments.
These are often coupled with co-investment schemes, which require participants in carried interest schemes to put money of their own at risk.

The left hand graph below compares the Company’s total shareholder return (“3i TSR”) for the five financial years to 31 March 2006 with the total shareholder return of the
FTSE All-Share Index. The Directors consider that since the Company invests in a broad range of industrial and commercial sectors, this continues to be the most appropriate
index against which to compare the Company’s total shareholder return. Additional information is provided by the right hand graph below, which compares percentage
changes in the Company’s diluted net asset value per share over each of the last five financial years (with dividends reinvested), with the Company’s total shareholder return
and the FTSE All-Share Index total return over the same periods. This has been included as changes in net asset value have been one of the tests used in the Company’s
long-term incentive schemes.

3i total shareholder return versus FTSE All-Share total return (cumulative)
for the years to 31 March

3i diluted NAV, 3i total shareholder return and FTSE All-Share total return
(non-cumulative) for the years to 31 March

140

120

100

–20

–40

–60

2001

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

3i TSR

FTSE All-Share

rebased to 100 at 31 March 2001

3i diluted NAV (with dividends reinvested)

3i TSR

FTSE All-Share

52 3i Report and accounts 2006 Directors’ remuneration report

Directors’ remuneration policy The Committee has made no major changes in Directors’ remuneration policy over the year, although implementation of that policy has
continued to develop, notably with the introduction of co-investment plans for executives below Director level. The Committee has decided to seek shareholder approval at
the 2006 AGM to the participation in co-investment plans of executive Directors responsible for investment businesses. These plans will ensure that senior executives
cannot receive carried interest without putting some of their own money at risk. Further details are provided below.

Non-executive Directors The Company’s policy for the financial year to 31 March 2007 (the “coming year”) for non-executive Directors (including the Chairman)
continues to be to pay fees which are competitive with the fees paid by other financial services companies. Non-executive Directors are not eligible for bonuses, share
options, long-term incentives, pensions or performance related remuneration. The Company does not currently expect its policy on non-executive Directors’ remuneration for
subsequent financial years to change significantly. Non-executive Directors’ fees (other than those of the Chairman, which are determined by the Committee) are regularly
reviewed and determined by the Board as a whole, within the limits set by the Company’s Articles of Association, having taken advice from PwC. During the year the basic
non-executive Director’s fee was £40,000 per annum. The annual fee for membership of each of the Audit and Compliance, Remuneration and Valuations Committees was
£3,000 and the annual fee for a Committee Chairmanship was £10,000. No fees were paid to Directors in respect of their membership of Nominations Committee.

Executive Directors The Company’s policy for the coming year for executive Directors is to provide remuneration and other benefits sufficient to attract, retain and
motivate executives of the calibre required. Variable remuneration (comprising annual cash bonuses, deferred share bonuses and long-term incentives) is intended to form a
substantial component of total remuneration.

(a) Salaries The Committee is sensitive to wider issues including pay and employment conditions elsewhere in the Group when setting executive Directors’ pay levels and
takes into account the Company’s reward strategy generally, before deciding specific packages for the executive Directors. The table below provides details of the percentage
increases in average base salaries per annum for members of Management Committee (including executive Directors) and other executive staff in the UK in the period from
31 March 2005 to 31 March 2006.

Management Committee (including executive Directors)
Other UK executive staff
Salaries for Chief Executive and Finance Director The Company’s policy in the coming year in relation to the remuneration of the Chief Executive and Finance Director is
to pay salaries comparable to those paid by other financial services companies of broadly similar UK market capitalisation. Salary supplements are paid to Mr P E Yea and
Mr S P Ball to enable them to make additional pension provision.
Salaries for Directors responsible for investment business The Company’s policy in the coming year in relation to the remuneration of Directors with responsibility for
investment business is to provide salaries comparable to those paid in the private equity and venture capital industry.

% increase from 31 March 2005
to 31 March 2006
5.12%
10.6%

(b) Annual bonuses Employees, including executive Directors, are eligible for discretionary annual bonuses. The Committee determines target bonuses for each executive
Director at the beginning of each year. These are intended to be competitive with arrangements in the financial services industry or, in the case of Directors responsible for
investment businesses, the private equity and venture capital industry. Target bonuses are achievable if corporate performance targets, personal performance targets and, in
the case of Directors responsible for investment businesses, business targets are met. During the year, executive Directors’ target bonuses were 90% of base salary except
that the target bonus for the executive Director responsible for Growth Capital was 100%. Bonuses above target will only be paid for outstanding performance, and the
maximum is twice the target bonus. Bonuses above 1.5 times target will be in shares deferred for two years and the Committee may decide that a higher proportion of
bonus should be paid in deferred shares. The Committee retains discretion to make adjustments to bonus arrangements in appropriate circumstances.

The main measures used to assess corporate performance for the year were: total shareholder return and change in net asset value per share both in absolute terms and
compared with the FTSE All-Share Index; total non market-driven return; and one to three year internal rate of return compared with performance of the private equity and
venture capital industry as a whole. In forming its overall judgment the Committee also takes into account a number of more detailed indicators of performance and activity,
such as the level of investment, realised profits and costs. The Committee’s view, after reviewing performance of the Company against indicators outlined above, was that
corporate performance merited bonus levels above target. As this report shows, total shareholder return was well ahead of the FTSE All-Share Index; total return was more
than 50% up compared to the year to 31 March 2005, and the greater part of this came from non market-driven factors. The two main business lines (Buyouts and Growth
Capital) performed ahead of their published return targets during the year, and IRR comparisons with the European private equity industry indicated strong outperformance
by the Company over the three-year period. Realisations were very high, and investment was significantly higher than in the year to 31 March 2005. While costs had risen,
these were mainly associated with the opening of new offices and the development of the Group’s business lines (for example, establishing an infrastructure team) and
increases in variable remuneration required to bring the Company more in-line with the private equity industry.

The Committee’s combined assessment of corporate and personal performance in the year led to awards in the upper part of the bonus range for all three executive
Directors. Within the maximum of 2 times target bonus, combined awards ranged from 1.7 to 1.83 times target, which translated into 1 times salary in cash and
0.53 to 0.75 times in shares deferred for two years.

For the coming year, the target bonuses for the Chief Executive and Finance Director will again be 90% of base salary (excluding salary supplements). In order to shift the
remuneration of the executive Director responsible for Growth Capital further towards the private equity model, he will receive no increase in salary but an increase in his
target bonus to 125% of base salary. Maximum bonuses for all executive Directors will continue to be twice target bonus.

3i Report and accounts 2006 Directors’ remuneration report 53

(c) Long-term incentives The Committee determines the levels of long-term incentives. In the coming year, long-term incentive arrangements for the Chief Executive and
Finance Director will consist of share options and performance share awards under The 3i Group Discretionary Share Plan (“the Discretionary Share Plan”). Executive Directors
responsible for investment business are eligible to participate in carried interest arrangements, as approved by shareholders in 2004. Subject to shareholder approval at the
2006 AGM, executive Directors responsible for investment business will also be eligible to participate in co-investment arrangements and will then not be allowed to
participate in carried interest arrangements unless they agree to participate in the co-investment arrangements.
The Discretionary Share Plan The Discretionary Share Plan is a shareholder approved executive share plan conforming with the Association of British Insurers’ guidelines on
dilution limits. The level of annual awards of options and performance shares is reviewed each year taking account of market practice, individual performance, the specific
circumstances facing the Company and calculations of the relative fair values of share options and performance shares. During the year the Company’s policy was that the
maximum annual award of options should be market price options with an aggregate exercise price of six times salary or its equivalent fair value in performance shares.
The performance targets for options and performance shares granted in the year are set out on pages 54 and 56 respectively. During the year awards with face values of
approximately three times salary in share options and 1.1 times salary in performance shares were made to the Chief Executive and 4.8 times salary in share options and 0.4
times salary in performance shares were made to the Finance Director. In March 2005, the fair values of share options and performance shares under the Discretionary Share
Plan were calculated and the fair value of a performance share at that time was estimated to be 1.9 times the fair value of an option. This ratio of fair values was used in
finalising the long-term incentive awards granted in July 2005.

To clarify the framework, for the coming year the Committee proposes to maintain the limit of six times salary in nominal terms for an award made in share options
and set a limit of three times salary for an award in performance shares, with any combination being subject to an overall limit on the fair value of all share-based
awards in the year. For the coming year this limit will be two times salary. The Committee’s remuneration consultant will calculate the fair values of share-based awards.
At 31 March 2006, these fair values were calculated by the Committee’s remuneration consultant to be 27% of face value for share options and 58% of face value for
performance shares. These fair values are subject to re-calculation in changing market conditions.
Carried interest plans At the Company’s AGM on 7 July 2004, shareholders approved the participation of executive Directors responsible for investment business in
the carried interest plans established for the Group’s investment executives. The Chief Executive and the Finance Director are not eligible to participate in these plans.
Decisions on an executive Director’s participation are taken by the Committee taking into account market practice and the Director’s investment responsibilities.

The carried interest plans are designed to follow best practice in the private equity and venture capital industry. The total carried interest, for all investment executives eligible
to participate in each Plan, does not exceed 15% of the relevant pool of investments made over a specific period (usually two years). Participants are entitled to the profits
made on the proportion of the total carried interest allocated to them subject to the satisfaction of a performance condition which is determined in advance by the
Committee, in line with market conditions at the time of award. The proportion of total carried interest that is allocated to an executive Director depends on, among other
things, the size of his investment team.

Following introduction of the co-investment arrangements referred to below, the Company’s policy is that awards of carried interest will only normally be made to executives
who have taken up the opportunity offered to them of participating in those co-investment arrangements.
Co-investment Plan Shareholder approval is being sought at the 2006 AGM to enable executive Directors responsible for investment business to participate in co-investment
plans established for the Group’s investment executives. Decisions on an executive Director’s participation will be taken by the Committee taking into account market practice
and the investment responsibilities of the executive Director concerned. If shareholder approval is granted, the policy of only normally awarding carried interest to executives
who have taken up the opportunity to participate in co-investment arrangements will be extended to executive Directors.

Individuals will participate in co-investment plans by investing their own money in the plan relating to the area of the business in which they work. Plans will be organised by
business line and geography with each plan investing in all investments made by the Group within the relevant business line and geography over a specified time period
(usually two years). Normally participants will provide at least one third of the capital to finance the plans and the Group not more than two thirds. The plans will invest in
investments alongside the Group on terms which are in all material respects the same as the terms on which the Group and its funds under management invest. For the
period 2006 to 2008 the plans will fund 1% (2% in the US) of the total investment made by the Group and its funds under management, including the plans. Plans will share
(in proportion to their investment) in the profits and losses made on those investments in the same way as the Group and its funds under management. Proceeds realised on
investments made by the plans will be applied first to repaying the amount provided by the Group together with a management charge and a preferential return fixed by
Remuneration Committee. For the period 2006 to 2008 this will be 2% over LIBOR (or equivalent) per annum compound. The remaining proceeds will be distributed to
participants as a return on their investment.

The Company does not currently expect its policy on executive Directors’ remuneration for subsequent financial years to change significantly.

54 3i Report and accounts 2006 Directors’ remuneration report

Directors’ remuneration during the year

Executive Directors
P E Yea (note 5)
S P Ball (note 5)
M J Queen (notes 5 and 6)
Non-executive Directors
Baroness Hogg (note 7)
O H J Stocken
Dr P Mihatsch
C J Morin-Postel
F D Rosenkranz
Sir Robert Smith
F G Steingraber
Former Directors
Dr J R Forrest (until 7 July 2004)
M M Gagen (until 23 August 2004) (note 8)
B P Larcombe (until 7 July 2004)
R W Perry (until 6 July 2005) (notes 6 and 8)
Total

(note 1)

(note 2)

(note 3)

Bonus
£’000

675
420
400

Deferred
share bonus
£’000

437
223
300

Salary
and fees
£’000

Salary
supplements
£’000

Total salary,
fees and
supplements
£’000

660
427
466

260
90
43
46
56
46
43

200
62

860
489
466

260
90
43
46
56
46
43

(note 4)

Benefits

Total
Total
remuneration
remuneration
Year to
Year to
in kind 31 March 2006 31 March 2005
£’000
£’000
£’000

17
2
2

1,989
1,134
1,168

1,137
128
884

260
90
43
46
56
46
43

–
–
–
150
5,025

220
83
21
40
48
22
37

11
325
437
761
4,154

146
2,283

262

146
2,545

1,495

960

4
25

Notes
1 Mr P E Yea and Mr S P Ball received salary supplements to enable them to make additional pension provision.
2 Bonuses relate to the year to 31 March 2006 and are expected to be paid in June 2006.
3 Deferred share bonuses will be paid in shares in the Company, deferred for two years.
4 “Benefits in kind” were company car (Mr P E Yea and Mr R W Perry) and health insurance (Mr P E Yea, Mr S P Ball, Mr M J Queen and Mr R W Perry).
5 In addition to the salaries and fees disclosed, executive Directors retained fees from outside directorships as follows: Mr P E Yea, £55,417 (Vodafone Group plc);

Mr S P Ball, £69,442 (Leica Geosystems AG); and Mr M J Queen, £48,765 (Northern Rock plc).

6 Salaries and fees for Mr M J Queen and Mr R W Perry include payments of deferred cash bonuses of £54,000 and £45,000 respectively granted in 1998, which became

payable on exercise of deferred share bonus awards under the Management Equity Investment Plan as described on page 58.

7 Baroness Hogg’s fees, which had remained unchanged at £220,000 per annum from her appointment as Chairman on 1 January 2002 to 31 March 2005, were increased

to £260,000 per annum with effect from 1 April 2005.

8 Amounts payable to former Directors were as follows: Mr R W Perry, £95,000 (consultancy); Mr M M Gagen, £156,646 (payments equal to base salary for the period
1 April 2005 to 30 August 2005 paid in accordance with the terms of his former employment) and £63,349 (payments under interests in carried interest plans retained
following cessation of employment); and Mr W J R Govett, £8,000 (director’s fees from Gardens Pension Trustees Limited, a trustee of the 3i Group Pension Plan).

Options to subscribe for shares Options granted under the Company’s executive share option plans entitle executives to acquire ordinary shares, at an exercise price based
on market price at the date of grant, from the third until the tenth anniversaries of grant to the extent, normally, that a performance condition set at the time of grant has
been satisfied over a three year performance period.

The performance condition for awards granted in the year was as follows:

Annual percentage compound growth in net asset value per share with dividends reinvested, relative to the annual percentage change in RPI
Below RPI +3 percentage points
At least RPI +3 percentage points
At levels of performance between RPI +3 percentage points and RPI +8 percentage points the grant will vest pro rata
At least RPI +8 percentage points

Percentage of the grant vesting
0%
30%

100%

This represented a toughening of the performance condition compared to the year to 31 March 2005 when the performance condition was the same save that the
percentage of the award vesting at the minimum performance level was 50% instead of 30%.

For grants made between 1 April 2001 and 31 March 2004 the condition requires annual percentage compound growth in net asset value per share (with dividends
reinvested) of RPI plus 5 percentage points to achieve minimum vesting of 50% of the award and growth of RPI plus 10 percentage points for full vesting. For these
grants, if the minimum threshold for vesting is not achieved in the three years from grant, the period is extended to four and then five years but from the same base year.
For options granted after 31 March 2004 there is no opportunity for the performance condition to be retested after the three year performance period.

These conditions are based on net asset value per share increases to enable a significant proportion of executive Directors’ potential remuneration to be linked to an increase
in the assets per share of the Company. The intention is to approximate to the performance conditions attached to carried interest schemes in the private equity and venture
capital industry whilst retaining the essential feature of aligning executives’ interests with those of the Company’s shareholders. The performance conditions were chosen as
appropriately demanding in the prevailing market conditions at the time of grant.

3i Report and accounts 2006 Directors’ remuneration report 55

Options held by Directors who held office during the year were as follows.

P E Yea

S P Ball

M J Queen

R W Perry (until 6 July 2005)

Year of grant
2004
2005

2005
2005

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005

1995
1996
1997
1997
1998
1999
2000
2001
2002
2003
2004

Held at
1 April 2005
314,410

314,410

–
40,850*
37,073*
62,177
36,002
30,795
114,000
184,318
57,218
89,552

651,985
1,600*
38,700*
40,800*
58,378*
29,381*
10,734*
20,294
100,000
145,670
35,211
40,422
521,190

Granted
during
the year
–
259,740
259,740
245,022
48,100
293,122

44,733
44,733

–

during
the year

Held at
Exercised 31 March 2006
(or retirement
if earlier)
– 314,410
– 259,740
– 574,150
– 245,022
–
48,100
– 293,122
–
40,850
37,073*
–
62,177
–
36,002
–
–
30,795
– 114,000
– 184,318
57,218
–
89,552
–
44,733
–
40,850 655,868
–
1,600
38,700*
–
40,800*
–
58,378*
–
29,381*
–
10,734*
–
–
20,294
– 100,000
– 145,670
35,211
–
40,422
–
1,600 519,590

Exercise
price
£
5.73
6.93

6.53
6.93

4.50
5.20
6.64
7.28
13.75
10.00
6.73
5.68
6.03
6.93

3.61
4.50
4.91
5.12
5.67
7.28
13.75
10.00
6.73
5.68
6.03

Market price
on date of
exercise
£

9.18

6.57

Date from
which
exercisable
21.07.07
21.06.08

Expiry date
20.07.14
20.06.15

17.05.08
21.06.08

16.05.15
20.06.15

25.06.99
16.06.00
22.06.01
06.07.02
28.06.03
09.08.04
27.06.05
25.06.06
23.06.07
21.06.08

03.07.98
25.06.99
06.01.00
17.12.00
16.12.01
06.07.02
28.06.03
09.08.04
27.06.05
25.06.06
23.06.07

24.06.06
15.06.07
21.06.08
05.07.09
27.06.10
08.08.11
26.06.12
24.06.13
22.06.14
20.06.15

02.07.05
24.06.06
06.07.06
06.07.06
06.07.06
06.07.06
27.06.10
08.08.11
26.06.12
24.06.13
22.06.14

The performance condition has not yet been met for those options shown in blue.
*Awarded before appointment as a Director.
Notes
1 The fair values of share option awards made in the year were as follows: Mr P E Yea, £462,600; Mr S P Ball, £496,867; and Mr M J Queen, £79,670. These fair values
were calculated by the Committee’s remuneration adviser using a Monte Carlo simulation based on appropriate assumptions. The fair value of the share options granted
during the year was calculated as being 25.7% of the market value at the date of grant of the shares under option.

2 During the year a special dividend of 40.7p per ordinary share of 50p was paid. This was followed by a share consolidation of 16 new ordinary shares of 531/8p for

every 17 ordinary shares of 50p. This was designed to maintain the price per share, other things being equal, at the same level after the special dividend as before it.
As a result of this consolidation there was no need to adjust the number of shares comprised in option awards or the exercise price per share and options took effect
following the consolidation as options over new ordinary shares of 531/8p.

3 Options granted before 31 March 2001 were granted under The 3i Group 1994 Executive Share Option Plan (the “1994 Plan”) and are normally exercisable between

the third and tenth anniversaries of grant provided a performance condition has been met over a rolling three year period. This requires adjusted net asset value per share
(after adding back dividends paid during the performance period) at the end of the three year period to equal or exceed the net asset value per share at the beginning of
the period compounded annually over the period by the annual increase in the RPI plus 4%.

4 Options granted after 31 March 2001 were granted under the Discretionary Share Plan and the performance conditions are as set out above on page 54.
5 The Committee determines the fulfilment of performance conditions based on calculations which are independently reviewed by the Company’s auditors.

These performance conditions require net asset value per share at the beginning and end of the performance period to be calculated on a consistent basis using the
same accounting policies. Where accounting policies have altered between the beginning and end of the period, the Committee adjusts the net asset value calculations
appropriately to ensure consistency. The Committee also has power to adjust the calculations to reflect circumstances including changes to the capital of the Company.
During the year the Committee made appropriate adjustments to reflect the consolidation of the Company’s share capital and the repurchase by the Company of its
own shares.

6 On the retirement of Mr R W Perry on 6 July 2005, under the rules of the 1994 Plan, the exercise periods of options granted to him before 2000 altered so as to expire
on 6 July 2006 and, under the rules of the Discretionary Share Plan, the exercise periods of the options granted to him in 2000 to 2004 altered so as to expire on the
earlier of six months following the satisfaction of the performance condition and the original expiry date.

7 The mid-market price of shares in the Company at 31 March 2006 was 940.5p and the range during the period 1 April 2005 to 31 March 2006 was 635.5p to 970.5p.

Aggregate gains made by Directors on share option exercises in the year (including on exercise of awards under the Management Equity Investment Plan detailed on
page 58) were £199,158 (2005: £318,380). The amount attributable to the highest paid Director during the year was £Nil (amount attributable to the highest paid
Director in 2005: £Nil). Options under the 1994 Plan and the Discretionary Share Plan were granted with exercise prices not less than prevailing market value.
Options were granted at no cost to the option holder. No options held by Directors lapsed during the year.

8 As at 31 March 2006 there were no shares available under the 5% dilution limit applicable to the Discretionary Share Plan arising from the guidelines issued by the

Association of British Insurers and approximately 24 million shares were available under the 10% dilution limit arising from those guidelines applicable to “all employee”
plans. In addition, approximately 2.4 million unallocated shares were held in an employee trust and were available for awards under the Discretionary Share Plan.

56 3i Report and accounts 2006 Directors’ remuneration report

Performance Share Awards These are awards of shares which are transferred to the participant subject to forfeiture in certain circumstances. Awards are subject to a
performance condition determining whether awards vest. Non-vested shares are forfeited. Shares vest based on the Company’s “percentage rank” by total shareholder return
for three years from grant (averaged over a 60 day period) compared to a comparator group. This group consists of the FTSE 100 Index constituents at the grant date
(adjusted for mergers, demergers and delistings during the performance period). A company’s percentage rank is its rank in the comparator group divided by the number of
companies in the group at the end of the performance period expressed as a percentage. At a percentage rank below 50% no shares vest. At a rank of 50%, 35% of the
shares vest and at 75% all the shares vest. Between these points shares vest pro rata. This condition was chosen to align the interests of participants and shareholders by
linking remuneration to shareholder returns relative to a comparator index of which the Company is a constituent. The Committee will determine whether the condition has
been met based on calculations prepared by the Committee’s remuneration consultant.

P E Yea

S P Ball

M J Queen

R W Perry (until 6 July 2005)

Held at
1 April 2005
179,663

(Note 2)
Adjustment
during the year

(2,823)

179,663

(2,823)

–
–

42,913
89,552
132,465

26,408
23,098
49,506

(675)
(1,407)
(2,082)

–
–
–

Granted
during
the year
–
90,484
90,484

25,134
25,134

–
–
–

Held at
Vested 31 March 2006 Market price on
date of grant
during
£
the year
5.73
6.98

(or retirement
if earlier)
– 176,840
90,484
–
– 267,324

Date
of vesting
21.07.07
14.07.08

–
–

25,134
25,134

42,238
–
–
88,145
– 130,383

–
–
–

26,408
23,098
49,506

6.98

14.07.08

5.56
6.03

24.06.06
23.06.07

5.56
6.03

24.06.06
23.06.07

Notes
1 The fair values of performance share awards made during the year were as follows: Mr P E Yea, £310,737; and Mr S P Ball, £86,314. These fair values were calculated by
the Committee’s remuneration adviser using a Monte Carlo simulation based on appropriate assumptions. The fair value of the performance shares awarded during the year
was calculated as being 49.2% of the market value at the date of award of the shares subject to the award.

2 Shares held at 1 April 2005 are ordinary shares of 50p each. “Adjustment during the year” refers to the change in the number of shares in the award resulting from the

consolidation of the Company’s shares on 11 July 2005 and the re-investment of the special dividend paid on 22 July 2005 in further shares which, in accordance with the
rules of the Plan, are treated as forming part of the original award. Shares held at 31 March 2006 are ordinary shares of 531/8p each.

3 During the year, the Committee agreed that ordinary dividends on performance share awards would be reinvested net of tax in further Company shares. These shares,
which are in addition to the above performance share awards, are required to be held for the remaining vesting period to which they relate, but are not forfeitable.
Such shares attributable to Directors during the year were as follows: Mr P E Yea, 2,629 shares; Mr S P Ball, 115 shares; and Mr M J Queen, 1,630 shares.

Share Incentive Plan The HM Revenue and Customs approved Share Incentive Plan is open to all eligible UK employees and is intended to encourage employees to invest
in the Company’s shares and is accordingly not subject to a performance condition. Participants invest up to £125 per month from pre-tax salary in shares (“partnership
shares”). For each partnership share the Company grants two free shares (“matching shares”) which are normally forfeited if employment ceases (other than on retirement)
within three years of grant. Dividends are reinvested in further shares (“dividend shares”).

Held at
1 April 2005
Partnership
shares
92
–
769
785

Held at
1 April 2005
Matching
shares
184
–
1,538
1,570

Held at

Held at
1 April 2005 31 March 2006 31 March 2006 31 March 2006
Dividend
shares
35
4
268
78*

Partnership
shares
276
154
913
842*

Matching
shares
555
310
1,827
1,684*

Dividend
shares
–
–
74
78

P E Yea
S P Ball
M J Queen
R W Perry (until 6 July 2005)
*As at his retirement date.
Notes
1 Shares at 1 April 2005 were ordinary shares of 50p each. On 11 July 2005 shares in the plan were consolidated on the same basis as the Company’s other issued shares.

Shares at 31 March 2006 were ordinary shares of 531/8p.

2 In the period from 1 April 2006 to 3 May 2006 inclusive, Mr P E Yea, Mr S P Ball and Mr M J Queen have acquired a further 14, 13 and 14 partnership shares and 28,

26 and 28 matching shares respectively. During the year, shares were awarded at prices between 645.67p and 955.33p per share and with an average price of
756.91p per share.

Carried interest plans The operation of the Group’s carried interest plans is described on page 53. In the table below scheme interests of Directors who served in the
year are expressed in terms of a percentage of the relevant pool of investments in respect of which the participant is entitled to the profits subject to fulfilment of relevant
conditions. The conditions include a requirement that, normally, before any payment to a participant becomes due, the Group (and funds under its management)
must first have received back the amount of its investment in the relevant vintage together with a 1.5% per annum management charge and a hurdle rate of return
of 8% per annum compound on its investment.

The table also shows the accrued value of the interest at the end of the year. This accrued value is calculated on the basis set out in note G on page 67. Accrued values can
increase and decrease with investment valuations and other factors and will not necessarily lead to a payment of that amount to the participant.

3i Report and accounts 2006 Directors’ remuneration report 57

Interests of Directors in carried interest plans during the year were as follows.

Scheme interests, being the percentage of the investment vehicle
held which in turn invests in a pool of investments and is entitled to
participate in the realised profits

As at
1 April 2005

As at
Awarded in year 31 March 2006

End of period
over which
interests
may vest

Amounts

respect of
scheme interests

receivable in Accrued value
of Scheme
interest as at
vested in year 31 March 2006
£

M J Queen
Pan-european Growth Capital Carry Scheme 2005-06
Infrastructure 2005-06

Nil
Nil

80%
18.5%

01.04.10
26.07.10

Nil
Nil

Pension arrangements The executive Directors are members of the 3i Group Pension Plan which is a defined benefit contributory scheme which from 1 April 2006 will
not be offered to new entrants. For members who joined the plan before 1 September 2002, the plan provides for a pension, subject to HM Revenue & Customs limits,
of two thirds of final pensionable salary (limited, in the case of members joining on or after 1 June 1989, to a plan earnings cap) on retirement (normally at age 60)
after 25 years’ service and less for service under 25 years. For members who joined the plan from 1 September 2002 up to 31 March 2006 inclusive (which include
Mr P E Yea and Mr S P Ball) 33.3 years’ service is required to accrue a pension of two thirds of final pensionable salary (limited to the earnings cap). The plan also provides
death-in-service cover of four times final pensionable salary (limited to the earnings cap where this applies), pensions payable in the event of ill health and spouses’ pensions
on death. Further details of the plan are set out in note 9 to the financial statements on pages 74 and 75.

Pension entitlements of Directors who served during the year are set out below. The final column of the table gives the difference between the transfer value of the
Director’s pension entitlement at the start of the year and the transfer value at the end, less the contributions paid by the Director. The difference over the year is the result
of any extra benefits earned over the year and any change in the value placed on £1 per annum of pension by the actuaries. The value placed on £1 per annum of pension
reflects financial conditions at the time (eg the level of the stock market or returns available on government bonds) and the method and assumptions the actuaries use to
calculate transfer values from time to time. Changes in the value placed on £1 per annum of pension can be positive or negative and can have much greater impact than the
actual pension benefits earned. The Trustees of the plan strengthened the transfer value basis during the course of the year and so the value placed on £1 per annum of
pension at the end of the year was greater, for these members, by about 30% to 35% than at the start of the year. Therefore the figures in the final column below should
be interpreted bearing this in mind.

(note 1)

(notes 1 and 2)

(notes 1 and 3)

(note 1)

(notes 1 and 2)

(note 4)

(note 5)

Increase
in accrued
pension
(excluding
pensionable inflation) during
the year to

Complete
years of

Director’s own
contributions
(excluding AVCs)
paid into the

Increase
in accrued
pension
(including
plan during inflation) during
the year to
the year to

Age at

service at

Total
accrued
pension at

Transfer
value of the
accrued
benefits at
31 March 2006 31 March 2006 31 March 2006 31 March 2006 31 March 2006 31 March 2006 31 March 2006 31 March 2005
£’000
18.1
3.1
1,613.7
4,076.7

£’000
58.7
31.6
2,441.7
4,160.8

£’000 p.a.
2.2
2.2
10.4
1.5

£’000 p.a.
2.2
2.2
15.4
1.9

£’000 p.a.
3.7
2.5
200.0
182.9

£’000
5.3
5.3
13.0
0.7

Transfer
value of the
accrued
benefits at

1
1
18
19

51
45
44
59

(note 6)
Difference
between
transfer values
at start and
end of the
accounting year,
less Director’s
contribution
£’000
35.3
23.2
815.0
83.4

P E Yea
S P Ball
M J Queen
R W Perry (until 24 April 2005 – see note 1)

Notes
1 In the case of Mr R W Perry, 24 April 2005, being the date on which he left pensionable service.
2 The increase in accrued pension shown reflects the difference between deferred pensions on leaving, payable from age 60.
3 The pensions shown are deferred pensions payable from age 60.
4 The transfer values have been calculated on the basis of actuarial advice in accordance with the relevant professional guidance applicable at 31 March 2006 (Actuarial
Guidance Note GN11 (version 9.1)). Mr Perry ceased pensionable service in the plan on 24 April 2005 and transferred out the cash equivalent transfer value of his
benefits on 3 May 2005. The figure shown for him is the transfer value paid on 3 May 2005.

5 The transfer values have been calculated on the basis of actuarial advice in accordance with the relevant professional guidance applicable at 31 March 2005 (Actuarial

Guidance Note GN11 (version 9.1)).

6 In the case of Mr Perry, the difference between the transfer value at the start of the year and the transfer value that was paid out in respect of him on 3 May 2005, less

his own contributions.

7 Additional voluntary contributions are excluded from the above table.
8 The pensions shown above become payable at a Normal Retirement Age of 60. On early retirement from active membership of the plan, there is a discretionary practice of
calculating the early retirement pension by applying a reduction factor less than the standard factor, in accordance with Company policy. This is not available to deferred
pensioners and no allowance for it is made in the calculations of cash equivalents for deferred pensioners under the plan.

Deferred pensions in excess of the guaranteed minimum pension (“GMP”) are increased in the deferment period according to statutory requirements (subject to an annual
minimum of 3% per annum on pension accrued prior to 1 July 2004 for those members who joined the plan before 7 February 1992). GMPs are increased at fixed rate
revaluation with increases vesting at Normal Retirement Age. For members who joined the plan before 1 September 2002, pensions in respect of service before 1 July 2004
and in excess of the GMP increase each year in payment to match the increase in the RPI since the pension started (or 30 June 1989, if later), subject to an annual maximum
of 7.5% per annum and a minimum of 3% per annum. Pensions for members who joined the plan after 1 September 2002 and pension in respect of service on or after 1 July
2004 for members who joined the plan before 1 September 2002, increase each year in payment to match the RPI subject to a maximum increase in any year of 7.5% and a
minimum of 0%. On death in deferment or after retirement, a two-thirds pension is payable to the member’s spouse. Dependants’ pensions may be payable in the absence of
a spouse’s pension. In addition, on death within the first five years of retirement, a lump sum is payable equal to the balance of five years’ pension.

58 3i Report and accounts 2006 Directors’ remuneration report

Directors’ service contracts Non-executive Directors, including the Chairman, hold office under the Company’s Articles of Association and do not have service contracts.
Their appointment letters provide that there is no entitlement to compensation or other benefits on ceasing to be a Director.

Company policy is that executive Directors’ notice periods should not normally exceed one year. Mr P E Yea, Mr S P Ball and Mr M J Queen have employment contracts
with 3i plc dated 27 July 2004, 19 April 2005 and 22 June 1987 respectively. These contracts are terminable on 12 months’ notice given by the Company or six months’
notice given by the employee. Save for these notice periods the contracts have no unexpired terms. There are no provisions for compensation of executive Directors on early
termination save that the Company can elect to give pay in lieu of notice. In the case of Mr Yea, the Company can also elect to terminate employment without notice subject
to making 12 monthly payments thereafter equivalent to monthly basic pay and benefits less any amounts earned from alternative employment.

Until retiring on 6 July 2005 aged 60, Mr R W Perry had an employment contract with 3i plc dated 1 July 1985 which was terminable on 12 months’ notice given by the
Company or six months’ notice given by Mr Perry. The contract contained no provision for compensation on early termination, save that the Company could elect to give pay
in lieu of notice.

The Committee considers that compensation payments on early termination of employment should depend on individual circumstances. The duty of Directors to mitigate
their loss will always be a relevant factor.

Historic awards This section details historic awards held by Directors under the Management Equity Investment Plan.

Deferred share bonuses under the Management Equity Investment Plan Until 31 March 2001 executives could be awarded part of their annual bonus in deferred shares
under the Management Equity Investment Plan. Awards were reported each year as remuneration for the year to which they related. There was no performance condition
since the award was a bonus already earned. Awards comprised options issued by an employee benefit trust to acquire shares at nil cost after three years provided, in the
case of executive Directors, they had maintained an agreed shareholding for the three year period. In 1998 market value options were granted together with a deferred cash
bonus which was payable only to fund the exercise price payable on exercise.

M J Queen

R W Perry (until 6 July 2005)

Year of grant
1998

1998
2000
2001

Held at
1 April 2005
8,144
8,144
6,787*
5,819
3,600
16,206

Held at
Exercised 31 March 2006
(or retirement
if earlier)
–
–
–
5,819
3,600
9,419

during
the year
8,144
8,144
6,787
–
–
6,787

Market price
on date
of exercise
£
7.025

6.61

Exercise
price
£
6.63

6.63
Nil
Nil

Date from
which
exercisable
15.06.01

Expiry date
14.06.05

15.06.01
28.06.03
09.08.04

14.06.05
05.07.06
05.07.06

*Awarded before appointment as a Director.
Notes
1 In the year a special dividend of 40.7p per ordinary share of 50p was paid. This was followed by a share consolidation, of 16 new ordinary shares of 531/8p for every
17 ordinary shares of 50p, which was designed, other things being equal, to maintain the price per share at the same level after the special dividend as before it.
As a result of this consolidation there was no need to adjust the number of shares comprised in awards.

2 On Mr R W Perry’s retirement on 6 July 2005, the expiry dates of his 2000 and 2001 awards were altered so as to expire on 5 July 2006.
3. The deferred cash bonuses paid to Mr M J Queen and Mr R W Perry on the exercise of their 1998 deferred share bonuses are disclosed in note 6 on page 54.

Performance linked awards under the Management Equity Investment Plan Until 2000, executives could also receive awards linked to longer term Group performance
under the Management Equity Investment Plan. Participants were awarded options by an employee benefit trust to acquire shares at nil cost after five years subject to a
performance condition.

M J Queen

R W Perry (until 6 July 2005)

Year of grant
2000

1999
2000

(note 1)

Held at
1 April 2005
25,776
25,776
543*
21,054
21,597

Held at
Exercised 31 March 2006
(or retirement
if earlier)
25,776
25,776
543*
21,054
21,597

during
the year
–
–
–
–
–

Exercise
price
£
Nil

Nil
Nil

Market price
on date
of exercise
£

Date from
which
exercisable
28.06.05

Expiry date
27.06.07

23.07.04
28.06.05

05.07.06
05.07.06

2 1999 awards are shown to the extent (64.6%) that they vested in accordance with the performance condition. It has not yet been determined if and to what extent

the 2000 awards will vest and they are shown in full.

3 On Mr R W Perry’s retirement on 6 July 2005, the expiry dates of his awards were altered to 5 July 2006.

3i Report and accounts 2006 Directors’ remuneration report 59

Under the performance condition no shares vest unless the Company’s total shareholder return over a three year performance period (averaged over the six months before
the beginning and end of the period) equals or exceeds the compounded annual increase in the RPI over the period + 6% per annum. At this level 35% of the shares vest and
all shares vest if the return equals or exceeds RPI + 20% per annum. Between these levels, a proportion of shares vest. If the minimum performance condition is not achieved
over the three year period, the performance period is extended up to a maximum period of seven years from the same base year. The Committee decided a performance
condition linked to shareholder return was in shareholders’ interests and by linking the condition to RPI inflationary increases were discounted. The condition was chosen
as being suitably demanding at that time whilst aligning the interests of participants and shareholders. The Group’s Human Resources department calculates whether
performance conditions have been satisfied and this calculation is audited by Ernst & Young LLP.

Audit The tables in this report (including the notes thereto) on pages 54 to 58 have been audited by Ernst & Young LLP.

By Order of the Board

F D Rosenkranz
Chairman, Remuneration Committee

10 May 2006

60 3i Report and accounts 2006

Independent auditors’ report to the members of 3i Group plc

We have audited the Group and Parent Company financial statements (the “financial statements”) of 3i Group plc for the year ended 31 March 2006 which comprise
the Consolidated income statement, the Group and Parent Company Statement of recognised income and expense, the Group and Parent Company Reconciliation of
movements in equity, the Group and Parent Company Balance sheets, the Group and Parent Company Cash flow statements, Significant accounting policies and the related
notes 1 to 39. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’
remuneration report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that
we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the
opinions we have formed.

Respective responsibilities of Directors and auditors The Directors are responsible for preparing the Annual Report, the Directors’ remuneration report and the financial
statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union as set out in the
Statement of Directors’ responsibilities.

Our responsibility is to audit the financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatory
requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view, the financial statements and the part of the Directors’ remuneration report
to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and the information given in the Directors’ report
is consistent with the financial statements.

We also report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our
audit, or if information specified by law regarding Directors’ remuneration and other transactions are not disclosed.

We review whether the Corporate Governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our
review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control
cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises
only the Group financial highlights, Our business lines, Chairman’s statement, Chief Executive’s statement, Our vision, Business review, Corporate responsibility, Board of
Directors and Management Committee, Directors’ Report, the unaudited part of the Directors’ remuneration report, Portfolio valuation methodology, Ten largest
investments, Forty other large investments, New investment analysis, Portfolio analysis, Realisations analysis, Portfolio and investment analysis including co-investment funds,
Funds under management, Private equity and venture capital – a lexicon, Returns and IRRs – an explanation, Information for shareholders, and Investor relations and general
enquiries. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ remuneration report to
be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to
give reasonable assurance that the financial statements and the part of the Directors’ remuneration report to be audited are free from material misstatement, whether caused
by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the
part of the Directors’ remuneration report to be audited.

Opinion
In our opinion:

– the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at

31 March 2006 and of its profit for the year then ended;

– the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the

provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 March 2006;

– the financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985

and Article 4 of the IAS Regulation; and

– the information given in the Directors’ report is consistent with the financial statements.

Ernst & Young LLP
Registered auditor

London

10 May 2006

Consolidated income statement

for the year to 31 March 2006

Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments

Portfolio income
Dividends
Income from loans and receivables
Fees receivable

Gross portfolio return
Carried interest

Carried interest receivable from managed funds
Carried interest payable to executives

Fund management fees
Operating expenses
Net portfolio return
Treasury interest receivable
Interest payable
Movements in the fair value of derivatives
Exchange movements
Other income
Profit before tax
Income taxes
Profit after tax and profit for the year

Earnings per share
Basic (pence)
Diluted (pence)

*As restated for the adoption of IFRS.

3i Report and accounts 2006 61

Notes
2
3

5
5

6, 7, 8

10
10
11
12
13

31
31

2006

£m
576
245
821

75
133
24
1,053

79
(64)
24
(211)
881
55
(72)
(78)
47
22
855
(3)
852

2005
(as restated)*
£m
250
245
495

104
101
27
727

2
(66)
30
(177)
516
46
(88)
13
13
1
501
(3)
498

152.0
147.3

82.6
81.0

Statement of recognised income and expense

for the year to 31 March 2006

Profit for the year
Revaluation of property
Exchange differences on translation of foreign operations
Actuarial losses
Total recognised income and expense for the year
Analysed in reserves as:

Revenue
Capital
Translation reserve

*As restated for the adoption of IFRS.

Notes

12
9

29
29
29

Group
2006

£m
852
–
(5)
(16)
831

117
719
(5)
831

Group
2005
(as restated)*
£m
498
(1)
5
(1)
501

129
367
5
501

Company
2006

£m
643
–
–
–
643

87
556
–
643

Company
2005
(as restated)*
£m
407
(1)
–
–
406

93
313
–
406

s
t
n
e
m
e
t
a
t
s

a
c
n
a
n
F

62 3i Report and accounts 2006

Reconciliation of movements in equity

for the year to 31 March 2006

Opening total equity
Total recognised income and expense for the year
Share-based payments
Ordinary dividends
Special dividends
Issues of shares
Share buy-backs
Own shares
Closing total equity
*As restated for the adoption of IFRS.

Notes

8
32
32
29
29
30

Group
2006

£m
3,699
831
8
(86)
(245)
13
(222)
8
4,006

Group
2005
(as restated)*
£m
3,294
501
6
(85)
–
5
–
(22)
3,699

Company
2006

£m
3,626
643
–
(86)
(245)
13
(222)
–
3,729

Company
2005
(as restated)*
£m
3,300
406
–
(85)
–
5
–
–
3,626

Balance sheet

as at 31 March 2006

Assets
Non-current assets
Investments

Quoted equity investments
Unquoted equity investments
Loans and receivables
Investment portfolio
Carried interest receivable
Interests in joint ventures
Interests in Group entities
Property, plant and equipment
Investment property
Total non-current assets
Current assets
Other current assets
Derivative financial instruments
Deposits
Cash and cash equivalents
Total current assets
Total assets

Liabilities
Non-current liabilities
Carried interest payable
Loans and borrowings
Convertible Bonds
Subordinated liabilities
Retirement benefit obligation
Deferred income tax
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest payable
Loans and borrowings
Derivative financial instruments
Current income tax
Provisions
Total current liabilities
Total liabilities
Net assets

Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Translation reserve
Capital reserve
Revenue reserve
Own shares
Total equity
*As restated for the adoption of IFRS.

3i Report and accounts 2006 63

Group
2006

£m

Group
2005
(as restated)*
£m

Company
2006

£m

Company
2005
(as restated)*
£m

Notes

15
15
15

16
17
18
19

20
22

23
24
25
9
14
27

23
22

28
29
29
29
29
29
29
29
29

259
2,514
1,366
4,139
77
–
–
31
–
4,247

149
19
1,108
847
2,123
6,370

(83)
(1,243)
(365)
(24)
(17)
(1)
(5)
(1,738)

(160)
(60)
(231)
(168)
(2)
(5)
(626)
(2,364)
4,006

292
376
17
17
–
3,110
263
(69)
4,006

235
2,682
1,400
4,317
9
46
–
33
6
4,411

116
35
885
314
1,350
5,761

(71)
(1,196)
(352)
(50)
(23)
(1)
(5)
(1,698)

(135)
(38)
(102)
(80)
(2)
(7)
(364)
(2,062)
3,699

307
364
1
9
5
2,613
477
(77)
3,699

173
1,349
735
2,257
77
–
1,483
9
–
3,826

193
19
1,052
776
2,040
5,866

(83)
(968)
(365)
–
–
–
–
(1,416)

(271)
(60)
(230)
(160)
–
–
(721)
(2,137)
3,729

292
376
17
–
–
2,767
277
–
3,729

203
1,899
987
3,089
9
14
981
25
–
4,118

165
35
791
279
1,270
5,388

(71)
(879)
(352)
–
–
–
–
(1,302)

(254)
(38)
(102)
(66)
–
–
(460)
(1,762)
3,626

307
364
1
–
–
2,433
521
–
3,626

64 3i Report and accounts 2006

Cash flow statement

for the year to 31 March 2006

Cash flow from operating activities
Purchase of investments
Proceeds from investments
Interest received
Dividends received
Fees received from investment and fund management activities
Carried interest received
Carried interest paid
Operating expenses
Income tax paid
Net cash inflow from operations

Cash flow from financing activities
Proceeds from issues of share capital
Purchase of own shares
Dividend paid
Interest received
Interest paid
Payment of finance lease liabilities
Proceeds from long-term borrowings
Repayment of long-term borrowings
Net cash flow from short-term borrowings
Net cash flow from deposits
Net cash flow from financing activities

Cash flow from investing activities
Purchases of property, plant and equipment
Sales of property, plant and equipment
Divestment from joint venture
Net cash flow from investing activities

Change in cash and cash equivalents
Opening cash and cash equivalents
Effect of exchange rate fluctuations
Closing cash and cash equivalents
*As restated for the adoption of IFRS.

Group
2006

£m

Group
2005
(as restated)*
£m

Company
2006

£m

Company
2005
(as restated)*
£m

(1,068)
2,213
67
76
46
9
(30)
(216)
(8)
1,089

13
(222)
(331)
50
(60)
–
69
(54)
188
(223)
(570)

(15)
24
2
11

530
314
3
847

(719)
1,287
64
103
56
–
(4)
(224)
(1)
562

5
(25)
(85)
46
(81)
(1)
44
(32)
(67)
(269)
(465)

(4)
1
14
11

108
203
3
314

(873)
1,949
42
70
13
9
–
(182)
(5)
1,023

13
(222)
(331)
46
(38)
–
92
–
156
(261)
(545)

–
17
2
19

497
279
–
776

(717)
1,184
45
99
1
–
–
(90)
–
522

5
(25)
(85)
45
(55)
–
–
(1)
(58)
(285)
(459)

–
–
3
3

66
213
–
279

3i Report and accounts 2006 65

Significant accounting policies

3i Group plc (the “Company”) is a company incorporated in Great Britain and registered in England and Wales. The consolidated financial statements of the Company for the
year to 31 March 2006 comprise the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates and jointly controlled entities.
Separate financial statements of the Company are also presented. The accounting policies of the Company are the same as the Group except where separately disclosed.

The financial statements were authorised for issue by the Directors on 10 May 2006.

A Statement of compliance These consolidated and separate financial statements have been prepared in accordance with International Financial Reporting Standards,
International Accounting Standards and their interpretations issued or adopted by the International Accounting Standards Board as adopted for use in the European Union
(“IFRS”). These are the Group’s first consolidated and separate financial statements prepared under IFRS and IFRS 1 First-time Adoption of International Financial Reporting
Standards (“IFRS 1”) has been applied.

These consolidated and separate financial statements have been prepared in accordance with and in compliance with the Companies Act 1985 and the Listing Rules of
the Financial Services Authority.

IFRS 1 permits those companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS in the transition period. 3i has taken the
following key decisions:

– The effect of changes in foreign exchange rates: Under IFRS 1, cumulative translation differences on the consolidation of subsidiaries are being accumulated from the date

of transition to IFRS and not from the original acquisition date.

– Share-based payment: IFRS 2 Share-based Payment (“IFRS 2”) has been adopted from the transition date and is only being applied to relevant equity instruments granted

after 7 November 2002 and not vested as at 1 January 2005. 3i has elected not to take up the option of full retrospective application of the standard.

– Financial Instruments: Under IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), all equity investments have been designated at the date of transition

to be assets at fair value through profit or loss except for subsidiaries held by the Company.

An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Group is provided in note 38.

New standards and interpretations not applied During the year, the IASB and IFRIC have issued the following standards and interpretations to be applied to financial
statements with periods commencing on or after the following dates:

International Accounting Standards (IAS/IFRSs)
IFRS 1 Amendment relating to IFRS 6
IFRS 4 Insurance Contracts (Amendment to IAS 39 and IFRS 4 – Financial Guarantee Contracts)
IFRS 6 Exploration for and Evaluation of Mineral Assets
IFRS 6 Amendment relating to IFRS 6
IFRS 7 Financial Instruments: Disclosures
IAS 1
Amendment – Presentation of Financial Statements: Capital Disclosures
IAS 19 Amendment – Actuarial Gains and Losses, Group Plans and Disclosures
IAS 39 Fair Value Option
IAS 39 Amendments to IAS 39 – Transition and Initial Recognition of Financial Assets and Financial Liabilities (Day 1 profits)
IAS 39 Cash Flow Hedge Accounting
IAS 39 Amendment to IAS 39 and IFRS 4 – Financial Guarantee Contracts
IAS 21 Amendments to IAS 21 – The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation

International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 4 Determining whether an arrangement contains a lease
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under IAS 29 – Financial Reporting in Hyper Inflationary Economies
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives

Effective date
1 January 2006
1 January 2006
1 January 2006
1 January 2006
1 January 2007
1 January 2007
1 January 2006
1 January 2006
1 January 2006
1 January 2006
1 January 2006
1 January 2006

1 January 2006
1 January 2006
1 December 2005
1 March 2006
1 May 2006
1 June 2006

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the financial statements in the period of initial
application. Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent
of risks that they give rise to. There will be no effect on reported income or net assets.

B Basis of preparation The financial statements are presented in sterling, the functional currency of the Company, rounded to the nearest million pounds.

The preparation of financial statements in conformity with IFRS requires management to make judgments, 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 historical experience and other factors that are
believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if
the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The most significant techniques
for estimation are described in the accounting policies below and in our “valuation methodology” for investments.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS
balance sheet as at 1 April 2004 for the purpose of the transition to IFRS. The income statement of the Company has been omitted from these financial statements in
accordance with Section 230 of the Companies Act 1985.

The accounting policies have been consistently applied across all Group entities for the purpose of producing these consolidated financial statements.

66 3i Report and accounts 2006

Significant accounting policies

C Basis of consolidation
(i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that
control commences until the date that control ceases.

(ii) Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments that are
held as part of the Group’s investment portfolio are carried in the balance sheet at fair value even though the Group may have significant influence over those companies.
This treatment is permitted by IAS 28 Investment in Associates (“IAS 28”), which requires investments held by venture capital organisations to be excluded from its
scope where those investments are designated, upon initial recognition, as at fair value through profit or loss and accounted for in accordance with IAS 39, with changes
in fair value recognised in profit or loss in the period of the change. The Group has no interests in associates through which it carries on its business.

(iii) Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Interests in joint ventures
through which the Group carries on its business are classified as jointly controlled entities and accounted for using the equity method.

Interests in joint ventures that are held as part of the Group’s investment portfolio are carried in the balance sheet at fair value. This treatment is permitted by IAS 31
Interests in Joint Ventures (“IAS 31”), which requires venturer’s interests held by venture capital organisations to be excluded from its scope where those investments are
designated, upon initial recognition, as at fair value through profit or loss and accounted for in accordance with IAS 39, with changes in fair value recognised in profit or loss
in the period of the change. The Group has no interests in joint ventures through which it carries on its business.

(iv) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are
eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with jointly controlled entities are eliminated to the extent of the
Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

D Exchange differences
(i) Foreign currency transactions Transactions in currencies different from the functional currency of the Group entity entering into the transaction are translated at the
exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at
the exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. 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 transaction. Non-monetary assets and liabilities denominated in
foreign currencies that are stated at fair value are translated to sterling using exchange rates ruling at the dates the fair value was determined.

(ii) Financial statements of non-sterling operations The assets and liabilities of operations whose functional currency is not sterling, including fair value adjustments
arising on consolidation, are translated to sterling at exchange rates ruling at the balance sheet date. The revenues and expenses of these operations are translated to sterling
at rates approximating to the exchange rates ruling at the dates of the transactions. Exchange differences arising on retranslation are recognised directly in a separate
component of equity, the translation reserve, and are released upon disposal of the non-sterling operation.

In respect of non-sterling operations, cumulative translation differences on the consolidation of non-sterling operations are being accumulated from the date of transition to
IFRS, 1 April 2004, and not from the original acquisition date.

E Investment portfolio The Group’s return is generated primarily from its investment portfolio, which forms the main element of its total assets.

(i) Recognition and measurement Investments are recognised and derecognised on a date where the purchase or sale of an investment is under a contract whose terms
require the delivery or settlement of the investments. The Group manages its investments with a view to profiting from the receipt of interest and dividends and changes in
fair value of equity investments. Therefore, all quoted investments and unquoted equity investments are designated as at fair value through profit or loss and subsequently
carried in the balance sheet at fair value. Other investments including loan investments and fixed income shares are classified as loans and receivables and subsequently
carried in the balance sheet at amortised cost less impairment. All investments are initially recognised at the fair value of the consideration given and held at this value until it
is appropriate to measure fair value on a different basis, applying 3i’s valuation policies. Acquisition costs are attributed to equity investments and recognised immediately in
profit or loss. Subsidiaries in the separate financial statements of the Company are accounted for at cost less provision for impairment.

(ii) Income Gross portfolio return is a key performance indicator and is equivalent to “revenue” for the purposes of IAS 1. It represents the overall increase in net assets from
the investment portfolio net of deal-related costs but excluding exchange movements. Investment income is analysed into the following components:

a Realised profits over value on the disposal of investments is the difference between the fair value of the consideration received less any directly attributable costs, on the
sale of equity and the repayment of loans and receivables, and its carrying value at the start of the accounting period, converted into sterling using the exchange rates in
force at the date of disposal.

b Unrealised profits on the revaluation of investments is the movement in carrying value of investments between the start and end of the accounting period converted into
sterling using the exchange rates in force at the date of the movement.

c Portfolio income is that portion of income that is directly related to the return from individual investments. It is recognised to the extent that it is probable that there will
be economic benefit and the income can be reliably measured. The following specific recognition criteria must be met before the income is recognised:

– Income from loans and receivables 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 that asset’s carrying value.

– Dividends from equity investments are recognised in profit or loss when the shareholders’ rights to receive payment have been established except to the extent that

dividends, paid out of pre-acquisition reserves, adjust the fair value of the equity investment.

– Fee income is earned directly from investee companies when an investment is first made and through the life of the investment. Fees that are earned on a financing

arrangement are considered to relate to a financial asset measured at fair value through profit or loss and are recognised when that investment is made. Fees that are
earned on the basis of providing an ongoing service to the investee company are recognised as that service is provided.

3i Report and accounts 2006

Significant accounting policies 67

F Fund management The Group manages private equity funds, which primarily co-invest alongside the Group.

(i) Fund management fees Fees earned from the ongoing management of funds is recognised to the extent that it is probable that there will be economic benefit and the
income can be reliably measured.

(ii) Carried interest receivable The Group earns a share of profits (“carried interest receivable”) from funds which it manages on behalf of third parties. These profits are
earned once the funds meet certain performance conditions.

Carried interest receivable is only accrued on those managed funds in which the fund’s performance conditions, measured at the balance sheet date, would be achieved if
the remaining assets in the fund were realised at fair value. Fair value is determined using the Group’s valuation methodology and is measured at the balance sheet date.
An accrual is made equal to the Group’s share of profits in excess of the performance conditions, taking into account the cash already returned to fund investors and the
fair value of assets remaining in the fund.

G Carried interest payable The Group offers investment executives the opportunity to participate in the returns from successful investments. “Carried interest payable”
is the term used for amounts payable to executives on investment-related transactions.

A variety of asset pooling arrangements are in place so that executives may have an interest in one or more carried interest scheme. Carried interest payable is only accrued
on those schemes in which the scheme’s performance conditions, measured at the balance sheet date, would be achieved if the remaining assets in the scheme were realised
at fair value. An accrual is made equal to the executive’s share of profits in excess of the performance conditions in place in the carried interest scheme.

H Property, plant and equipment
(i) Land and buildings Land and buildings are carried in the balance sheet at fair value less depreciation and impairment. Fair value is determined at each balance sheet date
from valuations undertaken by professional valuers using market-based evidence. Any revaluation surplus is credited directly to the Capital reserve in equity except to the
extent that it reverses a previous valuation deficit on the same asset charged in the income statement in which case the surplus is recognised in the income statement to the
extent of the previous deficit. Any revaluation deficit that offsets a previously recognised surplus in the same asset is directly offset against the surplus in the Capital reserve.
Any excess valuation deficit over and above the previously recognised surplus is charged in profit or loss.

Depreciation on revalued buildings is charged in the income statement over its estimated useful life, generally over 50 years. On subsequent sale or retirement of a revalued
property, the attributable surplus in the Capital reserve is transferred directly to accumulated profits.

(ii) Vehicles and office equipment Fixed assets are depreciated by equal annual instalments over their estimated useful lives as follows: office equipment five years;
computer equipment three years; computer software three years; motor vehicles four years.

(iii) Assets held under finance leases Assets held under finance leases are depreciated over their expected useful life on the same basis as owned assets or, where
shorter, the lease term. Assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
The interest element of the rental obligations is charged in the income statement over the period of the agreement and represents a constant proportion of the balance
of capital repayments outstanding.

I Investment property Investment properties are properties that are held either to earn rental income or for capital appreciation or for both.

(i) Recognition and measurement Investment properties are recorded at their fair value at the date of acquisition or upon classification as an Investment Property
following a change of use. They are subsequently held in the balance sheet at fair value. Fair value is determined at each balance sheet date from valuations undertaken by
professional valuers using market-based evidence. Gains or losses arising from the changes in fair value are recognised in profit or loss for the period in which they arise.

(ii) Income and expenditure Rental income from investment property is recognised in the income statement on a straight-line basis over the term of the lease.
Lease incentives granted are recognised immediately in the income statement. Expenditure on investment properties is expensed as it accrues.

J Treasury assets and liabilities Short-term treasury assets and short and long-term treasury liabilities are used in order to manage cash flows and overall costs
of borrowing. Financial assets and liabilities are recognised in the balance sheet when the relevant Group entity becomes a party to the contractual provisions of the
instrument.

(i) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of
three months or less. For the purposes of the cash flow statement, cash and cash equivalents comprise cash and short-term deposits as defined above and other short-term
highly liquid investments that are readily convertible into cash and are subject to an insignificant risk of changes in value, net of bank overdrafts.

(ii) Deposits Deposits in the balance sheet comprise longer term deposits with an original maturity of greater than three months.

(iii) Bank loans, loan notes and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated
with the borrowings. After initial recognition, these 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.

68 3i Report and accounts 2006 Significant accounting policies

(iv) Convertible bonds Where a convertible bond has an issuer cash settlement option, the convertible bonds are regarded as compound instruments consisting of a liability
and a derivative instrument (see policy below for derivatives). On issue of the convertible bonds, the fair value of the derivative component is determined using a market
rate for an equivalent derivative. Subsequent to initial recognition the conversion option is measured as a derivative financial instrument. The remainder of the proceeds is
allocated to the liability component and this amount is carried as a long-term liability on the amortised cost basis until extinguished on conversion or redemption.

Issue costs are apportioned between the liability and derivative component of the convertible bonds based on their relative carrying amounts at the date of issue.
The portion relating to the derivative instrument is recognised initially as part of the financial derivative instrument.

The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the
instrument. The difference between this amount and the interest paid is added to the carrying value of the convertible bonds.

(v) Derivative financial instruments Derivative financial instruments are used to manage the risks associated with foreign currency fluctuations of the investment
portfolio and changes in interest rates on its borrowings. This is achieved by the use of foreign currency contracts, currency swaps and interest rate swaps. All derivative
financial instruments are held at fair value.

Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to fair value at each reporting date. The fair value of
forward exchange contracts is calculated by reference to current forward exchange contracts for contracts with similar maturity profiles. The fair value of currency swaps and
interest rate swaps is determined with reference to future cash flows and current interest and exchange rates. All changes in the fair value of derivative financial instruments
are taken through profit or loss.

(vi) Subordinated liabilities The Group has some limited recourse funding, which individually finances investment assets, at various fixed rates of interest and whose
maturity is dependent upon the disposal of the associated assets. This funding is subordinated to other creditors of the individual Group entity to which the funds have been
advanced and becomes non-repayable as the assets fail. These liabilities are held in the balance sheet at the amount expected to be repayable based on the underlying assets.
Changes in the amounts repayable as a result of changes in the underlying assets are treated as other income in the income statement. Interest payable on subordinated
liabilities is charged as it accrues by reference to the principal outstanding and the effective interest rate applicable.

K Employee benefits
(i) Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as they fall due.

For defined benefit retirement plans, the cost of providing benefits is determined using the projected unit credit method with actuarial valuations being carried out at each
balance sheet date. Current service costs are recognised in profit or loss. Past service costs are recognised to the extent that they are vested immediately in profit or loss.
Actuarial gains or losses are recognised in full as they arise as part of the statement of recognised income and expense.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligations as reduced by the fair value of plan assets.

(ii) Share-based payments In accordance with the transitional provisions of IFRS 1, the requirements of IFRS 2 have been applied to all grants of equity instruments after
7 November 2002, that were unvested at 1 January 2005.

The Group enters into arrangements that are equity-settled share-based payments with certain employees (including Directors). These are measured at fair value at the date
of grant, which is then recognised in profit or loss on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value
is measured by use of an appropriate model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than market conditions linked to the
price of the shares of the Company. The charge is adjusted at each balance sheet date to reflect the actual number of forfeitures, cancellations and leavers during the period.
The movement in cumulative change since the previous balance sheet is recognised in the income statement, with a corresponding entry in equity.

L Other assets Assets, other than those specifically accounted for under a separate policy, are stated at their cost less impairment losses. They are reviewed at each
balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated based on expected
discounted future cash flows. Any change in the level of impairment is recognised directly in profit or loss. An impairment loss is reversed at subsequent balance sheet dates
to the extent that the asset’s carrying amount does not exceed its carrying value had no impairment loss been recognised.

M 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 balance sheet date.

N Equity instruments Equity instruments issued by the Group are recognised at the proceeds or fair value received with the excess of the amount received over nominal
value being credited to the share premium account. Direct issue costs net of tax are deducted from equity. When share capital is repurchased, the amount of consideration
paid, including directly attributable costs, is recognised as a change in equity. The nominal value of shares repurchased is transferred to the Capital redemption reserve
in equity.

O Provisions Provisions are recognised when the Group has a present obligation of uncertain timing or amount as a result of past events, and it is probable that the Group
will be required to settle that obligation and a reliable estimate of that obligation can be made. The provisions are measured at the Directors’ best estimate of the amount
to settle the obligation at the balance sheet date, and are discounted to present value if the effect is material. Changes in provisions are recognised in the profit or loss for
the period.

3i Report and accounts 2006 Significant accounting policies 69

P 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 income
statement, except when 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 consolidated income statement 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. The Group’s liability for current tax is
calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the
corresponding tax bases used in the computation of taxable profit (“temporary differences”), and is accounted for using the balance sheet liability method.

Deferred tax liabilities are generally recognised for all taxable temporary differences. Where there are taxable temporary differences arising on investments in subsidiaries and
associates, and interests in joint ventures, deferred tax liabilities are recognised except where the Group is able to control the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are generally recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
However, where there are deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures, deferred tax assets
are recognised only to the extent that it is probable that both the temporary differences will reverse in the foreseeable future and taxable profits will be available against which
the temporary differences can be utilised, and that the temporary differences will reverse in the foreseeable future.

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.

Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill and other assets and liabilities in a transaction
that affects neither the tax profit nor the accounting profit.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised using tax rates and laws that have been
enacted or substantively enacted by the balance sheet date.

70 3i Report and accounts 2006

Notes to the financial statements

1 Segmental analysis

Year to 31 March 2006
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income

Net (investment)/divestment
Realisation proceeds
New investment

Balance sheet
Value of investment portfolio

Year to 31 March 2005
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income

Net (investment)/divestment
Realisation proceeds
New investment

Balance sheet
Value of investment portfolio
*As restated for the adoption of IFRS.

Year to 31 March 2006
Gross portfolio return
Net (investment)/divestment
Realisation proceeds
New investment

Balance sheet
Value of investment portfolio

Year to 31 March 2005
Gross portfolio return
Net (investment)/divestment
Realisation proceeds
New investment

Balance sheet
Value of investment portfolio
*As restated for the adoption of IFRS.

Buyouts Growth Capital Venture Capital
2006
£m

2006
£m

Smaller Minority
Investments
2006
£m

208
124
115
447

877
(451)
426

232
60
49
341

855
(497)
358

72
51
5
128

207
(156)
51

64
10
63
137

268
(6)
262

Total
2006
£m

576
245
232
1,053

2,207
(1,110)
1,097

1,465

1,284

826

564

4,139

Buyouts
2005
(as restated)*
£m

Growth Capital
2005
(as restated)*
£m

Venture Capital
2005
(as restated)*
£m

Smaller Minority
Investments
2005
(as restated)*
£m

Total
2005
(as restated)*
£m

103
122
76
301

505
(338)
167

110
109
66
285

443
(263)
180

35
37
4
76

156
(143)
13

2
(23)
86
65

198
(11)
187

250
245
232
727

1,302
(755)
547

1,521

1,292

748

756

4,317

UK
2006
£m
392

Continental
Europe
2006
£m
586

1,173
(409)
764

891
(540)
351

US
2006
£m
27

76
(70)
6

Asia
2006
£m
48

67
(91)
(24)

Total
2006
£m
1,053

2,207
(1,110)
1,097

1,740

1,925

307

167

4,139

UK
2005
(as restated)*
£m
502

Continental
Europe
2005
(as restated)*
£m
230

US
2005
(as restated)*
£m
3

Asia
2005
(as restated)*
£m
(8)

Total
2005
(as restated)*
£m
727

897
(334)
563

365
(341)
24

34
(51)
(17)

6
(29)
(23)

1,302
(755)
547

2,258

1,693

277

4,317

3i Report and accounts 2006 Notes to the financial statements 71

2 Realised profits over value on the disposal of investments

Net proceeds
Valuation of disposed investments
Investments written off

*As restated for the adoption of IFRS.

3 Unrealised profits on the revaluation of investments

Movement in the fair value of equity
Impairment of loans and receivables
Provisions

*As restated for the adoption of IFRS.

Equity
2006

£m
1,643
(981)
(20)
642

Loans and
receivables
2006

£m
564
(584)
(46)
(66)

Total
2006

£m
2,207
(1,565)
(66)
576

Equity
2005
(as restated)*
£m
919
(652)
(14)
253

Loans and
receivables
2005
(as restated)*
£m
383
(363)
(23)
(3)

Total
2005
(as restated)*
£m
1,302
(1,015)
(37)
250

Equity
2006

£m
381
–
(40)
341

Loans and
receivables
2006

£m
–
(74)
(22)
(96)

Total
2006

£m
381
(74)
(62)
245

Equity
2005
(as restated)*
£m
440
–
(28)
412

Loans and
receivables
2005
(as restated)*
£m
–
(129)
(38)
(167)

Total
2005
(as restated)*
£m
440
(129)
(66)
245

Provisions have been recognised on investments where it is considered there is a significant risk of failure.

4 Fees receivable

Fees receivable
Deal-related costs

*As restated for the adoption of IFRS.

2006

£m
39
(15)
24

2005
(as restated)*
£m
36
(9)
27

Fees receivable include fees arising from the ongoing management of the portfolio together with fees arising from making investments. Deal-related costs represent fees
incurred in the process to acquire an investment.

5 Carried interest

Carried interest receivable from managed funds
Carried interest payable to executives

*As restated for the adoption of IFRS.

Realised
2006

Unrealised
2006

£m
48
(40)
8

£m
31
(24)
7

Total
2006

£m
79
(64)
15

Realised
2005
(as restated)*
£m
2
(30)
(28)

Unrealised
2005
(as restated)*
£m
–
(36)
(36)

Total
2005
(as restated)*
£m
2
(66)
(64)

Carried interest receivable represents the Group’s share of profits from managed funds. Each managed fund is reviewed at the balance sheet date and income is accrued
based on fund profits in excess of the performance conditions within the fund, taking into account cash already returned to fund investors and the fair value of assets
remaining in the fund.

Carried interest payable represents the amounts payable to executives from the Group’s carried interest schemes. As with carried interest receivable, each scheme is
separately reviewed at the balance sheet date, and an accrual made equal to the executives’ share of profits in excess of the performance conditions in place in the scheme.

The above table shows carried interest on realised and unrealised assets.

72 3i Report and accounts 2006 Notes to the financial statements

6 Operating expenses
Operating expenses include the following amounts:

Depreciation of property, plant and equipment

Owned assets
Under finance leases

*As restated for the adoption of IFRS.

2006

£m

2005
(as restated)*
£m

4
–

3
1

Services provided by the Group’s auditor During the year the Group obtained
the following services from the Group’s auditors, Ernst & Young LLP:

Audit services

Statutory audit – UK

– overseas

Audit-related regulatory reporting

Non-audit services

Investment due diligence
Tax services (compliance and advisory services)

*As restated for the adoption of IFRS.

2006

£m

2005
(as restated)*
£m

0.9
0.4
0.1
1.4

0.9
0.1
2.4

0.7
0.3
0.1
1.1

0.2
0.1
1.4

Audit services The Group’s auditor received £0.3 million (2005: £0.2 million) for
the statutory audit of the Company.

Non-audit services These services are services that could be provided by a
number of firms, including general consultancy work. Work is allocated to the
auditors only if it does not impact the independence of the audit team. Due diligence
provided by the auditors is carried out by teams which are independent of the audit
process.

Tax and further assurance services are services which it is most efficient for the
auditors to provide and are allocated to them subject to consideration of any impact
on their independence.

Included in the above are fees paid to the Group’s auditor in respect of non-audit
services in the UK of £0.4 million (2005: £0.2 million).

Auditor independence In addition to the above the Group has identified
£0.4 million (2005: £1.3 million) of investment-related fees paid to Ernst & Young
LLP by investee companies, where the Group’s investee companies and investment
teams have appointed the service provider. It is estimated that Ernst & Young LLP
receive less than 10% of the total investment-related fees paid to the four largest
accounting firms. Ernst & Young LLP also acts as auditor to the 3i Group Pension
Plan. The appointment of auditors to this Plan and the fees paid in respect of the
audit are agreed by the trustees who act independently from the management
of the Group. The aggregate fees paid to the Group’s auditor for audit services to
the pension scheme during the year were less than £0.1 million (2005: less than
£0.1million).

7 Staff costs

Wages and salaries
Social security costs
Share-based payment cost (note 8)
Pension costs (note 9)

*As restated for the adoption of IFRS.

2006

£m
91
14
8
15
128

2005
(as restated)*
£m
82
10
6
15
113

The average number of employees during the year was 733 (2005: 763).

Wages and salaries shown above include salaries paid in the year and bonuses
relating to the year. These costs are charged against operating expenses.

8 Share-based payments
Equity-settled share option schemes
Share options The Group has a number of share option schemes that entitle
employees to purchase shares in the Group. Options are exercisable at a price
equal to the market value of the Company’s shares on the date of grant. Each of the
schemes has different vesting periods and conditions and these are summarised
below:

The 3i Group 1994 Executive Share Option Plan Options granted between
1 January 1995 and 31 March 2001 were granted under this Plan and are normally
exercisable between the third and tenth anniversaries of the date of grant provided
that a performance condition has been met over a rolling three year period.
This requires that the adjusted net asset value per share (after adding back dividends
paid during the three year performance period) at the end of the three year period is
equal to or in excess of the net asset value per share at the beginning of the period
compounded annually over the period by the annual increase in the RPI plus 4%.

The 3i Group Discretionary Share Plan Options granted after 31 March 2001
were granted under the Discretionary Share Plan and are normally exercisable
between the third and tenth anniversaries of the date of grant to the extent a
performance target has been met over a performance period of three years from
the date of grant. For options granted between 1 April 2001 and 31 March 2003
and for options granted to three Directors in June 2003, if the minimum threshold
for vesting is not achieved in the first three years from grant, the performance
period is extended to four and then five years from the date of grant but from the
same base year. For options granted between 1 April 2003 and 31 March 2004
the performance period is extended to four years from the date of grant.
For options granted after 31 March 2004, there is no opportunity for the
performance condition to be retested after the three year performance period.

Options granted between 1 April 2001 and 31 March 2003 were subject to a
performance condition that options would vest if the annual compound growth
(“ACG”) in net asset value per share with dividends re-invested was RPI plus 5%.
If this target was achieved then 50% of the options would vest. If the ACG was
in excess of RPI plus 10% then the maximum number of shares would vest.
Options would vest pro rata if the ACG was between these two amounts.
For options granted after 31 March 2003 the target ACG was RPI plus 3% with
maximum vesting at RPI plus 8%, except for options granted to three Directors
in June 2003 where the target ACG was RPI plus 5% with maximum vesting at RPI
plus 10%. Details of all share options outstanding during the year are as follows:

2006

Number of
share options

2006
Weighted
average
exercise price
(pence)

2005

Number of
share options

2005
Weighted
average
exercise price
(pence)

24,943,522
3,597,145
(2,270,547)
(965,962)

739 22,919,966
692 4,687,971
543
(704,603)
868 (1,959,812)

25,304,158

745 24,943,522

4,860,952

837 4,007,987

761
600
858
470

739

540

Outstanding at start

of the year

Granted
Exercised
Lapsed
Outstanding at end

of the year

Exercisable at end
of the year

3i Report and accounts 2006 Notes to the financial statements 73

8 Share-based payments (continued)

Outstanding at start of the year
Granted
Forfeited
Outstanding at end of the year

2006
Number of
shares
443,107
152,865
(35,418)
560,554

2005
Number of
shares
144,585
336,154
(37,632)
443,107

The shares outstanding at the end of the year have a weighted average contractual
life of 1.64 years (2005: 0.96 years). The cost of these shares is spread over the
vesting period of three years.

The weighted average fair value of shares granted during the year was 343p
(2005: 270p).

These fair values were calculated using the Monte Carlo option pricing model.
The inputs to this model were as follows:

Expected volatility (%)
Expected life (years)
Risk free rate (%)
Expected dividend yield (%)

2006
24
3
4.5
2.0

2005
40
3
4.8
2.0

In the current financial year expected volatility was determined using an average of
the implied volatility and historic volatility of the Company’s share price over the
preceding three years, whereas in the prior year it was based on the historic volatility
only. The expected volatility of the comparator group is 35% (2005:35%).

Share incentive plan Eligible UK employees may participate in an Inland Revenue
approved Share Incentive Plan intended to encourage employees to invest in the
Company’s shares and which accordingly is not subject to a performance condition.
During the year participants could invest up to £125 per month from their pre-tax
salaries in the Company’s shares (referred to as partnership shares). For each
share so acquired the Company granted two free additional shares (referred to as
matching shares) which are normally subject to forfeiture if the employee ceases
to be employed (other than by reason of retirement) within three years of grant.
Dividends are re-invested on behalf of participants in further shares (referred to as
dividend shares).

The Company issues shares to cover the matching shares. The fair value of matching
shares is the share price at the date of the award.

Outstanding at start of the year
Granted
Exercised
Lapsed
Outstanding at end of the year

2006
Number of
shares
424,575
120,567
(78,857)
(17,138)
449,147

2005
Number of
shares
343,789
141,992
(44,670)
(16,536)
424,575

The average purchase price of the shares during the year was 798p (2005: 681p).

Deferred bonus share awards Certain employees receive an element of their
bonus as shares. These shares are held in trust for two years. The Company
purchases shares to cover the deferred shares awarded and these are held in the 3i
Group Employee Trust in a nominee capacity. The fair value of the deferred shares is
the share price at the date of the award.

8 Share-based payments (continued)
Included within this balance are options over 13 million (2005: 16 million) shares
that have not been recognised in accordance with IFRS 2 as the options were
granted on or before 7 November 2002. These options have not been subsequently
modified and therefore do not need to be accounted for in accordance with IFRS 2.

The range of exercise prices for options outstanding at the end of the year was:
Year of grant

2006

2005

Year ended 31 March
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

Weighted
average
exercise price
(pence)
–
457
513
623
810
1,341
999
663
570
599
692
745

Number
–
249,400
964,373
919,449
1,235,026
1,378,598
5,119,104
3,802,071
3,694,970
4,402,076
3,539,091
25,304,158

Number
72,750
872,422
1,626,095
1,595,624
1,673,164
1,610,538
5,234,362
3,885,130
3,819,565
4,553,872
–
24,943,522

The weighted average share price at the date of exercise during the year was 850p
(2005: 645p). The options outstanding at the end of the year have a weighted
average contractual life of 6.35 years (2005: 6.47 years). The cost of share options
is spread over the vesting period of three to five years. The weighted average fair
value of options granted during the year was 218p (2005: 193p). These fair values
were calculated using the Black-Scholes option pricing model.

The inputs to this model were as follows:

Weighted average share price (£)
Weighted average option price (£)
Average expected volatility (%)
Expected life (years)
Average risk free rate (%)
Average expected dividend yield (%)

2006
692
692
27
8.5
4.3
2.0

2005
600
600
29
8.5
5.0
2.5

The expected life of the option is based on the best estimate of the Directors
following a review of the profile of the award holders. Expected volatility was
determined using an average of the implied volatility on grant and historic share
price volatility of the preceding 8.5 years. No options have been repriced during the
year (2005: nil). All share options are equity settled.

Performance share awards Performance share awards are awards of shares
to executive Directors which are transferred to the participant by an employee
benefit trust on terms that the shares may, in certain circumstances, be forfeited.
While the shares are subject to forfeiture they may not be sold, transferred or
used as security. Awards are subject to a performance condition determining
whether and to what extent the award will vest. Non-vested shares are forfeited.
The performance condition provides for shares to vest based on the Company’s
“percentage rank” by total shareholder return for the period of three years from
grant (averaged over a 60 day period) compared to a comparator group.

The comparator group consists of the FTSE100 Index constituents at the grant date
(adjusted for mergers, demergers and delistings during the performance period).
A company’s percentage rank is its rank in the comparator group divided by the
number of companies in the group at the end of the performance period expressed
as a percentage. If the Company’s percentage rank is less than 50% none of the
shares vest. At a percentage rank of 50%, 35% of the shares vest and at 75% all
the shares vest. Between these points shares vest pro rata.

74 3i Report and accounts 2006 Notes to the financial statements

8 Share-based payments (continued)

Held in nominee capacity at start of the year
Awarded
Transferred to employee
Held in nominee capacity at end of year

2006
Number of
shares
–
85,957
–
85,957

2005
Number of
shares
–
–
–
–

9 Retirement benefit obligation (continued)
The amount recognised in the balance sheet in respect of the Group’s defined
benefit plans is as follows:

Present value of funded obligations
Fair value of Plan assets

2006
£m
472
(455)
17

2005
£m
390
(367)
23

The weighted average fair value of the shares awarded during the year was 698p
(2005: nil).

Amounts recognised in profit or loss in respect of the defined benefit plan are
as follows:

Share trust The Group has a trust that is used to hold shares in 3i Group plc to
meet its obligations under the above share schemes.

Total costs The total cost recognised in profit or loss for each of the share schemes
is shown below. The cost is borne mainly by 3i plc, the main operating company of
the Group.

Share options
Performance shares
Share incentive plan
Deferred bonus shares

2006
£m
6.1
0.6
0.7
0.6
8.0

2005
£m
5.0
0.3
0.9
–
6.2

9 Retirement benefit obligation
Retirement benefit plans
Defined contribution plans The Group operates a number of defined contribution
retirement benefit plans for qualifying employees outside the UK. A new defined
contribution scheme for UK employees was set up on 1 April 2006. The assets of
these plans are held separately from those of the Group. The employees of the
Group’s subsidiaries in France are members of a state-managed retirement benefit
plan operated by the country’s government. The French subsidiary is required to
contribute a specific percentage of payroll costs to the retirement benefit scheme
to fund the benefits. The only obligation of the Group is to make the contributions.

The total expense recognised in profit or loss is £4 million (2005: £3 million), which
represents the contributions payable to these plans. There were no outstanding
payments due to these plans at the balance sheet date.

Defined benefit scheme The Group operates a final salary defined benefit plan
for qualifying employees of its subsidiaries in the UK. The Plan is not offered to
new employees joining 3i on or after 1 April 2006. The Plan is a funded scheme, the
assets of which are independent of the Company’s finances and are administered
by the Trustees.

The last full actuarial valuation at 30 June 2004 was updated for 31 March 2006
on an IAS 19 basis by an independent qualified actuary.

The principal assumptions made by the actuaries used for the purpose of the year
end valuation were as follows:

Discount rate
Expected rate of salary increases
Expected rate of pension increases
Price inflation
Expected return on Plan assets

2006
4.6%
4.2%
3.0%
2.7%
5.7%

2005
5.4%
4.5%
3.1%
3.0%
6.4%

Operating costs

Current service costs
Past service cost

Net finance costs

Expected return on Plan assets
Interest on obligation

Statement of recognised income and expenses

Actuarial loss

2006
£m

11
–

(23)
21

16
25

Changes in the present value of the defined benefit obligation were as follows:

Opening defined benefit obligation
Current service cost
Past service cost
Interest cost
Actuarial losses
Contributions
Benefits paid
Closing defined benefit obligation

Changes in the fair value of the Plan assets were as follows:

Opening fair value of Plan assets
Expected returns
Actuarial gains
Contributions
Benefits paid
Closing fair value of Plan assets

2006
£m
390
11
–
21
63
1
(14)
472

2006
£m
367
23
48
31
(14)
455

Contributions paid to the Group Pension Plan are related party transactions as
defined by IAS 24 Related party transactions (“IAS 24”).

The fair value of the Plan assets at the balance sheet date is as follows:

Equities
Gilts
Cash equivalents

2006
£m
245
190
20
455

2005
£m

10
2

(21)
20

1
12

2005
£m
355
10
2
20
14
–
(11)
390

2005
£m
272
21
13
72
(11)
367

2005
£m
205
162
–
367

The post-retirement mortality assumptions used to value the benefit obligation at
31 March 2005 and 31 March 2006 are based on the “PA92 medium cohort” table
with a current year of use.

The Plan assets do not include any of the Group’s own equity instruments nor any
property in use by the Group. The expected rate of returns on individual categories
of Plan assets is determined by reference to individual indices.

9 Retirement benefit obligation (continued)
The history of the Plan for the current and prior period is as follows:

12 Exchange movements

Present value of defined benefit obligation
Fair value of Plan assets
Deficit

Experience adjustments on Plan liabilities
Experience adjustments on Plan assets

2006
£m
472
(455)
17

–
(11)%

2005
£m
390
(367)
23

(4)%
(4)%

In accordance with the transitional provisions for the amendment to IAS 19
Retirement Benefits in December 2004, the disclosures above are from the
transition date of 1 April 2004.

Exchange movements on items recorded in
currencies different from the functional
currency of the entity

Total exchange movements in the

income statement

Exchange differences on translation of

foreign operations
Net exchange movement
*As restated for the adoption of IFRS.

The Group expects to make contributions of approximately £10 million to the Plan
in the year to 31 March 2007.

13 Other income

Employees in Germany are entitled to a pension based on their length of service.
3i Deutschland GmbH contributes to individual investment policies for its employees
and has agreed to indemnify any shortfall on an employee’s investment policy should
it arise. The total value of 3i Deutschland GmbH’s investment policies intended to
cover pension liabilities is £3 million (2005: £2 million) and the future liability
calculated by German actuaries is £4 million (2005: £3 million). The Group carries
both the asset and liability in its consolidated financial statements.

10 Net interest receivable/(payable)

Treasury interest receivable
Interest on bank deposits
Interest payable
Interest on loans and borrowings
Interest on Convertible Bonds
Amortisation of Convertible Bonds
Interest on subordinated borrowings
Finance income on pension plan

Net interest receivable/(payable)
*As restated for the adoption of IFRS.

11 Movements in the fair value of derivatives

Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Derivative element of Convertible Bonds

*As restated for the adoption of IFRS.

2006

£m

(58)
(5)
(8)
(3)
2
(72)
(17)

2006

£m
(3)
6
(6)
(75)
(78)

2005
(as restated)*
£m

(73)
(5)
(8)
(3)
1
(88)
(42)

2005
(as restated)*
£m
16
3
(17)
11
13

3i Report and accounts 2006 Notes to the financial statements 75

2006

£m

2005
(as restated)*
£m

(5)
42

5
18

2006

£m
20
2
–
22

2005
(as restated)*
£m
–
–
1
1

2006

£m

2005
(as restated)*
£m

(3)
–
(3)

–
(3)

(3)
–
(3)

–
(3)

Write-back of subordinated borrowings
Gain on disposal of property
Gain on revaluation of investment property

*As restated for the adoption of IFRS.

14 Income taxes

Current tax
Current year
Adjustments in respect of previous periods

Deferred tax
Deferred income tax
Total income taxes in the income statement
*As restated for the adoption of IFRS.

The tax charge for the period is different to the standard rate of corporation tax in
the UK, currently 30% (2005: 30%), and the differences are explained below:

Reconciliation of income taxes in the income statement

Profit before tax
Profit before tax multiplied by rate of corporation tax

in the UK of 30% (2005: 30%)

Effects of:
Permanent differences
Short-term timing differences
Current period unutilised tax losses
Non-taxable UK dividend income
Repatriated profits of overseas subsidiaries
Foreign tax
Foreign tax credits available for double tax relief
Realised profits, changes in fair value and impairment

losses not taxable

Adjustments to tax in respect of prior periods
Total income taxes in the income statement
*As restated for the adoption of IFRS.

2006

£m
855

2005
(as restated)*
£m
501

(256)

(150)

6
1
(7)
20
(1)
(3)
1

236
–
(3)

3
(2)
(2)
31
(7)
(1)
1

124
–
(3)

76 3i Report and accounts 2006 Notes to the financial statements

14 Income taxes (continued)
The Group’s realised profits, fair value adjustments and impairment losses are
primarily included in the Company, the affairs of which are directed so as to allow it
to be approved as an investment trust. An investment trust is exempt from tax on
capital gains, therefore the Group’s capital return will be largely non taxable.

Consolidated
balance sheet
2006

£m

–

(3)

Consolidated
balance sheet
2005
(as restated)*
£m

(1)

(2)

(3)

Consolidated
income
statement
2006

£m

–

(1)

–

Consolidated
income
statement
2005
(as restated)*
£m

(1)

–

Deferred income tax assets
Tax losses
Gross deferred income

tax assets

Deferred income
tax liabilities

Unrealised valuation surpluses

on investments

Income in accounts taxable in

the future

Gross deferred income

tax liabilities

Deferred tax income

tax charge

*As restated for the adoption of IFRS.

At 31 March 2006 the Group had tax losses carried forward of £560 million
(2005: £550 million). It is unlikely that the Group will generate sufficient taxable
profits in the future to utilise these amounts and therefore no deferred tax asset has
been recognised. These tax losses are available to carry forward indefinitely.

15 Investment portfolio

Opening book value
Additions
Disposals, repayments

and write-offs

Revaluation
Provision and impairment of
loans and receivables

Other movements
Closing book value
Quoted
Unquoted

Group
Equity
investments
2006
£m
2,917
464

Group
Loans and
receivables
2006
£m
1,400
646

Group

Total
2006
£m
4,317
1,110

(1,001)
341

(630)
–

(1,631)
341

–
52
2,773
259
2,514
2,773

(96)
46
1,366
–
1,366
1,366

(96)
98
4,139
259
3,880
4,139

Other movements includes foreign exchange, reclassifications of joint ventures and
conversions from one instrument into another.

15 Investment portfolio (continued)
Additions to loans and receivables includes £45 million (2005: £36 million) interest
received by way of loan notes. A corresponding amount has been included in income
from loans and receivables.

Opening book value
Additions
Disposals, repayments

and write-offs

Revaluation
Provision and impairment of
loans and receivables

Other movements
Closing book value
Quoted
Unquoted

*As restated for the adoption of IFRS.

Group
Equity
investments
2005
(as restated)*
£m
2,900
294

Group
Loans and
receivables
2005
(as restated)*
£m
1,462
461

Group

Total
2005
(as restated)*
£m
4,362
755

(666)
412

–
(23)
2,917
235
2,682
2,917

(386)
–

(1,052)
412

(167)
30
1,400
–
1,400
1,400

(167)
7
4,317
235
4,082
4,317

The holding period of 3i’s investment portfolio is on average greater than one year.
For this reason the Directors have classified the portfolio as non-current. It is not
possible to identify with certainty investments that will be sold within one year.

16 Interest in joint ventures
Two joint ventures were reclassified during the year, as described below.

The Group had a 50% equity share in DIAB Intressenter AB, a joint venture set up
to acquire the assets and business of Atle AB, a Swedish venture capital company,
with Ratos AB. DIAB Intressenter AB now holds a single investment in DIAB AB, and
as such is considered a portfolio investment designated as fair value through profit
or loss.

The Group had a 50% equity share in Atle Industri AB, a venture capital fund
established with a joint venture partner Ratos AB to hold a small number of
investments previously owned by Atle AB. As these investments are held and
managed on the same basis as other portfolio investments, the joint venture has
been reclassified as a portfolio investment designated as fair value through profit
or loss.

Income statement
Realised profit over value on the disposal of investments
Unrealised profits on the revaluation of investments

Balance sheet
Interests in joint ventures
Represented by:
Cost
Share of post acquisition retained surpluses less losses
Impairment

*As restated for the adoption of IFRS.

Group
2006

£m
–
(5)

Group
2006

£m
–

–
–
–
–

Group
2005
(as restated)*
£m
3
16

Group
2005
(as restated)*
£m
46

121
(13)
(62)
46

3i Report and accounts 2006 Notes to the financial statements 77

17 Interests in Group entities

Opening book value*
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
*As restated for the adoption of IFRS.

Equity
investments

£m
122
122
–
(22)
–
–
222

Long-term
loans and
receivables
£m
859
452
71
(147)

(5)
31
1,261

Total

£m
981
574
71
(169)
(5)
31
1,483

18 Property, plant and equipment (continued)
Finance lease rentals are payable as follows:

Between one and five years

Group
2006
£m
1

Group
2005
£m
1

Company
2006
£m
–

Company
2005
£m
–

The Group’s freehold properties and long leasehold properties are revalued at each
balance sheet date by professional valuers. The valuations were undertaken in
accordance with the Appraisal and Valuation Manual of the Royal Institute of
Chartered Surveyors in the United Kingdom by CBRE and Howell Brooks,
independent Chartered Surveyors.

These valuations have been incorporated into the financial statements and the
resulting revaluation adjustments have been taken to the capital reserve.

Details of significant Group entities are given in note 37.

18 Property, plant and equipment

Land and buildings
Opening cost or valuation
Additions at cost
Disposals
Revaluation
Closing cost or valuation

Net book amount
*As restated for the adoption of IFRS.

Group
2006

£m
25
1
(17)
1
10

Group
2005
(as restated)*
£m
26
–
–
(1)
25

Company
2006

£m
25
–
(17)
1
9

Company
2005
(as restated)*
£m
25
–
–
–
25

19 Investment property

Opening book value
Disposals
Revaluation
Closing book value
*As restated for the adoption of IFRS.

Group
2006

£m
6
(6)
–
–

Group
2005
(as restated)*
£m
5
–
1
6

During the year, the Group’s remaining investment property was sold.

20 Other current assets

Prepayments
Other debtors
Amounts due from subsidiaries

*As restated for the adoption of IFRS.

Group
2006

£m
92
57
–
149

Group
2005
(as restated)*
£m
62
54
–
116

Company
2006

£m
57
89
47
193

Company
2005
(as restated)*
£m
47
90
28
165

Depreciation charged in the year on buildings was £0.1 million (2005: £0.1 million).

Plant and equipment
Opening cost or valuation
Additions at cost
Disposals
Closing cost or valuation
Opening accumulated

depreciation
Charge for the year
Disposals
Closing accumulated

depreciation

Net book amount
*As restated for the adoption of IFRS.

Group
2006

£m
51
18
(12)
57

43
4
(11)

Group
2005
(as restated)*
£m
59
4
(12)
51

50
4
(11)

Company
2006

£m
–
–
–
–

–
–
–

–

Company
2005
(as restated)*
£m
–
–
–
–

–
–
–

–

Assets held under finance leases (all vehicles) have the following net book amount:

Cost
Aggregate depreciation
Net book amount
*As restated for the adoption of IFRS.

Group
2006

£m
1
–
1

Group
2005
(as restated)*
£m
2
(1)
1

Company
2006

£m
–
–
–

Company
2005
(as restated)*
£m
–
–
–

78 3i Report and accounts 2006 Notes to the financial statements

21 Financial risk management
The funding objective of the Group and Company is that each category of investment asset is broadly matched with liabilities and shareholders’ funds according to the risk
and maturity characteristics of the assets and that funding needs are met ahead of planned investment.

Credit risk 3i’s financial assets are predominantly unsecured investments in unquoted companies, in which the Directors consider the maximum credit risk to be the carrying
value of the asset. The portfolio is well diversified and for this reason credit risk exposure is managed on an asset-specific basis by investment managers.

Liquidity risk During the financial year 3i generated a surplus of £1,089 million (2005: £562 million) from its investing activities and cash resources at the end of the period
amounted to £1,955 million (2005: £1,199 million). In addition, the Group had available to it undrawn facilities of £488 million at 31 March 2006 (2005: £764 million).
The Directors currently view liquidity risk as low.

Price risk The valuation of unquoted investments depends upon a combination of market factors and the performance of the underlying asset. 3i does not hedge the market
risk inherent in the portfolio but manages asset performance risk on an asset-specific basis.

Foreign exchange risk 3i reports in sterling and pays dividends from sterling profits. The Directors seek to reduce structural currency exposures by matching assets
denominated in foreign currency with borrowings in the same currency. The Group makes some use of derivative financial instruments to effect foreign exchange
management. The exposure to the Euro, US dollar, Swedish krona, Swiss franc and all other currencies combined is shown in the table below.

Total assets
Total liabilities
Net assets

Total assets
Total liabilities
Net assets
*As restated for the adoption of IFRS.

Sterling
2006
£m
3,820
(103)
3,717

Euro
2006
£m
1,511
(1,453)
58

US dollar
2006
£m
475
(370)
105

Swedish krona
2006
£m
385
(316)
69

Swiss franc
2006
£m
124
(92)
32

Other
2006
£m
55
(30)
25

Total
2006
£m
6,370
(2,364)
4,006

Sterling
2005
(as restated)*
£m
3,862
(1,192)
2,670

Euro
2005
(as restated)*
£m
1,102
(618)
484

US dollar
2005
(as restated)*
£m
449
(69)
380

Swedish krona
2005
(as restated)*
£m
211
(158)
53

Swiss franc
2005
(as restated)*
£m
104
–
104

Other
2005
(as restated)*
£m
33
(25)
8

Total
2005
(as restated)*
£m
5,761
(2,062)
3,699

Cash flow interest rate risk 3i has a mixture of fixed and floating rate assets. The assets are funded with a mixture of shareholders’ funds and borrowings according to the
risk characteristics of the assets. The Directors seek to minimise interest rate exposure by matching the type and maturity of the borrowings to those of the corresponding
assets. Some derivative financial instruments are used to achieve this objective.

The interest rate profile of the financial assets and liabilities of the Group is shown in the table below by the earlier of the contractual repricing or maturity date.

Fixed rate
Loans and receivables
Deposits
Cash and cash equivalents
Loans and borrowings
Convertible Bonds
Subordinated liabilities
Derivatives

Floating rate
Loans and receivables
Loans and borrowings
Derivatives

1–2 years
2006
£m

2–3 years
2006
£m

3–4 years
2006
£m

4–5 years
2006
£m

Over
5 years
2006
£m

121

889

Within
1 year
2006
£m

28
1,108
847
(230)

(200)

188
1,941

(282)
(441)

(365)

(32)
(334)

(19)
23

(164)
(43)

182
(444)
715
453

(600)

(24)
(406)
(141)

Total
2006
£m

1,184
1,108
847
(1,030)
(365)
(24)
(715)
1,005

182
(444)
715
453

3i Report and accounts 2006 Notes to the financial statements 79

1–2 years
2005
(as restated)*
£m

2–3 years
2005
(as restated)*
£m

3–4 years
2005
(as restated)*
£m

4–5 years
2005
(as restated)*
£m

Over
5 years
2005
(as restated)*
£m

Total
2005
(as restated)*
£m

813

(352)

(32)
(297)

(21)
23

(600)

(50)
(292)
(129)

Within
1 year
2005
(as restated)*
£m

46
885
314
(98)

(4)

(200)

(45)
1,102

178
204

(275)
(381)

286
(396)
487
377

1,114
885
314
(902)
(352)
(50)
(487)
522

286
(396)
487
377

21 Financial risk management (continued)

Fixed rate
Loans and receivables
Deposits
Cash and cash equivalents
Loans and borrowings
Convertible Bonds
Subordinated liabilities
Derivatives

Floating rate
Loans and receivables
Loans and borrowings
Derivatives

*As restated for the adoption of IFRS.

The derivatives line shows the notional value of currency and interest rate swaps.

Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until
the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject
to interest rate risk.

Fair value interest rate risk The fair value of 3i’s derivative assets and liabilities is subject to interest rate risk. At 31 March 2006 the fair value of derivative financial
instruments was £149 million (2005: £45 million).

22 Derivative financial instruments

Current assets
Forward foreign exchange contracts
Currency swaps
Interest rate swaps

Current liabilities
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Derivative element of Convertible Bonds

*As restated for the adoption of IFRS.

Group
2006

£m

Group
2005
(as restated)*
£m

4
–
15
19

(12)
(3)
(57)
(96)
(168)

19
1
15
35

(3)
(7)
(50)
(20)
(80)

Company
2006

£m

4
–
15
19

(12)
(3)
(49)
(96)
(160)

Company
2005
(as restated)*
£m

19
1
15
35

(3)
(7)
(36)
(20)
(66)

80 3i Report and accounts 2006 Notes to the financial statements

22 Derivative financial instruments (continued)
Forward foreign exchange contracts and currency swaps The Group uses forward exchange contracts and currency swaps to minimise the effect of fluctuations in the
value of the investment portfolio from movement in exchange rates. Foreign currency interest-bearing loans and borrowings are also used for this purpose.

The contracts entered into by the Group are principally denominated in the currencies of the geographic areas in which the Group operates. The fair value of these contracts
is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date. No contracts are designated as
hedging instruments and consequently all changes in fair value are taken to profit or loss.

At the balance sheet date, the notional amount of outstanding forward foreign exchange contracts is as follows:

Forward foreign currency contracts
Currency swaps

*As restated for the adoption of IFRS.

2006

£m
1,392
35
1,427

2005
(as restated)*
£m
825
68
893

Interest rate swaps The Group uses interest rate swaps to manage its exposure to interest rate movements on its interest-bearing loans and borrowings. The fair value of
these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market rates at the balance sheet date. No contracts are
designated as hedging instruments and consequently all changes in fair value are taken to profit or loss.

At the balance sheet date, the notional amount of outstanding interest rate swaps is as follows:

Fixed rate to variable rate
Fixed rate to fixed rate
Variable rate to fixed rate
Variable rate to variable rate

*As restated for the adoption of IFRS.

2006

£m
340
70
1,020
170
1,600

2005
(as restated)*
£m
430
70
849
170
1,519

The Group does not trade in derivatives. The derivatives held hedge specific exposures and have maturities designed to match the exposures they are hedging. It is the
intention to hold both the financial instruments giving rise to the exposure and the derivative hedging them until maturity and therefore no net gain or loss is expected to
be realised.

The derivatives are held at fair value which represents the replacement cost of the instruments at the balance sheet date. Movements in the fair value of derivatives are
included in the income statement.

23 Loans and borrowings

Loans and borrowings
Loans and borrowings are repayable as follows:
Within one year
In the second year
In the third year
In the fourth year
In the fifth year
After five years

*As restated for the adoption of IFRS.

Group
2006

£m
1,474

231
400
94
–
149
600
1,474

Group
2005
(as restated)*
£m
1,298

102
155
400
40
–
601
1,298

Company
2006

£m
1,198

230
200
94
–
74
600
1,198

Company
2005
(as restated)*
£m
981

102
79
200
–
–
600
981

3i Report and accounts 2006 Notes to the financial statements 81

23 Loans and borrowings (continued)
Principal borrowings include:

Notes issued under the £2,000 million note issuance programme
Fixed rate
£200 million notes (public issue)
£200 million notes (public issue)
£400 million notes (public issue)
Variable rate
£200 million notes (public issue)
Other

Committed multi-currency facilities
£486 million (negotiated September 2005)
£150 million (negotiated November 2005)
£360 million (facility expired)
£595 million (facility expired)

Other
Other bonds in issue
Other borrowings
Euro commercial paper
Finance lease obligations

Total loans and borrowings
*As restated for the adoption of IFRS.

Rate

Maturity

Group
2006

£m

Group
2005
(as restated)*
£m

Company
2006

£m

Company
2005

(as restated)*

£m

6.875%
6.875%
5.750%

2007
2023
2032

LIBOR+0.100%

2007

LIBOR+0.210%
LIBOR+0.175%

2010
2010

2010

200
200
400

200
94
1,094

–
148
–
–
148

1
2
228
1
232

200
200
400

200
4
1,004

–
–
151
40
191

1
101
–
1
103

200
200
400

–
94
894

–
74
–
–
74

–
2
228
–
230

1,474

1,298

1,198

200
200
400

–
4
804

–
–
76
–
76

–
101
–
–
101

981

The drawings under the committed multi-currency facilities are repayable within one year but have been classified as repayable at the maturity date as immediate
replacement funding is available until those maturity dates. The undrawn commitment fee on the £150 million committed multi-currency facility is 0.05%. The margin on this
facility increases to 0.20% if the drawn amount is greater than 50% of the facility. The undrawn commitment fee on the £486 million committed multi-currency facility is
0.08%. The margin on this facility increases to 0.235% if the drawn amount is between 33% and 66% of the facility, and to 0.26% if the drawn amount is greater than 66%
of the facility.

The other borrowings in 2005 principally relate to deposits taken when the Company was a licensed deposit taker. This activity has now ceased.

All of the Group’s borrowings are repayable in one instalment on the respective maturity dates. None of the Group’s interest-bearing loans and borrowings are secured on the
assets of the Group. The fair value of the loan and borrowings is £1,543 million (2005: £1,359 million).

82 3i Report and accounts 2006 Notes to the financial statements

24 Convertible Bonds

Group
2006

Group
2005
(as restated)*
£m
334
8
10
352

Company
2006

£m
352
8
5
365

Company
2005
(as restated)*
£m
334
8
10
352

£m
352
8
5
365

Opening balance
Amortised during the year
Exchange movements
Closing balance
*As restated for the adoption of IFRS.
On 1 August 2003, 3i Group plc issued c550 million 1.375% Convertible Bonds due 2008. The 3i share price on 1 August 2003 was 635p (31 March 2006: 941p).
They are convertible at the option of the Bondholder to cash and ordinary shares at any time from 11 September 2003 to 25 July 2008. The number of shares to be issued
on conversion will be determined by dividing the principal of the bond less the cash settled amount by the conversion price in effect on the conversion date. The initial
conversion price is £8.416757, which has subsequently been adjusted to £8.38 following the share consolidation and special dividend in July 2005. The issuer may make a
payment in cash as an alternative to issuing shares upon either conversion or redemption. Unless previously realised and cancelled, redeemed or converted, these bonds will
be redeemed on 1 August 2008. Interest is payable on the bonds in equal semi-annual instalments in arrears on 12 January and 12 July each year.

On issue, part of the proceeds of the Convertible Bonds was recognised as a derivative instrument. The remaining amount is recognised as a loan and is being held at
amortised cost. The effective interest rate is 4.1%. The fair value of the loan element of the Convertible Bonds is £366 million (2005: £362 million).

25 Subordinated liabilities

Subordinated liabilities are repayable as follows:
After five years
*As restated for the adoption of IFRS.

Group
2006

£m

Group
2005
(as restated)*
£m

Subordinated liabilities comprise limited recourse funding from Kreditanstalt fur Wiederaufbau (“KfW”), a German federal bank. Repayment of the funding, which individually
finances investment assets, is dependent upon the disposal of the associated assets. This funding is subordinated to other creditors of the German subsidiaries to which these
funds have been advanced and in certain cases becomes non-repayable as assets fail.

26 Trade and other payables

Other accruals
Amounts due to subsidiaries

*As restated for the adoption of IFRS.

The Directors consider that the fair value of other accruals approximates to the carrying value of other accruals.

Group
2006

£m
160
–
160

Group
2005
(as restated)*
£m
135
–
135

Company
2006

£m
42
229
271

Company
2005
(as restated)*
£m
28
226
254

27 Provisions

Opening balance
Charge for year
Utilised in year
Movement for the year
Closing balance

3i Report and accounts 2006 Notes to the financial statements 83

2006
Property
£m
6
1
(2)
(1)
5

2006
Redundancy
£m
6
4
(5)
(1)
5

2006
Total
£m
12
5
(7)
(2)
10

The provision for redundancy relates to staff reductions announced this financial year and the prior financial year. Most of the provision is expected to be utilised in the
next year.

The Group has a number of leasehold properties whose rent and unavoidable costs exceed the economic benefits expected to be received. These costs arise over the period
of the lease, and have been provided for to the extent they are not covered by income from sub-leases.

28 Issued capital

Authorised
Ordinary shares of 50p
Ordinary shares of 531⁄8p
Unclassified shares of 10p

Issued and fully paid
Ordinary shares of 50p
Opening balance
Issued on exercise of share options and under the 3i Group Share Incentive Plan
Share consolidation
Closing balance

2006
Number
–
771,764,704
1,000,000

2006
Number

614,409,167
268,792
(614,677,959)
–

2006
£m
–
410
–

2006
£m

307
–
(307)
–

2005
Number
820,000,000
–
1,000,000

2005
Number

613,479,159
930,008
–
614,409,167

2005
£m
410
–
–

2005
£m

307
–
–
307

During the period 1 April 2005 to 10 July 2005, the Company issued shares for cash on the exercise of share options at various prices from 361p to 664p per share (the
market prices of shares on grant, apart from options under the 3i Group Sharesave Scheme, which were issued at 583p and 975p per share). The Company repurchased
400,452 ordinary shares of 50p each at 683p per share. These shares were cancelled after the Company consolidated its share capital on 11 July 2005.

On 11 July 2005, the Company consolidated its issued share capital on the basis of 16 ordinary shares of 531⁄8p each for every 17 ordinary shares of 50p each held.
This coincided with the payment of a special dividend of 40.7p per share.

Ordinary shares of 531⁄8p
Opening balance
Share consolidation
Issued on exercise of share options and under the 3i Group Share Incentive Plan
Shares cancelled
Closing balance

2006
Number

–
578,520,432
2,222,966
(30,186,896)
550,556,502

2006
£m

–
307
1
(16)
292

2005
Number

2005
£m

–
–
–
–
–

Since 11 July 2005 up to 31 March 2006, the Company issued shares for cash on the exercise of share options at various prices from 467p to 805p per share (the market
prices of shares on grant, apart from options under the 3i Group Sharesave Scheme, which were issued at 583p and 975p per share). The Company repurchased
29,810,000 ordinary shares of 531⁄8p each at an average price of 734p per share. These shares, and those purchased before the share consolidation, amounting to a total
of 30,186,896 ordinary shares of 531⁄8p each, were cancelled and a transfer made to the capital redemption reserve equal to the nominal value of the shares repurchased.

84 3i Report and accounts 2006 Notes to the financial statements

29 Equity

Opening balance
Total recognised income and expense
Share-based payments
Issues of shares
Dividends paid
Share buy-backs
Own shares
Closing balance

Opening balance
Total recognised income and expense
Share-based payments
Dividends paid
Issues of shares
Own shares
Closing balance
*As restated for the adoption of IFRS.

Opening balance
Total recognised income and expense
Issues of shares
Dividends paid
Share buy-backs
Closing balance

Opening balance
Total recognised income and expense
Dividends paid
Issues of shares
Closing balance
*As restated for the adoption of IFRS.

Group

Share
capital
2006
£m
307

Group

Share
premium
2006
£m
364

Group
Capital
redemption
reserve
2006
£m
1

Group
Share-based
payment
reserve
2006
£m
9

(16)

292

376

Group

Translation
reserve
2006
£m
5
(5)

Capital
reserve
2006
£m
2,613
719

Revenue
reserve
2006
£m
477
117

(331)

(222)

–

3,110

263

Group

Own
shares
2006
£m
(77)

8
(69)

Group

Total
equity
2006
£m
3,699
831
8
13
(331)
(222)
8
4,006

Group

Share
capital
2005
(as restated)*
£m
307

Share
premium
2005
(as restated)*
£m
359

Group
Capital
redemption
reserve
2005
(as restated)*
£m
1

Group
Share-based
payment
reserve
2005
(as restated)*
£m
3

307

364

Group

Translation
reserve
2005
(as restated)*
£m

Capital
reserve
2005
(as restated)*
£m
2,246
367

Own
shares
2005
(as restated)*
£m
(55)

Revenue
reserve
2005
(as restated)*
£m
433
129

(85)

2,613

477

(22)
(77)

Total
equity
2005
(as restated)*
£m
3,294
501
6
(85)
5
(22)
3,699

Company

Share
capital
2006
£m
307

Share
premium
2006
£m
364

Company
Capital
redemption
reserve
2006
£m
1

Capital
reserve
2006
£m
2,433
556

(16)
292

376

16
17

(222)
2,767

Revenue
reserve
2006
£m
521
87

(331)

277

Total
equity
2006
£m
3,626
643
13
(331)
(222)
3,729

Company

Share
capital
2005
(as restated)*
£m
307

Share
premium
2005
(as restated)*
£m
359

Company
Capital
redemption
reserve
2005
(as restated)*
£m
1

Company

Capital
reserve
2005
(as restated)*
£m
2,120
313

Revenue
reserve
2005
(as restated)*
£m
513
93
(85)

Total
equity
2005
(as restated)*
£m
3,300
406
(85)
5
3,626

307

5
364

2,433

521

Capital redemption reserve The Company is required to establish this reserve on the redemption or repurchase of its own shares.

Share-based payment reserve The share-based payment reserve is a reserve to recognise those amounts in retained earnings in respect of share-based payments.

Translation reserve The translation reserve comprises all exchange differences arising from the translation of the financial statements of international operations.

Capital reserve The capital reserve recognises all profits that are capital in nature or have been allocated to capital. These profits are not distributable by way of dividend.

Revenue reserve The revenue reserve recognises all profits that are revenue in nature or have been allocated to revenue.

3i Report and accounts 2006 Notes to the financial statements 85

30 Own shares

Opening cost
Additions
Disposals
Closing cost

2006
£m
77
–
(8)
69

2005
£m
55
25
(3)
77

Investment in own shares consists of shares in 3i Group plc held by The 3i Group
Employee Trust to meet its obligations under the Group’s share schemes. The market
value of these shares at 31 March 2006 was £104 million (2005: £84 million).
The Trustee has waived its right to receive dividends on the shares held by the Trust.
The purchase of the shares is funded by an interest free loan from 3i Group plc.

31 Per share information
The earnings and net assets per share attributable to the equity shareholders of the
Company are based on the following data:

Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit for the year attributable to equity

holders of the Company

Effect of dilutive potential ordinary shares

*As restated for the adoption of IFRS.

2006

152.0
147.3

852
14
866

2006
Number

2005
(as restated)*

82.6
81.0

498
11
509

2005
Number

Number of shares
Weighted average number of

shares in issue

Effect of dilutive potential

ordinary shares
Share options
Convertible Bonds

Diluted shares

Net assets per share (pence)
Basic
Diluted
Net assets (£m)
Net assets attributable to equity

holders of the Company
*As restated for the adoption of IFRS.

Number of shares in issue
Effect of dilutive potential

ordinary shares
Share options

*As restated for the adoption of IFRS.

560,684,598

603,240,340

2,744,369
24,750,000
588,178,967

2006

743
739

119,980
24,750,000
628,110,320

2005
(as restated)*

615
614

4,006

3,699

2006
Number
539,475,744

2005
Number
601,912,869

2,916,552
542,392,296

1,007,723
602,920,592

32 Dividends

Declared and paid

during the period

Ordinary shares
Final dividend
Special dividend
Interim dividend

Proposed dividend
*As restated for the adoption of IFRS.

2006

pence per share

2006

2005
(as restated)*
£m pence per share

2005
(as restated)*
£m

9.3
40.7
5.5
55.5
9.7

56
245
30
331
52

8.9
–
5.3
14.2
9.3

53
–
32
85
56

33 Operating leases
Leases as lessee Future minimum payments due under non-cancellable operating
lease rentals are as follows:

Less than one year
Between one and five years
More than five years

2006
£m
6
32
39
77

2005
£m
6
33
45
84

The Group leases a number of its offices under operating leases. None of the leases
include contingent rentals.

During the year to 31 March 2006, £6 million was recognised as an expense in the
income statement in respect of operating leases (2005: £9 million). £2 million was
recognised as income in the income statement in respect of subleases (2005:
£2 million).

34 Commitments

Share and loan investments

Group
2006
£m
470

Group
2005
£m
431

Company
2006
£m
250

Company
2005
£m
377

Most of the above commitments are expected to be settled in the following
financial year.

35 Contingent liabilities

Contingent liabilities relating
to guarantees available to
third parties in respect of
investee companies

Group
2006
£m

Group
2005
£m

Company
2006
£m

Company
2005
£m

The Company has guaranteed the payment of principal, premium if any, and interest
on all the interest swap agreements of 3i Holdings plc. The Company has guaranteed
the payment of principal, premium if any, and interest on notes issued under the
£2,000 million note issuance programme by 3i Holdings plc.

The Company has guaranteed the payment of principal and interest on amounts
drawn down by 3i Holdings plc under the £150 million and the £486 million
revolving credit facilities. At 31 March 2006, 3i Holdings plc had drawn down
£74 million (2005: £nil) under the first facility.

The Company has provided a guarantee to the Trustees of the 3i Group Pension Plan
in respect of the liabilities of 3i plc to the Plan. 3i plc is the sponsor of the 3i Group
Pension Plan.

At 31 March 2006, there was no material litigation outstanding against the
Company or any of its subsidiary undertakings.

86 3i Report and accounts 2006 Notes to the financial statements

36 Related parties
The Group has various related parties stemming from relationships with limited
partnerships managed by the Group, its investments and its key management
personnel. In addition the Company has related parties in respect of its subsidiaries.

36 Related parties (continued)
Key management personnel The Group’s key management personnel comprises
the members of Management Committee and the Board’s non-executive directors.
The remuneration of key management personnel was:

Limited partnerships The Group manages funds on behalf of third parties.
These funds invest through a number of limited partnerships. Group companies
act as the general partners of these limited partnerships and exert significant
influence over them.

The following amounts have been included in respect of these limited partnerships:

Income statement
Carried interest receivable
Fund management fees

Balance sheet
Carried interest receivable
Amount due from

limited partnerships

*As restated for the adoption of IFRS.

Group
2006

£m
79
24

Group
2006

£m
77

Group
2005
(as restated)*
£m
2
30

Group
2005
(as restated)*
£m
9

Company
2006

£m
79
–

Company
2006

£m
77

–

Company
2005
(as restated)*
£m
2
–

Company
2005
(as restated)*
£m
9

–

Investments The Group makes minority investments in the equity of unquoted
companies. This normally allows the Group to participate in the financial and
operating policies of that company. It is presumed that it is possible to exert
significant influence when the equity holding is greater than 20%. These investments
are not equity accounted for (as permitted by IAS 28) but are related parties.
The total amounts included for these investments are as follows:

Income statement
Realised profits over value on
the disposal of investments

Unrealised profits on the

revaluation of investments

Portfolio income

Balance sheet
Quoted equity investments
Unquoted equity investments
Loan and receivables
*As restated for the adoption of IFRS.

Group
2006

£m

374

78
203

Group
2005
(as restated)*
£m

209

115
184

Group
2006

£m
66
1,721
1,317

Group
2005
(as restated)*
£m
75
1,823
1,297

Company
2006

£m

292

57
72

Company
2006

£m
46
974
694

Company
2005
(as restated)*
£m

183

88
152

Company
2005
(as restated)*
£m
60
1,400
911

Salaries, fees, supplements and benefits in kind
Bonuses and deferred share bonuses
Increase in accrued pension
Carried interest payable within one year
Carried interest payable after one year
Share-based payments
*As restated for the adoption of IFRS.

Group
2006

£m
5
6
–
4
5
1

Group
2005
(as restated)*
£m
4
3
–
2
4
1

Subsidiaries Transactions between the Company and its subsidiaries, which are
related parties of the Company are eliminated on consolidation. Details of related
party transactions between the Company, and its subsidiaries are detailed below.

Management, administrative and secretarial arrangements The Company
has appointed 3i Investments plc, a wholly owned subsidiary of the Company
incorporated in England, as investment manager of the Group. 3i Investments plc
received a fee of £26 million (2005: £26 million) for this service.

The Company has appointed 3i plc, a wholly owned subsidiary of the Company
incorporated in England, to provide the Company with a range of administrative
and secretarial services. 3i plc received a fee of £126 million (2005: £102 million)
for this service.

Investment entities The Company makes investments through a number of
subsidiaries by providing funding in the form of capital contributions or loans
depending on the legal form of the entity making the investment. The legal form
of these subsidiaries may be limited partnerships or limited companies or equivalent
depending on the jurisdiction of the investment. The Company receives interest on
this funding and receives dividends and distributions from these entities.

Realised profit/(loss) over fair value on the disposal

of investments

Dividends
Interest
*As restated for the adoption of IFRS.

Company
2006

£m

54
41
1

Company
2005
(as restated)*
£m

(79)
11
1

Other subsidiaries The Company borrows funds from certain subsidiaries and
pays interest on the outstanding balances. The amounts that are included in the
Company’s income statement are as follows:

Company
2006

£m
2

Company
2005
(as restated)*
£m
5

From time to time transactions occur between related parties within the investment
portfolio that the Group influences to facilitate the reorganisation or recapitalisation
of an investee company. There have been no single transactions in the year with a
material effect on the Group’s financial statements and all such transactions are fully
included in the above disclosure.

Interest
*As restated for the adoption of IFRS.

3i Report and accounts 2006 Notes to the financial statements 87

37 Group entities
Significant subsidiaries

Name
3i Holdings plc
3i International Holdings
3i plc
3i Investments plc
3i Europe plc
3i Nordic plc
3i Asia Pacific plc
Gardens Pension
Trustees Limited
3i Corporation

Country of incorporation
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales

Issued and fully paid share capital
1,000,000 shares of £1
2,715,973 shares of £10
110,000,000 shares of £1
10,000,000 ordinary shares of £1
500,000 ordinary shares of £1
500,000 ordinary shares of £1
140,000 ordinary shares of £1
100 ordinary shares of £1

Principal activity
Holding company
Holding company
Services
Investment manager
Investment advisory services
Investment advisory services
Investment advisory services
Pension fund trustee

15,000 shares of
common stock (no par value)

Investment manager

3i Deutschland Gesellschaft für
Industriebeteiligungen mbH

Germany

c25,564,594

Investment manager

3i Gestion SA

France

200,000 shares of c16

Investment manager

Registered office
16 Palace Street
London
SW1E 5JD

880 Winter Street
Suite 330
Waltham
MA 02451, USA
Bockenheimer
Landstrasse 55
60325 Frankfurt am
Main, Germany
3 rue Paul Cézanne
Paris, 75008
France

The list above comprises the principal subsidiary undertakings as at 31 March 2006 all of which were wholly owned. They are incorporated in Great Britain and registered in
England and Wales unless otherwise stated.

Each of the above subsidiary undertakings is included in the consolidated accounts of the Group.

As at 31 March 2006, the entire issued share capital of 3i Holdings plc was held by the Company. The entire issued share capital of all the other principal subsidiary
undertakings listed above was held by subsidiary undertakings of the Company, save that four shares in 3i Gestion SA were held by individuals associated with the Group.

The Directors are of the opinion that the number of undertakings in respect of which the Company is required to disclose information under Schedule 5 to the Companies Act
1985 is such that compliance would result in information of excessive length being given. Full information will be annexed to the Company’s next annual return.

88 3i Report and accounts 2006 Notes to the financial statements

38 Reconciliations of UK GAAP to IFRS for comparative periods
Under IFRS, the “Total recognised income and expense” is the equivalent of “Total
return”, as reported previously. In order to comply with IFRS 1, we provide below a
reconciliation of total return to the net profit per the income statement.

Total return under UK GAAP
IAS 39 – Quoted investments
IAS 39 – Fair value of derivatives
IAS 39 – Convertible Bonds
IFRS 2 – Share-based payments
IAS 21 – Functional currencies and exchange rates
IAS 16 – Own use property
IAS 19 – Retirement benefits
IAS 27 – Consolidation of limited partnerships
Profit under IFRS

Note

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(i)

Group
2005
£m
512
(11)
1
5
(6)
(5)
1
1
–
498

Company
2005
£m
433
(15)
(8)
5
–
(2)
1
–
(7)
407

Group
31 March
2005
£m

Group
1 April
2004
£m

Company
31 March
2005
£m

Company
1 April
2004
£m

Note

Total equity

under UK GAAP

IAS 39 – Quoted

investments

IAS 39 – Fair valuation
of derivatives

IAS 39 – Convertible

bonds

IAS 10 – Dividends

payable

IAS 27 – Consolidation

of limited
partnerships and
own shares

Total equity
under IFRS

(a)

(b)

(c)

(h)

(i)

3,637

3,230

3,488

3,160

(26)

(27)

(12)

(4)

3,699

3,294

3,626

3,300

Change in cash under UK GAAP
IAS 7 – Short-term deposits
Change in cash and cash equivalents under IFRS

Note

(j)

Group
2005
£m
68
40
108

Notes
(a) Under IFRS, quoted investment assets are valued at bid price. Under UK GAAP, these had been

valued at mid-market price with discounts applied for illiquidity.

(b) 3i uses derivatives in the form of swap and forward exchange contracts to manage exposures to
interest rates and currency. Under IFRS, these are held at fair value whereas they were held at
cost under UK GAAP.

(c) Under UK GAAP, the Convertible Bonds which were issued on 1 August 2003 were held at the
face value of the bonds (c550 million). Under IFRS, the derivative element of the bonds is held
at fair value. The liability is held at amortised cost.

(d) Under UK GAAP, the approach in respect of share-based payments was to record a charge
in profit or loss based on the intrinsic value of awarded shares at the grant date, with the
charge being spread over the performance period. IFRS 2 requires the fair value of the equity
instruments issued to be recognised in profit and loss over the vesting period of the instrument.
The cost is calculated using option pricing methods and applies to all options granted after
7 November 2002 and not vested by 1 January 2005.

(e) Under IFRS, revenue items will be held at the rates in force at the time of the transaction.

Exchange differences on the retranslation on consolidation of the opening net investment in
foreign entities and the retranslation of profit or loss items to closing rate are recorded as
movements on reserves.

38 Reconciliations of UK GAAP to IFRS for comparative periods
(continued)
(f) Under IFRS, unrealised profits or losses on the revaluation of properties in use by the Group are

taken directly to equity and do not appear in the income statement.

(g) Under IFRS, the actuarial gain or loss on retirement benefit obligations is taken directly to equity

and does not appear in the income statement.

(h) Under IFRS, dividends declared after the balance sheet date are not recognised as a liability at

the balance sheet date.

(i) Under UK GAAP, investment in limited partnerships were treated as an intrinsic part of the

Parent Company. Under IFRS it is more appropriate to show these investments as subsidiaries.
The 3i Group Employee Trust is now treated as a separate entity rather than an intrinsic part of
the Company. The limited partnerships and the Trust form part of the Group consolidation.
(j) Under IFRS, short-term deposits are classified as cash equivalents whereas they were included in
liquid resources under UK GAAP. The move from UK GAAP does not significantly change any of
the cash flows of the Group.

39 Directors’ share interests
The interests of the Directors (all of which are beneficial) in the ordinary shares of
the Company as stated in the register of directors’ interests are shown below.
Share interests stated before the Company’s share consolidation on 11 July 2005
relate to ordinary shares of 50p each while those stated after that date relate to
ordinary shares of 531/8p each.

31 March
2006
(or date of
cessation
if earlier)
18,686
–
1,872
28,238
3,952
–
20,026
379,460
30,422
92,366
327,697

Baroness Hogg
P Mihatsch
C J M Morin-Postel
F D Rosenkranz
R H Smith
F G Steingraber
O H J Stocken
P E Yea
S P Ball
R W Perry (until 6 July 2005)
M J Queen
*Represents conditional rights to acquire shares arising from deferred share bonus awards granted
under the Management Equity Investment Plan, described on page 58.

31 March
2005
17,355
–
2,000
30,000
4,200
–
12,825
281,611
–
87,488
319,191

31 March
2006
(or date of
cessation
if earlier)
conditional*
–
–
–
–
–
–
–
–
–
9,419
–

31 March
2005
conditional*
–
–
–
–
–
–
–
–
–
16,206
8,144

The share interests shown above for each of Mr S P Ball, Mr R W Perry,
Mr M J Queen and Mr P E Yea include performance share awards which are
subject to forfeiture and are detailed in the table on page 56.

In addition to the interests shown above, the executive Directors also have beneficial
interests in the conditional rights to acquire shares arising from performance linked
awards granted under the Management Equity Investment Plan, which are detailed
in the table on page 58. Each of the employees of the Group (including each of the
executive Directors) is a potential beneficiary of The 3i Group Employee Trust and as
such is interested (within the meaning of section 324 of the Companies Act 1985)
in the shares held by the trust. The trust held 12,496,297 shares as at
1 April 2005, 12,252,014 shares as at 6 July 2005 and 11,311,280 shares as at
31 March 2006. This number of shares includes the shares over which Directors are
mentioned above as having conditional rights to acquire under the Management
Equity Investment Plan.

Details of Directors’ share options under the Group’s Executive Share Option Plans
are shown in the Directors’ remuneration report on page 55.

In the period from 1 April 2006 to 3 May 2006 the undermentioned Directors
became beneficially interested in the following number of additional shares:
Mr P E Yea (42 shares), Mr S P Ball (39 shares) and Mr M J Queen (42 shares).
In addition, as at that date, the number of shares held by the 3i Group Employee
Trust was 11,311,280.

3i Report and accounts 2006 89

Portfolio valuation methodology

A description of the methodology used to value the Group’s portfolio is set out below in order to provide more detailed information than is included each year in the
accounting policies for the valuation of the portfolio. The methodology complies in all material aspects with the “International private equity and venture capital valuation
guidelines” endorsed by both the BVCA and EVCA.

Basis of valuation Investments are reported at the Directors’ estimate of Fair Value at the reporting date. Fair Value represents the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arm’s length transaction.

General In estimating Fair Value, we 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 total portfolio. 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 judgments and making the necessary estimates.

Quoted investments Quoted 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.

Unquoted investments Most unquoted investments are valued using one of the following methodologies:

– cost, less any required provision;

– earnings multiple;

– net assets;

– price of recent investment;

– expected sales proceeds.

New investments are valued at cost for the first 12 months and then until another methodology becomes more appropriate. This generally occurs when the first full set of
accounts covering a period of at least six months since the date of investment becomes available.

Any investment in a company that has failed or 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.

Generally, the process of estimating the Fair Value of an investment involves selecting one of the above methodologies and using that to derive an Enterprise Value for the
investee company. The process is then to:

– deduct from the Enterprise Value all financial instruments ranking ahead of the Group;

– apply an appropriate Marketability Discount;

– apportion the remaining value over the other financial instruments including the Group’s loans, fixed income shares and equity shares.

Where that apportionment indicates a shortfall against the loans or fixed income shares, then the Group considers whether, in estimating Fair Value, the shortfall should be
applied, and if so, to what extent.

The Marketability Discount will generally be between 10%-30% with the level set to reflect the Group’s influence over the exit prospects and timing for the investee
company.

When using the earnings multiple methodology, earnings before interest and tax (“EBIT”) are normally used, adjusted to a maintainable level. Generally, the latest full year
historical accounts are used unless there is an indication of a forecast downturn in earnings in the current or forecast year, in which case those earnings may be used.
An appropriate multiple is applied to these earnings to derive an Enterprise Value. Normally the multiple will be the average EBIT multiple for the relevant sector of the
FTSE Global SmallCap Europe index, adjusted downwards by the Group to exclude loss-making companies.

Where a company reports an operating loss or the industry standard valuation methodology is by reference to the asset base, then the value may be estimated using the net
assets methodology.

The “price of recent investment” methodology is used mainly for investments in venture capital companies and includes cost of the investment or valuation by reference to
a subsequent financing round. Valuation increases above cost are only recognised if that round involved a new external investor and the company is meeting milestones set
by the investors. The relevance of this methodology can be eroded over time due to changes in the technology, business or market which may indicate an impairment has
occurred. In this case, carrying values will be reduced to reflect Fair Value.

Other factors that may be taken into account include:

– the expected effect of ratchets, options and liquidation preferences;

– any industry standard valuation methodology;

– offers received as part of a sale process, which may either support the value derived from another methodology or be used as the valuation less a Marketability Discount

of typically 10%.

For the Group’s smaller investments, the valuation is determined by a more mechanistic approach using information from the latest audited accounts. Equity shares are
valued at the higher of an earnings or net assets methodology. Fixed income shares and loan investments are valued at the lower of cost and net recoverable amount.
Approximately 15% by value of the Group’s unquoted investments are valued using this methodology.

An analysis of the portfolio by valuation method is given in the portfolio analysis on pages 93 and 94.

90 3i Report and accounts 2006

Ten largest investments1

Investment
SR Technics Holding
Technical solutions provider for commercial aircraft fleets
Equity shares
Loans

Parking International Holdings Limited (NCP)
Transport management and parking services
Equity shares
Loans

Giochi Preziosi Spa
Retailer and wholesaler of toys
Equity shares

Boxer TV-Access AB
Digital TV distributor
Equity shares

Infrastructure Investors5
Secondary PFI and Infrastructure investment fund
Equity shares
Loans

Vetco International Ltd6
Oilfield equipment manufacturer
Equity shares

Tato Holdings Ltd
Manufacture and sale of specialist chemicals
Equity shares

Coor Service Management AB
Facilities management
Equity shares
Loans

Senoble Holding SAS
Manufacturer of dairy products and chilled desserts
Equity shares
Loans

Business
line
Buyouts

Geography
Switzerland

First
invested
in
2002

Residual
cost2
£m

Proportion
of equity
shares held

Directors’
valuation2
£m

Income in
the year3
£m

Net assets4
£m

Earnings4
£m

Buyouts

2005

Buyouts

Italy

2005

Growth

Sweden

2005

Growth

2005

Buyouts

2004

SMI

1989

Buyouts

Sweden

2004

Growth

France

2004

32.2%

39.9%

37.8%

30.0%

31.2%

17.7%

25.2%

37.5%

10.0%

7
30
37

1
95
96

63
63

58
58

–
59
59

–
–

2
2

1
26
27

9
18
27

70
30
100

1
95
96

64
64

60
60

–
59
59

53
53

26
26
52

27
19
46

–
3
3

–
12
12

–
–

–
–
–

–
–

–
2
2

–
1
1

(1)

(23)

(9)

208

(67)

(49)

Notes
1 The valuation of Vonage Holdings Corp., a US Venture Capital investment made in 2004, has been excluded as the company has commenced an IPO process in the US. If it had

been disclosed, the investment would have been among the largest five investments shown above.

2 The investment information is in respect of the Group’s holding and excludes any co-investment by 3i managed funds.
3 Income in the year represents dividends received (inclusive of any overseas withholding tax) and gross interest receivable in the year to 31 March 2006.
4 Net assets and earnings figures are taken from the most recent audited accounts of the investee business. The figures shown are the total earnings on ordinary activities after tax
and the net assets of each business. Because of the varying rights attaching to the classes of shares held by the Group, it could be misleading to attribute a certain proportion of
earnings and net assets to the proportion of equity capital held. Negative earnings and net assets are shown in brackets.

5 The investment by 3i is into three Infrastructure Investors’ entities, a limited partner in the fund, a general partner in the fund and a management company and as well as the loan

shown, has a cost of £3,177 for partnership capital. The net assets and earnings figures for this investment are for the LP and are unaudited.

6 The cost of the equity held in Vetco International Ltd is £423,367.

3i Report and accounts 2006 91

Forty other large investments

In addition to the ten largest investments shown on page 90, detailed below are forty other large investments which are substantially all of the Group’s remaining investments valued
over £19 million. This does not include 3 investments that have been excluded for commercial reasons.

Transport operator

Conference centres

Specialist healthcare

Software and services

Description of Business

Eye laser surgery clinics

Airport ground handling

Waste water pump producer

Production of glass products

International courier services

Specialist frozen food retailers

Operation of port concessions

Elderly, primary and specialist care

Online real estate listing and services

Services for Internet service providers

Real estate purchase, refurbishment and sale

Semiconductors/wireless single chip solutions

Polymer based sandwich technology laminates

Manufacturer of screening and crushing machinery

Investment
Renta Corporacion Real Estate, SA
Vextia (Poliris)
Financiere Keos SA (Keolis)
CSR plc2
Care Principles TopCo Ltd
La Sirena (Martifusgab)
H-Careholding AB
Hayley Conference Centres Ltd
DIAB Intressenter AB
Extec Holdings Ltd
Jung Pumpen GmbH
Progetto 26 Spa
Marken Ltd
Grup Maritim TCB, SL
Smartstream Technologies Group Ltd
Aviapartner Group SA
Telecity plc2
Clinica Baviera
Pharmadule Emtunga AB
Goromar XXI, SL
Interhyp AG2
Nimbus Communications Ltd
Morse plc2
HSS Hire Service Holdings Ltd
Refresco Holding BV
Sparrowhawk Media Limited
Target Express Ltd
International Tractors Ltd
Nordic Capital IV LP
Vetoquinol SA
Alma Mater Fund
Metropolitan Management BV (Polyconcept)
Nova Rodman, SL
Management Consortium Bid
MKM Building Supplies Ltd
Hyva Investments BV
Malachite 1 Ltd (Buy as you view)
FocusMedia Holdings Ltd2
Alimak Hek AB
Groupe Vendome SA
Notes
1 The investment information is in respect of the Group’s holding and excludes any co-investment by 3i managed funds.
2 Quoted company (including secondary markets).

Business line
Growth
Growth
Buyouts
Venture
Buyouts
Buyouts
Buyouts
Growth
Growth
Buyouts
Buyouts
Growth
Buyouts
Buyouts
Buyouts
Buyouts
Buyouts
Growth
Buyouts
Buyouts
Venture
Growth
Buyouts
Buyouts
Buyouts
Buyouts
Buyouts
Growth
Growth
Growth
Growth
Growth
Growth
Buyouts
Growth
Buyouts
Buyouts
Growth
Growth
Buyouts

Modular facilities to pharmaceuticals/biotech offshore and telecom sectors

Development, manufacture and distribution of vet pharmaceuticals

UK and International TV channel and business library

Manufacturer of frites and glazes for ceramic tiles

Investment in university student accommodation

Branded hydraulics to commercial vehicles

Construction of hoists and platforms

Manufacturer of agricultural tractors

Media and entertainment services

Supplier of promotional products

Coin meter based hire purchase

Cosmetic and toiletry products

Investment limited partnership

Container distribution by rail

Building materials suppliers

Freight transport by road

Online mortgage broker

Technology integrator

Services and utilities

Fruit juice producer

Boat manufacturer

Tool hire

Geography
Spain
France
France
UK
UK
Spain
Sweden
UK
Sweden
UK
Germany
Italy
UK
Spain
UK
Netherlands
UK
Spain
Sweden
Spain
Germany
India
UK
UK
Netherlands
UK
UK
India
UK
France
UK
UK
UK
UK
UK
Netherlands
UK
China
Sweden
France

First
invested
2004
2005
2004
1999
1997
2006
2005
2005
2002
2002
2004
1997
2006
1999
2000
2005
1998
2005
2003
2002
2000
2005
1995
2004
2003
2005
2000
2006
2000
2003
2003
2005
2004
1997
1999
2004
2004
2004
2001
2001

Residual
Cost1
£m
14
41
20
1
39
37
36
35
90
6
20
16
30
12
29
28
17
27
40
18
2
26
8
17
2
22
43
22
8
14
21
21
19
8
21
15
20
2
15
5

Directors’
Valuation1
£m
42
41
41
40
39
38
36
35
35
33
32
31
30
30
29
28
28
28
27
27
27
26
25
25
24
24
23
22
22
22
21
21
21
21
21
20
20
20
19
19

92 3i Report and accounts 2006

New investment analysis

Analysis of the equity, fixed income and loan investments made by the Group. This analysis excludes investments in joint ventures.
Investment by business line (£m)
Buyouts
Growth Capital
Venture Capital
SMI
Total

2006
451
497
156
6
1,110

2005
338
263
143
11
755

Investment by geography (£m)
UK
Continental Europe
US
Asia
Total

Continental European investment (£m)
Benelux
France
Germany/Austria/Switzerland
Italy
Nordic
Spain
Other European*
Total
*Other European includes investments in countries where 3i did not have an office at 31 March 2006.

Investment by FTSE industrial classification (£m)1
Resources
Industrials
Consumer goods
Services and utilities
Financials
Information technology
Total

First and subsequent investment (£m)
First investment in new investee companies
Drawdown on existing arrangements for first investments
Investment by 3i in external funds
Newly arranged further investment in existing portfolio companies
Other – including capitalised interest
Total
Note
1 In January 2006 there was a reclassification of industry sectors by the FTSE. Comparative data has not been restated.

409
540
70
91
1,110

62
88
76
65
126
94
29
540

17
208
235
481
84
85
1,110

755
12
111
162
70
1,110

334
341
51
29
755

17
73
92
20
81
41
17
341

68
163
155
234
59
76
755

488
10
26
167
64
755

2004
282
319
156
27
784

309
401
61
13
784

52
65
141
14
87
23
19
401

9
146
260
228
28
113
784

534
17
3
176
54
784

2003
221
325
170
–
716

318
304
74
20
716

35
30
104
24
62
43
6
304

12
230
163
134
48
129
716

433
48
6
163
66
716

2002
139
296
399
–
834

377
312
119
26
834

36
50
121
11
65
25
4
312

14
88
155
252
23
302
834

430
73
7
216
108
834

Portfolio analysis

The Group’s equity, fixed income and loan investments total £4,139 million at 31 March 2006.
Portfolio value by business line (£m)
Buyouts
Growth Capital
Venture Capital
SMI
Total

Portfolio value by geography (£m)
UK
Continental Europe
US
Asia
Total

Continental European portfolio value (£m)
Benelux
France
Germany/Austria/Switzerland
Italy
Nordic
Spain
Other European*
Total
*Other European includes investments in countries where 3i did not have an office at 31 March 2006.

Portfolio value by FTSE industrial classification (£m)2
Resources
Industrials
Consumer goods
Services and utilities
Financials
Information technology
Total

Portfolio value by valuation method (£m)
Imminent sale or IPO
Listed
Secondary market
Earnings
Cost
Further advance
Net assets
Other (including other Venture Capital assets valued below cost)
Loan investments and fixed income shares
Total
Notes
1 2004 and 2005 have been restated for IFRS.
2 In January 2006 there was a reclassification of industry sectors by the FTSE. Comparative data has not been restated.

3i Report and accounts 2006 93

2006
1,465
1,284
826
564
4,139

1,740
1,925
307
167
4,139

124
344
489
142
394
342
90
1,925

145
1,040
841
1,173
379
561
4,139

290
197
62
1,021
621
116
95
371
1,366
4,139

20051
1,521
1,292
748
756
4,317

2,258
1,693
277
89
4,317

180
292
503
69
344
249
56
1,693

162
1,077
969
1,214
326
569
4,317

373
198
37
1,138
468
203
92
408
1,400
4,317

20041
1,487
1,233
682
960
4,362

2,528
1,516
243
75
4,362

181
234
459
53
332
224
33
1,516

159
1,019
1,030
1,278
247
629
4,362

174
259
31
1,347
509
149
103
328
1,462
4,362

2003
1,197
2,000
742
–
3,939

2,494
1,175
180
90
3,939

101
186
319
69
273
211
16
1,175

186
944
873
1,018
274
644
3,939

37
187
30
938
607
155
139
282
1,564
3,939

2002
1,152
2,647
1,310
–
5,109

3,386
1,373
264
86
5,109

78
253
385
103
304
222
28
1,373

268
1,117
1,080
1,318
273
1,053
5,109

51
413
89
1,210
1,077
186
132
219
1,732
5,109

94 3i Report and accounts 2006 Portfolio analysis

Buyout portfolio value by valuation method (£m)
Imminent sale or IPO
Listed
Secondary market
Earnings
Cost
Net assets
Other
Loan investments and fixed income shares
Total

Growth Capital portfolio value by valuation method (£m)
Imminent sale or IPO
Listed
Secondary market
Earnings
Cost
Further advance
Net assets
Other
Loan investments and fixed income shares
Total

Venture Capital portfolio value by valuation method (£m)
Imminent sale or IPO
Listed
Secondary market
Earnings
Cost
Further advance
Net assets
Other Venture Capital assets valued below cost
Other
Loan investments and fixed income shares
Total
– of which early stage Venture Capital

SMI portfolio value by valuation method (£m)
Imminent sale or IPO
Listed
Secondary market
Earnings
Cost
Further advance
Net assets
Other
Loan investment and fixed income shares
Total

Venture Capital portfolio value by sector (£m)
Healthcare
Communications
Electronics, semiconductors and advanced technologies
Software
Total
Note
1 2004 and 2005 have been restated for IFRS.

2006
92
25
1
410
105
–
38
794
1,465

112
31
27
294
257
8
29
89
437
1,284

33
128
31
10
248
104
6
71
132
63
826
629

53
13
3
307
11
4
60
41
72
564

290
178
147
211
826

20051
134
48
1
372
71
4
22
869
1,521

120
62
9
360
159
14
33
200
335
1,292

33
72
22
25
221
186
1
71
55
62
748
561

86
16
5
381
17
3
54
60
134
756

228
189
141
190
748

20041
59
86
1
472
58
2
20
789
1,487

49
78
7
350
171
15
39
145
379
1,233

36
71
20
–
257
119
1
51
66
61
682
456

30
24
3
525
23
15
61
46
233
960

232
171
106
173
682

2003
–
46
6
245
93
7
32
768
1,197

23
102
6
658
230
14
131
135
701
2,000

14
39
18
35
284
141
1
79
36
95
742
589

–
–
–
–
–
–
–
–
–
–

2002
–
93
12
204
64
9
14
756
1,152

42
177
13
967
284
24
115
155
870
2,647

9
143
64
39
729
162
8
23
27
106
1,310
1,042

–
–
–
–
–
–
–
–
–
–

253
151
107
231
742

400
242
186
482
1,310

Realisations analysis

Analysis of the Group’s realisations proceeds (excluding third party co-investment funds).
Realisations proceeds by business line (£m)
Buyouts
Growth Capital
Venture Capital
SMI
Total

Realisations proceeds by geography (£m)
UK
Continental Europe
US
Asia
Total

Realisations proceeds (£m)
IPO
Sale of quoted investments
Trade and other sales
Loan and fixed income share repayments
Total

Realisations proceeds by FTSE industrial classification (£m)1
Resources
Industrials
Consumer goods
Services and utilities
Financials
Information technology
Total
Note
1 In January 2006 there was a reclassification of industry sectors by the FTSE. Comparative data has not been restated.

3i Report and accounts 2006 95

2006
877
855
207
268
2,207

1,173
891
76
67
2,207

229
143
1,271
564
2,207

132
418
529
739
225
164
2,207

2005
505
443
156
198
1,302

897
365
34
6
1,302

41
134
744
383
1,302

105
142
394
457
29
175
1,302

2004
205
391
91
236
923

608
245
10
60
923

7
118
532
266
923

14
216
167
352
80
94
923

2003
345
538
93
–
976

727
238
2
9
976

37
110
493
336
976

60
294
192
330
42
58
976

2002
138
540
261
–
939

794
133
10
2
939

55
370
303
211
939

52
193
255
288
18
133
939

96 3i Report and accounts 2006

Portfolio and investment analysis including co-investment funds

Investment by business line (£m)
Buyouts
Growth Capital
Venture Capital
SMI
Total

Investment by geography (£m)
UK
Continental Europe
US
Asia
Total

Portfolio value by business line (£m)1
Buyouts
Growth Capital
Venture Capital
SMI
Total

Portfolio value by geography (£m)1
UK
Continental Europe
US
Asia
Total
Note
1 The portfolio values for 2004 and 2005 have been restated for IFRS.

Funds under management

(£m)
Third party unquoted co-investment funds
Quoted investment companies and 3i Group Pension Plan
Total

2006
655
503
156
8
1,322

502
654
70
96
1,322

2,330
1,422
834
616
5,202

2,124
2,583
307
188
5,202

2005
532
274
144
12
962

440
433
51
38
962

2,521
1,474
747
813
5,555

2,742
2,428
283
102
5,555

2004
438
349
161
31
979

375
526
61
17
979

2,472
1,459
708
1,048
5,687

3,046
2,305
250
86
5,687

2003
376
379
176
–
931

399
436
74
22
931

1,998
2,301
798
–
5,097

3,041
1,773
182
101
5,097

2002
229
390
420
–
1,039

443
446
119
31
1,039

1,920
3,059
1,394
–
6,373

4,018
1,984
270
101
6,373

2006
1,573
–
1,573

2005
1,913
–
1,913

2004
1,875
600
2,475

2003
1,587
452
2,039

2002
1,995
761
2,756

3i Report and accounts 2006 97

Drivers of private equity investment Some of the
main drivers giving rise to investment opportunities
are as follows:

– Stock market conditions and M&A activity

levels – a strong stock market acts in many ways as
an “engine” for private equity, since it allows
acquisitive listed companies to purchase businesses
at attractive prices and also is more receptive to
businesses seeking a listing. The ability of the
PE investor to “exit” at reasonably high values is a
key part of the investment model, and exit
assumptions will be a key input to the pricing
parameters at the time of investing. In addition,
strong activity levels in the M&A market (which will
often follow from good stock market conditions)
tend to provide a source of investment opportunities
when the acquiring group disposes of the unwanted
parts of the business acquired.

– Restructuring by large corporate groups – as
corporate groups change strategic direction or
focus on core activities, they will often seek to sell
unwanted or non-core subsidiaries or divisions,
providing a good source of buyout opportunities.

– Entrepreneurial culture – this is to do with the

eagerness, across a society, of individuals to start up
or grow businesses or to give up a secure corporate
job for the opportunity to run or manage an
independent business.

– Growth strategies – the pursuit of profits by
businesses will often involve the use of growth
strategies. Whether the strategy is to grow
organically or through acquisition, there will usually
be a funding requirement, which can be met through
the provision of growth capital.

– Regulatory factors – regulatory factors will often
act to force corporations to sell off business units
or to limit or restrict courses of action by parties
operating in the complex world of business.
Additionally, regulatory factors can act to incentivise
certain types of investment or courses of action.
Either way, regulation can give rise to investment
opportunity for private equity.

– Developments in information technology and

life sciences – these act as engines for early stage
investment, as entrepreneurs seek to exploit the
development and research opportunities arising.

– Succession issues – especially in family-owned
businesses, succession issues can give rise to
investment opportunities.

Private equity and venture capital – a lexicon

Definitions “Private equity”, as the term suggests,
involves investment of equity capital in private
businesses. There are three broad categories of
investment within private equity:

The investment lifecycle The investment lifecycle
for an investment can be broken down into five
distinct phases, with each involving significant resource
and capability on the part of the VC:

– Venture capital investment – this is investment in

start-up and early or late stage technology
businesses. These businesses are usually engaged in
life sciences research or technology development
activities. Here, the investor (“the VC”) would usually
take a minority equity stake (ie less than 50% of the
equity shares) in the business as part of a syndicate
of venture investors; and the aim of the investment
is to provide funding for development or research
expenditure through a series of investment “rounds”.
Progress and prospects are re-assessed ahead of the
provision of further funding.

– Growth capital (or development capital)

investment – this involves the provision of capital
to accelerate the growth of established businesses
and generally involves the private equity investor
(“PE investor”) taking a minority equity position.
It is a type of investment suited to a diverse range
of growth opportunities, including acquisitions,
increasing production capacity, market or product
development, turnaround opportunities, shareholder
succession and change of ownership situations.

– Buyout investment – this involves the purchase
of an existing independent business or a subsidiary
or division of a corporate group from its current
owners. This category of investment includes
management buyouts, management buy-ins,
institutional buyouts, etc. Here, the equity in the
post-buyout business is usually shared between
the management team and the PE investor, with
the PE investor usually holding a majority stake.
The finance for the buyout would generally comprise
around 60% of senior and mezzanine debt (usually
provided by banks and mezzanine providers), with
substantially all of the balance of the purchase price
coming from the PE investor and a relatively small
amount coming from the management team.
In order to reflect the mismatch between the equity
finance provided respectively by the PE investor and
the management team and the equity stake taken
by each in the underlying business, a large part of
the PE investor’s finance is generally provided in the
form of redeemable preference shares or
shareholder loans.

Investment objective Like any other investment,
the objective of the PE investor is to earn attractive
returns on its investment commensurate with the risk
being taken. The returns come either in the form of
income (interest, dividends or fees) or capital gains.
The contrast with investment in quoted companies is
that the PE investor will usually prefer to crystallise its
capital gain through a trade sale (ie a sale to a
corporate purchaser), a sale to a financial purchaser or
a flotation on the public markets of the underlying
business. This preference tends to make private equity
investment medium to long term in nature, since
time is required to implement the value growth
strategy for the business and there will also be a
wish to optimise the timing of the “exit”.

– Origination – the ability to access and create
investment opportunities is critical to the
PE investor’s business model.

– Developing and validating the investment case

– this phase involves capability in the areas of
judgment, knowledge and experience within the
particular business area in which the opportunity lies;
building a management team and working with it to
develop the value growth strategy; consideration
of the exit strategy; and “due diligence” on all
significant assumptions and inputs to the
investment case.

– Structuring and making the investment – this
phase involves financial structuring, negotiation
and project management skills on the part of
the PE investor. Relationships with banks, mezzanine
finance providers, intermediaries and others
are also important.

– Implementing the value growth strategy –
this phase involves “actually making it happen”,
delivering value growth between making the
investment and exit. If the strategy involves
corporate acquisitions or mergers, restructuring
the business, achieving growth in turnover or
operating profits, the PE investor would need to
have the required capability to ensure these are
achieved. As important is the ability to assess and
strengthen the management team as the life cycle
proceeds – this might involve having access to a
pool of management talent in order to match a
particular need to a particular management skill-set.

– Exit – this phase generally involves a trade sale or
flotation of the underlying business. Exit prospects
and strategy should generally be reviewed on an
ongoing basis during the investment’s life – and
the sale or flotation itself requires resource and
capability from the PE investor, since both are
lengthy and complex processes.

Types of investment vehicle The predominant
vehicle in the industry is the independent, private,
fixed-life, closed-end fund, usually organised as a
limited partnership. These funds typically have a fixed
life of 10 years. Investments generally consist of an
initial commitment of capital which is then drawn
down as the investment manager finds investment
opportunities. Capital is returned to the investor via
earnings distributions and sales of investments.

Some investment vehicles are organised as captive or
semi-captive funds. A captive fund invests only for
the interest of its parent organisation (which may
be, for example, a bank or investment bank, insurance
company, university). A semi-captive fund mixes
capital from both outside investors and the parent
organisation. Both captive and semi-captive funds
tend to be “evergreen” in nature – income from
investments and proceeds received on the realisation
of investments are substantially retained for further
investment rather than being returned to investors.

There are also a limited number of private equity
investment companies, such as 3i, whose shares
are listed on a stock exchange. These tend to be
evergreen in nature and offer investors a relatively
liquid exposure to private equity.

98 3i Report and accounts 2006

Returns and IRRs – an explanation

Our aim is to achieve market-beating returns by
generating cash-to-cash vintage year IRRs of 20% for
Buyouts and Growth Capital and 25% for Venture Capital

What is an IRR measure?
The Internal Rate of Return (“IRR”) is the
interim return earned by 3i investing in an
asset from the date of initial investment up
until a particular point in time. It is calculated
as the annualised effective compound rate of
return, using monthly cash flows, generated
from the asset. For assets that have yet to be
sold, and therefore have not generated a final
cash inflow from sale proceeds, the asset
value at the date of calculation of the IRR is
used as the terminal cash flow. An IRR can
apply to a single asset or a pool of assets
(eg all new investments made in financial year
2003 can be pooled to calculate an IRR for
vintage year 2003).

An IRR calculated using the current value of
the asset as the terminal cash flow is called a
Fund IRR. A Cash-to-cash IRR does not include
any terminal value for unsold assets and is a
pure, more simple measure of cash invested
compared to cash returned as it does not
include any judgmental asset valuation for the
unsold assets.

In the business line IRR tables included in the
Business review, total investment represents
all first and further investment in a vintage
and investment in externally managed funds,
while return flow consists of capital proceeds
and revenue. Value remaining represents the
value still held within the vintage’s portfolio
based on our latest valuation.

What is a vintage and a vintage year?
A vintage is a collection of assets in which 3i
makes its first investment during a defined
period of time. The most common time period
measured in the private equity industry is a
year. A vintage year at 3i includes all new
investments made within our financial year,
ie vintage year 2006 covers new investments
made from 1 April 2005 to 31 March 2006.

Why does 3i track the performance of
vintage years? Looking at the performance
of a vintage enables us to assess the returns
we are making on pools of assets invested
during a vintage year. It gives a measure of
the performance of each year’s investment
activity in isolation.

It also allows us to assess the return generated
from assets over the length of time we
hold them, rather than just looking at the
performance between the beginning and end
of a financial year, which is shown in our yearly
total return statement. The annual total return
analysis has limitations as a measure of
longer-term performance as it is only a
representation of how the assets have
performed in one financial year and is heavily
influenced by the valuation of the asset at the
beginning and end of the year. It does not
show the evolution of how a vintage year is
performing over time.

To achieve this longer-term measure of
performance over time, the IRR is the
standard measure used across the
private equity industry.

How does 3i’s total return
equate to the IRR measures?
Table 1 on page 16 shows an
analysis of 3i’s total return.

Total return is calculated as the
gross portfolio return plus other
fee income, less costs and net
interest payable. Total return
can be expressed as a quantum
(eg £831 million for the year to
31 March 2006) or as a percentage
of opening shareholders’ funds
(eg 22.5% for the year to 31 March
2006).

Gross portfolio return is made up
of the income and value movement
(both realised and unrealised)
generated from our portfolio.

Costs include expenses and carried
interest payable.

The elements that make up
the gross portfolio return are the
same constituents used in an
IRR calculation.

Gross portfolio return (stated as
a percentage of opening portfolio
value) will equate to an IRR
measure over time. So, if 3i
achieves 20% gross portfolio
returns each year, the long-term
IRR will also move to 20%.

What is total shareholder
return?
Total shareholder return is
the change in share price over
a period plus dividends
reinvested.

3i Report and accounts 2006 Returns and IRRs – an explanation 99

Year 1

Year 2

Year 3

Year 4

(100)

–

(100%)

6.5

130

36%

(94%)

6.5

135

22%

(71%)

6.5

–

150

20%

Chart 1 IRR evolution

3i equity – value uplift

3i equity – cost
3i shareholder loan

Case A

Investment

Yield

Value at year end

Sale proceeds

Fund IRR

Cash-to-cash IRR

Tracking our progress To monitor a vintage
year we use a combination of Fund IRRs and
money multiples. The Fund IRR to give a
measure of performance and the money
multiple to show how much cash has been
returned compared to cost (eg Case A = 1.7x)
so that we can assess the extent to which that
performance is “locked-in”.

We have published the Fund IRRs for each
business line within the Business review
(Buyouts on page 23, Growth Capital on page
27 and Venture Capital on page 31) for the
last five vintages (2002 to 2006).

What IRR measures do 3i use to assess
the performance of a vintage? 3i has
published target Cash-to-cash IRRs for each
business line. These targets are 20% for
Buyouts and Growth Capital and 25% for
Venture Capital.

A Cash-to-cash IRR cannot be meaningfully
used to measure the performance of a vintage
until the majority of assets in that vintage are
realised. Therefore, 3i monitors the progress
of each vintage and the evolution of the IRR
using a combination of the Fund IRRs and the
extent to which a vintage is realised, to assess
the interim performance. Case A, depicted in
Chart 1, is an example to show the interim
Cash-to-cash IRR of an asset and clearly
indicates why, during the holding period of an
asset, the Fund IRR gives a more appropriate
measure of performance.

Volatility, the portfolio effect and the
holding period The published target IRRs are
for each business line in aggregate. It does not
mean that the IRR for each asset in those
business lines will achieve the target IRRs
individually. There will always be a range of
IRRs achieved on each of the individual assets
in each vintage year. However, when assets
are pooled together, the portfolio effect will
reduce this overall volatility in each vintage
year. The range of volatility we expect in any
one given vintage year is +/-10% for Buyouts,
+/-7% for Growth Capital and +/-15% for
Venture Capital.

Across the cycle, we expect the volatility to
average out at +/-5% for Buyouts, +/-3% for
Growth Capital and +/-7% for Venture Capital.

A 3i vintage year is made up of many assets.
All will have their own individual cash flows
and different timings of when value uplift
occurs and holding periods. We believe that
after three years the maturity of a vintage will
have developed enough for the Fund IRR to
give a good indication of the final outcome.
By seven years most vintage years will be
largely realised.

100 3i Report and accounts 2006

Information for shareholders

Financial calendar
Ex-dividend date
Record date
Annual General Meeting
Final dividend to be paid
Interim results
Interim dividend expected to be paid

Shareholder profile Location of investors at 31 March 2006
UK (including retail shareholders)
Continental Europe
US
Other international

Share price
Share price at 31 March 2006
High during the year (22 February 2006)
Low during the year (28 April 2005)

Balance analysis summary

Range
1 – 1,000
1,001 – 10,000
10,001 – 100,000
100,001 – 1,000,000
1,000,001 – 10,000,000
10,000,001 – highest
Total

21 June 2006
23 June 2006
12 July 2006
21 July 2006
November 2006
January 2007

78.8%
9.4%
10.0%
1.8%

940.5p
970.5p
635.5p

Number
of holdings
Individuals
23,984
5,633
140
20
0
0
29,777

Number
of holdings
Corporate
bodies
1,739
1,317
475
318
87
11
3,947

Balance as at
%
31 March 2006
2.28
12,544,775
2.77
15,250,303
4.01
22,076,899
20.37
112,175,551
39.14
215,473,301
31.43
173,035,673
550,556,502 100.00

The table above provides details of the number of shareholdings within each of the bands stated in the Register of Members at
31 March 2006.

3i Report and accounts 2006 101

Investor relations and general enquiries

For all investor relations and general enquiries about 3i Group plc,
including requests for further copies of the Report and accounts,
please contact:

Group Communications
3i Group plc
16 Palace Street
London SW1E 5JD
Telephone +44 (0)20 7928 3131
Fax +44 (0)20 7928 0058
email ir@3igroup.com

or visit our investor relations website www.3igroup.com for full
up-to-date investor relations information including the latest
share price, recent annual and interim reports, results
presentations and financial news.

If you would prefer to receive shareholder communications
electronically in future, including the Report and accounts,
please go to www.3igroup.com/e-comms to register your
details.

Registrars
For shareholder administration enquiries, including changes of
address, please contact:

Lloyds TSB Registrars
The Causeway
Worthing
West Sussex BN99 6DA
Telephone +44 (0)870 600 3970

3i Group plc
Registered office:
16 Palace Street, London SW1E 5JD, UK

Registered in England No. 1142830

An investment company as defined by section 266 of the
Companies Act 1985.

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3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7928 3131
Fax +44 (0)20 7928 0058
Website www.3igroup.com
M1406 May 2006