3i Group plc Report and accounts 2008
Contents
Directors’ report
Introduction
Group financial highlights
Chairman’s statement
3i at a glance
Chief Executive’s statement
Business review
Group business
Our strategy
Buyouts
Growth Capital
Directors’ remuneration report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional financial
information
Independent auditors’ report to
the members of 3i Group plc
Consolidated income statement
Statement of recognised income
and expense
Reconciliation of movements in equity
01
02
03
04
06
08
10
12
16
68
79
80
81
81
Business review continued
Infrastructure
Quoted Private Equity
Venture Capital
Financial review
Risk management
Corporate responsibility report
Board of Directors and
Management Committee
Directors’ report – statutory and
corporate governance information
Balance sheet
Cash flow statement
Significant accounting policies
Notes to the financial statements
20
22
24
28
38
44
54
56
82
83
84
88
115
116
118
120
122
Portfolio valuation – an explanation
Ten largest investments
Forty other large investments
Assets under management
3i portfolio
Investment
106
108
109
110
111
113
Realisations
Private equity and
venture capital – a lexicon
Returns and IRRs – an explanation
Carried interest – an explanation
3i and Transparency
Information for shareholders
124
Information for shareholders
Investor relations and general enquiries
124
Investor relations website – 3igroup.com 125
This Annual report and accounts may contain certain
statements about the future outlook for 3i Group plc
and its subsidiaries (“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.
Further information
You will see these symbols used throughout this report.
They point you towards further information either within
the report or online. We hope you find them useful.
dInformation online
Information in this report
Annual and half-yearly reports online
To receive shareholder communications electronically
in future, including your annual and half-yearly reports
and notices of meetings, please go to
www.3igroup.com/e-comms to register your details.
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Introduction
3i is a world leader in private equity. We focus on buyouts, growth capital,
infrastructure and quoted private equity, investing across Europe, Asia
and the US.
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.
Report and accounts 2008 3i Group plc 01
Group financial highlights
Year to/as at 31 March
Business activity
Investment
Realisation proceeds
Returns
Gross portfolio return
Total return
Total return on opening shareholders’ funds
Dividend per ordinary share
Assets under management
Own balance sheet
Third-party funds
Total assets under management
Balance sheet
Gearing
Diluted net asset value per ordinary share
Portfolio value by business line (£m)
as at 31 March
Buyouts
Growth Capital
Infrastructure
Quoted Private Equity Limited (“QPE”)
Smaller Minority Investments (“SMI”)
Venture Capital
Total
2008
2007
£2,160m £1,576m
£1,742m £2,438m
£1,041m £1,406m
£792m £1,075m
18.6%
26.8%
17.0p
16.1p
£6,016m £4,362m
£3,776m £2,772m
£9,792m £7,134m
40%
£10.77
0%
£9.32
2008
2,025
2,366
501
142
244
738
2007
1,281
1,460
469
20
391
741
6,016
4,362
02 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Chairman’s statement
“A good performance in challenging markets.”
Against a background of financial turmoil and
weakening stock markets, 3i achieved
substantial growth in net asset value, and
successfully continued its strategy of raising
external funds to accelerate growth in assets
under management.
The total return of £792 million for the year to
31 March 2008 represented an 18.6% return
on opening shareholders’ funds, close to the
five-year average of 20.4%. The Board is
recommending a final ordinary dividend of
10.9p, making a total ordinary dividend for the
year of 17.0p per share, up 5.6% on last year.
The contribution from our mid-market Buyouts
business was exceptionally strong. The Growth
Capital business performed well and will in future
include the results of later-stage technology
investing which shares the same characteristics
as growth investing in other sectors. Venture
Capital will continue to be reported as a separate
business line until all assets are disposed of,
although no new early-stage venture
investments will be made. Our new Quoted
Private Equity business has been a cautious
investor due to unsettled markets while
Infrastructure has continued to focus on
opportunities with long-term contractual cash
flows that make this asset class attractive to
investors in an uncertain environment.
Over the past three years, we have taken
advantage of strong demand to realise over
£6 billion from our portfolio, at an average
uplift over the opening value of these assets at
the beginning of each year of 43%. Over this
same three-year period we have returned just
over £2 billion to shareholders, improving our
capital efficiency, and raised funds totalling over
£5 billion including a commitment of £2.5 billion
from 3i. We closed the latest of these funds,
an unquoted vehicle for investing in Indian
infrastructure, above target in March 2008 at
$1.2 billion.
With so much uncertainty still clouding economic
prospects in the major economies, we take a
cautious view of the coming year. Management
has for some time made it clear that realisations
were expected to slow, as time would be
needed to fulfil the growth plans of newly-
acquired assets and realise full value from
these investments, and we will be taking a highly
selective approach to investment.
Our existing €550 million convertible bond
matures in August. It has provided a great deal
of flexibility in our capital planning, at attractive
rates of return. We have therefore decided
to replace it with a new circa £425 million
similar bond.
At times like these, 3i’s standards of
transparency and accountability, reinforced by
14 years’ experience as a quoted company,
serve the Company well. In our annual reports,
which have been widely praised by observers of
both private equity and quoted companies, we
strive to provide our shareholders with a detailed
picture of our approach to investment, valuation
and risk management. This also stood us in good
stead at a time of unprecedented interest in the
industry and some challenge to its reputation.
This led the British Private Equity and Venture
Capital Association to invite Sir David Walker to
set up a working group on transparency and
accountability, of which I was delighted to be a
member. This annual report is fully in compliance
with Sir David’s guidelines, as explained on page
122. Moreover, we have taken again the
opportunity to increase disclosure beyond that,
by providing more detailed information on our
valuation methodology (see page 106).
In the following pages, Philip Yea and his
management team provide updates on the
business lines, geographies and sectors in which
3i operates, with Asia showing the most
significant growth. At Board level, there will be
only one change at our AGM: as I intimated last
year, Fred Steingraber, who has been a non-
executive Director since the beginning of 2002,
will be retiring. Fred’s international experience
has been especially helpful to the Board over the
last six years and I would like to thank him for his
important contribution.
We start the year at a moment of great
uncertainty as to the impact of the credit
crunch, energy prices and raw material costs on
economic activity, and as to whether these
pressures can be managed by the world’s
monetary authorities without precipitating
recession or a sharp rise in inflation. We believe
that our mid-market focus, a portfolio well-
diversified by sector, geography and type of
investment, and the quality of our Board and
management team, provide a combination that
positions us well to meet these challenges and
build further value for shareholders.
Baroness Hogg Chairman
14 May 2008
Report and accounts 2008 3i Group plc 03
3i at a glance
3i is a mid-market private equity business making and managing investments
in Europe, Asia and the US. 3i Group plc is a FTSE 100 company, providing
shareholders with quoted access to private equity returns. Investments are made
with capital from the Group’s own balance sheet and from funds which the Group
manages or advises for others.
Buyouts
Focusing on leading mid-market transactions
primarily in Europe but also in Asia, with an
enterprise value of typically up to €1 billion.
Investments are generally made through Limited
Partnership private equity funds.
Growth Capital
Making minority investments of typically up
to €250 million in established and profitable
businesses across Europe, Asia and the US.
Investments are generally made using 3i’s own
balance sheet resources. From 1 April 2008,
all late-stage technology and healthcare minority
investment will also be conducted through this
business line.
Infrastructure
Investing in a broad range of international
infrastructure assets, principally in
transportation, utilities and social infrastructure.
Investments are made by 3i Infrastructure
Limited, a quoted company which is advised by
3i, the 3i India Infrastructure Fund, or from 3i’s
own balance sheet resources.
Gross portfolio return
57% (2007: 54%)
Gross portfolio return
21% (2007: 48%)
Gross portfolio return
14% (2007: 16%)
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management
Own balance sheet
Third-party funds
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management
Own balance sheet
Third-party funds
788
858
370
245
116
731
39
2,025
2,594
4,619
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management
Own balance sheet
Third-party funds
990
503
75
160
67
302
2
2,366
183
2,549
38
57
6
43
18
67
18
501
712
1,213
For further information on Buyouts
please go to page 12
For further information on Growth Capital
please go to page 16
For further information on Infrastructure
please go to page 20
04 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Assets under management
07
08
Owned
Third-party
61%
39%
£7,134 million
61%
39% £9,792 million
QPE
Creating value with the management teams of
quoted companies through applying 3i’s private
equity skill base, network and resources.
Investments are made through 3i Quoted
Private Equity Limited, a listed company which
is advised by 3i.
SMI
Managing and realising 3i’s older smaller
minority investments.
Venture Capital
Following the transition of 3i’s early and late-
stage technology investment business line to
a late-stage investment business, from 1 April
2008 a Venture Portfolio team will manage the
existing portfolio and all new late-stage
technology investments will be made within the
Growth Capital business line.
Gross portfolio return
n/a (2007: n/a)*
Gross portfolio return
0% (2007: 13%)
Gross portfolio return
(2)% (2007: (6)%)
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
182
18
Financial performance (£m)
year to/as at 31 March 2008
Investment
Realisation proceeds
6
136
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
–
(42)
–
(42)
1
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
7
(27)
20
–
–
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management
Own balance sheet
Third-party funds
*Fund launched June 2007
Assets under management
Own balance sheet
Third-party funds
142
269
411
Assets under management
Own balance sheet
Third-party funds
244
–
244
156
170
65
(88)
6
(17)
–
738
18
756
For further information on Quoted
Private Equity please go to page 22
For further information on SMI
please go to page 29
For further information on Venture Capital
please go to page 24
Report and accounts 2008 3i Group plc 05
Chief Executive’s statement
“Total return was underpinned by continued exceptional returns from
our Buyouts business and good returns from our Growth Capital and
Infrastructure businesses.”
3i achieved a strong performance in the year
to 31 March 2008, delivering a return on
opening shareholders’ funds of 18.6% as well as
a 37% growth in assets under management.
This result was achieved despite the significant
changes in financing markets which took place
during the year. These very changed market
conditions set the back drop for my review as
I recognise that no matter how good our
performance has been, in the current more
uncertain environment it is the outlook and how
3i is positioned that are likely to be of most
interest to shareholders.
My report to you coincides with a period of
considerable uncertainty. The 12 months to
31 March 2008 have seen a significant adverse
change in the outlook for the world’s economy
and have revealed major flaws in the soundness
of the global financial system, the full
consequences of which have still to be
understood. It is likely to be some time before
the extent of the downturn in the real
economies will be seen and even longer before
it will be possible to judge the effects of the
credit crunch.
“A significant adverse change in the outlook
for the world’s economy.”
For some time we had felt that the buoyancy
of the debt markets was not sustainable and
that investments made over the recent period
would be unlikely to benefit from such positive
conditions on exit. However, the extent of the
fallout from the sub-prime crisis and its effect
on mergers and acquisitions markets, and the
financing markets more generally, were not
predicted by most, including us.
Against this background, whilst we have
been maintaining our focus on the long-term
development of 3i, the last 12 months have
seen us being even more selective in our new
investment and active in our engagement with
portfolio companies. Our investment selection
process has increasingly favoured companies
with recurring income streams and more
defensive qualities. Our relationships in the
mid-market, particularly those with banks, have
allowed transactions to be completed, albeit on
terms closer to those of three years ago.
“Maintaining our focus on the long-term
development of 3i.”
The number of first new investments fell from
62 to 47 but, consistent with both the market
and our own strategy, the average size of these
first investments increased significantly from
£26 million to £37 million, and so total
investment levels increased from £1,576 million
to £2,160 million, with strong figures from both
Buyouts and Growth Capital. £182 million of this
year’s figure was to seed our new QPE business
line; whereas the prior year figure included our
£91 million cash investment in the newly-
created 3i Infrastructure Limited.
As anticipated at the start of last year, due to
the relative immaturity of the portfolio,
realisations slowed from last year’s exceptional
£2,438 million to £1,742 million. At year end,
our portfolio of investments numbered 487
(2007: 762). The most significant change was
in our SMI run-off portfolio, where we ended
the year with just 92 positions, down from 293
a year ago and some 1,079 in 2004 when we
started the disposal programme.
Assets on the 3i Group balance sheet grew to
£6,016 million from £4,362 million a year
earlier, and third-party funds rose again, reaching
£3,776 million, an increase from £2,772 million
at 31 March 2007. These figures showed
excellent progress in delivering a key element of
our strategy, which is to grow assets under
management. Closing assets under management
were £9,792 million (2007: £7,134 million).
“37% growth in assets under
management.”
Total return of 18.6% (2007: 26.8%) was
underpinned by continued exceptional returns
from our Buyouts business and good returns
from our Growth Capital and Infrastructure
businesses. Our Venture Capital and QPE
businesses both produced negative returns and
our SMI run-off portfolio’s gross return was
break even. With lower realisations, and lower
market multiples at year end, a significant
element of the return came from improved
earnings within the portfolio as well as continued
strong realisation profits on those assets that
were sold. The favourable mark-to-market
of the derivative element of the Group’s
€550 million convertible bond contributed
£162 million of return, reversing last year’s
negative £62 million. Provisions rose to
£188 million from last year’s exceptionally low
figure of £71 million.
Net asset value per share grew by £1.45 (16%)
to £10.77. The increase before dilution due to
the B share issue and dividends, was £1.94,
representing a 21% return.
06 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
During the year, we undertook a regular review
of our investment business to determine its
future shape in terms of geography, sector and
asset class. The recent evolution of our Venture
Capital business towards later-stage investing
has brought it closer to the long-standing remit
of our Growth Capital business and so we have
decided to combine these businesses by creating
Technology and Healthcare teams within an
expanded Growth Capital mandate. On a more
opportunistic basis, in view of the recent market
dislocations, our Buyouts business has acquired
selective leveraged debt assets on a prudent
basis. This is not only to produce private equity
like returns but also to give us the opportunity to
consider extending this business should market
conditions allow.
“The recent evolution of our Venture
Capital business towards later-stage
has brought it closer to Growth Capital.”
The relatively benign environment of the
last few years has allowed 3i to reshape itself
by expanding geographically, broadening its
asset classes, and increasing third-party funds
under management, and to make major
investments in people and process without
compromising shareholder expectations.
The results of this reshaping will be seen over
the next few years as the capabilities that we
have recently built deliver further profitable
assets for the Group and additional income
streams from third-party funds.
This also means that in the coming year our key
performance indicator of net costs as a
percentage of opening portfolio value will
continue its progress towards our long-term
objective of 3.0%.
Strategic development continued in the year
with the launches of 3i Quoted Private Equity
Limited and the 3i India Infrastructure Fund, the
development of our US Growth Capital business
and continued international expansion.
We closed the year with total assets under
management of approximately €12 billion,
and believe that we can grow this figure to
over €20 billion by the end of 2010, by which
time around half these assets could be managed
or advised funds, rather than on 3i’s own
balance sheet.
“We believe that we can grow assets under
management to over €20 billion by the end
of 2010.”
Our people are critical to our continued success,
and how we encourage their engagement with
the firm’s agenda and reward their contribution
to our success, both financial and otherwise, are
key responsibilities of our senior team. “Carried
interest” schemes have attracted considerable
comment over the last 12 months, much of it
mis-informed and mostly unfavourable. Given
the recent excesses of the banking system, it is
timely for those of us in the private equity
industry to emphasise that carried interest
schemes only pay out on the realisation of
investments, and are aligned with the interests
of the capital provider, whether 3i itself or our
third-party investors.
As an investment company, 3i will routinely face
mis-matches in timing between making new
investments and achieving disposals. This was
the case last year when, as anticipated, new
investment exceeded disposals by £418 million.
Having also returned £808 million to
shareholders last year through an issue
of B shares, and made further on-market
repurchases of £120 million, 3i ended the year
with gearing at 40%.
Over the last few years, we have benefited
from the financial flexibility which our
€550 million convertible bond has provided.
As this bond matures during the course of
2008, our strategy is to maintain such flexibility
by refinancing it through the issue of a new
bond structured at an effective 60% conversion
premium to 3i’s share price at launch.
In these markets, liquidity is at a premium.
We start the new year with liquid resources plus
undrawn facilities of £1,082 million. Looking
forward, although we are seeing a significant
level of new investment opportunities,
nevertheless we are targeting maintaining a
broadly similar level of debt by the end of the
current financial year, with a potentially modest
increase in gearing during the intervening period
as investments and divestments take place.
“Our strategy is as relevant today
as a year ago.”
There is, of course, continuing uncertainty in
many of our markets. History shows that
whenever the mergers and acquisitions markets
go through a period of adjustment such as this,
there is a time lag during which price
expectations are not fully matched, and so
activity is less predictable. However, compared
to previous periods of economic adjustment,
the positive influence of the fast-growing
economies of Asia during this period brings very
different dynamics to the outlook for the world
economy. Our portfolio is generally performing
very well but is not immune to general economic
conditions. Our strategy is as relevant today as a
year ago.
As a consequence, we enter the new year
confident in our strategy and realistic in outlook,
intending to make further progress and to build on
the significant investment of the last few years.
Philip Yea Chief Executive
14 May 2008
Report and accounts 2008 3i Group plc 07
Business review Group business
This review provides an overview of our main activities, principal markets, Group and
business line performance and risk management. It also describes our key financial
performance measures and our performance against them.
Introduction to the Group
3i is a world leader in private equity investing
across Europe, Asia and the US. We invest from
our own balance sheet and also with funds that
we advise or manage on behalf of others. Total
assets under management at 31 March 2008
were £9.8 billion, including £3.8 billion advised
or managed on behalf of third parties.
The Group’s vision is 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 for achieving this vision, along
with a summary of our progress with respect to
each element, the key risk factors involved and
statistics relating to our performance is set out
on pages 10 and 11.
Governance, accountability and alignment of
interests are key elements of the private equity
model. 3i achieves this by making investments
through distinct business line partnerships, which
operate internationally and draw upon the
combined resources of the Group.
Detailed descriptions, performance data and
commentaries for each of our Buyouts, Growth
Capital, Infrastructure, Quoted Private Equity
and Venture Capital business lines can be found
on pages 12 to 27, together with case studies
of our most significant investments and
realisations.
3i operates in a number of distinct geographical
and sector markets. The market for each of our
business lines has its own specific characteristics.
However, the environment and competitive
landscape for all of them is influenced by the
broader macroeconomic context, as well as
the strength of the capital markets, the level of
private equity funds raised and invested, and the
extent of mergers and acquisitions activity.
Market conditions
After four years of strongly positive influences,
the sub-prime lending crisis in the US which
emerged in summer 2007, together with the
subsequent volatility in capital markets and debt
markets, not only disrupted mergers and
acquisitions markets but also led to a more
challenging and uncertain economic outlook.
A description of the effect of these conditions is
detailed in the “Market” sections in each of our
business line reviews on pages 12 to 27.
The impact on the private equity industry as a
whole has been most pronounced in the large
leveraged buyout (“LBO”) market in the US and
in Europe, where new LBO investment activity
has come to a virtual standstill because of
the lack of availability of suitably-sized debt
packages. In the European mid-market buyouts
market, which is where 3i’s Buyouts business
operates, debt has remained available for new
investments, albeit on terms and conditions
more reflective of the market in 2004 and
2005 than in 2007. All of our business lines are
influenced by the slow down in the realisations
market and the broader macroeconomic
uncertainty, although the underlying
performance of the portfolio remains good.
Overall, global private equity fundraising
remained strong in 2007 at €566 billion (2006:
€532 billion), according to Private Equity
Intelligence data. Preliminary statistics for
calendar year 2007, released by the European
Private Equity and Venture Capital Association
(“EVCA”) in March 2008, show that European
private equity firms raised a total of €74 billion
in 2007 (2006: €112 billion) and invested
€86 billion (2006: €50 billion). However, data
from unquote”, shows that whereas deals with
an enterprise value of over £1 billion fell by over
50% in quarter four compared to quarter two of
2007, the number of mid-market transactions
was only 4% lower.
The key Group financial performance
measures are:
Total return
Gross portfolio return
Cost efficiency
Gearing
Net asset value growth*
2008
18.6%
23.9%
5.0%
40%
£1.94
2007
26.8%
34.0%
5.3%
0%
£2.24
*Growth in NAV is stated before dividends and other
distributions to shareholders.
The key business line performance
measures are:
Gross portfolio return
Portfolio health
Long-term IRRs by vintage
The key non-financial performance
measures are:
Employee engagement
Environmental impact
08 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
3i’s investments
in funds:
Central Europe
China
India
Israel
Japan
Korea
Russia
United Arab Emirates
3i investment teams:
Benelux
China
France
Germany
India
Italy
Nordic
Singapore
Spain
Switzerland
UK
US
Although there is no single source that
accurately tracks the European growth capital
market in which 3i operates, our own data
suggests that there was a 36% increase in the
amount invested to €4.8 billion in 2007.
According to Asian Venture Capital Journal
statistics, the Asian markets in which 3i operates
directly (China, India, North Asia and South East
Asia) continued to grow strongly with a 20%
increase in investment.
3i’s approach
3i is a highly selective investor and made 47
new investments during the year to 31 March
2008 (2007: 62), across a range of sectors,
regions and types of investment. As can be seen
from the tables on pages 35 and 36, the
portfolio is well diversified in terms of
investment type, geography and sector.
Consistent with our investment strategy, the
number of new investments in the period was
lower, principally because of a decrease in the
number of early-stage technology investments.
Since 2005, our Venture Capital business has
moved away from predominantly early-stage
technology and healthcare investments towards
late-stage investing. From 1 April 2008,
we have formalised this process such that all
new late-stage technology and healthcare
minority investments will be made by the
Growth Capital business line and the existing
Venture Capital business line portfolio will be
managed as a standalone activity.
Private equity thrives on change, and strategic
shifts within economies and sectors drive
activity both in terms of investment and
realisations. 3i’s local presence and dedicated
sector-focused teams continue to enable us to
achieve competitive advantage in originating
investment opportunities, assessing them and in
managing and realising value.
As a returns-focused business, we set clear
targets for our key performance measures at a
Group and business line level. For the Group,
these targets are set out in the relevant sections
of the Financial review. For the business lines,
they are contained within each of the business
line reviews on pages 12 to 27.
We employed an average of 772 people in
the year (2007: 765), working in focused teams
in 14 countries across three continents in a
matrix structure. The key dimensions of this
matrix are business line, geography and sector,
with each business line unified through common
carried interest schemes and processes.
Our internal professional services teams are
incentivised on Group performance.
The high levels of staff engagement achieved
by the Group, which are reported on page 51,
continue to be supported by our “One room:
One firm” culture. This is underpinned by a clear
set of values and developed through combining
capabilities and knowledge, aligning interests and
by selecting the “best team for the job” from our
internal and external resources around the world.
Our culture is performance-based and highly
collaborative and requires continuous investment
in our people and in our communications.
3i’s values and our non-financial key
performance measures are set out in our
Corporate responsibility report on pages 44
to 53. This report also describes our approach
and performance with respect to corporate
responsibility, both from the perspective
of 3i as a company and 3i as an investor.
Investment policy
3i is an investment company which aims to provide
its shareholders with quoted access to private
equity returns. Currently, our main focus is on
making quoted and unquoted equity and/or debt
investments in businesses and funds across Europe,
Asia and North America. The geographies, economic
sectors, funds and asset classes in which we invest
continue to evolve as opportunities are identified.
Proposed investments are assessed individually and
all significant investments require approval from the
Group’s Investment Committee. Overall investment
targets are subject to periodic reviews and the
investment portfolio is also reviewed to monitor
exposure to specific geographies, economic sectors
and asset classes.
We seek to diversify risk through significant
dispersion of investments by geography, economic
sector, asset class and size as well as through the
maturity profile of our investment portfolio.
In addition, although we do not set maximum
exposure limits for asset allocations, as an approved
UK investment trust, no more than 15% of the
Group’s portfolio can be held in a single investment.
Investments are generally funded with a mixture
of debt and shareholders’ funds with a view to
maximising returns to shareholders, whilst
maintaining a strong capital base. We do not
set minimum or maximum levels of gearing.
However, we are nonetheless committed to
achieving balance sheet efficiency. The Board of
Directors currently consider it appropriate to aim to
operate with an optimum gearing ratio of debt to
shareholders’ funds within a 30% to 40% range
across-the-cycle. Since our flotation in 1994, our
gearing has fluctuated between 0% and 52%.
Report and accounts 2008 3i Group plc 09
Business review Our strategy
Achieving our vision depends upon a clear strategy, ensuring that we measure our
progress towards reaching our strategic goals and taking account of the key risks
involved and how they change. Here is a summary of where we are today.
Strategy
Invest in high-return assets
Achieving our vision and delivering our return
objectives across the cycle depends upon making
high-quality investments.
Progress
– Gross portfolio return of 23.9% is in line with
targets and has exceeded 20.0% for the past
three years.
– Earnings growth in the portfolio generated
£307 million of return (2007: £142 million).
Grow our assets and those
we manage on behalf of third
parties
Combining growth in assets with our investment
disciplines will enable us to grow shareholder value.
Extend our international
reach, directly and through
investing in funds
International expansion supports asset growth,
provides competitive advantage and delivers
significant added value to our portfolio companies.
Use our balance sheet and
resources to develop existing
and new business lines
3i’s permanent capital base, FTSE 100 status, credit
rating and strong cash flow provide the platform,
resources and credibility to grow.
Continue to build our strong
culture of operating as one
company across business lines,
geographies and sectors
Every aspect of our vision depends upon our people,
the strength of their relationships and the way they
work together.
10 3i Group plc Report and accounts 2008
– The directly-held portfolio increased in value
by 38% in the year, from £4,362 million to
£6,016 million, following investments in 47 new
assets (2007: 62) and value growth in the
opening portfolio.
– External funds increased following the
£400 million listing of 3i Quoted Private Equity
Limited in June 2007 and the final close of 3i India
Infrastructure Fund, announced in April 2008 at
$1.2 billion.
– 3i now operates from 22 offices, 18 of which are
based outside the UK.
– Asia now represents 11% (2007: 9%) of the 3i
direct portfolio value and the US 8% (2007: 7%).
– US investment has increased from £92 million to
£303 million, mainly due to new Growth Capital
opportunities.
– 3i’s investments in nine private equity funds in
emerging markets continue to extend our
international reach.
– Two new business lines were established last year,
Infrastructure and Quoted Private Equity. Both
have subsequently listed on the London Stock
Exchange.
– A new fund has been raised to address the
infrastructure opportunity in India.
– Buyouts and Growth Capital have invested
£788 million and £990 million respectively, an
increase of 58% and 105% on the previous
financial year.
– Our 2008 staff engagement survey shows a very
high level of engagement and commitment to 3i’s
goals. Employee engagement is the extent to
which employees are committed to their role,
their team and the Group and its objectives.
– Our Business Leaders Network for Chairmen and
Chief Executives is now operating in Europe, Asia
and the US.
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Key risk factors
– Quality of origination, review and execution
processes, including consideration of corporate
responsibility issues.
– Pricing of assets on entry and exit.
– Strength of asset management.
– Timing of exit.
Performance
Gross portfolio return by year (%)
year to 31 March
04
05
06
07
08
19.4
16.7
24.4
23.9
– Need to build capabilities before committing capital.
– Adequacy of Group funding for balance sheet
Growth in assets under management (£m)
as at 31 March
investing.
– Availability of third-party investors to build assets
under management.
04
05
06
07
08
4,362
4,317
2,475
1,913
4,139
1,573
4,362
2,772
6,016
3,776
– Effectiveness of knowledge management and
sharing.
– Changes in local legal and regulatory frameworks.
– Maintenance of control environment.
– Managing corporate responsibility issues
appropriately.
– Appropriateness of capital structure.
– Availability of non-financial resources.
– Quality of opportunities identified, analysed
and implemented.
3i's direct portfolio
Managed and advised by 3i
Portfolio value by geography
as at 31 March
2008
£m
2,573
2,250
679
497
17
6,016
2008
43%
38%
11%
8%
–
100%
2007
£m
1,894
1,792
373
283
20
4,362
2007
43%
41%
9%
7%
–
100%
Continental Europe
UK
Asia
US
Rest of World
Total portfolio value
Assets under management by business line
as at 31 March
Buyouts
Growth Capital
Infrastructure (March 2007)
QPE (June 2007)
SMI
Venture Capital
2006
£m
1,923
1,736
167
307
6
4,139
2008
£m
4,619
2,549
1,213
411
244
756
9,792
34.0
6,837
6,230
5,712
7,134
9,792
2006
47%
42%
4%
7%
–
100%
2007
£m
3,410
1,687
854
20
407
756
7,134
– Ability to attract, develop and retain people
with requisite skills, experience and cultural fit.
– Effectiveness of knowledge management and
sharing.
– Effectiveness of decision making in a matrix
structure.
– Flexibility of resourcing model to adapt to change.
Employee engagement
The 2008 staff survey, in which 92% of staff took
part (2007: 78%) showed a high level of
engagement, with a score of 84% (2007: 87%).
High scores from questions which test employee
engagement have a direct positive impact on
employee retention and productivity.
Corporate responsibility
– 3i is a member of the Dow Jones Sustainability Index.
– 3i is one of Business in the Community’s top 100
Companies that Count.
– 3i’s Corporate responsibility report for 2006 was
awarded top place at the 2007 IR Society Best
Practice awards.
Report and accounts 2008 3i Group plc 11
Business review Buyouts
“Our strategy over the last three years, to be active sellers and highly selective
buyers, has delivered strong performance. We now face very different market
conditions. I believe that the strength of our model, our network and our portfolio will
enable us to deal well with both the challenges and opportunities that will arise.”
Gross portfolio return on opening value
Gross portfolio return
57%
£731m
Long-term performance
New investments made in the financial years
to 31 March
Vintage year
2008
2007
2006
2005
2004
2003
2002
Total
investment
£m
606
497
470
340
303
268
186
Return
flow
£m
8
122
585
805
523
663
441
Returns from Buyouts (£m)
year to 31 March
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Business activity – investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net divestment
Gross portfolio return by year (%)
year to 31 March
04
05
06
07
08
20
27
29
12 3i Group plc Report and accounts 2008
Business model
The Buyouts business line targets cash-to-cash
IRR returns of 20% through the cycle and is
focused on leading or co-leading mid-market
transactions, primarily across Europe, of typically
up to around €1 billion in value.
Investments are made through Limited
Partnership private equity fund vehicles (currently
Eurofund V), which are managed by 3i (see Fund
management section opposite). Returns from
individual investments are achieved through a mix
of capital realisations upon exit, returns of capital
and income. Returns to 3i Group are enhanced
through fees and carried interest from these
funds.
A core element of the business model is that
our team of over 100 investment professionals
operates as one team with full economic
alignment. This enables us to match resources to
opportunities on a “best team for the job” basis,
based on sector, operational and deal execution
experience.
IRR to
31 March
2007
n/a
9%
47%
54%
30%
50%
61%
2007
538
123
127
788
33
Strategy
The strategy is to apply sector and operational
expertise to a premium origination network in
order to find, pursue and execute investments in
which we can create value. Investment decisions
are made on a partnership basis, which provides the
ability to benchmark opportunities to select the
best 10 to 15 investments to make in each year.
Value
IRR to
remaining 31 March
2008
n/a
£m
640
543
488
138
100
43
4
35%
57%
62%
37%
50%
61%
2008
370
245
116
731
39
2008
858
(788)
70
2007
1,341
(498)
843
54
57
Working with management, we create a bespoke
value creation plan for each investment, focused
on growing earnings, improving operational
efficiency and strategic value, leveraging 3i’s
network, knowledge and expertise to maximum
effect. An illustration of the range of business
transformation possible through this approach can
be seen from the case studies on pages 14 and 15.
In the last three years, we have driven realisation
activity across the portfolio, taking full advantage
of buoyant exit markets and continued to invest in
high-quality businesses throughout our markets.
In the three years ended 31 March 2008,
£3,076 million was realised from the Buyouts
portfolio and £1,737 million was invested
(£4,948 million of realisation proceeds and
£2,796 million invested including external funds).
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Building on the Group’s growing network and
reputation in Asia, a Buyouts team presence was
established in the region during the year.
Utilising the expertise of our in-house banking
team, a debt management capability was
established in October 2007 to capitalise on the
opportunity to buy high-quality debt at a
discount. An €800 million debt warehouse
facility has been established in which 3i has
committed €160 million on a first loss basis and
which is separate from Eurofund V.
As at 31 March 2008, the debt warehouse
had invested €275 million of which the 3i
commitment was €55 million (£40 million).
The diversity and credit-worthiness of the
portfolio remains strong. However, given market
volatility, the short-term mark-to-market loss
on the debt warehouse was €15 million
(£12 million) and is included in the gross
portfolio return for Buyouts.
Market
The key features of the market during the year
were the influence of the more difficult financing
environment on the availability of debt and
subsequent slow down for the market for
mergers and acquisitions.
The impact on the private equity industry as a
whole has been most pronounced in the large
leveraged buyout (“LBO”) market in the US and
in Europe, where new LBO investment activity
has come to a virtual standstill because of the
lack of availability of suitably-sized debt packages.
According to unquote”, the number of European
buyouts with an enterprise value of over €1 billion
fell by 42% from 24 in the first half of 2007 to
14 in the second half of the calendar year.
In the European mid-market, which is where 3i
operates, debt has remained available for new
investments, albeit on terms and conditions
more reflective of the market in 2004 and
2005 than in 2007. Data from unquote”, shows
that the number of European transactions with
an enterprise value between €25 million and
€1 billion were down, but only by 4%, from 294
in the first half of 2007 to 282 in the second
half of the calendar year.
3i has been advantaged in these market
conditions because of the depth and breadth of
its international network of banking relationships
and the capability of its well-established
in-house banking team. We continue to see
good opportunities to invest.
Investment and realisations
During the first half of the year we continued
to actively sell into favourable markets, realising
proceeds of £540 million. However, as
anticipated, realisation levels slowed during
the second half of the year and realisations
for the 12 months to 31 March 2008 were
£858 million (2007: £1,341 million).
The largest realisation during the year was the
sale of Nordic-based facilities management
business, Coor Service Management, in
December, which generated proceeds of
£158 million.
Investment levels were higher at £788 million
(2007: £498 million), due to an increase in the
average size of investment to £55 million
(2007: £41 million). During the year, 11 new
investments were completed (2007: 12) in six
different countries and five different sectors.
The case studies on pages 14 and 15 include
our largest new investments and realisations.
Gross portfolio return
The Buyouts business generated a gross
portfolio return of £731 million (2007:
£788 million), a 57% return over opening
portfolio value (2007: 54%). Consistent with
the good level of realisation proceeds during the
year, realised profits upon exit at £370 million
(2007: £538 million) accounted for over 50%
of the gross portfolio return.
Unrealised profits during the year of
£245 million included assets valued on an
imminent sales basis of £75 million. Agreement
was reached in March 2008 to sell Giochi
Preziosi, one of the world’s leading toy
businesses, resulting in an uplift to opening value
of £75 million. Giochi Preziosi is profiled as a
case study on page 15.
Portfolio health
Portfolio health remains satisfactory and in line
with expectations. Our historic loss rates have
been extremely low. However, we anticipate a
more challenging environment for the portfolio
over the next 12 months. The realised loss rate
since 2001 was 1.8% at 31 March 2008
(2007: 1.1%). The level of provisions for the
period was 3.8% of total investment cost
(2007: 4.2%). As part of the year-end
valuations process, a specific review of assets
acquired in the last 12 months was conducted
with regard to debt, entry multiples and
performance. Of the 11 new investments made,
provisions have been taken against one, totalling
£22 million.
Fund management
Eurofund V had invested 40% of commitments
at 31 March 2008. Eurofund IV, which was
raised in 2003, has performed well compared
to latest available industry benchmark data.
The fund has already returned 131% of its
drawn commitments, has generated a 3.3 times
gross money multiple on realised investment and
has a remaining portfolio valued at 57% of
drawn commitments.
During the year, fund management fees and
carried interest receivable amounted to
£99 million (2007: £114 million).
Table 12 on page 36 contains a schedule of 3i’s
managed funds and provides details on when
each fund was raised, its size and the extent of
3i’s commitment as well as the amount invested
by the fund at 31 March 2008. A further
analysis of the source of funds by geography
and type of investor is provided on page 36.
Long-term performance
The vintage IRRs for 2002 to 2007 are all above
our “through-the-cycle” targeted IRR return of
20%. The 2002 to 2006 vintages have now
returned in excess of the original cost and, in
the case of the 2002 and 2003 vintages,
more than twice the original cost has been
returned to date.
Jonathan Russell Managing Partner
Report and accounts 2008 3i Group plc 13
Business review Buyouts continued
Case studies
Global Garden Products
New investment
Location: Italy
Sector: Consumer
Website: www.ggp-group.com
Inspicio
New investment
Location: UK
Sector: Business services
Website: www.inspicioplc.com
First investment
3i’s Eurofund V invested €260m in December 2007
to support the buyout, growth and development of
Global Garden Products (GGP).
Nature of business
GGP is Europe’s leading manufacturer of powered
garden equipment, including lawnmowers, ride-on
tractors and handheld equipment.
First investment
3i’s Eurofund V invested £164m in February 2008
to enable the public-to-private buyout of Inspicio.
Nature of business
Inspicio is a market-leading global provider of
commodity, food and environmental testing and
inspection services.
Results to 31 December
Results to 31 August
Sales
EBITDA
Net assets
2007
(audited)
€m
547
84
207
Sales
EBITDA
Net assets
*Net of goodwill.
2007
(audited)
£m
218
23
9*
Current trading
Sales and EBITDA in the current financial year to date
are performing ahead of the previous year’s results
for the same period.
Developments since 3i invested
The board of GGP has been strengthened through
3i’s introduction of Paolo Antonietti as Chairman. 3i is
also supporting GGP’s plans for growing the business,
particularly in new geographies. In January 2008,
GGP announced the acquisition of Alpina Italia Spa,
a company with a turnover of around €17m and the
main distributor of GGP’s Alpina brand in Italy.
3i Group plc’s investment
Cost
Equity and loan
Valuation (cost basis)
Equity and loan
Equity interest
Income in the year
March
2008
£m
104
116
34%
3
March
2007
£m
n/a
n/a
n/a
n/a
Current trading
The business continues to trade well, on the back of
increased regulation and strong demand for global
commodities.
Developments since 3i invested
3i is applying its sector expertise to support Inspicio’s
growth strategy. Since announcing an offer for the
business in December 2007, Inspicio has made four
strategic bolt-on acquisitions, as well as committing
to a further capital expenditure plan to accelerate
laboratory expansion.
3i Group plc’s investment
Cost
Equity and loan
Valuation (cost basis)
Equity and loan
Equity interest
Income in the year
March
2008
£m
91
91
38%
4
March
2007
£m
n/a
n/a
n/a
n/a
These case studies consist of the two largest investments
and the two largest realisations (by value) completed in the
year. We have also included the next largest investment in
the portfolio.
For new investments, cost and valuation may differ due to
the application of different exchange rates.
Where relevant, EBITDA represents operational EBITDA,
excluding non-recurring items.
For further information on 3i’s portfolio
and cases studies please visit
www.3i.com/investment-stories
For a list of our Top ten and 40 other large
investments by value, please go to pages 108
and 109
14 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Giochi Preziosi
Investment
Location: Italy
Sector: Consumer
Website: www.giochipreziosi.it
Care Principles
Realisation
Location: UK
Sector: Healthcare
Website: www.careprinciples.com
Coor Services Management
Realisation
Location: Sweden
Sector: Business services
Website: www.coor.com
First investment
3i’s Eurofund IV invested €126m in February 2006
to enable the buyout of Giochi Preziosi.
Nature of business
Giochi Preziosi is one of the world’s leading toy
businesses.
Results to 30 June
Sales
EBITDA
Net assets
2007
(audited)
€m
723
79
205
Current trading
Giochi Preziosi has continued to improve its sales and
profitability performance over the last year, building
on its position as the market leader in Italy with
around one quarter of market share.
Developments since 3i invested
3i has helped Giochi Preziosi make a number of
senior appointments since investment through its
global network. The sale and leaseback of the
properties of Giochi Preziosi was also driven by 3i’s
value plan, and returned a cash inflow of €73m to
enable the company to repay some of its borrowings.
The number of employees of Giochi Preziosi has
increased from 1,470 in 2004 to 1,717 in 2007.
In March 2008, an agreement was reached (subject
to regulatory approval and a material adverse change
clause) to sell Giochi Preziosi. This transaction would
return €290m to 3i and investors in Eurofund IV,
representing a money multiple of 2.3 times and a
45% IRR.
3i Group plc’s investment
Cost
Equity and loan
Directors’ valuation
(imminent sale/cost basis)
Equity and loan
Equity interest
Income in the year
March
2008
£m
63
151
38%
0
March
2007
£m
63
63
38%
0
First investment
3i’s Eurofund IV invested £54m in March 2005 to
enable the management buyout of Care Principles.
3i Group plc held a minority position in the company
since 1997.
Nature of business
Care Principles provides specialist assessment,
treatment and rehabilitation for adults with learning
difficulties, personality disorders and autistic
spectrum disorders.
Results to 30 April
(14 month period)
Sales
EBITDA
Net assets
2006
(audited)
£m
69
14
44
Developments since 3i invested
3i used its sector knowledge and experience in
Healthcare to assist in the development of Care
Principles. We introduced Paul Preston as CEO, and
Nick Irens, formerly of another successful 3i buyout
Westminster Healthcare, as Chairman. In 2005
3i helped Care Principles acquire Ermine Care, a
provider of community-based specialist services.
The company performed strongly and ahead of plan,
and in July 2006 Care Principles was re-capitalised,
returning £32m to 3i and Eurofund IV investors.
In July 2007, Care Principles was sold to Three
Delta LLP for £275m, generating a 3.5 times money
multiple for 3i and investors in Eurofund IV. Over 10
years, Care Principles has evolved from a start-up
operation to a company with over 1,400 employees.
3i Group plc’s return on investment March
2008
£m
Cost
Equity and loan
Realised value
Equity and loan
Unrealised value
Equity and loan
Equity interest
Income in the year
n/a
111
n/a
0%
1
March
2007
£m
20
23
44
43%
4
First investment
3i’s Eurofund IV invested €58m in December 2004
to enable the €131m buyout of Coor from Skanska.
Nature of business
Coor is a provider of Total Facilities Management in
the Nordic region, with services including workplace
support, property support, telephony and security
and production support.
Results to 31 December
Sales
EBITDA
Net assets
2006
(audited)
SEKm
3,745
309
241
Developments since 3i invested
3i’s network has assisted Coor in winning a number
of significant contracts. The company has delivered
on its plan to become the Nordic region market
leader through organic growth and the €56m
purchase of Celero from Volvo in 2005, which
increased sales by more than 60%. During the three
years of 3i’s investment, the company’s staff
numbers grew from 1,800 to 3,700.
In December 2007, Coor was sold to Cinven,
returning €370m to 3i and investors in Eurofund IV.
This represents a 6.3 times money multiple and an
IRR of 82% over the investment period.
3i Group plc’s return on investment March
2008
£m
Cost
Equity and loan
Realised value
Equity and loan
Unrealised value
Equity and loan
Equity interest
Income in the year
n/a
158
n/a
0%
2
March
2007
£m
30
0
72
38%
2
Report and accounts 2008 3i Group plc 15
Business review Growth Capital
“A year of considerable development for our business on so many fronts, yet we still
have much to do to achieve our full potential. The current environment, although
presenting some challenges, increases the attractions of our offering to world-class
growing companies and entrepreneurs.”
Gross portfolio return on opening value
Gross portfolio return
21%
£302m
Long-term performance
New investments made in the financial years
to 31 March
Vintage year
2008
2007
2006
2005
2004
2003
2002
Total
investment
£m
939
460
414
182
293
222
496
Returns from Growth Capital (£m)
year to 31 March
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Business activity – investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net (investment)/divestment
Gross portfolio return by year (%)
year to 31 March
04
05
06
07
08
25
23
26
21
16 3i Group plc Report and accounts 2008
Value
Return
flow
£m
£m
1 1,009
IRR to
remaining 31 March
2008
n/a
31
350
190
474
375
642
536
457
124
25
59
95
17%
43%
31%
26%
25%
12%
2008
75
160
67
302
2
IRR to
31 March
2007
n/a
(2)%
35%
35%
25%
25%
12%
2007
235
269
65
569
3
2008
503
(990)
(487)
2007
691
(482)
209
48
Business model
The Growth Capital business operates across
Europe, Asia and the US with over 100
investment professionals and targets gross
cash-to-cash IRRs of 20% through the cycle.
These returns are generated from minority
equity investments, funded from 3i’s balance
sheet, to support the growth of sizeable
businesses organically or through acquisition.
Investments are typically in companies with
relatively low leverage.
As the strength of 3i’s international offering has
grown, so has the average size of the companies
that the Growth Capital team invest in.
In the year to 31 March 2004, the Growth
Capital business line invested £319 million in 34
businesses, with an average size of investment
of £7 million. In the year to 31 March 2008,
this had grown to £990 million in 27 new
portfolio companies, an average size of new
investment of £37 million. These include
five investments totalling £26 million made
through our partnership with 3TS in central
and eastern Europe.
The team operates as a global partnership,
originating systematically and investing
selectively with the aim of building
a portfolio which is diversified by sector,
geography, type of investment and size
of company.
3i’s investment professionals engage in active
partnership with the companies in which they
invest through aligning interests with other
shareholders and joining the board. They provide
sector expertise together with strategic,
operational and financial insights.
During the year, the decision was taken to form
a new Technology sector team within the
Growth Capital business line, capitalising on
3i’s later-stage technology and healthcare
investing activity. This team will comprise
investors who will transfer from 3i’s Venture
Capital business line.
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Strategy
Our strategy has been to build our geographic
presence, improve effectiveness through
increasing the average size of investment and to
capitalise on 3i’s competitive advantage through
our international presence in the mid market.
Our aim is to be the private equity firm of choice
for world-class growing companies and
entrepreneurs.
Investments are sourced, executed and
managed using a “best team for the job”
approach, on a global basis. 3i’s geographic,
sector and Business Leaders Network provide
market access and insight. The development of
our sector approach, combined with the
strength of our international network and
resources, especially in Asia and the US, have
increased this access. Over the last few years,
approximately half of our deals have been
sourced directly. 3i’s track record and experience
of managing relationships with company owners
for over 60 years supports the conversion of
opportunities into investments.
Market
Comprehensive market data is difficult to access,
but our own analysis is that €28 billion was
invested world-wide in 2007, a 38% increase on
2006. Market growth has been particularly
strong in Asia, where growth capital has been
the driving factor in the growth of private equity
as an asset class.
The market is becoming more competitive in all
the regions in which we operate. In Europe, we
are seeing large buyout firms turning their
attention to growth capital and some direct
activity from hedge funds and mezzanine
players. In Asia, the market continues to see
European and US entrants as well as active IPO
markets. The US market remains the most
mature, with a number of dedicated and
experienced growth capital providers in direct
competition with 3i. We believe that with our
dedicated Growth Capital teams, geographic
coverage and investment style, we remain well
positioned competitively.
The upheaval in capital markets has provided
a further impetus to market activity, with
companies and investors alike focusing
on equity funding rather than debt.
Investment and realisations
Investment during the period doubled to
£990 million (2007: £482 million) in
approximately the same number of companies
as last year. This reflected the geographic
expansion in recent years and an increase in
the average size of new investment to
£37 million (2007: £26 million). The US business
completed four investments during the period
and invested £243 million (2007: £nil). The
largest investments during the period were UK-
based oil and gas producer, Venture Production
plc (£110 million) and US healthcare business,
Quintiles International (£100 million).
We continued to see good opportunities in Asia.
However, the prices of assets remained high
through the year. We followed a strategy
of selective investment while focusing on
delivering value from the portfolio.
Realisations during the year were lower at
£503 million (2007: £691 million), reflecting
the influence of a less mature portfolio and
market conditions in the second half of the year.
Some 70% of the portfolio was less than three
years old at 31 March 2008 (2007: 65%).
The two largest realisations were Hayley
Conference Centres in the UK (£72 million
proceeds) and Clínica Baviera in Spain
(£63 million proceeds), both of which delivered
over 2.5 times our original cost in less than
three years.
The case studies on pages 18 and 19 include
our largest new investments and realisations.
Gross portfolio return
The Growth Capital business generated a
gross portfolio return of £302 million (2007:
£569 million), which represents a 21% return
(2007: 48%) over the opening portfolio, in line
with our through-the-cycle target, but below
the exceptional level generated last year.
Unrealised profits of £160 million accounted
for over 50% of the return in the period.
The Asia business generated unrealised profits
of £143 million as a result of a number of first-
time uplifts and IPOs in the period. Indian
investment Mundra Ports listed on the Mumbai
stock exchange in November 2007, generating
an uplift of £24 million at 31 March 2008 over
opening value. An uplift of £47 million was also
taken on CDH China Fund.
Lower levels of realisations in the period meant
that realised profits were lower at £75 million
(2007: £235 million). In part, this was also
because Hayley Conference Centres and Clínica
Baviera, which were realised early in the first half
of the year, were valued on an imminent sales
basis at 31 March 2007.
Portfolio health
Provisions in the year of £26 million were above
last year (£6 million) but remain low on a historic
basis. As at 31 March 2008, 93%
of our investments were classified as healthy,
against a three-year rolling average of 89%
(2007: 92% and 81%). No provisions have
been made against assets acquired in the last
12 months.
Long-term performance
The long-term performance table shows
continued good progress against the 20% target
through-the-cycle IRR, especially from more
recent vintages. The 2005 and 2006 vintages,
in particular, have had substantial early-return
flow and value growth.
Michael Queen Managing Partner Growth Capital until
31 March 2008 – pictured left
Guy Zarzavatdjian Managing Partner Growth Capital (from
1 April 2008) and Managing Partner Growth Capital Europe
until 31 March 2008 – pictured right
Report and accounts 2008 3i Group plc 17
Business review Growth Capital continued
Case studies
Quintiles
New investment
Location: US
Sector: Healthcare
Website: www.quintiles.com
First investment
3i and associated limited partners invested $429m
for a combined 15% minority stake in Quintiles in
January 2008. This was to support the company’s
continued growth as part of a recapitalisation of the
company.
Nature of business
Quintiles is the market leader in providing outsourced
product development and commercialisation
solutions and services to the pharmaceutical and
biotech industries. Quintiles has played a role in
developing each of the world’s top 30 best-selling
drugs and nine of the top 10 best-selling biotech
products.
Results to 31 December
Sales
EBITDA
Net assets
2006
(audited)
$m
1,921
243
(448)
Current trading
Quintiles has performed to plan since 3i invested in
January 2008.
Developments since 3i invested
3i is actively involved in supporting Quintiles’ growth,
utilising its strong global network and Healthcare
sector expertise, as well as long-standing
relationships with major pharmaceutical and
biotech firms.
These case studies consist of the two largest investments
and the two largest realisations (by value) completed in the
year. We have also included the next largest investment in
the portfolio, which is also a new investment.
For new investments, cost and valuation may differ due to
the application of different exchange rates.
3i Group plc’s investment
Where relevant, EBITDA represents operational EBITDA,
excluding non-recurring items.
Cost
Equity and loan
Valuation (cost basis)
Equity and loan
Equity interest
Income in the year
March
2008
£m
100
101
7%
3
March
2007
£m
n/a
n/a
n/a
n/a
For further information on 3i’s portfolio
and cases studies please visit
www.3i.com/investment-stories
For a list of our Top ten and 40 other large
investments by value, please go to pages 108
and 109
18 3i Group plc Report and accounts 2008
Venture Production plc
New investment
Location: UK
Sector: Oil, gas and power
Website: www.venture-production.com
First investment
3i initially backed Venture Production in 1997 before
its IPO and divested in 2002. Since receiving a
minority stake as consideration on the sale of CH4 to
Venture Production in 2006, 3i invested a total of
£110m in Venture Production plc during August
2007. The aim is to support development in the UK
and Netherlands sectors of the North Sea.
Nature of business
Venture Production is a UK North Sea oil and
gas producer, focusing on development and
enhancement of discovered and producing oil and
gas fields.
Results to 31 December
Sales
EBITDA
Net assets
2007
(audited)
£m
358
267
281
Current trading
During 2007, the company continued the
development of its North Sea asset base, participating
in the drilling of 11 new wells and bringing two new
fields on stream.
Developments since 3i invested
Since the start of 2008, the company has announced
seven acquisitions of which six have already been
completed. These include the company’s first add-on
deal following its entry into the Dutch sector in 2006
and the acquisition of WHAM Energy plc, an AIM
listed company, for £14m. Venture Production’s debt
facilities have expanded to £585m, giving a strong
base to consolidate the company’s position as a
leading independent oil and gas company in the
North Sea.
3i Group plc’s investment
Cost
Equity and loan
Valuation (quoted basis)
Equity and loan
Equity interest
Income in the year
March
2008
£m
111
127
23%
3
March
2007
£m
0
24
3%
0
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
DNA Oy
New investment
Location: Nordic
Sector: Communications
Website: www.dnaoy.fi
Clínica Baviera
Realisation
Location: Spain
Sector: Healthcare
Website: www.clinicabaviera.com
Hayley Conference Centres
Realisation
Location: UK
Sector: Leisure
Website: www.hayley-conf.co.uk
First investment
3i invested €142m for a 13% stake in DNA Oy
(formerly known as Finnet Oy) in May 2007,
to support the expansion of DNA’s product offerings.
First investment
3i acquired a 32% interest in Clínica Baviera in May
2005 for €40m in order to enable both the organic
and acquisitive growth of the business.
First investment
In September 2005, 3i acquired a 46% stake in
Hayley for £40m to support the company’s plans for
UK and international expansion.
Nature of business
DNA is an integrated telecommunications and cable
TV network and services operator, operating in
Finland, providing a full range of services.
Nature of business
At the time of realisation, Clínica Baviera was the
leading provider of refractive surgery and other
ophthalmic treatments in Spain.
Nature of business
At the time of realisation, Hayley was the leading
provider of premium dedicated conference venues in
the UK.
Results to 31 December
(Pro forma including businesses acquired in 2007)
Sales
EBITDA
Net assets
2007
(unaudited)
€m
639
152
299
Results to 30 November
Sales
EBITDA
Net assets
2006
(audited)
€m
59
21
19
Results to 31 March
Sales
EBITDA
Net assets
2006
(audited)
£m
42
14
72
Current trading
Currently the fastest growing mobile operator in
Finland, DNA is building on its significant asset base
and well-established reputation. The integration of
the fixed-line businesses is being implemented as
planned.
Developments since 3i invested
The focus since 3i invested has been on the
integration of the local fixed-line networks and
operations. This will enable DNA to provide
broadband, voice telephony, cable television and IT
services in addition to its current mobile offerings.
DNA’s market position has strengthened and
the company now has a strong market position in
wireless broadband provision.
3i Group plc’s investment
Cost
Equity
Valuation (cost basis)
Equity
Equity interest
Income in the year
March
2008
£m
97
113
13%
0
March
2007
£m
n/a
n/a
n/a
n/a
Developments since 3i invested
3i utilised its considerable Healthcare sector
knowledge and experience to assist in the
development of Clínica Baviera. During the period of
3i’s investment, annual turnover rose from €43m to
€59m, new clinics were opened and Clínica Londres
was successfully acquired. Employment grew from
273 staff in late 2005 to 440 staff in early 2007.
In April 2007, the company achieved a successful
IPO on the Madrid Stock Exchange, generating
proceeds for 3i of €96m. This represents a cash
multiple of 2.6 times and an IRR of 62%.
3i Group plc’s return on investment March
2008
£m
March
2007
£m
Developments since 3i invested
At sale, the company had eight UK sites and one
under construction in France. Hayley was voted
number 70 in the Sunday Times 100 Best
Companies to Work For in 2006. Employee numbers
rose from 754 in September 2005 to 833 in May
2007. The reputation of the business as a high-
quality service provider led to the successful sale of
the company to Principal Hotels in May 2007.
This generated proceeds for 3i of £72m which, in
addition to £46m re-gearing proceeds in November
2006, represents a cash multiple of 2.9 times and
an IRR of 120%.
3i Group plc’s return on investment March
2008
£m
n/a
63
n/a
0%
0
27
Cost
Equity and loan
0
Realised value
62
32%
3
Equity and loan
Unrealised value
Equity and loan
Equity interest
Income in the year
n/a
72
n/a
0%
0
March
2007
£m
1
46
66
46%
2
Cost
Equity and loan
Realised value
Equity and loan
Unrealised value
Equity and loan
Equity interest
Income in the year
Report and accounts 2008 3i Group plc 19
Business review Infrastructure
“The progress of 3i Infrastructure Limited, the launch of our Indian infrastructure fund
and the development of our team and market position have been good indicators of
progress. The outlook for infrastructure remains positive.”
Returns from Infrastructure (£m)
year to 31 March
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management (£m)
as at 31 March
Own balance sheet
Managed funds
Advised funds
2008
6
43
18
67
18
2008
501
348
364
1,213
2007
(15)
3
27
15
–
2007
469
–
385*
854
*3i Infrastructure Limited was launched in March 2007. The value of external funds was based on the share price at
31 March 2007. The Group now uses the latest published net asset value rather than the market price to measure
external assets under management.
Business model
3i generates a blended return through its own
balance sheet investment in infrastructure
assets and through advisory, management
and performance fees generated from
3i Infrastructure Limited and the 3i India
Infrastructure Fund. The assets under
management table shows the composition of
assets advised and under management. At this
early phase of development, fees receivable
from external funds of £18 million (2007: £nil)
are already making a good contribution to the
Group return.
3i defines infrastructure investments as
investments in asset-intensive businesses which
provide essential services such as transport,
utilities and social infrastructure under long-term
contracts. These include a range of asset
maturities, from mature, typically high-yielding
assets to early-stage development projects,
which would generally provide a lower yield, but
higher potential for capital growth. This range of
maturities is intended to generate returns
through a combination of capital growth and
income yield.
The team comprises 23 investment
professionals operating from London, New York,
Frankfurt and Mumbai, mirroring the geographic
focus of investment in the UK, the US,
continental Europe and India.
3i Infrastructure Limited
3i holds a 46.2% investment in 3i Infrastructure
Limited, which was listed on the London Stock
Exchange in March 2007 and is now a
FTSE 250 company. 3i Group plc, through
3i Investments plc, a wholly-owned subsidiary,
acts as Investment Adviser to 3i Infrastructure
Limited and in return receives an advisory fee
of 1.5% of invested capital and an annual
performance fee of 20% of the growth in net
asset value, before distributions, over an 8%
hurdle, calculated each year.
20 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
3i Infrastructure Limited is a long-term investor
with a global investment mandate to focus on
three key sub-sectors: transport; utilities; and
social infrastructure. In addition to its direct
investments in infrastructure assets, during
the year, 3i Infrastructure Limited committed
to invest US$250 million in the 3i India
Infrastructure Fund.
3i Infrastructure Limited has its own
dedicated investor relations website
(www.3i-infrastructure.com). Results for the
period from incorporation on 16 January 2007
to 31 March 2008 are due to be published by
3i Infrastructure Limited in June 2008.
Strategy
The Infrastructure team, which advises
3i Infrastructure Limited and manages the
3i India Infrastructure Fund, focuses on
delivering the investment strategy of its advised
and managed funds and aims to use 3i’s
network, track record and brand to build a first-
class, global infrastructure investment business
which is highly respected in the relevant local
markets.
The team also seeks to be socially conscious
in all of its activities and conforms to 3i’s
social and environmental policies, procedures
and standards.
3i India Infrastructure Fund
3i’s growing presence and reputation in India,
and in the infrastructure sector, created the
opportunity for a strategic partnership to be
signed with the India Infrastructure Finance
Company Limited in April 2007. With this in
place, 3i set out to raise a US$1.0 billion fund,
with the mandate to invest in projects across
the power, ports, airports and road sub-sectors
in India.
Subsequent to the year end, on 16 April,
3i announced a final closing of the 3i India
Infrastructure Fund at US$1.2 billion,
exceeding its US$1.0 billion target. 3i and
3i Infrastructure Limited each committed
US$250 million to this fund during the year.
3i will receive a management fee of 2.0%
based on investment committed to the fund,
with the exception of 3i Infrastructure Limited,
which pays advisory fees to 3i.
During the year, the fund made two investments
in Adani Power Private Limited (US$227 million)
and Soma Enterprise Limited (US$101 million).
Market
The market for infrastructure investment
remains attractive. We continue to see
significant opportunities for investment, in
particular in Europe, India and North America.
The asset class has proven to be attractive in
current markets, due to its defensive
characteristics.
Gross portfolio return and fee income
The Infrastructure portfolio generated a gross
portfolio return of £67 million, 14% on opening
portfolio value during the period (2007:
£15 million, 16%). Unrealised profits of
£43 million (2007: £3 million) and portfolio
income of £18 million (2007: £27 million) were
the key drivers of this return. An increase in the
value of 3i’s holding in 3i Infrastructure Limited
contributed £29 million to this, as the value
of the shares rose from 100.75p on 31 March
2007 to 110p at 31 March 2008 and at
the same date the warrants issued at
3i Infrastructure Limited’s IPO had a price of
17p (31 March 2007: 19p). Portfolio income
mainly comprises dividend income from
3i Infrastructure Limited and from Anglian
Water Group Limited (“AWG”), in which
3i retains a direct holding.
Fee income included £12 million from
advising and providing other services to
3i Infrastructure Limited and £5 million from
managing the 3i India Infrastructure Fund.
Investment and realisations
As the Infrastructure business line’s investment
is mainly made through 3i Infrastructure Limited
and the 3i India Infrastructure Fund, investment
by the Group in the year was £38 million
(2007: £380 million). Investment in 2007
was substantially higher, due to the Group’s
£325 million initial investment in
3i Infrastructure Limited, comprising a transfer
of seed assets (£234 million) and cash.
The largest investment during the current
financial year (£36 million) was attributable to
drawdowns by the 3i India Infrastructure Fund
to invest in Adani Power Private Limited, which is
developing a portfolio of power plants across
India, and Soma Enterprise Limited, an
infrastructure construction, operation and
management firm.
Realisation proceeds of £57 million include the
partial divestment of AWG (£25 million) and
the sale of the Alma Mater Fund, active in the
construction and management of university
accommodation, to 3i Infrastructure Limited
(£25 million).
Portfolio
The total value of 3i’s direct Infrastructure
portfolio is £501 million. The investment in
3i Infrastructure Limited was valued at
£363 million. Four additional investments are
held by the Group, including a £98 million
investment in AWG.
All investments made since the launch of the
Infrastructure business in 2006 are classified
as healthy.
Michael Queen Managing Partner
Report and accounts 2008 3i Group plc 21
Business review Quoted Private Equity (“QPE”)
“Our investment strategy has been cautious in the early phase of our development.
However, market conditions have increased our opportunities and as markets stabilise
3i Quoted Private Equity Limited is well placed to invest.”
Returns from QPE (£m)
year to 31 March
Realised profits over value on the disposal of investments
Unrealised (losses)/profits on the revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Assets under management (£m)
as at 31 March
Own balance sheet
Third-party funds
2008
–
(42)
–
(42)
1
2008
142
269
411
2007
–
6
–
6
–
2007
20
–
20
Business model
3i’s Quoted Private Equity (“QPE”) business line
brings capital and value creation techniques to
public companies without taking them private.
Investments are made by 3i Quoted Private
Equity Limited, a company which listed on the
London Stock Exchange in June 2007 at a
capitalisation of £400 million. 3i Quoted Private
Equity Limited has its own dedicated investor
relations website (www.3iqpe.com) and is
scheduled to announce its annual results for the
year to 31 March 2008 later in May 2008.
3i acts as Investment Adviser to 3i Quoted
Private Equity Limited. The QPE team comprises
an experienced team of 11 investment
professionals, one of whom will normally join the
board of the portfolio company. The team
identifies investments in the small and mid-cap
market across continental Europe and the UK,
with a view to 3i Quoted Private Equity Limited
holding these investments for a period of years.
These are typically companies which are under-
researched, suffer from low liquidity in their
shares and where there is an opportunity
to unlock and enable significant strategic
development. 3i Quoted Private Equity Limited’s
approach is to leverage 3i’s international network
and resources and apply a private equity
mindset.
22 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
3i’s returns are generated through a combination
of capital appreciation from its 45% holding in
3i Quoted Private Equity Limited and advisory
and performance fees received from the listed
fund for acting as an investment adviser.
An advisory fee of 2% is payable to 3i Group
based on the gross investment value of
3i Quoted Private Equity Limited less cash
uninvested. A performance fee becomes payable
when the net asset value per share at the end of
the relevant performance period exceeds an 8%
performance trigger, compounding annually,
with the performance fee payable being 20% of
the entire growth in net asset value.
Strategy
The advisory strategy is to identify a limited
number of investments in the UK and
continental Europe through 3i’s international
network and sector teams. Detailed value
creation plans are formulated and agreed in
partnership with management for each situation.
Elements of the value creation plan include
providing capital to accelerate managements’
growth plans for their businesses; improving
governance; introducing management incentives
to align managements’ interests with growing
value for shareholders; and optimising the capital
structure of the businesses. In summary, the
QPE team engages with ambitious management
teams to enhance shareholder value through
strategic, operational or financial improvements
to the businesses in which 3i Quoted Private
Equity Limited invests.
Market
The turbulence in capital markets has
exacerbated the challenges for smaller public
companies throughout Europe, potentially
increasing the size of the market opportunity
for 3i Quoted Private Equity Limited since its
listing. 3i Quoted Private Equity Limited has now
invested approximately 26% of the initial capital
raised and has ample capital to invest as market
opportunities arise.
Progress to date
3i Quoted Private Equity Limited was listed
on the London Stock Exchange in June 2007
with a market capitalisation of £400 million.
The Group made a £181 million investment in
this company to acquire a 45% holding in the
company. On listing, 3i Group plc also
transferred two investments into 3i Quoted
Private Equity Limited, generating proceeds of
£18 million.
Since listing, 3i Quoted Private Equity
Limited has announced two new investments.
On 26 February 2008, it announced that it had
made a £30 million investment in Jelf Group plc,
an insurance broker and wealth adviser based in
the UK employing over 700 staff with more
than 20 offices across England and Wales.
On 13 March, it announced a US$53 million
purchase of shares in Phibro Animal Health
Corporation, a diversified global manufacturer
and marketer of a broad range of animal health
and nutrition products. Subsequent to the year
end, on 4 April, 3i Quoted Private Equity Limited
announced it had increased this investment to
US$93 million, following Phibro’s listing on AIM.
The gross portfolio return in this initial period
following 3i Quoted Private Equity Limited’s
listing was £(42) million. This was principally due
to the lower share price at 31 March 2008
(79p), which accounted for £40 million of this.
During the year, an advisory fee of £1 million
was generated.
The net asset value of 3i Quoted Private
Equity Limited at 31 March 2008 was
102.2p per share (unaudited), a 4.2%
increase over proceeds raised at flotation
(less initial expenses) of 98.1p per share.
In summary, this has been a year of considerable
progress for QPE. Our team is now in place, 3i
Quoted Private Equity Limited has been launched
and its first investments have been made. I look
forward to reporting more progress.
Bruce Carnegie-Brown Managing Partner
Report and accounts 2008 3i Group plc 23
Business review Venture Capital
“The transition from early to late-stage investing is now substantially complete.”
Business model
The transition from early to late-stage investing,
which was driven by the objective to maximise
shareholder returns and reduce the volatility
inherent with an early-stage investment
activity, has now been substantially completed.
This increased focus on later stage, where
3i’s competitive advantage and international
network has more resonance with management
teams, also improves the productivity of
our teams.
During the year, new early-stage investment
accounted for just 4% of total investment
(2007: 15%). As the proportion of late-stage
technology and healthcare investing has grown
and the size of transactions has increased, the
level of overlap between the Venture Capital
and Growth Capital investing activities became
a more regular occurrence. As such, it became
evident that the Venture Capital investment
activities could benefit, and provide 3i greater
market clarity, by being integrated in our global
Growth Capital business.
Return
flow
£m
0
8
12
21
91
31
Value
IRR to
remaining 31 March
2008
n/a
£m
72
139 (11)%
99
84
89
4%
4%
10%
IRR to
31 March
2007
n/a
(2)%
5%
(1)%
14%
34 (17)% (19)%
141
86
(8)% (12)%
2008
65
(88)
6
(17)
–
As a consequence, the decision was taken
during the year to form new Technology and
Healthcare sector teams within the Growth
Capital business line, through which all late-stage
technology and healthcare investments would
be made from 1 April 2008. This team has been
drawn predominantly from the Venture Capital
business line.
2007
12
(61)
3
(46)
1
All investments currently managed by the
Venture Capital team will be managed by a
focused team, the “Venture Portfolio team”,
who are incentivised through the value that they
derive from this portfolio. These investments
had a combined value at 31 March 2008 of
£738 million. The investment performance
and activity of this portfolio will continue to
be reported separately and, from 1 April 2008,
identified as the Venture Portfolio. In optimising
the return from this portfolio, 3i is committed to
making further investments in these companies
as appropriate.
2008
170
(156)
14
2007
187
(200)
(13)
10
11
17
Gross portfolio return on opening value
Gross portfolio return
(2)%
£(17)m
Long-term performance
New investments made in the financial years
to 31 March
Vintage year
2008
2007
2006
2005
2004
2003
2002
Total
investment
£m
59
167
103
93
141
122
339
Returns from Venture Capital (£m)
year to 31 March
Realised profits over value on the disposal of investments
Unrealised (losses) on the revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Business activity – investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net divestment/(investment)
Gross portfolio return by year (%)
year to 31 March
04
05
06
07 (6)
08
(2)
24 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Market
In 2007, both the US and European Venture
Capital markets displayed an increasing focus on
sizeable late-stage financings. According to
VentureSource, in Europe, late-stage accounted
for more than 45% of the overall Venture Capital
investment, the highest amount allocated to
later stage since 2001. Investment in early and
late-stage IT companies remained a key driver of
overall Venture Capital investment. IT remains a
key driver of change in media, financial services
and consumer sectors. While European
healthcare venture capital investment in 2007
decreased by 5%, in the US it grew 17%.
According to PricewaterhouseCoopers’ 2008
Technology M&A insights, the primary areas
for deal activity over the next 12 months are
likely to be around continued cross-border
consolidation in software and IT services.
Climate change and the demand for effective
environmentally friendly technology may also
stimulate additional mergers and acquisitions
activity in 2008.
Gross portfolio return
The Venture Capital portfolio incurred a marginal
negative gross portfolio return of (2)% over the
opening portfolio value (2007: (6)%).
Realised profits of £65 million were the main
contributor to gross portfolio return in the year.
An unrealised loss of £(88) million in the period
was primarily driven by provisions taken on the
portfolio of £79 million and a loss of £27 million
on the quoted portfolio.
Investment and realisations
Total realisation proceeds in the period
were £170 million (2007: £187 million).
The largest realisations in the year were German
pharmaceuticals business Doc Morris, which
generated a realised profit of £33 million
and the sale of Bluelithium to Yahoo inc., which
produced realised profits of £10 million.
There were 35 full realisations in the year
(2007: 35) which principally came from selling
older-vintage assets and an initiative in the
early part of the year to reduce the size of the
quoted portfolio.
Investment during the year was £156 million,
of which only £6 million was invested in new
early-stage technology (2007: £29 million).
The two largest investments were a £19 million
late-stage investment in France-based E-Travel
business FastBooking and a further late-stage
investment of £13 million in UK-based
Healthcare Brands International.
The case studies on pages 26 and 27 include
our largest new investments and realisations.
Portfolio health
Portfolio health was slightly worse in the year,
with 65% (2007: 69%) of the portfolio by cost
classified as healthy, compared to the rolling
three year average of 67% (2007: 67%).
Long-term performance
The longer life cycle of these investments and
the tendency for the major element of returns
to be generated on exit means that it is too early
to comment on the performance of the most
recent vintages. However, as the drive from
2004 to increase the proportion of late-stage
investment in each vintage has taken effect, the
vintage IRR performance has shown an
encouraging trend.
Jo Taylor Managing Partner
Report and accounts 2008 3i Group plc 25
Business review Venture Capital continued
Case studies
Fastbooking
New investment
Location: France
Sector: Internet
Website: www.fastbooking.org
First investment
In October 2007, 3i invested a27m in a late-stage
investment to support Fastbooking in growing the
business outside of France.
Nature of business
Fastbooking is a leading provider of advanced
internet booking systems and marketing services for
the hospitality industry, operating in Europe, Asia and
North America.
Results to 31 December
Sales
EBITDA
Net assets
2007
(unaudited)
$m
17
3
n/a
Current trading
Established in 2000, Fastbooking has over 3,500
client hotels world-wide, with over two million hotel
room nights booked through its platform during
2007. The company has developed a global range of
solutions designed to help hotels world-wide,
especially 4 star and above, grow their internet sales
and efficiently manage their electronic distribution
strategy.
Developments since 3i invested
3i introduced Amal Amar (former CEO of
SeLoger.com) to the board and he has been
appointed to act as Chairman of Fastbooking.
3i also introduced Guillaume de Marcillac (former
CFO of Expedia Corporate Travel) as the new CFO of
Fastbooking.
3i Group plc’s investment
Cost
Equity
Valuation (cost basis)
Equity
Equity interest
Income in the year
March
2008
£m
19
21
47%
1
March
2007
£m
n/a
n/a
n/a
n/a
Healthcare Brands International
New investment (further)
Location: UK
Sector: Healthcare
Website: www.healthcarebrandsinternational.com
First investment
3i first invested £3m in Healthcare Brands
International (“HBI”) alongside other investors as
part of a second-round funding in July 2006.
In December 2007, 3i invested a further £13m into
HBI to support the company’s growth.
Nature of business
HBI acquires, develops, and invests in differentiated
healthcare products, primarily in the over-the-
counter medicine market.
Results*
Sales
EBITDA
Net assets
2007
n/a
n/a
n/a
Current trading
HBI has been making acquisitions in products and
brands in line with its strategy and is expecting
trading to be in line with budget forecasts for 2007.
Developments since 3i invested
HBI’s first brand, Sambucol, is trading well and is now
available selectively across Europe and North
America. In December 2007, HBI acquired
Scandinavian healthcare company, Antula, with the
support of 3i’s investment. Antula is a significant
over-the-counter healthcare company in the
Scandinavian market.
3i Group plc’s investment
Cost
Equity
Valuation (cost basis)
Equity
Equity interest
Income in the year
March
2008
£m
16
16
17%
0
March
2007
£m
3
3
17%
0
*No published results are available for HBI.
These case studies consist of the two largest investments
and the two largest realisations (by value) completed in the
year. We have also included the next largest investment in
the portfolio.
For new investments, cost and valuation may differ due to
the application of different exchange rates.
Where relevant, EBITDA represents operational EBITDA,
excluding non recurring items.
For further information on 3i’s portfolio
and cases studies please visit
www.3i.com/investment-stories
For a list of our Top ten and 40 other large
investments by value, please go to
pages 108 and 109
26 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Demand Media
Investment
Location: US
Sector: Internet
Website: www.demandmedia.com
CSR plc
Realisation
Location: UK
Sector: Technology
Website: www.csr.com
First investment
3i invested $40m in September 2006 to enable
Demand Media to invest in future growth initiatives
and acquisitions. A further $20m was invested in
September 2007.
First investment
3i invested £7.7m in Cambridge Silicon Radio Ltd
(“CSR”) over several rounds of funding between
1999 and 2002, after the company was formed as a
spin-out from Cambridge Consultants Ltd.
Nature of business
Demand Media is a next-generation media platform
company with significant media properties and one
of the largest domain portfolios.
Nature of business
CSR is a leading manufacturer of single-chip
Bluetooth wireless devices.
Results to 31 December
DocMorris.com
Realisation
Location: Germany
Sector: Technology
Website: www.docmorris.de
First investment
3i initially invested a1m in DocMorris.com when the
company was founded in 1999 and has invested a
total of a13m over the lifetime of the investment.
Nature of business
DocMorris.com is a mail order company for
pharmaceuticals, acting as a fully-authorised
pharmacy in accordance with Dutch regulations.
Results to 31 December
Sales
EBITDA
Net assets
2006
(unaudited)
$m
79
19
233
Current trading
Demand Media has continued to grow both revenue
and EBITDA. The company has closely tracked its
plan, while growing the business both organically and
through acquisitions.
Developments since 3i invested
Since 3i invested, Demand Media has released its
new media platform. In addition, it has successfully
closed and integrated a number of acquisitions. In
June 2007, Charles Hilliard, former President and
CFO of United Online, was recruited to the position
of CFO at Demand.
Sales
EBITDA
Net assets
Developments since 3i invested
3i assisted in the successful development of CSR
from its founding through to its position as a market
leader at the point of divestment. This assistance was
provided through recruitment of several members of
the board, backing further funding rounds and
assisting with business negotiations with companies
such as Intel Capital and Sony. CSR floated in 2004
and 3i supported the IPO and fund raising on the
London Stock Exchange.
Over the course of 3i’s investment, CSR returned a
total of £75m, representing a 9.8 times money
multiple and an IRR of 57%.
3i Group plc’s investment
Cost
Equity
Valuation (further/advance)
Equity
Equity interest
Income in the year
March
2008
£m
31
41
*
0
*Equity interest cannot be disclosed for legal or
commercial reasons.
March
2007
£m
3i Group plc’s return on investment March
2008
£m
21
20
8%
0
Cost
Equity
Realised value
Equity
Unrealised value
Equity
Equity interest
Income in the year
n/a
20
n/a
0%
0
March
2007
£m
1
7
16
13%
0
2007
(audited)
$m
849
185
509
Results to 31 December
Sales
EBITDA
Net assets
2006
(audited)
€m
172
*
26
Developments since 3i invested
From its start up in 1999, DocMorris.com had
850,000 customers, employed 330 staff and was
generating annual revenues of a172m at the point of
3i’s divestment. The strategic shift to sell
pharmaceutical products under the DocMorris brand
and to set up a franchise system for stationary
pharmacies attracted interest from potential buyers.
In June 2007, DocMorris was sold to Celesio,
Europe’s largest pharmaceutical distributor.
This generated over a60m for 3i, which represents
a cash multiple of 5.3 times and an IRR of 59%.
3i Group plc’s return on investment March
2008
£m
Cost
Equity and loan
Realised value
Equity and loan
Unrealised value
Equity and loan
Equity interest
Income in the year
n/a
*
n/a
*
0
*EBITDA, realised value and equity interest for the
company cannot be disclosed for legal reasons.
March
2007
£m
8
n/a
8
*
0
Report and accounts 2008 3i Group plc 27
Business review Financial review
This review provides detailed information on our financial
performance for the year and the financial position at the
end of the year.
Investment activity
Table 1: Investment by business line and geography (£m)
for the year to 31 March
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Continental Europe
2007
326
212
6
–
1
15
560
2008
415
256
–
–
–
36
707
UK
Asia
US
2008
371
357
2
182
6
54
972
2007
169
11
374
14
1
81
650
2008
–
132
36
–
–
3
171
2007
–
258
–
–
–
1
259
2008
–
243
–
–
–
60
303
2007
–
–
–
–
–
92
92
Rest of World
2008
2
2
–
–
–
3
7
2007
3
1
–
–
–
11
15
Total
2008
788
990
38
182
6
156
2,160
2007
498
482
380
14
2
200
1,576
Investment
Consistent with the strategy to grow assets
under management and to extend our
international reach directly and through investing
in funds, investment in the year grew by 37%
to £2,160 million (2007: £1,576 million).
This included 3i’s £181 million investment in
3i Quoted Private Equity Limited, as well as
the Group’s £36 million initial investment in
the 3i India Infrastructure Fund.
The key driver of this increase was a rise in
the average size of investment. Excluding the
3i Quoted Private Equity Limited and 3i India
Infrastructure Fund investments, the average
size grew to £37 million (2007: £26 million).
The number of new investments in the period
was lower at 47 (2007: 62), principally because
of a decrease in the number of early-stage
technology investments (2008: 2, 2007: 14).
As can be seen from table 1, Growth Capital
accounted for 46% of new investment and
Buyouts accounted for 36% of new investment
in the year. Although remaining firmly in the
mid market, the average size of new buyout
investments increased to £55 million (2007:
£41 million).
The UK and continental Europe accounted for
78% (2007: 77%) of investment in the period.
Investment in the US increased to £303 million
(2007: £92 million) as the New York
Growth Capital team became established.
As a consequence, US investment accounted
for 14% of total Group investment during the
year (2007: 6%).
After significant increases in 2006 and 2007,
investment in Asia was lower at £171 million
(2007: £259 million). Investment in India
was broadly at the same level at £95 million
(2007: £99 million) and included the first
drawdowns for 3i India Infrastructure Fund for
a total of £36 million. There was continued
growth in China at £53 million (2007:
£39 million) but investment in South East Asia
fell compared to the previous year, which
included the £105 million ACR investment.
In addition to the amount invested by 3i directly,
a further £1,035 million (2007: £290 million)
was invested on behalf of funds advised or
managed by 3i.
28 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Table 2: Realisation proceeds by business line and geography (£m)
for the year to 31 March
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Continental Europe
2007
617
435
–
–
46
61
1,159
2008
471
320
6
–
27
70
894
UK
Asia
US
2008
387
166
51
18
109
52
783
2007
724
203
5
–
168
69
1,169
2008
–
17
–
–
–
8
25
2007
–
53
–
–
–
1
54
2008
–
–
–
–
–
40
40
2007
–
–
–
–
–
56
56
Rest of World
2008
–
–
–
–
–
–
–
2007
–
–
–
–
–
–
–
Total
2008
858
503
57
18
136
170
1,742
2007
1,341
691
5
–
214
187
2,438
Realisations
As anticipated, after achieving realisation
proceeds of over £2 billion in each of the
previous two years, the level of realisations
in the year to 31 March 2008, although
still strong, was lower at £1,742 million
(2007: £2,438 million). Some 28% of the
opening portfolio value was sold (2007: 39%)
during the period. This lower level was a
consequence of a less mature opening portfolio
following the realisations of the previous two
years. The percentage of the portfolio less than
one year old at 31 March 2007 was 36%
(2006: 26%, 2005: 17%).
Buyouts was again the largest contributor
to realisations, delivering proceeds of
£858 million (2007: £1,341 million) with
Growth Capital producing £503 million
(2007: £691 million) and Venture Capital
generating £170 million (2007: £187 million).
UK and continental European investments
accounted for 96% of realisations, reflecting
the relative maturity of this portfolio compared
to Asia and the US.
Despite the more difficult financing
environment, the Group has continued to find
buyers for good-quality investments. Third and
fourth quarter realisations of £429 million and
£269 million respectively included the largest
realisation for the year, Coor Service
Management, which generated proceeds of
£158 million and a money multiple of
6.3 times the original 2004 investment.
The SMI portfolio, a portfolio of older, smaller
minority investments, generated proceeds
of £136 million (2007: £214 million) from
201 investments. In March 2004, 3i
announced its strategy to accelerate the
realisation of this portfolio. Since then, the
total number of investments in the SMI
portfolio has been reduced from 1,079 to
92 and £816 million has been realised.
The nature of realisations changed from the
previous year, with 24% (2007: 37%) from
trade sales, and 8% (2007: 8%) through
refinancing portfolio businesses. Sales to
financial buyers, including other private equity
firms (sometimes called “secondaries”),
accounted for 38% of realisations (2007:
27%). Eight 3i portfolio companies achieved an
IPO during the year (2007: 10) and realisations
from these and other quoted portfolio
companies amounted to £199 million
(2007: £240 million).
Report and accounts 2008 3i Group plc 29
Business review Financial review continued
Returns
Total return
Total return for the year to 31 March 2008
was £792 million (2007: £1,075 million)
representing 18.6% (2007: 26.8%) over
opening shareholders’ funds. Over the last five
years, the Group has generated an average
total return of 20.4%.
Gross portfolio return of £1,041 million (2007:
£1,406 million) represents a 23.9% (2007:
34.0%) return over opening portfolio value.
At 28% (2007: 23%), a higher percentage of
this return has been generated from unrealised
profits in the year, reflecting strong earnings
growth across the portfolio. First-time uplifts
of £154 million (2007: £142 million) included
a £68 million contribution from the Asian
portfolio. Other significant factors included the
valuation of Giochi Preziosi on an imminent sales
basis and quoted value movements following
IPOs from the Growth Capital and Buyouts
portfolios.
Net carried interest payable increased to
£92 million (2007: £61 million) due to higher
levels of carried interest participation, arising
from a greater contribution to this year’s return
from more recent vintages. Total return was
increased by a £158 million gain from the
fair value of derivatives, of which the largest
contribution, £162 million (2007:
£(62) million), was from movements in
the fair value of the equity element of the
Group’s 2008 convertible bonds related mainly
to share price movements.
Table 3: Total return
for the year to 31 March
Realised profits on disposal of investments
Unrealised profits on revaluation of investments
Portfolio income
Gross portfolio return
Fees receivable from external funds
Carried interest receivable
Carried interest and performance fees payable
Operating expenses
Net portfolio return
Net interest payable
Movements in the fair value of derivatives
Exchange movements
Other
Profit after tax
Reserve movements (pension, property and currency translation)
Total recognised income and expense (“Total return”)
Total return by year (%)
for the year to 31 March
04
05
06
07
08
19.0
15.2
22.5
26.8
18.6
Total return comprises the total recognised
income and expense stated as a percentage of
opening shareholders’ funds.
2008
£m
523
291
227
1,041
60
60
(152)
(274)
735
(16)
158
(44)
(5)
828
(36)
792
2007
£m
830
323
253
1,406
37
81
(142)
(255)
1,127
(9)
(29)
(31)
(2)
1,056
19
1,075
30 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Table 4: Unrealised profits/(losses) on revaluation of investments
for the year to 31 March
Earnings multiples
Earnings growth
First-time uplifts
Provisions
Up rounds
Uplift to imminent sale
Other movements on unquoted investments
Quoted portfolio
Total
Realised profits
Realised profits of £523 million (2007:
£830 million) were the largest contributor to
gross portfolio return in the year, accounting for
50% (2007: 59%) of the total. The average
uplift over opening value for these realisations
was 43% (2007: 52%). Despite the level of
uplift being below last year’s levels, the level is
higher compared to historic levels and reflects
significant uplifts generated during the first
half (48%).
Unrealised value movement
A detailed explanation of each of the different
categories of unrealised value movement is
contained within the Portfolio valuation section
on pages 106 and 107.
Earnings multiples The deterioration of
international equity markets in the year has led
to a £162 million reduction (2007: £5 million
increase) in valuations, due to lower multiples
applied to portfolio earnings. At the year end,
28% (2007: 33%) of the Group’s portfolio was
valued on an earnings basis. Large differentials
exist between multiples used to value the
For further information on Portfolio valuation
please go to page 106
2008
£m
(162)
307
154
(188)
7
83
26
64
291
2007
£m
5
142
142
(71)
15
139
(12)
(37)
323
Uplift to imminent sale Investments valued on
an imminent sale basis totalled £83 million
(2007: £139 million). The largest of these was
Giochi Preziosi (£75 million).
Quoted portfolio Increased volatility has seen
significant value movements in the quoted
portfolio, although the net impact has been
mitigated by the effect of new IPOs and the
appreciation of the share price of 3i
Infrastructure Limited. The overall effect has
been a £64 million increase in the value of the
quoted portfolio. Significant listings during the
year included Telecity (closing value:
£83 million), Dockwise (£43 million),
Venture Production (£51 million) and Mundra
Ports (£53 million).
portfolio in Asia, Europe and the US. As a guide
to how multiples have moved, the weighted
average PE multiple has reduced by 7% from
11.6 to 10.8, and the weighted average EBITDA
multiple reduced by 15% from 6.8 to 5.8 year
on year. Approximately three quarters of the
companies valued on an earnings basis are
valued using an EBITDA multiple.
Earnings growth and first-time uplifts Earnings
increases within the portfolio contributed
£307 million (2007: £142 million) to value
growth and a further £154 million (2007:
£142 million) of “first-time uplift” on companies
valued on an earnings basis for the first time.
Earnings have proved resilient despite the global
decline in economic conditions.
Provisions Provisions during the year of
£188 million include impairments to loans
and are ahead of last year’s levels (2007:
£71 million) following the write-down of
several Venture Capital investments, totalling
£79 million. Provisions on Buyouts investments
totalled £74 million.
Report and accounts 2008 3i Group plc 31
Business review Financial review continued
2008
£m
56
149
22
227
5.2%
2007
£m
81
158
14
253
6.1%
Gross portfolio return
Return as a % of
opening portfolio
2008
£m
731
302
67
(42)
–
(17)
1,041
2007
£m
788
569
15
6
74
(46)
1,406
2008
%
57
21
14
n/a
–
(2)
24
2007
%
54
48
16
n/a
13
(6)
34
Portfolio income
Portfolio income for the year comprised dividend
income of £56 million (2007: £81 million),
interest receivable from loans of £149 million
(2007: £158 million) and portfolio fees net
of deal-related costs of £22 million (2007:
£14 million). Portfolio income at £227 million
(2007: £253 million) is lower, reflecting the
high level of dividend income generated during
the previous year following a significant
distribution from infrastructure fund I2, as well
as a fall in interest income following the sale of
a number of high-yielding buyouts during the
first half of the year.
The portfolio generated a yield of 5.2% (2007:
6.1%) of opening portfolio value during the year.
Increased investment levels within both Buyouts
and Growth Capital in the second half resulted
in second-half income being £125 million,
compared with £102 million in the first six
months.
Gross portfolio return
Cumulative gross portfolio return for the year
of £1,041 million (2007: £1,406 million)
represented a return of 24% (2007: 34%) over
the opening portfolio value.
Buyouts generated a return of £731 million
(2007: £788 million), representing a 57%
return over the opening portfolio value (2007:
54%). This excellent performance is primarily
driven by the strong levels of realised profits
generated during the year, but also by good
portfolio performance.
Table 5: Portfolio income
year to 31 March
Dividends
Income from loans and receivables
Fees receivable
Portfolio income
Portfolio income/opening portfolio (“income yield”)
Table 6: Gross portfolio return by business line
for the year to 31 March
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Gross portfolio return
Gross portfolio return by year (%)
for the year to 31 March
04
05
06
07
08
19.0
16.7
24.4
23.9
34.0
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.
32 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Growth Capital generated a gross portfolio
return in line with its objective, but below last
year’s exceptional level. The Growth Capital
gross portfolio return of £302 million (2007:
£569 million), a return of 21% (2007: 48%),
reflected lower realisations from a less mature
portfolio. 44% of the Growth Capital portfolio
by value is valued on a cost basis. The most
significant element of this return was unrealised
profits of £160 million (2007: £269 million) as
a number of first-time uplifts were generated
from the Indian and Chinese portfolios, including
Navayuga and China Digitone.
Infrastructure generated a gross portfolio return
of £67 million (2007: £15 million) including
£29 million from the increased value in the share
price of 3i Infrastructure Limited, £6 million of
dividend income from 3i Infrastructure Limited
and £5 million of dividend income from the
Group’s direct investment in AWG.
The £42 million negative return for QPE was
driven by the adverse movement in the share
price of 3i Quoted Private Equity Limited since
IPO.
SMI generated a gross portfolio return of
£nil million (2007: £74 million). The lower gross
portfolio return in the year was driven by lower
levels of realised profits, as well as a fall in the
multiples used to value the portfolio.
Venture Capital delivered a small loss of
£(17) million (2007: £(46) million) or (2)%
(2007: (6)%) over the opening portfolio value.
Fees receivable from external funds
An important element of our strategy is to grow
the assets we manage or advise on behalf of
others and to grow the level of fees 3i receives
for advising or managing these funds. These fees
have grown from £35 million in the year to
31 March 2004, when Eurofund IV was raised,
to £60 million in the year to 31 March 2008.
Carried interest receivable
Carried interest aligns the incentivisation of 3i’s
investment staff and the management teams
in 3i’s portfolio with the interests of 3i’s
shareholders and those of fund investors.
An explanation of carried interest is provided
on pages 120 to 121 together with a
description of our accounting methodology.
In the year, the Group received or accrued
fee income from its managed Buyout funds,
3i Infrastructure Limited, the 3i India
Infrastructure Fund, and 3i Quoted Private
Equity Limited. Fees received from the managed
funds were £40 million (2007: £37 million) of
which £26 million was from Eurofund V.
Carried interest receivable, which comes
principally from the Buyouts business, was
£60 million (2007: £81 million). This was
driven by the high level of realised profits
generated from the sale of Eurofund IV assets
during the year, including Care Principles, HSS
and Coor Service Management.
Total advisory fees of £9 million (2007: nil)
comprises £8 million (2007: nil) from 3i
Infrastructure Limited and £1 million (2007: nil)
from 3i Quoted Private Equity Limited. These
fees are payable based on the gross investment
value of the advisory companies.
This year we are recognising performance
fees received from 3i Infrastructure Limited
(£3 million). These performance fees, which
are based on the growth in NAV per share per
annum, are subject to an 8% hurdle. When the
performance hurdle is met, 20% of the net
asset growth above the 8% hurdle is receivable
by 3i. The amount accrued is based on 3i
Infrastructure Limited’s most recent publicly
available information.
Page 36 contains a detailed schedule of the
funds advised and managed by 3i.
Carried interest and performance
fees payable
Carried interest payable amounted to
£149 million (2007: £142 million). This was
based on the level of realised profits generated
during the year and the closing value of portfolio
assets that remain unrealised. The increase in the
year is a consequence of the sale of investments
from more recent vintages which attract a
higher rate of carry.
Performance fees are payable to investment
staff on both 3i Infrastructure Limited and 3i
Quoted Private Equity Limited. These totalled
£3 million in the year (2007: £nil) and relate to
3i Infrastructure Limited.
Report and accounts 2008 3i Group plc 33
Business review Financial review continued
Table 7: Cost efficiency
for the year to 31 March
Operating expenses
Fees receivable from external funds*
Net operating expenses
Net operating expenses/opening portfolio (“cost efficiency”)
*Net of £3 million performance fee from 3i Infrastructure Limited in 2008.
2008
£m
274
(57)
217
5.0%
2007
£m
255
(37)
218
5.3%
Operating expenses
In March 2007, we announced the introduction
of a new performance measure for cost
efficiency: operating expenses (net of fund
management and advisory fee income)
as a percentage of opening portfolio value.
The Group has published a mid-term target of
4.5% with a long-term objective of reducing
this to 3.0%.
Operating expenses for the year were
£274 million (2007: £255 million). This 7.5%
increase followed two years of substantially
higher increases (2007: 20.8%, 2006: 19.2%)
to support significant geographic and business
line expansion. The mid-term cost efficiency
performance target stood at 5.0% for the year
(2007: 5.3%).
With growth in assets under management
of 37% in the year, including growth of 38%
in 3i’s direct portfolio, portfolio value has grown
substantially ahead of the increase in operating
expenses in the year. As a consequence, further
progress towards the mid-term cost efficiency
target is expected in the coming year.
Other movements
The most significant other movement in the year
is the movement in the fair value of derivatives
of £158 million. This increase almost entirely
relates to fair value movements on the equity
element of the convertible bond. The movement
of this derivative is linked to movements in
3i Group plc’s share price and to movements in
the euro exchange rate. The movement in 3i’s
share price from £11.36 at 31 March 2007 to
£8.30 at 31 March 2008 was the main reason
for a £162 million gain.
34 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Assets under management
A key element of the Group’s strategy is to
increase our assets under management and
the fees generated from those assets. Assets
under management include 3i’s directly held
portfolio, managed unlisted funds, some of
which are co-investment funds and advised
listed funds. Where 3i has a direct investment in
the funds that it manages or advises, this is held
at fair value within the direct portfolio. The value
of external funds under management is based on
the value on which income is earned by the
Group, which normally includes uninvested
commitments and the accounting valuation of
invested assets.
Assets under management grew by 37% in the
year to £9,792 million (2007: £7,134 million).
This has been driven by higher investment levels
and value growth from 3i’s direct portfolio as
well as the £400 million launch of 3i Quoted
Private Equity Limited fund. At 31 March 2008,
external managed funds for the 3i India
Infrastructure Fund were £348 million (the
US$1.2 billion final closing of this fund was
announced on 16 April 2008).
Portfolio and assets under management
Table 8: Assets under management
as at 31 March
3i direct portfolio
Managed funds
Advised quoted funds
Total
2008
£m
6,016
3,143
633
9,792
2007
£m
4,362
2,387
385
7,134
04
05
06
07
08
3i direct portfolio
Managed funds
Quoted funds
Table 9: Portfolio value by business line and vintage
as at 31 March
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Percentage
2008
£m
672
1,009
40
140
–
72
1,933
32%
2007
£m
543
536
461
2
–
139
1,681
28%
2006
£m
488
457
–
–
–
99
1,044
17%
2005
£m
138
124
–
–
1
84
347
6%
Pre-
2005
£m
184
240
–
–
243
344
1,011
17%
Table 10: Portfolio value by geography
as at 31 March
Continental Europe
UK
Asia
US
Rest of World
Total
2008
£m
2,025
2,366
501
142
244
738
6,016
2008
£m
2,573
2,250
679
497
17
6,016
2007
£m
1,281
1,460
469
20
391
741
4,362
2007
£m
1,894
1,792
373
283
20
4,362
Report and accounts 2008 3i Group plc 35
Business review Financial review continued
Portfolio assets directly owned
by the Group
The value of 3i’s direct portfolio exceeded
£6 billion for the first time since flotation in
1994 and grew 38% in the year.
The value of the Asia portfolio increased
by 82% in the year to £679 million (2007:
£373 million) and now represents 11% of the
total Group portfolio (2007: 9%). The first US
Growth Capital investments, following the
opening of the New York office, resulted in a
value for the US portfolio of £497 million.
The overall number of investments in the
portfolio has also continued to fall. As at
31 March 2008, the number of investments in
the portfolio was 487 (395 excluding SMI)
compared with 762 (469 excluding SMI) at the
beginning of the year. The SMI programme
resulted in 201 exits in the year and Venture
Capital accounted for a reduction of 35.
The Growth Capital portfolio has increased by
almost £1 billion in the year to £2,366 million
(2007: £1,460 million) and now represents
39% of the Group portfolio. The Buyouts
portfolio increased by 58% in the year to
£2,025 million (2007: £1,281 million), despite
realising over 38% of the opening portfolio
value. The value of the Venture Capital portfolio
at £738 million is broadly in line with the value
at the start of the year (2007: £741 million).
Assets managed or advised by 3i
These have grown by 37% (2007: 25%) in the
period, reflecting growth in investment, the
launch of 3i Quoted Private Equity Limited,
a good performance from 3i Infrastructure
Limited and value growth from Buyout
co-investment funds managed by 3i.
As can be seen from Charts 1 and 2, the source
of these funds is well diversified internationally
and by type of investor. Eurofund V has 62
Limited Partners and the 3i India Infrastructure
Fund 14 Limited Partners, excluding 3i and 3i
Infrastructure Limited. 3i Quoted Private Equity
Limited and 3i Infrastructure Limited are both
listed companies.
36 3i Group plc Report and accounts 2008
Table 11: 3i direct portfolio value by sector
as at 31 March
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
Infrastructure
Quoted Private Equity
Total
2008
£m
819
703
415
1,423
572
455
316
670
5,373
501
142
6,016
2007
£m
586
494
222
970
501
338
175
587
3,873
469
20
4,362
Table 12: Managed and advised funds
Fund
Eurofund III
Eurofund IV
Eurofund V
3i Infrastructure Limited
3i Quoted Private Equity Limited
3i India Infrastructure Fund*
Date
closed
July 1999
June 2004
November 2006
March 2007
June 2007
March 2008
3i
Fund
commitment
size
€1,990m
€995m
€3,067m €1,941m
€5,000m €2,780m
£325m
£181m
$250m
£700m
£400m
$1,195m
Invested at
March
2008
%
93%
93%
40%
88%
26%
28%
*First close in October 2007 at $500 million, including a commitment of $250 million from 3i Group plc and
$250 million from 3i Infrastructure Limited.
Chart 1: Investor base for non-listed
funds managed and advised by type
of investor (%)
Chart 2: Investor base for non-listed
funds managed and advised by
geographical location (%)
13
1
11
1
4
1
27
24
18
Financial institutions
Fund of funds
Insurance companies
Pension funds
Private individuals
Endowment
35
North America
Middle East
Asia
UK
28
Rest of Europe
Corporate investors
20
Government agencies
Other
9
8
These charts have been prepared on the basis of size commitment.
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Capital structure, gearing and liquidity
Table 13: Group balance sheet
as at 31 March
Shareholders’ funds
Net borrowings/(surplus)
Gearing
Diluted net asset value per ordinary share
Capital structure
3i’s capital structure comprises shareholders’
funds, long-term and short-term borrowings,
as well as liquid treasury assets. The Board is
committed to achieving capital efficiency and
targets an optimum gearing ratio of debt to
shareholders’ funds of between 30% to 40%
through the cycle.
During the year, the Group returned
£808 million to shareholders through a bonus
issue of B shares. In addition, 12 million shares
were purchased on market for an aggregate
consideration of £120 million, and subsequently
cancelled.
The Group’s €550 million convertible bond has a
maturity date of 1 August 2008. The terms of
the bond provide for a number of settlement
options dependent on whether a conversion
notice is received from a bondholder, or
settlement arises on maturity. It is also the
Group’s intention to refinance its €550 million
convertible bond, which matures on 1 August
2008, through the issuance of another
convertible bond. The new circa £425 million
convertible bond will have an effective
conversion premium of 60% and will mature
in 2011.
2008
2007
£4,057m £4,249m
£1,638m £(1)m
0%
£9.32
40%
£10.77
Gearing
Capital efficiency improved during the year
due to net investment of £(418) million (2007:
net divestment of £862 million) and the return
of a total of £928 million (2007: £774 million)
to shareholders. Gearing at 31 March 2008
was 40% (2007: 0%).
Liquidity
3i had cash and liquid deposits totalling
£796 million at 31 March 2008 (2007:
£2,154 million) and undrawn committed
facilities of £286 million (2007: £491 million).
Growth in diluted net asset value
The net asset value per ordinary share rose from
£9.32 at 31 March 2007 to £10.77 at the year
end, an increase of £1.45. The increase before
dilution due to the £808 million return of capital
and dividends paid to shareholders in the year,
was £1.94. This represents a gross return before
shareholder distributions of 21%.
Report and accounts 2008 3i Group plc 37
Business review Risk management
3i has a 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.
Introduction
Risk management operates at all levels throughout the Group, across business lines, geographies and professional functions. The Board is ultimately
responsible for risk management, which includes the Group’s risk governance structure and maintaining an appropriate internal control framework.
Management’s responsibility is to manage risk on behalf of the Board.
By reporting regularly to Audit and Compliance Committee, the Group’s Compliance and Risk Assurance and Audit functions provide support to the
Board in maintaining the effectiveness of risk management across the Group. The Group’s risk management processes, including a number of new
committees providing input to Group Risk Management Committee, became operational in March 2007 and formalised many existing practices.
The diagram below shows this risk management framework and outlines the key responsibilities of each committee.
Risk governance
Group Risk Management Committee
– Responsible for overall risk management process
– Monitors changes in external risk environment
– Reviews reports from Investment, Operational and Financial Risk Committees
– Reports to Audit and Compliance Committee
Investment Committee
– Takes or recommends investment decisions on individual opportunities
Conflicts Committee
Decides issues on conflicts arising in investment process
and other areas
Operational Risk Committee
– Provides input to the setting of investment policy and guidelines
– Deals with all aspects of operational risk
Financial Risk Committee
– Assesses financial risk including treasury and funding risk
– Quarterly monitoring of portfolio composition
Health and Safety Committee
Reviews Health and Safety arrangements and policy
Monitors implementation and performance
Corporate Responsibility Committee
Recommends socially responsible investment policy
Identifies and promotes awareness of corporate
responsibility and developments, opportunities and risks
Regulatory Risk Forum
Provides regulatory input to investment policy
Identifies and promotes awareness of regulatory
developments and risks
38 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Risk categories
Risk type
External
Brief description
Risks arising from current,
proposed and anticipated political, – Chief Executive’s statement
legal, regulatory, economic policy – Business review,
and competitor changes
Further information
– Chairman’s statement
Group business section
Strategic
Investment
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
– Business review,
Group business,
Our strategy section
– Business review,
Financial review section
– Financial statements
– Ten largest investments
Risk mitigation
– Entry into new geographical markets subject
to extensive market research and due diligence
– Close monitoring of regulatory and fiscal
developments in main markets
– Diversified investment portfolio in a range of
sectors, with different economic cycles, across
geographical markets
– Monitoring of a range of key performance
indicators, forecasts and periodic updates
of plans and underlying assumptions
– Regular monitoring by Group Risk
Management Committee
– Investment Committee approval of all
significant investments
– Regular asset reviews
– Representation by a 3i investment executive
on the boards of investee companies
– Portfolio is subject to periodic reviews at both the
business line and Group levels to monitor exposure
to any one sector or geography
Treasury
and funding in market prices and rates,
Risks arising from (i) uncertainty
– Business review,
Financial review section
– Credit risk exposure is managed on an asset-specific
basis by individual investment managers
– Notes to the financial statements – Board review of the Group’s financial resources
(ii) an inability to raise adequate
funds to meet investment
needs or meet obligations as
they fall due, or (iii) inappropriate
capital structure
Operational Risks arising from inadequate
or failed processes, people and
systems or from external factors
affecting these
– Business review
– Corporate
responsibility report
every six months
– Assets denominated in foreign currency broadly
matched with borrowings in the same currency
– Type and maturity of the borrowings broadly
matched to those of the corresponding assets
– Line management at all levels is responsible for
identifying, assessing, controlling and reporting
operational risks
– Framework of core values, standards and controls,
a code of business conduct and delegated
authorities are in place
– Independent internal audit function carries out
periodic reviews
Report and accounts 2008 3i Group plc 39
Business review Risk management continued
External risks
Macroeconomic risks
3i invests mainly in European companies and
continues to develop its operations in Asia
and the US. The performance of the Group’s
underlying investment portfolio is influenced
by economic growth, interest rates, currency
movements and changes in commodity and
energy prices. Market conditions for initial public
offerings, the level of mergers and acquisitions
activity, the number of active trade or other
private equity buyers and the availability of
well-priced debt finance, all have an impact,
not only on the Group’s ability to invest but on
the Group’s ability to exit from its underlying
portfolio, or on the levels of profitability
achieved on exit.
To mitigate this, 3i aims to invest over time
in a range of sectors, with different economic
cycles, across its different business lines and
geographical markets. This includes expansion in
both the US and in Asia, which further diversifies
the portfolio.
Geopolitical risk
Part of the Group’s investment strategy is to
invest in new and emerging markets. The legal,
regulatory and capital frameworks in these
markets may be less developed than in the other
main geographical markets in which the Group
operates. Changes and developments in all our
markets are monitored closely to ensure that any
impact on the value of existing investments,
planned levels of investment or investment
returns are, as far as possible, anticipated,
understood and acted upon. This work includes
periodic legal and regulatory updates by
geography, in-depth market and sector research
and regular reviews for existing investments.
Entry into new geographical markets is subject
to extensive market research and due diligence.
Government policy and regulation
3i Investments plc, 3i Europe plc and
3i Nordic plc, all wholly-owned subsidiaries
of 3i Group plc, are authorised persons under
the Financial Services and Markets Act 2000
and regulated by the FSA in the United Kingdom.
Where applicable, certain 3i subsidiaries’
businesses outside the United Kingdom
are regulated locally by relevant authorities.
Changes to the regulatory frameworks under
which the Group operates are closely monitored.
There are also appropriate processes and
procedures in place, including a dedicated Group
Compliance function, whose remit is to minimise
the risk of a breach of applicable regulations
which could affect the Group’s compliance costs,
its business, results of operations or financial
position.
3i carries on business as an investment
trust under section 842 of the Income and
Corporation Taxes Act 1988. Continuation of
this status is subject to the Company directing
its affairs in line with the relevant requirements
of the legislation. Anticipated and actual changes
in government policy and related tax treatment
of investment trusts are closely monitored, as
are other changes which could affect results of
operations or financial position. Related risks
exist in other jurisdictions in which the Group
operates, where there is similar close monitoring
of changes in local taxation legislation which
could affect the expected tax position of
the Group.
Strategic risks
The Group’s strategy is based on a full analysis of
its operating environment. In determining the
appropriate business model, market and sector
evaluations are taken into account, as well as the
identification and assessment of external and
internal risk factors. Significant unexpected
changes or outcomes, beyond those factored
into the Group’s strategy and business model,
may occur which could have an impact on the
Group’s performance or financial position.
This is addressed through the monitoring of
a range of key performance indicators,
forecasts and periodic updates of plans and
underlying assumptions.
40 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
monitor the exposure to larger investments.
One of the conditions set out under section 842
of the Income and Corporation Taxes Act 1988
is that no single investment can exceed 15% of
the Group’s investment portfolio to maintain the
Group’s tax status as an Investment Trust.
This also mitigates the Group’s exposure to
investment concentration risk.
Investment valuations and exit opportunities
The valuation of 3i’s portfolio and opportunities
for realisations depend to some extent on stock
market conditions and the buoyancy of the
wider mergers and acquisitions market. Changes
in market or macroeconomic conditions could
impact the valuation of portfolio assets and the
ability to exit those investments profitably within
the desired timeframe.
Investment risks
Investment decisions
The Group operates in a very competitive
market. Changes in the number of market
participants, the availability of funds within the
market, the pricing of assets, or in the ability to
access deals on a proprietary basis could have
a significant effect on the Group’s competitive
position and on the sustainability of returns.
The ability of the Group to source and execute
good quality investments in such markets is
dependent upon a range of factors. The most
important of these include:
(i) the ability to attract and develop people with
the requisite investment experience and cultural
fit; (ii) organisation of teams whose structure
is market-adapted and whose compensation is
results-oriented; and (iii) effective application
of collective knowledge and relationships to
each investment opportunity.
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, together with 3i’s
international network of industry and sector
specialists. Investments over £5 million are
presented to an Investment Committee chaired
by an authorised member of the Management
Committee and comprising our senior
investment executives.
Investment performance
The performance of the Group’s portfolio is
dependent upon a range of factors. These
include, but are not limited to: (i) the quality
of the initial investment decision described
above; (ii) the ability of the portfolio company
to execute successfully its business strategy;
and (iii) actual outcomes against the key
assumptions underlying the portfolio company’s
financial projections. Any one of these factors
could have an impact on the valuation of a
portfolio company and upon the Group’s ability
to make a profitable exit from the investment
within the desired timeframe.
A rigorous process is put in place for managing
the relationship with each investee company for
the period through to realisation. This includes
regular asset reviews and, in many cases, board
representation by a 3i investment executive.
Investment concentration
The Group invests across a range of economic
sectors and geographies. Over-exposure to a
particular sector or geography could increase the
impact of adverse changes in macroeconomic
or market conditions on the Group. An increase
in the average size of investments over time
could also increase the exposure of the Group
to the performance of a small number of large
investments, albeit in different sectors and/or
geographies. The portfolio is subject to periodic
reviews by Financial Risk Committee and by
individual business lines in order to monitor
exposure to any one sector or geography and to
Report and accounts 2008 3i Group plc 41
Business review Risk management continued
Treasury and funding risks
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. An increase
in concentration of the portfolio in a particular
economic sector or geography could increase
credit risk. Likewise, large or unexpected
increases in interest rates could increase credit
risk, particularly in companies which are
highly leveraged.
The Group considers the maximum credit risk to
be the carrying value of loans and receivables
and credit risk exposure is managed on an asset-
specific basis by individual investment managers.
Regular asset reviews within each business line
provide an insight into the trading performance
of individual assets and give an early indication
of increased credit risk. Leverage levels and
performance of individual assets are also
reviewed periodically by the Financial Risk
Committee.
The Group’s remaining financial assets are mainly
in the form of deposits with banks of a credit
rating of AA or better. Counterparty limits are
set and closely monitored.
Liquidity risk
The Group invests from its own balance sheet
using cash generated from its investing activities
and its core funding. The Group also has available
to it undrawn committed facilities. In addition to
funding from its own balance sheet, the Group
periodically raises third-party funds and also
invests indirectly through funds administered by
third parties, or quoted investment vehicles.
Unexpected changes in the levels of investment
and divestment activities or in interest rates
could impact the availability of funds required for
investment needs or to meet obligations as they
fall due.
To manage this, a range of cash flow forecasts
are produced and updated on a regular basis for
each business line and for the Group as a whole.
Financial Risk Committee reviews the Group’s
liquidity on a quarterly basis and the Board
reviews the Group’s financial resources every
six months. This includes consideration of the
currency hedging and maturity profile aspects,
as well as liquidity, of the Group’s current and
forecast financial position.
Price risk
The valuation of unquoted investments depends
upon a combination of market factors and the
performance of the underlying asset. The Group
does not currently 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 Group seeks to reduce
structural currency exposures by matching
investment 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 current policy is to hedge the
main currency exposures in the range of 90%–
100%.
Interest rate risk
3i has a mixture of fixed and floating-rate
assets. The assets are funded with a combination
of shareholders’ funds and borrowings according
to the risk characteristics of the assets.
The Board seeks to minimise interest rate
exposure by considering the average life profile
of the various asset classes and adopting a
portfolio approach to the interest rate hedging
structure. Some derivative financial instruments
are used to achieve this objective.
42 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Business processes
The Group’s information technology and treasury
systems, as well as its business processes and
procedures, support its operations and business
performance. The Group has policies and
procedures covering information security,
change management, business continuity
and disaster recovery. These are subject
to periodic testing.
Legal and regulatory
In order to conform to necessary legal and
regulatory requirements across multiple
jurisdictions, the Group operates a complex
legal and corporate structure. This requires
appropriate internal processes and procedures
to be developed and followed, supported by
professional teams with appropriate skills,
drawing upon external resources where
appropriate. There is also a Regulatory Risk
Forum which meets periodically to review and
plan for forthcoming and anticipated legal
and regulatory changes which could impact
the Group.
Operational risks
The Group is exposed to a range of operational
risks which can arise from inadequate or
failed processes, people and systems or from
external factors affecting these. These include
operational events such as human resources
risks, legal and regulatory risks, information
technology systems failures, business disruption
and shortcomings in internal controls. Line
management at all levels is responsible for
identifying, assessing, controlling and reporting
operational risks. This is supported by a
framework of core values, standards and
controls, a code of business conduct and
delegated authorities. There is also an
independent internal audit function which
carries out periodic reviews.
People
The ability to recruit, develop and retain capable
people is of fundamental importance to
achieving the Group’s strategy. The Group
operates in a competitive industry and aims to
remunerate staff in line with market practice and
to provide superior development opportunities.
The Group has human resources policies and
procedures covering recruitment, vetting and
performance management and appropriate
processes in place to monitor their application.
Staff engagement is also regularly evaluated and
reported to the Board.
Report and accounts 2008 3i Group plc 43
Corporate responsibility report
“Our approach to corporate responsibility is commercially
based and driven by our vision to be the private equity firm of choice.”
Kevin Dunn Group Company Secretary
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.
Contact us
For more information please contact
Kevin Dunn at KevinDunnCR@3i.com
Our approach
3i has been helping to grow and to transform
businesses for over 60 years. We have also been
building our own business, from a small London-
based operation, to the international FTSE100
company that it is today, with assets under
management of almost £10 billion.
Our approach to corporate responsibility is
commercially based and driven by 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.
We view an active approach to corporate
responsibility as more than simply a means to
retain our licence to operate, or to reduce risk.
We believe that it provides genuine competitive
advantage and that it helps us to maximise the
returns for our shareholders, as well as for the
investors in the funds that we advise or manage.
We think about corporate responsibility from
two perspectives: “as an investor” and “as a
company” in our own right. Our experience of
working with management teams in growing
companies, in a broad range of sectors and
countries around the world, has led us to believe
that the companies we back will grow more and
be more attractive to potential purchasers if
they are strong on corporate responsibility
issues. Our own staff and the people who work
in our portfolio companies want to work for
companies of which they feel proud. Growth is
easier with enthusiastic customers, with strong
supplier relationships and with a good reputation
locally and within a sector.
Achieving these objectives depends upon high-
quality management teams and good values, as
well as effective communication and alignment
of interests. Statements of intent and policies are
necessary and important but they are by no
means sufficient. As a corporate investor, the
success of our approach depends upon the
actions of individuals and the judgments that
they make on a daily basis. Awareness and
training are therefore critical so that corporate
responsibility issues are properly considered and
the right decisions are made and implemented,
whether we are planning the launch of a new
3i business line or assessing an individual
investment.
The pace of change in business and in society,
combined with the rising expectations placed
on companies, means that the corporate
responsibility agenda is developing rapidly.
Our corporate responsibility committee, which
is comprised of executives from across the
business, is charged with ensuring that 3i is
thinking ahead on these issues, as well as
operating to the standards that our Board
expects.
As part of our drive for continuous
improvement, the current information
contained on our investor relations website
(www.3igroup.com) will soon be supplemented
by a new dedicated corporate responsibility
website – www.3icr.com – which is being
launched in June 2008.
As an investor
As an investor we view corporate responsibility
from two perspectives: risk and opportunity.
The most significant corporate responsibility-
related risks arising from our investment activity
relate to environmental, ethical, governance and
social issues. If these risks are not identified and
managed effectively, then the success of our
portfolio companies can be compromised and
3i’s reputation could be affected. So identifying
and managing these risks well is an important
part of managing risk for 3i. The opportunity for
3i is that supporting the sustainable growth of
our portfolio companies increases their value
and attraction to others.
44 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
With £9.8 billion of assets under management,
consisting of £6.0 billion of our own assets and
£3.8 billion of third party funds, and a portfolio
of over 450 investments in a broad range of
sectors across Europe, Asia and the US, we are
well diversified and have a broad base of
knowledge and experience on which to draw.
The business line reviews on pages 12 to 27
contain detailed case studies of our largest
investments and realisations in the year and
pages 108 to 109 contain details of our ten
largest investments and forty other large
investments.
As a company
As a private equity business with around 750
employees world-wide, 3i has a relatively small
footprint on many corporate responsibility issues.
However, being a private equity business with a
sizeable portfolio and a business which operates
internationally across Europe, in Asia and in the
US, we recognise that our sustained success and
our reputation for being a good corporate citizen
mean taking our corporate responsibilities
seriously.
Being focused on the mid market, operating on a
world-wide scale and as one of the few publicly-
listed private equity firms, 3i is differentiated
within the private equity industry and has been
actively involved in the evolution of the
corporate responsibility agenda for many years.
Indeed, 3i was a founder member of Business in
the Community over 25 years ago.
Throughout our history we have been actively
involved in supporting the development of the
industry through the industry associations and
other activity. Over the course of the past
12 months we have taken a leading role in a
number of sector-based initiatives, including in
particular the Walker Review Group in the UK
on transparency. Taking a lead on issues that
affect our sector as a whole is consistent with
our vision of 3i as a leading private equity firm.
It is also in our interest to share our experience
with our competitors in order to learn ourselves
and to help improve the performance of the
sector as a whole.
3i is well represented on the various committees
and councils of industry bodies, especially in
Europe where Jonathan Russell, Managing
Partner, Buyouts, is the Chairman elect of the
European Private Equity and Venture Capital
Association.
Detailed information is provided on pages 50 to
53 about 3i as a company, but we also felt that
it would be helpful to provide a 3i perspective on
four key challenges put to the industry recently.
These issues relate to the value that private
equity firms bring to their investments; their
approach to the management teams of the
companies in which they invest and the degree
to which they act in partnership; the
accountability of private equity firms and
finally, transparency.
3i is proud to have been a founder member of
Business in the Community over 25 years ago.
A 3i perspective on some
industry issues
Do private equity firms add value to their
portfolio companies?
The private equity industry is highly competitive
and is an industry in which competing firms
differentiate themselves by their track records
and style of investing.
This differentiation is key when raising funds or
pitching to the management teams and owners
of businesses. That the success of a business
depends on both financial and non-financial
performance is recognised within the industry
and 3i and other private equity firms have well-
developed approaches to helping their portfolio
companies grow. We do this through the boards
of these companies and by bringing the benefit
of our experience, knowledge and networks.
Our website, www.3i.com, has many examples
of businesses that we have backed and the value
that we have brought in the process.
How do private equity firms engage with
management teams?
Our experience of investing, and working
internationally has helped us to understand that
we are stronger as a company when we work
with others to pursue mutual interests. Strong
relationships are based on trust, which is earned
over time. Our focus with portfolio companies is
on working through the board and with
professional advisers. We recognise that the
quality of our track record locally and within a
sector is a key element of the origination and
conversion of future investment opportunities.
A good reputation, backed up by tangible
evidence of past behaviour, is therefore key
to becoming a preferred investor and making
investments.
Report and accounts 2008 3i Group plc 45
Corporate responsibility report continued
How accountable are private equity firms?
We understand that we are accountable to our
investors, but also to others, for the decisions
that we make. 3i is a member of the FTSE100
and has over 26,000 shareholders, including
some of the world’s biggest financial institutions.
There are also over 70 Limited Partners invested
in funds managed or advised by 3i. This means
that we are subject to considerable scrutiny,
not just by these investors, but also by rating
agencies, the press, governments and many
other groups.
We, like other private equity firms based in the
UK, are regulated by the Financial Services
Authority (“FSA”). As a listed company we must
also adhere to stock exchange regulations, as
well as the prevailing regulation in each of the
countries and markets where we operate.
An example of one aspect of FSA regulation is
the requirement for regulated firms to treat their
regulatory customers fairly. This is demonstrated
by the FSA’s “Treating Customers Fairly” initiative.
Whilst the focus of this FSA initiative is on retail
financial services businesses, the concept is
relevant to other financial service businesses
such as 3i. 3i has policies and procedures in place
to seek to ensure that all those that it interacts
with (and not just its regulatory customers) are
treated fairly.
How transparent are private equity firms?
3i’s objective has been to take an open and
straightforward approach to doing business and
in describing what we do and the way in which
we do it to those who have an interest. This
Corporate responsibility report, together with
“3i and Transparency” on pages 122 to 123, the
Private equity lexicon on pages 116 to 117, as
well as the guides to “Returns and IRRs” and
“Carried interest” on pages 118 to 121, are
practical examples of this.
3i is also delighted to participate in the Carbon
Disclosure Project and to be a member of both
the Dow Jones Sustainability Index and the
Business in the Community Corporate
Responsibility Index. In the last two years we
have also won awards for our Annual report and
our Corporate responsibility report.
The demand for transparency has been growing
as the private equity industry has grown. Private
equity has increasingly become a mainstream
asset class for investors. The size of the
companies in which private equity firms invest
has also grown, as have political and public
interest. Despite the scope of our own
disclosure and 3i’s reputation in this area,
it was clear in 2007 that the pressures being
placed on the private equity sector risked
affecting 3i as well and that in the UK in
particular a sector-wide response was needed.
Through the British Private Equity and Venture
Capital Association (“BVCA”) 3i supported the
creation of an independent working group led by
Sir David Walker. The group’s mandate was to
investigate how to improve disclosure within the
sector. 3i was supportive of the group’s work
and our Chairman, Baroness Hogg, was a
member. In November 2007 the Walker
Guidelines were published and 3i was one of
the first to commit to comply with them.
The “3i and Transparency” section on pages 122
to 123 provides details of these guidelines and
how 3i measures up against them.
Our commitment to greater transparency
has also prompted a reconsideration of our
Corporate responsibility report. We recognised
that people are generally most interested in our
activities as an investor and so this year we have
added more content on our investment process
in this report, as well as on the new Corporate
Responsibility website (www.3icr.com) which is
due to be launched in June.
For further information on 3i and Transparency and
how 3i meets the Walker guidelines, please go to
pages 122 and 123
46 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
“It is very important to Robeco that we
invest in private equity firms that take
corporate responsibility seriously
and 3i does.”
Andrew Musters Robeco
Corporate responsibility in
our investment activity
Our investment process involves four key
stages. Corporate responsibility considerations
are important in each of those stages to sustain
successful outcomes.
– Fund raising
– Investment assessment
– Creating value once we are invested
– Realisation
Fundraising
Investments are made by 3i using cash from
our own balance sheet, as well as from funds
that 3i manages or advises for third-parties.
At 31 March 2008 3i had £9.8 billion of assets
under management, comprising £6.0 billion of
our own assets and £3.8 billion of third party
funds. 3i’s own capital has been built from the
success of earlier investments. Since the
company was formed in 1945, with £10 million
of share capital, it has only received another
£10 million from shareholders and, ignoring
ordinary dividends, has given over £2 billion
back to shareholders.
A list of the funds managed for third parties is
set out on page 36. These funds are raised to
invest in specific business lines and have clear
investment mandates. For example, Eurofund V
is a mid-market buy out fund which is focused
on Europe, but has the flexibility to invest up to
10% of the size of the fund in Asia.
Interest in the degree to which 3i and other
public companies and private equity firms
consider environmental, ethical, governance and
social issues in our own business has been
growing amongst a number of large institutional
shareholders and Limited Partners in private
equity funds. 3i is a member of the Dow Jones
Sustainability index and the Business in the
Community Corporate responsibility index. 3i has
also been reporting to the Carbon Disclosure
Project for the past two years. Investors
representing $56 trillion of assets under
management have signed up to the Carbon
Disclosure Project, which calls on major
companies from around the world to provide
specific details on climate change risk.
Stages of investment process
682
182
47
Work in progress
Partner review
Entry to work
in progress
Partner review
Completion
of investment
The opportunity is then subsequently reviewed
in detail by a group of senior and experienced
investment executives in the relevant business
line and sector (known as the “Partner Review”).
If it is agreed through the Partner Review
process that a particular investment opportunity
should continue to be progressed, the Partner
Review process will also agree what further in-
depth analysis and due diligence should be
undertaken.
Overall, our approval process might involve up
to 30 different people with sector and regional
expertise, but there will be a core group of
people responsible for progressing the
investment. This investment team is given
access to the funds it needs to undertake
comprehensive due diligence. The time taken
for this will vary considerably, depending on the
nature of the investment, whether we are
already invested in the company and the
complexity of the issues involved. It is also not
uncommon, given the depth and breadth of our
relationships, for 3i to have known a company or
management team for a considerable time
before an investment opportunity emerges.
Investment assessment
Our reputation is one of our most important
assets. Accordingly, an effective review process
to identify risks and opportunities in potential
new investments is crucial to our sustained
success. This can be a particular challenge in
emerging markets, where publicly available
information is sometimes thin. One of the
benefits 3i has, in both developed and emerging
markets, is that our reputation as a values-based
company with high standards might deter those
who are reluctant to go through our diligence
process. In a competitive industry this may mean
that from time to time we lose otherwise
attractive business.
Whilst each investment is considered on its own
merits, there is a standard review process for all
types of investments, which aims to identify all
of the issues that might affect our decision to
invest. Consideration of corporate responsibility
issues is embedded as a mandatory part of
this process.
All new investment opportunities are the subject
of a process of filtering and review. In the year to
31 March 2008, 682 companies entered our
formal work in progress but we made only 47
investments. Following a preliminary appraisal of
the potential investment opportunity, a decision
is taken whether to commit further resource to
progress the investment opportunity and place it
in formal work in progress.
Report and accounts 2008 3i Group plc 47
Corporate responsibility report continued
“The corporate responsibility agenda is developing rapidly
and it is critical that 3i is not only operating to the standards
that our Board expects but also thinking ahead.”
Baroness Hogg Chairman
An explicit review of environmental, ethical,
governance and social issues is required for each
company under review. We have access to an
international network of specialist consultancies,
who undertake the due diligence on our behalf.
The “front sheet”, which summarises the
investment proposition, includes a mandatory
section on environmental, ethical and social risks.
The entrepreneurial culture is important to our
business model, so we do not impose a box-
ticking approach to compliance: we expect our
investment teams to take responsibility for
results and help ensure that they have the
capacity and resources to identify and address
relevant issues. We reinforce this by including in
the approval process senior partners from our
sector teams and from our country offices
together with relevant support from our
professional services teams or external
professional advisers. This ensures that the
proposals are screened by people with an in-
depth understanding of the sector, the country
and region and the issue, whatever it might be.
There are many reasons why an investment may
not be approved and often it is a combination of
different concerns that leads us to reject an
investment proposal.
Identifying an environmental, ethical or social risk
in our due diligence process does not necessarily
mean that we will withdraw. This is because we
recognise three levels of compliance with our
policies: full; partial; and serious non-compliance.
As a result of the nature of the relationship
between a private equity investor and a portfolio
company, we can often have a strong influence
on the company’s priorities. We will therefore
work with the company and its management
to change practices towards full compliance.
Helping to resolve an issue may be an
important element of our ability to enhance
our investment. A simple example might be
3i’s support in identifying and recruiting a
different director with specialist skills in the
area concerned.
We operate internationally and so it is important
that we consider issues in the context of local
expectations and 3i’s values, including
considering whether a problem exists because of
a lack of expertise or capacity, rather than
something more fundamental. 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 before we will
proceed. Confidence in the management team’s
capacity and will to address issues satisfactorily
will be a key determinant of whether we
proceed or not.
The assessment of the material risks and
opportunities facing a business is not the only
rationale for assessing corporate responsibility
issues in our investment process. Our experience
suggests that one of the fundamental factors for
investment success is the quality of the portfolio
company management team. The approach we
take to assessing potential investments places
considerable emphasis on understanding and
being comfortable with the management team.
Their approach to dealing with due diligence on
corporate responsibility issues can be a useful
indicator of quality. For example, a chief
executive with a poor approach to health and
safety is likely to be weak in other aspects of his
or her role.
Summary of Corporate responsibility
Investment policy
As a socially responsible investor, 3i aims to invest in
companies that act responsibly in terms of
environmental, ethical, governance and social issues.
This objective reflects our values and culture, as well
as the wishes of our investors and employees, and
helps protect and enhance our reputation.
Before we make an investment, we review all
potential investee companies from a corporate
responsibility perspective as part of our investment
procedures. Further details of our review process are
set out on pages 47 and 48.
We aim to avoid investing in companies that do not:
– respect human rights;
– comply with current environmental, ethical and
social legislation;
– have proposals to address defined future
legislation; or
– seek to comply with their industry standards and
best practice.
We consider that an awareness of corporate
responsibility risks and how to deal with them is
fundamental to our due diligence and portfolio
management. Our policies provide guidance to our
staff on a wide range of potential ethical,
governance, social and environmental challenges,
which include consideration of:
– susceptibility to human rights abuses, such as
child or slave labour or bans on trade unions;
– corruption issues arising as a result of industry or
geographic business practices;
– ethically sensitive sectors, including arms
manufacture, animal testing, gambling,
pornography and tobacco;
– impacts on the environment and sensitive natural
resources; and
– compliance with social legislation, such as laws
governing discrimination, employment terms and
health and safety.
3i operates internationally: our policy provides that a
particular practice considered lawful in one country
may nevertheless be considered unacceptable by 3i.
Post investment, we seek to ensure that the
companies in which we invest maintain a responsible
corporate responsibility policy. Further details of our
approach to actively engaging with our portfolio
companies to manage and, where necessary,
remediate corporate responsibility issues, are set out
on pages 48 and 49.
48 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Growing the company
Before we invest in a company we agree a clear
value creation plan with the board and with the
management team who will be responsible for
delivering the plan. This will also involve an
expectation that 3i will deliver on the actions it is
responsible for in the plan. These may relate to
strategic input, a specific functional expertise or
providing access to relevant relationships around
the world. This added value may be why we
have been chosen as the preferred investor and
so delivering on our commitments is important.
The initial post investment phase will involve
validation and refinement of the plan based
around a classic first 100-days’ approach.
Such a plan would also include any
environmental, ethical, governance or social risks
or opportunities that were identified either in
due diligence or in the post investment analysis.
We undertake portfolio reviews every six months,
where the investment team presents the progress
and future plans to a review committee. Any
material corporate responsibility issues that were
part of the 100-day plan would be included in this
until they are resolved; in addition, at least once a
year, other corporate responsibility issues will be
considered on the agenda.
We bring a collaborative approach to the
companies in which we invest. Despite having
extensive sector expertise and often taking a
role on the board, we recognise that we cannot
know a company as well as its management.
It is the management who, being closest to the
situation, must make most decisions.
An early priority, then, is to help ensure that the
governance of the company is as robust as
possible and to help support the management
team and board. Where necessary, we will put a
pre-selected chairman in place, one of whose
tasks is to be responsible for corporate
responsibility.
We have dedicated programmes and activities
to help build board capacity and capability.
These include our CEO forums and sector
events, which are opportunities for the CEOs
of our portfolio companies to come together.
These provide an opportunity to learn from, and
share experiences with peers in other companies
either in or outside the same sector and country.
Our Business Leaders Network which operates on
a world-wide basis, also provides opportunities
for our portfolio companies to access
experienced chairmen and board directors and,
for those involved, to network and learn from
each other. Many of those in our Business
Leaders Network have run successful 3i-backed
companies and so have a good understanding
and empathy with the issues managers face.
Sources of expertise
We are sometimes asked about the sources of
our expertise on corporate responsibility issues.
Within 3i it is the combination of our professional
service and investments teams who draw on the
knowledge and experience that we have built up
over many years. Our sector and local teams
also have in-depth knowledge of specific issues
relating to particular sectors or regions.
Our Corporate Responsibility, Health & Safety,
Risk and other committees provide the
necessary processes and additional expertise.
Externally, we work with the leading
consultancies on environmental, ethical and
social due diligence on issues including
compliance, liability and reputational risk.
Our portfolio companies are also a rich source
of experience and their management teams
can also provide interesting insights for 3i and
for their peers in other portfolio companies.
The chairman of the Corporate Responsibility
Committee, Kevin Dunn, is also a member of
Business in the Community’s leadership group.
Realisations
When we have helped the company implement
its plans, there are three basic approaches to
realising the value of our investment: a sale to a
trade buyer (eg, a company in the same sector);
a sale to another financial buyer (eg, another
private equity firm with a new growth strategy);
or a listing on a stock exchange through an IPO.
Corporate responsibility plays an important role in
the valuation process for each of these exits.
Trade buyers tend to be bigger companies in the
same sector. These companies, especially if they
are listed, tend to have well-developed corporate
responsibility policies and expect high standards.
Increasingly, therefore, their audit and valuation
processes look at the portfolio company’s
corporate responsibility strategy, systems and
performance.
If a trade buyer or another financial buyer were
to identify a material risk or opportunity that
we had missed, then this could be used to
disadvantage 3i in negotiations. As a result,
we often undertake another detailed due
diligence process prior to sale, which includes
environmental, ethical and social issues.
Any company that we take to IPO must meet
the listing requirements of the relevant markets
and pass the scrutiny of, for instance, the SEC
or FSA reviewers, as well as the environmental,
ethical, governance and social standards
expected.
Report and accounts 2008 3i Group plc 49
Corporate responsibility report continued
“Our people and the level of their engagement are critical
to our continued success.”
Philip Yea Chief Executive
The Corporate Responsibility Committee
Kevin Dunn
Company Secretary and
Chairman of the Committee
Deepak Bagla
a Director in 3i’s India
Infrastructure investment
business
Whitney Bower
a Partner in US Growth Capital
Denise Collis
Group Human Resources
Director
Douwe Cosijn
Head of Investor Relations
Patrick Dunne
Group Communications Director
David Holligon
a Partner in UK Buyouts
Hans Middelthon an Investment Director in
3i’s Oil and Gas team
Barbara Sterlina a Communications Executive
Tony Wang
an Associate Director in 3i’s Asia
investment business
Phil White
a Director in UK Infrastructure
The Committee’s membership reflects the balance
of 3i’s business with representation from Europe,
Asia and the US and from a range of business line
and Group activities.
Corporate responsibility
in our company
3i is a people business with an entrepreneurial
culture that depends on our employees’ depth of
knowledge and their networks of strong internal
and external relationships. Our success is directly
related to our ability to recruit, train, engage and
retain highly skilled people.
3i’s staff are fundamental to the success of our
business. An environment of mutual respect,
where staff are highly motivated by their work,
where they have a strong commitment to
deliver and where retention is good, are the
standards we strive to achieve and maintain.
Employees are organised in small teams and a
spirit of co-operation is encouraged to support
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.
An objective of our Chief Executive is to meet
separately with each team every year to listen to
their views and insights and to share his vision
and strategy for the business. In addition,
his policy is to have a one-to-one meeting
with each new joiner, regardless of
organisational level.
Roles and responsibilities
The Board as a whole is responsible for corporate
responsibility. The Executive Directors are
responsible for ensuring compliance with 3i’s
corporate values and standards. 3i’s Corporate
Responsibility Committee (“the Committee”)
considers and reviews environmental, ethical and
social issues relevant to 3i’s business and reports
regularly to the Board. 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.
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 and assess
potential risks and their impact, monitor
developing trends and best practice and
consider changes in 3i’s business and culture.
A Group-wide risk log is used to record identified
risks and to monitor their management and
mitigation. This log of identified risks is reviewed
and updated at meetings of the Committee and
significant risks are reported to 3i’s Operational
Risk Committee. There is a detailed description
of risk management at 3i on pages 38 to 43.
As Chairman of the Committee, Kevin Dunn
has specific responsibility for 3i’s corporate
responsibility policies, leading the development
of new initiatives and targets and reporting to
the Board. The Committee’s membership reflects
the balance of 3i’s business with representation
from Europe, Asia and the US and from a range
of business line and Group activities.
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.
Performance benchmarking and verification
The Committee has overseen the formulation
and implementation of corporate responsibility
investment procedures, implemented
appropriate risk management procedures and
recommended strategic targets and objectives
for corporate responsibility.
50 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
3i’s performance is measured against two
indices. These are 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 leader of its
industry group on a global basis. DJSI also
recognised 3i as one of the best companies on a
global basis in respect of our codes of conduct,
compliance and anticrime measures. We aim to
continue to be included within this Index.
In 2007 we again participated in the annual BitC
Corporate Responsibility Index and were included
in BitC’s “Top 100 Companies that Count”.
In particular, the integration into the business of
our corporate responsibility principles and risk
management processes relating to corporate
responsibility issues was recognised. We aim to
continue to be included within this Index.
We also provide information on our carbon
and greenhouse gas emissions to the Carbon
Disclosure Project.
Engagement and culture
Our latest comprehensive confidential telephone
survey of staff was conducted by Ipsos MORI in
January and February 2008 and communicated
to staff in March. The survey had a 92%
response rate, up from 78% in last year’s web-
based survey. It included a number of questions
that have a proven correlation to employee
engagement. The overall employee engagement
score of 84% (2007: 87%), remains very
positive, with 95% of those taking part saying
that they were committed to helping 3i achieve
its objectives and 90% saying they would speak
highly of 3i. 88% also thought that internal
communications were relevant to them.
As part of this survey of its own employees,
3i also undertook a survey of a sample of
contract and outsourced staff. Engagement
levels for this group of people were positive and
consistent with those for our own staff.
Results of the 2008 Employee survey
All 3i staff world-wide were given the opportunity
to take part in a confidential telephone survey,
conducted by Ipsos MORI in January and February
2008.
Highlights
– A response rate of 92%.
– 3i score ahead of the Ipsos MORI Top Ten norm*
on 19 of the 20 norm questions.
– An employee engagement score of 84%.
– High employee advocacy, with 90% saying that
they would speak highly of 3i.
– High commitment to 3i’s objectives (95%).
– 3i’s culture judged as “open and inclusive”,
“approachable and friendly” and “one where there
is good teamwork”.
Areas for improvement
– As with any survey of this nature, there were a
number of detailed or specific issues relating to
particular parts of the business.
– Although six points ahead of the MORI Top Ten
norm, only 72% of staff felt that 3i made the
best use of their skills and ability.
Action
– The results were communicated to all staff
in March.
– All issues relating to specific parts of the
business have been communicated and are being
followed up.
– Our increased training and development agenda
and 3i’s continued growth and development will
address the first area for improvement.
*The Ipsos MORI Top Ten norm is the average of the
most positive 10 responses to each question in the Ipsos
MORI normative database. These are regarded as
high-performing benchmarks.
Training and development
We are committed to encouraging the
continuous development of our staff, with the
objective of maximising both their career
potential and 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 our
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, 527 employees
attended a broad range of 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.
In addition to the fundamental training required
for people to fulfil their roles in a responsible
manner, 3i has established a number of
programmes to maximise the development of
our people and to reinforce the 3i culture.
Examples of these include our Global Welcome
Days for all new joiners, our Value Management
through the Board Courses to enhance board
skills, our intensive G10 international programme
for 40 high potential senior leaders and the
INSEAD leadership course for the leaders of our
professional services teams.
Report and accounts 2008 3i Group plc 51
Corporate responsibility report continued
Health and Safety
We recognise that the promotion of health and
safety at work is an essential responsibility of
staff and management at all levels. Simon Ball,
as Finance Director, has overall responsibility for
the implementation of 3i’s health and safety
policies and procedures. A Health and Safety
Committee, chaired by the Company Secretary,
Kevin Dunn, has been established to oversee
the application of these 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 we endeavour to
ensure that the health, safety and welfare of
our employees, visitors, customers, sub-
contractors’ staff and the general public are
not compromised.
In an endeavour to achieve high standards,
we have recently revised our Occupational
Health and Safety policy (“OH&S”). The
minimum benchmark set for our global OH&S
policies is UK legislation, unless country-specific
legislation or practice exceeds this level. This
year, we will also begin the process of
implementing and seeking certification to BS
OHSAS 18001:2007, an internationally
recognised occupational health and safety
management system.
The key objectives of the revised OH&S policy
are to identify, evaluate and control risks; to
maintain an OH&S management system; to
ensure all incidents are reported and investigated
in a timely manner; to set annual objectives and
targets; and to ensure that 3i employees are
informed of and engaged in the process of
improving OH&S. Additional details of these
policies and procedures can be found on 3i’s
website at www.3igroup.com.
Our objective is not to have any reportable
accidents or incidents. During the year to
31 March 2008, no reportable accidents
occurred under UK Health and Safety regulations
or under similar regulations outside the UK.
Environment
As a financial services business employing
approximately 750 employees world-wide, 3i’s
direct environmental impact is relatively low.
Our environmental priorities are carbon
emissions and waste. In 2007 the Board set an
objective to be carbon neutral by 2010. We are
currently in a three-year programme of action to
deliver this, which involves improving the
measurement and modelling of our carbon
emissions; reducing the energy intensity of our
operations; and investing in carbon offsets.
In 2007 we worked with a specialist adviser,
the Edinburgh Centre for Carbon Management
(ECCM) to expand our emissions monitoring to
include all three scopes of the World Business
Council for Sustainable Development (WBCSD)
greenhouse gas protocol. We also refined our
modelling to include updated UK government
CO2 equivalent (CO2e ) factor multipliers.
This information has improved our understanding
and control of emissions and enabled us to
produce our first published Carbon Disclosure
Project report.
In 2007, our reported emissions were 9,309
CO2e (t/yr), up roughly 14% from the 2006
estimate. This increase is largely explained by
the implementation of a much more rigorous
and broad monitoring process and should be
viewed in the context of a business which has
grown substantially in the year. The Climate
change impact assessment table outlines this
amount as a percentage of each emission type.
In the next year we will continue to reduce our
energy use and begin to work with a carbon
credit provider to identify projects to offset our
emissions. We will approach offsetting with a
private equity mindset and expect to identify
investment opportunities through what we learn
in the process.
Climate change impact assessment
Year to 31 March 2008
9,309 CO2 (tonnes per year)
‘equivalent emissions’
1 62
Premises
Business travel
Other
37
ECCM is now an internationally renowned
analytical facility for carbon and related eco-
metrics with close links with the University of
Edinburgh’s School of GeoSciences and
Imperial College, London. ECCM uses the most
up-to-date, country-specific emission factors
throughout their assessments, including those
developed by the UK Department for the
Environment, Food and Rural Affairs.
Procurement
We have developed environmentally conscious
policies and procedures relating to the
purchasing of goods and services. As far as
possible, we will work only with suppliers who
support our aim to source products responsibly
and we exclude suppliers who use child or forced
labour, disregard social legislation and basic
health and safety provisions, or wilfully and
avoidably damage the environment. We aim to
have a collaborative relationship with our
suppliers and, wherever possible, when problems
arise with a supplier’s performance or behaviour,
we will work with the suppliers concerned to
help them meet our requirements.
52 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
“3i was one of our original sponsors, and
has been key to our success. While their
financial support was useful, their network
and the credibility they gave to our effort
has been immensely helpful in our
rapid expansion.”
Doug Miller Founder and Chairman of the European Venture Philanthropy Association
Community and social enterprise
3i has been active for many years in a range
of charitable and social enterprise activities.
The concept of social enterprise is a natural fit
with 3i’s approach to supporting businesses.
Indeed, over thirty years ago it was a 3i
employee who had the idea of forming what is
today the Enterprise Education Trust (“EET”).
With 3i’s financial and other support EET has
grown and about 100,000 children each year
benefit from its programmes to increase
awareness of business and to inspire them to
become involved in business. 3i has supported
EET every year since formation.
3i was also a founder member of the European
Venture Philanthropy Association (“EVPA”) which
is a charity formed to promote the concept of
Venture philanthropy and to develop best
practice in this growing area of social enterprise.
3i was also proud to be a founding investor in
Bridges Ventures, a privately owned UK venture
capital company with a social mission. Bridges
was founded in 2002 and has since made equity
investments in 24 businesses employing 700
people, almost 200 of whom came out of
unemployment. 3i’s total commitment to
Bridges has been over £2 million.
We focus our charitable activities on the
disadvantaged, young people and education
in the communities in which we have offices.
Charities are supported on the basis of their
effectiveness and impact as well as their
resonance with our staff.
Two examples of this approach are 3i’s support
for a series of programmes with The Old Vic
theatre in London, one of which, The Sky’s the
Limit, is featured on this page. The other is 3i’s
support for The Passage, a charity focused on
the homeless, which is based close to 3i’s
London office.
An important aspect of our charitable giving,
which totalled £454,130 in the year to
21 March 2008 (2007: £429,409), is
matching what our staff raise. 3i has actively
promoted the UK’s Give As You Earn scheme,
which is administered by the Charities Aid
Foundation. In the year to 31 March 2008, this
resulted in donations of £129,733, from the
scheme, accounting for 29% of 3i’s charitable
donations up from 25% in 2007.
We are also supportive of staff who wish to
volunteer or become trustees or governors of
charities and are happy for them to use the 3i
network for the benefit of these charities in a
relevant and appropriate way.
The Sky’s the Limit at The Old Vic
This 2007 project, aimed at raising the
aspirations of UK primary school students,
was a result of a long-standing partnership
between 3i and The Old Vic Theatre in London.
A new play was created from a series of
workshops in schools to build confidence and
team-work skills. The workshops were
facilitated by professional drama educators
from The Old Vic and supported by 3i staff.
The play, which drew directly on the
suggestions and experiences of the young
people involved, was then performed to an
audience of over 1,000 primary school
students at The Old Vic. For many of the
young people this was their first visit to a
theatre.
In addition to working directly with schools
in London and the South East of the UK, a
resources pack was created and distributed
to over 1,000 schools.
The formal evaluation of the project
demonstrated that the project was very
successful from the perspectives of students,
teachers and the schools. The 3i staff taking
part also found it a highly-motivational
experience. This evaluation has also been
helpful in planning the next programme for
2008, which is focused on multicultural
understanding.
Report and accounts 2008 3i Group plc 53
Board of Directors and Management Committee
1
2
3
4
5
6
7
8
4. Simon Ball
Finance Director and member of the Management
Committee since joining the Company in 2005. A member
of the Valuations Committee and the Group’s Investment
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 48.
5. Willem Mesdag
Non-executive Director since July 2007. A member of the
Remuneration Committee and the Nominations Committee.
Managing Partner of Red Mountain Capital Partners LLC.
Formerly a Partner and Managing Director of Goldman,
Sachs & Co. Aged 54.
6. 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 British American Tobacco 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 Tractebel, Fortis
and Alcan, Inc. Aged 61.
7. Michael Queen
Executive Director since 1997. Managing Partner,
Infrastructure. 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 in 2005. A director of Gardens Pension Trustees
Limited, a corporate trustee of the 3i Group Pension Plan.
A former non-executive director of Northern Rock plc and
past Chairman of the British Venture Capital Association.
Aged 46.
8. Sir Robert Smith
Non-executive Director since 2004. Chairman of the
Remuneration Committee and a member of the Audit and
Compliance 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 63.
1. Baroness Hogg
Chairman since 2002 and a non-executive Director since
1997. Chairman of the Nominations Committee and the
Valuations Committee and a member of the Remuneration
Committee. Chairman of Frontier Economics Limited.
A director of BG Group plc. Deputy Chairman of the
Financial Reporting Council and a Governor of the London
Business School. From 1995 to 2002 Chairman of Foreign
& Colonial Smaller Companies PLC. From 2003 to 2006
Deputy Chairman of GKN plc. Formerly Head of the Prime
Minister’s Policy Unit. Aged 62.
2. 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
Remuneration Committee, the Nominations Committee and
the Valuations Committee. Chairman of Home Retail Group
plc, Oval Limited and Stanhope Group Holdings Limited and
a director of Standard Chartered plc. Formerly Finance
Director of Barclays plc. Aged 66.
3. 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 53.
54 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
9
10
13
15
17
11
12
14
16
18
9. Fred Steingraber
Non-executive Director since 2002. A member of the
Audit and Compliance Committee and the Nominations
Committee. A non-executive director of Elkay
Manufacturing and Diamond Hill Financial Trends Fund.
A member of the supervisory board of Continental AG.
Chairman Emeritus, and former Chairman and Chief
Executive, of AT Kearney, Inc. Formerly a director of Maytag
Corporation, Lawter International, Inc, Mercury Finance
Corporation, John Hancock Financial Trends Fund and the
Chicago Stock Exchange. Aged 69.
10. Robert Swannell
Non-executive Director since September 2006. A member
of the Nominations Committee and the Valuations
Committee. Vice Chairman, Citi Europe and a member of
Citi’s Global Investment Banking Operating Committee.
A non-executive director of The British Land Company PLC.
A member of the Takeover Panel Appeal Board, a member
of the Industrial Development Advisory Board of the
Department for Business, Enterprise & Regulatory Reform
(BERR) and a trustee of the UK Career Academy Foundation.
Aged 57.
Other members of Management Committee:
11. Bruce Carnegie-Brown
Managing Partner, Quoted Private Equity. A member of
the Management Committee since joining the Company
in January 2007 and a member of the Group’s Investment
Committee. Formerly CEO of Marsh Limited and Head
of Debt Capital Markets in Europe and Asia for JP Morgan
Chase. A non-executive director of Close Brothers
Group plc. Aged 48.
12. Denise Collis
Group HR Director. A member of the Management
Committee since joining the Company in 2004. Previously
employed by HSBC and Standard Chartered. Before joining
3i was HR Partner at Ernst & Young. A member of the
Advisory Boards of Leeds University Business School and
the School of Business and Economics at Exeter University.
Aged 50.
13. Kevin Dunn
General Counsel and Company Secretary since November
2007. Responsible for the Group’s legal, compliance, internal
audit and company secretarial functions. Chairman of the
Corporate Responsibility Committee. A member of the
Management Committee since joining the Company in
October 2007. Formerly a Senior Managing Director,
running the European Leveraged Finance business for GE’s
Commercial Finance division after serving as European
General Counsel for GE Commercial Finance. Prior to GE
Commercial Finance, was a partner at the law firms Travers
Smith and Latham & Watkins. Aged 45.
14. Chris Rowlands
Managing Partner, Asia. A member of the Management
Committee and the Group’s Investment Committee since
re-joining the Company in 2002. Formerly Managing
Partner, Group Markets. Previously employed by 3i from
1984 to 1996. Formerly a Partner of Andersen and a non-
executive director of Principality Building Society. Aged 51.
15. Jonathan Russell
Managing Partner, Buyouts. A member of the Management
Committee and the Group’s Investment Committee since
1999. Joined 3i in 1986. Chairman-elect of the European
Private Equity and Venture Capital Association and formerly
Chairman of its Buyout Committee. Aged 48.
16. Jo Taylor
Managing Partner, Venture Capital. A member of the
Management Committee and the Group’s Investment
Committee since 2005. Joined 3i in 1984. Chairman of
the British Venture Capital Association Venture Committee
and a British Venture Capital Association Council member.
Aged 47.
17. Paul Waller
Managing Partner, Funds. A member of the Management
Committee since 1999 and a member since 1997 of the
Group’s Investment Committee which he now chairs. Joined
3i in 1978. Past Chairman of the European Private Equity
and Venture Capital Association. Aged 53.
18. Guy Zarzavatdjian
Managing Partner, Growth Capital. A member of the
Management Committee since January 2007 and a
member of the Group’s Investment Committee since June
2006. Joined 3i’s Paris office in 1987. Managing Director,
Benelux from 1999 to 2002 and Managing Director, France
from 2002 until September 2007. Aged 50.
Report and accounts 2008 3i Group plc 55
Directors’ report – statutory and corporate governance information
This section of the Directors’ report contains
statutory and corporate governance information
for the year to 31 March 2008 (“the year”).
Principal activity
3i Group plc is a world leader in private equity.
The principal activity of the Company and
its subsidiaries (“the Group”) is investment.
The Company’s investment policy is set out
on page 9.
Tax and investment company status
The Company is an investment company as
defined by section 833 of the Companies
Act 2006 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
2007. Since that date the Company has
directed its affairs to enable it to continue
to be so approved.
Regulation
3i Investments plc, 3i Europe plc and 3i Nordic
plc, wholly owned subsidiaries of the Company,
are 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 2008
appear on pages 80 to 105.
Total recognised income and expense for the
year was £792 million (2007: £1,075 million).
An interim dividend of 6.1p per ordinary share in
respect of the year to 31 March 2008 was paid
on 2 January 2008. The Directors recommend a
final dividend of 10.9p per ordinary share be
paid in respect of the year to 31 March 2008
to shareholders on the register at the close of
business on 20 June 2008.
The trustee of The 3i Group Employee Trust
(“the Employee Trust”) has 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 (9,881,992 ordinary shares as
at 31 March 2008). In addition, as at that date
holders of certain performance share awards
granted under The 3i Group Discretionary Share
Plan in respect of an aggregate of 985,909
ordinary shares, have waived all dividends in
relation to those shares for the duration of the
three year performance periods relating to
the awards.
Operations
The Group operates through a network of
offices in Europe, Asia and the US. The Group
manages a number of funds established with
major institutions and other investors to make
equity and equity-related investments
predominantly in unquoted businesses in
Europe and Asia. It also advises two UK listed
investment companies: 3i Infrastructure
Limited (established to make investments in
infrastructure assets) and 3i Quoted Private
Equity Limited (established to acquire influential
or controlling stakes in small and mid-cap
quoted companies).
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 together with a performance fee based
on realised profits on the sale of assets.
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 Group’s development during the year to
31 March 2008, its position at that date and
the Group’s likely future development are
detailed in the Chairman’s statement on page
3, the Chief Executive’s statement on pages 6
and 7 and the Business review on pages 8
to 43.
Articles of Association
The amendment of the Company’s Articles of
Association is governed by relevant statutes.
The Articles may be amended by special
resolution of the shareholders in general
meeting.
Share capital
The issued share capital of the Company as at
31 March 2008 comprised 382,741,094
ordinary shares of 7319/22p each and
16,566,194 B shares (cumulative preference
shares of 1p each), which represented 99.94%
and 0.06% respectively of the nominal value of
the Company’s issued share capital. Further
details of the share capital structure of the
Company are set out in notes 22 and 26 on
pages 100 and 101. During the year, the issued
share capital of the Company altered as set
out below.
Ordinary shares
Pre-consolidation ordinary share capital
movements The issued share capital of the
Company as at 1 April 2007 was 461,106,007
ordinary shares of 6269/88p each. This increased
by 1,794,733 shares to 462,900,740 ordinary
shares of 6269/88p each in the period from
1 April 2007 to 13 July 2007 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.
56 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Consolidation of ordinary share capital Pursuant
to resolutions passed at an Extraordinary General
Meeting (“EGM”) of the Company on 11 July
2007, the issued ordinary share capital of the
Company, of 462,900,740 ordinary shares of
6269/88p each, was on 16 July 2007
consolidated into 393,465,629 ordinary shares
of 7319/22p each.
Post-consolidation ordinary share capital
movements At the Annual General Meeting
(“AGM”) on 11 July 2007, the Directors were
authorised to repurchase up to 46,111,000
ordinary shares in the Company (representing
approximately 10% of the Company’s issued
ordinary share capital as at 9 May 2007) until
the Company’s AGM in 2008 or 10 October
2008, if earlier. In the year to 31 March 2008,
the Company repurchased and cancelled
12,000,000 ordinary shares of 7319/22p each
(representing 2.99% of the nominal value of
the Company’s total called-up share capital as at
16 July 2007) pursuant to this authority for an
aggregate consideration of £120,352,302.
In the period from 16 July 2007 to 31 March
2008, a total of 1,275,465 ordinary shares
of 7319/22p were issued to the trustee of
The 3i Group Share Incentive Plan, on the
exercise of options under the Group’s executive
share option plans and on conversion of
€2,000 (nominal) of the €550 million 3i Group
1.375 per cent Convertible Bonds due 2008.
Accordingly, between 16 July 2007 and
31 March 2008, the share capital of the
Company decreased by 10,724,535 ordinary
shares to 382,741,094 ordinary shares of
7319/22p each.
B shares
B share issue Pursuant to resolutions passed at
the EGM on 11 July 2007:
(a) the authorised share capital of the Company
was increased by the creation of an additional
50,000,000 B shares (cumulative preference
shares of 1p each); and
(b) on 16 July 2007, the Company issued
636,473,739 B shares on the basis of 11
new B shares for 8 existing ordinary shares
of 6269/88p held on the register of members
on 13 July 2007.
B share repurchases At the EGM on 11 July
2007, the Directors were authorised to
repurchase up to 651,370,020 B shares in the
Company until the Company’s AGM in 2008.
In the year to 31 March 2008, the Company
repurchased and cancelled 628,537,525
B shares (representing 2.12% of the nominal
value of the Company’s total called-up share
capital as at 16 July 2007) pursuant to this
authority for an aggregate consideration of
£798,242,657. These shares were repurchased
as part of the Company’s arrangements to
return capital to shareholders. 16,566,194
B shares remained in issue as at 31 March 2008.
Major interests in ordinary shares
Notifications of the following voting interests in the Company’s ordinary share capital had been
received by the Company (in accordance with Chapter 5 of the FSA’s Disclosure and Transparency
Rules) as at 31 March 2008 and 1 May 2008:
As at
31 March
2008
% of
issued
share
capital
As at
1 May
2008
% of
issued
share
capital
41,760,144
10.91
44,788,612
11.7
Nature of
holding
Direct and
indirect
22,865,000
5.97
22,865,000
5.97
Indirect
22,737,966
4.93
22,737,966
4.93
Indirect
15,745,619
4.11
15,745,619
4.11
Indirect
15,554,776
4.01
17,732,765
4.63
Direct
11,725,266
3.02
11,725,266
3.02
Direct
AXA S.A. and its group
of companies
The Goldman
Sachs Group, Inc
BlackRock Investment
Management
(UK) Limited
Lloyds TSB
Group Plc
Legal & General
Group plc and/or
its subsidiaries
Prudential plc group
of companies
Report and accounts 2008 3i Group plc 57
Directors’ report – statutory and corporate governance information continued
Directors’ interests
In accordance with FSA Listing Rule 9.8.6(R)(1), Directors’ interests in the shares of the Company
(in respect of which transactions are notifiable to the Company under FSA Disclosure and
Transparency Rule 3.1.2(R)) as at 31 March 2008 are shown below:
Baroness Hogg
O H J Stocken
P E Yea
S P Ball
W Mesdag
C J M Morin-Postel
M J Queen
Sir Robert Smith
F G Steingraber
R W A Swannell
Ordinary
shares
20,956
19,651
742,360
304,915
–
6,985
353,501
8,186
–
10,350
B shares
–
–
547,847
260,534
–
1,872
176,478
–
–
–
The share interests shown above for each of Mr P E Yea, Mr S P Ball and Mr M J Queen include
certain Performance Share awards and Super-performance Share awards which are subject to
forfeiture and are detailed in the tables on pages 73 and 74 respectively.
Details of Directors’ share options under the Group’s executive share option plans are shown in the
Directors’ remuneration report on page 72.
In the period from 1 April 2008 to 1 May 2008, Mr P E Yea became interested in an additional
45 ordinary shares and Mr S P Ball and Mr M J Queen became interested in an additional 42
ordinary shares each.
Rights and restrictions attaching to shares
A summary of the rights and restrictions
attaching to shares as at 31 March 2008 is set
out below. The 2008 Notice of AGM contains a
special resolution proposing the adoption of new
Articles of Association in substitution for the
existing Articles of Association. If this resolution
is passed, the rights and restrictions attaching to
shares will be altered as set out in the form of
Articles of Association submitted to the AGM.
A summary of the differences between the
current and proposed Articles of Association is
set out in the 2008 Notice of AGM.
Holders of ordinary shares and B shares enjoy
the rights accorded to them under the
Memorandum and Articles of Association of the
Company and under the laws of England and
Wales. Any share may be issued with or have
attached to it such rights and restrictions as the
Company by ordinary resolution or failing such
resolution the Board may decide.
Holders of ordinary shares are entitled to attend,
speak and vote at general meetings of the
Company and to appoint proxies and, in the case
of corporations, corporate representatives to
attend, speak and vote at such meetings on their
behalf. On a poll, holders of ordinary shares are
entitled to one vote for each share held. Holders
of ordinary shares are entitled to receive the
Company's Annual Report and Accounts, to
receive such dividends and other distributions as
may lawfully be paid or declared on such shares
and, on any liquidation of the Company, to share
in the surplus assets of the Company after
satisfaction of the entitlements of the holders of
the B shares or such other shares with preferred
rights as may then be in issue.
58 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Holders of B shares are entitled, out of the
profits available for distribution in any year and
in priority to any payment of dividend or other
distribution to holders of ordinary shares, to a
cumulative preferential dividend of 3.75% per
annum calculated on the amount of 127p per
B share ("the Return Amount"). On a return of
capital (other than a solvent intra group re-
organisation) holders of B shares are entitled to
receive in priority to any payment to holders of
ordinary shares payment of the Return Amount
together with any accrued but unpaid dividends
but are not entitled to any further right of
participation in the profits or assets of
the Company.
Holders of B shares are not entitled in their
capacity as such to receive notice of or attend,
speak or vote at general meetings of the
Company save where the B share dividend has
remained unpaid for six months or more or
where the business of the meeting includes
consideration of a resolution for the winding-up
of the Company (other than a solvent intra
group re-organisation) in which case holders of
B shares shall be entitled to attend, speak and
vote only in relation to such resolution and in
either case shall, on a poll, be entitled to one
vote per B share held.
There are no restrictions on the transfer of fully
paid shares in the Company, save as follows. In
the case of uncertificated shares the Board may
decline to register a transfer in the
circumstances set out in the Uncertificated
Securities Regulations or where a transfer is to
more than four joint holders. In the case of
certificated shares the Board may decline to
register any transfer which is not in respect of
only one class of share, which is to more than
four joint holders, which is not accompanied by
the certificate for the shares to which it relates,
which is not duly stamped in circumstances
where a duly stamped instrument is required, or
where in accordance with section 794 of the
Companies Act 2006 a notice (under section
793 of that Act) has been served by the
Company on a shareholder who has then failed
to give the Company the information required by
the notice within the time specified in it. In the
latter circumstances the Company may apply for
an order directing that the relevant shares be
subject to certain restrictions (including in
respect of the ability to exercise voting rights, to
transfer the shares validly and, except in the case
of a liquidation, to receive the payment of sums
due from the Company). In addition, the
Directors and the employees of the Company
are subject to the Company’s share dealing
codes, such that approval may be required to
deal in the Company’s shares. At any time on or
after 14 July 2009 or at any time when the
criteria for the listing of the B shares under the
Listing Rules of the UK Listing Authority are no
longer met, the Company may appoint a person
to execute a transfer on behalf of all the holders
of the B shares in acceptance of an offer, paying
the holders of B shares such amount as they
would have been entitled to on a winding-up of
the Company. Certain restrictions on dealing in
and transferability of shares may also from time
to time be imposed by laws and regulations.
There are no shares carrying special rights with
regard to control of the Company. There are no
restrictions placed on voting rights of fully paid
shares, save where in accordance with Article 13
of the Company’s Articles of Association a
restriction notice has been served by the
Company in respect of shares for failure to
comply with statutory notices or where a
transfer notice (as described below) has been
served in respect of shares and has not yet been
complied with.
In the circumstances specified in Article 38 of
the Company’s Articles of Association the
Company may serve a transfer notice on holders
of shares. The relevant circumstances relate to:
(a) potential tax disadvantage to the Company,
including the Company’s assets being considered
“plan assets” within the meaning of regulations
adopted under relevant US legislation, (b) the
number of “United States Residents” who own
or hold shares becoming 75 or more, or (c) the
Company being required to be registered as an
investment company under relevant US
legislation. The notice would require the transfer
of the shares in respect of which the transfer
notice has been given and pending such transfer
the rights and privileges attaching to those
shares including voting rights would
be suspended.
Participants under the 3i Group Share Incentive
Plan and certain participants under the 3i Group
Performance Share Plan and the 3i Group
Deferred Bonus Plan, who beneficially own
shares under these schemes which are held by a
nominee on their behalf, cannot exercise directly
the voting rights attaching to such shares but
can instruct the nominee to vote the shares in
accordance with their instructions.
In order to be able to attend and vote at a
general meeting of the Company in respect of
shares in the Company a person must be
entered on the register of members in respect of
those shares at such time (not being earlier than
48 hours before the meeting) as may be
specified by the Company in the notice of
general meeting in accordance with Regulation
41 of the Uncertificated Securities
Regulations 2001.
The Company is not aware of any agreements
between holders of its securities that may
restrict the transfer of shares or exercise of
voting rights.
Debentures
As detailed in notes 20 and 21 on page 99,
as at 31 March 2008 the Company had in issue
1.375 per cent Convertible Bonds due 2008,
Notes issued under the 3i Group plc
£2,000,000 Note Issuance Programme and
Notes issued under the 3i Group plc
€1,000,000 Euro-Commercial Paper
Programme.
Report and accounts 2008 3i Group plc 59
Directors’ report – statutory and corporate governance information continued
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
June 2006.
The Articles of Association also specifically
empower the Board to exercise the Company’s
powers to borrow money and to mortgage or
charge the Company’s assets and any uncalled
capital and to issue debentures and other
securities.
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.
Meetings of the Board During the year, there
were six meetings of the Board of Directors.
The Directors who served throughout the
year attended all six meetings. Mr W Mesdag
attended the five meetings held since his
appointment on 11 July 2007 and
Mr F D Rosenkranz attended the one meeting
held before his retirement as a Director
on 11 July 2007.
The Board 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 half-yearly and
annual financial statements and changes in the
Group’s accounting policies or practices;
The principal matters considered by the Board
during the year (in addition to matters formally
reserved to the Board) included:
– changes relating to the capital structure of the
– the 3i Vision Plan 2008-2012, budget and
Company or its regulated status;
financial resources;
– major capital projects;
– the Group’s capital structure;
– major changes in the nature of business
– regular reports from the Chief Executive;
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 by the Board to management
include implementation of the Board approved
strategy, day-to-day operation of the business,
the appointment and remuneration of all
executives below Management Committee and
the formulation and execution of risk
management policies and practices.
– the recommendations of the Valuations
Committee on valuations of investments;
– the establishment of the 3i India
Infrastructure Fund;
– a review of the Group’s advisory and corporate
broking relationships;
– the financial risk management framework;
– the performance of co-investment funds;
– the review by Sir David Walker of
disclosure and transparency in the private
equity industry;
– independence of non-executive Directors; and
– corporate responsibility initiatives.
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 others who engage with 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 and may
exercise all the powers of the Company subject
to the provisions of relevant statutes, the
Company’s Memorandum and Articles of
Association and any directions given by special
resolution of the shareholders. The Articles of
Association empower the Board to offer, allot,
grant options over or otherwise dispose of the
unissued shares of the Company (subject to
relevant statutes) on such terms as the Board
may decide. The Articles of Association
empower the Board to issue and buy back
shares, which powers are exercisable in
accordance with authorities approved from time
to time by shareholders in general meeting.
At the AGM in July 2007, shareholders renewed
the Board’s authority to allot ordinary shares and
to buy back ordinary shares on behalf of the
Company subject to the limits set out in those
resolutions. At the EGM in July 2007,
shareholders authorised the Board to allot
B shares and to buy back B shares on behalf of
the Company, again subject to the limits set out
in those resolutions. Details of the authorities
which the Board will be seeking at its 2008
AGM are set out in the 2008 Notice of AGM.
60 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
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.
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.
Performance evaluation During the year, the
Board conducted its annual evaluation of its own
performance and that of its committees and
individual Directors. The Chairman led the
process with the aid of external consultants,
The Zygos Partnership, who conducted
interviews with all the Directors and members of
Management Committee. The Chairman also
spoke to each of the Directors and members of
Management Committee individually to obtain
their views. The Zygos Partnership’s written
evaluation and the Chairman’s own report were
subsequently reported formally to the Board and
the Chairman also gave feedback to individual
Directors. The Senior Independent Director led a
review by the Directors of the performance of
the Chairman.
The Board performance evaluation included
consideration of the overall functioning of the
Board with particular focus on strategy, meeting
composition, the agenda, Board committees,
corporate responsibility, risk and succession
issues. The Board found the involvement of
external consultants particularly useful in
benchmarking the Company’s own experience
against that of other quoted companies and
placing an external perspective on their
own views.
During the review, the value of the two strategy
sessions held each year, in addition to the regular
Board meetings, was endorsed by Directors.
The Board identified areas where its
working practices could be developed further.
In particular, the expansion of the Management
Committee with the development of new
business lines led the Board to note the value of
holding meetings attended by different groups,
with some meetings attended by Directors
only and others with some or all members of
Management Committee present.
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,
Mr B N Carnegie-Brown, Ms D R Collis,
Mr K J Dunn, Mr C P Rowlands, Mr J B C Russell,
Mr A J M Taylor, Mr P Waller and
Mr G A R Zarzavatdjian. 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
independent non-executive Directors and
three executive Directors. Biographical details
for each of the Directors are set out on pages
54 and 55. Baroness Hogg (Chairman),
Mr O H J Stocken, Mr P E Yea, Mr S P Ball,
Mme C J M Morin-Postel, Mr M J Queen,
Sir Robert Smith, Mr F G Steingraber and
Mr R W A Swannell served throughout the
period under review. Mr W Mesdag served as a
Director from 11 July 2007. Mr F D Rosenkranz
served as a Director until 11 July 2007.
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 (other than the Chairman, who was
independent on appointment) 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. 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.
Report and accounts 2008 3i Group plc 61
Directors’ report – statutory and corporate governance information continued
Directors’ employment contracts Details of
executive Directors’ employment contracts are
set out in the Directors’ remuneration report on
page 76.
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 or support teams.
During the year the Directors received briefings
on corporate responsibility matters, electronic
communications with shareholders and legal and
regulatory developments, including the
Companies Act 2006 (in particular directors’
duties) and changes to the Listing Rules for
closed-ended investment funds.
The Company has procedures for Directors to
take independent legal or other professional
advice about the performance of their duties.
Appointment and re-election of Directors
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) the minimum number of Directors to be two
and the maximum to be twenty, unless
otherwise determined by the Company by
ordinary resolution;
(b) Directors to be appointed by ordinary
resolution of the Company’s shareholders in
general meeting or by the Board;
(c) Directors appointed by the Board to retire at
the first AGM after their appointment and
for the number nearest to, but not
exceeding, one-third of the remaining
Directors to retire by rotation (with the
Directors to retire being those who have
been longest in office since their last
appointment or reappointment) at each
AGM;
(d) all Directors to retire at least every
three years; and
(e) shareholders to have the power to remove
any Director by special resolution.
Subject to the Company’s Articles of Association,
retiring Directors are eligible for reappointment.
The office of Director shall be vacated if the
Director resigns, becomes bankrupt or is
prohibited by law from being a Director or where
the Board so resolves following the Director
suffering from mental ill health or being absent
from Board meetings for 12 months without the
Board’s permission.
In accordance with the Articles of Association,
at the AGM to be held on 9 July 2008:
(i) Mr W Mesdag, having been appointed as a
Director by the Board since the AGM in
2007, will retire and, being eligible, offer
himself for reappointment; and
(ii) Mr O H J Stocken, Mr S P Ball and
Sir Robert Smith will retire by rotation
and, being eligible, offer themselves for
reappointment as Directors.
The Board’s recommendation for the
reappointment of Directors is set out in the
2008 Notice of AGM. As previously announced
Mr F G Steingraber will retire from the Board at
the conclusion of the 2008 AGM.
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. As permitted by the
Company’s Articles of Association, the Company
has maintained Qualifying Third-Party Indemnity
Provisions (as defined under relevant legislation)
for the benefit of the Company’s Directors
throughout the period.
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 relevant committee.
62 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Audit and Compliance Committee
The Audit and Compliance Committee
comprises Mr O H J Stocken (Chairman),
Mme C J M Morin-Postel, Sir Robert Smith
and Mr F G Steingraber, all of whom
served throughout the period, save for
Mr F G Steingraber who served from 11 July
2007. Mr F D Rosenkranz served as a member
of the Committee until 11 July 2007. 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 three meetings of
the Committee. The members who served
throughout the period attended all meetings.
Mr F G Steingraber attended the two meetings
held following his appointment and
Mr F D Rosenkranz attended the one meeting
held before he ceased to be a member.
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 half-
yearly and annual financial statements of the
Company and reviewed the scope of the
annual external audit plan and the external
audit findings;
– received regular reports from Group Risk
Assurance and Audit (the Group’s internal audit
function), monitored its activities and
effectiveness, and agreed the annual internal
audit plan;
– received regular reports from Group
Compliance (the Group’s regulatory
compliance function) and Group Risk
Management Committee, and monitored their
activities and effectiveness;
– oversaw the Company’s relations with its
external auditors including assessing auditor
performance, independence and objectivity,
recommending the auditors’ reappointment
and approving the auditors’ fees; and
– met with the external auditors in the absence
of management.
Remuneration Committee
The Remuneration Committee comprises
Sir Robert Smith (Chairman), Baroness Hogg,
Mr W Mesdag, Mme C J M Morin-Postel and
Mr O H J Stocken, all of whom served
throughout the period, save for Baroness Hogg
and Mr W Mesdag who served from
11 July 2007. Mr F D Rosenkranz and
Mr F G Steingraber served as members until
11 July 2007. All the members of the
Committee are independent non-executive
Directors, save for Baroness Hogg who was
independent on appointment as Chairman
of the Board.
During the year, there were six meetings of the
Remuneration Committee. The members who
served throughout the period attended all the
meetings. Baroness Hogg and Mr W Mesdag
attended the five meetings held following
their appointment. Mr F D Rosenkranz and
Mr F G Steingraber attended the one meeting
held before they ceased to be members. 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, Mr W Mesdag,
Mme C J M Morin-Postel, Sir Robert Smith,
Mr F G Steingraber and Mr R W A Swannell, all
of whom served throughout the period, save for
Mr W Mesdag who served from 11 July 2007.
Mr F D Rosenkranz served as a member until
11 July 2007. During the year, there were two
meetings of the Nominations Committee.
The members who served throughout the year
attended both meetings and Mr F D Rosenkranz
attended the one meeting held before he ceased
to be a Director. 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
considered and recommended a candidate for
appointment as a non-executive Director of the
Company.
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.
Valuations Committee
The Valuations Committee comprises Baroness
Hogg (Chairman), Mr O H J Stocken, Mr P E Yea,
Mr S P Ball and Mr R W A Swannell, all of whom
served throughout the period. There were three
meetings of the Valuations Committee during
the year. The members who served throughout
the year attended all meetings.
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 half-yearly and annual
financial statements of the Group and reviewed
valuations policy and methodology.
The Company Secretary
All Directors have access to the advice and
services of the Group Legal Counsel and
Company Secretary, who 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.
Report and accounts 2008 3i Group plc 63
Directors’ report – statutory and corporate governance information continued
Relations with shareholders
The Board recognises the importance of
maintaining a purposeful relationship with the
Company’s 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
presentations to analysts and are offered the
opportunity to meet shareholders.
The Company’s major shareholders are offered
the opportunity to meet newly-appointed non-
executive Directors. During the year such
shareholders were given the opportunity to
meet Mr W Mesdag following his appointment
on 11 July 2007.
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 and the Company
Secretary to discuss matters of corporate
governance and corporate responsibility relevant
to the Company and its shareholders.
The 2007 Notice of AGM was dispatched to
shareholders not less than 20 working days
before the Meeting. At that Meeting, voting on
each resolution was taken on a poll and the poll
results were made available on the Company’s
website.
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 its interests.
The Group Risk Management Committee’s
activities are supported by the activities of
Investment Committee as well as two sub-
committees, Financial Risk Committee and
Operational Risk Committee. Details of the risk
management framework can be found in the
Risk management section of the Business review
on pages 38 to 43.
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. The Board considers and
approves a strategic plan every two years and
approves a budget on an annual basis. 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.
The Group Risk Management Committee is a
management committee formed by the Chief
Executive and its 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 2008 and up to the date of
this report.
The overall internal control 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;
– the setting of control, mitigation and
monitoring procedures and the review of
actual occurrences, identifying lessons to be
learnt;
64 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
– a comprehensive system of financial reporting
to the Board, based on an annual budget with
monthly reporting of actual results, analysis of
variances, scrutiny of key performance
measures 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 Group Compliance function whose role is to
integrate regulatory compliance procedures
and best practices 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;
Verification
– a Group Risk Assurance and 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; and
– an Audit and Compliance Committee which
considers significant control matters and
receives reports from Group Risk Assurance
and Audit and the external auditors and the
Group Compliance function on a regular basis.
The internal control system is monitored and
supported by a Group Risk Assurance and 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 Group Risk Assurance
and Audit 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 Group Risk
Assurance and Audit, 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 age,
gender, sexual 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 to disabled employees
who are unable to work, as appropriate to local
market conditions.
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. Where appropriate, employees are
eligible to participate in Group share schemes to
encourage employees’ involvement in the
performance of the Group. Investment
executives may also participate in co-
investment plans and carried interest schemes,
which allow executives to share directly in the
future profits on investments. 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 2008 amounted to
£454,130. Excluding the Company’s matching
of Give As You Earn contributions by staff,
charitable donations amounted to £324,397.
Of this amount approximately 44% was donated
to causes which aim to relieve poverty or benefit
the community, or both, approximately 29% was
donated to charities which advance education,
and approximately 10% was donated to medical
charities. Further details of charitable donations
are set out in the Corporate responsibility report
on pages 44 to 53.
In line with Group policy, no donations were
made to political parties during the year.
Report and accounts 2008 3i Group plc 65
Directors’ report – statutory and corporate governance information continued
Policy for paying creditors
It is the policy of the Group to pay suppliers in
accordance with the terms and conditions of the
relevant markets in which it operates. Expenses
are paid on a timely basis in the ordinary course
of business. The Company had no trade creditors
outstanding at the year end. 3i plc had trade
creditors outstanding at the year end
representing on average 19 days’ purchases.
Significant agreements
The Company is a party to the following
agreements that take effect, alter or terminate
on a change of control of the Company following
a takeover bid:
provision of a multi-currency revolving credit
facility to 3i Holdings plc and the Company.
Under this agreement, the Company would
be required to notify Nordea Bank AB (publ)
within five days of any change of control of
the Company. Such notification would open a
negotiation period of 50 days (from the date
of the change of control) to determine
whether Nordea Bank AB (publ) would be
willing to continue to make available the
facility and, if so, on what terms. Failing
agreement and if so required by Nordea Bank
AB (publ), amounts outstanding would be
required to be repaid and the facility
cancelled;
(a) £486 million Revolving Credit Facility
(c) Limited Partnership Agreements dated
Agreement dated 20 September 2005,
between 3i Holdings plc, Barclays Capital,
Bayerische Landesbank, London branch,
Dresdner Kleinwort Wasserstein Limited,
HSBC Bank plc, Lloyds TSB Bank plc, The
Royal Bank of Scotland plc, Société Générale,
UBS Limited, WestLB AG, London branch and
the Company, in relation to the provision of a
multi-currency revolving credit facility to 3i
Holdings plc and the Company. Under this
agreement, the Company would be required
to notify Lloyds TSB Bank plc, in its capacity
as agent for the banks, within five days of
any change of control of the Company. Such
notification would open a negotiation period
of 50 days (from the date of the change of
control) to determine whether Majority
Banks (as defined in the agreement) would
be willing to continue to make available the
facility and, if so, on what terms. Failing
agreement and if so required by the Majority
Banks, amounts outstanding would be
required to be repaid and the facility
cancelled. If no such requirement was
imposed by the Majority Banks, any
dissenting bank could require amounts
outstanding to it to be repaid and cease to
participate in the facility;
(b) £150 million Revolving Credit Facility
Agreement dated 24 November 2005,
between 3i Holdings plc, the Company and
Nordea Bank AB (publ) in relation to the
12 July 2006, between 3i EFV GP Limited,
3i Europartners V Verwaltungs GmbH & Co.
KG, the Company and other investors from
time to time in relation to the formation of
partnerships to carry on the business of
investing as the fund known as 3i Eurofund
V. Under these agreements, the manager, 3i
Investments plc, would be required to notify
the investors of any change of control of the
Company. If such a change of control occurs
before the end of the relevant investment
period, the manager’s powers to make new
investments on behalf of the partnerships
would be suspended unless the investors had
given consent before the change of control
occurred. Where suspension occurs, the
investors may consent at any time before the
end of the investment period to the
resumption of the manager’s powers; and
(d) 3i Group plc €550,000,000 1.375 per cent
Convertible Bonds due 2008 (the “bonds”).
Condition 6 of the terms and conditions of
the bonds sets out the conversion rights
of the holders of the bonds and the
calculation of the conversion price payable.
The conversion price will decrease if a
“Relevant Event” occurs. Condition 6(b)(x)
sets out the definition of Relevant Event and
the consequential adjustment to the
conversion price. In summary, a Relevant
Event occurs if an offer is made to all (or as
nearly as may be practicable all) shareholders
to acquire all or a majority of the issued
shares of the Company or if any person
proposes a scheme with regard to such
acquisition (other than a Newco Scheme (as
defined)) and (such offer or scheme having
become unconditional in all respects) the
right to cast more than 50 per cent of the
votes which may ordinarily be cast on a poll
at a general meeting of the Company has or
will become unconditionally vested in the
offeror and/or an associate (as defined) of
the offeror.
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
year and of the profit for the year. 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.
In accordance with the FSA’s Disclosure and
Transparency Rules, the Directors confirm to the
best of their knowledge that:
(a) the financial statements, prepared in
accordance with applicable accounting
standards, give a true and fair view of
the assets, liabilities, financial position and
profit or loss of the Company and the
undertakings included in the consolidation
taken as a whole; and
66 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
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 AGM.
By order of the Board
K J Dunn Company Secretary
14 May 2008
Registered Office:
16 Palace Street London SW1E 5JD
– 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; and
– 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 90.
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.
(b) the Directors’ report includes a fair review
of the development and performance of the
business and the position of the Company
and the undertakings included in the
consolidation taken as a whole together with
a description of the principal risks and
uncertainties that they face.
The Directors of the Company and their
functions are listed on pages 54 and 55.
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.
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 scheduled to be held during the
current financial year. 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 Audit and Compliance 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:
Report and accounts 2008 3i Group plc 67
Directors’ remuneration report
Remuneration Committee
Composition and terms of reference
The Remuneration Committee (the “Committee”) comprises independent non-executive Directors, together with Baroness Hogg (Chairman of
the Board). Its members during the year to 31 March 2008 (the “year”) were Sir Robert Smith (Committee Chairman), Mme C J M Morin-Postel,
Mr O H J Stocken, Baroness Hogg (from 11 July 2007), Mr W Mesdag (from 11 July 2007), Mr F D Rosenkranz (until 11 July 2007) and
Mr F G Steingraber (until 11 July 2007). 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 and consider, on behalf of the Board, the specific
remuneration packages and co-investment and carried interest arrangements for executive Directors and other members of Management Committee.
The Committee also reviewed the fees payable to the Chairman of the Board. Details of Committee members’ attendance at Committee 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: Kepler Associates, external remuneration
advisers appointed by the Committee; the Chairman of the Board, Baroness Hogg (until her appointment as a member of the Committee on
11 July 2007); 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. Kepler Associates did not
provide any other services to the Group during the year.
Background
The Company operates in the private equity 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. In the private equity industry the ability of trained and experienced executives to gain substantial rewards remains and therefore 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 sector to be given the opportunity to participate in co-investment and carried
interest investment plans which create close alignment of the executives’ interests with those of investors in the funds that they manage or advise.
The executives put their own money at risk by co-investing and are able to share directly in the future returns on investments, subject normally to
a variety of conditions relating to the performance of those investments.
The left hand graph below compares the Company’s total shareholder return (“3i TSR”) for the five financial years to 31 March 2008 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 re-invested) with the FTSE All-Share Index total return over the same periods. This has been included as net asset
value growth is one of the tests used in the Company’s long-term incentive schemes.
3i total shareholder return versus FTSE All-Share total return
(cumulative)
3i diluted NAV versus FTSE All-Share total return
(non-cumulative)
340
300
260
220
180
140
100
60
%
60
40
20
0
–20
–40
–60
2003
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
3i
FTSE All-Share
rebased to 100 at 1 April 2003
3i diluted NAV (with dividends re-invested)
FTSE All-Share
68 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Directors’ remuneration policy
The Committee made no changes in Directors’ remuneration policy during the year but, following consultation with major shareholders in 2007, revised
a number of the targets and limits for executive Directors’ remuneration arrangements as explained below.
Non-executive Directors
The Company’s policy for the financial year to 31 March 2009 (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 of broadly similar UK market capitalisation. 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 from time to time, having taken advice from the Committee’s remuneration advisers.
Details of non-executive Directors’ remuneration for the year, which include fees for sitting on or chairing Board committees (where relevant), are set
out in the table on page 70. During the year, arrangements were introduced to ensure that non-executive Directors (other than those based in the US)
take part of their basic fee in the form of ordinary shares in the Company: for non-executive Directors this amounted to 1,000 shares a year; and for
the Chairman 5,000 shares a year, purchased in November each year.
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. When setting executive Directors’ remuneration, the Committee is able to evaluate
corporate performance on environmental, social and governance issues.
(a) Salaries and bonuses
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 average
percentage increases in base salaries per annum for members of Management Committee (including executive Directors) and for other executive staff
in the UK employed in the period from 31 March 2007 to 31 March 2008 were 5.6% and 11.5% respectively.
Policy for the coming year for:
(i) the Chief Executive and Finance Director continues to be to pay salaries, and if appropriate discretionary bonuses, which are competitive with those
paid by other financial services companies of broadly similar UK market capitalisation. Salary supplements are paid to both, to enable them to make
additional pension provision; and
(ii) executive Directors responsible for investment business, currently only Mr Queen, continues to be to pay salaries, and if appropriate discretionary
bonuses, competitive with those paid in the private equity industry.
Executive Directors’ discretionary annual bonuses are non-pensionable. Target bonuses for each executive Director are determined by the Committee
at the beginning of each year. Bonus awards are assessed against the achievement of corporate, personal and business targets. Following consultation
with 3i’s major shareholders in 2007 on executive Directors’ remuneration, bonus targets were revised for 2007-08. The Chief Executive and
Mr Queen had target bonuses of 125% of base salary, whilst the Finance Director had a target bonus of 100% of base salary. Bonuses above target
will only be paid to executive Directors for outstanding performance, and the maximum is twice the target bonus. For both the Chief Executive and the
Finance Director, any bonus over 100% of base salary will be in shares deferred for two years and for Mr Queen any bonus in excess of 1.5 times
target will be in shares deferred for two years. However, this year the approach for Mr Queen was that any bonus in excess of 1 times target (excluding
the exceptional bonus referred to in note 1 on page 78) would 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 other companies in the private equity industry. In forming its overall judgment the Committee also took 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 taking
account of the performance measures referred to above, was that bonuses above target although below maximum were appropriate for all three
executive Directors. This was in light of strong total return on opening shareholders’ funds of 18.6% and the fact the greater part of this came from
non market-driven factors. On a three year performance basis, returns outperformed the European private equity industry. Realised profits on the sale
of investments of £523 million were high as were levels of investment at £2,160 million and realisation proceeds at £1,742 million. Within the
maximum of two times target bonus, combined awards ranged from 1.52 to 1.65 times target, which translated into 1.0 to 1.24 times salary in cash
and 0.52 to 0.94 times salary in shares deferred for two years.
Report and accounts 2008 3i Group plc 69
Directors’ remuneration report continued
(b) Long-term incentives
During the year, long-term incentive arrangements for the Chief Executive and Finance Director consisted of share options, Performance Share awards
and Super-performance Share awards under the 3i Group Discretionary Share Plan (“the Discretionary Share Plan”).
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, Performance Shares and Super-performance Shares is reviewed each
year taking account of market practice, individual performance, the specific circumstances facing the Company and calculations of the fair values of
awards. During the year, the Company’s policy was that maximum annual awards should be market price options with an aggregate exercise price of
six times annual salary and three times salary in respect of Performance Shares and Super-performance Shares. This was subject to an overall limit
on the fair value of all share-based awards of 2.5 times salary. During the year awards were made to the Chief Executive and to the Finance Director
with face values of approximately six times salary in share options, 1.9 times salary in Performance Shares and 1.1 times salary in Super-performance
Shares.
The Committee’s remuneration advisers calculate the fair values of share-based awards. For the coming year, these fair values have been calculated by
the Committee’s remuneration advisers to be 17% of face value for share options, 52% of face value for Performance Share awards and 24.4% of face
value for Super-performance Share awards. These fair values are subject to re-calculation in changing market conditions.
The Infrastructure Incentive Plan The Infrastructure Incentive Plan is a part-deferred bonus plan established during the year to provide senior members
of the Infrastructure team, including Mr Queen, with incentives aligning the interests of the executives with those of the Group and investors in
3i Infrastructure Limited.
The Company does not currently have any plans to alter its policy on executive Directors’ remuneration for the coming year.
Directors’ remuneration during the year
(note 1)
(note 2)
(note 3)
(note 4)
Salary and
fees
£’000
Salary
supplements
£’000
Total salary,
fees and
supplements
£’000
Bonus
£’000
Deferred
share bonus
£’000
Benefits
in kind
£’000
Total
Total
remuneration remuneration
year to
31 March
2007
£’000
year to
31 March
2008
£’000
Executive Directors
P E Yea
S P Ball
M J Queen
Non-executive Directors
Baroness Hogg
O H J Stocken
C J M Morin-Postel
W Mesdag (from 11 July 2007)
Sir Robert Smith
F G Steingraber
R W A Swannell
Former Directors
F D Rosenkranz (until 11 July 2007)
Total
Notes
773
492
427
290
113
64
42
74
60
61
249
72
–
1,022
564
427
790
490
1,270
741
255
346
23
2
2
2,576
1,311
2,045
2,152
1,252
1,357
–
–
–
–
–
–
–
290
113
64
42
74
60
61
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2908
113
64
42
74
60
61
260
103
54
–
61
51
30
15
2,411
–
321
15
2,732
–
2,550
–
1,342
–
27
15
6,651
57
5,377
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 2008 and are expected to be paid in June 2008 save that £750,000 of the bonus shown for Mr M J Queen represented the exceptional bonus
described in note 1 on page 78 and paid in July 2007.
3 Deferred share bonuses relate to the year to 31 March 2008 and will be paid in shares in the Company, deferred for two years.
4 “Benefits in kind” were company car (Mr P E Yea) and health insurance (Mr P E Yea, Mr S P Ball and Mr M J Queen).
5 In addition to the salaries and fees shown, executive Directors’ retained fees from outside directorships as follows: Mr P E Yea, £105,000 (Vodafone Group plc); Mr S P Ball, £65,000
(Cable & Wireless plc); and Mr M J Queen, £38,923 (Northern Rock plc).
6 Amounts payable to former Directors in respect of the year were as follows: Dr P Mihatsch, £71,811 (Chairman of the Company’s German Advisory Board); and Mr W J R Govett,
£12,000 (as director of Gardens Pension Trustees Limited, a trustee of the 3i Group Pension Plan).
7 As at 31 March 2008, executive Directors’ salaries were as follows: Mr P E Yea, £790,000 pa plus a salary supplement of £260,000 pa; Mr S P Ball, £490,000 pa plus a salary
supplement of £73,500 pa; and Mr M J Queen, £420,000 pa.
8 Before the year to 31 March 2008, the Chairman’s remuneration had remained unchanged for 2 years.
70 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Share options
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. Vesting of such options is normally subject to the satisfaction of a
performance condition, set at the time of the grant, which is calculated over a three-year performance period. Performance conditions for options
granted to Directors since 1 April 2001 are summarised below.
RPI + 3 percentage points
NAV growth required for minimum vesting
Award granted
Since
31 March 2005
In year to
31 March 2005
Between
1 April 2001
and 31 March 2004 RPI + 5 percentage points
RPI + 3 percentage points
% vesting
30%
50%
50%
NAV growth required for maximum vesting
At least
RPI + 8 percentage points
At least
RPI + 8 percentage points
% vesting
100%
100%
For NAV growth between minimum
and maximum vesting levels
The grant vests pro rata
The grant vests pro rata
At least
RPI + 10 percentage points
100%
The grant vests pro rata
Notes
1 NAV growth refers to annual percentage compound growth in net asset value per share with dividends reinvested, relative to the annual percentage change in RPI.
2 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 performance conditions are based on increases in net asset value per ordinary share to enable a significant proportion of relevant executive
Directors’ potential remuneration to be linked to an increase in the assets per ordinary share of the Company. The intention is to approximate to the
performance conditions attached to carried interest investment plans in the private equity industry whilst retaining the essential feature of aligning
executives’ interests with those of the Company’s shareholders. The performance conditions were chosen as being appropriately demanding in the
prevailing market conditions at the time of grant.
Report and accounts 2008 3i Group plc 71
Directors’ remuneration report continued
Options held by Directors who held office during the year were:
P E Yea
S P Ball
M J Queen
Date of
grant
21.07.04
21.06.05
14.06.06
18.06.07
17.05.05
21.06.05
14.06.06
18.06.07
06.07.99
28.06.00
27.06.02
25.06.03
23.06.04
21.06.05
Held at
1 April
2007
314,410
259,740
322,966
Granted
during
the year
–
–
–
– 368,129
368,129
897,116
245,022
48,100
200,956
–
–
–
– 230,080
230,080
494,078
36,002
30,795
184,318
57,218
89,552
44,733
442,618
–
–
–
–
–
–
–
Exercised
during
the year
–
–
–
–
–
Lapsed
during
the year
Held at
31 March
2008
– 314,410
– 259,740
– 322,966
– 368,129
– 1,265,245
–
–
–
–
–
–
–
–
–
–
–
–
– 245,022
48,100
–
– 200,956
– 230,080
– 724,158
–
–
36,002
30,795
(52,715) 131,603
57,218
89,552
44,733
(52,715) 389,903
–
–
–
Exercise
price
£
5.73
6.93
8.36
11.74
6.53
6.93
8.36
11.74
7.28
13.75
6.73
5.68
6.03
6.93
Market price
on date
of exercise
Earliest
normal
£ exercise date
Expiry date
21.07.07 20.07.14
21.06.08 20.06.15
14.06.09 13.06.16
18.06.10 17.06.17
17.05.08 16.05.15
21.06.08 20.06.15
14.06.09 13.06.16
18.06.10 17.06.17
06.07.02 05.07.09
28.06.03 27.06.10
27.06.05 26.06.12
25.06.06 24.06.13
23.06.07 22.06.14
21.06.08 20.06.15
The performance condition has not yet been met for those options shown in blue.
Notes
1 The fair values of awards made in the year were as follows: Mr P E Yea, £993,600 and Mr S P Ball, £621,000. These fair values have been calculated by the Committee’s remuneration
advisers using a Monte Carlo simulation based on appropriate assumptions. The fair value of the share options granted during the year was calculated as being 23% of the market value
at the date of grant of the shares under option.
2 On 16 July 2007, the Company issued 11 B shares for every 8 ordinary shares of 6269⁄88p each existing on 13 July 2007. This was followed by a share consolidation, of 17 new ordinary
shares of 7319⁄22p for every 20 ordinary shares of 6269⁄88p. This was designed to maintain the price per share, other things being equal, at the same level after the bonus issue of
B shares 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 7319⁄22p.
3 Options granted before 1 April 2001 were granted under The 3i Group 1994 Executive Share Option Plan (the “1994 Plan”) and vested provided a performance condition was met over
a rolling three-year period. This required 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 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 ordinary 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 period the Committee made appropriate adjustments to reflect the
bonus issue of B shares, the consolidation of the Company’s share capital and the repurchase by the Company of its own shares.
5 The market price of ordinary shares in the Company at 31 March 2008 was 830p and the range during the period 1 April 2007 to 31 March 2008 was 733.5p to 1,231p. No Directors
exercised share options during the year. Accordingly, no gains were made by the highest paid director (2007: nil) or by all the Directors in aggregate (2007: £402,467).
6 As at 31 March 2008, 16.65 million ordinary shares had been issued or remained issuable in respect of share options granted under Discretionary Share Plans within the past 10 years.
This was within the 5% dilution limit for such plans specified in the guidelines issued by the Association of British Insurers. As as 31 March 2008, 18.93 million ordinary shares had been
issued or remained issuable in respect of awards granted under “all employee” plans within the past 10 years. This was within the 10% dilution limit for such plans specified in the above
mentioned guidelines.
72 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Performance Share and Super-performance Share awards
These are awards of shares subject to a performance condition.
(a) Performance Shares
Awards made during the year will vest based on the outperformance of the growth in value of a shareholding in the Company (with dividends
reinvested) for the three-year performance period from grant (averaged over a 60 day period) compared to the growth in value of the FTSE 100
Index (with dividends reinvested). If the growth in value for the Company is below that for the FTSE 100 Index, no part of the award will vest.
If growth in value is the same as the Index, 35% of the award will vest and for outperformance above 8% per annum the full award will vest.
At outperformance between these two levels of performance, the award will vest on a pro rata basis.
Performance Share awards made before 1 April 2007 vest based on the Company’s “percentage rank” by total shareholder return for the three years
from grant (averaged over a 60 day period) compared to a comparator group consisting 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.
These performance conditions were 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 determines whether conditions have been met based on
calculations prepared by the Committee’s remuneration advisers.
Performance Share awards of ordinary shares and related B shares are detailed below.
Date of
award
(note 2)
Adjustment
during
Held at 1 April 2007
the year
Ordinary
B
Ordinary
P E Yea 21.07.04 149,633 176,840 (22,445)
90,484 (11,485)
76,563
(5,481)
36,537
–
14.07.05
20.07.06
30.07.07
Granted/issued
during the year
B
Ordinary
Vested during the year
Ordinary
B Ordinary
Lapsed
during the year
–
–
–
262,733 267,324 (39,411) 124,250 361,258 (124,262)
– 124,250
–
–
– 205,746 (124,262) (373,785) (2,926) (8,801)
– 105,274
– 50,238
–
–
–
–
–
–
–
(373,785)
(2,926) (8,801)220,384 245,996
Held at
31 March 2008
B Ordinary
–
Market
price on
grant
Date of
£
vesting
B Ordinary
B
– 5.73 31.07.07
– 65,078 195,758 6.98 14.07.08
– 31,056 50,238 8.60 20.07.09
– 11.01 30.07.10
– 124,250
S P Ball
14.07.05
20.07.06
30.07.07
21,267
22,734
–
44,001
25,134
–
–
25,134
(3,191)
(3,411)
– 77,656
(6,602) 77,656
– 29,242
– 31,259
–
60,501
–
–
–
–
–
–
–
–
–
–
–
–
– 18,076 54,376 6.98 14.07.08
– 19,323 31,259 8.60 20.07.09
– 77,656
– 11.01 30.07.10
– 115,055 85,635
MJQueen 23.06.04
74,584
74,584
88,145
88,145
–
–
–
–
–
–
(67,125)
(67,125)
(79,330)
(79,330)
(7,459) (8,815)
(7,459) (8,815)
–
–
– 6.03 09.07.07
–
Notes
1 The fair values of Performance Share awards made in the year were as follows: Mr P E Yea, £711,360 and Mr S P Ball, £444,600. 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 52%
of the market value at the date of award of the shares subject to the award.
2 Ordinary shares held at 1 April 2007 were ordinary shares of 6269⁄88p each. “Adjustment during the year” refers to the change in the number of ordinary shares in the award resulting from
the consolidation of the Company’s share capital on 16 July 2007. Ordinary shares held at 31 March 2008 were ordinary shares of 7319⁄22p each.
3 For Performance Share awards granted prior to 1 April 2007 (including related B shares), dividends during the year (including dividends on related B Shares) were re-invested net of tax in
further ordinary shares of the Company. 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, 1,605 ordinary shares; and Mr S P Ball, 588 ordinary shares.
4 The market prices of ordinary shares on the dates of vesting of Mr Yea’s and Mr Queen’s awards granted in 2004, shown above, were £10.78 and £11.62 respectively.
5 Bonus issues of B shares were made on: 17 July 2006 on the basis of one B share for each ordinary share held as at 14 July 2006; and 16 July 2007 on the basis of 11 B shares for every
eight ordinary shares held as at 13 July 2007. B shares may, in certain circumstances, be repurchased by the Company at a price of 127p per share. The B shares detailed above are
regarded as forming part of the award from which they derived.
Report and accounts 2008 3i Group plc 73
Directors’ remuneration report continued
(b) Super-performance Shares
Super-performance Shares are subject to a particularly challenging performance condition. The performance condition is measured over a three-year
period. If the condition is satisfied, the awards remain subject to a further two-year holding period before they vest.
Annual percentage compound growth in net asset value per share with dividends re-invested, relative to the annual percentage change in RPI
Below RPI + 10 percentage points
At RPI + 10 percentage points
At levels of performance between RPI + 10 percentage points and RPI + 13.5 percentage points the grant will vest pro rata
(between 25% and 50% of the grant)
At RPI + 13.5 percentage points
At levels of performance between RPI + 13.5 percentage points and RPI + 17 percentage points the grant will vest pro rata
(between 50% and 100% of the grant)
At least RPI + 17 percentage points
Percentage of the
grant vesting
0%
25%
50%
100%
The performance condition was chosen to add to the mix of long-term incentives a further incentive to achieve outstanding levels of shareholder
returns. The Committee will determine whether the condition has been met based on calculations independently reviewed by the Company’s auditors.
Super-performance Share awards of ordinary shares and related B shares are detailed below.
(note 2)
Held at
1 April 2007
Adjustment
during
the year
Granted/Issued
during the year
Vested
during the year
Date of
award Ordinary
29.11.06 133,261
29.03.07 25,000
–
13.11.07
158,261
29.11.06 84,264
29.03.07 15,000
–
13.11.07
99,264
29.11.06 82,559
82,559
B Ordinary Ordinary
– 183,233
– (19,990)
– 34,375
– (3,750)
–
–
– 85,321
– (23,740) 85,321 217,608
– 115,863
– (12,640)
– 20,625
– (2,250)
–
–
– 52,920
– (14,890) 52,920 136,488
– 113,518
– (12,384)
– 113,518
– (12,384)
B Ordinary
–
–
–
–
–
–
–
–
–
–
Market
price
on
grant
£
B Ordinary
Date of
vesting
9.69 29.11.11
11.44 29.03.12
10.19 13.11.12
9.69 29.11.11
11.44 29.03.12
10.19 13.11.12
9.69 29.11.11
Held at
31 March 2008
B Ordinary
– 113,271 183,233
– 21,250 34,375
– 85,321
–
– 219,842 217,608
– 71,624 115,863
– 12,750 20,625
– 52,920
–
– 137,294 136,488
– 70,175 113,518
– 70,175 113,518
P E Yea
S P Ball
M J Queen
Notes
1 The fair values of Super-performance Share awards made in the year were as follows: Mr P E Yea, £212,036 and Mr S P Ball, £131,516. 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 Super-performance Shares awarded during the year was
calculated as being 24.4% of the market value at the date of award of the shares subject to the award.
2 Ordinary shares held at 1 April 2007 were ordinary shares of 6269⁄88p 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 share capital on 16 July 2007. Ordinary shares held at 31 March 2008 were ordinary shares of 7319⁄22p each.
3 A bonus issue of B shares was made on 16 July 2007 on the basis of 11 B shares for every eight ordinary shares held as at 13 July 2007. B shares may, in certain circumstances,
be repurchased by the Company at a price of 127p per share. The B shares detailed above are regarded as forming part of the award from which they derived.
74 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Share Incentive Plan
The HM Revenue and Customs approved Share Incentive Plan is open to eligible UK employees and is intended to encourage employees to invest in the
Company’s shares. Participants invest up to £125 per month from pre-tax salary in ordinary shares (“partnership shares”). For each partnership share
the Company grants two free ordinary shares (“matching shares”) which are normally forfeited if employment ceases (other than on retirement or
other “qualifying reasons”) within three years of grant. Dividends are re-invested in further ordinary shares (“dividend shares”). The extent of executive
Directors’ participation in the Plan is detailed below.
Held at 1 April 2007
Partnership shares
B
318
196
956
Ordinary
381
278
921
Held at 1 April 2007
Matching shares
B
639
394
1,914
Ordinary
764
557
1,843
P E Yea
S P Ball
M J Queen
Notes
Held at 1 April 2007 Held at 31 March 2008 Held at 31 March 2008 Held at 31 March 2008
Dividend shares
B
98
22
575
Partnership shares
B
886
623
2,154
Matching shares
B
1,777
1,247
4,313
Dividend shares
B
35
4
267
Ordinary
59
26
281
Ordinary
933
757
1,850
Ordinary
466
379
926
Ordinary
46
13
274
1 Ordinary shares at 1 April 2007 were ordinary shares of 6269⁄88p each. On 16 July 2007 shares in the plan were consolidated on the same basis as the Company’s other issued shares.
Ordinary shares at 31 March 2008 were ordinary shares of 7319⁄22p.
2 In the period from 1 April 2008 to 30 April 2008, Mr P E Yea acquired a further 15 partnership ordinary shares and 30 matching ordinary shares and Mr S P Ball and Mr M J Queen each
acquired a further 14 partnership ordinary shares and 28 matching ordinary shares.
3 During the year, ordinary shares were awarded under the Plan at prices between 833.7p and 1,204.3p per share and with a weighted average price of 1,026.4p per share.
4 Bonus issues of B shares were made on 17 July 2006 on the basis of one B share for each ordinary share within the Share Incentive Plan as at 14 July 2006 and on 16 July 2007 on the
basis of 11 B shares for every eight ordinary shares within the Share Incentive Plan as at 13 July 2007. B shares continue to be held in the Plan as detailed above.
The Infrastructure Incentive Plan
The Infrastructure Incentive Plan was established in order to align the remuneration arrangements of infrastructure executives with both the interests
of the Group and the objectives of investors in infrastructure assets, who expect to see much of their return in the form of yield. Under the Plan,
executives are granted a percentage interest in a bonus pool for each year. Executives are required to invest from their own resources in shares in
3i Infrastructure Limited as a condition of their award. The bonus pool comprises Advisory Fees and Performance Fees received by the Group as
investment adviser to 3i Infrastructure Limited. 50% of the participant’s share of the bonus pool is paid out shortly after the end of the year to which
the fees relate, 25% paid a year later and 25% paid a further year later. During the year, Mr Queen participated in the Plan and has undertaken to
invest approximately £1 million of his own money in 3i Infrastructure Limited shares over three years from 13 March 2007.
M J Queen
Vintage year 2007–08
Note
Scheme interests, being the percentage of the bonus
pool in which the participant is interested
As at
1 April
2007
Awarded
in year
As at
31 March
2008
End of period
over which
interests
may vest
Amounts
receivable
in respect
of scheme
interests
vested
in year
£’000
Accrued
value of
scheme
interest
as at
31 March
2008
£’000
Nil
16.4%
16.4% 31.03.10
Nil
1,569
1 The accrued value of the scheme as at 31 March 2008 comprises an estimate of the value of scheme interests which are likely to vest in respect of the year and are expected to become
receivable by Mr Queen after that date. The amount which vests will be paid as follows: 50% in July 2008; 25% in July 2009; and 25% in July 2010.
Report and accounts 2008 3i Group plc 75
Directors’ remuneration report continued
Pension arrangements
The executive Directors are members of the 3i Group Pension Plan, a defined benefit contributory scheme. The Plan provides for a maximum pension
of two-thirds of final pensionable salary (limited, in the case of members joining on or after 1 June 1989, to the plan earnings cap) on retirement
(normally at age 60). 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 91 and 92.
(note 1)
(note 2)
(note 1)
(note 3)
(note 4)
Increase
in accrued
pension
(excluding
inflation)
during the
year to
31 March
2008
£’000 pa
2.3
2.3
2.5
Director’s
own
contributions
(excluding
AVCs) paid
Total into the Plan
during the
year to
31 March
2008
£’000 pa
5.6
5.6
20.0
accrued
pension at
31 March
2008
£’000 pa
8.5
7.1
221.3
Increase
in accrued
pension
(including
Transfer
value of
inflation)
during the the accrued
benefits at
31 March
2008
£’000
145.7
99.5
10.7 2,916.7
year to
31 March
2008
£’000 pa
2.5
2.4
Difference
between
transfer values
at start and
end of the
accounting
year, less
Director’s
contribution
£’000
41.6
31.1
228.4
Transfer
value of
the accrued
benefits at
31 March
2007
£’000
98.5
62.8
2,668.3
Transfer
value at
the end of
the year of
the increase
in accrued
benefits
during the
year, less
Director’s
contribution
£’000
33.2
25.8
10.1
Complete
years of
pensionable
service at
31 March
2008
3
3
20
Age at
31 March
2008
53
47
46
P E Yea
S P Ball
M J Queen
Notes
1 The increase in accrued pension shown reflects the difference between deferred pensions on leaving, payable from age 60.
2 The pensions shown are deferred pensions payable from age 60.
3 The transfer values have been calculated on the basis of actuarial advice in accordance with the relevant professional guidance applicable at 31 March 2008 (Actuarial Guidance Note
GN11 (version 9.3)).
4 The transfer values have been calculated on the basis of actuarial advice in accordance with the relevant professional guidance applicable at 31 March 2007 (Actuarial Guidance Note
GN11 (version 9.2)).
5 Additional voluntary contributions are excluded from the above table.
6 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.
Directors’ service contracts
The Chairman and the non-executive Directors 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.
76 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Co-investment plans and carried interest plans
In addition to the Directors’ remuneration arrangements, the Company also has in place capital investment plans which permit Mr Queen and other
investment executives to co-invest their own money in areas of the business where they work. These plans are designed to follow best practice in the
private equity industry. An explanation of how co-investment and carried interest plans operate can be found on pages 120 to 121.
The Company’s policy is that awards of carried interest are only normally made to executives who have taken up the opportunity offered to them of
participating in co-investment plans. The Chief Executive and the Finance Director are not eligible to participate in these plans.
Mr Queen has interests in the following co-investment and carried interest plans relating to the areas of the business for which he has responsibility.
Mr Queen’s interests are shown as a percentage of the relevant pools of investments.
(a) Co-investment plans
Amounts invested by Directors in co-investment plans were as follows:
M J Queen
Global Growth Co-invest 2006–08
Interests of Directors in co-investment plans during the year were as follows:
M J Queen
Global Growth Co-invest 2006–08
Notes
Invested to
1 April
2007
£’000
Invested
during
the year
£’000
Total
invested to
31 March
2008
£’000
97
Nil
97
Scheme interests, being the percentage of
the relevant pool of investments in which
the participant is interested
Amounts
receivable in
year in respect
of scheme
interests
£’000
Accrued
value of
scheme
interest
as at
31 March
2008
£’000
As at
1 April
2007
Acquired
in year
As at
31 March
2008
0.023%
Nil
0.023%
Nil
Nil
1 As explained in last year’s report, in recognition of Mr Queen’s increased focus on infrastructure investment, his level of participation in the Global Growth 2006–08 carried interest plan
was cut by half and he ceased to be eligible to make any further related co-investment in the above plan with effect from 1 April 2007.
2 The accrued value of the scheme interest is calculated on the basis set out in note 5 on page 89. Accrued values can increase and decrease with investment valuations and other factors
and will not necessarily lead to a payment of the relevant amount to the participant.
Report and accounts 2008 3i Group plc 77
Directors’ remuneration report continued
(b) Carried interest plans
Interests of Directors in carried interest plans during the year were as follows:
M J Queen
Pan-european Growth Capital 2005–06
Infrastructure 2005–06
Primary Infrastructure 2005–06
Global Growth 2006–08
Notes
Scheme interests, being the percentage of
the relevant pool of investments in respect
of which the participant is entitled to
participate in the realised profits
As at
1 April
2007
Awarded
in year
As at
31 March
2008
2.18%
0.69%
0.53%
0.34%
Nil
Nil
Nil
Nil
2.18%
0.69%
0.53%
0.34%
Amounts
receivable in
year in respect
of scheme
interests
£’000
209
Nil
Nil
Nil
Accrued
value of
scheme
interest
as at
31 March
2008
£’000
1,155
see note 5
Nil
Nil
1 As explained above, in recognition of Mr Queen’s increased focus on infrastructure investment, his level of participation in the Global Growth 2006–08 carried interest plan was cut by
half, from 0.68% to 0.34% of investments (the figure shown is after this reduction). After consultation with major shareholders, it was decided that he would instead receive an
exceptional bonus, part of which is to be deferred over the three years to 2009-10.
2 Normally, before any payment to a participant becomes due under the carried interest plans, the Group and funds under its management must first have received back the amount of
their investment in the relevant vintage together with a management charge (ranging between 1% and 2.5% per annum) and a hurdle rate of 8% per annum compound on their
investment.
3 The accrued values of the scheme interests are calculated on the basis set out in note 5 on page 89. Accrued values can increase and decrease with investment valuations and other
factors and will not necessarily lead to a payment of the relevant amount to the participant.
4 The total carried interest, for all 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).
The proportion of the total carried interest that is allocated to an executive Director depends, amongst other matters, on the size of their investment team.
5 No accrued value available. During the year the Infrastructure 2005-06 assets and carried interest plan were transferred to 3i Infrastructure Limited. No Annual Accounts have yet been
produced by that company and consequently no accrued value of scheme interest is available.
Audit
The tables in this report (including the notes thereto) on pages 70 to 78 have been audited by Ernst & Young LLP.
By Order of the Board
Sir Robert Smith Chairman, Remuneration Committee
14 May 2008
78 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
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 2008
which comprise the Consolidated income statement, the Group and parent company Balance sheets, the Group and parent company Cash flow
statements, the Group and parent company Reconciliation of movements in equity, the Group and parent company Statement of recognised income
and expense and the related notes 1 to 35. 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’ responsibilities 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 are 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 and whether 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, as regards the Group
financial information, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ report
is consistent with the financial statements.
In addition we 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 information reflects the Company’s compliance with the nine provisions of the 2006 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 Directors’ report, the unaudited part of the Directors’ remuneration report, 3i Group investment policy, Ten largest
investments, Forty other large investments, additional financial information and information for shareholders. 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 2008 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 2008;
– 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, as regards the Group financial statements, 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
14 May 2008
Report and accounts 2008 3i Group plc 79
Consolidated income statement
for the year to 31 March
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
Fees receivable from external funds
Carried interest
Carried interest receivable from external funds
Carried interest and performance fees payable
Operating expenses
Net portfolio return
Treasury interest receivable
Interest payable
Movement 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 (note 29).
Notes
2
3
4
1
1
5
5
6
10
10
11
12
13
29
29
2008
£m
523
291
814
56
149
22
1,041
60
60
(152)
(274)
735
89
(105)
158
(44)
1
834
(6)
828
2007
£m
830
323
1,153
81
158
14
1,406
37
81
(142)
(255)
1,127
91
(100)
(29)
(31)
1
1,059
(3)
1,056
207.9
173.4
220.4*
217.9*
80 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Statement of recognised income and expense
for the year to 31 March
Profit for the year
Exchange differences on translation of foreign operations
Revaluation of own-use property
Actuarial (losses)/gains
Total recognised income and expense for the year
Analysed in reserves as:
Revenue
Capital
Translation reserve
Reconciliation of movements in equity
for the year to 31 March
Total equity at start of year
Total recognised income and expense for the year
Share-based payments
Ordinary dividends
Issue of B shares
Issues of ordinary shares
Buy-back of ordinary shares
Own shares
Total equity at end of year
Notes
9
27
27
27
Notes
8
30
22
27
27
27
Group
2008
£m
828
6
(1)
(41)
792
111
675
6
792
Group
2007
£m
1,056
5
1
13
1,075
134
936
5
1,075
Company
2008
£m
882
–
(1)
–
881
94
787
–
881
Company
2007
£m
1,099
–
1
–
1,100
88
1,012
–
1,100
Group
2008
£m
4,249
792
8
(70)
(808)
19
(120)
(13)
4,057
Group
2007
£m
4,006
1,075
9
(79)
(700)
18
(74)
(6)
4,249
Company
2008
£m
4,020
881
8
(70)
(808)
19
(120)
–
3,930
Company
2007
£m
3,746
1,100
9
(79)
(700)
18
(74)
–
4,020
Report and accounts 2008 3i Group plc 81
Balance sheet
as at 31 March
Assets
Non-current assets
Investments
Quoted equity investments
Unquoted equity investments
Loans and receivables
Investment portfolio
Carried interest receivable
Interests in Group entities
Property, plant and equipment
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
B shares
Subordinated liabilities
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest payable
Loans and borrowings
Convertible bonds
Derivative financial instruments
Current income taxes
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
Baroness Hogg Chairman
14 May 2008
82 3i Group plc Report and accounts 2008
Notes
Group
2008
£m
Group
2007
£m
Company
2008
£m
Company
2007
£m
14
14
14
15
16
17
19
20
22
23
9
13
25
24
20
21
19
25
26
27
27
27
27
27
27
27
27
889
3,209
1,918
6,016
75
–
30
6,121
49
24
44
752
869
6,990
(110)
(1,509)
(21)
(14)
(38)
(2)
(5)
(1,699)
(166)
(140)
(373)
(433)
(108)
(5)
(9)
(1,234)
(2,933)
4,057
283
397
42
21
11
3,026
359
(82)
4,057
570
2,609
1,183
4,362
83
–
32
4,477
197
21
1,668
486
2,372
6,849
(153)
(916)
(11)
(21)
(1)
(1)
(7)
(1,110)
(179)
(71)
(675)
(363)
(189)
(2)
(11)
(1,490)
(2,600)
4,249
289
387
27
18
5
3,280
318
(75)
4,249
770
1,050
513
2,333
75
3,140
8
5,556
182
24
25
611
842
6,398
–
(1,224)
(21)
–
–
–
–
(1,245)
(308)
–
(373)
(433)
(108)
(1)
–
(1,223)
(2,468)
3,930
283
397
42
21
–
2,877
310
–
3,930
498
1,253
474
2,225
83
1,766
9
4,083
168
21
1,668
346
2,203
6,286
(153)
(843)
(11)
–
–
–
–
(1,007)
(191)
(42)
(474)
(363)
(188)
(1)
–
(1,259)
(2,266)
4,020
289
387
27
18
–
3,013
286
–
4,020
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Cash flow statement
for the year to 31 March
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Interest received
Dividends received
Portfolio fees received
Fees received from external funds
Carried interest received
Carried interest paid
Operating expenses
Income taxes paid
Net cash flow from operations
Cash flow from financing activities
Proceeds from issues of share capital
Buy-back of ordinary shares
Purchase of own shares
Disposal of own shares
Repurchase of B shares
Dividend paid
Interest received
Interest paid
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
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at end of year
Group
2008
£m
Group
2007
£m
Company
2008
£m
Company
2007
£m
(2,072)
1,824
47
56
22
61
67
(154)
(243)
(7)
(399)
19
(120)
(21)
8
(798)
(70)
95
(125)
591
(413)
(133)
1,624
657
(6)
1
(5)
253
486
13
752
(1,503)
2,364
68
66
17
37
76
(58)
(202)
(8)
857
18
(74)
(20)
8
(689)
(79)
80
(101)
1
(2)
211
(560)
(1,207)
(9)
2
(7)
(357)
847
(4)
486
(2,246)
1,733
21
45
–
–
67
–
(108)
3
(485)
19
(120)
–
–
(798)
(70)
88
(79)
592
(401)
(133)
1,643
741
–
–
–
256
346
9
611
(1,693)
2,458
47
30
–
–
76
–
(114)
–
804
18
(74)
–
–
(689)
(79)
73
(81)
–
–
213
(616)
(1,235)
–
1
1
(430)
776
–
346
Report and accounts 2008 3i Group plc 83
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 for the year to 31 March 2008 comprise
the financial statements of the Company and its subsidiaries (together referred to as the “Group”). Separate financial statements of the Company are also presented. The accounting policies
of the Company are the same as for the Group except where separately disclosed.
The financial statements were authorised for issue by the Directors on 14 May 2008.
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 consolidated and separate financial statements have been prepared in accordance with and in compliance with the Companies Act 1985.
New standards and interpretations not applied
The IASB has issued the following standards and interpretations to be applied to financial statements with periods commencing on or after the following dates:
IFRS 2
IFRS 8
IAS 1
IAS 23
IAS 27
IFRIC 12
IFRIC 13
IFRIC 14
Amendment – Share-based payments: Vesting conditions and cancellations
Operating Segments
Presentation of Financial Statements (Revised)
Borrowing Costs (Revised)
Amendment – Consolidation and Separate Financial Statements
Service Concession Arrangements
Customer Loyalty Payments
IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
Effective for period beginning on or after
1 January 2009
1 January 2009
1 January 2009
1 January 2009
1 July 2009
1 January 2008
1 July 2008
1 January 2008
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 and have
decided not to early adopt.
B Basis of preparation
The financial statements are presented in sterling, the functional currency of the Company, rounded to the nearest million pounds (£m) except where otherwise indicated.
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 relating to the investment portfolio (Section E).
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. 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 purposes of producing these consolidated financial statements.
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 benefit 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, 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 the income statement in the period of the change. The Group has no
interests in associates through which it carries on its business.
(iii) Joint ventures
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, 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 the income statement in the period of the change.
84 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
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 date 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
(i) Recognition and measurement
Investments are recognised and de-recognised on a date where the purchase or sale of an investment is under a contract whose terms require the delivery or settlement of the investment.
The Group manages its investments with a view to profiting from the receipt of dividends and changes in fair value of equity investments.
Quoted investments are designated at fair value through profit and loss and subsequently carried in the balance sheet at fair value. Fair value is measured using the closing bid price at the
reporting date, where the investment is quoted on an active stock market.
Unquoted equity investments are designated at fair value through profit and loss and are subsequently carried in the balance sheet at fair value. Fair value is measured using the International
Private Equity and Venture Capital valuation guidelines, details of which are in the section called Portfolio valuation – an explanation.
Other investments including loan investments, bonds, fixed income shares and variable funding notes are included as loans and receivables. Loans, bonds and fixed income shares are carried
in the balance sheet at amortised cost less impairment. For more detail see the section called Portfolio valuation – an explanation. Variable funding notes are used to invest in quoted debt
instruments and are carried in the balance sheet at the value derived from the bid price of the underlying debt instrument taking into account the Group’s obligations under the funding
contract. The fair value of loans and receivables is not anticipated to be substantially different to the holding value.
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 Group’s
valuation policies.
(ii) Income
Gross portfolio return is equivalent to “revenue” for the purposes of IAS 1. It represents the overall increase in net assets from the investment portfolio net of deal-related costs but
excluding exchange movements. Investment income is analysed into the following components:
(a) Realised profits over value on the disposal of investments are the difference between the fair value of the consideration received less any directly attributable costs, on the sale of
equity and the repayment of 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 are the movement in the 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 the asset’s carrying value.
– Dividends from equity investments are recognised in the income statement 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.
F Fees receivable from external funds
(i) Fund management fees
The Group manages private equity funds, which primarily co-invest alongside the Group. Fees earned from the ongoing management of these funds are recognised to the extent that it is
probable that there will be economic benefit and the income can be reliably measured.
(ii) Advisory fees
The Group acts as investment adviser to private equity funds. Fees earned from the provision of investment advisory services are recognised on an accruals basis in accordance with the
substance of the relevant investment advisory agreement.
(iii) Performance fees
The Group earns a performance fee from funds to which it provides investment advisory services where specified performance targets are achieved. Performance fees are recognised to the
extent that it is probable that there will be economic benefit and the income can be reliably measured.
(iv) Support services fees
The Group provides support services to external funds, including accounting, treasury management, corporate secretariat and investor relations. Fees earned from the provision of these
support services are recognised on an accruals basis in accordance with the relevant support services agreement.
Report and accounts 2008 3i Group plc 85
Significant accounting policies continued
G Carried interest
(i) 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.
(ii) 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 that previously recognised in surplus
is charged in the income statement.
Depreciation on revalued buildings is charged in the income statement over its estimated useful life, generally over 50 years.
(ii) Vehicles and office equipment
Vehicles and office equipment 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 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. De-recognition occurs when rights to cash flows from a financial asset
expire, or when a liability is extinguished.
(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 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.
(iv) Convertible Bonds
Where Convertible Bonds have an issuer cash settlement option in addition to an equity conversion option, the Convertible Bonds are regarded as compound instruments consisting of a
liability and a derivative instrument (see policy below for derivatives). Subsequent to initial recognition the conversion option is measured as a derivative financial instrument with the market
value of the instrument at period end used as its fair value. The remainder of the proceeds are 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.
(v) Derivative financial instruments
Derivative financial instruments are used to manage the risk 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 re-measured to the 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 financial instruments are taken to the income statement.
(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.
86 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
J Employee benefits
(i) Retirement benefit costs
Payments to defined contribution retirement benefit plans are charged to the income statement as they fall due.
For defined benefit retirement plans, the cost of providing benefits is determined using the projected unit method with actuarial valuations being carried out at each balance sheet date.
Current service costs are recognised in the income statement. Past service costs are recognised to the extent that they are vested in the income statement. Actuarial gains or losses
are recognised in full as they arise as part of the statement of recognised income and expense.
A retirement benefit deficit is recognised in the balance sheet to the extent that the present value of the defined benefit obligations exceeds the fair value of plan assets. A retirement benefit
surplus is recognised in the balance sheet where the fair value of plan assets exceeds the present value of the defined benefit obligations limited to the extent that the Group can benefit
from that surplus.
(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 costs of share-based payments made by the Company in respect of subsidiaries’ employees are treated as additional investments in those subsidiaries.
The Group enters into arrangements that are equity-settled share-based payments with certain employees. These are measured at fair value at the date of grant, which is then recognised
in the income statement 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 conditions linked to the price of the shares of 3i Group plc. 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 changes since the previous balance sheet is
recognised in the income statement, with a corresponding entry in equity.
K 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 the income statement. 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 been recognised.
L 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.
M Share capital
Ordinary shares 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.
N 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 income statement for the period.
O 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 where it relates to
items charged or credited directly to equity, in which case the tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year. This may differ from the profit included in the 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 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 reversal of the temporary difference and it is probable that the temporary differences will
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.
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 differences arise from the initial recognition of goodwill and other assets and liabilities in a transaction that affects
neither the taxable 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.
Report and accounts 2008 3i Group plc 87
Notes to the financial statements
1 Segmental analysis
Year to 31 March 2008
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Fees receivable from external funds
Net (investment)/divestment
Realisation proceeds
Investment
Balance sheet
Value of investment portfolio at end of year
Year to 31 March 2007
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Fees receivable from external funds
Net (investment)/divestment
Realisation proceeds
Investment
Balance sheet
Value of investment portfolio at end of year
Year to 31 March 2008
Gross portfolio return
Fees receivable from external funds
Net (investment)/divestment
Realisation proceeds
Investment
Balance sheet
Value of investment portfolio at end of year
Year to 31 March 2007
Gross portfolio return
Fees receivable from external funds
Net (investment)/divestment
Realisation proceeds
Investment
Balance sheet
Value of investment portfolio at end of year
88 3i Group plc Report and accounts 2008
Total
£m
523
291
227
1,041
60
65
(88)
6
(17)
–
170
(156)
14
1,742
(2,160)
(418)
Total
£m
830
323
253
1,406
37
12
(61)
3
(46)
1
187
(200)
(13)
2,438
(1,576)
862
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Capital
£m
370
245
116
731
39
75
160
67
302
2
6
43
18
67
18
–
(42)
–
(42)
1
858
(788)
70
503
(990)
(487)
57
(38)
19
18
(182)
(164)
7
(27)
20
–
–
136
(6)
130
2,025
2,366
501
142
244
738
6,016
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Capital
£m
538
123
127
788
33
235
269
65
569
3
1,341
(498)
843
691
(482)
209
(15)
3
27
15
–
5
(380)
(375)
–
6
–
6
–
–
(14)
(14)
60
(17)
31
74
–
214
(2)
212
1,281
1,460
469
20
391
741
4,362
UK
£m
372
37
Continental
Europe
£m
559
18
Asia
£m
149
5
US Rest of World
£m
£m
(9)
(30)
–
–
Total
£m
1,041
60
783
(972)
(189)
894
(707)
187
25
(171)
(146)
40
(303)
(263)
–
(7)
(7)
1,742
(2,160)
(418)
2,250
2,573
679
497
17
6,016
UK
£m
716
31
Continental
Europe
£m
692
6
Asia
£m
25
–
US
£m
(27)
–
Rest of World
£m
–
–
Total
£m
1,406
37
1,169
(650)
519
1,159
(560)
599
54
(259)
(205)
56
(92)
(36)
–
(15)
(15)
2,438
(1,576)
862
1,792
1,894
373
283
20
4,362
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
2 Realised profits over value on the disposal of investments
Net proceeds
Valuation of disposed investments
Investments written off
*Restated for investment in external funds reclassified from loans and receivables to equity.
3 Unrealised profits on the revaluation of investments
Movement in the fair value of equity
Provisions and loan impairments*
2008
Unquoted
equity
£m
1,081
(627)
(2)
452
2008
Quoted
equity
£m
199
(162)
–
37
2008
Loans and
receivables
£m
462
(425)
(3)
34
2008
Total
£m
1,742
(1,214)
(5)
523
2007
Unquoted
equity
£m
1,647
(791)
(25)
831
2007
Quoted
equity
£m
145
(146)
–
(1)
2007
Loans and
receivables
£m
646
(644)
(2)
–
2007*
Total
£m
2,438
(1,581)
(27)
830
2008
Unquoted
equity
£m
415
(109)
306
2008
Quoted
equity
£m
64
–
64
2008
Loans and
receivables
£m
–
(79)
(79)
2008
Total
£m
479
(188)
291
2007
Unquoted
equity
£m
431
(22)
409
2007
Quoted
equity
£m
(37)
–
(37)
2007
Loans and
receivables
£m
–
(49)
(49)
2007†
Total
£m
394
(71)
323
*Included within loan impairments for the Group and Company is an £12 million value reduction for quoted debt instruments.
†Restated for investment in external funds reclassified from loans and receivables to equity.
Provisions have been recognised only on investments where it is considered there is a significant risk of failure. All other value movements are included within the movement in the fair value
of equity.
4 Fees receivable
Fees receivable
Deal-related costs
2008
£m
45
(23)
22
2007
£m
30
(16)
14
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 external funds
Carried interest and performance fees payable
2008
£m
60
(152)
(92)
2007
£m
81
(142)
(61)
Carried interest receivable represents the Group’s share of profits from external funds. Each 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 amount 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 once the performance conditions in the scheme have been met.
Report and accounts 2008 3i Group plc 89
Notes to the financial statements continued
6 Operating expenses
Operating expenses include the following amounts:
Depreciation of property, plant and equipment
Audit fees
Staff costs (note 7)
2008
£m
7
1
178
2007
£m
6
1
154
Services provided by the Group’s auditors
During the year the Group obtained the following services from the Group’s auditors, Ernst &
Young LLP:
Audit services
Statutory audit– Company
– UK subsidiaries
– Overseas subsidiaries
Audit-related regulatory reporting
Non-audit services
Investment due diligence
Tax services (compliance and advisory services)
2008
£m
2007
£m
0.3
0.6
0.4
0.1
1.4
0.4
0.2
2.0
0.3
0.6
0.4
0.1
1.4
1.0
0.1
2.5
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.
In addition to the above, Ernst & Young LLP has received fees from investee companies. 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 the
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 auditors for audit services to the pension scheme during the year were less than
£0.1 million (2007: less than £0.1 million).
8 Share-based payments (continued)
The features of the Group’s share schemes are set out below. For legal or regulatory reasons
certain participants may be granted “phantom awards” under these schemes, which are
intended to replicate the financial effects of a share award without entitling the participant to
acquire shares.
Share options
(i) 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.
For options granted between 1 April 2003 and 31 March 2004 the performance period is
extended only 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 re-tested 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 between 31 March 2003 and 1 April 2004 the target
ACG was RPI plus 3% with maximum vesting at RPI plus 6%, 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%. For options granted after 1 April 2005 the target ACG was RPI plus 3% with
maximum vesting at RPI plus 8%.
(ii) The 3i Group 1994 Executive Share Option Plan Options granted before 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 (with
dividends re-invested) 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%.
Details of share options outstanding during the year are as follows:
2008
2008
Weighted
average
share options exercise price
(pence)
Number of
2007
Number of
share options
2007
Weighted
average
exercise price
(pence)
7 Staff costs
Wages and salaries
Social security costs
Share-based payment costs (note 8)
Pension costs (note 9)
2008
£m
130
20
12
16
178
2007
£m
110
16
12
16
154
Outstanding at
start of the year
Granted
Exercised
Lapsed
Outstanding at end of year
Exercisable at end of year
16,894,767
1,360,430
(4,210,287)
(1,467,797)
12,577,113
6,821,753
712 25,304,158
1,165
1,411,173
637
(4,059,359)
764
(5,761,205)
781 16,894,767
735
7,636,530
745
839
577
986
712
742
The average number of employees during the year was 772 (2007: 765).
Wages and salaries shown above include salaries paid in the year and bonuses relating to the
year. These costs are charged against operating expenses.
Included within the total number of share options are options over 3 million (2007: 6 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.
8 Share-based payments
The Group has a number of share schemes that allow employees to acquire shares in the
Company.
The total cost recognised in the income statement is shown below:
Share options*
Performance shares*
Share incentive plan
Deferred bonus shares
*Credited to equity.
2008
£m
6
2
1
3
12
2007
£m
8
1
1
2
12
90 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
8 Share-based payments (continued)
The range of exercise prices for options outstanding at the year end was:
Year ended 31 March
Year of grant
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2008
2008
Weighted
average
exercise
price
(pence)
–
628
819
Number
–
325,590
579,862
1,341 1,024,860
895
16,761
644 1,132,187
571 1,088,933
597 2,408,538
692 3,312,195
839 1,388,851
1,165 1,299,336
781 12,577,113
2007
2007
Weighted
average
exercise
price
(pence)
505
630
884
1,312
895
663
571
599
692
839
–
Number
277,622
405,472
756,975
1,170,432
21,026
3,785,511
1,414,290
4,247,510
3,409,732
1,406,197
–
712 16,894,767
Options are exercisable at a price based on the market value of the Company’s shares on the
date of grant.
The weighted average share price at the date of exercise during the year was 1,136p
(2007: 1,054p). The options outstanding at the end of the year have a weighted average
contractual life of 6.07 years (2007: 6.34 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 456p (2007: 331p). These fair values were calculated using the Black-
Scholes option pricing model.
The inputs to this model were as follows:
Weighted average share price (pence)
Average expected volatility (%)
Expected life (years)
Average risk-free rate (%)
Average expected dividend yield (%)
2008
1,195
29
8.5
5.5
1.7
2007
849
29
8.5
4.6
1.6
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 (2007: nil).
Performance share awards
Performance Share awards made under the 3i Group Discretionary Share Plan during the year
were conditional awards of shares to executives which will be transferred to the participant
by the 3i Group Employee Trust on vesting. Awards are subject to a performance condition
determining whether and to what extent the award will vest. There are two types of awards:
conditional Performance Share awards and conditional Super-performance Share awards.
The performance condition for Performance Share awards made during the year is based on
the outperformance of the theoretical growth in value of a shareholding in the Company
(with dividends reinvested) for the three year performance period from grant (averaged over
a 60 day period) compared to the growth in value of the FTSE 100 Index (with dividends
reinvested) adjusted for mergers, demergers and delistings over that period. At an
outperformance level below 0% per annum no part of the award will vest. At an
outperformance level of 0% per annum, 35% of the award will vest and above 8% per
annum the full award will vest. At outperformance levels between 0% and 8%, the award will
vest on a pro rata basis.
Performance Share awards made before 1 April 2007, were restricted awards which vest
based on the Company’s “percentage rank” by total shareholder return for the three years
from grant (averaged over a 60 day period) compared to a comparator group consisting 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.
8 Share-based payments (continued)
Super-performance Share awards made during the year were conditional awards of shares
which are subject to a particularly challenging performance condition. The performance
condition requires annual percentage compound growth in the net asset value per share
(with dividends re-invested) over the three-year period of RPI plus 10 percentage points per
annum to achieve minimum vesting of 25% of the award; RPI plus 13.5 percentage points
per annum to achieve 50% vesting; and RPI plus 17 percentage points per annum to achieve
maximum vesting.
The performance condition is measured over a three-year period. If the condition is satisfied,
the awards remain subject to a further two-year holding period before they vest.
Super-performance Share awards made before 1 April 2007, were restricted awards which
were transferred to the participants by the 3i Group Employee Trust on terms that the shares
would be forfeited to the extent the performance condition was not satisfied and in certain
other circumstances.
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. Accordingly it 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 grants 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).
Deferred Bonus Share Plan
Certain employees receive an element of their bonus as shares. These shares are held in trust
for two years by the trustee of the 3i Group Employee Trust in a nominee capacity. The fair
value of the deferred shares is the share price at date of the award.
Employee trust
The Group has established the 3i Group Employee Trust which holds shares in 3i Group plc to
meet its obligations under certain share schemes. The share schemes which use this trust are
the 3i Group Discretionary Share Plan and the Deferred Bonus Share Plan.
9 Retirement benefit deficit
Retirement benefit plans
(i) Defined contribution plans The Group operates a number of defined contribution
retirement benefit plans for qualifying employees throughout the Group. 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 total expense recognised in profit or loss is £5 million (2007: £4 million), which
represents the contributions payable to these plans. There were no outstanding payments
due to these plans at the balance sheet date.
(ii) Defined benefit scheme The Group operates a final salary defined benefit plan for
qualifying employees of its subsidiaries in the UK. The plan has not been offered to new
employees joining 3i since 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 as at 30 June 2004 was updated on an IAS 19 basis by an
independent qualified actuary as at 31 March 2008.
The principal assumptions made by the actuaries and 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
2008
6.0%
6.0%
3.8%
3.5%
6.2%
2007
5.0%
4.5%
3.1%
3.0%
6.1%
The post-retirement mortality assumptions used to value the benefit obligation at 31 March
2008 are based on 80% PNA medium cohort with 1.5% pa minimum annual improvement
“PA00 medium cohort table” (2007: PA92 medium cohort table). The life expectancy of a
male member reaching age 60 in 2028 is projected to be 33.6 years compared to 30.2
years for someone reaching 60 in 2008.
Report and accounts 2008 3i Group plc 91
Notes to the financial statements continued
9 Retirement benefit deficit (continued)
The amount recognised in the balance sheet in respect of the Group’s defined benefit plan is
as follows:
Present value of funded obligations
Fair value of Plan assets
Retirement benefit deficit
2008
£m
515
(477)
38
2007
£m
480
(479)
1
Amounts recognised in the income statement in respect of the defined benefit plan are
as follows:
Included in operating costs
Current service cost
Included in finance costs (note 10)
Expected return on Plan assets
Interest on obligation
Included in statement of recognised income
and expenses
Actuarial loss/(gain)
2008
£m
10
(30)
24
41
45
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 loss/(gain)
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 loss
Contributions
Benefits paid
Closing fair value of Plan assets
2008
£m
480
10
1
24
12
1
(13)
515
2008
£m
479
30
(29)
10
(13)
477
2007
£m
12
(26)
22
(14)
(6)
2007
£m
472
12
–
22
(15)
–
(11)
480
2007
£m
455
26
(1)
10
(11)
479
Contributions paid to the Group Pension Plan are related party transactions as defined by
IAS 24 Related party transactions.
The fair value of the Plan assets at the balance sheet date is as follows:
Equities
Gilts
Other
2008
£m
261
217
(1)
477
2007
£m
268
213
(2)
479
The actual return on Plan assets for the year was £1 million (2007: £25 million).
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 of individual categories of Plan assets is
determined by reference to individual indices.
9 Retirement benefit deficit (continued)
The history of the Plan is as follows:
Present value of
defined benefit
obligation
Fair value of
Plan assets
Deficit
Experience
adjustments on
Plan liabilities
Experience
adjustments on
Plan assets
2008
£m
2007
£m
2006
£m
2005
£m
2004
£m
515
480
472
390
355
(477)
38
(479)
1
(455)
17
(367)
23
(272)
83
(1)%
2%
–
(4)%
(3)%
6%
–
(11)%
(4)%
(3)%
The cumulative actuarial losses recognised in equity are £44 million (2007: losses £4 million).
The Group expects to make regular contributions of approximately £10 million to the Plan in
the year to 31 March 2009.
German retirement scheme
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 £4 million (2007: £3 million) and the future liability calculated by German
actuaries is £5 million (2007: £5 million). The Group carries both the asset and liability
in its consolidated financial statements and has recognised an actuarial loss of £1 million
(2007: £1 million).
10 Net interest payable
Treasury interest receivable
Interest on bank deposits
Finance income on pension plan
Interest payable
Interest on loans and borrowings
Interest on Convertible Bonds
Amortisation of Convertible Bonds
Subordinated borrowings
Net interest payable
11 Movements in the fair value of derivatives
Forward foreign exchange contracts
Currency swaps
Interest-rate swaps
Derivative element of Convertible Bonds
2008
£m
2007
£m
83
6
89
(86)
(4)
(7)
(8)
(105)
(16)
2008
£m
–
(1)
(3)
162
158
87
4
91
(84)
(6)
(7)
(3)
(100)
(9)
2007
£m
1
–
32
(62)
(29)
Further information on interest-rate swaps is provided in note 19 and on 3i’s Convertible
Bonds in note 21. The fair value of the liability due to the equity element of 3i’s Convertible
Bonds has decreased, mainly due to the decrease in 3i’s share price in the year. The resulting
profit has been recognised in the income statement.
92 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
12 Other income
14 Investment portfolio
Other financing income
13 Income taxes
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income taxes in the income statement
2008
£m
1
1
2007
£m
1
1
2008
£m
2007
£m
(5)
(1)
(6)
(3)
–
(3)
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Provision and impairment of loans and receivables
Other movements
Closing book value
Quoted
Unquoted
Closing book value
Reconciliation of income taxes in the income statement
The tax charge for the year is different to the standard rate of corporation tax in the UK,
currently 30% (2007: 30%), and the differences are explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax
in the UK of 30% (2007: 30%)
Effects of:
Permanent differences
Short-term timing differences
Current period unutilised tax losses
Prior period utilised 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
Total income taxes in the income statement
2008
£m
834
2007
£m
1,059
(250)
(318)
(3)
(8)
(2)
18
10
–
(5)
1
5
3
(7)
8
15
(4)
(3)
4
233
(6)
294
(3)
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.
Deferred income taxes
Opening deferred income tax liability
Tax losses
Unrealised valuation surpluses on investments
Income in accounts taxable in the future
Recognised through income statement
Tax losses utilised
Valuation surplus now realised
Income in accounts taxable in the future
Closing deferred income tax liability
Tax losses
Unrealised valuation surpluses on investments
Income in accounts taxable in the future
2008
Group
balance
sheet
£m
12
–
(13)
(1)
(7)
–
6
(1)
5
–
(7)
(2)
2007
Group
balance
sheet
£m
2
–
(3)
(1)
10
–
(10)
–
12
–
(13)
(1)
At 31 March 2008 the Group had tax losses carried forward of £867 million (2007:
£588 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. Deferred income taxes are calculated using
an expected rate of corporation tax in the UK of 28% (2007: 30%).
Group
2008
Equity
investments
£m
3,179
1,102
(791)
479
(109)
238
4,098
889
3,209
4,098
Group
2008
Loans and
receivables
£m
1,183
1,058
(428)
–
(79)
184
1,918
–
1,918
1,918
Group
2007
Equity
investments
(as restated*)
£m
2,878
968
(962)
394
(22)
(77)
3,179
570
2,609
3,179
Group
2007
Loans and
receivables
(as restated*)
£m
1,261
608
(646)
–
(49)
9
1,183
–
1,183
1,183
Group
2008
Total
£m
4,362
2,160
(1,219)
479
(188)
422
6,016
889
5,127
6,016
Group
2007
Total
£m
4,139
1,576
(1,608)
394
(71)
(68)
4,362
570
3,792
4,362
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Provision and impairment of loans and receivables
Other movements
Closing book value
Quoted
Unquoted
Closing book value
*Restated for investment in external funds reclassified from loans and receivables to equity.
The holding period of 3i’s investment portfolio is on average greater than one year. For this
reason the portfolio is classified as non-current. It is not possible to identify with certainty
investments that will be sold within one year.
Additions to loans and receivables includes £46 million (2007: £79 million) interest received
by way of loan notes. A corresponding amount has been included in income from loans and
receivables.
Other movements include foreign exchange and conversions from one instrument into
another.
Report and accounts 2008 3i Group plc 93
Notes to the financial statements continued
15 Interests in Group entities
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
Company
2008
Equity
investments
£m
246
31
–
(46)
–
–
231
Company
2008
Loans and
receivables
£m
1,520
2,171
360
(1,229)
(27)
114
2,909
Company
2008
Total
£m
1,766
2,202
360
(1,275)
(27)
114
3,140
16 Property, plant and equipment (continued)
Assets held under finance leases (all vehicles) have the following net book amount:
Cost
Aggregate depreciation
Net book amount
Finance lease rentals are payable as follows:
Group
2008
£m
1
–
1
Group
2008
£m
–
1
Group
2007
£m
1
–
1
Group
2007
£m
1
–
Company
2008
£m
–
–
–
Company
2008
£m
–
–
Company
2007
£m
–
–
–
Company
2007
£m
–
–
Details of significant Group entities are given in note 35.
Within one year
Between one and five years
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.
17 Other current assets
Prepayments
Other debtors
Amounts due from subsidiaries
Group
2008
£m
39
10
–
49
Group
2007
£m
44
153
–
197
Company
2008
£m
12
9
161
182
Company
2007
£m
19
38
111
168
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
16 Property, plant and equipment
Land and buildings
Opening cost or valuation
Additions at cost
Disposals
Revaluation
Closing cost or valuation
Net book amount
Company
2007
Equity
investments
£m
239
92
–
(85)
–
–
246
Group
2008
£m
10
–
–
(1)
9
9
Group
2007
£m
10
–
(1)
1
10
10
Company
2007
Loans and
receivables
£m
1,261
818
483
(982)
(1)
(59)
1,520
Company
2008
£m
9
–
–
(1)
8
8
Depreciation charged in the year on buildings was £0.2 million (2007: £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
Group
2008
£m
44
6
(1)
49
22
7
(1)
28
21
Group
2007
£m
57
8
(21)
44
36
6
(20)
22
22
Company
2008
£m
–
–
–
–
–
–
–
–
–
Company
2007
Total
£m
1,500
910
483
(1,067)
(1)
(59)
1,766
Company
2007
£m
9
–
(1)
1
9
9
Company
2007
£m
–
–
–
–
–
–
–
–
–
94 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
18 Financial risk management
Introduction
A review of the Group’s objectives, policies and processes for managing and monitoring risk is set out in the Directors’ report (pages 38 to 43). This note provides further detail on financial
risk management, cross-referring to the Directors’ report where applicable, and includes quantitative data on specific financial risks.
The Group invests in approximately 50 new investment opportunities per annum and each investment is subject to a full risk assessment through an investment approval process.
The Group’s Investment Committee is part of the overall risk management framework.
Capital structure
The capital structure of the Group consists of net debt, including cash held on deposit, and shareholders’ equity. The type and maturity of the Group’s borrowings are analysed further in note
20 and the Group’s equity is analysed into its various components in note 27. Capital is managed so as to maximise the return to shareholders while maintaining a capital base to allow 3i to
operate effectively in the marketplace and sustain future development of the business. Strong realisations from the investment portfolio in recent years have led to the return of capital to
shareholders. This has been achieved through the issue and repurchase of B shares (2008: £808 million; 2007: £700 million), on-market share purchases (2008: £120 million; 2007:
£74 million; 2006: £222 million) and a special dividend (2006: £245 million).
Cash, deposits and derivative financial assets
Borrowings and derivative financial liabilities
Net (debt)/surplus
Total equity
Gearing (net debt/total equity)
Group
2008
£m
820
(2,458)
(1,638)
4,057
40%
Group
2007
£m
2,175
(2,174)
1
4,249
0%
Capital is managed on a consolidated basis and the gearing KPI is only applicable to the Group, not the Company.
Capital constraints
The Group is generally free to transfer capital from subsidiary undertakings to the parent company subject to maintaining each subsidiary with sufficient reserves to meet local statutory
obligations. No significant constraints have been identified in the past and the Group has been able to distribute profits in a tax-efficient manner. The Company operates so as to qualify as a
UK Investment Trust for tax purposes which necessitates its investment in subsidiaries remaining below 15% of the Company’s investment portfolio.
The Group’s regulated capital requirement is reviewed regularly by the Board of 3i Investments plc, an investment firm that is regulated by the FSA. The last submission to the FSA
demonstrated a significant consolidated capital surplus in excess of the FSA’s prudential rules. Since 1 January 2008 the Group’s capital requirement has been amended following approval
of the Group’s Internal Capital Adequacy Assessment Process (ICAAP) report by the Board of 3i Investments plc. Although this has increased the regulated capital requirement,
there remains a significant regulatory capital surplus.
Financial risks
Concentration risk
The Group’s exposure to and mitigation of concentration risk is explained within “investment risks” (page 41) in the Directors’ report. Quantitative data regarding the concentration risk of the
portfolio across economic sectors and geographies can be found in the additional portfolio and financial information section (pages 110 to 115).
Credit risk
The Group is subject to credit risk on its loans, receivables, cash and deposits. The Group’s cash and deposits are held with a variety of counterparties with a credit rating of AA or better.
The credit quality of loans and receivables within the investment portfolio is based on the financial performance of the individual portfolio companies. For those assets that are not past due
it is believed that the risk of default is small and that capital repayments and interest payments will be made in accordance with the agreed terms and conditions of the Group’s investment.
Where the portfolio company has failed or is expected to fail in the next 12 months, the Group’s policy is to record a provision for the full amount of the loan. Partial provisions, or “loan
impairments”, are made when the valuation of the portfolio company implies non-recovery of all or part of the Group’s loan investment. In these cases a loan impairment is recorded equal
to the valuation shortfall. Further information on how credit risk is managed is given on page 42 of the Directors’ report. In accordance with IFRS7, the amounts shown as past due represent
the total credit exposure, not the amount actually past due.
Loans and receivables before provisions and impairments
Provisions on investments that have failed
or expected to fail in the next 12 months
Impairments where the valuation of the portfolio
company implies non-recovery of all or part
of the Group’s loan investment*
Total
Loans and receivables before provisions and impairments
Provisions on investments that have failed
or expected to fail in the next 12 months
Impairments where the valuation of the portfolio
company implies non-recovery of all or part
of the Group’s loan investment
Total
Group
2008
not past
due
£m
1,772
Group
2008
up to
12 months
past due
£m
174
Group
2008
more than
12 months
past due
£m
128
Group
2008
Total
£m
2,074
Company
2008
not past
due
£m
432
Company
2008
up to
12 months
past due
£m
83
Company
2008
more than
12 months
past due
£m
108
Company
2008
Total
£m
623
(44)
(1)
(40)
(85)
(6)
(1)
(37)
(44)
(4)
1,724
(31)
142
(36)
52
(71)
1,918
(9)
417
(27)
55
(30)
41
(66)
513
Group
2007
not past
due
£m
1,217
Group
2007
up to
12 months
past due
£m
91
Group
2007
more than
12 months
past due
£m
91
Group
2007
Total
£m
1,399
Company
2007
not past
due
£m
471
Company
2007
up to
12 months
past due
£m
87
Company
2007
more than
12 months
past due
£m
86
Company
2007
Total
£m
644
(61)
(6)
(42)
(109)
(53)
(3)
(42)
(98)
(78)
1,078
(8)
77
(21)
28
(107)
1,183
(48)
370
(5)
79
(19)
25
(72)
474
*Included within impairments not past due for the Group and Company is an £12 million value reduction for quoted debt instruments.
Report and accounts 2008 3i Group plc 95
Notes to the financial statements continued
18 Financial risk management (continued)
Movements on loan impairments and provisions are shown below.
Balance as at 31 March 2006
Released in year
Charged in year
Balance as at 31 March 2007
Released in year
Charged in year
Balance as at 31 March 2008
Group
Provisions
£m
(189)
85
(5)
(109)
65
(41)
(85)
Group
Impairments
£m
(179)
116
(44)
(107)
74
(38)
(71)
Group
Total
£m
(368)
201
(49)
(216)
139
(79)
(156)
Company
Provisions
£m
(169)
76
(5)
(98)
60
(6)
(44)
Company
Impairments
£m
(150)
96
(18)
(72)
30
(24)
(66)
Company
Total
£m
(319)
172
(23)
(170)
90
(30)
(110)
Liquidity risk
Further information on how liquidity risk is managed is provided in the Directors’ report (page 42). The table below analyses the maturity of the Group’s contractual liabilities.
As at 31 March 2008
Gross commitments:
Fixed loan notes
Variable loan notes
Committed multi-currency facility
Convertible Bond 2008 1550 million 1.375%
Euro commercial paper
Derivative financial instruments
Equity element of Convertible Bond
Carried interest payable within one year
Total
As at 31 March 2007
Gross commitments:
Fixed loan notes
Variable loan notes
Committed multi-currency facility
Convertible Bond 2008 1550 million 1.375%
Euro commercial paper
Derivative financial instruments
Equity element of Convertible Bond
Carried interest payable within one year
Total
Group
due within
Group
due between
Group
due between
1 year 1 and 2 years 2 and 5 years
£m
£m
£m
39
131
19
437
267
–
6
140
1,039
39
114
19
–
–
–
–
–
172
165
437
385
–
–
398
–
–
1,385
Group
due greater
than 5 years
£m
1,198
–
–
–
–
258
–
–
1,456
Group
due within
1 year
£m
Group
due between
1 and 2 years
£m
Group
due between
2 and 5 years
£m
Group
due greater
than 5 years
£m
251
213
3
5
265
276
–
71
1,084
37
98
7
364
–
32
156
–
694
110
639
159
–
–
200
–
–
1,108
1,234
–
–
–
–
431
–
–
1,665
Group
Total
£m
1,441
682
423
437
267
656
6
140
4,052
Group
Total
£m
1,632
950
169
369
265
939
156
71
4,551
Company
due within
Company
due between
Company
due between
1 year 1 and 2 years 2 and 5 years
£m
£m
£m
Company
due greater
than 5 years
£m
Company
Total
£m
39
131
4
437
267
–
6
–
884
39
114
4
–
–
–
–
–
157
165
437
89
–
–
398
–
–
1,089
1,198
–
–
–
–
258
–
–
1,456
Company
due within
1 year
£m
Company
due between
1 and 2 years
£m
Company
due between
2 and 5 years
£m
Company
due greater
than 5 years
£m
251
8
1
5
265
66
–
–
596
37
98
4
364
–
32
156
–
691
110
639
80
–
–
188
–
–
1,017
1,234
–
–
–
–
431
–
–
1,665
1,441
682
97
437
267
656
6
–
3,586
Company
Total
£m
1,632
745
85
369
265
717
156
–
3,969
Market risk
The valuation of the Group’s investment portfolio is largely dependent on the underlying trading performance of the companies within the portfolio but the valuation and other items in the
financial statements can also be affected by interest rate, currency and quoted market fluctuations. The Group’s sensitivity to these items is set out below.
(i) Interest rate risk
Further information on how interest rate risk is managed is provided in the Directors’ report (page 42). The direct impact of a movement in interest rates is relatively small. An increase of
100 Basis Points would lead to an approximate exposure of £4 million (2007: £5 million) for the Group and £1 million (2007: £5 million) for the Company. This exposure arises principally
from changes in interest payable and receivable on floating rate and short-term instruments and changes in the fair value of interest rate derivatives held at the year end. In addition the
Group and Company have indirect exposure to interest rates through changes to the financial performance of portfolio companies caused by interest rate fluctuations.
.
96 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
18 Financial risk management (continued)
(ii) Currency risk
Further information on how currency risk is managed is provided in the Directors’ report (page 42). The Group’s net assets in Euro, US dollar, Swedish krona, Indian rupee, Swiss franc and all
other currencies combined is shown in the table below. This sensitivity analysis is based on the sensitivity of the Group and Company’s monetary assets to movements in foreign currency
exchange rates. The Group hedges currency on a consolidated basis.
Net assets
Sensitivity analysis
Assuming a 5% movement in exchange rates against sterling:
Impact on exchange movements in the income statement
Impact on the translation of foreign operations in statement
of recognised income and expense
Total
Net assets
Sensitivity analysis
Impact on exchange movements in the income statement assuming a
5% movement in exchange rates against sterling:
Group
2008
Sterling
£m
4,077
Group
2008
Euro
£m
(24)
Group
2008
US dollar
£m
91
Group
2008
Swedish
krona
£m
(14)
Group
2008
Indian rupee
£m
(67)
Group
2008
Swiss franc
£m
(6)
n/a
n/a
n/a
10
(17)
(7)
25
(19)
6
(1)
–
(1)
(5)
–
(5)
–
–
–
Group
2008
Other
£m
–
n/a
n/a
n/a
Group
2008
Total
£m
4,057
29
(36)
(7)
Company
2008
Sterling
£m
4,125
Company
2008
Euro
£m
203
Company
2008
US dollar
£m
238
Company
2008
Swedish
krona
£m
(89)
Company
2008
Indian rupee
£m
(281)
Company
2008
Swiss franc
£m
(184)
Company
2008
Other
£m
(82)
Company
2008
Total
£m
3,930
n/a
2
8
(5)
(15)
(10)
n/a
(20)
Net assets
Sensitivity analysis
Assuming a 5% movement in exchange rates against sterling:
Impact on exchange movements in the income statement
Impact on the translation of foreign operations in statement
of recognised income and expense
Total
Group
2007
Sterling
£m
4,284
n/a
n/a
n/a
Group
2007
Euro
£m
(121)
Group
2007
US dollar
£m
86
Group
2007
Swedish
krona
£m
(4)
Group
2007
Indian rupee
£m
–
Group
2007
Swiss franc
£m
1
(20)
14
(6)
14
(6)
8
(4)
–
(4)
–
–
–
Group
2007
Other
£m
3
n/a
n/a
n/a
Group
2007
Total
£m
4,249
(11)
8
(3)
Company
2007
Sterling
£m
4,326
Company
2007
Euro
£m
(127)
Company
2007
US dollar
£m
136
Company
2007
Indian rupee
£m
(99)
Company
2007
Swiss franc
£m
(130)
Company
2007
Other
£m
6
Company
2007
Total
£m
4,020
Net assets
Sensitivity analysis
Impact on exchange movements in the income statement assuming a
5% movement in exchange rates:
n/a
(12)
2
(5)
(5)
(7)
n/a
(27)
(iii) Price risk – market fluctuations
Further information about the management of price risk, which arises principally from quoted and unquoted equity investments, is provided in the Directors’ report (page 42). A 5% change
in the fair value of those investments would have the following direct impact on the income statement:
Group
Company
2008
Quoted
equity
£m
44
39
2008
Unquoted
equity
£m
160
53
2008
Total
£m
204
92
2007
Quoted
equity
£m
29
25
2007
Unquoted
equity
£m
130
63
2007
Total
£m
159
88
In addition, other price risk arises from carried interest balances and the derivative element of the Convertible Bonds.
Report and accounts 2008 3i Group plc 97
(1)
–
(1)
Company
2007
Swedish
krona
£m
(92)
Notes to the financial statements continued
19 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
Group
2008
£m
5
8
11
24
–
(79)
(23)
(6)
(108)
Group
2007
£m
Company
2008
£m
Company
2007
£m
1
8
12
21
(1)
(10)
(22)
(156)
(189)
5
8
11
24
–
(79)
(23)
(6)
(108)
1
8
12
21
(2)
(10)
(20)
(156)
(188)
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, as defined
in IAS 39, and consequently all changes in fair value are taken to the income statement.
At the balance sheet date, the notional amount of outstanding forward foreign exchange contracts is as follows:
Currency swaps
Forward foreign currency contracts
2008
£m
2,322
346
2,668
2007
£m
1,455
174
1,629
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, as defined in
IAS 39, and consequently all changes in fair value are taken to the income statement.
At the balance sheet date, the notional amount of outstanding interest rate swaps is as follows:
Fixed rate to variable rate
Variable rate to fixed rate
Variable rate to variable rate
2008
£m
–
510
150
660
2007
£m
10
687
200
897
The Group does not trade in derivatives. In general, 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.
98 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
20 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
Principal borrowings include:
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)
Other
Variable rate
£200 million notes (public issue)
€500 million notes (public issue)
Other
Committed multi-currency facilities
£486 million
£150 million
Other
Other borrowings
Euro commercial paper
Finance lease obligations
Group
2008
£m
373
92
394
398
25
600
1,882
Group
2008
£m
–
200
400
50
–
398
195
1,243
200
169
369
–
269
1
270
Group
2007
£m
Company
2008
£m
Company
2007
£m
675
90
81
145
–
600
1,591
373
92
109
398
25
600
1,597
474
90
81
72
–
600
1,317
Group
2007
£m
Company
2008
£m
Company
2007
£m
200
200
400
200
–
171
1,171
–
145
145
8
266
1
275
–
200
400
50
–
398
195
1,243
–
85
85
–
269
–
269
200
200
400
–
–
171
971
–
72
72
8
266
–
274
Rate
Maturity
6.875%
6.875%
5.750%
2007
2023
2032
LIBOR+0.100%
EURIBOR+0.100%
2007
2012
LIBOR+0.210%
LIBOR+0.175%
2010
2010
Total for loans and borrowings
1,882
1,591
1,597
1,317
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 £169 million liability on the £150 million multi-currency facility represents a two billion Swedish Krona drawing being re-translated at
the year end exchange rate. 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.
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 loans and borrowings is £1,840 million (2007: £1,626 million).
21 Convertible Bonds
Opening balance
Amortised during the year
Exchange movements
Closing balance
Group
2008
£m
363
7
63
433
Group
2007
£m
365
7
(9)
363
Company
2008
£m
363
7
63
433
Company
2007
£m
365
7
(9)
363
On 1 August 2003 the Company issued €550 million 1.375% 5-year convertible bonds. The 3i Group plc share price on issue was 635p and at 31 March 2008 was 830p (2007: 1,136p).
The initial conversion price was £8.41, which has subsequently been adjusted to £8.53 following share consolidations implemented by the Company in the period 2005–2007. Interest is
payable on the bonds on 12 January and 12 July each year.
On issue, part of the proceeds was recognised as a derivative financial instrument and the remaining amount recognised as a loan held at amortised cost with an effective interest rate
of 4.1%. The fair value of the loan at 31 March 2008 was £433 million (2007: £363 million).
Report and accounts 2008 3i Group plc 99
Notes to the financial statements continued
22 B shares
Opening balance
Issued
Repurchased and cancelled
Closing balance
Group
2008
£m
11
808
(798)
21
Group
2007
£m
–
700
(689)
11
Company
2008
£m
11
808
(798)
21
Company
2007
£m
–
700
(689)
11
On 16 July 2007, the Company issued B shares with a nominal value of 1p on the basis of 11 B shares for eight existing 6269⁄88p ordinary shares. The B shares carry the right to a
cumulative preferential dividend at a rate per annum of 3.75% based on a notional value of 127p per B share and an entitlement to a priority payment equal to 127p per B share,
plus any accrued but unpaid dividend, from the assets of the Company on a winding up, but will not ordinarily carry voting rights in the Company.
The Company repurchased and cancelled in aggregate 628,537,525 B shares on 23 July 2007 and 20 August 2007 at a price of 127p per share. The Company expects to make future
purchase offers in July 2008 and July 2009 at 127p per B share and has the right to repurchase all outstanding B shares on or after 14 July 2009.
23 Subordinated liabilities
Subordinated liabilities are repayable as follows:
After five years
Group
2008
£m
14
Group
2007
£m
21
Subordinated liabilities comprise limited recourse funding from Kreditanstalt für 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 circumstances become non-repayable should assets fail.
24 Trade and other payables
Other accruals
Amounts due to subsidiaries
25 Provisions
Opening balance
Charge for the year
Utilised in the year
Closing balance
Opening balance
Charge for the year
Utilised in the year
Closing balance
Group
2008
£m
166
–
166
Group
2007
£m
179
–
179
Company
2008
£m
67
241
308
Company
2007
£m
22
169
191
Group
2008
Property
£m
7
2
(2)
7
Group
2008
Redundancy
£m
11
6
(10)
7
Group
2007
Property
£m
5
4
(2)
7
Group
2007
Redundancy
£m
5
11
(5)
11
Group
2008
Total
£m
18
8
(12)
14
Group
2007
Total
£m
10
15
(7)
18
The provision for redundancy relates to staff reductions announced prior to 31 March 2008. 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 subleases. The leases covered by the provision have a remaining term of up to eight years.
100 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
26 Issued capital
Authorised
Ordinary shares of 6269⁄88p
Ordinary shares of 7319⁄22p
B shares of 1p
Unclassified shares of 10p
Issued and fully paid
Ordinary shares of 531⁄8p
Opening balance
Issued on exercise of share options and under the 3i Group Share Incentive Plan
Share consolidation
Shares cancelled
Closing balance
Issued and fully paid
Ordinary shares of 6269⁄88p
Opening balance
Issued on exercise of share options and under the 3i Group Share Incentive Plan
Share consolidation
Shares cancelled
Closing balance
2008
Number
–
555,076,720
660,000,000
1,000,000
2008
£m
–
410
7
1
2007
Number
653,031,456
–
610,000,000
1,000,000
2008
Number
2008
£m
2007
Number
–
–
–
–
–
–
–
–
–
–
550,556,502
603,757
(551,160,259)
–
–
2008
Number
2008
£m
2007
Number
461,106,007
1,794,733
(462,900,740)
–
–
289
2
(291)
–
–
–
2,169,634
466,366,373
(7,430,000)
461,106,007
2007
£m
410
–
6
–
2007
£m
292
–
(292)
–
–
2007
£m
–
2
292
(5)
289
During the period 1 April 2007 to 15 July 2007, the Company issued shares for cash on the exercise of share options at various prices from 512p to 1,012p per share.
On 16 July 2007, the Company consolidated its issued share capital on the basis of 17 ordinary shares of 7319⁄22p each for every 20 ordinary shares of 6269⁄88p each held.
This occurred immediately following the issue of the B shares.
Issued and fully paid
Ordinary shares of 7319⁄22p
Opening balance
Share consolidation
Issued on exercise of share options, conversion of bonds, and under the 3i Group Share Incentive Plan
Shares cancelled
Closing balance
2008
Number
–
393,465,629
1,275,465
(12,000,000)
382,741,094
2008
£m
–
291
1
(9)
283
2007
Number
2007
£m
–
–
–
–
–
–
–
–
–
–
During the period 16 July 2007 to 31 March 2008, the Company issued shares for cash on the exercise of share options at various prices from 470p to 895p per share.
27 Equity
Year to 31 March 2008
Group
Opening balance
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Issue of ordinary shares
Dividends paid
Share buy-backs
Issue of B shares
Own shares
Closing balance
Share
capital
£m
289
Share
premium
£m
387
Capital
redemption
reserve
£m
27
Share-based
payment
reserve
£m
18
Translation
reserve
£m
5
6
8
(5)
3
(9)
16
(6)
283
397
9
6
42
Capital
reserve
£m
3,280
675
(1)
(120)
(808)
Revenue
reserve
£m
318
111
Own shares
£m
(75)
(70)
Total equity
£m
4,249
792
8
–
19
(70)
(120)
(808)
(13)
4,057
6
(13)
(82)
21
11
3,026
359
Report and accounts 2008 3i Group plc 101
Notes to the financial statements continued
27 Equity (continued)
Year to 31 March 2007
Group
Opening balance
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Issue of ordinary shares
Dividends paid
Share buy-backs
Issue of B shares
Own shares
Closing balance
Year to 31 March 2008
Company
Opening balance
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Issue of ordinary shares
B share issue
Dividends paid
Share buy-backs
Closing balance
Year to 31 March 2007
Company
Opening balance
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Issue of ordinary shares
B share issue
Dividends paid
Share buy-backs
Closing balance
Share
capital
£m
292
Share
premium
£m
376
Capital
redemption
reserve
£m
17
Share-based
payment
reserve
£m
17
Translation
reserve
£m
–
5
9
(8)
2
(5)
16
(5)
289
387
5
5
27
Own shares
£m
(69)
Revenue
reserve
£m
263
134
(79)
Capital
reserve
£m
3,110
936
8
(74)
(700)
18
5
3,280
318
Share
capital
£m
289
Share
premium
£m
387
Capital
redemption
reserve
£m
27
Share-based
payment
reserve
£m
18
16
(6)
397
6
9
42
8
(5)
21
Share
premium
£m
376
Capital
redemption
reserve
£m
17
Share-based
payment
reserve
£m
17
16
(5)
387
5
5
27
9
(8)
18
3
(9)
283
Share
capital
£m
292
2
(5)
289
Capital
reserve
£m
3,013
787
5
(808)
(120)
2,877
Capital
reserve
£m
2,767
1,012
8
(700)
(74)
3,013
(6)
(75)
Revenue
reserve
£m
286
94
(70)
310
Revenue
reserve
£m
277
88
(79)
286
Total equity
£m
4,006
1,075
9
–
18
(79)
(74)
(700)
(6)
4,249
Total
equity
£m
4,020
881
8
–
19
(808)
(70)
(120)
3,930
Total
equity
£m
3,746
1,100
9
–
18
(700)
(79)
(74)
4,020
Capital redemption reserve
The capital redemption reserve is established in respect of the redemption of the Company’s ordinary 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.
102 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
28 Own shares
Opening cost
Additions
Disposals
Closing cost
30 Dividends
2008
£m
75
21
(14)
82
2007
£m
69
20
(14)
75
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Own shares consists of shares in 3i Group plc held by The 3i Group Employee Trust.
The market value of these shares at 31 March 2008 was £90 million (2007: £124 million).
The Trust is funded by an interest-free loan from 3i Group plc.
Proposed dividend
2008
pence
per share
2008
£m
2007
pence
per share
10.3
6.1
16.4
10.9
47
23
70
42
9.7
5.8
15.5
10.3
2007
£m
52
27
79
47
29 Per share information
The earnings and net assets per share attributable to the equity shareholders of the Company
are based on the following data:
31 Operating leases
Leases as lessee
Future minimum payments due under non-cancellable operating lease rentals are as follows:
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit for the year attributable to equity holders
of the Company
Effect of dilutive ordinary shares
*Restated for the deduction of own shares not previously taken into account.
2008
2007
207.9
173.4
220.4*
217.9*
828
(87)
741
1,056
–
1,056
Less than one year
Between one and five years
More than five years
Group
2008
£m
13
38
44
95
Group
2007
£m
9
32
42
83
Company
2008
£m
–
–
–
–
Company
2007
£m
–
–
–
–
The Group leases a number of its offices under operating leases. None of the leases include
contingent rentals.
During the year to 31 March 2008, £14 million (2007: £10 million) was recognised as an
expense in the income statement in respect of operating leases. £1 million (2007: £1 million)
was recognised as income in the income statement in respect of subleases.
Weighted average number
of shares in issue
Ordinary shares
Own shares
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
2008
Number
2007
Number
32 Commitments
408,633,804
(10,458,932)
398,174,872
489,987,864
(10,756,533)
479,231,331
4,663,864
24,408,684
427,247,420
5,396,980
–
484,628,311
Equity and loan investments
2008
2007
Equity and loan investments
1,091
1,077
944
932
4,057
4,249
Equity and loan investments
Ordinary shares in issue
Own shares
Effect of dilutive potential
ordinary shares
Share options
Diluted shares
2008
Number
382,741,094
(10,867,901)
371,873,193
2007
Number
461,106,007
(10,931,404)
450,174,603
4,954,110
376,827,303
5,896,253
456,070,856
Equity and loan investments
Group
2008
due
within
one year
£m
220
Group
2007
due
within
one year
£m
147
Company
2008
due
within
one year
£m
95
Company
2007
due
within
one year
£m
73
Group
2008
due
2-5 years
£m
126
Group
2008
due
over 5 years
£m
10
Group
2007
due
2-5 years
£m
257
Group
2007
due
over 5 years
£m
22
Company
2008
due
2-5 years
£m
78
Company
2008
due
over 5 years
£m
1
Company
2007
due
2-5 years
£m
132
Company
2007
due
over 5 years
£m
19
Total
£m
356
Total
£m
426
Total
£m
174
Total
£m
224
Report and accounts 2008 3i Group plc 103
Notes to the financial statements continued
33 Contingent liabilities
Contingent liabilities relating
to guarantees available to
third parties in respect
of investee companies
Group
2008
£m
Group
2007
£m
Company
2008
£m
Company
2007
£m
15
9
6
5
The Company has guaranteed the payment of principal, premium if any, and interest on all
the interest rate swap agreements of 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 2008, 3i Holdings plc had drawn down £84 million (2007: £73 million) under
the first facility and £200 million (2007: £nil) under the second facility.
The Company has provided a guarantee to the Trustees of the 3i Group Pension Plan in
respect of liabilities of 3i plc to the Plan. 3i plc is the sponsor of the 3i Group Pension Plan.
At 31 March 2008, there was no material litigation outstanding against the Company or any
of its subsidiary undertakings.
34 Related parties
The Group has various related parties stemming from relationships with limited partnerships
managed by the Group, its investment portfolio, its advisory arrangements and its key
management personnel. In addition the Company has related parties in respect of its
subsidiaries.
Limited partnerships
The Group manages a number of third-party funds which invest through 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
Fees receivable from external funds
Balance sheet
Carried interest receivable
Group
2008
£m
60
60
Group
2008
£m
75
Group
2007
£m
81
37
Group
2007
£m
83
Company
2008
£m
60
–
Company
2008
£m
75
Company
2007
£m
81
–
Company
2007
£m
83
Investments
The Group makes minority investments in the equity of unquoted and quoted investments.
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 profit over value on the
disposal of investments
Unrealised profits on the revaluation
of investments
Portfolio income
Balance sheet
Quoted equity investments
Unquoted equity investments
Loans and receivables
Group
2008
£m
369
196
204
Group
2008
£m
661
1,990
1,679
Group
2007
£m
715
316
195
Group
2007
£m
411
1,392
803
Company
2008
£m
Company
2007
£m
180
59
65
Company
2008
£m
654
738
323
346
143
144
Company
2007
£m
405
674
292
34 Related parties (continued)
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 has been no single transaction in the year with a material effect on the
Group’s financial statements and all such transactions are fully included in the above
disclosure.
Advisory arrangements
The Group acts as an adviser to 3i Infrastructure Limited and 3i Quoted Private Equity
Limited, companies listed on the London Stock Exchange. The following amounts have been
included in respect of these advisory relationships:
Income statement
Unrealised (losses)/profits on the
revaluation of investments
Fees receivable from external funds
Dividends
Balance sheet
Quoted equity investments
Group
2008
£m
(11)
12
6
Group
2008
£m
503
Group
2007
£m
Company
2008
£m
Company
2007
£m
9
–
–
(11)
12
6
9
–
–
Group
2007
£m
334
Company
2008
£m
503
Company
2007
£m
334
Key management personnel
The Group’s key management personnel comprises the members of Management
Committee and the Board’s non-executive Directors.
Income statement
Salaries, fees, supplements and benefits in kind
Bonuses and deferred share bonuses
Increase in accrued pension
Carried interest payable
Share-based payments
Balance sheet
Bonuses and deferred share bonuses
Carried interest payable within one year
Carried interest payable after one year
Group
2008
£m
5
12
–
19
4
Group
2008
£m
12
11
11
Group
2007
£m
5
8
–
15
2
Group
2007
£m
8
6
12
Carried interest paid in the year to key management personnel was £18 million (2007:
£6 million).
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 and Wales, as investment manager of the Group. 3i Investments plc
received a fee of £39 million (2007: £39 million) for this service.
The Company has appointed 3i plc, a wholly owned subsidiary of the Company incorporated
in England and Wales, to provide the Company with a range of administrative and secretarial
services. 3i plc received a fee of £223 million (2007: £194 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, amounting in 2008 to £1 million (2007: £1 million).
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 £1 million
(2007: £10 million).
104 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
35 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
3i Deutschland Gesellschaft für
Industriebeteiligungen mbH
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
USA
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
15,000 shares of common stock
(no par value)
Principal activity
Holding company
Holding company
Services
Investment manager
Investment adviser
Investment adviser
Investment adviser
Pension fund trustee
Investment manager
Germany
125,564,594
Investment manager
3i Gestion SA
France
1,762,500 shares of 110
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 Cezanne
Paris,75008
France
The list above comprises the principal subsidiary undertakings as at 31 March 2008 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 2008, 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.
Advantage has been taken of the exemption conferred by regulation 7 of The Partnerships and Unlimited Companies (Accounts) Regulations 1993 from the requirements to deliver to the
Register of Companies and publish the accounts of those limited partnerships included in the consolidated accounts of the Group.
Report and accounts 2008 3i Group plc 105
Portfolio valuation – an explanation
Our policy is to value 3i’s investment portfolio at fair value and achieve this by valuing
individual investments on an appropriate basis using a consistent methodology across the
portfolio. The following guide explains the valuation methods used.
What is fair value?
Fair value is the value of an asset or liability in an arm’s-length transaction between two
willing and knowledgeable parties. This generally provides the best estimate of what we
would receive if we sold the investment at the date of valuation. The Group’s financial
statements are prepared in accordance with International Financial Reporting Standards
(“IFRS”), many of which are based on the concept of fair value.
Does 3i follow industry guidelines?
Yes. The Group complies with all material aspects of the International Private Equity and
Venture Capital (“IPEVC”) valuation guidelines. The IPEVC valuation guidelines specify the
valuation methodology which is most appropriate to individual investments at a particular
point in time.
Is an investment valued on the same basis throughout the period 3i is invested?
3i carries out a detailed valuation of its investment portfolio twice yearly. At each valuation point
the investment is valued on the most appropriate basis. For example, if a portfolio company lists
its shares on a stock exchange it would be valued on a quoted basis at the next valuation.
How are quoted investments valued?
Quoted investments are valued at closing bid price at the date of valuation. No discounts
are applied for illiquidity of the stock or dealing restrictions, such as lock-up periods, provided
investments are traded on an active stock market.
How are unquoted investments valued?
In line with the IPEVC valuation guidelines a number of different valuation methods are used
for unquoted investments:
– Cost less provisions;
– Earnings;
– Net assets;
– Price of recent investment; or
– Imminent sale or IPO.
What proportion of the portfolio is valued on each valuation basis?
The portfolio for the year ended 31 March 2008 is valued on the following basis:
Cost less provisions
Earnings
Quoted equity investments at bid-price
Price of recent investment
Imminent sale or IPO
Net assets
Other
33%
28%
15%
5%
3%
1%
15%
Note: Cost includes unquoted equity investments and loans and receivables.
Under what circumstances would an investment be valued on a cost basis?
For investments that are less than 12 months old, the price that 3i paid, ie cost,
is considered the most appropriate valuation method. However the performance of
the investment is also reviewed to see if any impairment should be made if the company
is underperforming. When a full set of accounts (covering a period of at least six months
following the investment) are received then those figures are used to prepare the valuation
on an alternative basis to cost.
What does valuing an investment on an earnings basis actually mean?
The “earnings” basis is a very common basis of valuing unquoted companies when they
are being bought or sold. Essentially a multiple is applied to the earnings of the company,
to calculate an enterprise value. This enterprise value is the total value of the investment,
including debt, any preferred financial instruments and equity. Before calculating the value
of 3i’s shareholding in the company, the debt and any preferred instruments need to be
deducted from the enterprise value. The total value of 3i’s investment is then the value
of its equity plus any debt or preferred financial instruments that are due to 3i.
How do we calculate 3i’s share of the enterprise value?
We allocate the enterprise value to financial instruments which rank above 3i, such as senior
loans. We then generally apply a marketability discount of 10%–30% in accordance with the
IPEVC valuation guidelines. We can then allocate the remaining balance between equity
holders dependent on individual shareholding.
What level of marketability discount is applied?
The marketability discount of 10%–30% is based on the Group’s influence over the
exit prospects and timing for the company. A greater influence gained through a greater
equity holding implies a smaller discount. In a smaller number of cases a greater discount may
be applied if there are particular factors affecting the ability to sell.
What happens if the enterprise value is less than the loan amount?
This implies that there is a shortfall in the value of the loan. A decision based on
the performance of the investment is then taken as to whether to recognise this shortfall.
How do we value loans?
We value loans using the “amortised cost” method, which is in accordance with IFRS.
The amortised cost represents the amount at which the loan is measured at initial
recognition, less principal repayments taking into account any premium or discount on
the original loan amount. Effectively, this is cost less any provisions required. Interest
income is recognised using the effective interest rate based on all the loan’s cash flows.
How are earnings defined?
The objective is to use maintainable earnings of the company in which 3i is invested.
These are the “normal” earnings of the company, and are calculated by removing any ad hoc
amounts included in the current year figures, such as profits on disposal of fixed assets or
one-off expenses that are not expected to occur on a regular basis. A common measure of
earnings used for this calculation is earnings before interest and tax “EBIT”. Other measures
used are earnings before interest, tax, depreciation and amortisation ”EBITDA”, or profit after
tax. These figures are usually taken from the latest audited accounts, which cover a period of
at least six months since the date of investment. A review of more recent management
accounts is conducted to ensure that the audited accounts remain a valid basis.
Which multiple is appropriate to use?
Multiples need to be consistent with the measure of earnings chosen. Therefore EBIT
multiples must be used with EBIT, EBITDA multiples with EBITDA and Price Earnings
(“PE”) multiples used with profit after tax. The multiple used can be calculated using recent
transaction information, external valuations or quoted sector multiples.
What happens if an investment is reporting a loss?
One of the other valuation methodologies can be used. For example the valuation can be
prepared on a net asset basis.
What happens if the investment is failing?
If a company is failing or we consider that there is a 50% chance or more that it is likely
to fail within the next 12 months, the equity element is valued at nil, and any loan element
is valued at the lower of cost or net recoverable amount.
When is the price of recent investment basis used?
Venture capital investments often have a number of financing rounds during the life of the
investment. The last round of financing can be used as a reference point to calculate fair
value. To increase the value of an investment, the round of financing must have external
parties investing.
What is the “other” basis of valuation?
”Other” includes DCF calculations, which estimate the present value of an investment’s future
cash flows. This methodology is most appropriate where cash flows over the life of an
investment are predictable. This basis is commonly used for infrastructure investments,
which are usually held over a long period of time and generate regular and predictable cash
flows. “Other” could also include investments in funds valued based on 3i’s share of net
assets or investments in specific sectors such as insurance where industry specific
benchmarks are used. Six of the investments detailed on pages 108 and 109, totalling
£451 million and representing 7.5% of the portfolio value, were included in this category.
What happens if an investment is in the process of being sold?
When an investment is in an advanced sales process, we will use the imminent sale basis of
valuation, which uses the expected proceeds from the sale, applying a 10% marketability
discount. We will consider the potential effect of completion conditions before moving an
asset to this basis.
106 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
The calculation shows the sector multiple of 10x being applied to the EBITDA of
Investment A of £10 million to derive the enterprise value. After reducing the enterprise
value by £20 million for higher ranking loans a 25% marketability discount is applied.
This reflects the fact that 3i has reduced influence due to its minority position. The value
attributable to 3i and other shareholders is £60 million. 3i’s loan ranks above equity holders
and therefore this reduces the amount attributable to equity holders to £40 million. We can
now apply the 3i equity holding percentage of 25% to £40 million to achieve the value of
£10 million for 3i’s equity. The total value to 3i is therefore £20 million for the loan and
£10 million for equity, £30 million in total.
Year 3 – Earnings basis
Following year 2 the valuation is updated for the performance of Investment A. Earnings
have increased to £12 million and the sector multiple has increased to 11x and there is
no reason to change the valuation basis, therefore an earnings basis continues to be used.
As other factors have remained the same as for year 2, the valuation of 3i’s equity
investment has increased to £16 million and the loan value remains at £20 million.
Total value: £36 million.
Year 4 – Imminent sale basis
We have been approached by an external buyer to purchase our equity and loan investment
in Investment A for £50 million, and discussions are now in their final stages. This is now
valued on an imminent sale basis. The cash has not been received at the time of valuation
and therefore a 10% discount has been applied. The valuation is now calculated as the sum
of the loan value (£20 million) and of the equity element (£25 million) which together total
£45 million.
Year 5 – Realisation
The investment is sold and is no longer held in the portfolio at the year end. If proceeds are
different to the imminent sale value there would be a realisation profit or loss.
The valuation lifecycle
The following illustration walks through the valuation of an asset from investment
to realisation.
(cid:2) Equity
(cid:2) Loan
Value £m
50
45
40
35
30
25
20
15
10
5
0
Year 1
Cost
basis
Year 2
Earnings
basis
Year 3
Earnings
basis
Year 4
Imminent
sale basis
3i invested £20 million in loans and £5 million in equity for a 25% equity holding in
Investment A in year 1. Investment A is an oil and gas production company, based in Europe.
The following description explains the valuation bases used throughout the ownership of
Investment A.
Year 1 – Cost basis
The investment is less than a year old and there are no indications of impairment, therefore
the valuation remains at cost. Total value £25 million.
Year 2 – Earnings basis
The audited accounts for Investment A are now available and the valuation can be prepared
on an earnings basis, using a sector multiple as the most accurate multiple available for
Investment A.
The audited EBITDA of Investment A are £10 million and the sector EBITDA multiple
for the quoted European oil and gas production sector is 10x. There is also £20 million of
external debt within Investment A that ranks above 3i’s investment and needs to be included
in the following valuation calculation:
Earnings – EBITDA
Multiple – Oil and Gas sector EBITDA multiple
Enterprise value (earnings x multiple)
Less:
Higher ranking loans (external debt)
Net enterprise value
Less:
Marketability discount 25%
Less:
3i Loan
Amount attributable to equity holders
3i equity holding at 25%
Total value for 3i (loan and equity)
£m
10
x10
100
(20)
80
(20)
60
(20)
40
10
30
Report and accounts 2008 3i Group plc 107
Ten largest investments
The table below provides information on our ten largest investments in respect of the Group's holding and excluding any managed or advised external funds. The valuation basis provides
further information on how the Group’s valuation has been derived. Income represents dividends received (inclusive of overseas withholding tax) and gross interest receivable in the year to
31 March 2008. Net assets and earnings figures are taken from the most recently audited accounts of the investee business, and are the net assets of each business and the total earnings
on ordinary activities after tax respectively. It should be noted that, because of the varying rights attached to the classes of shares held by the Group, it could be misleading to attribute a
certain proportion of the earnings and net assets to the proportion of equity capital held by the Group.
Further information on our portfolio investments is provided as case studies within the Business review section, and more generally at 3i.com
Business
line
Infrastructure
Geography
UK
First
invested
in
2007
Valuation
basis
Quoted
Proportion
of equity
shares held
Residual
cost
£m
Valuation
£m
Income in
the year
£m
Net assets
£m
Earnings
£m
Investment
3i Infrastructure Limited1
Quoted investment company, investing in infrastructure
Equity shares
Giochi Preziosi S.r.l
Buyouts
Italy
2005
Imminent
sale
Retailer and wholesaler of toys
Equity shares
3i Quoted Private Equity Limited2
QPE
UK
2007
Quoted
Quoted investment company, investing in quoted companies
Equity shares
Venture Production plc3
Growth
UK
2007
Quoted
Oil and gas production
Equity shares
Loans
Viridis Holding S.p.A. (Global Garden Products)
Buyouts
Italy
2007
Cost
Garden power tools
Equity shares
Loans
DNA Oy4
Telecom operator
Equity shares
Growth
Finland
2007
Cost
Enterprise Group Holdings Limited5
Buyouts
UK
2007
Cost
UK utilities and public sector maintenance outsourcing
Equity shares
Loans
ACR Capital Holdings Pte Limited
Growth
Singapore
2006
Other
Reinsurance in large risk segments
Equity shares
Quintiles Transnational Corporation6
Growth
US
2008
Cost
Clinical research outsourcing solutions
Equity shares
Anglian Water Group Limited
Infrastructure
UK
2006
Other
Provider of drinking water and waste water services
Equity shares
Loans
Notes
46.2%
325
325
363
363
37.8%
44.9%
23.5%
33.7%
13.0%
32.2%
10.2%
7.0%
5.5%
63
63
181
181
34
77
111
4
100
104
97
97
3
108
111
105
105
100
100
–
86
86
151
151
140
140
50
77
127
5
111
116
113
113
3
108
111
110
110
101
101
12
86
98
6
6
–
–
–
–
2
1
3
–
–
–
–
–
–
12
12
–
–
–
–
7
3
10
137
3
281
48
140
6
201
(19)
(28)
(38)
307
8
(228)
(93)
1,493
335
1 3i Infrastructure Limited was incorporated in March 2007 and subsequently listed on the London Stock Exchange. No audited accounts are yet available, consequently no net assets or earnings are disclosed.
2 3i Quoted Private Equity Limited was incorporated in March 2007 and subsequently listed on the London Stock Exchange. No audited accounts are yet available, consequently no net assets or earnings are disclosed.
3 Equity element is valued as listed, and loans are valued using amortised cost.
4 The audited accounts for DNA Oy are for the year ended 31 December 2006 and are proforma accounts. EBIT has been used for the earnings figure.
5 The net liabilities and earnings figures have been extracted from the audited accounts of Enterprise Group Holdings Limited for the seven month period ended 31 December 2007. The acquisition of Accord in September 2007 is included in
these results.
6 The audited accounts of Quintiles Transnational Corporation are for the year ended 31 December 2006.
For further information on 3i’s portfolio valuation
methodology please go to pages 106 and 107
108 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Forty other large investments
In addition to the ten largest investments shown on page 108, detailed below are forty other large investments which are substantially all of the Group's investments valued over
£33 million. This does not include two investments that have been excluded for commercial reasons.
Investment
Boxer TV-Access AB
Inspicio Sarl
Description of business
Digital TV distributor
Global testing and inspection
Business
line
Geography
Valuation
basis
First
invested in
Residual
cost
£m
Valuation
£m
Growth
Sweden
Earnings
Buyouts
UK
Cost
Ambea AB (H-Careholding)
Hyva Investments BV
Sistemas Technicos de Encofrados S.A. (STEN)
Sale and rental of formwork and scaffolding equipment Growth
Spain
Earnings
Telecity Group plc
Services for internet service providers
Buyouts
UK
Quoted
DEUTZ Power Systems GmbH
Provider of decentralised power generation systems
Buyouts
Germany
Cost
Sortifandus S.L. (GES - Global Energy Services) Wind power service provider
Elderly, primary and specialist care
Buyouts
Buyouts
Spain
Earnings
Sweden
Earnings
Branded hydraulics for commercial vehicles
Buyouts Netherlands
Earnings
Newco Sourcing Limited (British Seafood)
Seafood sourcer, processor and importer from Far East
Growth
CDH China Growth Capital Fund II LP
China growth capital fund
Mold Masters Luxembourg Holdings Sarl
Leading plastic processing technology provider
Eltel Networks Oy
Network services
Growth
Growth
Buyouts
UK
China
Canada
Finland
Cost
Other
Cost
Other
Laholm Intressenter AB (DIAB)
Polymer-based sandwich construction laminates
Growth
Sweden
Earnings
Dutch recruitment classified advertising
Buyouts Netherlands
Earnings
Supplier of promotional products
Growth Netherlands
Earnings
Volnay B.V. (VNU Media)
Polyconcept Investments B.V.
Aviapartner Group S.A.
Ultralase Group Limited
Jake Holdings Limited (Mayborn)
Airport ground handling
Laser vision correction surgery
Manufacture and distributor
of baby and household products
Planet Acquisitions Holdings Limited (Chorion)
Owner of intellectual property
Mundra Port & Special Economic Zone (MPSEZ)
Port and Special Economic Zone operator
Nimbus Communications Limited
Media and entertainment services
Navayuga Engineering Company Limited
Engineering and construction
Buyouts
Buyouts
Buyouts
Buyouts
Growth
Growth
Growth
Belgium
Earnings
UK
UK
Cost
Earnings
UK
India
India
India
Other
Quoted
Other
Earnings
NORMA Group holding GmbH
Provider of plastic and metal connecting technology
Buyouts
Germany
Earnings
Gain Capital Holdings Inc
Inspecta Holding Oy
Retail online foreign exchange trading
Supplier of testing and inspection services
Scandferries Holding AG (Scandlines)
Ferry operator in the Baltic Sea
Emperor I Limited (Bestinvest)
Wealth management
Welspun Gujarat Stahl Rohren Limited
Oil and gas line pipe manufacturing
Consulting 1 S.p.A (Targetti Sankey)
Design and manufacturer of lighting fixtures
Dockwise
Specialist in heavy transport shipping
within the marine and oil and gas industry
Hobbs Holdings No. 1 Limited
Retailer of women’s clothing and footwear
Demand Media Inc
Internet/media domain name
registry services
Growth
Buyouts
US
Finland
Buyouts
Germany
Buyouts
Growth
Growth
UK
India
Italy
Cost
Cost
Cost
Cost
Quoted
Cost
Buyouts Netherlands
Quoted
Buyouts
Venture
UK
US
Earnings
Further
advance
Car Interior Design Holding GmbH (CID)
Manufacturer of vehicle interior trim
Growth
Germany
Earnings
3i India Infrastructure Holdings Limited
Fund investing in Indian infrastructure
Infrastructure
Everis Participaciones S.L.
IT consulting business
Goromar XXI, S.L.
Azelis Group
Manufacture of frites, glazes and colours for tiles
Distributor of speciality chemicals,
polymers and related services
Pearl (AP) Group Limited (Agent Provocateur)
Women’s lingerie and associated products
Alö Intressenter AB
Manufacture of front end loaders
TS Marine (Contracting) Limited
Oil services
Growth
Buyouts
Buyouts
Buyouts
Growth
Growth
India
Spain
Spain
Italy
Cost
Cost
Earnings
Cost
UK
Cost
Sweden
Earnings
UK
Cost
For further information on 3i’s portfolio valuation
methodology please go to pages 106 and 107
2005
2007
2006
1998
2007
2006
2005
2004
2007
2005
2007
2007
2001
2007
2005
2005
2008
2006
2006
2006
2005
2006
2005
2008
2007
2007
2007
2007
2007
2007
2004
2006
2004
2007
2007
2002
2007
2007
2002
2008
56
91
78
16
68
35
20
4
72
18
67
74
8
51
27
49
58
58
58
34
39
23
28
48
40
40
47
40
38
1
42
31
21
36
30
19
30
35
32
33
97
91
89
83
80
79
77
75
72
67
66
66
65
61
59
58
58
57
57
53
53
52
52
49
47
47
47
47
45
44
42
41
40
38
35
35
35
35
33
33
Report and accounts 2008 3i Group plc 109
Assets under management
Total assets under management include portfolio assets directly owned by the Group, assets and uninvested commitments in funds managed by the Group, and investment companies
advised by the Group .
3i direct portfolio (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Managed funds (£m)
Buyouts
Growth Capital
Infrastructure
SMI
Venture Capital
Total
Advised investment companies (£m)
3i Infrastructure Limited1
3i Quoted Private Equity Limited1
Total
Quoted investment companies and 3i Group Pension Plan2
Total assets under management
Notes
2008
2,025
2,366
501
142
244
738
6,016
2008
2,594
183
348
–
18
3,143
2008
364
269
633
–
2007
1,281
1,460
469
20
391
741
4,362
2007
2,129
227
–
16
15
2,387
2007
385
–
385
–
2006
1,465
1,192
92
–
564
826
4,139
2006
1,090
401
–
52
30
1,573
2006
–
–
–
–
2005
1,521
1,292
–
–
756
748
4,317
2005
1,292
527
–
59
35
1,913
2005
–
–
–
–
2004
1,487
1,233
–
–
960
682
4,362
2004
1,113
574
–
88
100
1,875
2004
–
–
–
600
9,792
7,134
5,712
6,230
6,837
1 The value of the advised investment companies is based on the most recently disclosed net asset value. For 3i Infrastructure Limited this was as at 30 September 2007. For 3i Quoted Private Equity Limited this was as at 31 March 2008.
2 3i closed its quoted fund management business in 2005. The 3i Group Pension Plan is now managed by a third party.
110 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
3i portfolio
3i direct portfolio by geography (£m)
Continental Europe
UK
India
China
Other Asia*
US
Rest of World
Total
*Includes Japan, Singapore, South Korea and Taiwan.
3i direct 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 2008.
3i direct portfolio value by sector* (£m)
Business services
Consumer
Financial services
General industrial
Healthcare
Media
Oil, gas and power
Technology
Infrastructure
Quoted private equity
Total
*The Group’s sector analysis was updated in 2008. The figures in 2007 have been reclassified for comparison.
3i direct portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Price of recent investment
Net assets
Other
Total
3i direct Buyouts portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Net assets
Other
Total
For further information on 3i’s portfolio valuation
methodology please go to pages 106 and 107
2008
2,573
2,250
334
171
174
497
17
6,016
2008
419
195
428
351
653
443
84
2,573
2008
819
703
415
1,423
572
455
316
670
501
142
6,016
2008
185
889
1,660
2,007
308
46
921
6,016
2008
150
141
781
767
–
186
2,025
2007
1,894
1,792
148
60
165
283
20
4,362
2007
326
257
297
113
491
370
40
1,894
2007
586
494
222
970
501
338
175
587
469
20
4,362
2007
254
570
1,432
1,431
159
67
449
4,362
2007
–
23
658
490
–
110
1,281
2006
1,923
1,736
56
63
48
307
6
4,139
2006
124
344
489
142
394
342
88
1,923
2006
340
259
1,490
1,239
122
121
568
4,139
2006
115
26
719
475
2
128
1,465
2005
1,693
2,258
–
21
68
277
–
4,317
2005
180
292
503
69
344
249
56
1,693
2005
452
235
1,757
933
206
135
599
4,317
2005
164
49
853
372
6
77
1,521
2004
1,516
2,528
–
8
67
243
–
4,362
2004
181
234
459
53
332
224
33
1,516
2004
250
290
1,948
998
156
250
470
4,362
2004
115
87
827
336
70
52
1,487
Report and accounts 2008 3i Group plc 111
2008
12
174
710
1,041
26
16
387
2,366
2007
197
55
543
481
9
17
158
1,460
2006
130
58
425
376
11
25
167
1,192
2005
147
71
448
289
14
48
275
1,292
2004
59
85
513
326
13
62
175
1,233
2008
14
70
19
157
282
7
189
738
578
2008
362
38
–
101
501
2008
142
–
142
2008
9
–
150
4
–
23
58
244
2007
21
130
15
315
146
2
112
741
580
2007
334
135
–
–
469
2007
19
1
20
2007
36
9
216
9
4
48
69
391
2006
33
159
17
292
106
6
213
826
629
2006
–
80
12
–
92
2006
–
–
–
2006
62
16
329
16
5
76
60
564
2005
39
94
25
247
189
1
153
748
561
2005
–
–
–
–
–
2005
–
–
–
2005
102
21
431
25
3
80
94
756
2004
41
91
–
286
126
1
137
682
456
2004
–
–
–
–
–
2004
–
–
–
2004
35
27
608
50
17
117
106
960
3i portfolio continued
3i direct Growth Capital portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Price of recent investment
Net assets
Other
Total
3i direct Venture Capital portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Price of recent investment
Net assets
Other
Total
– of which early stage Venture Capital
3i direct Infrastructure portfolio value by valuation method (£m)
Quoted
Cost
Net assets
Other
Total
3i direct QPE portfolio value by valuation method (£m)
Quoted
Cost
Total
3i direct SMI portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Price of recent investment
Net assets
Other
Total
For further information on 3i’s portfolio valuation
methodology please go to pages 106 and 107
112 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Investment
3i direct investment by business line (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
3i direct investment by geography (£m)
Continental Europe
UK
India
China
Other Asia*
US
Rest of World
Total
*Includes Japan, Singapore, South Korea and Taiwan.
3i direct continental European investment (£m)
Benelux
France
Germany/Austria/Switzerland
Italy
Nordic
Spain
Other European*
Total
*Includes investments in countries where 3i did not have an office at 31 March 2008.
3i direct investment by sector* (£m)
Business services
Consumer
Financial services
General industrial
Healthcare
Media
Oil, gas and power
Technology
Infrastructure
Quoted private equity
Total
*The Group’s sector analysis was updated in 2008. The figures in 2007 have been reclassified for comparison.
2006
451
497
–
–
6
156
1,110
2006
538
405
52
26
13
70
6
1,110
2006
62
88
76
65
126
94
27
538
2005
338
263
–
–
11
143
755
2005
341
334
–
12
17
51
–
755
2005
17
73
92
20
81
41
17
341
2004
282
319
–
–
27
156
784
2004
401
309
–
7
6
61
–
784
2004
52
65
141
14
87
23
19
401
2008
788
990
38
182
6
156
2,160
2008
707
972
95
53
23
303
7
2,160
2008
24
40
155
142
226
93
27
707
2008
456
237
218
353
234
56
187
199
38
182
2,160
2007
498
482
380
14
2
200
1,576
2007
560
650
99
39
121
92
15
1,576
2007
218
71
44
–
87
124
16
560
2007
137
109
152
309
106
380
162
86
14
121
1,576
Report and accounts 2008 3i Group plc 113
Investment continued
3i direct 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
Investment by business line (including managed and advised external funds) (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Investment by geography (including managed and advised external funds) (£m)
Continental Europe
UK
Asia
US
Rest of World
Total
2008
1,617
92
253
130
68
2,160
2008
1,520
991
340
182
6
156
3,195
2008
1,275
1,308
302
303
7
3,195
2007
1,184
38
168
102
84
1,576
2007
781
489
380
14
2
200
1,866
2007
765
731
263
92
15
1,866
2006
755
12
111
162
70
1,110
2006
655
503
–
–
8
156
1,322
2006
652
498
96
70
6
1,322
2005
488
10
26
167
64
755
2005
532
274
–
–
12
144
962
2005
433
440
38
51
–
962
2004
534
17
3
176
54
784
2004
438
349
–
–
31
161
979
2004
526
375
17
61
–
979
114 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Realisations
Realisations proceeds by business line (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Capital
Total
Realisations proceeds by geography (£m)
Continental Europe
UK
India
China
Other Asia*
US
Rest of World
Total
*Includes Japan, Singapore, South Korea and Taiwan.
Realisations proceeds by method (£m)
IPO
Sale of quoted investments
Sale of unquoted equity
Refinancing and loan repayments
Total
2008
858
503
57
18
136
170
1,742
2008
894
783
–
5
20
40
–
1,742
2008
94
105
1,081
462
1,742
2007
1,341
691
5
–
214
187
2,438
2007
1,159
1,169
–
39
15
56
–
2,438
2007
124
116
1,546
652
2,438
2006
877
855
–
–
268
207
2,207
2006
891
1,173
–
23
44
76
–
2,207
2006
229
143
1,271
564
2,207
2005
505
443
–
–
198
156
1,302
2005
365
897
–
–
6
34
–
1,302
2005
41
134
744
383
1,302
2004
205
391
–
–
236
91
923
2004
245
608
–
–
60
10
–
923
2004
7
118
532
266
923
Report and accounts 2008 3i Group plc 115
Private equity and venture capital – a lexicon
Like any industry, the Private Equity industry has its own language.
This Lexicon provides a description of some of the key terms.
Definitions
“Private equity”, as the term suggests,
involves investment of equity capital in private
businesses. More recently it has become as
much associated with an investment style
as it has with its more literal description.
3i’s private equity activities cover:
Buyouts 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,
and institutional buyouts. Here, the equity in the
post-buyout business is usually shared between
the management team and the Private Equity
investor (“PE investor”), with the PE investor
usually holding a majority stake.
The financing for the buyout would generally
comprise around 50% 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. A large part of
the PE investor’s finance is generally provided
in the form of redeemable preference shares or
shareholder loans. This is to reflect the mismatch
between the equity finance provided by the PE
investor and that of the management team, as
well as to provide a significant equity incentive
for management.
Examples of buyouts investments can be found
on pages 14 and 15.
Growth capital (or development capital)
This involves the provision of capital to
accelerate the growth of established businesses
and generally involves the 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. For 3i from 1 April 2008 this
category of investing also includes investments
in later stage technology and healthcare
businesses.
Examples of growth capital investments can be
found on pages 18 and 19.
Infrastructure 3i also invests in infrastructure
assets. These are investments in asset-intensive
businesses which provide essential services such
as transport, utilities and social infrastructure
under long-term contracts. These include a
range of asset maturities, from mature,
typically high-yielding assets to early-stage
development projects.
Quoted Private Equity (“QPE”) This involves
the purchase of influential stakes in smaller
quoted companies which have low liquidity
in their shares, little analyst coverage and
potential to grow significantly. The concept is
that through taking a private equity value
creation approach to these companies and
working with management their prospects
can be significantly improved.
Venture capital These are typically investments
in “early“ and “late” stage technology and
healthcare companies. Here, the investor
(“the VC”) typically takes a minority equity
stake in the business as part of a syndicate of
VCs. “Early-stage” investments typically fund
research or development expenditure and costs
associated with building an organisation for a
company which is not yet generating revenues.
“Late-stage” investments tend to fund the
scaling up of a business, once the model is
proven, for companies which are either yet to
make a profit or in the early stages of
profitability. Both early and late-stage investing
usually involves a number of “funding rounds”.
From 1 April 2008, 3i has stopped investing in
the early-stage segment of the market and the
Venture Capital portfolio has been managed by
a separate Venture Portfolio team. Later-stage
investments will continue to be made through
the Growth Capital business line.
Examples of venture capital investments can
be found on pages 26 and 27.
116 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
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 creation plan This phase
involves “actually making it happen”, creating
value 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.
The ability to assess and strengthen the
management team as the life cycle proceeds is
as important. 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, a
listing on a stock exchange or a sale to another
private equity firm (“a secondary”). 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 ten years. Investments generally consist
of an initial commitment of capital by
investors in the fund which is then drawn
down as the investment manager finds
investment opportunities. Capital is returned to
the investors 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 more
liquid exposure to private equity.
Investment objective
Like any other investor, 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 of the underlying business (ie a sale
to a corporate purchaser), a sale to a financial
purchaser or a flotation on the public markets.
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”.
Investment lifecycle
The lifecycle for an investment can be broken
down into five distinct phases, with each
requiring significant resource and capability on
the part of the VC or PE investor:
Origination The ability to access and create
investment opportunities. This is a critical
component of a PE investor’s business model.
Developing and validating the investment case
In this phase the PE investor draws upon its
knowledge, experience, commercial judgment
and other capabilities to develop and validate
their investment case. This might involve building
a potential board and management team and
working with them to develop the strategy for
value growth and exit; as well as conducting
“due diligence” on all significant assumptions
and inputs to the investment case.
Report and accounts 2008 3i Group plc 117
Returns and IRRs – an explanation
Our aim is to achieve consistent market-beating returns measured by using
“cash-to-cash vintage year IRRs”.
How does 3i’s total return equate to
the IRR measures?
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 or as a percentage of opening
shareholders’ funds.
Gross portfolio return is made up of the income
and value movement (both realised and
unrealised) generated from our portfolio.
Costs include expenses and net 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
re-invested.
What is an IRR measure?
The Internal Rate of Return (“IRR”) is the interim
return earned by 3i through investing in an asset
from the date of initial investment up until the
particular point in time at which it is calculated.
The calculation uses monthly cash flows
generated from the asset to work out the
annualised effective compound rate of return.
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 to calculate the
return. An IRR can apply to a single asset or a
pool of assets (eg all new investments made in
financial year 2008 can be pooled to calculate
an IRR for vintage year 2008).
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
income. 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
2008 covers new investments made from
1 April 2007 to 31 March 2008.
Why does 3i track the performance
of vintage years?
Looking at the performance of a vintage enables
3i to assess the returns 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 an assessment of the return
generated from assets over the length of time
they are held, rather than just looking at the
performance between the beginning and end
of a financial year, which is shown in the annual
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.
What IRR measures does 3i use to
assess the performance of a vintage?
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.
118 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Chart 1: IRR evolution
3i equity – value uplift
3i equity – cost
3i shareholder loan
Volatility, the portfolio effect and
the holding period
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. For example,
the range of volatility expected in any one
vintage year is +/-10% for Buyouts and,
+/-7% for Growth Capital.
Across the cycle, the volatility is expected to
average out at +/-5% for Buyouts and, +/-3%
for Growth Capital.
A 3i vintage year is made up of many assets.
All will have their own individual cash flows,
holding periods and will be revalued at different
times. After three years the maturity of a
vintage tends to 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.
Tracking our progress
To monitor a vintage year 3i uses a combination
of Fund IRRs and money multiples. The Fund IRR
gives a measure of performance and the money
multiple shows 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”.
Case A
Investment
Yield
Value at year end
Sale proceeds
Fund IRR
Cash-to-cash IRR
We have published the Fund IRRs for our
long-established business lines within the
Business review.
30
25
75
35
25
75
25
75
50
25
75
Year 1
Year 2
Year 3
Year 4
(100)
–
–
–
0%
(100%)
–
6.5
130
–
36%
(94%)
–
6.5
135
–
22%
(71%)
–
6.5
–
150
20%
20%
Report and accounts 2008 3i Group plc 119
Carried interest – an explanation
Private equity firms ensure alignment between the interests
of management teams and investors through a variety of
mechanisms. A key financial mechanism is “carried interest”
or “carry” and this is explained below.
What is carried interest?
Carried interest refers to the profits generated
in a successful private equity fund that are
received by the carried interest holders, and
which typically amount to 20% of the net profit
in the fund.
Who is the carried interest holder?
This is often the senior management team of
the fund manager, but varies between private
equity firms.
Where does the term carried interest
come from?
The investor who receives the carried interest is
said to be carried by the other investors since
they are willing to allocate up to 20% of their
profits to the carried interest holder.
How does carried interest ensure
alignment of the parties in a private
equity transaction?
The main parties in a private equity transaction
are the management team of the underlying
company in which the fund is investing, the
investors in the fund and those who manage
the fund.
When is carried interest paid and how
is it calculated?
Carried interest is usually based on the
performance of the fund as a whole, but in some
funds is paid on an investment-by-investment
basis. Usually investors receive their initial capital
back plus a “hurdle” to ensure a minimum level of
return before any carried interest is paid.
Typically, this hurdle is based on the Internal Rate
of Return (“IRR”) of the fund since its inception
– for more information on IRRs see page 118.
An IRR-based hurdle is the most appropriate
mechanism in the private equity industry due
to the focus on cash-to-cash returns.
Once the hurdle has been met, most funds
allocate cash flows above the hurdle
disproportionately for a short period, known as
the “catch up” phase, until the carried interest
holder has received the right proportion of the
overall profits in the fund.
Why are investors in a private equity fund
willing to forego as much as 20% of profit
in carried interest?
Generally investors value the alignment that
carried interest provides.
Management teams of companies backed
with private equity are incentivised by the
potential capital gain on their investment in
the company. Investors in private equity funds
benefit from the growth in value of these
underlying companies.
Carried interest functions in a similar way to a
performance fee. It is directly linked to the
success of the investment fund and has the
benefit to the investors of being measured on
the cash returned to them rather than the value
of the fund.
Managers of the fund holding the carried
interest benefit if the overall performance of
the fund is successful.
In return for paying carried interest, fund
investors demand “active” management of their
capital. Specifically, the fund manager will:
What other return does the fund
manager receive?
The fund will pay a priority profit share (often
called the “management fee”) to cover the
costs of the fund manager. This is typically
1% to 2% of the investors’ commitments to
the fund annually.
Why does 3i have both carried interest
receivable and carried interest payable?
3i’s carried interest receivable is due from the
third-party funds that 3i manages. 3i has raised
a succession of buyout funds, the most recent
being Eurofund V, a a5 billion mid-market fund,
and this year a $1.2 billion infrastructure fund to
invest in the Indian market.
3i’s carried interest payable is due to investment
executives employed by 3i. Assets in a vintage
are grouped together in pools (typically covering
two years of investment), which are specific to
a particular investment team. The executives in
that team purchase the rights to the carried
interest and, if the pool is profitable, they will
receive an allocation of investment profits.
3i’s internal carry schemes are structured in the
same way as external funds, with similar terms
and conditions. Approximately 94% of 3i’s
portfolio assets, measured by value at 31 March
2008, are within carried interest schemes.
Both carried interest receivable and payable
are accrued in line with underlying realised and
unrealised profits in the fund but cash payments
are not made until the cash is returned to
investors, as noted above.
– invest fund investors’ capital in high
quality companies;
– develop and implement a value-creation
strategy for each company in the portfolio;
– participate in the strategic and operational
policy-making through board representation;
– earn an appropriate yield on the investment;
– and provide a profitable exit through a trade
sale, IPO or refinancing.
120 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Worked example
Company A
Company B
Company C
Company D
Company E
£100m
Carried interest
Management fee
Cash returned to investors
£200m
£200m
£18m*
£10m**
£172m
Assume a
£100 million
private equity
fund invests in
five companies
Five companies
in portfolio
perform
differently
Assume £200 million
cash received by
investors by the end
of the fund, ie when
companies are sold
How might the
£200 million
be split?
*Assume carried interest of
20% of £90 million profits
in the fund (£100 million –
£10 million fees)
**Assume average
management fee
of £1 million pa during
the life of the fund
As the level of carried interest receivable is
related to the returns in 3i’s co-investment
funds, while the level of carried interest
payable is related to the returns from 3i’s
own investments, carried interest receivable
and payable are only indirectly related in
3i’s accounts.
However in 3i’s Buyout business line, there is a
correlation between carried interest receivable
and payable because investments in the same
business are held both by the managed fund
and held on 3i’s own balance sheet.
Why does 3i have co-investment
arrangements alongside its carried
interest schemes?
In line with market practice, 3i requires
those investment executives who acquire
carried interest rights also to invest alongside
3i. The terms of these “co-investment”
arrangements are changed from time to time
but typically involve investment executives
personally investing up to 2% of the total 3i
and funds commitment to each new investment.
Gains or losses from the co-investments accrue
to the investment executives and provide
further alignment with 3i and the fund investors.
How does 3i account for carried interest?
3i accounts for carried interest on an accruals
basis. As realisations are made and valuations are
adjusted, 3i reviews the impact on each carry
scheme in place and amends its carried interest
accruals accordingly.
3i’s accounting policy means that movements
in gross portfolio return are fully reflected in
the calculation of carried interest payable and
receivable, ultimately reducing year-on-year
volatility to 3i’s total return.
Report and accounts 2008 3i Group plc 121
3i and Transparency
For over 60 years, 3i’s objective has been to take an open and
straightforward approach to doing business and describing what we
do to those who have an interest.
Our track record
The Walker review
Long before becoming a public company in
1994, 3i produced an annual report which
went beyond what was required from a legal
perspective. We do this because we think it is
good for our business, especially as we have
grown 3i internationally and in markets where
the Private Equity model is less familiar. Once 3i
became listed on the London Stock Exchange in
July 1994, and shortly afterwards became a
FTSE 100 company, its peer group consisted of
other members of the FTSE 100 as well as PE
firms. 3i is regularly ranked in surveys against
these peers. At the UK 2007 Investor Relations
Society Best Practice awards in April 2007,
our 2006 Annual report was one of four short
listed for the Best Annual report: Most effective
communication FTSE 100 award. 3i’s Corporate
responsibility report for 2006 was awarded
top place.
As the industry’s profile increased, as
PE became mainstream as an asset class for
investors and as PE firms have bought larger
businesses and businesses with a higher profile,
the demand for greater transparency and public
disclosure also increased.
In 2007, there was a considerable amount of
press coverage in many countries about the
role of Private Equity and in the UK there was
a formal Treasury Select Committee Review.
3i played an active role in this debate and
the Group’s Chief Executive, Philip Yea, gave
evidence at the committee with the heads
of other leading Private Equity firms. During
this review, 3i’s 2007 Annual report was
commended by the Chairman of the Treasury
Select Committee, John McFall.
3i has also been very active in ensuring that
there is comprehensive and timely information
available online. According to IR WebReport’s
2007 survey of 535 large-cap international
companies, 3i’s investor relations website -
www.3igroup.com - ranks fifth globally and
second in the global Financials sector.
The review by Sir David Walker in 2007,
which produced “Guidelines for Disclosure and
Transparency in Private Equity” in November
2007, was actively supported by 3i. 3i Group’s
Chairman Baroness Hogg was a member of the
Review Group and Philip Yea, 3i’s Chief Executive
and Patrick Dunne, 3i’s Communications Director
were both members of the committee within
the British Private Equity and Venture Capital
Association (“BVCA”) which proposed the review.
How did 3i engage and input to
the Walker process?
3i engaged with the Walker process in a very
active way through the BVCA Big Buy Out
committee, through its own submission to
the Working Group and through the input of
Baroness Hogg and other senior executives
at 3i. 3i also gave its support for the
recommendations when they were published
in November 2007.
What was the Walker review?
In response to the growing debate about the
role of Private Equity in the UK, the BVCA
suggested a review be conducted by
Sir David Walker, the highly-respected City
figure, to examine ways in which levels of
disclosure in companies backed by the UK
Private Equity industry could be improved.
Sir David, Senior Advisor at Morgan Stanley
International (former Chairman of Morgan
Stanley International, former Executive Director
Bank of England, and former Chairman of the
Securities and Investments Board) chaired an
independent industry working group which
was tasked with drawing up a voluntary code,
addressing the levels of disclosure in the industry
and how it should communicate with a wide
range of stakeholders.
The working group recognised the very different
types of investment and issues relating to different
segments of the industry from small start-up
financing to large buyouts. It also took account of
the size of the portfolio companies concerned.
It received support from across the industry.
The working group consulted widely and invited
representations from within the private equity
industry, with interested parties and among
other financial institutions, pension funds and the
investment community as well as more broadly
portfolio companies, trade unions and employer
representatives.
What were Sir David Walker’s
recommendations?
Sir David Walker’s recommendations with
respect to reporting for Private Equity firms and
their relevant portfolio companies were on a
“comply or explain” basis. He also had a number
of recommendations for the industry as a whole.
For Private Equity firms:
The guidelines apply exclusively to UK Private
Equity firms authorised by the FSA, that are
managing or advising funds that either own or
control one or more UK companies.
The guidelines say that such Private Equity firms
should produce an annual review, accessible via
a website, which:
– communicates how the Private Equity
practice fits into the firm and confirm that
arrangements are in place to deal with
conflicts of interest;
– provides some commentary on history,
investment approach and investment holding
periods;
– commits to conform to the guidelines on a
“comply or explain” basis;
– provides details on the leadership of the UK
firm and describes the UK firms meeting the
portfolio criteria below; and
– provides a categorisation of the limited
partners in its funds and follows established
guidelines in reporting to their limited partners.
122 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Portfolio companies:
3i has two portfolio companies which fit
the Walker criteria for enhanced disclosure.
These are Anglian Water Group Limited, an
infrastructure investment, and Enterprise
Group Holdings Limited, a mid-market Buyouts
investment. Both of these companies were
formerly public companies listed on the London
Stock Exchange.
Anglian Water Group’s year end is 31 March
and its Annual report and accounts for the
year to 31 March 2008 are expected to be
published in June 2008 and expected to be
fully Walker compliant. The company’s website –
www.awg.com – already contains a high level
of disclosure.
Enterprise’s year end is 31 December and
its Annual report and accounts for the year
to 31 December 2007 and website
– www.enterprise.plc.uk – are fully Walker
compliant.
This 3i Annual report also contains 15 detailed
case studies comprising the two largest
investments and the two largest realisations
by value together with the next largest
investments in the portfolio for our Buyouts,
Growth Capital and Venture Capital business
lines. Details of forty other large investments
are also included in this report.
For Private Equity backed portfolio companies:
The guidelines apply to portfolio companies
which are:
So how does 3i measure up against the
Walker guidelines?
3i is fully compliant with the Walker guidelines.
– acquired by one or more private equity firms
in a public-to-private transaction, where the
market capitalisation together with the
premium for acquisition of control was in
excess of £300 million; and
– acquired by one or more private equity firms in
a secondary or other non-market transaction,
where the enterprise value at the time of the
transaction was in excess of £500 million.
And, in each case, where more than 50% of
the revenues were generated in the UK and UK
employees totalled in excess of 1,000 full-time
equivalents.
Portfolio companies meeting these criteria
should publish annual reports and accounts on
their websites within six months of the year
end and include:
– the identity of the private equity fund or funds
that own the company, the senior managers
or advisers who have oversight of the fund or
funds and detail on the composition of its board;
– a business review that substantially conforms
to section 417 of the Companies Act 2006;
and
– a financial review to cover risk management
objectives and policies, including those relating
to leverage.
Portfolio companies should also:
– publish a summary mid-year update no later
than three months after mid-year; and
– provide data to the BVCA in support of its
work in aggregating data for the industry as
a whole.
For the industry as a whole:
– increase industry-wide reporting and intelligence
and, in particular, to undertake rigorous
evidence-based analysis of the economic
impact of Private Equity activity; and
– establish a guidelines review and monitoring
capability.
As a Private Equity firm:
– 3i’s annual and half-yearly reports are fully
compliant;
– our 3i.com and 3igroup.com websites provide
substantially more information than is required
by the Walker guidelines;
– we have high levels of employee engagement.
92% of our staff took part in the latest staff
survey and 3i exceeded 19 of the 20 Ipsos
Mori Top Ten norms. Further information
regarding employee engagement is provided in
our Corporate responsibility report on page
44;
– regular surveys of shareholders evidence
strong satisfaction with the level and nature of
communications;
– 3i has a well-developed approach to
communicating with the LP investors in the
funds which it manages or advises with a
regular flow of information, as well as events
and meetings. Investors are also encouraged
to provide feedback;
– 3i’s website 3i.com contains a large number of
endorsements from the management teams
of portfolio companies who work with 3i;
– regular surveys of journalists’ views on the
industry and on the Company undertaken by
Ipsos Mori show high levels of trust in 3i and
satisfaction with press communications;
– 3i has a well-developed compliance function
which ensures that arrangements are in place
to deal with conflicts of interest. As can be
seen from our Risk management report on
page 38, there is a formal Conflicts
Committee which reports to our Operational
Risk Committee; and
– 3i provides extensive information on the
leadership of the UK firm and the Group
as a whole.
Report and accounts 2008 3i Group plc 123
Information for shareholders
Financial calendar
Ex-dividend date
Record date
Annual General Meeting
Final dividend to be paid
Half-year results
Interim dividend expected to be paid
Information on ordinary shares
Shareholder profile Location of investors at 31 March 2008
UK (including retail shareholders)
US
Continental Europe
Other international
Share price
Share price at 31 March 2008
High during the year (21 May 2007)
Low during the year (17 March 2008)
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
Number
of holdings
Individuals
23,190
3,300
103
11
0
0
26,604
18 June 2008
20 June 2008
9 July 2008
18 July 2008
November 2008
January 2009
62.4%
25.0%
10.8%
1.8%
830.0p
1,231.0p
733.5p
%
2.58
2.42
4.33
22.71
53.80
14.16
100.00
Number
of holdings
Corporate
bodies
1,911
1,014
386
255
Balance as at
31 March 2008
9,876,257
9,251,738
16,583,696
86,921,413
71 205,897,426
54,210,564
3,641 382,741,094
4
The table above provides details of the number of shareholdings within each of the bands stated in the register of members at 31 March 2008.
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:
Registrars
For shareholder administration enquiries, including changes
of address, 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 half-yearly reports,
results presentations and financial news.
Electronic communications
If you would prefer to receive shareholder communications
electronically in future, including your annual and half-yearly
reports and notices of meetings, please visit our Registrars’
website at www.shareview.co.uk/clients/3isignup and follow
the instructions there to register.
More general information on electronic communications may
also be found on our website at www.3igroup.com/e-comms
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone +44 (0)870 195 6310
Frequently used Registrars’ forms may
be found on our website at
www.3igroup.com/e-comms
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.
Designed and produced by Radley Yeldar (London) www.ry.com.
Printed by St Ives Westerham Press Ltd, ISO14001, FSC
certified and CarbonNeutral®.
The cover and pages 1 to 68 of this document are printed on ERA
Silk paper. The paper contains 50% de-inked post-consumer waste
and virgin wood fibre from well-managed forests independently
certified according to the rules of the Forest Stewardship Council
(FSC). It is manufactured at a mill that is certified to ISO14001
and EMAS environmental standards. The mill uses pulps that are
elemental chlorine free (ECF) and the inks in printing this report are
all vegetable-based.
Pages 69 to 124 of this document are printed on Take 2 Offset
paper. This paper is made from 100% post consumer waste. It has
been certified according to the rules of the Forest Stewardship
Council (FSC) and it is produced at a mill that is certified to the
ISO14001 environmental management standards.
FSC – Forest Stewardship Council.
This ensures there is an audited chain
of custody from the tree in the well-
managed forest through to the finished
document in the printing factory.
ISO 14001 – A pattern of control for
an environmental management system
against which an organisation can be
credited by a third party.
The CO2 emissions produced from the
production and distribution of our Annual
report and accounts 2007 have been
neutralised through a renewable energy
project in China.
CarbonNeutral® publication
124 3i Group plc Report and accounts 2008
Directors’ report
Directors’ remuneration report
Auditors’ report
Financial statements
Portfolio and additional
financial information
Information for shareholders
Investor relations website – 3igroup.com
www.3igroup.com is 3i Group’s dedicated investor relations website, providing convenient access to online
annual and half-yearly reports and presentations, as well as 3i’s latest deal and financial news (with RSS
feeds and an alert service) and a debt section. Our financial calendar and results day centre (including
webcasts), historic AGM and dividend information are also on the site.
Shareholders will find tools such as share price charting, a Blackberry share price service, calculators,
frequently used Registrars’ forms and a dedicated email address for investor relations enquiries
(ir@3igroup.com) on www.3igroup.com.
Home page:
www.3igroup.com/shareholders/
Share price look-up and calculator:
www.3igroup.com/shareholders/shareinfo/calculator/
Results day centre:
www.3igroup.com/shareholders/presreports/
Online Report and accounts:
www.3igroup.com/shareholders/presreports/ reports/
Report and accounts 2008 3i Group plc 125
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
M60908 May 2008
Shareholder communications
– print or online?
It’s quick and easy online...
It’s more environmentally friendly online...
It’s more cost-effective online.
Why not try online?
View our online report and accounts at:
www.3igroup.com/shareholders
To register for electronic communications
If you would prefer to receive shareholder
communications electronically in future,
including your annual and half-yearly reports
and notices of meetings, please visit our
Registrars’ website at
www.shareview.co.uk/clients/3isignup and
follow the instructions there to register.
For investor relations information,
please visit:
www.3igroup.com
For other information on 3i, please visit:
www.3i.com