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
M65409 May 2009
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3i Group plc
Report and accounts
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2009
3i Group plc Report and accounts 2009
Contents
Directors’ report
Pages 1 to 79, comprise the Directors’ report and pages 80 to 90
comprise the Directors’ remuneration report, both of which are
presented in accordance with English company law and the
liabilities of Directors in connection with these reports shall be
subject to the limitations and restrictions provided by such law.
1. Overview
Our business
Key financial data
Chairman’s statement
At a glance
Our strategy and priorities
Chief Executive’s statement
01-12
02
04
05
06
08
10
2. Business review
Introduction to the Group
Market conditions
Group investment policy
3i’s Investment approach
Investment activity
Development of 3i’s fund management and advisory business
Business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
13-32
14
15
16
16
18
20
20
20
25
30
32
3. Case studies
New investments
Realisations
Infrastructure
4. Financial review
Returns
Portfolio and assets under management
Capital structure, gearing and liquidity
5. Risk
Risk management framework
Risk factors
Review of risks
33-36
34
35
36
37-46
38
43
46
47-52
48
49
52
6. Corporate responsibility
Core values
Corporate responsibility at 3i
Corporate responsibility in our investment activity
Corporate responsibility as a company
7. Governance
Board of Directors and Management Committee
Statutory and corporate governance information
Directors’ remuneration report
53-64
54
54
55
58
65-90
66
68
80
8. Financial statements
Independent auditors’ report to the members of 3i Group plc
Income statement
Statement of recognised income and expense
Reconciliation of movements in equity
Balance sheet
Cash flow statement
Significant accounting policies
Notes to the financial statements
91-120
92
93
94
94
95
96
97
101
9. Portfolio and additional information
Portfolio valuation – an explanation
Ten largest investments
Forty other large investments
Assets under management
3i portfolio
Investment
Realisations
Private equity – a lexicon
Returns and IRRs – an explanation
Carried interest – an explanation
3i and Transparency
Information for shareholders
Investor relations and general enquiries
Investor relations website – 3igroup.com
121-144
122
124
126
128
129
131
133
134
136
138
140
143
143
144
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.
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.
Further information
You will see these symbols used throughout this report.
They point you towards further information either
within the report or on our website. We hope you find
them useful.
Information in this report
Information online
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Overview
Pages 01-12
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
1
An overview of our business and
our performance for the year
to 31 March 2009.
Our business
Key financial data
Chairman’s statement
At a glance
Our strategy and priorities
Chief Executive’s statement
02
04
05
06
08
10
01
3i Group plc Report and accounts 2009
Overview
Our business
We are a mid-market
private equity business.
Our focus is on buyouts,
growth capital and
infrastructure.
We invest across Europe,
Asia and North America.
02
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Market conditions
Conditions for private equity investment and realisations have been
the most challenging for some time. A liquidity crisis, which spread
through the banking system during 2008, undermined confidence in
the capital markets and led to a broader economic slowdown in most
of the world’s major economies, as well as a significant reduction in
mergers and acquisitions activity.
3i has been affected in three ways – through the fall in asset values,
by the lack of liquidity available from the stressed banking sector, and
by the fall in underlying economic demand for goods and services.
Further information on page 15.
Our priorities
Our immediate priorities, having further strengthened our balance
sheet, are to generate increased value from the Group’s portfolio and
prepare 3i to take full advantage of the opportunities that will emerge.
Longer term, our strategy continues to be to invest in high-return
assets; grow our assets, including external funds; extend our
international reach; 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.
Further information on page 8.
03
3i Group plc Report and accounts 2009
Overview
Key financial data
Year to/as at 31 March
Investment activity
Investment
Realisation proceeds
Net divestment/(investment)
Returns
Gross portfolio return
Gross portfolio return on opening portfolio value
Total return
Total return on opening shareholders’ funds
Dividend per ordinary share
Portfolio and assets under management
Own balance sheet
External funds
Total assets under management
Balance sheet
Gearing
Diluted net asset value per ordinary share
Portfolio value by business line
as at 31 March
Buyouts
Growth Capital
Infrastructure
Quoted Private Equity (“QPE”)
Smaller Minority Investments (“SMI”)
Venture Portfolio
Total
04
2009
2008
£968m
£1,308m
£340m
£(2,206)m
(36.7)%
£(2,150)m
(53.0)%
6.3p
£4,050m
£3,969m
£8,019m
103%
£4.96
2009
£1,467m
£1,574m
£371m
£171m
£153m
£314m
£4,050m
£2,160m
£1,742m
£(418)m
£1,041m
23.9%
£792m
18.6%
17.0p
£6,016m
£3,776m
£9,792m
40%
£10.77
2008
£2,025m
£2,366m
£501m
£142m
£244m
£738m
£6,016m
3i Group plc Report and accounts 2009
Chairman’s statement
“We believe that the actions being
taken to reinforce 3i’s financial
strength give your Company the
time to manage its well-diversified
portfolio to maximise value for
shareholders, and position us to
take advantage of well-priced
opportunities in the upturn.”
During the year to 31 March 2009, 3i’s net asset value per share fell
from £10.77 to £4.96, in sharp contrast to the strong returns of the
previous five years. The most rapid economic downturn in 3i’s history,
the dislocation of capital markets and the collapse of mergers and
acquisitions activity all undermined the value of our portfolio. It also
led to a significant increase in the leverage on our balance sheet,
which itself magnified our negative return.
The largest single element of the decline in the value of our
investments is due to the fall in quoted market multiples used to value
most of our unrealised investments. While the prices at which we
have been able to realise investments have been depressed by the
collapse in mergers and acquisitions activity that accompanied the
credit crunch, we still achieved an average 5% uplift to opening value
on the £1.3 billion of realisations during the year.
However, in these highly uncertain economic times, we believed that
we should again review our approach to the valuation of our portfolio.
Two examples of this are the decisions the Board has taken to carry
no assets at cost at 31 March, and to value the non-core SMI and
Venture portfolios at the level of expected proceeds.
The disposal of a number of assets in these portfolios, together with
the decision to bring 3i’s Quoted Private Equity business back on to
our balance sheet, are amongst the actions that have been taken
to improve the Group’s financial position since the appointment of
Michael Queen as Chief Executive on 28 January 2009. The decline
in asset values drove our gearing to 103% at the year end, and the
Baroness Hogg
Chairman
8 May 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Board therefore asked Mr Queen to set a high priority on the
reduction of debt. Today’s announcement of a rights issue is a further
important step on the road to his objective, which is to bring 3i’s net
debt down to about £1 billion over the next 12 to 15 months.
The £732 million underwritten rights issue approved by the Board will
enable 3i to strengthen its balance sheet. It will also provide flexibility
and further capacity for 3i to manage existing assets for value over
time and invest in new opportunities as they arise.
The Company paid an interim dividend of 6.3p per share on 7 January
2009 for the year to 31 March 2009. The Board has decided, in the
light of the Group's financial results for the year and the proposed
rights issue, not to recommend a final dividend for the year ended
31 March 2009. For the year to 31 March 2010 the Board intends to
pay a total dividend at least as high in aggregate as the amount paid in
respect of the year ended 31 March 2009 (£24 million), and remains
committed to the principle of paying an increasing dividend thereafter.
The appointment of Michael Queen followed the decision of the
Board to put in place a Chief Executive who would take 3i through
the challenges of a deep and potentially prolonged recession and
focus on rebuilding the Company’s financial strength. His predecessor,
Philip Yea, did a great deal to lead and develop 3i through the previous
years of growth, for which I would like to express the Board’s thanks.
In view of Michael’s successful stewardship of Growth Capital and
launch of 3i’s Infrastructure funds, the respect with which he is held in
3i and his deep knowledge of the private equity industry, the Board
decided that he was the outstanding candidate to succeed Philip Yea.
Other Board changes during the year include the appointment of Julia
Wilson as Finance Director. Julia, who knows 3i well as she first joined
us as Deputy Finance Director, is currently on maternity leave and
her operational responsibilities are being ably managed by Stephen
Halliwell, Chief Financial Officer of 3i’s Infrastructure business line, and
Ian Nolan, who has been appointed to the Management Committee
as Managing Partner, Investments.
The Board was also strengthened during the year by the appointment
of a new non-executive Director, Richard Meddings, the highly-
respected Finance Director of Standard Chartered Bank, who brings
further valuable expertise to our discussions.
At the end of 2008-09, the Deputy Chairman, Oliver Stocken,
reached nine years on the Board. Robert Swannell has therefore taken
over the role of Oliver as Senior Independent Director and Chairman
of the Audit and Compliance Committee. I would like to take this
opportunity to thank both of them for their wisdom and support
during this challenging year.
I closed my statement in May 2008 by warning 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 could
be managed by the world’s monetary authorities without precipitating
recession or a sharp rise in inflation. It is now painfully clear that they
could not avoid a deep recession; whether governments will manage
to calibrate policy to avoid the subsequent pitfall of inflation remains
to be seen. No economic forecasts can currently be relied on, but we
believe that the actions being taken to reinforce 3i’s financial strength
will give your Company the time to manage its well-diversified
portfolio to maximise value for shareholders, and position us to
take advantage of well-priced investment opportunities when the
upturn comes.
05
3i Group plc Report and accounts 2009
Overview
At a glance
3i provides 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,
on which it earns fees.
as at 31 March (£m)
Business model
Current market
Performance
Opportunity for 3i
06
Business lines
Buyouts
Own balance sheet
External funds
Total
Growth Capital
Infrastructure
2009
2008
1,467 2,025
2,312 2,594
3,779 4,619
Own balance sheet
External funds
Total
2009
2008
1,574 2,366
183
1,731 2,549
157
Own balance sheet
External funds
Total
2009
2008
501
371
712
1,287
1,658 1,213
Market focus: leading mid-market
transactions, with an enterprise value
of typically up to €1bn.
Geographic focus: Europe and Asia.
Funding model: investments made
by a combination of funds managed
by 3i and 3i’s own balance sheet.
Value creation: working with our
portfolio to systematically deliver
step improvements in performance.
Market focus: minority investments of
typically between €25m and €150m
in established, profitable and typically
international businesses.
Geographic focus: Europe, Asia and
North America.
Funding model: investments to date
made from own balance sheet.
Value creation: working with our
portfolio to systematically deliver
step improvements in performance.
Market focus: investing in
infrastructure assets principally in
transportation, utilities and social
infrastructure.
Geographic focus: UK, continental
Europe, India and North America.
Funding model: investments made
by funds managed and advised
by 3i as well as from 3i’s own
balance sheet.
Value creation: working actively
with portfolio companies to
systematically deliver step
improvements in performance.
– Mergers and acquisitions activity
− Constrained debt financing markets
– Fundamentally an attractive market
subdued due to economic uncertainty
and limited availability of credit.
– Corporates focusing on core activities.
– Debt for new transactions
for high-growth companies.
− IPO markets and corporate partnering
opportunities limited.
− Growth plans on hold for many
constrained.
businesses.
– Investment activity levels significantly
− Investment activity levels lower than
lower than previous year.
previous year.
with replacement of existing
infrastructure in developed economies
and building of new infrastructure in
developing economies.
− Typically more resilient than other
asset classes.
– Debt available but reduced availability
and on less favourable terms.
Financial performance (£m)
year to 31 March 2009
519
Investment
494
Realisation proceeds
255
Realised profits
(995)
Unrealised value movement
62
Portfolio income
(678)
Gross portfolio return
Gross portfolio return
(34)%
Fees receivable from external funds 45
Financial performance (£m)
year to 31 March 2009
343
Investment
461
Realisation proceeds
(66)
Realised profits
(1,029)
Unrealised value movement
60
Portfolio income
(1,035)
Gross portfolio return
Gross portfolio return
(44)%
Fees receivable from external funds 1
Financial performance (£m)
year to 31 March 2009
50
Investment
117
Realisation proceeds
(20)
Realised profits
(62)
Unrealised value movement
32
Portfolio income
(50)
Gross portfolio return
Gross portfolio return
(10)%
Fees receivable from external funds 26
– To take investment opportunities
generated by 3i’s network as and
when markets recover.
– Potential for our existing portfolio
to generate greater value as
M&A markets and the general
economy recover.
− To invest in high growth companies
– To build a significantly larger
requiring capital to grow
internationally.
− Recent volatility likely to produce
a preference for equity over debt.
− Potential for additional value creation
through increased acquisition activity
in the portfolio.
asset management and advisory
business which capitalises on inherent
market growth and 3i’s network
and resources.
P20
for more information on Buyouts
P25
for more information on Growth Capital
P30
for more information on Infrastructure
3i Group plc Report and accounts 2009
A focused and diversified business
Porfolio by business line (%)
(Total portfolio value £4,050m) as at 31 March 2009
Portfolio by geography (%)
as at 31 March 2009
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
8
36
4
4
9
UK
Continental Europe
Asia
North America
Rest of World
1
5
42
12
39
40
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Portfolio by sector (%)
as at 31 March 2009
Healthcare
Business Services
Media
Consumer
Financial Services
Technology
Oil, Gas and Power
General Industrial
Infrastructure
QPE
4
13
9
19
6
10
7
19
5
8
Non-core activities
Quoted Private Equity
2008
2009
SMI
Own balance sheet
External funds
Total
171
202
373
142
269
411
Own balance sheet
External funds
Total
2009
2008
153
–
153
244
–
244
Venture Portfolio
2009
Own balance sheet
External funds
Total
314
11
325
2008
738
18
756
Group
Own balance sheet
External funds
Total
2009
2008
4,050 6,016
3,969 3,776
8,019 9,792
The recommended acquisition of the
assets of 3i Quoted Private Equity plc
by 3i Group plc, which completed in
April 2009, resulted in five portfolio
companies in the 3i Quoted Private
Equity plc portfolio being transferred
to the 3i Group plc Growth Capital
business line from that date.
This consists of 3i’s older smaller
minority investments, managed by
a separate team.
The intention is to continue to realise
this portfolio.
This consists of 3i’s portfolio of early
and late-stage technology investments,
made before 31 March 2008.
The intention is to continue to realise
this portfolio.
3i’s objective is to generate returns
through a combination of:
– realised and unrealised growth in the
value of assets held by the Group
– portfolio income and fees from the
funds that it manages or advises.
3i is differentiated through:
– the combination of its business
lines, sectors, geographical
resources and network
– its active partnership style of investing
– its approach to corporate
responsibility.
– Realisations, although more difficult
to achieve in more challenging
M&A and economic markets,
continue to be made.
– Although M&A markets are subdued,
the market for secondary venture
assets has remained open, as
evidenced by the level of realisations.
– Asset price deflation, lack of liquidity
in the banking sector, contraction in
M&A activity and a general
economic slowdown have all
affected 3i’s market.
Financial performance (£m)
year to 31 March 2009
3
Investment
–
Realisation proceeds
–
Realised profits
26
Unrealised value movement
–
Portfolio income
26
Gross portfolio return
Gross portfolio return
18%
Fees receivable from external funds 3
Financial performance (£m)
year to 31 March 2009
–
Investment
27
Realisation proceeds
4
Realised profits
(68)
Unrealised value movement
11
Portfolio income
(53)
Gross portfolio return
Gross portfolio return
(22)%
Fees receivable from external funds –
Financial performance (£m)
year to 31 March 2009
53
Investment
209
Realisation proceeds
(110)
Realised profits
(312)
Unrealised value movement
6
Portfolio income
(416)
Gross portfolio return
Gross portfolio return
(56)%
Fees receivable from external funds –
Financial performance (£m)
year to 31 March 2009
968
Investment
1,308
Realisation proceeds
63
Realised profits
(2,440)
Unrealised value movement
171
Portfolio income
(2,206)
Gross portfolio return
Gross portfolio return
(37)%
Fees receivable from external funds 75
– To release capital from this portfolio
for use elsewhere in the Group.
– To release capital from this portfolio
for use elsewhere in the Group.
– To release capital from this portfolio
for use elsewhere in the Group.
– To invest on a highly selective basis
as economies recover.
– To generate increased value from
the Group’s portfolio.
– To increase the Group’s competitive
advantage.
– To grow its assets under
management.
07
P32
for more information on QPE
P32
for more information on SMI
P32
for more information on the Venture Portfolio
3i Group plc Report and accounts 2009
Overview
Our strategy and priorities
Achieving our ambitions 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
Delivering our return objectives across the cycle depends upon making high-quality
investments and managing our portfolio well.
Priorities
To take a highly cautious approach
to new investment.
As we start the new year
To capitalise on 3i’s strengths and
market access and remain highly
selective in our investment choices.
Grow our assets and those
we manage on behalf of third parties
Combining growth in assets with our approach to making and managing investments
enables us to protect and grow shareholder value.
To support our portfolio through a
difficult period and to maintain our
approach to communicating with
shareholders and the investors in
our funds.
As we start the new year
To use 3i’s market access to ensure that
we take opportunities to invest and raise
funds as they arise.
Extend our international reach,
directly and through investing in funds
To focus on our existing markets and
align our resources to the market.
As we start the new year
To continue with our current
geographical focus.
International expansion provides diversity, 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 provides the platform and resources to protect value
and to grow.
To conserve our capital and reduce
our net debt.
As we start the new year
To further strengthen our balance sheet
so that we can take advantage of
opportunities as they emerge.
Continue to build our strong culture of
operating as one company across business
lines, geographies and sectors
Every aspect of our activity depends upon our people, the strength of their
relationships and the way they work together.
08
In a challenging environment and
through a period of reorganisation,
to ensure that we maintain our high
levels of staff engagement.
To manage a major reduction in staff
whilst preserving our strong culture.
As we start the new year
To build on our high level of staff
engagement and reinforce our
“One 3i” approach.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
3i Group plc Report and accounts 2009
The key Group financial performance measures are:
Total return
Gross portfolio return
Cost efficiency
Gearing
Net assets value movement
Cost efficiency metric is net operating expenses over opening portfolio value.
NAV movement stated before dividends and other distributions to shareholders.
2009
(53.0)%
(36.7)%
3.0%
103%
(5.64)
2008
18.6%
23.9%
5.0%
40%
1.94
Risks
Performance
Any further deterioration of economic
conditions and/or financial instability in
volatile markets.
Gross portfolio return by year (%)
year to 31 March
2005
2006
2007
2008
2009
Any further deterioration in economic
conditions that affects our portfolio
and/or inhibits the appetite of
potential investors.
Growth in assets under management (£m)
as at 31 March
05
06
07
08
09
4,317
4,139
4,362
4,050
1,913
1,573
2,772
6,016
3,776
Any further economic deterioration
and/or political shocks in any of the
countries where 3i has a presence.
The opportunity cost of missing
opportunities to develop in areas
where 3i has potential.
Any further worsening of economic
conditions which impacts our portfolio
value and our balance sheet and
consequently our capacity to develop.
3i’s direct portfolio
Managed and advised by 3i
Portfolio value by geography
as at 31 March
Continental Europe
UK
Asia
North America
Rest of World
Total portfolio value
2009
£m
1,618
1,719
491
209
13
4,050
2009
40%
42%
12%
5%
1%
100%
2008
£m
2,573
2,250
679
497
17
6,016
2008
43%
38%
11%
8%
–
100%
Assets under management by business line
as at 31 March
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
Retention and motivation of key
employees in the current economic
environment.
Employee engagement
The 2009 staff survey showed a high
level of engagement, with a score of
85% (2008: 84%).
High scores from questions which test
employee engagement have a direct
positive impact on employee retention
and productivity.
Corporate responsibility
− We are a member of the Dow Jones
Sustainability Index.
− We are one of Business in the
Community’s top 100 Companies
that Count.
− We reduced our CO2 emissions by
11% in the year.
3,969
2007
£m
1,894
1,792
373
283
20
4,362
2007
43%
41%
9%
7%
–
100%
2009
£m
3,779
1,731
1,658
373
153
325
8,019
2006
£m
1,923
1,736
167
307
6
4,139
2008
£m
4,619
2,549
1,213
411
244
756
9,792
Gross portfolio
16.7
24.4
34.0
23.9
(36.7)
Total
6,230
5,712
7,134
9,792
8,019
2006
47%
42%
4%
7%
–
100%
2007
£m
3,410
1,687
854
20
407
756
7,134
09
3i Group plc Report and accounts 2009
Overview
Chief Executive’s statement
“While the operating environment
remains very challenging I have great
confidence in 3i’s intrinsic strengths.”
10
Michael Queen
Chief Executive
8 May 2009
Having spent over 20 years at 3i, it is a great honour to have been
appointed Chief Executive. 3i is one of the leading global private
equity businesses with great brand strength, established business
franchises, a strong network, and excellent people. My immediate
priority is to ensure 3i performs to its potential through the current
downturn and is well placed to use its strong market position to take
advantage of the opportunities that will be available as the global
economy starts to recover.
Market environment
This has been a very difficult year. The sub-prime mortgage crisis
spread during the year to a broader liquidity crisis affecting all financial
institutions. Significant capital raising by banks during summer 2008
failed to stop the downward momentum, leading to the failure
of Lehman Brothers and government rescues of other financial
institutions in most developed economies.
Multiple interventions and stimulus packages have failed to stop most
western countries experiencing their sharpest downturn in economic
activity since the 1930s. India and China, while continuing to grow,
have done so at much slower rates than in recent years.
This environment has resulted in significant asset price deflation, with
values of financial assets falling particularly sharply. 3i has been affected
in three ways – through the fall in asset values, by the lack of liquidity
available from the stressed banking sector, and by the fall in underlying
economic demand for goods and services.
Activity in the private equity industry has fallen to the lowest level
since 1997 with £87 billion invested in Europe during 2008 – this is
a fall of 59% on the previous year. Fund raising has also slowed down
and this will have a significant impact through the next few years with
2009 expected to be the lowest year for fund raising for a decade.
Performance
Total return of (53.0)% (2008: 18.6%) was mainly the result of
valuation falls as a result of valuing assets using multiples derived from
quoted markets, portfolio performance and realised losses on the sale
of non-core assets and the impact of leverage.
During the year, we have been highly selective in the investments we
have made, investing £968 million and adding 10 new companies
to the portfolio. This level of investment is under half that of the
previous year.
Realisations have also fallen, but at £1.3 billion (compared with
£1.7 billion in 2008), this demonstrates that, even in the toughest
economic conditions, there is considerable liquidity in the 3i portfolio.
The number of companies in the portfolio has continued to fall to
376 from 487 last year, as we continue to increase our investment
focus to a smaller number of larger investments.
Assets on the Group balance sheet fell from £6,016 million last year
to £4,050 million at 31 March 2009. The value of assets that 3i
manages on behalf of third parties increased from £3,776 million to
£3,969 million, resulting in total assets under management at the year
end of £8,019 million (2008: £9,792 million).
3i Group plc Report and accounts 2009
Each of our core business lines was impacted by valuation falls and,
as a result, each produced negative returns in the year. Despite this
overall performance, there were encouraging aspects. We achieved an
overall uplift of 5% on opening values on assets that we sold, despite
selling into declining markets. Income from external funds grew in the
year from £60 million to £75 million as we saw the benefit of a full
year’s fee income from the 3i India Infrastructure Fund. We also saw a
small net positive contribution to returns from earnings in the underlying
portfolio. This reflects the fact that while many companies are seeing
falls in turnover and profits, others are still seeing the opportunity to
grow market share or take advantage of growth in specific subsectors.
Strategy and short-term priorities
Since becoming Chief Executive, my main priorities have been to
ensure 3i is financially robust and operationally agile to both withstand
the downturn and be ready to take advantage of investment
opportunities when the economy recovers.
Our core strategy, as outlined on page 8, remains valid, though
timing and implementation will naturally alter to take account
of economic conditions and reshaped priorities.
We remain committed to maintaining our international network,
investing in Europe, Asia and North America as this remains an
important strength of our business model.
Looking forward, we will concentrate on Buyouts, Growth Capital
and Infrastructure as the three business lines where we have clearly
differentiated products and, as a result, can build a sustainable
competitive advantage.
Our decision to stop investing in new venture capital assets was based
on inconsistent returns and an inability to scale this type of investing.
Similarly, the accelerated sale of our remaining SMI assets reflects the
need to focus on those business lines where we can achieve improved
capital productivity.
We have also announced the decision to acquire the assets and business
of 3i Quoted Private Equity plc and, subsequent to the year end,
following a board recommendation, shareholders of that company
have voted in favour of this proposal. The original idea behind 3i QPE
was sound, ie that 3i could bring private equity skills to bear on listed
companies. Unfortunately, the listed vehicle through which this was
delivered was trading at a significant discount to net assets, resulting in
3i shareholders suffering a double discount to the underlying value of
assets. This activity has now been absorbed within our Growth Capital
business, although it is unlikely much new investment in listed stocks
will take place in the near future.
Since the mid-1990s, 3i has managed external capital alongside
its own balance sheet capital. Currently, 51% of investment assets are
on balance sheet and 49% are managed or advised. Over the next few
years, we intend to manage a higher proportion of capital on behalf
of third parties such that, over time, the proportion held on balance
sheet will fall to between 25% and 33%. I do not envisage this
resulting in a fall in assets on balance sheet, but the majority of future
increases in assets will not require additional shareholder capital.
This will give 3i significant advantages in broadening the potential pool
of capital available for investment. It will also provide shareholders
with less volatile returns as a higher proportion of returns will be in
the form of asset management and performance fees.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
3i has experienced a period of expansion both internationally and by
business line over the past five years. This, inevitably, increases cost.
During the year, we have taken the opportunity to review our
cost base and have identified cost savings of circa 15% through
re-engineering certain processes, outsourcing and consolidating
parts of our office network. Over the next year, we will continue
this process and, in order to do this and meet the changing market
environment, I have made a number of changes to the senior team.
In an investment business, particularly when in a bull market, experience
is often an undervalued asset. I am very fortunate that on the
Management Committee, Jonathan Russell, Guy Zarzavatdjian,
Paul Waller, Ian Nolan and I have all worked together for over 20 years.
A common understanding of what makes a good investment and
experience of previous downturns is key to future prospects.
Ian Nolan was appointed Managing Partner, Investments, in what is a
new role for 3i – Chief Investment Officer. Ian will be responsible for
ensuring consistent quality and rigour in all investment decisions and
that a consistent approach is taken across business lines.
Since the year end, Chris Rowlands has retired. Chris made a huge
contribution to 3i, both in establishing our Growth Capital business
and, as the Head of our Asia business, building our business in Asia.
Everyone at 3i thanks him and wishes him every success in the next
phase of his life.
Denise Collis, who was responsible for Human Resources, has left the
Company since the year end. I would like to thank her for her support
over the past few years. Kevin Dunn has taken over responsibility
for Human Resources in addition to his existing responsibilities.
Robert Stefanowski has joined the Company from GE Capital and
is now responsible for North America and Asia. Bob brings great
experience and rigour to this role.
Following my appointment as Chief Executive, Cressida Hogg has
taken over my previous position as Managing Partner, Infrastructure.
Cressida has been largely responsible for building this business since
it was started four years ago.
As noted in the Chairman’s statement, Julia Wilson was appointed
Finance Director during the year. She is currently on maternity leave
and her operational responsibilities are being covered by a combination
of Ian Nolan and Stephen Halliwell (Chief Financial Officer of 3i’s
Infrastructure business line).
These changes enable 3i to move forward in a challenging environment.
A combination of experience, external challenge and a leaner
organisational structure will enable faster, more consistent decision
making to both deal with current conditions and prepare for the future.
Given the economic challenge and more difficult investment
environment, I would like to thank all 3i staff for the huge
commitment shown during the year. Our most recent staff survey
highlights a high level of engagement.
11
3i Group plc Report and accounts 2009
Overview Chief Executive’s statement
Balance sheet management
Periods such as these are a significant test of any business strategy,
risk management and control environment. I am encouraged that
the investment discipline within our business lines has held up well
and our active portfolio management is helping many businesses
to ensure they will survive and prosper. We could not, however,
escape the impact of significant falls in portfolio values on the overall
level of gearing. As a consequence, gearing has risen to 103%.
Looking forward, it is clear that financial risk needs to be reduced
and borrowing should fall significantly over the next few years.
Our through-the-cycle gearing target of 30% to 40% has been
significantly exceeded as asset values fell sharply in the second half of
the year. Given that market movements are outside of our control,
we will also target an absolute level of net debt. Our current objective
is to reduce net debt from £1.9 billion to about £1.0 billion over the
next 12 to 15 months.
The rights issue announced today, will make a significant impact on
achieving this objective. Adjusting the balance sheet at 31 March
2009 for the impact of this capital, together with the impact of the
3i Quoted Private Equity plc transaction, will result in pro forma
gearing of 42% and net debt of £1.1 billion.
Assets denominated in currencies other than sterling have historically
been hedged using a combination of currency borrowings and short-
term derivative contracts. In recent years, the use of short-term
contracts increased. During the year, the cost of rolling over these
contracts increased to such an extent that the Board decided to rely
solely on currency borrowings as the hedging strategy.
In the short term, 3i is therefore only partially hedged through the
use of matching borrowings and will be exposed to potential foreign
exchange fluctuations. In order to reduce this exposure, the Board will
review the introduction of a more comprehensive hedging strategy
as a priority.
Outlook
Looking forward, we face an uncertain macroeconomic landscape.
We are approaching this uncertainty by adopting a conservative
financing strategy but preparing 3i to take advantage of the upturn.
The steps that have already been taken to boost balance sheet strength
and liquidity through the rights issue and sales of non-core assets
mean 3i is well funded.
Our three core businesses are also well placed to see excellent
investment opportunities once it becomes clear the global economy
is recovering.
Equity for private companies will be in short supply and our Growth
Capital business with its international reach is one of the few
significant investors that can fill this gap.
Many countries are now looking to the private sector to finance
infrastructure investment, which is seen as a means of revitalising
developed economies. We are well placed in Europe, North America
and India to provide this capital.
We can also be confident that as the recovery becomes established,
companies will re-define what are core and non-core activities.
From previous cycles, we can see that this stimulates mergers and
acquisitions activity, providing opportunities for the Buyouts business.
While the operating environment remains very challenging, I have
great confidence in 3i’s intrinsic strengths which will help it weather
the difficult times while remaining alert to seize the opportunities that
undoubtedly lie ahead.
12
Business review
Pages 13-32
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2
A review of our main activities
and principal markets, our key financial
performance measures and our
performance against them.
Introduction to the Group
Market conditions
Group investment policy
3i’s investment approach
Investment activity
Development of 3i’s fund management and advisory business
Business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
14
15
16
16
18
20
20
20
25
30
32
13
3i Group plc Report and accounts 2009
Business review
Introduction to the Group
The key Group financial performance measures are:
Gross portfolio return
2009: (36.7)%
2008: 23.9%
Gearing
2009: 103%
2008: 40%
Total return
2009: (53.0)%
2008: 18.6%
Cost efficiency
2009: 3.0%
2008: 5.0%
Net assets value movement*
2009: £(5.64)
2008: £1.94
*Growth in NAV is stated before dividends and
other distributions to shareholders.
The key non-financial performance measures are:
Employee engagement
2009: 85.0%
2008: 84.0%
Environmental impact*
2009: 8,428 CO2 (tonnes)
2008: 9,309 CO2 (tonnes)
*Tonnes per year equivalent emissions.
The key business line performance measures are:
Gross portfolio return
Portfolio health
Long-term IRRs by vintage
Performance data for each business line can be found on pages 22, 27 and 31.
3i is a mid-market private equity business
focused on buyouts, growth capital and
infrastructure, investing across Europe, Asia
and North America.
We invest from our own balance sheet and also
with funds that we manage or advise on behalf
of others.
Total assets under management at 31 March
2009 were £8.0 billion (2008: £9.8 billion),
including £4.0 billion (2008: £3.8 billion) advised
or managed on behalf of third parties.
The Group’s total return is fundamentally driven by the realised and
unrealised returns we generate from our portfolio, the fees we
generate from advising or managing external funds and the costs
of operating the business.
3i has a diverse portfolio by business line, geography and sector and
this is described further on pages 6 and 7. Detailed descriptions,
performance data and commentaries for each business line, together
with case studies of the most significant investments, can be found
on pages 20 to 36.
Buyout investments are made through managed funds, the latest of
which is Eurofund V, a €5 billion fund including 3i’s co-investment of
€2.8 billion. Growth Capital investments are made directly from 3i’s
balance sheet. Infrastructure investments are made either through
3i Infrastructure plc, in which 3i has a 33.3% shareholding, the
$1.2 billion 3i India Infrastructure Fund, to which the Group has a
$250 million commitment, or directly from the Group’s balance sheet.
During the year, the Group increased its focus on its core activities
and took the decision to absorb its Quoted Private Equity business line
into the Growth Capital business line. 3i also decided to accelerate the
disposal of the non-core SMI and Venture portfolios. At 31 March
2009, the core Buyouts, Growth Capital and Infrastructure portfolios,
which comprised of investments in 177 companies (2008: 213),
represented 84% (2008: 81%) of total portfolio value. The total
number of companies in the portfolio as at 31 March 2009 was 376
(2008: 487).
3i’s strategy and near-term priorities, along with a summary of our
progress, the key risk factors involved and the statistics relating to
our performance with respect to each element of this strategy is
set out on pages 8 and 9.
A key component of 3i’s business model is our approach to corporate
responsibility and to risk management. Detailed reports on these
important topics are provided on pages 53 to 64 and 47 to 52
respectively.
14
P6to7
for further information on our portfolio diversity
P8 to 9
for further information on our strategy and priorities
P20to 36
for further information on our business lines
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
In this environment, the capital markets became almost closed to new
listings. Ernst and Young compiled statistics for 2009 IPOs in Europe,
the US and Asia Pacific record 50 deals globally in Q1 2009 raising a
total of $1.4 billion (2008: 251 and $41.2 billion), an 80% decrease
in activity. The Q1 2009 saw the number of IPOs completed at its
lowest level since Q1 2003 and was dominated by activity in Asia
(72% market share), with EMEA and North America making up 20%
and 8% respectively.
The availability of debt in the leveraged finance market also sharply
contracted. Standard & Poor’s LCD Euro Stats reported new issue
volume of just €1 billion during the first quarter of 2009, a 12 year
record low.
Mergers and acquisitions activity was also affected. Europe targeted
M&A totalled $182 billion in Q1 2009, down 42% from the previous
year and the lowest activity level since Q3 2004.
Pricing of transactions was difficult in a market where there was lower
visibility of earnings and few transactions from which to benchmark.
Fund raising by private equity firms also slowed during the year.
Data from preqin, however, shows that as a result of a strong
first half, the aggregate capital raised by private equity funds at
$554 billion in 2008 only declined by 11% from the 2007 record
level of $624 billion. Buyout funds at $216 billion were responsible
for half of the non-real estate fund raising in 2008 and were
responsible for six of the largest 10 fundraisings in the year, which
collectively accounted for $67 billion.
The Infrastructure fund raising environment, however, remained
attractive, as demonstrated by fundraising for the infrastructure asset
class of $30 billion globally over the 12 months to April 2009,
(preqin data).
Detailed descriptions of the conditions for each of our Buyouts,
Growth Capital and Infrastructure businesses are contained within
the reviews on pages 20 to 32.
3i Group plc Report and accounts 2009
Market conditions
Conditions for private equity investment and
realisations have been the most challenging for
some time. A liquidity crisis, which spread through
the banking system during 2008, undermined
confidence in the capital markets and led to a
broader economic slowdown in most of the
world’s major economies, as well as a significant
reduction in mergers and acquisitions activity.
In addition to having a significant impact on portfolio valuations, these
conditions had an effect on the levels of private equity investment,
realisations and fund raising activity in Europe, Asia and North
America, the regions of most importance to 3i. The market data
referred to below for the final quarter of calendar year 2008
demonstrates how pronounced these effects were.
Levels of investment in almost all categories of private equity
investing were significantly lower in 2008 than the previous year.
Data from unquote” shows that overall European private equity
investment fell by 59% to €87 billion in calendar year 2008 from
2007’s record €198 billion. Investment in the final quarter to
December 2008 at €8 billion was 74% lower than the year before.
European mid-market buyout investment, defined by unquote” as
deals between €160 million and €1.65 billion, at €39 billion was less
than half the amount in 2007. European growth capital investment
was 7% higher than in 2007. However, 67% of this was in the first
half of the year and only $1.3 billion was invested in the final quarter.
According to the Asian Venture Capital Journal, new private equity
investment in “Asia Pacific”, which includes the three main areas in
which 3i is active (India, China and South East Asia) fell 38% in 2008,
despite a rise of 8.2% in China. In India, which represents 3i’s largest
activity in the region overall, investment was down 38%.
The capital markets of most importance to 3i relate to the quoted
markets for equities and the availability of debt finance. Despite major
interventions by governments to protect the banking sector and
to improve liquidity in the banking system, there was a collapse in
confidence in public equity markets in the autumn of 2008. Falls in the
FTSE 250, FTSE Euro MidCap, S&P 400 MidCap and Nikkei 225, over
the year to 31 March 2009, were consistent at 36%, 38%, 36% and
35% and were also accompanied by levels of significant volatility.
P22, 27 & 31
for further information on our business line performance data
P20to 32
for further information on Buyouts, Growth Capital and Infrastructure
15
3i Group plc Report and accounts 2009
Business review
Group investment policy
3i’s investment policy, which as a closed ended investment fund it is
required to publish, is as follows:
– 3i is an investment company which aims to provide its shareholders
with quoted access to private equity returns. Currently, its 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 3i invests 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.
– 3i seeks to diversify risk through significant dispersion of
investments by geography, economic sector, asset class and size
as well as through the maturity profile of its investment portfolio.
In addition, although 3i does not set maximum exposure limits for
asset allocations, no more than 15% by value of 3i’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. 3i’s gearing
depends not only on its level of debt, but also on the impact
of market movements and other factors on the value of its
investments. The Board takes this into account when, as required,
it sets a precise maximum level of gearing. The Board has therefore
set the maximum level of gearing at 150% and has set no minimum
level of gearing. If the gearing ratio should exceed the 150%
maximum limit, the Board will take steps to reduce the gearing ratio
to below that limit as soon as practicable thereafter. 3i is committed
to achieving balance sheet efficiency.
When the Company published its investment policy in its Annual
report and accounts for the year to 31 March 2008, the Board also
stated that it then considered it appropriate to operate with an
optimum gearing ratio within a 30% to 40% range across the cycle.
In light of the current dislocation in the debt markets and the
substantial changes occurring and expected in the pricing and
availability of debt finance, the Board intends to reconsider the
appropriateness of this optimum range for the Group’s gearing ratio
in due course when markets are more settled. Furthermore, given that
market movements are outside the Company’s control, the Board will
also target an absolute level of net debt, in addition to the optimum
gearing ratio referred to above. If a material change to the investment
policy is considered appropriate, the Board would seek the approval of
shareholders for such a change.
3i’s investment approach
Our approach to investing has evolved over many years and is driven
by our belief that our reputation with whom we work is a key factor
in our future success. 3i’s investment track record is fundamental to
our reputation, as are our values which are set out in our corporate
responsibility report on page 53. These, together with the key
Group financial and non-financial performance measures set out
on page 14 and the individual performance objectives of our staff,
drive the behaviour and actions on which our performance and
reputation depend.
We further strengthened our model of combining business line
expertise with geographic and sector knowledge and resources
in the year, with an acceleration in the development of our “Active
partnership” model and the appointment of a Managing Partner,
Investments. This role is to ensure consistency of approach across our
business lines, sectors and geographies, as well as to maximise the use
of best practice and investment strategy.
Other aspects of our investing approach include our Active
partnership programme which is key to achieving the step increases
in portfolio performance which drive returns, our Business Leaders
Network which provides access to high quality business leaders
around the world, our debt advisory team which has been especially
helpful in the environment of the last year and our open and
transparent approach to conducting business. A brief description of
each of these activities is provided below.
Active partnership
Creating value through effective portfolio company management is at
the heart of any private equity firm’s performance, and never more so
than in the current economic climate.
Over the last two years, we have taken a long-standing 3i philosophy
of supportive investing and codified it into a rigorous methodology
for effecting business change. It is an approach that we believe to be
genuinely differentiated in terms of scale, rigour and effectiveness.
Our “Active partnership” approach builds upon 3i’s traditional high
engagement with the boards and management teams of our portfolio
companies. We believe that superior performance is achievable by
focusing on the key functions and value drivers within a portfolio
company and then striving to make these functions “best in class”.
This is delivered in practice by drawing upon the knowledge and
experience we have developed across our portfolio and our ability
to access a wide range of expertise from within and outside of
our portfolio.
The programme operates in each of our Buyouts, Growth Capital
and Infrastructure business lines, geographic regions, and investment
professionals are formally trained to identify potential performance
improvement opportunities.
Success depends upon a targeted needs analysis for each portfolio
company which is then followed up through facilitated knowledge-
sharing and peer group learning between other portfolio companies,
our Business Leaders Network and those in the broader 3i network.
Examples of this have included lean operations, sales force
effectiveness, communications and human resources management.
16
P14
for further information on our performance measures
P54
for further information on our core values
3i Group plc Report and accounts 2009
Business Leaders Network
3i’s Business Leaders Network (BLN) is a network of entrepreneurs,
non-executive and executive directors, CEOs, CFOs and project
consultants with whom 3i maintains active contact. The location
and sector experience of these individuals are broadly aligned to 3i’s
international network and the sectors within which it wishes to invest.
The network is a valuable resource for 3i. Members of the network
provide assistance and know-how which help the business line
teams identify investment opportunities and perform due diligence.
Members of the BLN may also give 3i access to operational and
market expertise. 3i may introduce members of the network to its
portfolio companies, and on occasion appoint them to portfolio
company boards, where 3i believes their expertise and contacts can
add value for the portfolio company and, ultimately, to the value of
3i’s investment.
Our Business Leaders Network team manages the relationships with
members and potential members of the network to ensure that the
composition of the network meets 3i’s business requirements and is
aligned to 3i’s investment strategy. The composition of the network
therefore changes over time. They also provide advice on recruitment
to portfolio company boards, either using the network or working
with external executive search agents with whom the team maintains
relationships.
Debt Advisory team
3i’s in-house banking team was formally established in 2005,
creating a centre of excellence within 3i for best practice and
market knowledge on arranging and managing debt for 3i’s portfolio
companies. The team also provides an additional source of value by
working with the Group’s Treasury team who manage the Group’s
banking relationships.
Investment approach for the year to
31 March 2009
In a market characterised by considerable uncertainty, 3i’s approach
has been to conserve capital, increase the focus on core activities,
achieve efficiency gains and prepare the business to take advantage
of the investment opportunities which we believe will emerge from
the next phase of the cycle. As a consequence, realisations in the year
exceeded new investment by £340 million and the Group invested in
only 10 new portfolio companies.
Openness and transparency
Building on our reputation for openness and transparency is even
more important when markets are more challenging. Hence we have
further increased our disclosure in this report in several key aspects.
Pages 140 to 142 contain more details about our approach to
transparency and disclosure as well as how 3i complies with the
Walker “Guidelines for transparency and disclosure in private equity”.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
17
P140to142
for 3i and Transparency
3i Group plc Report and accounts 2009
Business review
Investment activity
Table 1: Investment activity
– own balance sheet and external funds
year to 31 March
3i own balance sheet
External funds
2009
£m
Investment
(968)
Realisations
1,308
Net divestment/(investment) 340
2008
£m
(2,160)
1,742
(418)
2009
£m
2008
£m
(749) (1,035)
584
360
(451)
(389)
Investment activity in the year made directly from 3i's balance sheet
and also that made on behalf of external funds reflected the market
conditions, the Group's caution with respect to new investment and
the actions taken to realise non-core assets.
The commentary which follows refers to investment and realisations
made from 3i’s own balance sheet. Additional data relating to the
amount of investment and realisations made on behalf of external
funds managed or advised by 3i can be found in table 4 on page 20.
The market backdrop for investment activity in the year to 31 March
2009 was characterised by uncertainty and a severe downturn in
confidence. For both 3i and the funds it manages, visibility of earnings
for potential new investments became less clear as the year
progressed and general mergers and acquisitions activity contracted
sharply. As a consequence, portfolio management was prioritised over
new investment activity, which, as a result, was substantially lower
than in the previous year. However, despite this difficult environment,
the Group generated realisations of £1,308 million (2008:
£1,742 million), including £711 million in the second half of the
year (2008: £698 million).
The highly selective approach taken to new investment resulted in
the Group completing only 10 (2008: 47) investments in new
portfolio companies. Total investment in the year was £968 million
(2008: £2,160 million), of which £300 million was in the second half
of the year (2008: £926 million).
As a result, the Group generated net divestment of £340 million
(2008: net investment £418 million) during the year, with realisations
exceeding investment by £411 million in the second half (2008:
£228 million, net investment).
New investment
During the year, 10 investments in new portfolio companies were
made (2008: 47), totalling £514 million (2008: £1,834 million).
A further £454 million (2008: £326 million) was invested in the
existing portfolio, including capitalised interest of £127 million
(2008: £46 million), bringing total investment for the year to
£968 million (2008: £2,160 million).
The largest new investments in the year were £94 million in Growth
Capital investment Labco, a leading pan-European diagnostics
network and £84 million into the buyout of Memora, a market-
leading funeral services provider with operations in Spain and
Portugal. The largest investment in an existing portfolio company
was £46 million to support the merger between 2008 US Growth
Capital investment Fulcrum with Butterfield Fund Services to create
one of the leading global fund administrators for the hedge fund and
alternative investment management industry.
Investment has been made across a broad range of sectors.
The largest proportion of investment by sector was in business
services, which accounted for 20% of new investment in the year
to 31 March 2009.
The average size of new investment remained firmly in the
mid-market range at £57 million (2008: £37 million).
Investment in Buyouts totalled £519 million (2008: £788 million),
including £64 million of further investment in the debt warehouse
vehicle, £29 million of further investment into existing portfolio
companies and capitalised interest of £117 million (2008:
£39 million).
Table 2: Investment by business line and geography (£m)
year to 31 March
Core business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
QPE
SMI
Venture Portfolio
Total
18
Continental Europe
UK
Asia
North America
Rest of World
Total
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
278
246
–
524
–
–
15
15
539
415
256
–
671
–
–
36
36
707
223
40
28
291
3
–
22
25
316
371
357
2
730
182
6
54
242
972
16
8
21
45
–
–
1
1
46
–
132
36
168
–
–
3
3
171
–
48
–
48
–
–
15
15
63
–
243
–
243
–
–
60
60
303
2
1
1
4
–
–
–
–
4
2
2
–
4
–
–
3
3
7
519
343
50
912
3
–
53
56
968
788
990
38
1,816
182
6
156
344
2,160
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Buyouts and Growth Capital accounted for 73% (2008: 78%) of total
realisations, generating £494 million and £461 million respectively.
The largest realisation from the Buyouts portfolio was the sale in May
2008 of Italian toy manufacturer, Giochi Preziosi, which generated
proceeds of £166 million and a 2.3x money multiple. The largest
Growth Capital realisation, Swedish digital TV operator, Boxer,
generated proceeds of £71 million and a 1.4x money multiple.
Infrastructure realisations totalled £117 million (2008: £57 million),
including the sale of a proportion of the Group’s holding in
3i Infrastructure plc which generated proceeds of £61 million.
Realisations from the Venture Portfolio increased by 23% during the
year to £209 million (2008: £170 million). Having sold 43% of the
opening portfolio value in the year, there are now 123 investments in
the portfolio (2008: 180). The Venture Portfolio realisations also led
to an increase in North American realisations, which increased to
£106 million (2008: £40 million).
The continuing development of 3i’s business in Asia also led to Asian
realisations increasing to £127 million (2008: £25 million) in the year.
3i Group plc Report and accounts 2009
Growth Capital investment of £343 million was 65% lower than last
year (2008: £990 million) and represented 35% of total investment.
Venture Portfolio investment of £53 million has been on a selective
basis, with the objective of strengthening positions ahead of sale.
In geographic terms, continental Europe accounted for over half
of investment in the year at £539 million (2008: £707 million).
A further £316 million (2008: £972 million) was invested in the UK,
£63 million in North America (2008: £303 million) and £46 million
(2008: £171 million) in Asia.
Despite relatively strong macroeconomic performance in Asia,
the Group took a cautious approach to investment in this region.
Total balance sheet investment in Asia was just £46 million (2008:
£171 million). However, during the year, the newly established Asia
Buyouts team completed its first investment (£16 million) in LHI,
a manufacturer of medical cables. We have continued to make
investments through the 3i India Infrastructure Fund, which
completed its third investment during the year with a $161 million
investment in Krishnapatnam Port Company Ltd.
Realisations
Despite challenging mergers and acquisitions markets, the quality
of 3i’s portfolio and its mid-market profile has enabled the Group
to continue to find opportunities to generate realisations. Total
realisations in the year were £1,308 million (2008: £1,742 million),
with 21% (2008: 28%) of the opening portfolio value sold during
the year. These realisations were made on a selective basis.
Realisations during the second half of the year were stronger than in
the first half, with proceeds of £711 million (2008: £698 million),
of which £345 million was generated during the third quarter (2008:
£429 million) and £366 million (2008: £269 million) during the final
three months of the year. Notable realisations during the second half
of the year include ABX, a Belgium-based logistics business, which
generated a 5x money multiple and a 125% IRR for 3i and investors in
Eurofund IV.
Table 3: Realisation proceeds by business line and geography (£m)
year to 31 March
Continental Europe
UK
Asia
North America
Rest of World
Total
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
Core business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
QPE
SMI
Venture Portfolio
Total
404
318
–
722
–
15
58
73
795
471
320
6
797
–
27
70
97
894
90
21
117
228
–
12
40
52
280
387
166
51
604
18
109
52
179
783
–
122
–
122
–
–
5
5
127
–
17
–
17
–
–
8
8
25
–
–
–
–
–
–
106
106
106
–
–
–
–
–
–
40
40
40
–
–
–
–
–
–
–
–
–
–
494
–
461
–
117
– 1,072
–
–
–
27
–
209
–
236
– 1,308
858
503
57
1,418
18
136
170
324
1,742
19
3i Group plc Report and accounts 2009
Business review
Development of 3i’s fund
management and advisory business
As noted in the introduction, 3i invests from its own balance sheet
and also with funds that we manage or advise on behalf of others.
Page 44 contains details about the assets managed or advised by the
Group. This information includes a schedule of the individual funds,
including information about 3i’s commitment to those funds and the
demographics of investors in funds managed or advised by 3i.
Table 28 on page 44 shows that since 2004, the major funds raised
in the last five years have been for our Buyouts and Infrastructure
business lines. The €3 billion Eurofund IV, for European mid-market
buyouts, which had a final closing in June 2004, was 91% invested at
31 March 2009. The €5 billion Eurofund V mid-market buyout fund
which also had the capability to invest up to 10% of the fund outside
of western Europe, closed in November 2006 and is now 53%
invested. There are two infrastructure vehicles, 3i Infrastructure plc,
which was launched in March 2007 and has raised, in aggregate,
£818 million of equity and the 3i India Infrastructure Fund, which
closed in March 2008 at $1.2 billion and is now 41% invested.
3i has been a significant investor in each of these funds, committing
€1.9 billion to Eurofund IV, €2.8 billion to Eurofund V, an aggregate
£350 million to 3i Infrastructure plc and $250 million to the 3i India
Infrastructure Fund. In terms of direction, the Group is moving more
towards a model where the Group’s commitment will be between
25% and 33% of fund size. The Group’s outstanding commitments
to these funds at 31 March 2009 was £1,435 million.
The strategy of managing external funds has enabled the Group to
increase the amount of capital for investment as well as to generate
fees. Fee income from external funds has grown from £31 million in
2004 to £75 million in 2009.
Table 4: Investment and realisations from funds managed
or advised by 3i
year to 31 March
Investment
Realisations
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
Total
2009
£m
411
1
246
91
–
–
749
2008
£m
732
1
302
–
–
–
1,035
2009
£m
174
8
178
–
–
–
360
2008
£m
524
21
19
–
19
1
584
The Group has potential to raise further funds to support the
development of our business. In raising further funds, 3i’s track record
through the downturn will be critical. Our reputation for high standards
of governance and corporate responsibility and for the openness and
quality of our communications with investors in our funds is also
increasingly important.
20
Business lines
Buyouts
The market
The crisis in the banking sector, the macroeconomic slowdown,
falling and highly volatile stock markets, combined with much reduced
levels of mergers and acquisitions activity, produced a challenging
environment for the buyout industry in the year to 31 March 2009.
In these conditions, many private equity firms, including 3i,
prioritised portfolio management activity over investment activity.
The shake out in the banking system has had a significant effect on
the availability of debt for new transactions. We estimate that the
number of active leveraged loan providers is now down by around
two-thirds since 2007. Those remaining in the market are being
highly selective about who they work with and have also tightened
their terms.
Despite this contraction, there remains some appetite to lend to
robust businesses with good forward visibility of earnings where both
local relationships and the track record of the private equity firm with
banks are strong. This was evidenced by the buyout of Spanish funeral
services business, Memora, in November 2008, in which 3i invested
£84 million.
The impact of the above has been significant on mid-market buyout
activity levels, which were down in value by 44% in 2008 compared
to 2007 (source: unquote”/3i, deal sizes €25 million to €1 billion).
The decline was most pronounced in the final quarter of 2008,
which was 73% below final quarter 2007 levels.
Limited Partners, are the main group of external investors in buyout
funds. The decline in exits, especially at the larger end of the market,
has meant that distributions to Limited Partners have reduced.
This, combined with a reduction in public equity market values, has
meant that some are now over-allocated to private equity as an
asset class.
Consequently, 2009 looks like it will be a tough year for raising new
buyout funds. The secondary market for existing fund investments is,
however, active with some significant new funds focused on this area,
as some Limited Partners look to reduce their existing commitments
and exposures.
Those private equity firms that can deliver good performance from
their portfolio across the cycle will be well placed to continue to raise
future funds and to find the banking that they need to complete
suitable transactions, albeit with a larger proportion of equity than
seen in more recent vintages.
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
The private equity model has demonstrated a long-term track
record of delivering returns. This is especially the case from
investments made during the first phase of recovery, where pricing
of companies is lower and the potential for earnings growth higher.
Periods of economic turmoil lead to a rise in corporate restructurings
which can generate buyout opportunities. These can also be
attractive to high-quality management teams who feel constrained
in organisations where capital is rationed.
Our investment criteria is to invest in mid-market companies where
we can create substantial value. We pursue opportunities across
Europe and Asia where we have genuine insight, with our main focus
on five core sectors: Business Services; Consumer; General Industrial;
Healthcare; and TMT (Technology, Media, Telecoms). For each target
company we look for a strong management team to back, leveraging
from the Group’s Business Leaders Network, and the potential to
create a step change in profits.
We therefore anticipate that the second half of 2009 and 2010 may
present some attractive new investment opportunities for those
like 3i with strong origination networks and access to capital and
management talent.
Opportunities for 3i
3i’s Buyouts business has two major opportunities. The first is to
deliver the full potential of our existing portfolio, ensuring that it is not
only well positioned to survive the downturn but also to maximise its
value from an economic recovery. The second is to use our market
access to generate attractive new investment opportunities.
Priorities for 3i
In order to take these opportunities, the main priority for 3i’s Buyouts
business is to use our “Active partnership” approach and emphasis on
operational performance to enable our portfolio companies not just
to navigate the current difficult economic environment but also to
take full advantage of organic and other opportunities. A further
priority is to reinforce our positioning as a leader in mid-market
buyouts and to continue to invest the second half of Eurofund V
in attractive opportunities.
Finally, developing existing and new relationships with Limited Partner
investors is important so that we are well placed for the raising of our
next fund.
Business model
The business model for 3i’s mid-market Buyouts business is consistent
with the Group’s overall vision and strategy. It is focused on leading or
co-leading mid-market buyout transactions primarily in Europe, with
some exposure to Asia, in companies with an enterprise value of
typically up to around €1 billion.
Investments are made through Limited Partnership private equity
fund vehicles (currently Eurofund V), which are managed by 3i
(see Fund management section on page 20) and alongside which
3i co-invests. Returns from individual investments are achieved
through a mix of capital realisations upon exit, returns of capital
and portfolio income. Returns to 3i Group are enhanced through
management fees and carried interest from these managed funds.
The full economic alignment of our team, through carried interest,
enables us to match resources to opportunities on a “best team
for the job” basis based on sector, operational and deal execution
experience.
Investment decisions are made on a partnership basis and draw upon
3i’s wider knowledge, network and resources in order to benchmark
and select the best opportunities.
Chart 1 shows the success of our portfolio in delivering earnings
growth. As at 31 March 2009, for the 59 investments made since
1 January 2001 that have been successfully exited, 56% of the
growth in the value of the companies’ equity was driven by earnings
growth. Enhanced multiples on exit also contributed to this growth
in equity value, the majority of which is due to the strategic
repositioning of these companies with the balance due to market
movements. The debt reduction over the life of these investments
has been driven by our focus on working capital and cash efficiency
to deliver further value.
We believe that 3i’s approach to portfolio management is genuinely
differentiated. The “Active partnership” component of this approach,
which is described on page 16, has been developed to build on
conventional private equity value creation techniques. It systematically
seeks to identify the key levers of management and functional
performance improvement in each portfolio company through
targeted needs analysis and through facilitated knowledge sharing
across the portfolio. Delivery of “Active partnership” is tailored to the
portfolio company and involves in-house functional experts working
alongside each individual deal team. It also draws upon chosen
preferred suppliers, each of whom is an expert in specific levers
(eg working capital management; pricing; and lean operations).
In summary, 3i’s Buyouts business model is about improving and
enhancing the value of mid-market companies to deliver returns to
our shareholders and to the investors in our managed funds. This also
benefits wider stakeholder groups in these companies.
Chart 1: Buyouts sources of value creation
from realised investments (%)
16
28
56
Equity value
at entry
Earnings
growth
Multiple
enhancement
Debt
reduction
Equity value
at exit
The above shows the change in equity value of the 59 successfully exited investments made since January 2001.
21
3i Group plc Report and accounts 2009
Business review
Performance
Business activity
Table 5: Buyouts business activity
investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net (investment)/divestment
2009
494
(519)
(25)
2008
858
(788)
70
After five years in which Buyouts has realised more in aggregate
than it has invested, generating total proceeds of £3,786 million
and investing a total of £2,357 million from 1 April 2003 to
31 March 2008, investment and realisations were broadly
balanced in the year to 31 March 2009, with total investment of
£519 million (2008: £788 million) and realisations of £494 million
(2008: £858 million).
Total investment of £519 million in the year included £309 million
(2008: £604 million) invested in seven (2008: 11) new investments
in the year. Also included is a further investment of £64 million
(2008: £40 million) in the debt warehouse vehicle, with the balance
being in further investments into the portfolio and capitalised interest.
Realisation proceeds of £494 million (2008: £858 million) in the year
included the full realisation of six investments (2008: 19), the largest
of which was Giochi Preziosi, which delivered £166 million of
proceeds in May 2008, with this investment being valued on an uplift
to sale basis at 31 March 2008. The largest realised profit over
opening book value was from the exit of ABX in October 2008
(realisation proceeds of £162 million), which represented a 5.0x
money multiple for 3i and the investors in Eurofund IV over the life
of the investment.
Gross portfolio return
Table 6: Returns from Buyouts (£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
Table 7: Gross portfolio return by year – Buyouts
year to 31 March
2005
2006
2007
2008
2009
2009
2008
255
370
(995)
62
(678)
45
245
116
731
39
%
20
29
54
57
(34)
A combination of significant falls in the multiples used to value the
portfolio, some investments seeing a decline in earnings and the
lower level of realisations, more than offset portfolio income and the
good uplift percentage over opening value achieved on realisations in
the period.
The result was a gross portfolio return of £(678) million (2008:
£731 million), despite realised profits of £255 million (2008:
£370 million). This represented a (34)% gross portfolio return on
opening portfolio value of which (6)% relates to the debt warehouse
vehicle, which was valued at £nil at 31 March 2009 on a mark-to-
market basis. Portfolio income has fallen in the year to £62 million
(2008: £116 million) as a result of increased provisions against
income, which correspond to falls in the value of the portfolio
companies where the valuation of the loan investment has been
valued below cost at 31 March 2009.
Portfolio health
As anticipated, overall portfolio health has declined since 31 March
2008. At 31 March 2009, 67% of the portfolio based on cost was
classified as “healthy” (2008: 90%). This reduction in the health of
the portfolio reflects the harsher environment and is reflected in
lower valuations.
22
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Portfolio demographics
As can be seen from the charts below, the Buyouts portfolio is well
diversified by sector and geography, both by value and by number
of portfolio companies. The total book value of the portfolio as
at 31 March 2009 of £1,467 million compares with a cost of
£1,852 million.
Buyouts – Direct portfolio by value
Total portfolio value £1,467 million
Buyouts – Direct portfolio by number
Total number of companies 55
By geography (%)
as at 31 March
UK
Continental Europe
Asia and Rest of World
2
40
By geography (%)
as at 31 March
UK
Continental Europe
Asia and Rest of World
By sector (%)
as at 31 March
Healthcare
Business Services
Media
Consumer
Financial Services
Technology
Oil, Gas and Power
General industrial
By vintage year (%)
as at 31 March
2009
2008
2007
2006
2005
2004
2003
2002 and before
58
11
31
11
1
2
10
1
2
20
4
4
31
3
16
By sector (%)
as at 31 March
Healthcare
Business Services
Media
Consumer
Financial Services
Technology
Oil, Gas and Power
General industrial
By vintage year (%)
as at 31 March
24
2009
2008
2007
2006
2005
2004
2003
2002 and before
4
42
54
9
24
29
4
5
4
16
9
13
9
4
7
11
22
18
29
16
23
3i Group plc Report and accounts 2009
Business review
Portfolio leverage
Financing situations for the majority of the Buyouts portfolio are
typically based on committed seven to nine year term loans, providing
long-term secured financing. In addition to the acquisition debt in the
underlying portfolio companies, committed working capital facilities
are typically secured.
In the event of a covenant breach on a loan, there is the risk that the
loan requires refinancing earlier if an agreement over the effect of the
breach cannot be reached with the leverage providers. The impact of
a breach can vary significantly – in some cases it can be waived or “cured,”
in others it can be remedied through changes in debt terms (eg a fee
to the banks or a higher margin), and in some cases a wider scale
capital restructuring is required. These negotiations can be complex
and protracted, often involving multiple counter parties. 3i’s in-house
banking advisory team provides assistance and expertise in such
situations. When considering whether to provide any further investment
into these situations as part of the negotiation, 3i needs to carefully
balance the ongoing portfolio company needs with the likelihood of
achieving a positive return on any additional capital it invests.
As at 31 March 2009, we were in negotiations with debt providers
on 16 investments as a result of covenant breaches up to this date.
The value of these 16 investments at 31 March 2009 was
£87 million, compared to a cost of £447 million. These fall into the
range of breach scenarios highlighted – from minor breaches to wider
restructuring. The investments with more serious breaches have
been valued at £nil as at 31 March 2009. Chart 2 below shows the
repayment profile for the acquisition debt in the Buyouts portfolio
at 31 March 2009, weighted by the value of 3i’s investment at
this date.
Chart 2: Contracted repayment profile of acquisition debt
in the Buyouts portfolio
Repayment index weighted by 3i carrying value at 31 March 2009
70
60
50
40
30
20
10
%
1.6
2.0
2.3
3.0
6.3
0
2009
2010
2013
Acquisition debt in breach of covenants at 31 March 2009
Acquisition debt not in breach of covenants at 31 March 2009
2012
2011
65.0
19.8
2014
2015 on
Note: Index weighted by 3i Group carrying value at 31 March 2009. Repayment profile reflects gross acquisition
debt as at 31 March 2009. Excludes working capital lines, leasing and cash on balance sheet.
Levels of leverage vary across the portfolio depending on the specific
nature of business, the terms available in the debt market at the time
of investment and the underlying business performance. Chart 3
shows the range of leverage across the Buyouts portfolio at 31 March
2009, weighted by the 3i carrying value at 31 March 2009. Higher
leverage levels do not necessarily correlate with underperformance.
Portfolio valuations
Unrealised losses from the Buyouts portfolio in the 12 months to
31 March 2009 were £(995) million. This has been driven by falls in
the multiples used to value portfolio companies and specific company
under-performance compared to plan.
24
Chart 3: Ratio of net debt to EBITDA – Buyouts portfolio
weighted by 3i Group carrying value (£m)
400
350
300
250
200
150
100
50
0
105
41
<1x
1-2x
261
199
299
220
342
2-3x
4-5x
Net debt/EBITDA segmentation
3-4x
5-6x
>6x
Note: The above has been calculated in line with 31 March 2009 3i Group valuations.
For unquoted portfolio companies which were over one year old at
31 March 2009, a small number saw a value uplift in the year totalling
£48 million. This, however, was significantly offset by aggregate
value falls of £(847) million on the majority of unquoted portfolio
companies which were over one year old. Of these,15 unquoted
had their valuations reduced to £nil this financial year, contributing
£(476) million of the total unrealised value loss. The largest
movement in the year was a £(137) million unrealised value loss on
Global Garden Products, which was valued at £nil at 31 March 2009.
Of the seven new investments in the year, four were moved on to a
full earnings basis at the 31 March 2009, with the remaining three
valued on a market adjustment basis of valuation. The combined
impact on the unrealised value loss in the year from these seven
investments was £(73) million.
The impact of quoted valuation movements was relatively small at
£(11) million. Within this, the value of the Group’s holding in Telecity
grew by £12 million in the year. The debt warehouse, on which
further details are set out below, recorded an unrealised loss of
£(112) million in the year on a first loss mark-to-market basis.
Portfolio earnings
For 2008 company year ends, aggregate earnings in the portfolio
increased by 6% on 2007 portfolio company year end levels.
We anticipate the earnings outlook for 2009 to be more challenging.
Debt warehouse
A debt management capability was established in October 2007
to capitalise on the opportunity to buy high-quality debt in
non-3i investments at a discount. Investments are made through
a €550 million debt warehouse facility to which 3i has committed
€165 million on a first loss basis and which is separate from
Eurofund V activities.
As at 31 March 2009, the debt warehouse had invested €445 million
of which 3i’s commitment was €133 million (£124 million). The credit
quality of the portfolio is satisfactory and is focused on a diversified
portfolio of large businesses in defensive sectors.
Secondary loan pricing fell dramatically in 2008, as at 31 December
2008, the average bid for European leverage loans was 59, having
fallen 36 points over the year. The warehouse has been valued on a
conservative first loss mark-to-market basis, leading to a book value
for the 3i element of £nil at 31 March 2009 (2008: £32 million).
The Lloyds bank facility, which supports the warehouse, and matures
in November 2010, was in full compliance at 31 March 2009 with all
its covenants, none of which is mark-to-market related.
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Long-term performance
Table 8: Long-term performance – Buyouts
New investments made in the financial
years ended 31 March
Vintage year
2009
2008
2007
2006
2005
2004
2003
2002
Total
investment
£m
318
631
551
495
362
307
275
186
Return
flow
£m
1
19
289
765
952
523
664
441
Value
remaining
£m
290
358
426
234
52
66
29
0
IRR to
31 March
2009
n/a
(30)%
25%
46%
62%
34%
49%
61%
IRR to
31 March
2008
n/a
n/a
35%
57%
62%
37%
50%
61%
Analysis excludes investment in Debt warehouse.
Having achieved significant realisations in previous years, the
performance of the 2002 to 2006 vintages remains strong, with
each above 20% at 31 March 2009 and all having returned more
than the original investment cost.
The sale of ABX in October 2008, delivering a return of 5.0x
our original investment cost, has benefited the 2007 vintage
performance in the year. However, the 2007 vintage performance
overall at 31 March 2009 has been adversely impacted by falls in
the valuations of some of the remaining companies in this vintage.
The 2008 vintage is currently immature. Its performance to date has
been significantly impacted by 31 March 2009 valuations, leading to
a negative IRR of (30)%.
Fund management
The Buyouts business line’s track record with Limited Partner investors
is based on long-term performance and the way it interacts with
the investors in the funds it manages. Details on the profile of the
investors in 3i’s funds are contained on page 45.
The latest Buyouts fund, Eurofund V, a €5 billion fund which was
raised in November 2006, was 53% invested at 31 March 2009 in
23 companies. Eurofund IV, which had its final close in 2004, has
continued to deliver strong performance with four exits in the year
(ABX; Giochi Preziosi; Sampletest; and Monviso). At 31 March 2009,
the fund had returned 1.76x of its gross commitments.
During the year to 31 March 2009, the Group invested £340 million
(2008: £572 million) on behalf of external funds through its Buyouts
business line. Fund fee income for the Buyouts business line has grown
and totalled £45 million in the year to 31 March 2009.
As described above, Limited Partner investors have also been
adversely affected by market conditions. To date, investors in 3i’s
Buyouts funds have continued to meet their commitments.
The slower rate of new investment also means that the raising of
a new fund as a successor to Eurofund V is not now likely to be
before 2010.
Growth Capital
The market
The Growth Capital business is focused on making minority equity
investments in relatively un-leveraged businesses. Although affected
by the challenging economic conditions which prevailed for most of
the financial year to 31 March 2009, this market was not as badly
affected as other parts of the industry. Comprehensive market data
is difficult to access but we would estimate that investment activity
slowed by approximately 30% in 2008 in our target markets of Asia,
Europe and North America.
Pricing in this market has been a challenge and prices are only
now starting to adjust to fully reflect public market movements.
In addition, many owners of companies have felt that this has not
been a good environment in which to embark upon major capital
investment and international expansion projects, two key drivers of
growth capital activity.
However, with debt markets constrained and traditional alternatives,
such as raising money on public markets through an IPO, more difficult
to achieve, the relative attractions of private equity for growth capital
have increased.
3i’s European heritage, established track record in Asia and its long-
established approach to minority investing provides differentiation
both against the small number of other, typically US, global funds
and smaller regional players who cannot offer the same level of
international expertise, knowledge and networks.
These conditions also create the market opportunity described
below to invest further in existing portfolio companies to consolidate
markets through acquisition. Finance for acquisitions represented 44%
of 3i’s Growth Capital investment in the year to 31 March 2009.
As economies begin to stabilise and then recover, we expect that
there will be a substantial increase in demand for growth capital as
companies who have constrained working capital during the downturn
require further equity to fund increased activity and they and others
return to growth agendas. This pick up in demand is currently not
anticipated before the end of 2009.
Opportunities for 3i
The opportunity for 3i’s Growth Capital business is driven by a
number of factors. The first is the fundamental nature of the business
and the opportunity to invest in high growth companies requiring
capital to grow internationally, both organically and through
acquisition. As referred to above, recent volatility both economically
and in capital markets is likely to produce a preference for private
equity capital over debt or raising capital through an IPO.
3i’s differentiation through its track record in this area and its “Active
partnership” style of investing, combined with its market access,
should enable it to take advantage of these opportunities.
P45
for further details on the profile of investors in 3i’s funds
25
3i Group plc Report and accounts 2009
Business review
Priorities for 3i
In this environment, the main priority for 3i’s Growth Capital business
is to continue to maximise the value of our portfolio. As with other
business lines, the use of our “Active partnership” approach and
emphasis on operational performance to enable our portfolio
companies not just to navigate the current difficult economic
environment but also to take full advantage of organic and other
opportunities in their sector will be central to achieving this.
Maintaining our privileged market access and reinforcing our
positioning as a leading mid-market growth capital investor on a
global basis are also important. This is critical if we are to capitalise
on the significant market opportunity that we believe will emerge.
Finally, we will also continue to exit our older and smaller investments
to free up capital for new opportunities.
Business model
The Growth Capital business operates across Europe, Asia and North
America making, typically, minority equity investments of between
€25 million and €150 million in established, profitable and typically
international businesses. The Group’s international presence, sector
knowledge, networks and broader resources create the premium
market access to companies that are generally “not for sale”. Over the
last two years, 53% of the new investments completed have been
proprietary. These resources also provide the ability to benchmark
investment opportunities globally and to work actively with high-
growth companies to maximise value.
As can be seen from the portfolio demographics section on page 28,
the portfolio is well diversified by geography and by sector and has
a low reliance on leverage to provide returns.
The Group’s track record of making such investments for over 60
years has provided it with the experience, approach and techniques
critical to success in minority investing. These are underpinned by
only investing where we can align interests with entrepreneurs and
management teams and the differentiated approach that 3i takes to
adding value to its portfolio companies.
Another important aspect of our business model is the way in which
we drive the growth in the value of our portfolio companies. As can be
seen from chart 4, the major driver of value creation in the Growth
Capital business, for investments realised from the 2003 and more
recent vintages, has been the underlying earnings growth of portfolio
companies. Multiple enhancement on exit in Growth Capital portfolio
companies is driven by three factors: improvement in the strategic
positioning of portfolio companies; the fact that whilst investments
are made on minority valuations, exits tend to occur when a company
is sold or listed; and general market conditions.
As also can be seen from chart 4, only 2% of value creation for this
Growth Capital portfolio can be attributed to debt reduction.
Chart 4: Growth Capital sources of value creation from
realised investments (%)
40
2
58
Equity value
at entry
Earnings
growth
Multiple
enhancement
Debt
reduction
Equity value
at exit
The above shows the change in value of the 26 successfully exited investments made since 1 January 2003.
26
3i Group plc Report and accounts 2009
Performance
Business activity
Table 9: Growth Capital business activity –
investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net divestment/(investment)
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Gross portfolio return
Table 10: Gross portfolio return by year – Growth Capital
year to 31 March
2009
461
(343)
118
2008
503
(990)
(487)
2005
2006
2007
2008
2009
%
23
26
48
21
(44)
The combination of a highly selective approach to new investment
and a good level of realisations has resulted in the Growth Capital
business delivering net divestment of £118 million in the year to
31 March 2009 (2008: net investment £487 million).
Total investment during the year was £343 million (2008:
£990 million) and realisations totalled £461 million (2008:
£503 million).
Investment into new portfolio companies and further investment
to support the growth of existing portfolio companies was broadly
balanced, with £206 million invested in three new portfolio companies
in the year to 31 March 2009 (2008: £938 million, 27).
A key element of 3i’s Growth Capital model is to back companies
growing by acquisition and so a further £99 million has also been
committed to these three companies for acquisitions. An example
being Labco, which has completed acquisitions in five different
countries and is profiled as a case study on page 34.
Whereas the level of deal flow was only 36% lower than the previous
year, the level of new investment was reduced by 78%. This reflected
the Group’s caution in an environment where there was lower visibility
on earnings and where the pricing expectations of management
teams and shareholders were adjusting more slowly to the new
market level.
There continues to be good levels of investment activity within our
portfolio where robust businesses can take advantage of the current
market and make strategic acquisitions. Over 40 acquisitions have
been completed by our investee companies with our support this year.
Realisation proceeds of £461 million from 39 exits were marginally
below the amount realised last year (2008: £503 million, 49 exits).
We have focused on aggressively selling a large number of smaller,
older investments in the year while continuing to opportunistically
sell larger investments such as Little Sheep, Transport Alloin and CID
Novem at good profits. The largest realisation was the sale of Nordic-
based digital television operator, Boxer, which generated proceeds
of £71 million this year and is profiled as a case study on page 35.
Table 11: Returns from Growth Capital (£m)
year to 31 March
Realised (losses)/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
2009
2008
(66)
75
(1,029)
60
(1,035)
1
160
67
302
2
The major contributor to a gross portfolio return of £(1,035) million
(2008: £302 million), which represented a (43.7)% return over
the opening portfolio value (2008: 20.7%), was the impact of an
unrealised value movement of £(1,029) million (2008: £160 million).
A significant element of this unrealised loss has been driven by a fall in
multiples used to value the portfolio. Underlying earnings within the
portfolio remained healthy at 14% up year on year whilst the average
valuation metric has fallen by c.30%, pre a typical marketability
discount of 25%.
Realised losses of £(66) million (2008: £75 million realised profit)
reflect the sale of a number of non-core smaller investments and
more challenging M&A markets reducing company valuations during
the year. However, these investments have been sold at a profit over
cost, generating on average a 1.5x multiple over cost.
The most profitable realisation in the year was the sale of the Group’s
holding in Little Sheep, China’s leading hot pot restaurant chain, which
generated realised profits of £20 million and a 3.1x money multiple in
March 2009.
Portfolio income of £60 million (2008: £67 million) was lower than
the prior year. In 2008, portfolio income benefitted from exceptional
dividends from a small number of investments.
Portfolio health
As at 31 March 2009, 81% (2008: 93%) of the portfolio was
classified as healthy, based on cost. This reduction in the health of
the portfolio reflects the harsher environment and is itself reflected
in lower valuations.
27
P34 & 35
for Labco and Boxer case studies
3i Group plc Report and accounts 2009
Business review
Portfolio demographics
As can be seen from the charts below, the Growth Capital portfolio
is well diversified by sector and geography, both by value and by
number of portfolio companies. The total book value of the portfolio
as at 31 March 2009 of £1,574 million compares with an original
cost of £2,042 million.
Growth Capital – Direct portfolio by value
Total portfolio value £1,574 million
Growth Capital – Direct portfolio by number
Total number of companies 118
1
25
10
24
15
14
13
5
16
11
40
16
10
1
4
122
4
6
47
24
By geography (%)
as at 31 March
UK
Continental Europe
Asia
North America and
Rest of World
By sector (%)
as at 31 March
Healthcare
Business Services
Media
Consumer
Financial Services
Technology
Oil, Gas and Power
General industrial
By vintage year (%)
as at 31 March
2009
2008
2007
2006
2005
2004
2003
2002 and before
4
19
19
58
5
20
13
12
3
18
9
11
24
8
29
3
5
7
11
22
By geography (%)
as at 31 March
UK
Continental Europe
Asia
North America
Rest of World
By sector (%)
as at 31 March
Healthcare
Business Services
Media
Consumer
Financial Services
Technology
Oil, Gas and Power
General industrial
By vintage year (%)
as at 31 March
2009
2008
2007
2006
2005
2004
2003
2002 and before
28
3i Group plc Report and accounts 2009
Portfolio leverage
In line with the business model, leverage is low across the portfolio.
The average entry level of debt on new investments over the last
five years has been 1.5 times EBITDA (Earnings Before Interest,
Depreciation and Amortisation). The current debt across the portfolio
is marginally higher at 2.0 times EBITDA. Debt is often raised
alongside our equity investment to fund acquisition strategies such as
that described in the Labco case study on page 34.
Levels of leverage vary across the portfolio depending upon the
specific nature of business, international profile and the phase of
development. Chart 5 shows the range of leverage (net debt to
EBITDA multiples) across the portfolio as at 31 March 2009.
By number, 80 of the 118 investments in the portfolio have
leverage below 1x EBITDA.
Chart 5: Ratio of net debt to EBITDA – Growth Capital portfolio
weighted by 3i Group carrying value (£m)
1,000
900
800
700
600
500
400
300
200
100
0
907
203
260
119
45
<1x
1-2x
2-3x
3-4x
Net debt/EBITDA segmentation
4-5x
32
5-6x
9
>6x
Note: The above has been calculated in line with 31 March 2009 Group valuations.
The chart below shows the repayment profile of underlying debt,
weighted by the value of 3i’s investment at 31 March 2009, in the
existing portfolio as at 31 March 2009.
Chart 6: Debt repayment profile – Growth Capital portfolio
Repayment index weighted by 3i carrying values as at 31 March 2009
%
100
90
80
70
60
50
40
30
20
10
0
87
3
2009
3
2010
3
2011
4
2012
2013 on
Note: Index weighted by 3i Group carrying value as at 31 March 2009.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Portfolio valuations
With no investments held at cost at 31 March 2009 and all valued
with reference to an external benchmark (typically multiples), the
adverse movement in market valuations was the major factor in the
fall of the portfolio during the year.
The average multiple used to value investments which were valued on
an earnings basis at 31 March 2009 was 5.3x, a 25% reduction from
the 7.1x used at 31 March 2008.
For Growth Capital investments, we also apply a marketability
discount of typically 25%, to reflect our minority position. This has a
large impact at the first valuation date post acquisition and during the
year to 31 March 2009, investments with a cost of £800 million had
the discount applied, reducing valuations by £103 million.
Quoted investments were valued at £78 million (2008: £174 million),
the largest of which was the Group’s shareholding in Venture Production
plc, which was valued at £64 million (excluding a convertible bond
separately valued at £76 million) at 31 March 2009.
The largest privately held investment is the Group’s investment in ACR
Capital Holdings Pte Limited, which is valued on an industry metric
basis, and was valued at £125 million.
Portfolio earnings
For 2008 company year ends, aggregate earnings in the portfolio
were over £1.5 billion and increased by 14% on 2007 company year
end levels. This growth was achieved through a mix of organic and
acquisitive growth with c 25% delivered via acquisitions.
We expect 2009 to be a more challenging year for company earnings.
Where we have forecast earnings that show a decline during 2009,
this lower level of earnings has been used for 31 March 2009
valuation purposes.
Long-term performance
Table 12: Long-term performance – Growth Capital
New investments made in the financial
years ended 31 March
Vintage year
2009
2008
2007
2006
2005
2004
2003
2002
Total
investment
£m
206
986
542
422
182
295
223
498
Return
flow
£m
1
34
139
539
245
477
380
713
Value
remaining
£m
193
745
380
95
55
16
54
11
IRR to
31 March
2009
n/a
(16)%
(2)%
23%
27%
25%
25%
12%
IRR to
31 March
2008
n/a
n/a
17%
43%
31%
26%
25%
12%
The performance of the more mature vintages (2002 to 2005) has
remained stable due to the significant realisations achieved in previous
years. Similarly, 2006 remains above 20%, having already returned
more than the original investment cost. The 2007 vintage has had
two early profitable exits during the year with Little Sheep exited at
3.1x our original cost for a 62% IRR and Electrawinds, a Belgium-
based energy business, exited for 1.6x our original cost for a 47% IRR.
Notwithstanding these early gains, the impact of lower valuations,
driven by reductions in multiples, has reduced the IRR to a marginally
negative return.
The 2008 vintage is immature and has been hardest hit by reduced
valuations, leading to a negative IRR of (16)%.
29
3i Group plc Report and accounts 2009
Business review
Infrastructure
Table 13: Assets under management (£m)
as at 31 March
Introduction
The development of 3i’s Infrastructure business line has continued in
the year to 31 March 2009. This business line now accounts for 9%
(2008: 8%) of the Group’s portfolio value and 21% (2008: 12%) of
assets under management, reflecting the higher proportion of funds
managed or advised than other business lines.
3i Infrastructure plc and the 3i India Infrastructure Fund both
developed further in the year. The 3i India Infrastructure Fund is
41% invested and 3i Infrastructure plc, having raised expansion equity
in July 2008, is well positioned with cash balances of £387 million
at 31 March 2009. Following the successful placings of a proportion
of the Group’s holdings in 3i Infrastructure plc and Osprey LP
(the vehicle which holds the Group’s interest in Anglian Water Group
Limited “AWG”), the value of the Group’s balance sheet investment
in this business line as at 31 March had reduced to £371 million
(2008: £501 million).
The focus on investing in a broad range of international infrastructure
assets, principally in transportation, utilities and social infrastructure
in Europe, India and North America, has been maintained.
The market
Infrastructure assets are typically more resilient than other asset
classes through the economic cycle. However, recent macroeconomic
volatility has had an impact on infrastructure, and in particular
changes in inflation as revenues are typically strongly linked to this.
Financing infrastructure transactions has also become more
challenging, despite the relative attractiveness of the asset class.
Infrastructure’s lower risk profile and longer term contract nature
has also meant that, in a generally tight debt market, infrastructure
lending is still available albeit on less attractive terms.
Nevertheless, the infrastructure market remains fundamentally
attractive. Adjustments in asset pricing to reflect greater market
uncertainty continues, but mature asset sales by distressed vendors
and those de-leveraging balance sheets create interesting deal
opportunities. The combination of demand for replacement
infrastructure in Europe and North America and for new infrastructure
in India provides inherent market growth in the key markets in which
3i operates.
The competitive landscape has been improved due to issues at several
other major investors in this market. Given the market opportunity
and 3i’s growing differentiation, infrastructure remains an attractive
market for 3i.
Own balance sheet
Managed funds
Advised funds
2009
371
599
688
1,658
2008
501
348
364
1,213
The Group uses the latest published net asset value rather than the market price to measure external assets under
management.
Business model
The business model for 3i’s infrastructure business line is to invest in a
broad range of international infrastructure assets with a geographic
focus on the UK, continental Europe and Asia and a sectoral focus on
transportation, utilities and social infrastructure.
Investments are made by 3i Infrastructure plc and the 3i India
Infrastructure Fund as well as from 3i’s own balance sheet.
3i Infrastructure plc
3i holds a 33.3% investment in 3i Infrastructure plc, which was listed
on the London Stock Exchange in March 2007 and is a FTSE250
company. 3i Group plc, through 3i Investments plc, a wholly-owned
subsidiary, acts as an investment adviser to 3i Infrastructure plc 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.
3i Infrastructure plc is Jersey based, with an independent board and
targets a 12% net return through NAV growth, of which 5% is
returned to shareholders through dividends. 3i Infrastructure plc
raised £703 million at IPO in March 2007 and, in July 2008, raised
a further £115 million of equity to fund new investment through
a Placing and Open offer.
The Group reduced its holding in 3i Infrastructure plc from 46.2% to
33.3% during the year. This was achieved through both a Placing and
Open offer in July 2008 – where, in order to provide access to new
investors, 3i deliberately took up only £25 million of its full pro-rata
share in the placing, thus reducing the Group’s holding to 43% –
and in February 2009 by selling 77 million shares for proceeds of
£61 million, reducing its shareholding to 33.3%.
3i Infrastructure plc has its own dedicated investor relations website,
www.3i-infrastructure.com.
3i India Infrastructure Fund
3i manages a $1.2 billion unquoted infrastructure fund, focusing
in India in the ports, airports, roads and power sectors of
Infrastructure. The fund closed in March 2008 with a target
investment horizon of two to four years and had invested 41.1%
of total commitments to 31 March 2009.
3i earns management fees and carry from all Limited Partners in the
Fund with the exception of 3i Infrastructure plc, which also has a
$250 million commitment to the fund.
30
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Investment and realisations
Investment
The Infrastructure business line’s investment is mainly made through
3i Infrastructure plc and the 3i India Infrastructure Fund. Investment
and drawdowns by the Group into those vehicles was £50 million in
the year (2008: £38 million). This included the £25 million further
investment in 3i Infrastructure plc in the Placing and Open Offer and
£21 million drawn down commitments to the 3i India Infrastructure
Fund as part of its investment in the Krishnapatnam Port Company
Ltd and a further £3 million investment in AWG.
Total new investment completed by infrastructure funds managed
and advised by the Group for the year was £246 million. The largest
investment was the 3i India Infrastructure Fund’s $161 million
investment in the Krishnapatnam Port Company Limited, which is
developing a natural deep sea port on the East coast of India.
Realisations
Realisation proceeds for the year to 31 March 2009 totalled
£117 million (2008: £57 million).
In February 2009, 77 million shares in 3i Infrastructure plc were sold
generating proceeds of £61 million. As a result of this sale, 3i Group now
holds 33.3% of the issued share capital of 3i Infrastructure plc.
As part of the strategy to reduce own balance sheet holdings in
infrastructure, other than those held through managed funds and advised
companies, 3i has disposed of its interest in Tramtrack Croydon
Limited, sold part of its stake in AWG and small residual interests in I2
and the Alma Mater Fund. These generated proceeds of £56 million
at a realised profit of £5 million.
In addition, realisation proceeds received by 3i Infrastructure plc
totalled £178 million.
3i Group plc Report and accounts 2009
Other Infrastructure assets
Over the year, 3i Group has continued to reduce its holdings in assets
held directly on its own balance sheet where it does not have an
advisory or management role. It has therefore sold part of its holding
in AWG and several other smaller infrastructure assets for £56 million,
resulting in a total portfolio held directly by 3i (excluding its holdings
in 3i Infrastructure plc and the 3i India Infrastructure Fund) of
£51 million.
Gross portfolio return and fee income
Table 14: Returns from Infrastructure (£m)
year to 31 March
Realised (losses)/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
2009
2008
(20)
(62)
32
(50)
26
6
43
18
67
18
The Infrastructure business line has generated a loss of £50 million
for the year to 31 March 2009 (2008: £67 million profit). Higher
portfolio income of £32 million (2008: £18 million) was more than
offset by unrealised losses on the revaluation of investments of
£62 million (2008: £43 million profit), principally as the valuation of
the quoted holding in 3i Infrastructure plc fell. A profit of £5 million
was achieved through the disposal of a number of assets held directly
by the Group and a loss of £25 million arose from the sale of
3i Infrastructure plc shares.
Higher portfolio income was principally driven by dividends from
3i Infrastructure plc and dividends and loan interest income from
AWG. Fee income continued to grow through advisory and
performance fees from 3i Infrastructure plc and fund management
fees from the 3i India Infrastructure Fund.
Despite outperforming the FTSE AllShare, which fell by 34% during
the year, the 24% fall in share price of 3i Infrastructure plc led to a
reduction in the value of the Group’s holding in 3i Infrastructure plc
of £74 million. This was the major contributor to the unrealised loss.
31
3i Group plc Report and accounts 2009
Business review
Non-core activities
Venture Portfolio
Quoted Private Equity
3i’s Quoted Private Equity business line was established in 2007
to provide capital and value creation techniques to smaller public
companies. Following the launch of 3i Quoted Private Equity plc
(“3i QPEP” ) on the London Stock Exchange at a capitalisation of
£400 million, investments were made through this company.
The Group acted as investment adviser to 3i QPEP and had a
44.9% shareholding.
Since the onset of the dislocation to the credit markets in autumn
2007, 3i QPEP’s share price traded at a significant discount to its net
asset value and a cautious approach was taken to new investment.
In its interim management statement on 13 February 2009, 3i QPEP
reported that it had five portfolio companies and cash and deposits
of £243 million.
On 23 February 2009, the Group announced a recommended
scheme for the solvent winding up of 3i QPEP. Under this transaction,
which was effective on 28 April 2009, 3i acquired the cash and
the portfolio of 3i QPEP and in return gave the other 3i QPEP
shareholders 50p in cash for every share they held plus 0.1706 of
a new 3i ordinary share. In order to achieve this, 3i issued 37.6 million
shares representing 8.9% of 3i’s post-transaction issued share capital.
For the Group, this transaction had the benefit of producing a net
cash inflow of £110 million on 28 April 2009. Management of the
five portfolio companies, which had a combined value of £148 million
at 28 April 2009, has been transferred to the Growth Capital business
line. Four of the QPE team are still with 3i and have transferred to
Growth Capital or elsewhere within the Group, with the remainder
having left or in the process of leaving 3i. A reduction in operating
expenses of £3 million per annum will offset the loss of fee income
from 3i QPEP, which totalled £3 million in the year to 31 March 2009.
The return in the year was £26 million (2008: £(42) million),
generated entirely through an increase in the 3i QPEP share price.
SMI
The SMI portfolio is a portfolio of older, smaller minority investments
predominantly in the UK. In March 2004, 3i announced its intention 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
74 at 31 March 2009 and a total of £843 million has been realised.
The return for the year was £(53) million (2008: nil).
During the year, 18 investments were sold realising a total of
£27 million (2008: £136 million). The strategy continues to be to
realise these investments to maximise value either individually or in
groups of assets in a way that is both responsible and sensitive to
the needs of other shareholders. The unrealised value movement of
the portfolio generated a loss of £(68) million and total income was
£11 million.
Table 15: Returns from Venture Portfolio (£m)
year to 31 March
Realised (losses)/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
Table 16: Venture Portfolio business activity
investment and divestment (£m)
year to 31 March
Realisation proceeds
Investment
Net divestment
2009
2008
(110)
65
(312)
6
(416)
–
(88)
6
(17)
–
2009
209
(53)
156
2008
170
(156)
14
Following the decision to stop investing in new early stage technology
investments, the Venture Portfolio team was established on 1 April
2008 to maximise value from the Venture portfolio. This portfolio,
which consisted of 180 investments in technology and healthcare
companies, predominantly in Europe and North America, had a
combined value of £738 million at 31 March 2008.
The focus of the Venture Portfolio team has been on realising the
portfolio and on determining which companies should receive further
funding. During the year, despite difficult conditions for realising
such investments, the Venture Portfolio team was able to realise
investments in 42 companies for a total consideration of £209 million
(2008: £170 million). Of these realisations, £112 million was to
financial buyers and £97 million was to trade buyers.
Further funding provided to the Venture Portfolio was £53 million
(2008: £156 million). These investments were made on a selective
basis and only where there was potential to enhance or protect
future value.
The Venture Portfolio generated a gross portfolio return of
£(416) million (2008: £(17) million) in the period as realised losses
of £(110) million, together with an unrealised value movement
of £(312) million, offset portfolio income of £6 million (2008:
£6 million).
The remaining Venture portfolio of 123 assets, which was valued at
£314 million at 31 March 2009, is made up of predominantly UK and
European assets.
The strategy for the coming year is to continue to focus on achieving
realisations from the Venture portfolio.
Further investments into the Venture portfolio will only be made
where we are convinced that value can be protected or enhanced.
32
Case studies
Pages 33-36
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
3
The largest new investments and
realisations in the year, together with
information about our two largest
Infrastructure investments.
New investments
Realisations
Infrastructure
34
35
36
33
3i Group plc Report and accounts 2009
Case studies
New investments
The four case studies on these two pages are the largest individual new investments and realisations from each of our Buyouts and Growth
Capital business lines.
Memora
Location: Spain
Sector: Business Services
Business line: Buyouts
Website: www.memora.es
Labco
Location: France
Sector: Healthcare
Business line: Growth Capital
Website: www.labco.eu
First investment
3i has invested €111m (out of a total commitment of €140m) for a 17% shareholding
in Labco to support the company’s growth both organically and by acquisitions.
Nature of business
Labco is the leading European network of clinical laboratories, providing diagnostic
lab testing services to patients, general practitioners and hospitals. The company
currently owns over 250 laboratories in six countries, operated by a staff of more
than 4,000 healthcare professionals.
Results to 31 December
Sales
EBITDA
Net assets
2008
(unaudited)
€m
410
80
282
Current trading
Since the beginning of 2008, Labco has continued to grow strongly, in line with the
investment plan. Labco completed 21 new acquisitions in five different countries
in 2008.
Developments since 3i invested
Daniel Bour, former CEO of General de Sante, has joined the board of Labco as a
non-executive Director following 3i’s introduction.
3i has actively participated in Labco’s geographical expansion in countries such as
France and Belgium. 3i has also used its network to introduce targets, and strengthened
relations with key regulatory authorities and advisers.
With 3i’s support, Labco launched a series of operational alignment initiatives aimed
at restructuring the organisation, improving financial control and integrating
recent acquisitions.
3i Group plc’s investment
Cost
Equity
Directors’ valuation
Equity
Equity interest
Income in the year
www.labco.eu
March
2009
£m
93
89
17%
1
First investment
3i’s Eurofund V invested €187m in November 2008 to enable the buyout of Memora.
Nature of business
Memora is a market leading funeral services provider with operations in Spain
and Portugal.
Results to 31 December
Sales
EBITDA*
Net assets
2008
(unaudited)
€m
88
18
125
*EBITDA adjusted for extraordinary items relating to acquisition.
Current trading
Memora currently operates 96 funeral parlours, 16 crematories and 25 cemeteries
across Spain and Portugal. It has experienced considerable growth in the past two
years and currently employs 913 staff.
Developments since 3i invested
Memora is anticipated to grow through further acquisition and play a leading role in the
industry’s consolidation in the Iberian peninsular.
3i has introduced Ramon Lafuente, an experienced chairman or non-executive director
in several other 3i-backed businesses, including Panreac and Esmalglass as Executive
Vice Chairman.
March
2009
£m
87
102
38%
6
3i Group plc’s investment
Cost
Equity and loan
Directors’ valuation
Equity and loan
Equity interest
Income in the year
www.memora.es
34
3i Group plc Report and accounts 2009
Realisations
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Giochi Preziosi
Location: Italy
Sector: Consumer
Business line: Buyouts
Website: www.giochipreziosi.it
Boxer
Location: Sweden
Sector: Media
Business line: Growth Capital
Website: www.boxer.se
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
2008
(audited)
€m
771
94
207
Developments since 3i invested
3i helped Giochi Preziosi make a number of senior appointments through its global
network. The company grew substantially from when 3i first invested.
The number of employees increased from 1,470 in 2004 to 1,957 in 2008 and
turnover also increased from €590m to €771m during the same period.
In May 2008, Giochi Preziosi was sold to private equity firm Clessidra for €290m,
generating a 2.3 times money multiple for 3i and investors in Eurofund IV and a 45% IRR.
3i Group plc’s investment
Cost
Equity
Proceeds
Equity
Unrealised value
Equity
Equity interest
Income in the year
How did we invest?
Sold to Clessidra
for €290 million in
2008, delivering a
45% IRR.
R e a li s e
March
2009
£m
n/a
166
n/a
0%
0
March
2008
£m
63
0
151
38%
0
This investment was
made from 3i’s
Eurofund IV, a
€3 billion Buyouts
fund, raised in 2004.
F
u
n
First investment
3i invested €78m in June 2005 for a 30% stake in Stockholm based digital television
operator Boxer to support the company’s expansion strategy against a backdrop of
a scheduled switch-over from an analogue to digital network.
Nature of business
At the time of realisation Boxer was a leading pay digital television operator in Sweden.
Results to 31 December
Sales
EBITDA
Net assets
2008
(audited)
SEKm
1,965
424
314
Developments since 3i invested
3i worked closely in partnership with management to grow the company into a leading
and highly profitable pay television operator during a period of substantial regulatory
change to the pay television market.
During the period of 3i’s investment, Boxer strengthened its position in the Swedish
market, growing its subscriber base from 380,000 to c.700,000 and pre-tax profits
from SEK8m in 2004 to SEK376m in 2007.
This performance positioned the company well for international expansion, and during
2008 it was awarded exclusive license to operate in Denmark.
In November 2008, 3i sold its equity stake to majority shareholder Teracom, the
Swedish government-owned media operator, for £71m, resulting in a cash multiple
of 1.4 times and an IRR of 12%.
3i Group plc’s investment
Cost
Equity
Proceeds
Equity
Unrealised value
Equity
Equity interest
Income in the year
March
2009
£m
n/a
71
n/a
0%
7
March
2008
£m
56
0
97
30%
6
w
o
r
G
3i provided
support to
Giochi Preziosi in
many ways,
including, Board
building, strategic
input and numerous
introductions.
Invest
In 2006 Eurofund IV
invested €126 million
to back the buyout of
Giochi Preziosi.
d
O
p
p
ortunity
3i‘s Milan office
enjoyed an excellent
relationship with the
company since
2002 and earlier
success in the
sector provided
credibility.
P124 to127
for a list of our Top ten and Forty other large investments
35
3i Group plc Report and accounts 2009
Case studies
Infrastructure
The case studies below are the two largest investments in our Infrastructure business line portfolio.
3i Infrastructure plc
3i India Infrastructure Fund
The 3i India Infrastructure Fund was established by 3i to apply its infrastructure
business’ successful investment strategy to the rapidly growing Indian infrastructure
market. The Fund closed in March 2008 with total commitments of $1.2 billion,
of which $250 million from each of 3i and 3i Infrastructure.
At 31 March 2009, 41.1% of these commitments had been drawn down.
3i acts as investment manager to the 3i India Infrastructure Fund through a dedicated
team of seven infrastructure investment professionals based in Mumbai and Delhi, who
draw from the expertise of 3i’s wider infrastructure team, headquartered in London,
as well as on the rest of the 3i network to source and make investments.
Return objective
The 3i India Infrastructure Fund aims to provide investors with an 18% IRR (net) over
the life of the fund.
Target market
The 3i India Infrastructure Fund is building a portfolio of infrastructure assets whose
primary commercial operations are in India, with a primary focus on ports, airports,
roads and power.
The Fund has completed three investments, in Adani Power Limited, which is building a
portfolio of power plants across India, in Soma Enterprise Limited, one of India’s top five
infrastructure engineering and construction firms and in Krishnapatnam Port Company
Limited, which has a 30-year concession (extendable to 50 years) to develop, operate
and maintain the port of Krishnapatnam, a natural, deep water, all-weather port with
12 km of quays in the state of Andhra Pradesh.
3i Infrastructure plc (“3i Infrastructure”) is a Jersey-incorporated, closed-ended
investment company that invests in infrastructure businesses and assets.
3i Infrastructure listed on the London Stock Exchange in March 2007, raising
£703 million in its initial public offering, and an additional £115 million in July 2008
through a placing and open offer.
3i Infrastructure is a constituent of the FTSE 250 index and had a market capitalisation
of £677 million at 31 March 2009.
3i acts as investment adviser to 3i Infrastructure plc through a team of 21 dedicated
infrastructure investment professionals. Following a placing of 9.5% of the issued
share capital of 3i Infrastructure in February 2009, 3i holds a 33.3% stake in the
company.
Key figures1
Total return
Total return as a % of shareholders’ equity
Dividend per share
Diluted NAV/share (post dividend)
March
2009
£73.2m
8.8%
5.3p
108.7p
March
2008
£90.5m
13.1%
5.0p
105.6p
1 The return measures provided above are calculated using the investment presentation basis, which accounts
for majority investments and subsidiaries formed for investment purposes in the same way as minority
investments and does not consolidate these entities as is required under IFRS.
Return objective
3i Infrastructure’s overall objective is to provide a total return of 12% per annum (net),
to be achieved over the long term.
Within this overall objective, the company also targets a 5% distribution yield on
opening net asset value.
Target market
3i Infrastructure is building a portfolio which is diversified by geography, maturity and
infrastructure sector. The focus is on infrastructure assets that deliver strong underlying
performance: asset-intensive businesses which provide essential services over the long
term, often on a regulated basis, or with a significant component of revenues and costs
that are subject to long-term contracts. Within this broad definition, the company
targets investments principally in the transport, utilities and social infrastructure
sub-sectors.
At 31 March 2009, 3i Infrastructure had a portfolio of nine core investments, including
the 3i India Infrastructure Fund, which has three underlying investments and a portfolio
of junior debt investments with five underlying investments. Of its total net assets of
£918 million, the portfolio value was £537 million with the remainder consisting almost
entirely of cash balances of £380 million.
36
3igroup.com
3i.com
further detailed case studies at www.3igroup.com/shareholders/presreports/
further information on 3i’s portfolio and case studies at www.3i.com/investment-stories
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
4
A review of our financial performance
and financial position.
Returns
Portfolio and assets under management
Capital structure, gearing and liquidity
38
43
46
Financial review
Pages 37-46
37
3i Group plc Report and accounts 2009
Financial review
Returns
Total return
Table 17: Total return (£m)
for the year to 31 March
Realised profits over value on the disposal of investments
Unrealised (losses)/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
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Other finance income
(Loss)/profit before tax
Income taxes
(Loss)/profit after tax
Reserve movements (pensions, property and currency translation)
Total recognised income (“Total return”)
Tables 17 and 18 show that after five years (to 31 March 2008) in
which the Group generated an average annual total return of 20.4%
on opening shareholders’ funds, the total return for the year of
£(2,150) million (2008: £792 million), represented a (53.0)% return
on opening shareholders’ funds (2008: 18.6%).
As can be seen from table 17, which provides a breakdown of the key
elements of total return, the £(2,440) million (2008: £291 million)
unrealised value movement, which included £(354) million from
non-core operations was the main driver of these substantial
negative results.
The Buyouts and Growth Capital business lines were impacted by
significant unrealised value movements of £(995) million (2008:
£245 million) and £(1,029) million (2008: £160 million) respectively.
The negative unrealised value movement for Infrastructure was
considerably lower at £(62) million (2008: £43 million).
A notable feature of realised profits, which totalled £63 million
(2008: £523 million) was the £255 million generated by Buyouts
(2008: £370 million).
38
2009
£m
63
(2,440)
(2,377)
2008
£m
523
291
814
65
108
(2)
56
149
22
(2,206) 1,041
60
75
(3)
56
(250)
(2,328)
34
(120)
(38)
505
3
(1,944)
(4)
(1,948)
(202)
(2,150)
60
(152)
(274)
735
89
(105)
158
(44)
1
834
(6)
828
(36)
792
%
19.0
15.2
22.5
26.8
18.6
(53.0)
Table 18: Total return by year
year to 31 March
2004
2005
2006
2007
2008
2009
Total return comprises the total recognised income and expense stated as a percentage of opening
shareholders’ funds.
3i Group plc Report and accounts 2009
Realised profits
Despite the sale of a number of older non-core assets at significant
discounts to opening value, overall the Group achieved realised profits
in the year of £63 million (2008: £523 million) and an average uplift
to opening book value of 5% (2008: 43%).
Realised profits from Buyouts of £255 million (2008: £370 million)
were offset by realised losses from the Venture Portfolio of
£(110) million (2008: £65 million) and losses of £(66) million
from Growth Capital (2008: £75 million).
Realisations from our core business line portfolios continued to be
made at a significant uplift to cost. Realisations during the year were
sold at a 1.3x multiple to cost, which increases to 1.7x if SMI and
Venture Portfolio realisations are excluded.
Realised profits in the first six months of the year were £190 million.
Realisations during these six months were made at an average uplift
of 47% (2008: £337 million, 48%). Realised losses in the second half
of £(127) million (2008: £186 million) were made at an uplift to
1 April 2008 value of (15)% (2008: 36%).
Unrealised value movements
There was a significant fall in the value of the Group’s portfolio in the
year to 31 March 2009, with an unrealised value movement of
£(2,440) million (2008: unrealised profits £291 million).
This was due to a combination of factors including the steep falls in
market indices and asset valuations in the period and the considerable
economic challenges facing portfolio companies. The Group
announced in its pre-close statement on 26 March 2009, that no
assets would be held at cost at 31 March 2009 and that the non-
core assets in the SMI and Venture portfolios would be valued on their
expected disposal proceeds.
Table 19: Unrealised (losses)/profits on revaluation of investments
year to 31 March
Earnings and multiples based valuations
Equity – Earnings multiples
– Earnings growth
Loans – Impairments (earnings basis)
First time movements from cost
Other bases
Provisions
Uplift to imminent sale
Loans – Impairments (other basis)
Other movements on unquoted investments
Quoted portfolio
Total
2009
£m
2008
£m
(412)
14
(620)
(584)
(156)
(140)
(228)
(188)
(126)
(2,440)
(162)
307
(16)
154
(150)
83
(22)
33
64
291
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Chart 7: Proportion of portfolio value by valuation basis (%)
Earnings
Imminent sale or IPO
Market adjustment
Net assets
Other
Price of recent investment
Quoted
48
15
4
20
1
9
3
Table 19 shows the unrealised value movement for each category of
valuation movement grouped by investments valued on an earnings
multiple basis and those valued on other bases. Chart 7 shows the
resultant proportion of portfolio value by valuation basis as at
31 March 2009. A detailed explanation of the different bases of
valuation, together with descriptions of the different categories of
unrealised value movement, is contained within the Portfolio valuation
– an explanation section on pages 122 and 123.
This section provides a summary of the movements for each
individual category of value movement as well as details of the effect
of not holding any investments made in the year on a cost basis of
valuation, together with a review of the effect that the significant fall
in multiples had across the relevant categories of value movement
during the year.
Impact of multiple movements
EBITDA multiples and PE multiples were used to value 79% and
5% respectively, of the portfolio valued on an earnings basis as at
31 March 2009. The weighted average EBITDA multiple used to value
the portfolio on an earnings basis was 5.9x as at 31 March 2009 and
the weighted average PE multiple was 7.4x as at 31 March 2009.
These falls in multiples impacted the value of all of those investments
valued on an earnings basis. This includes those equity investments
valued on an earnings basis both at the beginning and end of the
year (the “Earnings multiples” category in table 19), those equity
investments valued on a “First time movements from cost” basis and
those investments where a reduction in enterprise value as a result
of a multiple movement led to an impairment of the value of loans
shown as “Impairments (earnings basis)” in table 19. The fall in
multiples also impacted the quoted portfolio, which had a value
movement in the year of £(126) million.
During periods of significant market correction there is often a lag
effect of applying published market multiples. This is because current
share prices are based on expected future earnings, whereas the
published multiple is based on historic earnings. As a consequence of
this lag, the impact of using the latest multiple on portfolio valuations
may generate more significant reductions.
As can be seen from table 19 the value movement for companies
valued on an earnings basis both at 31 March 2008 and at
31 March 2009 was £(412) million (2008: £(162) million).
39
P122 to123
for Portfolio valuation – an explanation
3i Group plc Report and accounts 2009
Financial review
The estimated overall effect due to reductions in the earnings
multiples used to value the portfolio, including quoted movements
and assets being sold imminently, was approximately £1,279 million
or some 52% of the unrealised value movement on investments for
the year.
Earnings growth
Overall portfolio earnings performance held up in a challenging
environment during the year to 31 March 2009. An indication of this
is that the overall movement in value of equity investments due to
earnings growth for those companies valued on an earnings basis at
the start and end of the year to 31 March 2009 was £14 million
(2008: £307 million).
However, in the light of prevailing economic uncertainty, the Group
believes that it has taken a prudent approach to the earnings data
used to value companies on an earnings basis and has incorporated
management accounts or forecast earnings in deriving earnings for
valuation purposes where these indicated falls.
The weighting of accounts used to value the portfolio as at 31 March
2009 was audited 37% (2008: 58%), management accounts 42%
(2008: 34%) and forecast 21% (2008: 8%). A higher proportion of
management and forecast earnings used to value this element of the
portfolio than in the previous year reflected a conservative outlook.
It should also be noted that forecast earnings are only used when
we consider the portfolio company has a proven track record of
reliable forecasting.
Across all assets valued on an earnings basis, earnings have fallen by
12%, some 21% lower than the overall portfolio data using merely
historical audited accounts, which showed an increase of 12%.
This includes assets valued on an earnings basis for the first time.
First time movements from cost
The Group’s valuation policy has historically been to value investments
that are less than 12 months old at cost. In light of the significant level
of economic volatility in the year, the Group announced in March that
no assets would be held at cost at 31 March 2009. Consequently, the
“First time movements from cost” category includes both investments
that were held at cost at 31 March 2008 as well as investments
made during the year.
First time movements from cost resulted in a reduction in the value of
the portfolio of £584 million (2008: £154 million unrealised profit).
Of this, £498 million relates to investments that were in the portfolio
as at 31 March 2008. Of the 10 new investments made during the
year, four have been moved to an earnings basis resulting in an
unrealised loss of £73 million, of which £51 million is included in
“First time movements from cost” and the remaining £22 million
within “Impairments”. We have received a full set of audited financial
statements for these investments and consequently we have a
reliable basis to apply both the latest earnings and multiples to these
investments. We have not received audited financial statements for
six of the new investments. However, in order to reflect the significant
movements in quoted markets since acquisition the latest benchmark
multiples have been applied to these investments resulting in an
unrealised value movement of £(35) million; no marketability discount
is applied to these investments.
Impairments
When the enterprise value (less senior debt) of a portfolio company
falls below the combined value of 3i’s equity in the company and the
cost of any loans provided, a shortfall is recognised against the value
of the loan. This movement is classified as an impairment. Total loan
impairments in the period were £848 million (2008: £38 million).
Impairments to loans as a result of earnings based valuations were
£(620) million.
The largest movement in Impairments for a basis other than earnings
was the £112 million fall (2008: £12 million fall) in the value of the
debt warehouse.
The largest impairments to loans are generally Buyouts investments
from recent vintages: Global Garden Products £(131) million;
Aviapartner Group £(66) million; VNU Business Information
£(62) million; and Bestinvest £(47) million.
Provisions
A provision is recognised where we anticipate a 50% or greater chance
that the company may fail within the next 12 months. Total provisions
for the year are broadly in line with last year at £156 million (2008:
£150 million). There are also several companies whose value is £nil
where we do not consider the assets will fail. However, the impact of
reduced enterprise value from either falling earnings or multiples has
reduced the equity to nil and impaired all of our loan value.
Uplift to imminent sale
Investments valued on an imminent sales basis resulted in an
unrealised value movement of £(140) million (2008: £83 million).
Included within this category are investments where the proceeds
have been received since the year end or where they are currently in
a negotiated sales process.
Quoted portfolio
The value of the Group’s quoted portfolio fell by £126 million (2008:
£64 million unrealised profit) during the year to £611 million (2008:
£889 million). The largest movements were the Group’s investment
in 3i Infrastructure plc £(74) million following a 26p fall in the share
price of the company during the period and £(45) million fall in the
value of Welspun Gujarat, an Indian manufacturer of line pipes for the
oil and gas industry.
Portfolio income
Table 20: Portfolio income
year to 31 March
2009
£m
Dividends
65
Income from loans and receivables
108
Fees receivable
(2)
171
Portfolio income
Portfolio income/opening portfolio (“income yield”) 2.8%
2008
£m
56
149
22
227
5.2%
Portfolio income of £171 million (2008: £227 million) includes
dividend income of £65 million (2008: £56 million), interest
receivable on loans of £108 million (2008: £149 million) and fees
receivable net of abort costs of £(2) million (2008: £22 million).
The fall in interest reflects not recognising accrued interest where
provisions or impairments have been taken against loans during the
year. The fall in net investment fees receivable is driven by the lower
level of investment activity in the year.
40
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Gross portfolio return
Table 21: Gross portfolio return by business line
year to 31 March
Gross portfolio return
Return as a %
of opening portfolio
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
Gross portfolio return
2009
£m
(678)
(1,035)
(50)
26
(53)
(416)
(2,206)
2008
£m
731
302
67
(42)
–
(17)
1,041
2009
%
(34)
(44)
(10)
18
(22)
(56)
(37)
Table 22: Gross portfolio return by year
year to 31 March
2005
2006
2007
2008
2009
2008
%
57
21
14
n/a
–
(2)
24
%
16.7
24.4
34.0
23.9
(36.7)
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.
Gross portfolio return for the Group for the year to 31 March 2009
totalled £(2,206) million (2008: £1,041 million), a (37)% return over
opening portfolio value (2008: 24%).
Our core business lines Buyouts, Growth Capital and Infrastructure
have generated a combined gross portfolio return of £(1,763) million
(2008: £1,100 million), which represented (36)% on opening
portfolio value.
Buyouts generated a gross portfolio return of £(678) million (2008:
£731 million). An unrealised value movement of £(995) million
(2008: £245 million) was only partially offset by a good level of
realised profits of £255 million (2008: £370 million), which were
achieved at uplifts of 107% (2008: 76%). Portfolio income from the
Buyouts portfolio of £62 million fell in the year (2008: £116 million)
due to provisions taken against interest where the value of our loan
is impaired.
Growth Capital generated a gross portfolio return of £(1,035) million
(2008: £302 million). Unrealised losses in the year of £(1,029)
million (2008: £160 million) and realised losses of £(66) million
(2008: £75 million realised profits) were the key reasons for this.
Portfolio income during the year was £60 million (2008: £67 million).
The Infrastructure gross portfolio return of £(50) million (2008:
£67 million) includes unrealised losses of £(62) million (2008:
£43 million), realised losses of £(20) million (2008: £6 million),
offset by portfolio income which at £32 million (2008: £18 million)
was nearly double the level of the previous year. The fall in the
3i Infrastructure plc share price and the sale of part of our holding in
3i Infrastructure plc generated an unrealised loss of £74 million and a
realised loss of £25 million respectively. Total portfolio income for the
Infrastructure business line included dividends of £26 million (2008:
£16 million).
As announced in our pre-close statement on 26 March 2009, our
investments in SMI and the Venture Portfolio are valued based on
expected sale proceeds. These portfolios are now classified as non-
core activities, with the Venture Portfolio generating a gross portfolio
return of £(416) million (2008: £(17) million) and SMI generating
a gross portfolio return of £(53) million (2008: £nil).
Quoted Private Equity generated a gross portfolio return of
£26 million (2008: £(42) million), which is entirely driven by the 15p
increase in the share price in the year. Following the announcement of
the scheme for the solvent winding up of 3i Quoted Private Equity plc
on 23 February 2009, the share price increased to 93p at 31 March
2009. Following shareholder approval, this transaction subsequently
completed on 28 April 2009 and there are further details about this
on page 32.
Fees receivable from external funds
During the year, the Group received fund fee income from its
managed Buyouts and Infrastructure funds and the Infrastructure
and Quoted Private Equity companies. Total income from Buyouts
and Infrastructure managed funds increased to £53 million (2008:
£45 million). This increase is mainly a consequence of the Group
benefiting from a full year of fees from the 3i India Infrastructure
Fund, as well as the impact of a strengthening of the euro against
sterling on the fees from our Buyouts funds.
Advisory fee income is received based on the gross investment value
of the advised companies. Total advisory fee income of £11 million
(2008: £9 million) comprises £8 million from 3i Infrastructure plc
(2008: £8 million) and £3 million from 3i Quoted Private Equity plc
(2008: £1 million).
A performance fee is also payable by 3i Infrastructure plc, which is
based on the net asset value growth per share of the fund, subject to
an 8% hurdle. During the year, a performance fee of £8 million (2008:
£3 million) was recognised. This includes an element of under accrual
of prior year fees, due to 3i Infrastructure plc announcing its results
after 3i Group plc last year.
Net carried interest and performance fees payable
Carried interest aligns the incentives of 3i’s investment staff and
the management teams in 3i’s portfolio with the interests of 3i’s
shareholders and fund investors. A two-page guide to carried interest,
including worked examples, is contained on pages 138 and 139.
Whereas 3i only receives carried interest from the external funds it
manages (eg Eurofund V), it pays carried interest to investment
executives who manage investments from both balance sheet and
external funds.
Although the Group only receives and pays carried interest as a result
of cash-to-cash returns subject to performance conditions, it must
account for carried interest payable based on both the realised profits
generated and unrealised value movements.
As a consequence of the unrealised losses generated in the year,
unrealised carried interest payable recognised in prior periods
has been reversed and a £56 million gain recognised (2008:
£152 million expense).
41
P138 to139
for Carried interest – an explanation
3i Group plc Report and accounts 2009
Financial review
The fall in the value of the Buyouts portfolio has resulted in carried
interest receivable, recognised in previous periods relating to
unrealised movements, being reversed and consequently, total carried
interest receivable was £(3) million (2008: £60 million).
The performance fee payable and a share of the advisory fees
generated by 3i Infrastructure plc are payable to 3i investment staff.
During the year, £6 million was payable as carried interest or
performance fees payable (2008: £6 million). The performance of
the underlying investments in 3i India Infrastructure Fund has been
good and carried interest payable of £6 million has been recognised
(2008: £nil).
Operating expenses
Table 23: Cost efficiency
year to 31 March
Operating expenses
Fees receivable from external funds*
Net operating expenses
Net operating expenses/
opening portfolio (“cost efficiency”)
2009
£m
250
(67)
183
2008
£m
274
(57)
217
3.0%
5.0%
*Net of £8 million performance fee from 3i Infrastructure plc in 2009 (2008: £3 million).
Improving cost efficiency has been a major focus through the year and,
through a range of actions and lower performance pay in the year, the
Group has reduced total operating expenses by 9% to £250 million (2008:
£274 million), including £45 million of restructuring and redundancy costs.
The Group’s cost efficiency metric is defined as operating costs net
of management and advisory fee income as a percentage of opening
portfolio. Higher fee income, lower operating expenses and a higher
opening portfolio value resulted in an improvement in this measure to
3.0% (2008: 5.0%).
During the next financial year, the Group will conduct a strategic
review of the balance of investment made between own balance
sheet and external funds. As a consequence, the appropriateness
of the current cost efficiency metric definition will be reviewed.
Total headcount at 31 March 2009 was reduced to 607 (2008: 739)
after remaining fairly stable, between 700 and 800, for the financial
years from 2004 to 2008. During the period, the mix of resourcing
changed considerably as the Group increased its international reach,
most notably in Asia and North America, established the Infrastructure
and QPE business lines and reduced staffing in the SMI and Venture
Portfolio teams as these portfolios reduced in size. A further 37
headcount reduction took place in April 2009.
The combination of further reductions in the size of the SMI and
Venture portfolios, the closure of the QPE business line and a major
downsizing exercise in December 2008 following a detailed review
of the Group’s operational requirements, has resulted in employee
numbers falling to 607 (2008: 739) at 31 March 2009. In addition to
the reduction in headcount, a number of smaller offices in continental
Europe, Asia and North America were closed. In addition, a review of
expenditure by the business lines and the professional service teams
was conducted. As a consequence of these factors, the direct costs
of our business lines, professional service teams and office network
is planned to fall by circa 9% in the year to 31 March 2010.
All employees are eligible for a discretionary cash bonus, which is subject
to Group performance. In the year to 31 March 2008, these bonuses
totalled £56 million. In view of the performance for the year to
31 March 2009, no bonuses will be paid to Management Committee
other than in fulfilment of contractual commitments. In total,
£8.6 million, which includes contractual commitments, has been
provided for, the majority of which will be delivered as deferred
bonus shares.
Net interest payable
Net interest payable in the year has increased from £(16) million to
£(86) million. A reduction in the level of cash balances in the year,
combined with a fall in interest rates during the year, resulted in interest
receivable falling to £34 million (2008: £89 million). Interest payable
increased to £120 million (2008: £105 million) and is mainly a result of
a higher rate of interest payable on the £430 million convertible bond
issued in the year than was payable on the previous €550 million
convertible bond.
Movement in the fair value of derivatives
In previous years, the €550 million convertible bond raised in August
2003, resulted in the Group’s total return being impacted by movements
in the value of the equity element of the convertible bond. In July 2008,
this convertible bond was repaid and replaced with a £430 million
convertible bond. 3i also entered into agreements called “call spread
overlays”, which reduce the volatility associated with the derivative
element of this bond. Consequently, fair value movements on derivatives
is significantly lower than last year at £(38) million (2008: £158 million)
and relate almost entirely to movements in the fair value of our interest
rate swaps.
Exchange movements
Following the decision in October to close its foreign exchange swap
portfolio, 3i’s total return now has exposure to foreign exchange movements
affecting the value of its portfolio. Some 54% of the Group’s debt is
sterling denominated and therefore foreign exchange movements also
affect the value of the Group’s net debt. During the year, there was a
net foreign exchange gain of £315 million (2008: £38 million loss).
This is comprised of a £765 million increase in portfolio values offset by
£188 million on translation of debt and a further £262 million relating to
movements from foreign exchange swaps and other balance sheet items.
Pension
In September 2008, the tri-annual valuation to June 2007 of the
UK-defined benefit pension scheme was completed. This resulted
in a £86 million deficit, which the Group has agreed to fund over
five years.
The pension deficit recognised in the Group’s balance sheet is accounted
for under IAS 19 and reduced from £38 million to £18 million in the
year, principally due to the Group providing additional contributions of
£20 million.
The Group recognised an £8 million actuarial loss in the year (2008:
£41 million), principally due to changes in the value of the plan’s assets
and liabilities.
42
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
The value of external funds managed and advised by the Group
increased by 5% (2008: 37% growth) during the year. This was due
to the strong performance of underlying investments in the 3i India
Infrastructure Fund, growth in 3i Infrastructure plc, as well as the
impact of foreign exchange movements on un-invested
commitments within the euro-denominated Eurofund V.
Table 28 on page 44 provides a schedule of managed and advised
funds together with information about the fund size, level of 3i
commitment and proportion invested at 31 March 2009. Further
information about the development of 3i’s fund management and
advisory business can be found on page 20. As can be seen from
the charts on page 45, the sources of these funds at a Group and
business line level are well diversified by nature of investor and
geographical location.
The Buyouts and Infrastructure business lines are funded with a mix
of balance sheet funding and external funds whereas Growth Capital
is funded almost entirely from the Group’s balance sheet.
At 78% (2008: 59%), Infrastructure has the highest proportion of
external funds. The proportion of external funds for Buyouts has risen
to 61% (2008: 56%) mainly as a consequence of the fall in the value
of the direct portfolio in the year.
3i Group plc Report and accounts 2009
Portfolio and assets under
management
Table 24: Assets under management
as at 31 March
3i direct portfolio
Managed funds
Advised quoted funds
Total
2009
£m
4,050
3,079
890
8,019
2008
£m
6,016
3,143
633
9,792
Assets under management comprise 3i’s directly held portfolio,
managed unlisted funds and advised listed funds. Details on the
valuation methodology for the Group’s direct portfolio are provided on
pages 122 and 123. The value of external funds under management
is based on the value on which income is earned by the Group, which
normally includes un-invested commitments and the accounting
valuation of invested assets. Where 3i has a direct investment in the
funds that it manages or advises, this is held at fair value within the
direct portfolio.
An 18% fall in assets under management during the year to
£8,019 million at 31 March 2009 (2008: £9,792 million) was
principally due to the 33% fall in the value of the Group’s direct
portfolio to £4,050 million (2008: £6,016 million). This movement
is described in detail on pages 38 to 41.
Portfolio assets directly owned by the Group
Table 25: Portfolio value movement by business line
Core business lines
Buyouts
Growth Capital
Infrastructure
Non-core business lines
QPE
SMI
Venture Portfolio
Total
Opening
Portfolio
value
1 April
2008
£m
2,025
2,366
501
4,892
142
244
738
1,124
6,016
New
investment
£m
Divestment
£m
Value
movement
£m
519
343
50
912
(239)
(527)
(137)
(903)
(995)
(1,029)
(62)
(2,086)
3
–
53
56
–
(23)
(319)
(342)
968 (1,245)
26
(68)
(312)
(354)
(2,440)
Closing
Portfolio
value
31 March
2009
£m
1,467
1,574
371
3,412
171
153
314
638
4,050
Other
£m
157
421
19
597
–
–
154
154
751
Table 25 also shows that the strategic actions taken by the Group, including the decision to grow the Infrastructure business line and to
accelerate the disposal of non-core assets, combined with the significant reduction in the value of the direct portfolio, has changed the mix by
business line. At 31 March, Buyouts represented 36% (2008: 34%) of the direct portfolio value, Growth Capital 39% (2008: 39%) and
Infrastructure 9% (2008: 8%). Excluding non-core activities, these proportions rise to 43%, 46% and 11% of the remaining portfolio value.
The total number of investments in the portfolio, excluding 199 QPE, SMI and Venture Portfolio investments, was 177 as at 31 March 2009
(2008: 213 excluding 274 QPE, SMI and Venture Portfolio investments).
P6 to7
for further information on our portfolio diversity
P122 to123
for Portfolio valuation – an explanation
43
3i Group plc Report and accounts 2009
Financial review
Table 26: 3i direct portfolio value by geography
as at 31 March
Table 27: 3i direct portfolio value by sector
as at 31 March
Continental Europe
UK
Asia
North America
Rest of World
Total
2009
£m
1,618
1,719
491
209
13
4,050
2008
£m
2,573
2,250
679
497
17
6,016
As can be seen from table 26, the geographic mix of the portfolio has
also changed with 40% of the direct portfolio value at 31 March
2009 in continental Europe (2008: 43%), 43% (2008: 37%) in the
UK and 12% (2008: 11%) in Asia. The sale of almost 86% of the
opening US Venture Portfolio in the year and value reductions on a
small number of significant Growth Capital investments in the US
resulted in a 58% lower US portfolio value than the previous year.
In Asia, significantly higher realisations at £127 million (2008:
£25 million) combined with a low level of new investment at
£46 million (2008: £171 million) meant that, although the proportion
of portfolio value increased to 12%, the absolute value fell by 28%.
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
Total
2009
£m
749
327
265
764
545
214
253
391
3,508
2008
£m
819
703
415
1,423
572
455
316
670
5,373
Note: the total Group portfolio is £4,050 million, which includes 3i’s investment in Infrastructure and Quoted Private
Equity.
Although all sectors have been impacted by the general fall in
valuations, the most significant proportionate fall was within the
general industrial sector, which fell in value by 46%. This fall follows
the realisation of 17% of the opening portfolio value, which included
the successful sale of a number of companies including ABX (Buyouts,
realised profits £146 million), Freightliner (Buyouts, £75 million) and
Transport Alloin (Growth, £11 million). The portfolio has also been
impacted by unrealised value movements of £(629) million, which
include Mold Masters (Growth, £(94) million) and STEN (Growth,
£(89) million).
At 31 March 2009, the 3i debt warehouse had acquired €445 million
in assets supported by an equity commitment from 3i Group of
€133 million on a first loss basis. These assets, which are
predominantly related to buyout businesses, are described in more
detail as part of the Buyouts business line review on page 20.
In addition, the debt management team, alongside the Infrastructure
team, manages a £92 million portfolio of junior debt in infrastructure
businesses.
Assets managed and advised by 3i
Table 28: Managed and advised funds
as at 31 March 2009
Fund
3i Eurofund III
3i Eurofund IV
3i Eurofund V
3i Infrastructure plc
3i Quoted Private Equity plc
3i India Infrastructure Fund
Business line
Buyouts/Growth
Buyouts
Buyouts
Infrastructure
QPE
Infrastructure
Final close date
July 1999
June 2004
November 2006
March 2007
June 2007
March 2008
Fund size
€1,990m
€3,067m
€5,000m
£818m
£400m
$1,195m
3i commitment
€995m
€1,941m
€2,780m
£272m
£180m
$250m
*Defined as proceeds as a percentage of original amount invested.
Invested
Realised*
March 2009 March 2009
%
184
176
7
n/a
n/a
–
%
91
91
53
75
45
41
Table 28 provides a schedule of funds managed or advised by 3i. As can be seen from the charts opposite, the source of these funds is well
diversified internationally and by type of investor. Eurofund V has 60 Limited Partners and the 3i India Infrastructure Fund 14 Limited Partners,
excluding 3i and 3i Infrastructure plc. On 23 February 2009 3i Group plc announced a recommended scheme for the solvent winding up of 3i
QPEP. This transaction became effective after the year end, on 28 April 2009.
44
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Fund investor demographics
Investor base for non-listed funds managed and
advised by geographical location (%)
Buyouts investor base for non-listed funds managed
and advised by type of investor (%)
North America
Middle East
Asia
UK
Rest of Europe
28
36
10
8
18
Group investor base for non-listed funds managed and
advised by type of investor (%)
11
10
22
141411
41
Financial institutions
Fund of funds
Insurance companies
Pension funds
Private individuals
Endowments
Corporate investors
Government agencies
Other
Financial institutions
Fund of funds
Insurance companies
Pension funds
Private individuals
Endowments
Corporate investors
Government agencies
12
11
1010
41
27
23
22
Infrastructure investor base for non-listed funds
managed and advised by type of investor (%)
22
Financial institutions
Fund of funds
Pension funds
Endowments
Government agencies
Other
77
17
4040
18
29
3333
1
45
3i Group plc Report and accounts 2009
Financial review
Capital structure, gearing
and liquidity
Capital structure
Table 29: Group balance sheet
as at 31 March
Shareholders’ funds
Net debt
Gearing
Diluted net asset value per share
2009
2008
£1,862m £4,057m
£1,912m £1,638m
40%
£10.77
103%
£4.96
The effects of a reduction in the value of the portfolio and the
£274 million increase in net debt principally due to currency
translation has meant that, although net debt on a constant currency
basis fell during the year, the Group’s gearing increased significantly to
103%, which is outside the Group’s targeted through-the-cycle range
of 30%-40%.
During the year, 3i took a number of actions to reduce net debt which
had risen to £2,033 million at the end of January 2009 and was
£1,912 million as at 31 March 2009 (2008: £1,638 million). These
actions included cash generated through the disposal of core portfolio
and non-core assets (£366 million realised in the three months to
31 March 2009) and the sale of 9.5% of the issued share capital in
3i Infrastructure plc, which generated £61 million. The net benefit
from the acquisition of the assets of 3i Quoted Private Equity plc was
to deliver net cash of £110 million shortly after the year end.
Chart 8 shows the maturity profile of 3i’s debt at 31 March 2009.
The refinancing in May 2008 of the Group’s €550 million convertible
bond with a £430 million convertible bond lengthened this profile.
Chart 8: Gross debt repayment profile
(£m)
2009 2010 2011 2012 2013 2014 2016 2018 2020 2022 2023 2028 2032
600
500
400
300
200
100
0
46
Gearing
The combination of a fall in shareholders’ funds to £1,862 million
(2008: £4,057 million) following the total return of £(2,150) million
and an increase in net debt to £1,912 million principally driven by
foreign exchange movements has resulted in an increase in gearing in
the year from 40% to 103%.
Liquidity
The Group’s performance on realisations, combined with a highly
selective approach to investment and its strategy to sell non-core
assets, has resulted in total cash and deposits remaining broadly in line
with last year at £734 million (2008: £796 million) and undrawn
committed facilities of £286 million (2008: £286 million).
Currency hedging
Historically, the Group has maintained a policy to hedge 90% to 100%
of the investment currency portfolio. This was achieved through cash
settled currency swaps and core currency debt where available.
The significant weakening of sterling meant that the cash volatility
associated with this policy of using short-term foreign exchange
swaps was no longer appropriate. As a consequence, the Group
closed out the majority of its foreign exchange swap portfolio.
This programme is now complete at a cash settlement of
£174 million. As a result, 16% of the North American and Asian
portfolios and 67% of the European and Nordic portfolios are now
hedged. The Board intends to review the introduction of a more
comprehensive hedging strategy as a priority.
Diluted NAV
The total return of £(2,150) million resulted in diluted net asset value
per share falling by £5.81 in the year to £4.96 as at 31 March 2009
(2008: £10.77).
Rights issue
In May 2009, the Board announced an underwritten rights issue to
raise gross proceeds of £732 million, which the Board believes will
strengthen 3i’s financial position and deliver a number of additional
benefits for the business.
Proforma gearing at 31 March 2009, reflecting both the rights issue
and the 3i Quoted Private Equity plc transaction in April 2009, would
be 42%.
Risk
Pages 47-52
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
5
A description of our risk management
framework, key risks and our approach
to mitigate them.
Risk management framework
Risk factors
Review of risks
48
49
52
47
3i Group plc Report and accounts 2009
Risk
Introduction
This section sets out the main elements of 3i’s risk management
framework together with a description of the main inherent risk
factors facing the Group, and a review of the evolution and
management of the Group’s key risks during the year. Further
details on the management of key risks, and related results and
outcomes, can be found in the relevant sections of the annual
report shown under “Further information” column in the table on
page 49.
Risk management framework
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.
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 Internal Audit functions provide support
to the Board in maintaining effective risk management across
the Group. This risk management framework and the main
responsibilities of each committee are shown below.
The key components of 3i’s risk management framework, which
are regularly reviewed, remain fundamentally the same as last
year, with some modifications to address the increased risks
related to the deterioration in market and economic conditions;
most notably the introduction of weekly meetings of a sub-
committee of the Group Risk Management Committee chaired by
the Chief Executive. This is considered in more detail in the Review
of risks on page 52.
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
Detailed information about 3i’s approach to corporate responsibility and its performance during the year are set out in the Corporate
responsibility section on pages 53 to 64.
48
3i Group plc Report and accounts 2009
Risk factors
Risk type
External
Risks arising from current, proposed
and anticipated political, legal,
regulatory, economic and competitor
changes
Strategic
Risks arising from the analysis, design
and implementation of the Group’s
business model, and key decisions
on the investment levels and capital
allocations
Investment
Risks in respect of specific asset
investment decisions, the subsequent
performance of an investment or
exposure concentrations across
business line portfolio
Treasury and funding
Risks arising from
(i) uncertainty in market prices
and rates,
(ii) an inability to raise adequate funds
to meet investment needs or meet
obligations as they fall due, or
(iii) inappropriate capital structure
Operational
Risk arising from inadequate or failed
processes, people and systems or
from external factors affecting these
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Key developments
Further information
Risk mitigation
− Adverse economic and market
conditions impacting (i) liquidity and
net debt; (ii) investment levels;
(iii) portfolio performance and
(iv) valuations
− Regulatory developments
Overview
– Chairman’s statement, 3i at a
glance, Our priorities and strategy,
Chief Executive’s statement
Business review
– Market conditions, 3i’s approach
− Organisational changes, including
changes to senior management
Overview
− Chairman’s statement, 3i at a glance,
− Acceleration or initiation of corporate
projects in context of current market
Our priorities and strategy,
Chief Executive’s statement
− Significantly reduced investment and
realisation levels
− Impact of current economic
environment on portfolio
management processes; earnings;
leverage; valuation multiples
− Impact of market and economic
turbulence on Group’s financial
position, in particular liquidity and net
debt, and currency management
Business review
– Market conditions, 3i’s approach
Overview
− 3i at a glance
Business review
− Market conditions, 3i’s approach;
Investment activity, Business lines
Financial review
− Returns, Portfolio and assets under
management
Financial statements
Portfolio and additional information
Overview
− Chief Executive’s statement
Business review
− market conditions
Financial review
− capital structure, gearing and liquidity
Financial statements
− Execution of organisational changes
and other corporate initiatives
Business review
Corporate responsibility report
Governance report
− Regular Group Risk Management
Committee and Board reviews
− 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
− Monitoring of key projects
– Investment Committee approval
of all significant investments
− Regular asset reviews, including risk
assessments
− 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
− Credit risk exposure is managed on
an asset-specific basis by individual
investment managers
− Regular Board reviews of the Group’s
financial resources
− Regular reviews of liquidity, gearing,
net debt and large currency exposures
− Line management at all levels is
responsible for identifying, assessing,
controlling and reporting operational
risks
− Framework of core values, global
policies, a code of business conduct
and delegated authorities are in place
− Independent internal audit function
carries out periodic reviews
The table above sets out the definitions of each key risk type; the key developments for each category during the year; the relevant sections
of the annual report where further information can be found on the key developments; and a summary of the main risk mitigation processes.
The principal components of each risk type are explained in more detail on pages 50 to 52 followed by a commentary on the main changes to
the Group’s risk profile during the year.
49
3i Group plc Report and accounts 2009
Risk
External risks
Macroeconomic risks
3i invests mainly in European companies and continues to develop its
operations in Asia and North America. 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 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.
Comments on current market conditions and 3i’s approach are set out
on pages 15 to 17 of the Business review.
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 each market 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 by the Operational Risk Committee. 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 or results.
The European Commission has recently released its proposal for a
Directive on Alternative Investment Fund Managers (which covers
hedge funds and private equity) as well as recommendations on
executive remuneration and remuneration in the financial services
sector. The first draft Directive contains requirements on
authorisations, reporting and disclosure and minimum capital, and
could come into force in 2011 if agreement on the proposals is
reached by the end of this year. This is part of the Commission’s
response to the current financial crisis.
3i carries on business as an investment trust under section 842 of
the Income and Corporation Taxes Act 1988. Continuation of this
approval is subject to the Company directing its affairs in line with
the requirements of the legislation. Changes in government policy
and taxation legislation which could affect the results of the Group’s
operations or financial position are closely monitored.
50
3i complies with the “Guidelines for Disclosure and Transparency in
Private Equity”, known as the Walker guidelines, which is a voluntary
code published in November 2007. Further details are set out on
pages 140 to 142. The Group’s Pillar 3 disclosure document can be
found at www.3igroup.com.
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.
A commentary on the impact of current market conditions, and 3i’s
priorities and strategy in this context, is set out in the Overview
section on pages 1 to 12.
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 business
strategy and the ability of the portfolio company to execute that
business strategy; (iii) actual outcomes against the key assumptions
underlying the portfolio company’s financial projections; and (iv)
market conditions which affect the value of investments. 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.
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 the
Financial Risk Committee and by individual business lines in order to
monitor exposure to any one sector or geography and to 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 a considerable extent on stock market conditions and the state
of the wider mergers and acquisitions market. Changes in market or
macroeconomic conditions impact the valuation of portfolio assets
and the ability to exit those investments profitably within the desired
timeframe.
Further information on investment activity and market conditions is
set out in the Business review section on pages 13 to 32.
Investment performance is covered in the Financial review on pages
37 to 46.
Details of 3i’s investment process, current portfolio and valuation
methodology are provided in the Portfolio and additional information
section on pages 121 to 144.
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 credit risk exposure is in financial assets, which
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 external
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 weekly basis for each business line and for the Group
as a whole. These forecasts are reviewed weekly by the Group Risk
Management Committee. The Board reviews the Group’s financial
resources on a regular basis. 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 value of quoted investments is directly related to the relevant
market and so subject to price risk. The value 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 also makes use of derivative financial
instruments to effect foreign exchange risk management.
Assets denominated in currencies other than sterling have historically
been hedged using a combination of currency borrowings and short-
term derivative contracts. In recent years, the use of short-term
contracts increased. During the year, the cost of rolling over these
contracts increased to such an extent that the Board decided to rely
solely on currency borrowings as the hedging strategy.
In the short term, 3i is therefore only partially hedged through the
use of matching borrowings and will be exposed to potential foreign
exchange fluctuations. In order to reduce this exposure, the Board will
review the introduction of a more comprehensive hedging strategy as
a priority.
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. These derivative positions are limited to
“plain vanilla” instruments and do not include exotic options.
A commentary on the Group’s capital structure, gearing, liquidity and
currency hedging can be found on page 46 of the Financial review.
Further details on financial risk management are set out in note 17
to the Financial statement on pages 109 to 112.
51
3i Group plc Report and accounts 2009
Risk
Operational risks
The Group is exposed to a range of operational risks which can arise
from a combination of shortcomings in processes, people or 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, global policies and controls,
a code of business conduct and delegated authorities. The Operational
Risk Committee exercises oversight and regularly monitors operational
risk throughout the business. There is also an independent internal audit
function which carries out periodic reviews.
Further relevant information can be found in the Corporate governance
statement in the Governance section on pages 74 to 79.
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.
Further information on staff engagement can be found in the
Corporate responsibility report on pages 60 to 61.
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.
Review of risks
Evolution of risks during the year
As already noted in the Chairman’s and Chief Executive’s statements,
this has been a year of severe economic challenge. As a result, and
in common with many other businesses, 3i’s risk profile has shifted
fundamentally due to the unprecedented combination of factors
including the collapse of credit markets; high market volatility;
complex and unforeseen risk interdependencies; and the onset
of recession in the main markets in which the Group operates.
The consequences of this combination have, at times, been difficult to
predict, particularly in the latter half of the year. Examples include the
very significant and rapid deterioration in market multiples, and thus
the portfolio valuation, driving up the gearing ratio, and the weakening
of sterling resulting in the decision to close out the Group’s hedging
swap portfolio. In response to this complexity, weekly special Group
Risk Management Committee meetings, chaired by the Chief Executive,
were set up in October 2008 at which developments in areas of higher
risk are considered, together with the need for further action, with
regular updates provided to the Board.
The main changes to the Group’s risk profile were the increases in the
estimated severity of several key risks identified at the start of the
financial year; in particular the areas of liquidity and refinancing risk
and the management of gearing and net debt.
Risk management
The Group’s risk management strategy has been adapted to address
the changes in 3i’s risk profile. A key assumption underpinning this
strategy is that the current economic recession will be prolonged,
affecting earnings and valuations across the portfolio, the availability
of credit, consumer demand and levels of taxation. In this context,
there has been a significantly increased focus on the risks inherent in
the investment portfolio and Group’s balance sheet management.
A formal review of the effectiveness of the current risk management
framework was carried out in March 2009. The principal conclusion of
this review was that although the basic framework remains sound, the
terms of reference and membership of the main committees required
updating where necessary to eliminate some overlap in coverage and
to support further the effectiveness of the current structure.
These changes were agreed with a view to improving oversight and
decision taking in relation to balance sheet management, including
foreign exchange risk, and to investment portfolio risks. This includes
the implementation of a new portfolio risk model designed to provide
additional insight to both balance sheet management and portfolio
strategies for investment and realisations.
Reviews of the performance of investment portfolio companies
have increased in frequency and intensity, supported by improved
availability and use of management information and detailed risk
assessments, including for example close monitoring of refinancing
risks and potential reputational risks. The new role of Managing
Partner, Investments, has been created to ensure consistency and
rigour in all investment decisions.
A further priority is to reduce the Group’s current level of financial risk,
specifically the levels of net debt and unhedged currency exposures,
as outlined in the Chief Executive’s statement.
The implications of the recently announced proposed European
Directive, affecting the regulation of private equity, will need to be
evaluated in the context of the Group’s operations.
Business disruption from avian or swine flu or similar health pandemics
has again moved up the risk agenda and could have a significant
effect on 3i’s investment portfolio, and business confidence in general,
if it were to escalate. This may require aspects of current business
continuity plans to be re-assessed.
Finally, corporate responsibility and business sustainability are of
increasing importance, particularly when trust in the financial services
sector has declined significantly. The Corporate responsibility report
on pages 53 to 64 provides details of 3i’s approach and performance.
52
Corporate
responsibility
Pages 53-64
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
6
Detailed information about 3i’s
approach to corporate responsibility
and our performance during the year.
Core values
Corporate responsibility at 3i
Corporate responsibility in our investment activity
Corporate responsibility as a company
54
54
55
58
53
3i Group plc Report and accounts 2009
Corporate responsibility
Core values
We believe that the highest standard of integrity
is essential in business. In all our activities,
we aim to:
– be commercial and fair;
– respect the needs of our shareholders, our
staff, our suppliers, the local community and
the businesses in which we invest;
– maintain our integrity and professionalism; and
– strive for continual improvement and
innovation.
“It’s in hard times, not easy ones,
that strong companies can pull
ahead of the competition. By
increasing our connectivity to
the rest of the world, and by taking
a sensible and authentic approach
to corporate responsibility, 3i can
enhance further its reputation as
the private equity firm of choice.”
Kevin Dunn Group Company Secretary & General Counsel
54
Corporate responsibility at 3i
– 3i’s approach to corporate responsibility,
both as an investor and a company, is
commercially driven.
– An active approach to corporate responsibility
means more to 3i than simply retaining our
licence to operate or reducing risk.
– We believe that our approach to
corporate responsibility provides genuine
competitive advantage and helps to
maximise long-term returns.
– We also think it is important to review
our approach to corporate responsibility
every year and to keep innovating in this
important area.
We hope that the pages which follow will illustrate our
commitment to good corporate responsibility as well as
provide detail on our performance.
Corporate Responsibility Committee
Kevin Dunn
Deepak Bagla
Whitney Bower
Douwe Cosijn
Patrick Dunne
Jan-Peter Onstwedder
Barbara Sterlina
Tony Wang
Phil White
Company Secretary and Chairman
of the Committee
a Director in 3i’s India Infrastructure
investment business
a Partner in US Growth Capital
Head of Investor Relations
Group Communications Director
Head of Risk
a Communications Project Manager
an Associate Director in 3i’s Asia
investment business
a Partner in UK Infrastructure
The Committee’s membership reflects the balance of 3i’s business
with representation from Europe, Asia and North America, and from
a range of business line and Group activities.
Sources of expertise
In addition to the Corporate Responsibility Committee,
3i is able to draw upon a wide range of internal and external
sources of expertise on corporate responsibility matters.
An illustration of some of these is provided on page 59.
Contact us
For more information please contact Kevin Dunn at
KevinDunnCR@3i.com
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Corporate responsibility
in our investment activity
As an investor, we view corporate responsibility from two
perspectives; opportunity and risk.
We believe that an active approach to corporate responsibility has the
potential to bring a wide variety of business benefits to our portfolio
companies including:
– improved efficiency, reduced costs and lower waste;
– increased employee, customer and supplier engagement;
– greater access to international markets;
– new market opportunities;
– enhanced brand and reputation;
– greater awareness and management of risks; and
– a potentially wider pool of buyers for the company when it
is time to sell.
The most significant corporate responsibility risks arising from our
investment activity are likely to relate to environmental, ethical,
governance and social issues. Failure to identify or manage these risks
effectively not only has the potential to undermine the success of
our portfolio companies but also might compromise 3i’s reputation.
Identifying and managing these risks is therefore an important part
of managing risk for 3i and doing so successfully has the potential to
increase the value and attraction of our portfolio companies to others.
Our investment process involves four key stages:
– fund raising;
– investment assessment;
– creating value once we are invested; and
– realisation.
A description of the issues involved at each of these stages and 3i’s
approach to them is set out on pages 56 to 58.
In 2008, we conducted a Group-wide review of our business needs
and policies in relation to corporate responsibility. This review identified
several factors driving the need for further development of our policy
and accompanying operational procedures. These factors included
increased globalisation and 3i’s own international growth in developing
markets, as well as a recognition that public expectations were growing
at a time when trust in the financial services sector was coming under
greater scrutiny. Increased regulation on a wide range of issues affecting
a broad range of industries also needed to be taken into account.
As a result of this review, a new Group-wide corporate responsibility
policy was developed.
The main features of this new policy, which is summarised on page 56
and to which all staff have online access, include:
– a single, short policy document with a clear overall corporate goal,
supplemented by a set of broad aspirations and commitments
(see box);
– a set of new investment procedures for all stages in the investment
process – fundraising, investment, growth and realisation;
– a series of guidance notes for investment teams, covering key
issues and sectors, with links to case studies, international norms
and standards and information about specific emerging markets;
and
– clear arrangements for policy governance and accountability.
The policy, together with revised procedures, staff training and a new
corporate responsibility web-based portal, was designed to provide
3i staff with a clear framework, as well as the tools to think about
and manage issues relating to corporate responsibility throughout the
investment process.
The appointment of Ian Nolan as Managing Partner, Investments,
during the year, with responsibility for the quality, consistency and
improvement of investment processes within and across each
business line will provide Management Committee with further
oversight and control in this very important area.
Corporate responsibility website
For further information on 3i’s approach to corporate responsibility
both as a company and as an investor, please visit our dedicated
corporate responsibility website, www.3icr.com.
55
3i Group plc Report and accounts 2009
Corporate responsibility
Summary of new 3i Corporate
responsibility policy
As a public and international company, 3i is committed to putting
its core values into effect by investing responsibly and encouraging
responsible business conduct among its portfolio companies.
Our revised policy and procedures are designed to help employees
understand and manage the impacts they and investee companies
have on society and the environment, including any relevant
ethical issues.
3i has set itself the overall goal of being a top performer in
corporate responsibility among private equity companies and
a positive influence for sustainable social and environmental
practices across its international investment portfolio.
Specifically, 3i is committed to:
1. Human rights
Respect the protection of international human rights and avoid
complicity in human rights violations.
2. Labour/workplace rights
Uphold the right to freedom of association and collective
bargaining; abolish child labour; eliminate forced and compulsory
labour; and end employment discrimination.
3. The environment
Take a cautious and responsible approach to the environment;
promote compliance with environmental law, improvement in
management standards and the sustainable management of
natural resources; and help combat climate change by supporting
the development of products and services that are environmentally
beneficial.
4. Anti-corruption
Avoid corruption in all its forms, including extortion and bribery,
upholding compliance standards and integrity and complying with
relevant anti-fraud and money-laundering regulations.
We see these aspirations as going beyond corporate good
governance and compliance with local and other law. The policy
is not just concerned with “doing no harm” or ethical business
practices, but impinges on issues of wider trust and corporate
reputation, which are critically important in the new global climate
where there is greater public mistrust of the financial sector.
New procedures have been adopted based on a simple corporate
responsibility materiality test for all investments, and a requirement
for staff to demonstrate, throughout the life of the investment
through to exit, that they have taken account of the issues
and understand the value, opportunities and risks involved.
By encouraging corporate learning and the sharing of good
practice, we believe this process will be self-reinforcing.
56
Corporate responsibility in our
investment process
The following summary information about each of
the four key stages in our investment process is
supplemented by further details on 3i’s dedicated
Corporate responsibility website www.3icr.com
Fundraising
Investments are made by using capital from 3i’s own balance sheet,
as well as from external funds managed or advised by 3i. At 31 March
2009, 3i had £8.0 billion of assets under management, comprising
£4.0 billion of our own assets and £4.0 billion on behalf of external
funds. 3i’s own capital has been built from the success of earlier
investments.
A list of the external funds managed or advised by 3i is set out on
page 44. These funds are raised to invest in specific business lines and
have clear investment mandates. For example, Eurofund V is a mid-
market buyout fund which is focused on Europe, but has the flexibility
to invest up to 10% of the size of the fund in the rest of the world.
Interest in the degree to which public companies and private equity
firms consider environmental, ethical, governance and social issues has
been growing amongst a number of large institutional shareholders
and Limited Partners, the major investors in private equity funds.
3i has been a member of the Dow Jones Sustainability World Index
(“DJSI”) since 2002 and the Business in the Community Corporate
Responsibility Index since 2003. 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.
A key reason for the development of 3i’s corporate responsibility
website was to provide existing or potential investors in 3i’s shares
or funds with easy access to relevant information on corporate
responsibility issues relating to 3i’s business. 3i also actively
communicates its approach on corporate responsibility issues to
investors in a wide variety of other ways and has a dedicated
investor relations website www.3igroup.com.
“At AlpInvest, we promote sustainability
and governance as a key factor
in investment choices as well as
increased transparency. We appreciate
working with partners like 3i who
share the same objectives.”
AlpInvest Partners
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
The time taken to go through the whole investment process varies
significantly and depends upon many factors, including the nature of
the investment, the complexity of the issues, as well as the number
and nature of the parties involved. In some cases, 3i may already
know the company well before an investment opportunity emerges
or may even be an existing investor.
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 may be weak in other aspects of his or
her role.
Creating value once we are invested
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, providing specific 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 corporate
responsibility risks or opportunities that were identified either in due
diligence or in the post-investment analysis.
Portfolio reviews take place every six months. In these reviews 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.
3i.net
A dedicated portal for our portfolio
3i Group plc Report and accounts 2009
Investment
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.
The key steps in the process are:
– Preliminary appraisal
During this stage, a decision is taken on whether to commit further
resource to progress the investment opportunity and place it in
formal work in progress.
– Partner review
A decision is taken to progress the opportunity only after a detailed
review by a group of senior and experienced investment executives
in the relevant business line and sector team. A decision is also
taken at this point as to what further in-depth analysis and due
diligence should be undertaken.
– Due diligence and negotiation
Alongside other commercial due diligence and negotiation, an
explicit review of corporate responsibility issues is undertaken for
each company under review.
– Dealing with any corporate responsibility issues which emerge
Identifying an issue in due diligence may result in 3i withdrawing,
depending on the severity of the issue and our confidence in being
able to resolve it in an acceptable period. There are three levels of
compliance with our policies: “full”; “partial”; and “serious non-
compliance”. Confidence in the management team’s capacity and
will to address issues satisfactorily will be a key determinant of
whether we proceed or not. Our relationship with the company
may mean that we can resolve issues and ensure that there is full
compliance before we invest. Helping to resolve an issue may be an
important element of our ability to add value, as well as enhance
the investment opportunity.
– Investment Committee
Investments over £5 million are presented to 3i’s Investment
Committee. If approval is given, it is usually subject to a number of
conditions precedent, which may include some relating to corporate
responsibility issues, for example, a key appointment being
made or confirmation that a certain process meets a certain
standard. Certain larger transactions also require approval by
non-executive Directors.
– Final approval
Once all conditions precedent have been met, final approval is given
and the investment is made.
We operate internationally and across a broad range of sectors so
it is also important that we consider issues in the context of local
and sector expectations. Although there is a core group of people
responsible for progressing an investment overall, our approval
process might involve over 20 different people with sector and
regional expertise. When investment opportunities are declined,
it is often for a number of reasons rather than one single issue.
P16 to 32
for further information on our investment activity
57
3i Group plc Report and accounts 2009
Corporate responsibility
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, therefore, 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 Active partnership
programmes and events such as 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.
Realisation
When we have helped the company implement its plans, there are
three basic approaches to realising the value of our investment:
– sale to a trade buyer (eg, a company in the same sector);
Corporate responsibility as a company
As a private equity business with around
600 employees world-wide, 3i has a relatively
small footprint on many corporate responsibility
issues. However, we recognise that our sustained
success and our reputation for being a good
corporate citizen means 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 its formal associations and
other activity. Our current Management Committee contains one
former chairman of the BVCA, as well as the current and a former
chairman of the EVCA.
3i is compliant with the Walker Guidelines on disclosure for private
equity firms and their portfolio companies and more detailed
information on 3i’s approach to transparency can be found on pages
140 to 142 in this report.
In this section, we provide commentary and detailed information on a
range of different areas of corporate responsibility with respect to
3i itself, including:
– sale to another financial buyer (eg, another private equity firm with
a new growth strategy); and
– roles and responsibilities;
– sources of expertise;
– a listing on a stock exchange through an IPO.
– performance benchmarking and verification;
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
corporate responsibility 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 corporate responsibility
standards expected.
– staff engagement, training, diversity and culture;
– health and safety;
– environment;
– procurement; and
– community and social enterprise.
3i’s dedicated CR website, www.3icr.com, contains further
information on each of these topics.
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P140 to142
for 3i and Transparency
3i Group plc Report and accounts 2009
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.
– The Corporate Responsibility Committee (“the Committee”)
considers and reviews corporate responsibility issues relevant
to 3i’s business, reports regularly to the Board and promotes
awareness of these issues across the business through training
and communication.
– The Committee promotes the development of corporate
responsibility policies, procedures and initiatives, and monitors
and reviews their operation.
– The Committee identifies and assesses the significant risks and
opportunities for 3i arising from corporate responsibility issues.
– A Group-wide risk log is used to record identified risks and to
monitor their management and mitigation.
– The 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 47 to 52.
– The 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.
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.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Sources of expertise
In addition to the Corporate Responsibility Committee, 3i is able to
draw upon a wide range of sources of internal and external expertise
on corporate responsibility issues. These include 3i’s professional
services and investment teams, who have specialised knowledge
on specific issues, sectors and markets, as well as 3i’s advisers and
Business Leaders Network.
3i’s scale, international reach and network also provide access to
leading international consultancies on environmental, ethical and social
issues for a wide variety of purposes from compliance to creating
value in portfolio companies. Our portfolio companies themselves
are a rich source of knowledge and through our Active partnership
programme and other means we encourage experience sharing.
Performance benchmarking and verification
As can be seen from this report and 3i’s dedicated CR website
www.3iCR.com, the Group monitors and measures its performance
on a range of corporate responsibility issues in addition to the two
non-financial Key Performance Indicators (employee engagement and
CO2 emissions), both of which improved during the year.
3i’s performance on a range of these and other corporate
responsibility issues is measured annually 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 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.
In 2008, we again participated in the annual BitC Corporate
Responsibility Index and were included in Business in the Community’s
(”BitC”) “Top 100 Companies that Count”. In particular, the integration
into our investment processes of our corporate responsibility
principles and management of these processes were recognised.
We aim to continue to be included in this Index.
We also provide information on our carbon and greenhouse gas
emissions to the Carbon Disclosure Project.
In addition to formal benchmarking on corporate responsibility issues,
3i has received acknowledgement and recognition through awards
voted on by peers. For example, in Management Today’s 2008
survey of Britain’s “Most Admired Companies”, 3i was ranked
tenth overall and thirteenth out of 240 companies for community
and environmental responsibility.
59
P47 to 52
for further information on risk management
Results of the 2009 employee survey
Measuring employee engagement and giving staff an opportunity
to give feedback is a key objective for 3i. Every second year, 3i staff
world-wide take part in a confidential telephone survey conducted
by Ipsos MORI. In the intervening years, as in 2009, staff are given
the chance to give feedback via an electronic questionnaire as part
of an internally run process.
Highlights
– A response rate of 56%.
– An employee engagement score of 85%.
– 87% of staff are proud to work for 3i.
– High employee advocacy, with 90% of those surveyed saying
they would speak highly of 3i.
– High commitment to 3i’s objectives (97%).
– 82% of staff felt that the organisational changes announced in
the previous few months to the survey were necessary.
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 10 points ahead of the MORI Top Ten norm*, and
20 points ahead of the 2008 figure, only 67% of staff feel
valued and recognised for the work that they do.
– Qualitative feedback also suggested that there was room to
improve communication of organisational change and strategy.
Action
– The results were communicated to all staff in May.
– All issues relating to specific parts of the business have been
communicated and are being followed up.
– Our increased commitment to communication with staff will
address the other areas for improvement.
*The Ipsos MORI Top Ten norm is the average of the most positive ten responses to each question in the Ipsos
MORI normative database. These are regarded as high-performing benchmarks.
3i Group plc Report and accounts 2009
Corporate responsibility
Staff engagement, training,
diversity and culture
The ability to recruit, develop and retain capable
people is of fundamental importance to achieving
our strategy.
3i has human resources policies and procedures covering recruitment,
vetting and performance management, as well as appropriate processes
in place to monitor staff appreciation and to gain feedback.
Employee survey
3i regularly polls its staff to measure employee engagement, to
understand how they feel about topical issues within the Company,
as well as to give all staff the opportunity to provide confidential
feedback. The method of polling alternates each year between a
comprehensive telephone survey and a web-based poll. Core questions
are included each time to evaluate how our performance is changing
year on year.
Following last year’s comprehensive telephone poll survey, conducted
by Ipsos MORI, this year’s survey, which was open to all staff, was
web-based. It was conducted in February and March 2009, shortly
after the major downsizing exercise announced to staff in December.
The response rate for the 2009 survey, although good by general
standards at 56%, was lower than 3i’s last web-based poll in 2007
(72%). 3i’s web-based polls traditionally achieve lower response rates
than telephone surveys (2008 telephone survey response: 92%).
The 2009 poll was also conducted in a period when there were a
number of staff in the process of leaving the Company, workloads
were high due to reorganisation, the appointment of a new Chief
Executive had recently been announced and the Company had also
announced the acceleration of the sale of non-core assets.
The results from those surveyed were encouraging in that the
overall employee engagement score was marginally higher at 85%
(2008: 84%) than the previous year. 82% of those taking part in
the survey thought that the changes that were made to 3i in the
previous few months were necessary and 75% of respondents
thought that they would place 3i in a better position for the future.
Advocacy, which has traditionally been high at 3i, remained so, with
87% of staff taking part saying that they were proud to work
for 3i and 90% who would be prepared to recommend 3i as an
employer. The survey also highlighted some areas for improvement,
including the communication of strategy and organisational change.
The results of the survey were communicated to staff in May 2009.
60
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Corporate responsibility portal
3i has a dedicated internal corporate responsibility
portal for staff
3i Group plc Report and accounts 2009
Diversity
3i has a highly diversified staff and a “best team for the job” approach
to the work that it does. Consequently, at 3i, diversity is not about
compliance but more about deriving the maximum business benefit
from the broad range of cultures, experience, knowledge and skills of
our staff.
Training and development
As a company, 3i is committed to encouraging the continuous
development of its staff, with the objective of maximising both their
career potential and the overall performance of the business. 3i is also
highly regulated and needs to ensure that staff are familiar and also
compliant with relevant regulation.
Despite a more challenging economic environment and a significant
reduction in headcount during the year, we have maintained our
emphasis on training and development, by adapting the range of
activity to suit the current and anticipated needs of the business
and our staff.
Our revised Corporate responsibility policy and processes have been
the subject of a number of workshops for our staff across the world.
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 its 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 and the courses that we run
in conjunction with INSEAD to increase the effectiveness of people
working in multi-cultural teams.
During the year, 332 employees attended a broad range of internal
training and development courses. These courses included training for
investment executives relating to our Active partnership programme
for the enhancement of portfolio performance. Given the international
nature of our business, another element of training for professional
service staff during the year focused on multi-cultural awareness.
It is a legal and regulatory requirement that all executives involved in
making or managing investment transactions receive anti-money
laundering training and periodic compliance refresher training. During
the year, all staff sat and passed two e-based compliance courses on
Financial Crime and Data Sharing.
Regular reports are provided to Board Directors on legal and
regulatory issues, to ensure they are appraised of the latest relevant
developments. During the year, a detailed induction programme
was organised for Richard Meddings, who joined the Board as a
non-executive Director in September 2008.
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3i Group plc Report and accounts 2009
Corporate responsibility
Health and safety
Promotion of health and safety at work is an essential responsibility
of staff and management at all levels. The Health and Safety
Committee oversees the application of these policies and procedures
and considers health and safety risks across the business.
The purpose of 3i’s health and safety policy, which is set out below, 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.
The minimum benchmark set for our global Occupational Health &
Safety (“OH&S”) policies is UK legislation, unless country-specific
legislation or practice exceeds this level. In 2008, 3i continued the
process of verification to BS OHSAS 18001:2007, an internationally
recognised occupational health and safety management system.
Key objectives of our OH&S policy:
– 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.
Overall objective: not to have any reportable accidents
or incidents.
During the year to 31 March 2009, no reportable accidents
occurred under UK Health and Safety regulations or under similar
regulations outside the UK.
Additional details of these policies and procedures can be found on
3i’s CR website at www.3iCR.com.
Environment
As a financial services business with just over 600 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.
This involves improving the measurement and modelling of our carbon
emissions; reducing the energy intensity of our operations; and
investing in carbon offsets.
In 2008, we worked with a specialist adviser, the Edinburgh Centre
for Carbon Management (“ECCM”), to evaluate our greenhouse gas
emissions. We also refined our modelling to include updated UK
government CO2 equivalent (“CO2e” ) emissions factors, most notably
the CO2 factor for UK grid electricity generation. This information has
improved our understanding, control and reporting of emissions.
In 2008, our reported emissions were 8,428 CO2e (t/yr), down 11%
from the 2007 data. This decrease is largely explained by our work
in this area, particularly reducing energy usage and business travel.
The climate change impact assessment table outlines this amount as
a percentage of each emission type.
Climate change impact assessment
Year to 31 March 2009
8,428 CO2 (tonnes per year)
"equivalent emissions"
Premises
Business travel
Other
4
62.9
33.1
ECCM is now an internationally renowed 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.
In the forthcoming year, we will continue to endeavour to reduce our
energy use and begin work with a carbon credit provider to identify
projects to offset our emissions.
62
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
We focus our charitable activities on the disadvantaged, on young
people and on 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.
Three examples of this approach are 3i’s support for a series of
programmes with The Old Vic Theatre in London, Historic Royal
Palaces and the GOONJ project in Mumbai.
London’s Language at The Old Vic
This 2008 project, aimed at UK primary and secondary school
students, was a result of a long-standing partnership between
3i and The Old Vic Theatre in London. London’s Language was
based around George Bernard Shaw’s Pygmalion, and 3i’s funding
enabled 1,000 students to attend a free performance of the play
at The Old Vic Theatre. For many of the young people this was
their first visit to a theatre.
In addition, 800 students participated in workshops exploring
one of the four key themes of Pygmalion: class; gender; personal
identity and manners; and created a monologue reflecting
their views.
The workshops were facilitated by professional drama educators
from The Old Vic and supported by 3i staff.
Four short films were made based on each of the themes and
included in a resource pack containing workshop activities.
The education pack was distributed to 2,000 schools and placed
on the London Grid for Learning website.
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 who assisted at the workshops held
in schools found it a rewarding experience.
3i Group plc Report and accounts 2009
Procurement
Procuring goods and services in a way that is environmentally
conscious is built into the policies and procedures to which we
operate. 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. As far as possible,
we will work only with suppliers who support our aim to source
products responsibly. When problems arise with a supplier’s
performance or behaviour, wherever possible we aim to work
collaboratively with the suppliers concerned to help them meet
our requirements.
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.
Over 35 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 their 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.
63
An important aspect of our charitable giving, which totalled
£483,750 in the year to 31 March 2009 (2008: £454,130), 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 2009, this resulted in donations
of £130,937 from the scheme, accounting for 27% of 3i’s charitable
donations (2008: 29%).
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.
Volunteering in North America
3i’s New York team is engaged in a range of volunteering activities
that directly involve their local community and fit with 3i’s overall
focus on the disadvantaged, young people and education.
The team supports New York Cares, a charity supporting initiatives
in and around New York City, which offers opportunities to work
with the homeless, or to support youth education programmes,
domestic violence shelters, substance abuse programmes and
urban clean-up programmes.
Mirroring 3i’s support for the homeless charity, The Passage, based
in London, the New York team also supports the breakfast soup
kitchen at St. Bart’s church, which is in close proximity to 3i’s
New York office.
New initiatives for the coming year include the commitment
to support the Harlem Children’s Zone, a truancy prevention
programme.
3i Group plc Report and accounts 2009
Corporate responsibility
Educational programme at Historic Royal Palaces
3i supported an education programme at Kensington Palace, which
was focused on local disadvantaged communities. In addition, a
store room was transformed into a learning space for workshops.
We funded a specialist youth worker to deliver projects based on
the heritage and history of Kensington Palace. The objective of the
programme was to provide stimulating activities for young people
and build confidence and skills for all of the participants.
The Palace Takeover project was held over seven weeks and
involved young people with learning difficulties and physical
disabilities. This programme explored the history of the palace
by using a different medium each week, including drama,
photography and mask making.
GOONJ project in Mumbai
3i is supporting a project managed by GOONJ, a voluntary
organisation based in India. The School-to-School programme
redistributes surplus resources from urban schools to help
underprivileged schoolchildren in rural India. 3i funding will
benefit 12,000 children with the provision of basic resources
and the promotion of better hygiene.
64
Governance
Pages 65-90
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
7
Profiles of our Board and Management
Committee, Statutory and Corporate
Governance information, together with
our Directors’ remuneration report.
Board of Directors and Management Committee
Statutory and corporate governance information
Directors’ remuneration report
66
68
80
65
3i Group plc Report and accounts 2009
Governance
Board of Directors and Management Committee
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. Senior
Independent Director of BG Group plc
and a Director of Cadbury 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.
2. Oliver Stocken
Deputy Chairman since 2002 and
a non-executive Director since 1999.
Chairman of the trustees of the
3i Group Pension Plan. A member
of the Nominations Committee and
the Valuations Committee. Senior
Independent Director from 2002 to
March 2009. 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.
3. Michael Queen
Chief Executive since January 2009,
and an Executive Director since 1997.
A member of the Management
Committee and the Group’s Investment
Committee since 1997. Joined 3i in
1987. From 1994 to 1996 seconded to
HM Treasury. Group Financial Controller
from 1996 to 1997 and Finance Director
from 1997 to 2005. Managing Partner,
Growth Capital 2005 to 2008 and
Managing Partner, Infrastructure 2008
to January 2009. Past Chairman of the
British Venture Capital Association.
4. Richard Meddings
Non-executive Director since September
2008. A member of the Audit and
Compliance Committee and the
Nominations Committee. Group Finance
Director of Standard Chartered PLC
since 2006, having joined the Board of
Standard Chartered PLC as a Group
Executive Director in November
2002. A member of the Governing
Council of the International Chamber
of Commerce, United Kingdom.
Formerly Chief Operating Officer,
Barclays Private Clients, Group Financial
Controller at Barclays PLC and Group
Finance Director of Woolwich PLC.
8. Robert Swannell
Non-executive Director since 2006
and Senior Independent Director since
April 2009. Chairman of the Audit and
Compliance Committee and a member
of the Nominations Committee and the
Valuations Committee. Senior Adviser,
Citi Europe and formerly Chairman of
Citi’s European Investment Bank and
Vice-Chairman Citi Europe. Chairman
of HMV Group plc and a non-executive
Director of The British Land Company
PLC. A member of the Takeover Panel
Appeal Board, and a trustee of Career
Academies UK.
9. Julia Wilson
Group Finance Director since December
2008 and a Director and member of the
Management Committee since October
2008. Joined 3i in 2006 as Deputy
Finance Director, with responsibility
for the Group’s finance, taxation and
treasury functions. Previously Group
Director of Corporate Finance at Cable &
Wireless plc. A member of the Valuations
Committee. Currently on maternity leave.
5. Willem Mesdag
Non-executive Director since 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.
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 p.l.c., Royal Dutch
Shell plc and EXOR S.p.A. 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.
7. Lord Smith of Kelvin
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.
1
2
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6
7
3
4
8
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3i Group plc Report and accounts 2009
Other members of Management Committee:
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
12. Jonathan Russell
Managing Partner, Buyouts. A member
of the Management Committee and the
Group’s Investment Committee since
1999. Joined 3i in 1986. Chairman
of the European Private Equity and
Venture Capital Association.
13. Bob Stefanowski
Chairman and Managing Partner,
3i North America, 3i Asia. Head of the
Group’s Global Financial Services Practice.
A member of the Management
Committee since joining 3i in September
2008. Spent 15 years with GE Capital
Corporation, most recently President and
CEO of GE Corporate Finance EMEA.
14. 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.
15. Guy Zarzavatdjian
Managing Partner, Growth Capital.
A member of the Management
Committee since 2007 and a member
of the Group’s Investment Committee
since 2006. Joined 3i’s Paris office in
1987. Managing Director, Benelux from
1999 to 2002 and Managing Director,
France from 2002 until 2007.
10. Kevin Dunn
General Counsel and Company Secretary
since 2007. Responsible for the Group’s
legal, compliance, internal audit, human
resources and company secretarial
functions. Chairman of the Corporate
Responsibility Committee. A member
of the Management Committee since
joining the Company in 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.
11. Ian Nolan
Managing Partner, Investments
(Chief Investment Officer). A member
of the Management Committee since
February 2009 and the Group’s
Investment Committee since January
2006. Formerly Managing Director
UK Buyouts. Joined 3i in 1987.
10
11
14
15
12
13
67
3i Group plc Report and accounts 2009
Governance
Statutory and corporate governance information
This section of the Directors’ report contains statutory and corporate
governance information for the year to 31 March 2009 (“the year”).
Principal activity
3i Group plc is a mid-market private equity business. The principal
activity of the Company and its subsidiaries (“the Group”) is
investment. The Company’s investment policy is set out on page 16.
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 2008. 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 2009 appear on pages 93 to 120.
Total recognised income and expense for the year was
£(2,150) million (2008: £792 million). An interim dividend of
6.3p per ordinary share in respect of the year to 31 March 2009
was paid on 7 January 2009.
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. In addition, holders of certain
performance share awards granted under The 3i Group Discretionary
Share Plan 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 3i Infrastructure plc, a UK listed investment company
which invests in infrastructure assets.
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 2009, its position
at that date and the Group’s likely future developments are detailed in
the Chairman’s statement on page 5, the Chief Executive’s statement
on pages 10 to 12 and the Business review on pages 13 to 32.
Risk
A description of the risk management framework and processes are
included in the Risk section on pages 47 to 52.
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 2009
comprised 383,970,880 ordinary shares of 7319/22p each and
9,305,993 B shares (cumulative preference shares of 1p each),
which represented 99.97% and 0.03% 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 21 and 25
on pages 114 and 115. During the year, the issued share capital of
the Company altered as set out below.
68
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Ordinary shares
The issued ordinary share capital of the Company as at 1 April 2008
was 382,741,094 ordinary shares. During the year to 31 March
2009 this increased by 1,229,786 ordinary shares as a result of the
issue of ordinary 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.
At the Annual General Meeting (“AGM”) on 9 July 2008, the Directors
were authorised to repurchase up to 38,274,000 ordinary shares in
the Company (representing approximately 10% of the Company’s
issued ordinary share capital as at 19 May 2008) until the Company’s
AGM in 2009 or 8 October 2009, if earlier. This authority was not
exercised during the year to 31 March 2009.
B shares
The issued B share capital of the Company as at 1 April 2008 was
16,566,194 B shares. No new B shares were issued in the year to
31 March 2009. At the AGM on 9 July 2008, the Directors were
authorised to repurchase up to 16,566,194 B shares in the Company
until the Company’s AGM in 2009 or 8 October 2009, if earlier.
In the year to 31 March 2009, the Company repurchased and
cancelled 7,260,201 B shares (representing 0.03% of the nominal
value of the Company’s total called-up share capital as at 1 April
2009) pursuant to this authority for an aggregate consideration
of £9,220,455. These shares were repurchased as part of the
Company’s arrangements to return capital to shareholders.
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 2009 and 1 May 2009:
AXA S.A. and its group of companies
The Goldman Sachs Group, Inc
BlackRock, Inc.
Deutsche Bank AG
Lehman Brothers International (Europe)
Lloyds Banking Group Plc
Legal & General Group plc
Prudential plc group of companies
Schroder Plc
As at
31 March
2009
% of issued
share capital
As at
1 May
2009
% of issued
share capital
15,580,556
22,865,000
19,653,461
22,407,866
11,550,096
26,677,335
23,209,163
11,865,771
19,370,309
4.06 15,580,556
5.97 22,865,000
5.11 19,653,461
5.84 22,407,866
3.01 11,550,096
6.95 19,736,041
6.04 25,253,140
3.09
5.05 19,370,309
4.06
5.97
5.11
5.84
3.01
4.68
5.98
Below 3% Below 3%
5.05
Nature of
holding
Direct and indirect
Indirect
Indirect
Direct and indirect
Direct
Direct and indirect
Direct
Direct
Indirect
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 2009 are shown below:
Baroness Hogg
O H J Stocken
M J Queen
R H Meddings
W Mesdag
C J M Morin-Postel
Lord Smith of Kelvin
R W A Swannell
J S Wilson
Ordinary shares
B shares
32,956
30,714
420,453
5,583
50,000
7,985
14,186
15,350
1,986
0
0
121,851
0
0
0
0
0
1,037
The share interests shown for Mr M J Queen include a Super-
performance Share award (over 70,175 ordinary shares) which is
subject to forfeiture and is included in the table on page 87 and the
share interests shown for Mr M J Queen and Mrs J S Wilson include
ordinary shares held by them in the 3i Share Incentive Plan, as shown
in the table on page 87. These interests do not include other share
options or awards under the Company’s share plans, details of which
are shown in the Remuneration Report.
In the period from 1 April 2009 to 1 May 2009, Mrs J S Wilson
and Mr M J Queen became interested in an additional 120 ordinary
shares each.
Save as detailed above, there have been no changes in the above
interests between 1 April 2009 and 1 May 2009.
69
3i Group plc Report and accounts 2009
Governance
Rights and restrictions attaching to shares
A summary of the rights and restrictions attaching to shares as at
31 March 2009 is set out below.
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.
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 make the relevant shares 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 12 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 19 and 20 on pages 113 and 114 respectively,
as at 31 March 2009 the Company had in issue 3.625 per cent
Convertible Bonds due 2011, Notes issued under the 3i Group plc
£2,000 million Note Issuance Programme and Notes issued under
the 3i Group plc €1,000 million Euro-Commercial Paper Programme.
70
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 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 to retire by rotation at an AGM if
(i) they have been appointed by the Board since the preceding
AGM; or
(ii) they held office during the two preceding AGMs but did not
retire at either of them; or
(iii) not being Chairman of the Board, they held non-executive
office for a continuous period of nine years or more at the date
of that AGM.
(d) 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 8 July 2009:
(i) Mr R H Meddings and Mrs J S Wilson, having both been appointed
as Directors by the Board since the AGM in 2008, will retire and,
being eligible, offer themselves for reappointment; and
(ii) Mr M J Queen, Mme C J M Morin-Postel and Mr O H J Stocken
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 2009 Notice of AGM.
Directors’ conflicts of interest
From October 2008, Directors have had a statutory duty under
the Companies Act 2006 to avoid conflicts of interests with the
Company. As permitted by the Act, at its AGM in 2008 the Company
adopted new Articles of Association which enabled Directors to
approve conflicts of interest and which included other conflict of
interest provisions. The Company has implemented processes to
identify potential and actual conflicts of interest. Such conflicts are
then considered for approval by the Board, subject, if necessary,
to appropriate conditions.
Directors’ indemnities
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.
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. Arrangements are made as
necessary to ensure access and support to job applicants who happen
to be disabled and who respond to our request to inform the Company
of any requirements. 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.
71
3i Group plc Report and accounts 2009
Governance
Charitable and political donations
Charitable donations made by the Group in the year to 31 March 2009
amounted to £483,750. Excluding the Company’s matching of Give
As You Earn contributions by staff, charitable donations amounted
to £352,813. Of this amount approximately 56% was donated to
causes which aim to relieve poverty or benefit the community, or
both, approximately 26% was donated to charities which advance
education, and approximately 4% was donated to medical charities.
Further details of charitable donations are set out in the Corporate
responsibility report on pages 53 to 64.
In line with Group policy, during the year to 31 March 2009 no
donations were made to political parties or organisations, or independent
election candidates, and no political expenditure was incurred.
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 8.5 days’ purchases.
Significant agreements
As at 31 March 2009 the Company was party to the following
agreements that take effect, alter or terminate on a change of control
of the Company following a takeover bid:
(a) £486 million Revolving Credit Facility 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 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;
(c) Limited Partnership Agreements dated 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 £430,000,000 3.625 per cent Convertible Bonds
due 2011 (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% 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. Condition 7(d) of
the terms and conditions of the bonds gives bondholders an early
redemption option (early repayment at face value plus accrued
interest) upon a Relevant Event occurring.
72
3i Group plc Report and accounts 2009
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
(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
66 and 67.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Going concern
The Directors have acknowledged their responsibilities in relation to
the financial statements for the year ended 31 March 2009.
The Group’s business activities, together with the factors likely to
affect its future development, performance and position are set out in
the Business review section. The financial position of the Group, its
capital structure, gearing and liquidity positions are described in the
Financial review section. The Group’s policies on risk management,
including treasury and funding risks, are contained in the Risk section.
Further details are contained in the financial statements and notes
and, in particular, notes 17 and 18 provide details on financial risk
management and derivative financial instruments.
The Directors believe that the Group is well placed to manage its
business risks successfully despite the current uncertain economic
outlook. The Directors have considered the uncertainties inherent in
current and expected future market conditions and their possible
impact upon the financial performance of the Group. Due regard has
also been given to the material post balance sheet events disclosed
in note 34 to the financial statements. After consideration, the
Directors are satisfied that the Company has and will maintain
sufficient financial resources to enable it to continue operating in
the foreseeable future and therefore continue to adopt the going
concern basis in preparing the Annual Report and Accounts.
Audit information
Pursuant to section 234ZA (2) of the Companies Act 1985, each
of the Directors confirms that: (a) so far as they are aware, there is
no relevant audit information of which the Company’s auditors are
unaware; and (b) they have taken all steps they ought to have taken
to make themselves aware of any relevant audit information and to
establish that the Company’s auditors are aware of such information.
Appointment of auditors
In accordance with section 384 of the Companies Act 1985,
a resolution proposing the reappointment of Ernst & Young LLP as the
Company’s auditors will be put to members at the forthcoming AGM.
By order of the Board
K J Dunn Company Secretary
8 May 2009
Registered Office:
16 Palace Street, London SW1E 5JD
73
3i Group plc Report and accounts 2009
Governance
Corporate governance statement
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 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 global policies 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 2008, 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 AGM in July 2008, shareholders authorised the Board
to buy-back B shares on behalf of the Company, again subject to the
limits set out in the resolution. Details of the authorities which the Board
will be seeking at its 2009 AGM are set out in the 2009 Notice of AGM.
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.
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;
– 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.
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 seven scheduled meetings of the Board
of Directors as well as eleven ad hoc meetings called to deal with
matters arising at short notice (2008: six scheduled meetings).
The Directors who served throughout the year attended all seven
scheduled meetings. Mr R H Meddings attended the five scheduled
meetings held since his appointment on 1 September 2008 and
Mrs J S Wilson attended three of the four scheduled meetings held
since her appointment on 1 October 2008. Mr F G Steingraber
attended the one scheduled meeting before he ceased to be a
Director on 9 July 2008. Mr S P Ball attended two of the four
scheduled meetings before he ceased to be a Director on
30 November 2008. Mr P E Yea attended the six scheduled meetings
held before his resignation as a Director on 27 January 2009.
The principal matters considered by the Board during the year
(in addition to matters formally reserved to the Board) included:
– the 3i Vision Plan 2008-2012, budget and financial resources;
– the Group’s capital structure;
– regular reports from the Chief Executive;
– the recommendations of the Valuations Committee on valuations
of investments;
– the progress of the 3i India Infrastructure Fund;
– the acquisition of the assets of 3i QPE plc;
– approval of the Company’s half-yearly and annual financial statements
and changes in the Group’s accounting policies or practices;
– a review of the Group’s advisory and corporate broking
relationships;
– changes relating to the capital structure of the Company or its
regulated status;
– major capital projects;
– major changes in the nature of business operations;
– the financial risk management framework;
– the performance of co-investment funds;
– independence of non-executive Directors;
– the issue of new convertible bonds; and
– investments and divestments in the ordinary course of business
above certain limits set by the Board from time to time;
– currency hedging issues.
74
3i Group plc Report and accounts 2009
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.
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, meeting with each of the Directors to
ascertain their views and discuss their answers to a questionnaire
developed with the aid of external consultants. The Chairman
subsequently reported formally to the Nominations Committee and
the Board and also gave feedback to individual Directors. In the course
of this process, the Board decided that it should make a change in the
executive leadership of the Company, and appoint a successor to
Mr Yea as Chief Executive to manage the Company through a deep
recession, delivering actions to strengthen the Company’s financial
position. In considering possible candidates, the Board unanimously
took the view that Mr Queen’s experience as Finance Director, his
stewardship of Growth Capital, his success in launching and managing
3i’s infrastructure business, the respect in which he was held within
3i and his deep knowledge of private equity made him the
outstanding choice.
The Board performance evaluation included consideration of the
overall functioning of the Board including strategic planning, risk
management processes, Board balance and succession issues, meeting
management and the work of the Board’s Committees, and agreed on
a number of changes designed to maintain focus on the challenges
facing the Company in turbulent economic times. It was agreed that
it was helpful to continue to hold additional ad-hoc Board Meetings
where circumstances warranted this, and the Board continued to
identify areas where its working practices could be developed further.
The Board reviewed its non-executive membership and agreed to
commence processes to recruit Directors to replace those likely to
leave the Board in the next two years. It further decided to appoint
Mr Robert Swannell as Senior Independent Director in 2009-10,
succeeding Mr Oliver Stocken, who would by then have been on the
Board for nine years. Mr Stocken remained Deputy Chairman. In his
role as Senior Independent Director during 2008-09 Mr Stocken led
a review by the Directors of the performance of the Chairman and
subsequently reported back to the Board. In view of the change in
executive leadership, the Board asked the Chairman to delay her
retirement from the Board for an appropriate period.
The roles of the Chairman, Chief Executive
and Senior Independent Director
The division of responsibilities between the Chairman of the Board
and the Chief Executive is clearly defined and has been approved by
the Board.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 K J Dunn,
Mr I M Nolan, Mr J B C Russell, Mr R Stefanowski, 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
Throughout the year Mr O H J Stocken served as Senior Independent
Director, to whom, in accordance with the Combined Code, concerns
were able to be conveyed. Mr R W A Swannell was appointed Senior
Independent Director with effect from 1 April 2009.
Directors
The Board comprises the Chairman, five independent non-executive
Directors, one other non-executive Director and two executive
Directors. Biographical details for each of the Directors are set out
on pages 66 and 67. Baroness Hogg (Chairman), Mr O H J Stocken,
Mr W Mesdag, Mme C J M Morin-Postel, Mr M J Queen, Lord Smith
of Kelvin and Mr R W A Swannell served throughout the period under
review. Mr R H Meddings served as a Director from 1 September
2008, Mrs J S Wilson served as a Director from 1 October 2008,
Mr F G Steingraber served as a Director until 9 July 2008, Mr S P Ball
served as a Director until 30 November 2008 and Mr P E Yea served
as a Director until 27 January 2009. Mrs J S Wilson is currently on
maternity leave and the Board has granted her leave of absence from
Board meetings.
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.
75
3i Group plc Report and accounts 2009
Governance
Directors’ independence
All the non-executive Directors (other than the Chairman, who was
independent on appointment) were considered by the Board to be
independent for the purposes of the Combined Code in the year
to 31 March 2009. Since 1 April 2009 all of the non-executive
Directors have been considered by the Board to be independent
for the purposes of the Combined Code with the exception of
Mr O H J Stocken, who has served as a non-executive Director for in
excess of nine years. Mr Stocken ceased to be a member of the Audit
and Compliance and the Remuneration Committees with effect from
1 April 2009. 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.
The Board considered the common directorship of Mr O H J Stocken
and Mr R H Meddings in Standard Chartered PLC where Mr Stocken is
a non-executive Director and Mr Meddings is an executive Director.
The Board concluded this common directorship did not affect
Mr Meddings’ independence from the Company and its management
as no executive Director of the Company has any influence over
Mr Meddings’ position or remuneration at Standard Chartered PLC.
Directors’ employment contracts
Details of executive Directors’ employment contracts are set out in
the Directors’ remuneration report on page 88.
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.
The Company has procedures for Directors to take independent legal
or other professional advice about the performance of their duties.
76
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.
Audit and Compliance Committee
The Audit and Compliance Committee comprises Mr R W A Swannell
(Chairman), Mr R H Meddings, Mme C J M Morin-Postel and Lord
Smith of Kelvin, all of whom served throughout the period, save for
Mr R W A Swannell who served from 9 July 2008 and Mr R H Meddings
who served from 1 January 2009. Mr O H J Stocken also served
as a member of the Committee throughout the period, and
Mr F G Steingraber served as a member of the Committee until
9 July 2008. All the members of the Committee are independent
non-executive Directors. The Board is satisfied that the Committee
Chairman, Mr R W A Swannell, has recent and relevant financial
experience.
During the year, there were seven meetings of the Committee (2008:
three meetings). The members who served throughout the period
attended all meetings. Mr R W A Swannell and Mr R H Meddings
attended the five and two meetings respectively following their
appointments. Mr F G Steingraber attended one meeting before he
ceased to be a member.
During the year, the Committee:
– reviewed the findings of the FSA Arrow review;
– 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 the reports of the Valuations Committee on the valuation
of the Group’s investment assets;
– 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.
3i Group plc Report and accounts 2009
Remuneration Committee
The Remuneration Committee comprises Lord Smith of Kelvin
(Chairman), Baroness Hogg, Mr W Mesdag and Mme C J M Morin-
Postel, all of whom served throughout the period. Mr O H J Stocken
also served as a member of the Committee throughout the period
until 31 March 2009. All the current 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 five scheduled meetings of the
Remuneration Committee as well as four ad hoc meetings called
to deal with matters arising at short notice (2008: six scheduled
meetings). The members who served throughout the period attended
all the scheduled meetings. Details of the work of the Remuneration
Committee are set out in the Directors’ remuneration report.
Nominations Committee
The Nominations Committee comprises Baroness Hogg (Chairman),
Mr O H J Stocken, Mr M J Queen, Mr R H Meddings, Mr W Mesdag,
Mme C J M Morin-Postel, Lord Smith of Kelvin and Mr R W A Swannell,
all of whom served throughout the year, save for Mr R H Meddings
who served from 1 January 2009 and Mr M J Queen who served
from 28 January 2009. Mr F G Steingraber served as a member
until 9 July 2008 and Mr P E Yea served as a member until
27 January 2009.
During the year, there were three scheduled meetings of the
Nominations Committee as well as two ad hoc meetings called to deal
with matters arising at short notice (2008: two scheduled meetings).
The members who served throughout the year attended all three
scheduled meetings save for Mr R W A Swannell and Mr W Mesdag
who attended two of the scheduled meetings. Mr R H Meddings and
Mr M J Queen each attended the one scheduled meeting following
their appointments. Mr F G Steingraber attended the one meeting
held before he ceased to be a Director and Mr P E Yea attended
the two scheduled meetings held before he ceased to be a member.
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;
– considered the size, balance and composition of the Board;
– recommended a candidate for appointment as the Finance Director
of the Company; and
– recommended a candidate for appointment as the Chief Executive
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.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Valuations Committee
The Valuations Committee comprises Baroness Hogg (Chairman),
Mr O H J Stocken, Mr M J Queen, Mrs J S Wilson and Mr R W A Swannell,
all of whom served throughout the year, save for Mrs J S Wilson who
served from 1 December 2008 and Mr M J Queen who served from
28 January 2009. Mr S P Ball served as a member until 30 November
2008 and Mr P E Yea served as a member until 27 January 2009.
During the year there were three meetings of the Valuations
Committee (2008: three meetings). The members who served
throughout the year attended all meetings. Mrs J S Wilson attended
the one meeting held following her appointment. Mr S P Ball attended
the two meetings held before he ceased to be a member and
Mr P E Yea attended the three meetings held before he ceased to
be a member.
During the year, the Valuations Committee considered and made
recommendations to the Audit Committee 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 General
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.
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.
The Company also uses its AGM as an opportunity to communicate
with its shareholders. At the Meeting, business presentations are
generally made by the Chief Executive and the Finance Director.
The Chairmen of the Remuneration, Audit and Compliance, and
Nominations Committees are generally 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 2008 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.
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3i Group plc Report and accounts 2009
Governance
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.
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 2009 and up
to the date of this report.
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 section on pages 47 to 52.
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 and global policies 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;
– 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 including
gearing and net debt levels, 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
– an internal audit function which undertakes periodic examination
of business units and processes and recommends improvements
in controls to management;
– the external auditors who are engaged to express an opinion on the
annual financial statements; and
– an Audit and Compliance Committee which considers significant
control matters and receives reports from the internal audit
function and the external auditors and the Group Compliance
function on a regular basis.
The internal control system is monitored and supported by an internal
audit function which operates on an international basis and reports
to management and the Audit and Compliance Committee on the
Group’s operations. The work of the internal audit function is focused
on the areas of greatest risk to the Group determined on the basis
of the Group’s risk management process.
The external auditors independently and objectively review the approach
of management to reporting operating results and financial condition.
In co-ordination with the internal audit function, 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.
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3i Group plc Report and accounts 2009
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 last review being held during the year to 31 March 2009.
Following this review the Audit and Compliance Committee 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:
– 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 102.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
79
3i Group plc Report and accounts 2009
Governance
Directors’ remuneration report
Remuneration Committee
Composition and terms of reference
The Remuneration Committee (the “Committee”) comprises
independent non-executive Directors, together with Baroness Hogg,
the Chairman of the Board. Its members during the year to 31 March
2009 (the “year”) were Lord Smith of Kelvin (Committee Chairman),
Baroness Hogg, Mr W Mesdag, Mme C J M Morin-Postel and
Mr O H J Stocken (who stepped down from the Committee on
31 March 2009). The Committee’s terms of reference are available
on the Company’s website.
Activities during the year
The Committee held five regular scheduled meetings during the year
to consider remuneration policy and to determine, 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. Ad hoc meetings were also
held to deal with various matters as they arose during the year.
The table below shows the attendance of Committee members
at the regular scheduled meetings during the year.
Name
Lord Smith of Kelvin
Baroness Hogg
Mr W Mesdag
Mme C J M Morin-Postel
Mr O H J Stocken
Scheduled meetings attended
5
5
5
5
5
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 Chief Executive,
Mr M J Queen from his appointment on 28 January 2009; and, until
his resignation from the Board on 27 January 2009, the former Chief
Executive, Mr P E Yea. Mr M J Queen and Mr P E Yea did not advise
the Committee on their own remuneration. Kepler Associates did not
provide any other services to the Group during the year.
Remuneration policy
Executive Directors
The Company’s policy is to provide remuneration and other benefits
sufficient to attract, retain and motivate executives of the calibre
required. Variable remuneration linked to performance (comprising
discretionary annual cash bonuses, deferred share bonuses and long-
term incentives) is intended to form a substantial component of total
remuneration. For the Chief Executive and Finance Director, the policy
is to provide remuneration competitive with other financial services
companies of broadly comparable size, while for any other executive
Directors (of which at present there are none) appropriate
benchmarks are sought within the private equity industry.
The Company’s defined benefit pension scheme has not been offered
to new employees joining the Company since 1 April 2006, and all
Management Committee members now remaining within it are either
subject to the plan earnings cap (currently £123,600) or became
subject to a pensionable salary cap in 2004 or 2005.
80
Long-term incentive arrangements for the Chief Executive and
Finance Director consist of share-based schemes; for any other
executives on the Board, long-term incentives have recently
principally been provided by carried interest or similar plans, for
which eligibility is usually determined by commitments to co-invest.
The Committee considered the guidance issued by the Financial
Services Authority on remuneration and in particular its emphasis on
the need to ensure that remuneration schemes do not incentivise
excessive risk taking and short-termism. Most of the long-term
variable incentive available within the Group consists of “carried
interest”, which only delivers on cash-to-cash performance. So far
as short-term remuneration is concerned the Committee took the
view that the economic conditions of 2008-09, which have had
a significant effect on Company performance, required particular
restraint with respect to remuneration in general and variable pay in
particular. Looking forward, the Company has made no structural
changes in remuneration for 2009-10, but will be undertaking a full
review of its remuneration policies in the course of the year which
may result in changes.
The Committee has also agreed that, going forward, executive
Directors will be subject to share ownership and retention guidelines.
These will require executive Directors to build up over time, and
then maintain, a shareholding equivalent to 1.5 times salary in the
Company’s shares. Following the introduction of an Employee Share
Investment Plan for employees who invest in the Company’s shares
following the rights issue, the Committee also proposes to consider
the mix of shareholding and co-investment requirements for members
of the Management Committee as part of this year’s review.
(a) Salaries
The Committee seeks the advice of its remuneration advisers in
reviewing salary benchmarks for the Chief Executive and Finance
Director (drawn from UK financial services companies of similar
market capitalisation). When considering pay increases, the
Committee is also sensitive to wider issues, including pay and
employment conditions elsewhere in the Group.
Salary increases for the years to 31 March 2009 and 2010
The average percentage increase in base salaries for members of
Management Committee (including executive Directors) granted in
July 2008 was 4.2% compared with 9.4% for other executive staff.
Mrs J S Wilson received an increase of 33% in base salary on her
appointment to the Board as Finance Director in October 2008.
Mr M J Queen received an increase of 21% on his appointment
as Chief Executive in January 2009. No member of Management
Committee will receive an increase in base salary in the summer
of 2009, except in consequence of promotion to a new role.
No executive Director will receive such an increase.
(b) Bonuses
Executive Directors are eligible for discretionary annual bonuses,
which are non-pensionable. Target bonuses for each executive
Director are determined by the Committee at the beginning of each
year, expressed as a multiple of salary, together with the split between
cash and deferred shares. The maximum bonus payable is twice the
target bonus. Annual bonus awards are determined on the basis of
corporate and personal performance for the Chief Executive and
the Finance Director. Bonuses above target will only be given for
outstanding performance. The Committee retains discretion to make
adjustments to bonus arrangements in appropriate circumstances,
and is able to take into account factors relating to social responsibility,
governance and environmental performance.
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Bonus arrangements for 2008-09 and 2009-10
For 2008-09 the target bonus for the Chief Executive was set at
125% of base salary and the maximum at 250%, whilst the Finance
Director had a target bonus of 100% of base salary and a maximum
of 200%. Any bonus over target would be in shares deferred for two
years. The target bonus set for Mr M J Queen as Managing Partner,
Infrastructure, was 125% of base salary with a maximum bonus of
twice the target bonus; any bonus over 1.5 times target was to be in
shares deferred for two years. The indicators to be used as a guide to
the corporate performance element were set out in the 2007-08
Remuneration Report. However, in current economic and financial
conditions, and following a sharp fall in 3i’s share price, the Committee
did not think it would be appropriate to pay any bonuses at all with
respect to 2008-09 to executive Directors and other members of
Management Committee, other than in fulfilment of contractual
requirements.
For 2009-10 the bonus ranges for the Chief Executive and Finance
Director will be the same as they were in 2008-09, and any bonus
over 100% of salary will be in shares deferred for two years.
The indicators to be used as a guide to the corporate performance
element for 2009-10 will reflect the Company’s current short
term priorities and will include the level of realisations, income
(fees, dividends, interest), cost control, provisions, vintage year returns
(for the last three years relative to the market) and net debt.
The bonus arrangements for future periods will reflect the outcome
of the proposed review of remuneration policies.
(c) Long-term incentives
Long-term incentive arrangements for the Chief Executive and
Finance Director consist of share options, Performance Share and
Super-performance Share awards under The 3i Group Discretionary
Share Plan (“the Discretionary Share Plan”). This is a shareholder-
approved executive share plan, conforming with the Association
of British Insurers’ guidelines on dilution limits.
Share options and/or share awards may be awarded under this plan,
at a level that is determined each year, taking account of market
practice, individual performance, the specific circumstances facing the
Company and calculations of the fair values of awards. The Company’s
current policy is that the annual maximum for an award of options
should be an aggregate market price at the time of issue of six times
salary, and for an award of Performance Shares an aggregate market
price of three times salary. A further limit is that the combination
of all share-based awards should not have a fair value of more than
2.5 times salary in any year.
Options under the Company’s executive share option plans entitle
executives to acquire ordinary shares, at an exercise price not less
than 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.
Since 2005, the condition has been that no options will vest if the
increase in net asset value per share, with dividends re-invested, is
less than RPI + 3% per year; that 30% of options will vest if this
threshold is reached; that 100% will vest if net asset value per share,
with dividends re-invested, increases by RPI + 8% a year; and that
options vest pro rata along the range of outcomes in between.
(Performance conditions for options granted to Directors before
2005 are given in the notes to the table on page 85.)
For awards of Performance Shares since 1 April 2007, the extent to
which they vest depends on comparison of the growth in value of
a shareholding in the Company over three years (averaged over a
60 day period) with the FTSE 100 Index (both with dividends
re-invested). If the growth in value for the Company is below that
for the FTSE 100 Index, no shares will vest. If growth in value is the
same as the index, 35% of the award will vest and if it is 8% per
annum higher the full award will vest. Between these two levels of
performance, the award will vest on a pro rata basis. (Performance
conditions for Performance Shares granted to Directors before 2007
are given in the notes to the table on page 86).
Super-performance Shares are subject to particularly challenging
conditions, and were introduced into the mix of long-term incentives
in 2006 to enable the Committee to draw from a wider range of
incentive schemes in determining incentive packages for each year.
They are still subject to the overall cap on awards of a maximum fair
value of 2.5 times salary. The performance condition is measured over
a three-year period. If the increase in net asset value per share with
dividends re-invested is less than RPI+ 10% per year then none of the
award vests. At that level 25% of the award vests. At a level of RPI+
13.5% per year 50% of the award vests and at a level of RPI+ 17.5%
per year 100% of the award vests. Between those points the award
vests on a pro-rata basis.
Fair values are calculated by the Committee’s remuneration advisers.
Performance conditions are regularly reviewed by the Committee
to determine whether they are appropriate to current market,
commercial and Company-specific conditions.
The Committee may also make grants of restricted shares subject
only to forfeiture conditions on departure from the Company within a
specified period, in order to meet recruitment or retention objectives.
3i’s co-investment and carried interest schemes, comparable to those
available in private equity firms with which 3i competes for talent,
have been used to provide long-term incentives for senior executives
other than the Chief Executive and Finance Director. (Further details
are provided on pages 89 and 90). The Chief Executive and Finance
Director are not eligible for these schemes, although the Chief
Executive is entitled to retain certain interests in such schemes he
had acquired before his appointment as Chief Executive.
Awards for the years to 31 March 2009 and 2010
In February 2009 share-based awards were made to Mr Queen on his
appointment as Chief Executive with face values of approximately
four times salary in share options and three times salary in
Performance Shares, with a combined “fair value” calculated by the
Committee’s remuneration advisers amounting to 1.72 times salary.
In view of the low share price at the date of grant, the options were
granted “out of the money” at £3.50, approximately 50% above the
market price at the time of the grant. The fair values were calculated
to be 10% of face value for the share options and 44% of face value
for the Performance Shares.
As Managing Partner, Infrastructure, Mr Queen was due to receive
a substantial cash payment from a recent disposal. The Committee
decided that instead he should receive a one-off grant of 170,000
shares, deferred for three years. Unlike the cash payment, these
shares will be forfeitable if Mr Queen leaves within three years.
As part of these arrangements and to reflect his commitment to 3i,
Mr Queen has undertaken that until at least 28 January 2011 he
will maintain at not less than their current level his shareholdings in
3i Group plc and 3i Infrastructure plc amounting to some 240,000
3i Group plc shares and some 450,000 3i Infrastructure plc shares.
He has also agreed to retain until at least that same date any shares
vesting under the Group’s share plans (after allowing sales to cover
tax, exercise costs etc.).
81
3i Group plc Report and accounts 2009
Governance
In November 2008, awards were made to Mrs Wilson on her
appointment as Finance Director with face values of approximately
3.55 times salary in share options and 2.47 times salary in
Performance Shares. The options were granted at the exercise price
of £4.81 per share. The fair value of the total award was calculated
to be 1.36 times salary, at 17% of face value per option and 44%
of face value per Performance Share.
Earlier awards made to the previous Chief Executive and Finance
Director are detailed on pages 84, 86 and 87.
The Committee will make its judgment as to the appropriate awards
for 2009-10 at the usual time, in the summer of 2009.
As part of the arrangements for the Company’s rights issue, the
Remuneration Committee has approved a specific Employee Share
Investment Plan to create alignment between employees and
shareholders. The plan will allow employees who have taken up their
rights and who agree to subscribe for additional shares at full market
price to receive an award of matching shares. The matching shares will
be awarded on the basis of one matching share for every two shares
purchased, subject to a performance condition. Directors will not be
eligible to receive these matching shares. Details of the arrangement
are set out in the Circular to Shareholders.
Full details of the interests Mr Queen was awarded during his
period as Managing Partner, Infrastructure and Managing Partner,
Growth Capital are given on pages 89 and 90. In considering
Mr Queen’s remuneration and incentive arrangements as Chief
Executive the Committee believes it is important to recognise the
very considerable potential financial benefits which Mr Queen would
have received had he remained in his previous position as Managing
Partner, Infrastructure, where he would have continued to benefit
from further awards under the Infrastructure Incentive Plan as
well as interests in certain carried interest and co-investment
arrangements. On becoming Chief Executive Mr Queen forfeited
certain of his interests in carried interest plans and became ineligible
for participation in future carried interest and co-investment
arrangements. Whilst it would be difficult to quantify the value
of these opportunities they have significant potential value.
Performance graphs
The left hand graph below compares the Company’s total shareholder
return (“3i TSR”) for the five financial years to 31 March 2009 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.
Chairman and non-executive Directors
The Company’s policy continues to be to pay fees which are
competitive with the fees paid by other financial services companies
of broadly similar size. The Chairman and non-executive Directors
are not eligible for bonuses, long-term incentives, pensions or
performance-related remuneration. Non-executive Directors’ fees 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.
The Chairman’s fee is determined by the Committee.
Fees during the year to 31 March 2009 and 2010
In 2008-09, the only increases in fees were for chairing the Audit and
Compliance and Remuneration Committees (which rose to £20,000
each) and an increase in the Deputy Chairman’s fee of £10,000.
For 2009-10, the only change follows from Mr Robert Swannell’s
appointment as Senior Independent Director in place of the Deputy
Chairman, Mr Oliver Stocken. The Deputy Chairman’s fee is therefore
being reduced by £10,000 and a fee of £10,000 is being paid to the
Senior Independent Director.
The table below shows the current annual fee structure.
Chairman
Non-executive Directors
Board membership
Deputy Chairman
Senior Independent Director
£260,000 plus 5,000 shares
£48,000 plus 1,000 shares
£78,000 plus 1,000 shares
£58,000 plus 1,000 shares
Committee fees*
Chairman
Member
£20,000
£3,000
*No fees are payable in respect of the Nominations Committee or the Valuations
Committee.
3i total shareholder return versus FTSE All-Share total return
(cumulative)
3i diluted NAV versus FTSE All-Share total return
(non-cumulative)
220
180
140
100
60
20
2004
2005
2006
2007
2008
2009
60
40
20
%
0
–20
–40
–60
2005
2006
2007
2008
2009
82
3i
FTSE All-Share
Rebased at 100 at 1 April 2004
3i diluted NAV (with dividends re-invested)
FTSE All-Share
3i Group plc Report and accounts 2009
Directors’ remuneration during the year
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
(note 1)
Salary
supplements
£’000
Salary and fees
£’000
Executive Directors (note 8)
M J Queen
J S Wilson
475
(from 1 October 2008)
206
Chairman and
non-executive Directors (note 10)
Baroness Hogg
O H J Stocken (note 9)
R H Meddings
(from 1 September 2008)
C J M Morin-Postel
W Mesdag
Lord Smith of Kelvin
R W A Swannell
Former Directors
F G Steingraber
(until 9 July 2008)
S P Ball (until 30 November
2008) (note 5)
P E Yea (until 27 January
2009) (note 11)
Total
Notes
287
109
32
60
63
75
71
17
347
694
2,436
–
–
–
–
–
–
–
–
–
–
51
226
277
Total salary,
(note 2)
Award
fees and deferred from
prior periods
£’000
supplements
£’000
(note 3)
(note 4)
Deferred
share award
£’000
Benefits
In kind
£’000
(note 5)
Total
Total
remuneration
remuneration
Pay in lieu
year to 31
year to 31
of notice March 2009 March 2008
£’000
£’000
£’000
475
206
287
109
32
60
63
75
71
17
398
375
400
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
1
–
–
–
–
–
–
–
–
2
920
2,713
–
375
–
400
7
12
–
–
–
–
–
–
–
–
–
–
1,252
2,045
207
–
287
109
290
113
32
60
63
75
71
17
–
64
42
74
61
60
168
–
168
568
1,311
927
3,668
2,576
6,636
1. Mr P E Yea and Mr S P Ball received salary supplements to enable them to make additional pension provision.
2. The £375,000 award shown for Mr Queen represented the exceptional payment described in note 1 on page 90 and paid in July 2008.
3. On appointment as Chief Executive, Mr Queen received a one-off award over 170,000 shares, forfeitable if employment ceases within three years. This was a deferred award,
intended to compensate Mr Queen for a cash payment he would otherwise have received arising from the recent disposal of an Infrastructure investment.
4.
“Benefits in kind” were health insurance (Mr M J Queen, Mrs J S Wilson, Mr P E Yea and Mr S P Ball) and company car (Mr P E Yea).
5. On ceasing to be a Director on 30 November 2008, Mr S P Ball received pay in lieu of notice, in respect of his unexpired contractual notice period, as shown in the table, being
a sum equal to his base salary, salary supplement, pension contributions and car allowance for the period from 1 December 2008 to 8 March 2009.
6.
In addition to the salaries and fees shown, fees retained from outside directorships during the year were: Mr M J Queen, £4,791 (Northern Rock plc, until 1 May 2008);
Mr S P Ball (until 30 November 2008), £49,167 (Cable & Wireless plc); and Mr P E Yea (until 27 January 2009), £91,667 (Vodafone Group plc). The Company’s policy is that
executive Directors are permitted to take a maximum of one outside directorship at a listed company and to retain the fee from such directorship.
7. After ceasing to be a Director on 27 January 2009, Mr P E Yea remained an employee until 31 March 2009. During that period, in addition to the amounts shown above,
Mr Yea was paid salary, salary supplements and benefits totalling approximately £201,000. Other amounts payable to former Directors in respect of the year were as follows:
Dr P Mihatsch, £138,197 (Chairman of the Company’s German Advisory Board); and Mr W J R Govett, £7,559 (as director of Gardens Pension Trustees Limited, a trustee of
the 3i Group Pension Plan, until his resignation on 17 November 2008).
8. As at 31 March 2009, executive Directors’ salaries were as follows: Mr M J Queen, £550,000 per annum and Mrs J S Wilson, £400,000 per annum.
9. The fees shown for Mr O H J Stocken include £15,000 as Chairman of Gardens Pension Trustees Limited, a trustee of the 3i Group Pension Plan.
10. During the year, non-executive Directors (other than those based in the US) were required to take part of their basic fee in the form of ordinary shares in the Company: for the
Chairman this amounted to 5,000 shares and for non-executive Directors 1,000 shares (583 on a pro-rated basis for Mr R H Meddings who was appointed during the year).
Figures in the table reflect the market value at the date of receipt (6 November 2008), which was 90% above the market value at 31 March 2009.
11. For the period from 31 March 2009 to 31 January 2010, in accordance with his service agreement, Mr Yea is entitled to receive monthly payments equal to his former salary
and benefits less amounts earned from alternative employment.
83
3i Group plc Report and accounts 2009
Governance
Share options held by Directors during the year:
Held at
1 April 2008
(or appointment
if later)
Date of grant
Granted
during
the year
Exercised
during
the year
Held at
31 March
Lapsed
2009
during (or cessation
if earlier)
the year
M J Queen
36,002
06.07.99
28.06.00
30,795
27.06.02 131,603
57,218
25.06.03
89,552
23.06.04
21.06.05
44,733
09.02.09
–
–
–
–
–
–
– 936,170
389,903 936,170
J S Wilson (appointed 1 October 2008)
11.01.06
14.06.06
18.06.07
23.06.08
12.11.08
13,113**
8,433**
21,303**
26,537**
–
–
–
–
– 249,739
69,386 249,739
S P Ball (until 30 November 2008)
17.05.05 245,022
48,100
21.06.05
14.06.06 200,956
18.06.07 230,080
23.06.08
–
–
–
–
– 354,644
724,158 354,644
P E Yea (until 27 January 2009)
21.07.04 314,410
21.06.05 259,740
14.06.06 322,966
18.06.07 368,129
23.06.08
–
–
–
–
– 571,773
1,265,245 571,773
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
36,002
–
30,795
– 131,603
–
57,218
–
89,552
–
44,733
–
936,170
– 1,326,073
–
13,113
–
8,433
–
21,303
–
26,537
– 249,739
– 319,125
– 245,022
–
48,100
– 200,956
– 230,080
– 354,644
– 1,078,802
– 314,410
– 259,740
– 322,966
– 368,129
– 571,773
– 1,837,018
The performance condition has not yet been met for those options shown in blue.
*The exercise price of these options was set approximately 50% above the market price at the date of grant.
**Awarded before appointment as a Director.
Exercise
Price
£
7.28
13.75
6.73
5.68
6.03
6.93
3.50*
8.96
8.36
11.74
8.29
4.81
6.53
6.93
8.36
11.74
8.29
5.73
6.93
8.36
11.74
8.29
Market price
on date of
exercise
£
Earliest
normal
exercise
date
Expiry
Date
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
31.03.12 08.02.19
11.01.09 10.01.16
14.06.09 13.06.16
18.07.10 17.06.17
23.06.11 22.06.18
12.11.11 11.11.18
17.05.08 16.05.15
21.06.08 20.06.15
14.06.09 13.06.16
18.06.10 17.06.17
23.06.11 22.06.18
21.07.07 20.07.14
21.06.08 20.06.15
14.06.09 13.06.16
18.06.10 17.06.17
23.06.11 22.06.18
84
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Notes
1. Options granted before 1 April 2001 were granted under The 3i Group 1994 Executive Share Option 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%.
2. Options granted after 1 April 2001 were granted under The 3i Group Discretionary Share Plan. Performance conditions for awards are measured over a three-year
performance period and are as set out below (NAV growth refers to annual percentage compound growth in net asset value per share with dividends re-invested, relative
to the annual percentage change in RPI). For options granted after 31 March 2004 there is no opportunity for the performance condition to be re-tested after the
three-year period.
Award granted
Since 31 March 2005
In year to 31 March 2005
Between 1 April 2001
and 31 March 2004
NAV growth required
for minimum vesting
%
vesting
NAV growth required
for maximum vesting
%
vesting
For NAV growth between
minimum and maximum
vesting levels
RPI + 3 percentage points
RPI + 3 percentage points
30% More than RPI + 8 percentage points 100% The grant vests pro rata
50% More than RPI + 8 percentage points 100% The grant vests pro rata
RPI + 5 percentage points
50%
RPI + 10 percentage points 100% The grant vests pro rata
3. The fair values of awards made during 2008-09 were as follows: Mr M J Queen, £220,000; Mrs J S Wilson, £241,400; Mr S P Ball, £499,800; and Mr P E Yea, £805,800.
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 (other than the premium priced options granted to Mr Queen in February 2009) was calculated as being 17% of the market value at the date
of grant of the shares under option.
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.
5.
Following the cessation of Mr Yea’s and Mr Ball’s employment with the Company during the year, the exercise periods of the options held by them were altered in accordance
with the rules of the Discretionary Share Plan so as to expire on the later of 12 months following the cessation of employment and six months following the satisfaction of the
performance conditions.
6. The market price of ordinary shares in the Company at 31 March 2009 was 271p and the range during the period 1 April 2008 to 31 March 2009 was 956.5p to 176.2p.
No Directors exercised share options during the year. Accordingly, no gains were made by the highest paid Director (2008: nil) or by the Directors in aggregate (2008: nil).
7. As at 31 March 2009, 14.37 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 at 31 March 2009, 15.53 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.
85
3i Group plc Report and accounts 2009
Governance
Performance Shares held by Directors during the year:
Date of
Held at 1 April 2008
award (or appointment if later)
Granted/issued
during the year
Vested during the year
Held at 31 March 2009
Lapsed during the year (or cessation if earlier)
M J Queen
06.02.09
Ord
B
Ord
–
–
– 702,127
– 702,127
J S Wilson (appointed 1 October 2008)
23.06.08
46,988*
–
–
12.11.08
–
46,988
– 124,869
– 124,869
S P Ball (until 30 November 2008)
14.07.05
18,076
54,376
20.07.06
19,323
31,259
30.07.07
77,656
–
–
–
–
23.06.08
–
– 177,322
115,055
85,635 177,322
P E Yea (until 27 January 2009)
14.07.05
65,078 195,758
20.07.06
31,056
50,238
30.07.07 124,250
–
–
–
–
23.06.08
–
– 285,886
220,384 245,996 285,886
*Awarded before appointment as a Director.
Notes
B
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Ord
–
–
–
–
–
B
–
–
–
–
–
Ord
B
Ord
–
–
–
–
–
– 702,127
– 702,127
– 46,988
– 124,869
– 171,857
11,351
34,147
6,725
20,229
–
B
–
–
–
–
–
–
Market price
on date
of grant £
Ord
Date of
vesting
2.35 06.02.12
8.29 23.06.11
4.81 12.11.11
6.98 14.07.08
4,294
6,947 15,029 24,312
8.60 20.07.09
43,143
– 152,694
– 34,513
– 24,628
–
–
11.01 30.07.10
8.29 23.06.11
11,351
34,147 206,856
27,176 74,170 24,312
40,868 122,935
24,210
72,823
–
–
6.98 14.07.08
–
– 31,056 50,238
8.60 20.07.09
13,805
– 119,119
– 110,445
– 166,767
–
–
11.01 30.07.10
8.29 23.06.11
–
–
–
–
–
–
–
–
–
–
40,868 122,935 157,134
72,823 308,268 50,238
1. During the year awards made in 2005 lapsed, as the performance condition was not met. On Mr S P Ball and Mr P E Yea ceasing to be employees on 30 November 2008 and
31 March 2009, respectively, certain other awards held by them were forfeited as shown above. The remaining Performance Shares remain subject to the original
performance condition.
2. The fair values of Performance Share awards made in the year were as follows: Mr M J Queen, £726,000; Mrs J S Wilson, £435,396; Mr S P Ball, £646,800; and Mr P E Yea,
£1,042,800. 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 44% of the market value at the date of award of the shares subject to the award.
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, 872 ordinary shares; and
Mr S P Ball, 482 ordinary shares.
4. The performance conditions relating to awards made after 1 April 2007 are detailed on page 81. 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.
86
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Super-performance Shares held by Directors during the year:
Date of
award
Held at 31 March 2009
Held at 1 April 2008 Lapsed during the year Vested during the year (or cessation if earlier)
Market
price
on date
of grant £
Date of
vesting
M J Queen
29.11.06
70,175 113,518
70,175 113,518
S P Ball (until 30 November 2008)
Ord
B
Ord
–
–
B
–
–
P E Yea (until 27 January 2009)
29.11.06
71,624 115,863
71,624 115,863
29.03.07
12,750
20,625
12,750
20,625
13.11.07
52,920
–
33,810
–
137,294 136,488 118,184 136,488
29.11.06 113,271 183,233 113,271 183,233
29.03.07
21,250
34,375
21,250
34,375
13.11.07
85,321
–
16,590
–
219,842 217,608 151,111 217,608
Ord
B
Ord
B
Ord
–
–
–
–
–
–
–
–
–
–
– 70,175 113,518
9.69 29.11.11
– 70,175 113,518
–
–
–
–
– 19,110
– 19,110
–
–
–
–
– 68,731
– 68,731
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
–
–
–
–
–
–
–
–
Notes
1. The performance condition relating to these awards is detailed on page 81.
2. On Mr S P Ball and Mr P E Yea ceasing to be employees on 30 November 2008 and 31 March 2009, respectively, certain Super-performance Shares held by them were
forfeited as shown above. The remaining Super-performance Shares remain subject to the original performance condition.
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 2008
Held at 1 April 2008 Held at 31 March 2009 Held at 31 March 2009 Held at 31 March 2009
(or appointment if later) (or appointment if later) (or appointment if later) (or cessation if earlier) (or cessation if earlier) (or cessation if earlier)
Dividend Shares
Held at 1 April 2008
Partnership Shares
Partnership Shares
Matching Shares
Matching Shares
Dividend Shares
M J Queen
Ord
926
B
Ord
B
2,154
1,850
4,313
J S Wilson (appointed 1 October 2008)
374
344
748
689
S P Ball (until 30 November 2008)
379
623
757
1,247
P E Yea (until 27 January 2009)
466
886
933
1,777
Ord
281
24
26
59
Notes
B
Ord
B
Ord
B
575
1,282
1,527
2,562
3,082
Ord
415
B
490
4
642
344
1,284
689
22
98
522
623
1,043
1,247
658
886
1,317
1,777
60
42
78
4
22
98
1.
In the period from 1 April 2009 to 1 May 2009, Mr M J Queen and Mrs J S Wilson each acquired a further 40 partnership ordinary shares and 80 matching ordinary shares.
2. During the year, ordinary shares were awarded under the Plan at prices between 888.7p and 199p per share and with an average price of 433.3p per share.
87
3i Group plc Report and accounts 2009
Governance
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 105 and 106.
(note 1)
(note 1)
(notes
1 & 2)
(note 3)
(note 1)
(notes
1 & 2)
(note 4)
(note 4)
Increase in
accrued
pension
Complete (excluding
inflation)
pensionable during the
years of
Director’s
contributions
(excluding
AVCs) paid
Total into the plan
own Increase in
accrued
pension
(including
inflation)
Transfer
value at
Difference
the end of
between
transfer
the year of
values at the increase
in accrued
start and
benefits
end of the
during the
accrued during the during the the accrued the accrued accounting
year less
year, less
Director’s
Director’s
2008 contribution contribution
£’000
£’000
£’000
31 March 31 March 31 March
2009
£’000
year to benefits at benefits at
31 March
Transfer
value of
Transfer
value of
year to
service at
31 March 31 March
2009
year to pension at
31 March
2009
2009
2009
£’000 p.a. £’000 p.a. £’000 p.a. £’000 p.a.
2009
21
(0.4)
232.0
20.0
10.7 3,926.3
2,916.7
989.6
(31.5)
3
3
4
2.3
1.5
2.3
7.6
9.0
11.2
5.9
3.9
5.9
2.6
1.9
2.7
98.2
159.7
239.8
50.4
99.5
145.7
41.9
56.3
88.2
23.9
22.9
43.3
Age at
31 March
2009
47
41
48
54
M J Queen
J S Wilson
S P Ball
P E Yea
Notes
1.
In the cases of Mr P E Yea and Mr S P Ball, 31 March 2009 and 30 November 2008, respectively, being the dates that they left pensionable service.
2. The increase in accrued pension shown reflects the difference between deferred pensions on leaving, payable from age 60.
3. The pensions shown are deferred pensions payable from age 60.
4. The transfer values have been calculated on the basis of actuarial advice in accordance with pensions regulations.
5. Additional voluntary contributions are excluded from the above table.
6. The pensions shown above become payable at a Normal Retirement Age of 60.
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.
The main terms of the service contracts of the executive Directors who served in the year are shown in the following table:
Dates of contracts
Notice period – by the Director
– by the Company
Termination payments
31 March 2009
1 October 2008
19 April 2005
27 July 2004
Mr M J Queen:
Mrs J S Wilson:
Mr S P Ball:
Mr P E Yea:
– Six months
– 12 months
Company policy is that executive Directors’ notice periods should not normally exceed one year.
Save for these notice periods the contracts have no unexpired terms.
There were no provisions for compensation of executive Directors on early termination save as follows:
(a) the contracts for Mr Queen and Mr Yea contained provisions entitling the Company 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; and
(b) all Directors’ contracts entitled the Company to give pay in lieu of notice.
88
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Arrangements relating to Mr Queen’s previous responsibilities
Before his appointment as Chief Executive on 28 January 2009 Mr Queen had been awarded interests in various arrangements relating to his
responsibilities as Managing Partner, Infrastructure and, before that, Managing Partner, Growth Capital.
(a) The Infrastructure Incentive Plan
The Infrastructure Incentive Plan was established to align the remuneration of infrastructure executives with both the interests of the Group
and the objectives of infrastructure investors, who expect to see much of their return in the form of yield. Executives are granted a percentage
interest in a bonus pool for each year, and required to invest from their own resources in shares in 3i Infrastructure plc 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 plc.
In general 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% a year
later and 25% two years later. Mr Queen undertook to invest approximately £1 million in 3i Infrastructure plc shares over three years from
13 March 2007 (and to retain these shares for a three-year period) and has to date invested a total of £889,000. Mr Queen remains entitled
to his existing participation in the Infrastructure Incentive Plan for periods to 31 March 2009 and will continue to receive payments in relation
to that participation. However, following his appointment as Chief Executive, Mr Queen will not be eligible to receive further awards under this
plan and will not be required to make the final instalment of the investment referred to above.
Scheme interests, being the percentage of
the bonus pool in which the participant
is interested
Award as at
1 April 2008
Awarded
in year
As at
31 March
2009
End of period
over which
interests
may vest
Amounts
received
in respect
of scheme
interests
in year
£’000
Amounts
receivable
in respect
of scheme
interests in
future years
£’000
16.4%
–
5.94%
15.5%
22.34% 31.03.10
15.5% 31.03.10
1,524
–
1,524
1,413
M J Queen
Vintage year 2007-08
Vintage year 2008-09
Note
Amounts receivable under scheme interests are payable as follows: for vintage year 2007-08, 50% was paid in July 2008 and 25% is expected to be paid in each of July 2009 and
July 2010; for vintage year 2008-09, 50% will be paid in July 2009 and 25% is expected to be paid in each of July 2010 and July 2011.
(b) Co-investment plans
M J Queen
Global Growth Co-invest 2006-08 plans
Invested to 1 April 2008
£’000
Invested during the year
£’000
Total invested to
31 March 2009
£’000
97
–
97
Scheme interests, being the percentage of
the relevant pool of investments in which the
participant is interested
As at
1 April 2008
Acquired
in year
As at
31 March
2009
in respect of
End of
period over
which
Amounts
receivable Accrued value
of scheme
scheme interests as at
interests
31 March
interests vested in year
2009
£’000
may vest
£’000
M J Queen
Global Growth Co-invest 2006-08 plans
Notes
0.023%
–
0.023% 31.07.08
Nil
30
1. Mr Queen ceased to be eligible to make any further related co-investment in the above plan with effect from 1 April 2007, following his appointment as Managing Partner,
Infrastructure.
2. The accrued value of the scheme interest is calculated on the basis set out in note 5 on page 102. Accrued values can increase and decrease with investment valuations and
other factors and will not necessarily lead to an actual payment to the participant.
89
3i Group plc Report and accounts 2009
Governance
(c) Carried interest plans
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
End of
interests
period over
31 March which interests vested in year
£’000
may vest
2009
Amounts
receivable Accrued value
in respect
of scheme
of scheme interests as at
31 March
2009
£’000
As at
1 April 2008
Awarded
in year
M J Queen
Pan-european Growth Capital 2005-06
Infrastructure 2005-06
Primary Infrastructure 2005-06
Global Growth 2006-08 plans
Notes
0.44%
0.69%
0.53%
0.34%
–
–
–
–
0.44% 31.03.10
0.69% 16.05.10
0.53% 19.08.10
0.34% 31.03.11
342
Nil
Nil
Nil
642
469
33
Nil
1. As disclosed previously, in recognition of Mr Queen’s increased focus on infrastructure investment on his appointment in 2007 as Managing Partner, Infrastructure, 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. After consultation with major shareholders, it was
decided that he would instead receive an exceptional payment, part of which was deferred over the three years from 2007-08 to 2009-10. The second payment as part of
this arrangement, in respect of 2008-09, is set out in note 2 to the table on page 83.
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 102. Accrued values can increase and decrease with investment valuations
and other factors and will not necessarily lead to a payment to the participant.
4. Total carried interest, for all executives eligible to participate, does not exceed 15% of the relevant pool of investments made over a specific period (usually two years).
(d) Combined carried interest and co-investment plans
Amounts co-invested
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
Invested
during the year
£’000
Total invested
to 31 March
2009
£’000
As at
1 April 2008
Awarded
in year
Forfeited
in year
As at
End of
interests
period over
31 March which interests vested in year
£’000
may vest
2009
Amounts
receivable Accrued value
in respect
of scheme
of scheme interests as at
31 March
2009
£’000
M J Queen
Global Growth 08-10
India Infrastructure 07-10
Note
–
–
0.24%
2.43%
0.21%
1.43%
0.03% 31.03.13
1.00% 30.09.12
Nil
Nil
Nil
418
In accordance with the provisions of the relevant plans, following his appointment as Chief Executive, Mr Queen forfeited a proportion of his interests in the Global Growth 08-10
and India Infrastructure 07-10 plans.
Audit
The tables in this report (including the notes thereto) on pages 83 to 90 have been audited by Ernst & Young LLP.
By Order of the Board
Lord Smith of Kelvin Chairman, Remuneration Committee
8 May 2009
90
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
8
Financial statements
Pages 91-120
Independent auditors’ report to the members of 3i Group plc
Income statement
Statement of recognised income and expense
Reconciliation of movements in equity
Balance sheet
Cash flow statement
Significant accounting policies
Notes to the financial statements
92
93
94
94
95
96
97
101
91
3i Group plc Report and accounts 2009
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
2009 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 and portfolio and additional
information. 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 2009 and of its loss 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 2009;
– 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
8 May 2009
London
92
3i Group plc Report and accounts 2009
Income statement
for the year to 31 March
Realised profits over value on the disposal of investments
Unrealised (losses)/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
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Other finance income
(Loss)/profit before tax
Income taxes
(Loss)/profit for the year
Earnings per share
Basic (pence)
Diluted (pence)
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Notes
2
3
4
1
1
5
5
6
10
10
11
13
12
2009
£m
63
(2,440)
(2,377)
65
108
(2)
(2,206)
75
(3)
56
(250)
(2,328)
34
(120)
(38)
505
3
(1,944)
(4)
(1,948)
2008
£m
523
291
814
56
149
22
1,041
60
60
(152)
(274)
735
89
(105)
158
(44)
1
834
(6)
828
28
28
(522.2)
(522.2)
207.9
173.4
93
3i Group plc Report and accounts 2009
Statement of recognised income and expense
for the year to 31 March
(Loss)/profit for the year
Exchange differences on translation of foreign operations
Revaluation of own-use property
Actuarial losses
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
Equity settled call option
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
26
26
26
Notes
8
29
21
26
26
26
Group
2009
£m
(1,948)
(190)
(4)
(8)
(2,150)
99
(2,059)
(190)
(2,150)
Group
2008
£m
828
6
(1)
(41)
792
111
675
6
792
Company
2009
£m
(1,602)
–
(3)
–
(1,605)
20
(1,625)
–
(1,605)
Company
2008
£m
882
–
(1)
–
881
94
787
–
881
Group
2009
£m
4,057
5
(2,150)
3
(64)
–
9
–
2
1,862
Group
2008
£m
4,249
–
792
8
(70)
(808)
19
(120)
(13)
4,057
Company
2009
£m
3,930
5
(1,605)
3
(64)
–
9
–
–
2,278
Company
2008
£m
4,020
–
881
8
(70)
(808)
19
(120)
–
3,930
94
3i Group plc Report and accounts 2009
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
Convertible bonds
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
Other reserves
Own shares
Total equity
Baroness Hogg Chairman
8 May 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Notes
Group
2009
£m
Group
2008
£m
Company
2009
£m
Company
2008
£m
13
13
13
14
15
16
18
19
21
20
22
9
12
24
23
19
20
18
24
25
26
26
26
26
26
26
26
27
26
611
1,970
1,469
4,050
44
–
22
4,116
70
10
59
675
814
4,930
(51)
(1,793)
(12)
(384)
(7)
(18)
–
(18)
(2,283)
(255)
(61)
(349)
–
(112)
(3)
(5)
(785)
(3,068)
1,862
284
405
42
20
(179)
968
394
5
(77)
1,862
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
551
715
303
1,569
44
2,641
4
4,258
176
10
26
545
757
5,015
–
(1,522)
(12)
(384)
–
–
–
–
(1,918)
(358)
–
(349)
–
(112)
–
–
(819)
(2,737)
2,278
284
405
42
20
–
1,257
265
5
–
2,278
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
95
3i Group plc Report and accounts 2009
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
Premium on call options acquired
Premium on call options sold
Proceeds from long-term borrowings
Repayment of long-term borrowings
Net cash flow from short-term borrowings
Net cash flow from derivatives
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
96
Group
2009
£m
Group
2008
£m
Company
2009
£m
Company
2008
£m
(827)
1,308
23
65
–
63
43
(103)
(316)
(5)
251
9
–
–
2
(9)
(64)
34
(80)
(78)
29
686
(585)
(46)
(249)
(15)
(366)
(4)
3
(1)
(116)
752
39
675
(2,072)
1,824
47
56
22
61
67
(154)
(243)
(7)
(399)
19
(120)
(21)
8
(798)
(70)
95
(125)
–
–
591
(413)
(23)
(110)
1,624
657
(6)
1
(5)
253
486
13
752
(777)
1,072
14
46
–
–
43
–
(144)
-
254
9
–
–
–
(9)
(64)
28
(79)
(78)
29
686
(566)
(46)
(249)
(1)
(340)
–
–
–
(86)
611
20
545
(2,246)
1,733
21
45
–
–
67
–
(108)
3
(485)
19
(120)
–
–
(798)
(70)
88
(79)
–
–
592
(401)
(23)
(110)
1,643
741
–
–
–
256
346
9
611
3i Group plc Report and accounts 2009
Significant accounting policies
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 2009
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 8 May 2009.
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
IFRS 3
IAS 32/IAS 1
IAS 39
IFRIC 15
IFRIC 16
Amendment – Share-based payments: Vesting conditions and cancellations
Operating Segments
Presentation of Financial Statements (Revised)
Borrowing Costs (Revised)
Amendment – Consolidation and Separate Financial Statements
Business Combinations (Revised)
Amendment – Puttable Financial Instruments and Obligations Arising on Liquidation
Eligible Hedged Items
Agreements for the Construction of Real Estates
Hedges of a Net Investment in a Foreign Operation
Effective for period beginning on or after
1 January 2009
1 January 2009
1 January 2009
1 January 2009
1 July 2009
1 July 2009
1 January 2009
1 July 2009
1 January 2009
1 October 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.
97
3i Group plc Report and accounts 2009
Significant accounting policies
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 debt instruments and are carried in the balance sheet at the value derived from the bid prices of the underlying debt instruments 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.
98
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 their 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
The Convertible Bonds are cash settled and 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 have historically been 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.
Derivatives over own shares are classified as equity when they will be settled by the exchange of a fixed amount of shares for a fixed amount of cash.
(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.
99
3i Group plc Report and accounts 2009
Significant accounting policies
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 charges 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.
100
3i Group plc Report and accounts 2009
Notes to the financial statements
1 Segmental analysis
Year to 31 March 2009
Gross portfolio return
Realised profits/(losses) over value on the disposal of investments
Unrealised (losses)/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
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Fees receivable from external funds
Net divestment/(investment)
Realisation proceeds
Investment
Balance sheet
Value of investment portfolio at end of year
Year to 31 March 2009
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 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
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Portfolio
£m
255
(995)
62
(678)
45
494
(519)
(25)
(66)
(1,029)
60
(1,035)
1
461
(343)
118
(20)
(62)
32
(50)
26
117
(50)
67
–
26
–
26
3
–
(3)
(3)
4
(68)
11
(53)
–
27
–
27
(110)
(312)
6
(416)
–
209
(53)
156
Total
£m
63
(2,440)
171
(2,206)
75
1,308
(968)
340
1,467
1,574
371
171
153
314
4,050
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Portfolio
£m
370
245
116
731
39
858
(788)
70
75
160
67
302
2
503
(990)
(487)
6
43
18
67
18
57
(38)
19
–
(42)
–
(42)
1
18
(182)
(164)
7
(27)
20
–
–
136
(6)
130
Total
£m
523
291
227
1,041
60
65
(88)
6
(17)
–
170
(156)
14
1,742
(2,160)
(418)
2,025
2,366
501
142
244
738
6,016
UK
£m
(494)
47
280
(316)
(36)
Continental
Europe
£m
(972)
19
795
(539)
256
Asia
£m
(285)
9
127
(46)
81
North
America Rest of World
£m
(16)
–
£m
(439)
–
106
(63)
43
–
(4)
(4)
Total
£m
(2,206)
75
1,308
(968)
340
1,719
1,618
491
209
13
4,050
UK
£m
372
37
783
(972)
(189)
Continental
Europe
£m
559
18
894
(707)
187
Asia
£m
149
5
25
(171)
(146)
North
America
£m
(30)
–
40
(303)
(263)
Rest of World
£m
(9)
–
Total
£m
1,041
60
–
(7)
(7)
1,742
(2,160)
(418)
2,250
2,573
679
497
17
6,016
2 Realised profits over value on the disposal of investments
Net proceeds
Valuation of disposed investments
Investments written off
2009
Unquoted
equity
£m
1,023
(896)
(14)
113
2009
Quoted
equity
£m
172
(214)
–
(42)
2009
Loans and
receivables
£m
113
(117)
(4)
(8)
2009
Total
£m
1,308
(1,227)
(18)
63
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
101
3i Group plc Report and accounts 2009
Notes to the financial statements
3 Unrealised (losses)/profits on the revaluation of investments
Movement in the fair value of equity
Provisions, loan impairments and other movements*
2009
Unquoted
equity
£m
(1,323)
(110)
(1,433)
2009
Quoted
equity
£m
(126)
–
(126)
2009
Loans and
receivables
£m
–
(881)
(881)
2009
Total
£m
(1,449)
(991)
(2,440)
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
*Included within loan impairments for the Group and Company is an £112 million value reduction for variable funding notes relating to the debt warehouse (2008: £12 million).
Provisions have been recognised only on investments where it is considered there is a 50% 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
2009
£m
13
(15)
(2)
2008
£m
45
(23)
22
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
2009
£m
(3)
56
53
2008
£m
60
(152)
(92)
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. During the period,
the performance of some of the schemes resulted in a reversal of the accrual recognised as at 31 March 2008 resulting in the £56 million gain.
6 Operating expenses
Operating expenses include the following amounts:
Depreciation of property, plant and equipment
Audit fees
Staff costs (note 7)
Restructuring and redundancy costs
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)
2009
£m
7
2
110
45
2008
£m
7
1
178
8
2009
£m
2008
£m
0.6
0.5
0.4
0.1
1.6
0.3
0.2
2.1
0.3
0.6
0.4
0.1
1.4
0.4
0.2
2.0
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 15% 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 (2008: less than £0.1 million).
102
3i Group plc Report and accounts 2009
7 Staff costs
Wages and salaries
Social security costs
Share-based payment costs (note 8)
Pension costs (note 9)
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2009
£m
73
11
12
14
110
2009
£m
1
2
1
8
12
2008
£m
130
20
12
16
178
2008
£m
6
2
1
3
12
The average number of employees during the year was 702 (2008: 772).
Wages and salaries shown above include salaries paid in the year and bonuses relating to the year. These costs are charged against operating expenses.
8 Share-based payments
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.
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:
Outstanding at start of the year
Granted
Exercised
Lapsed
Outstanding at end of year
Exercisable at end of year
2009
Number of
share options
12,577,113
3,126,458
(1,233,466)
(1,344,675)
13,125,430
7,414,046
2009
Weighted
average
exercise price
(pence)
781
665
661
858
758
713
2008
Number of
share options
16,894,767
1,360,430
(4,210,287)
(1,467,797)
12,577,113
6,821,753
2008
Weighted
average
exercise price
(pence)
712
1,165
637
764
781
735
Included within the total number of share options are options over 2 million (2008: 3 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.
103
3i Group plc Report and accounts 2009
Notes to the financial statements
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
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2009
Weighted
average
exercise
price
(pence)
–
832
1,356
895
647
571
596
691
839
1,165
664
758
2009
Number
–
409,165
687,704
9,300
995,892
963,684
2,062,830
2,285,471
1,346,734
1,260,092
3,104,558
13,125,430
2008
Weighted
average
exercise
price
(pence)
628
819
1,341
895
644
571
597
692
839
1,165
–
781
2008
Number
325,590
579,862
1,024,860
16,761
1,132,187
1,088,933
2,408,538
3,312,195
1,388,851
1,299,336
–
12,577,113
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 872p (2008: 1,136p). The options outstanding at the end of the year have a weighted average
contractual life of 6.33 years (2008: 6.07 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 241p (2008: 456p). 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 (%)
2009
636
47
8.5
4.6
3.6
2008
1,195
29
8.5
5.5
1.7
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 (2008: 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.
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.
104
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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 £6 million (2008: £5 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 2007 was updated on an IAS 19 basis by an independent qualified actuary as at 31 March 2009.
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
2009
6.7%
5.7%
3.6%
3.2%
6.2%
2008
6.0%
6.0%
3.8%
3.5%
6.2%
The post-retirement mortality assumptions used to value the benefit obligation at 31 March 2009 are based on 80% PNA medium cohort (2008: 80%) with 1.5% pa minimum
annual improvement “PA00 medium cohort table” (2008: 1.5% PA00 medium cohort table). The life expectancy of a male member reaching age 60 in 2029 (2008: 2028) is
projected to be 33.8 (2008: 33.6) years compared to 30.3 (2008: 30.2) years for someone reaching 60 in 2009.
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
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
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 (gain)/loss
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
Contributions paid to the Group Pension Plan are related party transactions as defined by IAS 24 Related party transactions.
2009
£m
437
(419)
18
2009
£m
8
(30)
31
8
17
2009
£m
515
8
–
31
(102)
1
(16)
437
2009
£m
477
30
(110)
38
(16)
419
2008
£m
515
(477)
38
2008
£m
10
(30)
24
41
45
2008
£m
480
10
1
24
12
1
(13)
515
2008
£m
479
30
(29)
10
(13)
477
105
3i Group plc Report and accounts 2009
Notes to the financial statements
9 Retirement benefit deficit (continued)
The fair value of the Plan assets at the balance sheet date is as follows:
Equities
Gilts
Other
2009
£m
216
204
(1)
419
2008
£m
261
217
(1)
477
The actual return on Plan assets for the year was a loss of £79 million (2008: gain of £1 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.
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
2009
£m
437
(419)
18
(2)%
26%
2008
£m
515
(477)
38
(1)%
6%
2007
£m
480
(479)
1
2%
–
2006
£m
472
(455)
17
–
(11)%
2005
£m
390
(367)
23
(4)%
(4)%
The cumulative actuarial losses recognised in equity are £52 million (2008: losses £44 million).
The Group expects to make regular contributions of approximately £12 million to the Plan in the year to 31 March 2010. The triennial valuation completed in September 2008
resulted in an actuarial deficit of £86 million. The Group has agreed to fund this over five years making contributions of £20 million per annum. Included with note 34 (Post Balance
Sheet Events) are details regarding further commitments to the UK defined benefit plan.
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 £5 million (2008: £4 million) and the future liability calculated by German actuaries is £7 million (2008: £5 million). The Group carries both the asset and liability in its
consolidated financial statements and has recognised an actuarial loss of £2 million (2008: £1 million).
10 Net interest payable
Interest receivable
Interest on bank deposits
Net finance income on pension plan
Interest payable
Interest on loans and borrowings
Interest on Convertible Bonds
Amortisation of Convertible Bonds
Subordinated borrowings*
Net finance expense on pension plan
Net interest payable
*Includes fair value movement on the underlying loan.
11 Movement in the fair value of derivatives
Forward foreign exchange contracts and currency swaps
Interest-rate swaps
Derivative element of Convertible Bonds
Call options
Further information on interest-rate swaps is provided in note 18 and on 3i’s Convertible Bonds in note 20.
106
2009
£m
2008
£m
34
–
34
(84)
(17)
(20)
2
(1)
(120)
(86)
2009
£m
4
(46)
58
(54)
(38)
83
6
89
(86)
(4)
(7)
(8)
–
(105)
(16)
2008
£m
(1)
(3)
162
–
158
3i Group plc Report and accounts 2009
12 Income taxes
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income taxes in the income statement
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2009
£m
2008
£m
(6)
2
(4)
(5)
(1)
(6)
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 28% (2008: 30%), and the differences are explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax
in the UK of 28% (2008: 30%)
Effects of:
Permanent differences
Short-term timing differences
Current period unutilised tax losses
Prior period utilised tax losses
Non-taxable UK dividend income
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
2009
£m
(1,944)
2008
£m
834
544
(250)
3
4
–
–
5
(6)
3
(3)
(8)
(2)
18
10
(5)
1
(557)
(4)
233
(6)
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
Income in accounts taxable in the future
Recognised through income statement
Tax losses utilised
Income in accounts taxable in the future
Closing deferred income tax liability
Tax losses
Income in accounts taxable in the future
2009
Group
balance
sheet
£m
5
(7)
(2)
4
(2)
2
9
(9)
–
2008
Group
balance
sheet
£m
12
(13)
(1)
(7)
6
(1)
5
(7)
(2)
At 31 March 2009 the Group had tax losses carried forward of £751 million (2008: £867 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. Deferred income taxes are calculated using an expected rate of corporation tax in the UK of 28%
(2008: 30%).
13 Investment portfolio
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Provision and impairment of loans and receivables
Other movements
Closing book value
Quoted
Unquoted
Closing book value
Group
2009
Equity
investments
£m
4,098
489
(1,124)
(1,449)
(110)
677
2,581
611
1,970
2,581
Group
2009
Loans and
receivables
£m
1,918
479
(121)
–
(881)
74
1,469
–
1,469
1,469
Group
2009
Total
£m
6,016
968
(1,245)
(1,449)
(991)
751
4,050
611
3,439
4,050
107
3i Group plc Report and accounts 2009
Notes to the financial statements
13 Investment portfolio (continued)
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
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
2008
Total
£m
4,362
2,160
(1,219)
479
(188)
422
6,016
889
5,127
6,016
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 £4 million (2008: £46 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.
The variable funding note, relating to the debt warehouse, is included within loans and receivables and had a carrying value of £nil (2008: £32 million).
Included within the income statement are foreign exchange gains of £505 million (2008: £(44) million). This includes exchange movements on non-monetary items (eg equity
investment portfolio) and on monetary items (eg non-sterling loans and borrowings) as well as foreign exchange gains/losses on currency swaps and forward currency contracts.
Foreign exchange losses on monetary items not measured at fair value total £231 million (2008: £225 million) and on currency swaps and forward currency contracts total
£251 million (2008: £200 million). A further £971 million (2008: £342 million) relates to foreign currency denominated inter-company loans.
14 Interests in Group entities
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
Details of significant Group entities are given in note 35.
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
15 Property, plant and equipment
Land and buildings
Opening cost or valuation
Additions at cost
Disposals
Revaluation
Closing cost or valuation
Net book amount
Depreciation charged in the year on buildings was £nil (2008: £0.2 million).
108
Company
2009
Equity
investments
£m
231
35
–
(89)
(50)
–
127
Company
2009
Loans and
receivables
£m
2,909
547
494
(611)
(1,268)
443
2,514
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
Group
2009
£m
9
–
–
(4)
5
5
Group
2008
£m
10
–
–
(1)
9
9
Company
2009
£m
8
–
–
(4)
4
4
Company
2009
Total
£m
3,140
582
494
(700)
(1,318)
443
2,641
Company
2008
Total
£m
1,766
2,202
360
(1,275)
(27)
114
3,140
Company
2008
£m
9
–
–
(1)
8
8
3i Group plc Report and accounts 2009
15 Property, plant and equipment (continued)
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
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:
Within one year
Between one and five years
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Group
2009
£m
49
4
(3)
50
28
7
(2)
33
17
Group
2009
£m
1
–
1
Group
2009
£m
1
–
Group
2008
£m
44
6
(1)
49
22
7
(1)
28
21
Group
2008
£m
1
–
1
Group
2008
£m
–
1
Company
2009
£m
–
–
–
–
–
–
–
–
–
Company
2009
£m
–
–
–
Company
2009
£m
–
–
Company
2008
£m
–
–
–
–
–
–
–
–
–
Company
2008
£m
–
–
–
Company
2008
£m
–
–
The Group’s freehold properties and long leasehold properties are revalued at each balance sheet date by professional valuers. The valuations were undertaken in accordance with
the Appraisal and Valuation Manual of the Royal Institute of Chartered Surveyors in the United Kingdom by CBRE and Howell Brooks, independent Chartered Surveyors.
16 Other current assets
Prepayments
Other debtors
Amounts due from subsidiaries
17 Financial risk management
Group
2009
£m
12
58
–
70
Group
2008
£m
39
10
–
49
Company
2009
£m
6
10
160
176
Company
2008
£m
12
9
161
182
Introduction
A review of the Group’s objectives, policies and processes for managing and monitoring risk is set out in the Risk section. References in this note to the Risk section refer only to the
contents of that section and not to other information referred to from the Risk section. This note provides further detail on financial risk management, cross-referring to the Risk
section where applicable, and includes quantitative data on specific financial risks.
The Group is a highly selective investor 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 set out in the Risk section.
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 19 and the Group’s equity is analysed into its various components in note 26. 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.
Cash, deposits and derivative financial assets
Borrowings and derivative financial liabilities
Net debt
Total equity
Gearing (net debt/total equity)
Group
2009
£m
744
( 2,656)
(1,912)
1,862
103%
Group
2008
£m
820
(2,458)
(1,638)
4,057
40%
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 updated 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. Following the Group's FSA ARROW visit in June 2008, 3i Group complies with the Individual Capital Guidance
as agreed with the FSA and remains at a significant regulatory capital surplus. The Group’s Pillar 3 disclosure document can be found on 3iGroup.com.
109
3i Group plc Report and accounts 2009
Notes to the financial statements
17 Financial risk management (continued)
Financial risks
Concentration risk
The Group’s exposure to and mitigation of concentration risk is explained within “investment risks” and ”liquidity risks” in the Risk section. Quantitative data regarding the
concentration risk of the portfolio across economic sectors and geographies can be found in the Portfolio and additional information section in the tables 3i direct portfolio by
geography and 3i direct portfolio value by sector.
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 circa 79% of the Group’s
surplus cash held on demand in AAA Liquidity funds. The balance is held on short-term deposit with 3i's relationship banks. 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. 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 in the Risk section. 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
2009
not past
due
£m
1,749
Group
2009
up to
12 months
past due
£m
415
Group
2009
more than
12 months
past due
£m
82
Group
2009
Total
£m
2,246
Company
2009
not past
due
£m
401
Company
2009
up to
12 months
past due
£m
99
Company
2009
more than
12 months
past due
£m
55
Company
2009
Total
£m
555
(37)
(3)
(6)
(46)
(13)
(3)
(6)
(22)
(421)
1,291
(280)
132
(30)
46
(731)
1,469
(158)
230
(48)
48
(24)
25
(230)
303
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
*Included within impairments not past due for the Group and Company is a £112 million value reduction for variable funding notes relating to the debt warehouse (2008: £12 million).
Movements on loan impairments and provisions are shown below.
Balance as at 31 March 2007
Other movements
Charged to income statement in year
Balance as at 31 March 2008
Other movements
Charged to income statement in year
Balance as at 31 March 2009
Group
Provisions
£m
(109)
65
(41)
(85)
85
( 46)
(46)
Group
Impairments
£m
(107)
74
(38)
(71)
175
( 835)
(731)
Group
Total
£m
(216)
139
(79)
(156)
260
( 881)
(777)
Company
Provisions
£m
(98)
60
(6)
(44)
33
(11)
(22)
Company
Impairments
£m
(72)
30
(24)
(66)
77
(241)
(230)
Company
Total
£m
(170)
90
(30)
(110)
110
(252)
(252)
Liquidity risk
Further information on how liquidity risk is managed is provided in the Risk section. The table below analyses the maturity of the Group’s contractual liabilities.
Financial liabilities (excluding currency swaps and forward foreign exchange contracts)
As at 31 March 2009
Gross commitments:
Fixed loan notes
Variable loan notes
Convertible Bond 2011 £430 million 3.625%
Committed multi-currency facility
Euro commercial paper
Interest rate swaps
Equity element of Convertible Bond
Carried interest payable within one year
Total
110
Group
due within
Group
due between
Group
due between
1 year 1 and 2 years 2 and 5 years
£m
£m
£m
41
142
15
7
240
10
–
61
516
76
21
15
349
–
14
–
–
475
184
691
438
–
–
11
2
–
1,326
Group
due greater
than 5 years
£m
1,161
–
–
–
–
8
–
–
1,169
Group
Total
£m
1,462
854
468
356
240
43
2
61
3,486
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
41
142
15
2
240
10
–
61
511
76
21
15
73
–
14
–
–
199
184
691
438
–
–
11
2
–
1,326
1,161
–
–
–
–
8
–
–
1,169
1,462
854
468
75
240
43
2
61
3,205
3i Group plc Report and accounts 2009
17 Financial risk management (continued)
Currency swaps and forward foreign exchange contracts
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
As at 31 March 2009
Gross amount receivable from currency swaps
Gross amount receivable from forward
foreign currency contracts
Total amount receivable
Gross amount payable for currency swaps
Gross amount payable for forward
foreign currency contracts
Total amount payable
Total net amount payable
Group
due within
Group
due between
Group
due between
1 year 1 and 2 years 2 and 5 years
£m
–
£m
258
£m
–
220
478
(305)
(214)
(519)
(41)
–
–
–
–
–
–
–
–
–
–
–
–
Group
due greater
than 5 years
£m
–
–
–
–
–
–
–
Financial liabilities (excluding currency swaps and forward foreign exchange contracts)
As at 31 March 2008
Gross commitments:
Fixed loan notes
Variable loan notes
Convertible bond 2008 €550 million 1.375%
Committed multi-currency facility
Euro commercial paper
Interest rate swaps
Equity element of Convertible Bond
Carried interest payable within one year
Total
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
39
131
437
19
267
(1)
6
140
1,038
39
114
–
19
–
8
–
–
180
165
437
–
385
–
17
–
–
1,004
1,198
–
–
–
–
9
–
–
1,207
Currency swaps and forward foreign exchange contracts
As at 31 March 2008
Gross amount receivable from currency swaps
Gross amount receivable from forward
foreign currency contracts
Total amount receivable
Gross amount payable for currency swaps
Gross amount payable for forward
foreign currency contracts
Total amount payable
Total net amount payable
Group
due within
1 year
£m
2,290
Group
due between
1 and 2 years
£m
–
Group
due between
2 and 5 years
£m
–
Group
due greater
than 5 years
£m
–
347
2,637
(2,354)
(346)
(2,700)
(63)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Group
Total
£m
258
220
478
(305)
(214)
(519)
(41)
Group
Total
£m
1,441
682
437
423
267
33
6
140
3,429
Group
Total
£m
2,290
347
2,637
( 2,354)
(346)
(2,700)
(63)
Company
due within
Company
due between
Company
due between
1 year 1 and 2 years 2 and 5 years
£m
–
£m
258
£m
–
Company
due greater
than 5 years
£m
–
Company
Total
£m
258
220
478
(305)
(214)
(519)
(41)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
39
131
437
4
267
(1)
6
–
883
39
114
–
4
–
8
–
–
165
165
437
–
89
–
17
–
–
708
1,198
–
–
–
–
9
–
–
1,207
Company
due within
1 year
£m
2,290
Company
due between
1 and 2 years
£m
–
Company
due between
2 and 5 years
£m
–
Company
due greater
than 5 years
£m
–
347
2,637
(2,354)
(346)
( 2,700)
( 63)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
220
478
(305)
(214)
(519)
(41)
Company
Total
£m
1,441
682
437
97
267
33
6
–
2,963
Company
Total
£m
2,290
347
2,637
( 2,354)
(346)
(2,700)
(63)
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 Risk section. 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 £5 million (2008: £4 million) for the Group and £3 million (2008: £1 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.
(ii) Currency risk
Further information on how currency risk is managed is provided in the Risk section. 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 net assets to movements in foreign currency
exchange rates. The Group manages currency risk 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
Group
2009
Sterling
£m
750
n/a
n/a
n/a
Group
2009
Euro
£m
176
Group
2009
US dollar
£m
707
Group
2009
Swedish
krona
£m
(75)
Group
2009
Indian rupee
£m
97
Group
2009
Swiss franc
£m
(8)
58
107
(11)
(2)
30
(46)
12
(79)
28
10
(1)
7
5
(30)
–
Group
2009
Other
£m
215
n/a
n/a
–
Group
2009
Total
£m
1,862
182
(138)
44
111
3i Group plc Report and accounts 2009
Notes to the financial statements
17 Financial risk management (continued)
Net assets
Sensitivity analysis
Impact on exchange movements in the income statement assuming a
Company
2009
Sterling
£m
1,007
Company
2009
Euro
£m
390
Company
2009
US dollar
£m
912
Company
2009
Swedish
krona
£m
19
Company
2009
Indian rupee
£m
–
Company
2009
Swiss franc
£m
(147)
Company
2009
Other
£m
97
Company
2009
Total
£m
2,278
5% movement in exchange rates against sterling
n/a
14
40
5
–
(8)
7
58
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
Group
2008
Sterling
£m
4,077
n/a
n/a
n/a
Group
2008
Euro
£m
(24)
10
(17)
(7)
Group
2008
US dollar
£m
91
25
(19)
6
Company
2008
Sterling
£m
4,125
Company
2008
Euro
£m
203
Company
2008
US dollar
£m
238
(1)
–
(1)
Company
2008
Swedish
krona
£m
(89)
Group
2008
Swedish
krona
£m
(14)
Group
2008
Indian rupee
£m
(67)
Group
2008
Swiss franc
£m
(6)
(5)
–
(5)
–
–
–
Group
2008
Other
£m
–
n/a
n/a
n/a
Group
2008
Total
£m
4,057
29
(36)
(7)
Company
2008
Indian rupee
£m
(281)
Company
2008
Swiss franc
£m
(184)
Company
2008
Other
£m
(82)
Company
2008
Total
£m
3,930
5% movement in exchange rates against sterling
n/a
2
8
(5)
(15)
(10)
n/a
(20)
(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 Risk section. A 5% change in the
fair value of those investments would have the following direct impact on the income statement:
Group
Company
2009
Quoted
equity
£m
30
28
2009
Unquoted
equity
£m
96
33
2009
Total
£m
126
61
2008
Quoted
equity
£m
44
39
2008
Unquoted
equity
£m
160
53
2008
Total
£m
204
92
In addition, other price risk arises from carried interest balances and the derivative element of the Convertible Bonds.
18 Derivative financial instruments
Current assets
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Call options
Current liabilities
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Derivative element of Convertible Bonds
Call options
Group
2009
£m
Group
2008
£m
Company
2009
£m
Company
2008
£m
7
–
–
3
10
(2)
(46)
(59)
(3)
(2)
(112)
5
8
11
–
24
–
(79)
(23)
(6)
–
(108)
7
–
–
3
10
(2)
(46)
(59)
(3)
(2)
(112)
5
8
11
–
24
–
(79)
(23)
(6)
–
(108)
Forward foreign exchange contracts and currency swaps
The Group has historically used forward exchange contracts and currency swaps to minimise the effect of fluctuations in the value of the investment portfolio from movements
in exchange rates. During the year the decision was taken to unwind these positions and consequently the income statement is currently subject to these movements.
Foreign currency interest-bearing loans and borrowings continue to be used to partially hedge the portfolio.
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.
112
3i Group plc Report and accounts 2009
18 Derivative financial instruments (continued)
At the balance sheet date, the notional amount of outstanding forward foreign exchange contracts is as follows:
Currency swaps
Forward foreign currency contracts
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2009
£m
259
198
457
2008
£m
2,322
346
2,668
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:
Variable rate to fixed rate
Variable rate to variable rate
2009
£m
634
150
784
2008
£m
510
150
660
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.
As a result of the bankruptcy filing in the US by Lehman Brothers in September 2008 and insolvency proceedings being commenced in respect of a number of its affiliates, the
Company terminated the call spread overlay arrangements it had entered into with Lehman Brothers International (Europe) in May 2008 as part of the £430 million 3.625% three
year Convertible Bond issued by the Company. Termination of this call spread overlay arrangement resulted in a £12 million adjustment to the fair value of derivatives. The original
call spread overlay arrangement with Lehman Brothers International (Europe) has been replaced at a net cost of £13 million, with an equivalent arrangement with another
counterparty, which will continue to offset the volatility within the Convertible Bond.
19 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)
£400 million notes (public issue)
Other
Variable rate
€500 million notes (public issue)
Other
Committed multi-currency facilities
£486 million
£150 million
Other
Euro commercial paper
Finance lease obligations
Total loans and borrowings
Group
2009
£m
349
379
35
500
279
600
2,142
Group
2009
£m
200
400
105
465
389
1,559
200
143
343
239
1
240
Group
2008
£m
Company
2009
£m
Company
2008
£m
373
92
394
398
25
600
1,882
349
108
35
500
279
600
1,871
373
92
109
398
25
600
1,597
Group
2008
£m
Company
2009
£m
Company
2008
£m
200
400
50
398
195
1,243
200
169
369
269
1
270
200
400
105
465
389
1,559
–
73
73
239
–
239
200
400
50
398
195
1,243
–
85
85
269
–
269
2,142
1,882
1,871
1,597
113
Rate
Maturity
6.875%
5.750%
2023
2032
EURIBOR+0.100%
2012
LIBOR+0.210%
LIBOR+0.175%
2010
2010
3i Group plc Report and accounts 2009
Notes to the financial statements
19 Loans and borrowings (continued)
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 £143 million liability on the £150 million multi-currency facility represents a 1.7 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 £1,922 million (2008: £1,840 million), determined where applicable with reference to their published market price.
20 Convertible Bonds
Opening balance
Amortisation on €550 million convertible
Amortisation on £430 million convertible
Exchange movements on €550 million convertible
Repayments during the year
New borrowings during the year
Closing balance
Group
2009
£m
433
4
16
(3)
(434)
368
384
Group
2008
£m
363
7
–
63
–
–
433
Company
2009
£m
433
4
16
(3)
(434)
368
384
Company
2008
£m
363
7
–
63
–
–
433
On 1 August 2008 the Group repaid its €550 million 1.375% 5-year convertible. The convertible element of the €550 million bond was cash settled. On 29 May 2008
a £430 million three year 3.625% convertible bond was raised. The derivative element of the £430 million convertible is cash settled. The Group share price on issue was
£8.86 and the conversion price for bondholders is £11.32.
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 8.5%. The fair value of the loan at 31 March 2009 was £341 million, and is determined by its published market price.
21 B shares
Opening balance
Issued
Repurchased and cancelled
Closing balance
Group
2009
£m
21
–
(9)
12
Group
2008
£m
11
808
(798)
21
Company
2009
£m
21
–
(9)
12
Company
2008
£m
11
808
(798)
21
The Company repurchased and cancelled 7,260,201 B shares on 28 July 2008. The Company expects to make further purchase offers in July 2009.
22 Subordinated liabilities
Subordinated liabilities are repayable as follows:
After five years
Group
2009
£m
7
Group
2008
£m
14
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.
23 Trade and other payables
Other accruals
Amounts due to subsidiaries
24 Provisions
Opening balance
Charge for the year
Utilised in the year
Closing balance
114
Group
2009
£m
255
–
255
Group
2008
£m
166
–
166
Company
2009
£m
144
214
358
Company
2008
£m
67
241
308
Group
2009
Property
£m
7
7
(4)
10
Group
2009
Redundancy
£m
7
11
(5)
13
Group
2009
Total
£m
14
18
(9)
23
3i Group plc Report and accounts 2009
24 Provisions (continued)
Opening balance
Charge for the year
Utilised in the year
Closing balance
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Group
2008
Property
£m
7
2
(2)
7
Group
2008
Redundancy
£m
11
6
(10)
7
Group
2008
Total
£m
18
8
(12)
14
The provision for redundancy relates to staff reductions announced prior to 31 March 2009. 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 15 years.
25 Issued capital
Authorised
Ordinary shares of 7319⁄22p
B shares of 1p
Unclassified shares of 10p
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
Closing balance
2009
Number
555,076,720
660,000,000
1,000,000
2009
Number
–
–
–
–
2009
£m
410
7
0.1
2009
£m
–
–
–
–
2008
Number
555,076,720
660,000,000
1,000,000
2008
Number
461,106,007
1,794,733
(462,900,740)
–
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.
During the period 16 July 2007 to 31 March 2008, the Company issued shares for cash on exercise of share options at various prices from 470p to 895p per share.
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
2009
Number
382,741,094
–
1,229,786
–
383,970,880
2009
£m
283
–
1
–
284
2008
Number
–
393,465,629
1,275,465
(12,000,000)
382,741,094
2008
£m
410
7
0.1
2008
£m
289
2
(291)
–
2008
£m
–
291
1
(9)
283
During the period 1 April 2008 to 31 March 2009, the Company issued shares for cash on the exercise of share options at various prices from 567p to 728p per share.
26 Equity
Year to 31 March 2009
Group
Total equity at start of year
Equity settled call option
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Own shares
Total equity at end of year
Share
capital
£m
283
Share
premium
£m
397
Capital
redemption
reserve
£m
42
Share-based
payment
reserve
£m
21
Translation
reserve
£m
11
Capital
reserve
£m
3,026
Revenue
reserve
£m
359
Other*
reserves
£m
–
5
Own shares
£m
(82)
3
(4)
(190)
(2,059)
99
1
(64)
1
8
284
405
42
20
(179)
968
394
5
3
2
(77)
Total equity
£m
4,057
5
(2,150)
3
–
(64)
9
2
1,862
*Other reserves include the cost of the option relating to the call spread overlay set up as part of the £430 million Convertible Bond. This equity settled element of the call spread overlay has a strike price of £14.09 and 9,498,061
exercisable shares
115
3i Group plc Report and accounts 2009
Notes to the financial statements
26 Equity (continued)
Year to 31 March 2008
Group
Total equity at start of year
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Issue of B shares
Buy-back of ordinary shares
Own shares
Total equity at end of year
Year to 31 March 2009
Company
Total equity at start of year
Equity settled call option
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Total equity at end of year
Year to 31 March 2008
Company
Total equity at start of year
Total recognised income and expense
Share-based payments
Release on exercise/forfeiture of share options
Ordinary dividends
B share issue
Issue of ordinary shares
Buy-back of ordinary shares
Total equity at end of year
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
6
9
42
Revenue
reserve
£m
318
111
(70)
Capital
reserve
£m
3,280
675
(1)
(808)
(120)
Own shares
£m
(75)
6
(13)
(82)
21
11
3,026
359
Share
capital
£m
283
Share
premium
£m
397
Capital
redemption
reserve
£m
42
Share-based
payment
reserve
£m
21
Capital
reserve
£m
2,877
Revenue
reserve
£m
310
Other
reserves
£m
1
284
8
405
Share
capital
£m
289
(1,625)
20
3
(4)
4
(64)
42
20
1,256
266
Share
premium
£m
387
Capital
redemption
reserve
£m
27
Share-based
payment
reserve
£m
18
3
(9)
283
(6)
16
397
6
9
42
8
(5)
21
Capital
reserve
£m
3,013
787
5
(808)
(120)
2,877
5
5
Revenue
reserve
£m
286
94
(70)
310
Total equity
£m
4,249
792
8
–
(70)
19
(808)
(120)
(13)
4,057
Total
equity
£m
3,930
5
(1,605)
3
–
(64)
9
2,278
Total
equity
£m
4,020
881
8
–
(70)
(808)
19
(120)
3,930
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.
27 Own shares
Opening cost
Additions
Disposals
Closing cost
2009
£m
82
–
(5)
77
2008
£m
75
21
(14)
82
Own shares consists of shares in 3i Group plc held by The 3i Group Employee Trust. As at 31 March Trust held 10,259,767 shares in 3i Group plc (2008:10,867,901). The market
value of these shares at 31 March 2009 was £28 million (2008: £90 million). The Trust is funded by an interest-free loan from 3i Group plc.
116
3i Group plc Report and accounts 2009
28 Per share information
The earnings and net assets per share attributable to the equity shareholders of the Company are based on the following data:
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
(Loss)/profit for the year attributable to equity holders of the Company
Effect of dilutive ordinary shares
Weighted average number of shares in issue
Ordinary shares
Own shares
Effect of dilutive potential ordinary shares
Share options*
Convertible bonds
Diluted shares
*The potential effect of share options is excluded from the dilution calculation, as the impact is anti-dilutive.
Net assets per share (pence)
Basic
Diluted
Net assets (£m)
Net assets attributable to equity holders of the Company
Number of shares in issue
Ordinary shares
Own shares
Effect of dilutive potential ordinary shares
Share options
Diluted shares
29 Dividends
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Proposed dividend
30 Operating leases
Leases as lessee
Future minimum payments due under non-cancellable operating lease rentals are as follows:
Less than one year
Between one and five years
More than five years
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2009
Number
383,495,547
(10,465,956)
373,029,591
–
–
373,029,591
2009
2008
(522.2)
(522.2)
207.9
173.4
(1,948)
–
(1,948)
828
(87)
741
2008
Number
408,633,804
(10,458,932)
398,174,872
4,663,864
24,408,684
427,247,420
2009
2008
498
496
1,091
1,077
1,862
4,057
2009
Number
2008
Number
383,970,880
(10,259,767)
373,711,113
1,399,354
375,110,467
382,741,094
(10,867,901)
371,873,193
4,954,110
376,827,303
2009
pence
per share
2009
£m
2008
pence
per share
2008
£m
47
23
70
42
10.3
6.1
16.4
10.9
Company
2009
£m
–
–
–
–
Company
2008
£m
–
–
–
–
10.9
6.3
17.2
–
Group
2009
£m
14
37
37
88
41
23
64
–
Group
2008
£m
13
38
44
95
The Group leases a number of its offices under operating leases. None of the leases include contingent rentals.
During the year to 31 March 2009, £15 million (2008: £14 million) was recognised as an expense in the income statement in respect of operating leases. £1 million
(2008: £1 million) was recognised as income in the income statement in respect of subleases.
117
3i Group plc Report and accounts 2009
Notes to the financial statements
31 Commitments
Equity and loan investments
Equity and loan investments
Equity and loan investments
Equity and loan investments
32 Contingent liabilities
Contingent liabilities relating to guarantees available to third parties in respect of investee companies
Group
2009
due
within
one year
£m
331
Group
2008
due
within
one year
£m
220
Company
2009
due
within
one year
£m
143
Company
2008
due
within
one year
£m
95
Group
2009
due
2-5 years
£m
57
Group
2009
due
over 5 years
£m
2
Group
2008
due
2-5 years
£m
126
Group
2008
due
over 5 years
£m
10
Company
2009
due
2-5 years
£m
31
Company
2009
due
over 5 years
£m
2
Company
2008
due
2-5 years
£m
78
Company
2008
due
over 5 years
£m
1
Total
£m
390
Total
£m
356
Total
£m
176
Total
£m
174
Group
2009
£m
6
Group
2008
£m
15
Company
2009
£m
1
Company
2008
£m
6
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 2009, 3i Holdings plc had drawn down £72 million (2008: £84 million) under the first facility and £200 million (2008: £200 million) 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 2009, there was no material litigation outstanding against the Company or any of its subsidiary undertakings.
33 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
2009
£m
(3)
53
Group
2009
£m
44
Group
2008
£m
60
60
Group
2008
£m
75
Company
2009
£m
(3)
–
Company
2009
£m
44
Company
2008
£m
60
–
Company
2008
£m
75
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 (losses)/profits on the revaluation of investments
Portfolio income
118
Group
2009
£m
151
(1,372)
138
Group
2008
£m
369
196
204
Company
2009
£m
2
(421)
45
Company
2008
£m
180
59
65
3i Group plc Report and accounts 2009
33 Related parties (continued)
Balance sheet
Quoted equity investments
Unquoted equity investments
Loans and receivables
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Group
2009
£m
496
1,224
1,219
Group
2008
£m
661
1,990
1,679
Company
2009
£m
487
502
8
Company
2008
£m
654
738
323
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 plc and 3i Quoted Private Equity plc, companies listed on the London Stock Exchange. The following amounts have been included
in respect of these advisory relationships:
Income statement
Unrealised losses on the revaluation of investments
Fees receivable from external funds
Dividends
Balance sheet
Quoted equity investments
Group
2009
£m
(47)
19
17
Group
2009
£m
395
Group
2008
£m
(11)
12
6
Group
2008
£m
503
Company
2009
£m
(47)
19
17
Company
2008
£m
(11)
12
6
Company
2009
£m
395
Company
2008
£m
503
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
Termination benefits
Balance sheet
Bonuses and deferred share bonuses
Carried interest payable within one year
Carried interest payable after one year
Group
2009
£m
6
1
–
(1)
2
3
Group
2009
£m
1
4
7
Group
2008
£m
5
12
–
19
4
–
Group
2008
£m
12
11
11
Carried interest paid in the year to key management personnel was £14 million (2008: £18 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 (2008: £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 £143 million (2008: £223 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 2009 to £1 million (2008: £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
£nil (2008: £1 million).
119
3i Group plc Report and accounts 2009
Notes to the financial statements
34 Post balance sheet events
UK Defined Benefit Scheme
Since the balance sheet date the Group has agreed with the Trustees of the 3i Group Pension plan to provide additional contributions of £25.0 million per annum to the plan over
the next two financial years to 31 March 2011. These contributions are incremental to the contributions agreed in September 2008 of £20.4 million per annum over five years.
Under IFRIC 14 the Group is required to assess whether any additional contributions would result in a pension surplus arising where the full economic benefit is not available to the
company. The potential impact of this on the financial statements in future accounting periods would be to increase both the pension liability and the actuarial loss recognised in the
financial statements.
3i Quoted Private Equity
On 23 February 2009, the Boards of 3i QPEP “the Company” and 3i Group “3i” announced proposals for the acquisition of the assets of the Company by 3i to be effected by way
of a solvent winding up of the Company. On 28 April 2009, at an EGM of the Company, shareholders passed the resolutions which supported the proposal. Under the terms of
the scheme each independent non 3i shareholder became entitled to 50p in cash and 0.1706 of a New 3i Share. The financial impact of this transaction being that 3i issued
37.6 million new shares representing 8.9% of 3i's post-transaction issued share capital, received net cash proceeds of £110 million (being the difference between the cash
consideration paid to Company shareholders (£110 million) and the cash on Balance Sheet of the Company (£220 million) and took ownership of the investment assets of
the Company (£148 million).
Rights issue
On 8 May the Group announced that it was proposing to raise £732 million (before expenses) by way of a rights issue. Under the rights issue, the Board is proposing to issue
542 million new ordinary shares at 135p per new ordinary share on the basis of nine new ordinary shares for every seven ordinary shares held.
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
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
3i Deutschland Gesellschaft für
Industriebeteiligungen mbH
Germany
€25,564,594
Investment manager
3i Gestion SA
France
1,762,500 shares of €10
Investment manager
Registered office
16 Palace Street
London
SW1E 5JD
375 Park Avenue
Suite 3001
New York
NY 10152, 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 2009 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 2009, 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.
120
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Portfolio and additional
information
Pages 121-144
9Extensive detail about our portfolio
and some guides to understanding
key aspects of our business.
Portfolio valuation – an explanation
Ten largest investments
Forty other large investments
Assets under management
3i portfolio
Investment
Realisations
Private equity – a lexicon
Returns and IRRs – an explanation
Carried interest – an explanation
3i and Transparency
Information for shareholders
Investor relations and general enquiries
Investor relations website – 3igroup.com
122
124
126
128
129
131
133
134
136
138
140
143
143
144
121
3i Group plc Report and accounts 2009
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?
The IPEVC valuation guidelines recommend a number of different valuation methods
for unquoted investments:
– Cost;
– Earnings;
– Net assets;
– Price of recent investment; or
– Imminent sale or IPO.
With effect from 31 March 2009, 3i only uses cost as the most appropriate estimate
of fair value until the first update on an investment’s trading performance, unless there
is a significant downward movement in public markets.
What proportion of the portfolio is valued on each valuation basis?
The portfolio for the year ended 31 March 2009 is valued on the following basis:
Cost less provisions
Market adjustment
Earnings
Quoted
Price of recent investment
Imminent sale or IPO
Net assets
Other
nil
10%
47%
15%
4%
3%
1%
20%
20
1
3
4
10
47
15
Note: Cost includes unquoted equity investments and loans and receivables.
Under what circumstances would an investment be valued on a cost basis?
Immediately after investing 3i’s cost is the best estimate of fair value. Once we receive
a full set of audited accounts the investment will be valued on an earnings basis.
However, if we receive a set of accounts from the company that shows worse
performance, or if there is a significant downward movement in public markets, the
investment will be valued on a market adjustment basis. Under the market adjustment
basis, the total enterprise value at acquisition is simply adjusted for the change in
multiples (no marketability discount is applied) since our initial investment and 3i’s share
of the enterprise value is recomputed.
122
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 generally apply a marketability discount of 10%–30% in accordance
with the IPEVC valuation guidelines. We then allocate the remaining balance between
3i and other holders of equal ranking and subordinated instruments such as preference
shares and equity consistent with the capital structure of the investee company.
What level of marketability discount is applied?
The marketability discount of 10% to 50% 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 small number of cases a greater
discount may be applied if there are particular factors affecting the ability to sell.
Most marketability discounts applied are either 15% or 25%.
What happens if 3i’s share of 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 and the likelihood of full repayment is then taken as to
whether to recognise this shortfall. Any shortfall recognised is shown as an impairment.
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 impairment recognised.
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. 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. We take into account more recent management
accounts, and forecasts from management and 3i. Where those indicate a rapid change
in performance, we may use forecast earnings as the basis for estimating fair value.
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. Similarly, multiples are selected based
on actually realised or forecast earnings (historical or forward looking multiples).
The multiple used can be calculated using recent transaction information, external
valuations or quoted sector multiples. In general we value a company based on an
average multiple from a selection of comparable companies, using a broader sector
multiple as a cross check.
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 will 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?
Some investments 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 change 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 relatively 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 sectors such as
insurance where industry specific benchmarks are used.
3i Group plc Report and accounts 2009
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% discount
until we actually receive the sale proceeds. We will consider the potential effect of
completion conditions before moving an asset to this basis.
The valuation lifecycle
The following illustration walks through the valuation of an asset from investment to
realisation. Scenario A depicts a successful outcome where 3i ultimately realises a gain;
scenario B an unsuccessful outcome resulting in a loss.
Scenario A
(cid:2) Equity
(cid:2) Loan
Value £m
Scenario B
(cid:2) Equity
(cid:2) Loan
Value £m
50
45
40
35
30
25
20
15
10
5
0
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
Earnings
basis
Year 5
Imminent
sale basis
Year 1
Cost
basis
Year 2
Earnings
basis
Year 3
Earnings
basis
Year 4
Earnings
basis
Year 5
Imminent
sale basis
Scenario A. 3i invests in an oil and gas production company, based in Europe.
Year 1 – Market adjustment
Three months after investing, we do not yet have updated earnings or audited
accounts, and in the absence of significant public market movements our cost of
£25 million remains the best estimate of fair value. If we have received updated
accounts or other information that suggests a decline in value, the investment will be
valued on a market adjustment basis.
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 valuation calculation. Total value for 3i: £30 million.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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
Year 3 – Earnings basis
Earnings have increased to £12 million and the sector multiple has increased to 11x.
There is no reason to change the valuation basis. As other factors have remained
unchanged, the valuation of 3i’s equity investment has increased to £16 million and
the loan remains valued at £20 million. Total value for 3i: £36 million.
Year 4 – Earnings basis
Earnings have increased to £14 million and the multiple has fallen back to 10x.
The valuations calculation now shows an equity value of £17.5 million for a total value
of £17.5 million. The loan remains valued at £20 million. Total value for 3i: £37.5 million.
Year 5 – 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 total value for
3i is now calculated as the sum of the loan value (£20 million) and of the equity
element (£25 million) which together total £45 million.
Scenario B
We track the same oil and gas production company, based in Europe, but now in a
scenario where the company fails to grow earnings, in a challenging economic climate.
Year 1 – Market adjustment
Three months after investing, we do not yet have updated earnings or audited
accounts, and in the absence of significant public market movements our cost of
£25 million remains the best estimate of fair value. If we have received updated
accounts or other information that suggests a decline in value, the investment will
be valued on a market adjustment basis.
Year 2 – Earnings basis
The earnings are £8 million and the sector EBITDA multiple for the quoted European oil
and gas production sector is 7.5x. The enterprise value is now £60 million, and after
the senior debt and the marketability discount, the attributable enterprise value is
£30 million. 3i’s loan continues to be valued at £20 million but the equity stake is now
worth £2.5 million. An unrealised loss of £2.5 million is recognised. Total value for 3i:
£22.5 million.
Year 3 – Earnings basis
Earnings have fallen further to £7 million and the sector multiple has declined to 6x.
The attributable enterprise value is now £16.5 million which is below the nominal
value of 3i’s loan, and consequently there is no equity value. Upon consideration of the
company’s prospects, 3i recognises the shortfall in the value of its loan and that value is
now stated at £16.5 million. A further loss of £6 million is recognised, being £2.5 million
resulting from equity and £3.5 million from the loan. Total value for 3i: £16.5 million.
Year 4 – Earnings basis
No change in the situation. The total value for 3i remains at £16.5 million.
Year 5 – Imminent sale basis
Conditions have improved slightly and an external buyer to purchase our equity and
loan investment has offered £20 million, and discussions are now in their final stages.
The investment 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 total value for 3i is now calculated at £18 million (loan) and £nil (equity).
123
3i Group plc Report and accounts 2009
Ten largest investments
The table below provides information on our ten largest investments in respect of the Group’s holding 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 2009. 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 plc
3i-infrastructure.com
Quoted investment company, investing in infrastructure
Equity shares
33.3%
271
271
228
228
17
17
922
44
44.9%
180
180
167
167
5.4%
32.2%
34
76
110
3
125
128
64
76
140
–
125
125
31.6%
105
105
125
125
6
31
37
43.2%
40.0%
79
41
120
–
111
111
–
–
1
2
3
–
16
16
–
–
–
3
3
–
16
16
409
15
425
77
194
48
307
8
20
6
(14)
(15)
3i Quoted Private Equity plc
3iqpe.com
Quoted investment company, investing in quoted companies
Equity shares
QPE
UK
2007
Quoted
Venture Production plc1
vpc.co.uk
Oil and gas production
Equity shares
Loans
Enterprise Group Holdings Limited
enterprise.plc.uk
UK utilities and public sector maintenance outsourcing
Equity shares
Loans
ACR Capital Holdings Pte Limited
asiacapitalre.com
Reinsurance in large risk segments
Equity shares
Sortifandus, S.L.
(GES - Global Energy Services)
services-ges.com
Wind power service provider
Equity shares
Loans
Foster and Partners2
fosterandpartners.com
Architectural services
Equity shares
Loans
Growth
UK
2007
Quoted
Buyouts
UK
2007
Earnings
Growth
Singapore
2006
Other
Buyouts
Spain
2006
Earnings
Growth
UK
2008
Earnings
124
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Investment
Quintiles Transnational Corporation3
quintiles.com
Clinical research outsourcing solutions
Equity shares
Inspicio Sarl
inspicioplc.com
Global testing and inspection
Equity shares
Loans
Memora Inversiones Funerarias3
memora.es
Funeral service provider
Equity shares
Loans
Notes
Business
line
Growth
Geography
US
First
invested in
2008
Valuation
basis
Earnings
Proportion
of equity
shares held
Residual
cost
£m
Valuation
£m
Income in
the year
£m
Net assets
£m
Earnings
£m
Buyouts
UK
2007
Other
Buyouts
Spain
2008
Market
adjustment
7.0%
100
100
109
109
38.2%
38.1%
2
105
107
8
79
87
–
105
105
9
93
102
–
–
–
14
14
–
4
4
(421)
24
107
3
85
7
1 Equity element is valued as listed, and loans are valued using amortised cost.
2 The residual cost for this investment cannot be disclosed per a confidentiality agreement in place at investment.
3 The increase in the difference between valuation and residual costs is due to foreign exchange movements between the date of investment and 31 March 2009.
125
3i Group plc Report and accounts 2009
Forty other large investments
In addition to the ten largest investments shown on pages 124 and 125, detailed below are forty other large investments which are
substantially all of the Group’s investments valued over £19 million. This does not include four investments that have been excluded for
commercial reasons.
Description of business
Elderly, primary and specialist care
Business
line
Buyouts
Geography
Sweden
First
invested in
2005
Valuation
basis
Earnings
Proportion
of equity
shares held
44.7%
Residual
cost
£m
20
Valuation
£m
102
Operator of carrier neutral data centres
Buyouts
UK
1998
Quoted
22.6%
3i India Infrastructure Holdings Limited1 Fund investing in Indian
Infrastructure
India
2007
Other
21.2%
infrastructure
Provider of decentralised
power generation systems
Buyouts
Germany
2007
Earnings
41.3%
Clinical laboratories
Growth
France
2008
Hispanic radio operator
Growth
Spain
2008
Market
adjustment
Market
adjustment
17.4%
8.1%
Telecom operator
Growth
Finland
2007
Earnings
12.8%
Seafood sourcer, processor
and importer from Far East
Growth
UK
2007
Earnings
28.5%
Public sector IT and services
Buyouts
UK
2008
Market
adjustment
40.6%
65
65
Branded hydraulics for
commercial vehicles
Buyouts Netherlands
2004
Earnings
44.1%
Network services
Buyouts
Finland
2007
Earnings
36.9%
Manufacturer and distributor
of baby products
Buyouts
UK
2006
Earnings
45.7%
Investment
Ambea AB
ambea.se
Telecity Group plc
telecitygroup.com
MWM GmbH
mwm.net
Labco SAS
labco.eu
Socieded de Servicios
Radiofonicos Union Radio, S.L.
cadenaser.com
DNA Oy
dnaoy.fi
British Seafood Distribution
Group Holdings Limited
britishseafood.co.uk
Cornwall Topco Limited (Civica)
civica.co.uk
Hyva Investments BV
hyva.com
Eltel Networks Oy
eltelnetworks.com
Mayborn Group plc
mayborngroup.com
Anglian Water Group Limited
osprey-water.co.uk
Provider of drinking water and
waste water services
Infrastructure
UK
2006
Other
2.8%
Inspecta Holding OY
inspecta.fi
EUSA Pharma Inc
eusapharma.com
Supplier of testing
and inspection services
Buyouts
Finland
2007
Earnings
40.7%
Business focused on pain control,
oncology and critical care
Venture
Portfolio
UK
2007
Further
round
21.6%
NORMA Group Holding GmbH
norma.de
Provider of plastic and metal
connecting technology
Buyouts
Germany
2005
Earnings
30.2%
Joyon Southside1
Real estate
Growth
China
2008
Other
49.9%
Scandferries Holding GmbH (Scandlines) Ferry operator in the Baltic Sea
scandlines.de
Buyouts
Germany
2007
Other
22.7%
Gain Capital Holdings Inc
gaincapital.com
Retail online foreign exchange trading
Growth
US
2008
Earnings
13.8%
Otnortopco AS (Axellia/Alpharma)
alpharma.com
Developer and supplier of specialist
active pharmaceutical ingredients
Buyouts
Norway
2008
Earnings
49.9%
Notes
1 No company website is available for this investment.
126
16
57
75
93
80
88
76
95
91
91
89
83
71
69
4
85
64
46
45
30
31
27
31
48
59
65
54
52
50
50
42
42
41
40
31
31
3i Group plc Report and accounts 2009
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Investment
Navayuga Engineering Company Limited Engineering and construction
necltd.com
Description of business
Business
line
Growth
Geography
India
First
invested in
2006
Valuation
basis
Earnings
Proportion
of equity
shares held
10.0%
Residual
cost
£m
23
Valuation
£m
30
Boomerang TV, S.A.
grupoboomerangtv.com
Production of audiovisual contents
Growth
Spain
2008
Earnings
40.0%
Goromar XXI,S.L. (Esmalglass)
esmalglass.com
Manufacture of frites,
glazes and colours for tiles
Buyouts
Spain
2002
Earnings
21.6%
Radius Systems Limited
radius-systems.com
Manufacture of thermoplastic pipe
systems for gas and water distribution
Buyouts
UK
2008
Market
adjustment
31.6%
APB SpA (AP Bags)
antichipellettieri.it
Alö Intressenter AB
alo.se
Advanced Power AG
advancedpower.ch
Luxury handbags
Buyouts
Italy
2008
Earnings
27.5%
Manufacturer of front end loaders
Growth
Sweden
2002
Earnings
35.2%
Developer of traditional power stations
Growth Switzerland
2008 Net Assets
38.1%
Kneip Communication SA
kneip.com
Outsourced publication
of investment fund data
Growth Luxembourg
2007
Earnings
41.1%
Beijing Digital Telecom Co. Limited
dixintong.com
Hyperion Insurance Group Limited
hyperiongrp.com
SLR Holdings Limited
slrconsulting.co.uk
Mobile phone retailer
Growth
China
2006
Earnings
17.4%
Specialist insurance intermediary
Growth
UK
2008
Other
26.5%
Specialist environmental consultancy
Growth
UK
2008
Market
adjustment
34.0%
Hobbs Holding No. 1 Limited
hobbs.co.uk
Retailer of women’s clothing
and footwear
Buyouts
UK
2004
Earnings
42.2%
LHI Technology Private Limited
lhitechnology.com
Medical cable assemblies
Buyouts
China
2008
Earnings
37.5%
Delta Hydrocarbons
eep-llp.com
RBG Limited
rbgltd.com
Apatech Limited
apatech.com
Dockwise
dockwise.com
Oil and gas exploration
Growth Netherlands
2007
Other
23.2%
Oil and gas service provider
Buyouts
UK
1996
Earnings
39.5%
Synthetic bone products
Venture
Portfolio
UK
2001
Further
round
44.6%
22
Specialist in heavy transport
shipping within the marine
and oil and gas industry
Buyouts Netherlands
2007
Quoted
14.7%
1
Franklin Offshore International Pte
Limited
franklin.com.sg
Manufacture installation and
maintenance of mooring and
rigging equipment
Growth
Singapore
2007
Other
30.9%
15
20
Everis Participaciones S.L.
everis.com
Polyconcept Investments B.V.
polyconcept.com
IT consulting business
Growth
Spain
2007
Earnings
18.3%
Supplier of promotional products
Growth Netherlands
2005
Earnings
13.0%
30
21
19
19
127
27
19
26
52
33
21
25
11
28
33
49
17
42
4
29
28
26
26
26
25
25
24
22
22
22
21
21
20
20
20
3i Group plc Report and accounts 2009
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 Portfolio
Total
Managed funds (£m)
Buyouts
Growth Capital
Infrastructure
SMI
Venture Portfolio
Total
Advised investment companies (£m)
3i Infrastructure plc1
3i Quoted Private Equity plc1
Total
Total assets under management
Notes
2009
1,467
1,574
371
171
153
314
4,050
2009
2,312
157
599
–
11
3,079
2009
688
202
890
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
–
–
–
8,019
9,792
7,134
5,712
6,230
1 The value of the advised investment companies is based on the most recently disclosed net asset value. For both 3i Infrastructure plc and 3i Quoted Private Equity plc this was as at 31 March 2009.
128
3i Group plc Report and accounts 2009
3i portfolio
3i direct portfolio by geography (£m)
Continental Europe
UK
India
China
Other Asia*
North America
Rest of World
Total
*Includes Japan, Singapore and South Korea.
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 2009.
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 at 31 March 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
Market adjustment
Fund
Industry metric
DCF
Other
Total
3i direct Buyouts portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Net assets
Market adjustment
Fund
Other
Total
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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
–
145
110
98
568
6,016
2008
150
141
781
767
–
–
5
181
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
–
69
–
–
380
4,362
2007
–
23
658
490
–
–
3
107
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
–
46
–
–
522
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
–
32
–
–
567
4,317
2005
164
49
853
372
6
–
–
77
1,521
2009
1,618
1,719
196
105
190
209
13
4,050
2009
170
206
286
41
384
457
74
1,618
2009
749
327
265
764
545
214
253
391
371
171
4,050
2009
110
611
1,925
–
145
47
387
167
125
91
442
4,050
2009
–
116
985
–
–
194
7
165
1,467
129
P122 to123
for Portfolio valuation – an explanation
2009
57
78
785
–
24
26
193
63
125
41
182
1,574
2009
229
–
–
92
50
–
371
2009
168
–
3
171
2009
8
–
112
–
–
20
13
153
2008
12
174
710
1,041
26
16
–
133
110
–
144
2,366
2008
362
38
–
1
98
2
501
2008
142
–
–
142
2008
9
–
150
4
–
23
58
244
2007
197
55
543
481
9
17
–
61
–
–
97
1,460
2007
334
135
–
–
–
–
469
2007
19
1
–
20
2007
36
9
216
9
4
48
69
391
2006
130
58
425
376
11
25
–
44
–
–
123
1,192
2006
–
80
12
–
–
–
92
2006
–
–
–
–
2006
62
16
329
16
5
76
60
564
2005
147
71
448
289
14
48
–
32
–
–
243
1,292
2005
–
–
–
–
–
–
–
2005
–
–
–
–
2005
102
21
431
25
3
80
94
756
3i Group plc Report and accounts 2009
3i portfolio
3i direct Growth Capital portfolio value by valuation method (£m)
Imminent sale or IPO
Quoted
Earnings
Cost
Price of recent investment
Net assets
Market adjustment
Fund
Industry metric
DCF
Other
Total
3i direct Infrastructure portfolio value by valuation method (£m)
Quoted
Cost
Net assets
Fund
DCF
Other
Total
3i direct QPE portfolio value by valuation method (£m)
Quoted
Cost
Other
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
Note
The Venture Portfolio has been excluded from this analysis.
130
3i Group plc Report and accounts 2009
Investment
3i direct investment by business line (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
Total
3i direct investment by geography (£m)
Continental Europe
UK
India
China
Other Asia*
US
Rest of World
Total
*Includes Japan, Singapore and South Korea.
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 2009.
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 at 31 March 2008. The figures for 2007 have been reclassified for comparison.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
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
2009
519
343
50
3
–
53
968
2009
539
316
28
17
1
63
4
968
2009
61
96
45
52
38
178
69
539
2009
196
106
122
52
189
112
48
91
49
3
968
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
131
3i Group plc Report and accounts 2009
Investment
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 Portfolio
Total
Investment by geography (including managed and advised external funds) (£m)
Continental Europe
UK
Asia
US
Rest of World
Total
2009
514
152
57
120
125
968
2009
930
344
296
94
–
53
1,717
2009
776
706
151
80
4
1,717
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
132
3i Group plc Report and accounts 2009
Realisations
Realisations proceeds by business line (£m)
Buyouts
Growth Capital
Infrastructure
QPE
SMI
Venture Portfolio
Total
Realisations proceeds by geography (£m)
Continental Europe
UK
India
China
Other Asia*
US
Total
*Includes Japan, Singapore and South Korea.
Realisations proceeds by method (£m)
IPO
Sale of quoted investments
Sale of unquoted equity
Refinancing and loan repayments
Total
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
2009
494
461
117
–
27
209
1,308
2009
795
280
28
47
52
106
1,308
2009
37
135
1,023
113
1,308
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
133
3i Group plc Report and accounts 2009
Private equity – a lexicon
Like any industry, the Private Equity industry has its own language.
This Lexicon provides a description of some of the key terms.
Types of investment
Private Equity involves the medium to long-term investment of
equity capital in high-growth private businesses.
In “Growth Capital” investments, the Private Equity investor
typically makes a minority equity investment in a company to
support growth.
When financing “Buyouts”, the investor, together with funds they
manage, typically takes a majority equity position and the capital is
used both to purchase the company from its existing owners as well
as to fund the business’s development.
In addition to “Growth Capital” and “Buyouts”, some Private Equity
investors, including 3i, also invest in Infrastructure assets.
The term “Venture Capital“ applies to investments made in ‘early’
and ‘late’ stage technology and healthcare companies.
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. 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 traditionally 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. In the current post
“credit crunch” environment, this balance has changed with higher
proportions of equity being deployed. 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 provide both a significant
equity incentive for management and to reflect the difference in
scale of finance provided by the PE investor and that of the
management team.
An example of a Buyouts investment can be found on page 20.
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.
An example of a Growth Capital investment can be found on
page 25.
Infrastructure
3i also invests in infrastructure assets. These are investments in
asset-intensive businesses which provide essential services over
the long term, often on a regulated basis or with a significant
component of revenue and costs that are subject to long-term
contracts. Infrastructure assets can be categorised into transport
infrastructure (eg toll roads, ports, airports, rail); utilities (eg water
treatment and distribution, power generation, waste processing,
communications infrastructure); and social infrastructure
(eg healthcare facilities, education facilities, government
accommodation). They include a range of asset maturities from
mature, typically high-yielding assets, to early-stage development
projects. 3i’s infrastructure sector investment is achieved primarily
through its shareholding in 3i Infrastructure plc and its commitment
to the 3i India Infrastructure Fund.
An example of infrastructure investments can be found on
page 30.
3i also has a portfolio of Smaller Minority Investments (“SMI”) and
Venture Capital investments, which it is in the process of realising.
Investment objective
The objective of the PE investor is to earn attractive returns on its
investment, commensurate with the risk being taken. The returns
come in the form of income (interest, dividends or fees) and capital
gains. The PE investor will invest capital and bring its knowledge,
experience and network to bear on the asset to improve its
performance and value. 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 (a ‘secondary’ transaction) or a flotation on the public
markets (an ‘IPO’). 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”.
134
P20 to 32
for detailed case studies
3i Group plc Report and accounts 2009
Investment lifestyle
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 PE investor:
Exit
5
Origination
1
Implementing
the value
creation plan
4
2
Developing
and validating
investment
case
3
Structuring
and making
the investment
1. Origination
The ability to access and create investment opportunities.
This is a critical component of a PE investor’s business model.
2. Developing and validating the investment case
In this phase, the PE investor draws upon its knowledge,
experience, network, commercial judgment and other capabilities
to develop and validate its 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.
3. 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 important.
4. 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 also 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.
5. 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.
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Types of investment vehicle
The predominant vehicle through which private equity firms invest
is the independent, private, fixed-life, closed-end fund, usually
organised as a “Limited Partnership”. These funds typically have a
fixed life of 10 years. Investments generally consist of an initial
commitment of capital 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.
3i invests with capital from the Group’s own balance sheet and from
funds which the Group manages or advises for others.
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 access to private equity returns.
The language of returns and reward
The measurement of returns, whether realised or unrealised, is
described on pages 38 to 42 of this report. Pages 138 and 139
contain both descriptions and worked examples of how rewards are
split between investors, private equity professionals and portfolio
management teams.
P138 to139
for Carried interest – an explanation
135
3i Group plc Report and accounts 2009
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.
136
3i Group plc Report and accounts 2009
Volatility, the portfolio effect
and the holding period
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.
Individual investments clearly have their own holding periods,
illustrated by the two examples given.
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”.
We have published the Fund IRRs for our long-established business
lines within the Business review.
Examples
Case A and Case B show the investment life cycle of two investments.
Case A is a successful investment, which over the life of the
investment generated interest income, grew in value and exited
generating a 1.7x multiple and an IRR of 20%.
Case B is an unsuccessful investment. At the end of the second year
of our investment earnings had remained flat and the multiple used
to value the investment remained unchanged. However, after holding
an investment for a year the Group’s valuation policy is to apply a
25% liquidity discount, which resulted in a fall in the book value of the
investment. During the third year of our investment, the company
lost a large contract and a decision was taken to recognise a 75%
provision against the investment. In year 4 the decision was taken
to sell the business to one of Case B’s competitors who saw some
strategic value in Case B’s remaining contracts and was prepared to
pay a premium to our book value. The price paid was, however, at a
significant discount to our original cost and resulted in a 0.5x money
multiple and an IRR of (18)%.
Chart 1: IRR evolution
Case A
3i equity – value uplift
3i equity – cost
3i shareholder loan
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
30
25
75
35
25
75
25
75
50
25
75
Investment
Yield
Value at year end
Proceeds
Fund IRR
Year 1
(100)
–
160
–
0%
Cash-to-cash IRR
(100)%
Year 2
Year 3
Year 4
–
6.5
130
–
(37)%
(94)%
–
6.5
135
–
22%
(71)%
–
6.5
–
150
20%
20%
Case B
3i equity – value uplift
3i equity – cost
3i shareholder loan
25
75
25
75
25
25
25
Investment
Yield
Value at year end
Proceeds
Fund IRR
Cash-to-cash IRR
Year 1
(100)
–
100
–
–
–
Year 2
Year 3
Year 4
–
6.5
75
–
–
–
25
–
–
–
–
50
(19)%
(94)%
(47)%
(94)%
(18)%
(18)%
137
3i Group plc Report and accounts 2009
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. Each of these
parties invests in the transaction. The private equity fund managers’
investment is typically through a co-investment in the fund.
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.
Managers of the fund holding the carried interest benefit if the
overall performance of the fund is successful.
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
pages 136 and 137. An IRR-based hurdle is the most appropriate
mechanism in the private equity industry due to the focus on
cash-to-cash returns.
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.
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.
In return for paying carried interest, fund investors demand “active”
management of their capital. Specifically, the fund manager will:
– 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.
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 €5 billion mid-market fund. Another
example would be the 3i India Infrastructure Fund, 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.
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.
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.
138
P136to137
for further information on IRRs
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
Carried interest
Management fee
Cash returned
to investors
£200m
£200m
£18m*
£10m**
£172m
3i Group plc Report and accounts 2009
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.
Worked example
Company A
Company B
Company C
Company D
Company E
£100m
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.
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
139
3i Group plc Report and accounts 2009
3i and transparency
For over 60 years, 3i’s objective has been to take an open
and straightforward approach to doing business.
Our approach
We have a bias to openness and a culture of pioneering on
transparency issues because we believe that this is good for our
business. As a public company and a Private Equity business,
3i operates in a highly regulated environment. We also respect
the responsibilities we have towards our portfolio companies and
to those that we do business with around the world.
Our approach, therefore, is to balance these factors, consider
carefully what information might be helpful to those with a legitimate
interest in 3i, and then to find the best way of communicating it.
Illustrations of our approach are included below.
Our track record
3i’s approach to transparency has been encouraged and reinforced
by the benefits we believe that we derive from having a good track
record on this very important issue. Long before becoming a public
company, 3i’s annual reports went beyond what was required from
a legal perspective. Since listing on the London Stock Exchange in
1994, we have also aimed to be amongst the best in our peer group,
whether our peers are other listed companies or Private Equity firms.
From surveys of investors, press comment and the numerous awards
acknowledging our efforts in this area, we feel this has been an
important element in 3i’s differentiation.
Transparency on
Corporate responsibility
3i takes a very open approach to
corporate responsibility issues.
Our Corporate responsibility
report on page 53 and our
dedicated corporate responsibility
website, www.3icr.com, contain a
significant amount of information
on the subject.
Transparency with
our portfolio
From first meeting to exit,
we aim to take an open and
straightforward approach to
doing business with our portfolio
companies. Our “Active
partnership” style of investing
and the board membership we
typically have in portfolio
companies provide several
channels for communication
and feedback. The many events
we hold for the management
teams of our portfolio companies
provide additional means for our
portfolio companies to interact
with a wide range of 3i staff.
Transparency
with investors
We aim to provide investors in
3i Group plc, and investors in
funds managed or advised by
3i, with the highest standards
of communications, whether
through our Investor relations
website, www.3igroup.com,
investor meetings, or through
other interaction.
Transparency
with the media
3i has taken a very open
approach to dealing with the
press and is regularly ranked in
Ipsos MORI polls as the most
familiar and most favourably
viewed Private Equity firm in
the UK by business journalists.
The media centre on our
website at www.3i.com/media
was specifically designed for
journalists.
www.3icr.com
www.3i.com
www.3igroup.com
www.3i.com/media
140
3i Group plc Report and accounts 2009
Since 2007, there has been a considerable amount of political
comment and press coverage in many countries about the role of
Private Equity. 3i has played an active role in this debate. We gave
evidence at the UK Treasury Select Committee Review in 2007,
during which our 2007 Annual report was commended by the
Chairman of the Treasury Select Committee, John McFall.
In Europe more generally, Jonathan Russell, the Managing Partner
of 3i’s Buyouts business, has been Chairman of the European Private
Equity and Venture Capital Association since June 2008 and has
been at the forefront of the industry’s submission to the European
parliament. This submission, “Private Equity and Venture Capital
in the European Economy”, which provides extensive data and
description of how the Private Equity model works in practice,
can be found at www.evca.eu.
Transparency
with our staff
We believe that it is important
to keep our staff well informed
about what 3i is doing. As we
have a relatively small number
of staff, we are able to achieve
this through a combination of
using efficient web-based tools
such as our online portal and a
lot of individual or team based
discussions. Our “One 3i”
approach underpins this and
we conduct a staff survey each
year to ensure that we continue
to improve. A summary of the
highlights of our latest survey
is contained on page 60.
3i portal
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
The Walker review
In 2007, in response to the growing debate about the role of Private
Equity in the UK, the BVCA suggested a review to examine ways in
which levels of disclosure in companies backed by the UK Private
Equity industry could be improved.
The review was led by Sir David Walker, the highly-respected City
figure, who 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 with portfolio companies, trade unions and
employer representatives.
3i actively supported the review. The Group’s Chairman, Baroness
Hogg, was a member of the Review Group and Patrick Dunne, 3i’s
Communications Director, was a member of the committee within
the British Private Equity and Venture Capital Association (“BVCA”)
which proposed the review.
3i also endorsed the voluntary code which resulted in, “Guidelines for
Disclosure and Transparency in Private Equity”, which was published
in November 2007.
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.
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 confirms 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.
141
3i Group plc Report and accounts 2009
3i and transparency
For Private Equity backed portfolio companies
The guidelines apply to portfolio companies which are:
− 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.
So how does 3i measure up against the Walker guidelines?
3i is fully compliant with the Walker guidelines.
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 and further details of
the results of our latest staff survey are provided in our Corporate
responsibility report on page 60;
− 3i has a well-developed approach to communicating with
shareholders and 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 which 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 report on page 47, 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.
Portfolio companies
There were two 3i portfolio companies, Anglian Water Group and
Enterprise, which fitted the Walker criteria for its first review and
one, NCP Services, which the Walker Guidelines Monitoring Group
decided at the end of their review that they would like to report
next time.
Anglian Water Group and Enterprise are both fully Walker compliant.
Their website addresses are www.awg.com and www.enterprise.plc.uk.
www.awg.com
www.enterprise.plc.uk
NCP Services is the residual business remaining after 3i sold the
bulk of the business of NCP to Macquarie in 2007. Although NCP
Services is considerably smaller than the criteria required for the
Walker guidelines to apply, and NCP under its new ownership has
produced a Walker compliant report, the Walker Guidelines Monitoring
Group decided that in order to track the full performance of NCP since
the buyout in 2005, it would be helpful to have a “Walker compliant”
report from NCP Services for the second year of Walker reports and
requested 3i to do this. 3i agreed straight away.
This 3i Annual report also contains a number of detailed case studies
on pages 34 to 36.
142
P34 to 36
for detailed case studies
P53 to 64
for our Corporate responsibility report
3i Group plc Report and accounts 2009
Information for shareholders
Financial calendar
Annual General Meeting*
Half-year results
Interim dividend expected to be paid
01–12
Overview
13–32
Business review
33–36
Case studies
37–46
Financial review
47–52
Risk
53–64
Corporate responsibility
65–90
Governance
Financial statements
91–120
Portfolio and additional information 121–144
8 July 2009
November 2009
January 2010
*The 2009 Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 8 July 2009 at 11.00am.
For further details please see the Notice of Annual General Meeting 2009.
Information on ordinary shares
Shareholder profile Location of investors at 31 March 2009
UK
US
Continental Europe
Other international
Share price
Share price at 31 March 2009
High during the year (11 August 2008)
Low during the year (9 March 2009)
Dividends paid in the year to 31 March 2009
2007/2008 Final Dividend, paid 18 July 2008
2008/2009 Interim Dividend, paid 7 January 2009
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
70.1%
11.4%
9.2%
9.3%
271.0p
956.5p
176.2p
10.9p
6.3p
%
2.53
2.49
4.33
21.39
43.03
26.23
100.00
Number
of holdings
Individuals
22,671
3,331
103
9
0
0
26,114
Number
of holdings
Corporate
bodies
1,912
1,063
358
239
Balance as at
31 March 2009
9,701,906
9,578,322
16,605,327
82,128,892
62 165,225,636
7 100,730,797
3,641 383,970,880
The table above provides details of the number of shareholdings within each of the bands stated in the register of members at 31 March 2009.
Investor relations and general enquiries
For all investor relations and general enquiries about 3i Group plc, including requests for
further copies of the Report and accounts, please contact:
Group Communications
3i Group plc
16 Palace Street
London SW1E 5JD
Telephone +44 (0)20 7928 3131
Fax +44 (0)20 7928 0058
email ir@3igroup.com
or visit our investor relations website, www.3igroup.com, for full up-to-date investor
relations information, including the latest share price, recent annual and half-yearly
reports, results presentations and financial news.
Registrars
For shareholder administration enquiries, including changes of address, please
contact:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone 0871 384 2031
(international callers +44 121 415 7183)
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
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 833
of the Companies Act 2006.
143
3i Group plc Report and accounts 2009
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.
Results day centre:
www.3igroup.com/shareholders/presreports/
Online Report and accounts:
www.3igroup.com/shareholders/presreports/ reports/
Share price look-up and calculator:
www.3igroup.com/shareholders/shareinfo/calculator/
144
3i Group plc Report and accounts 2009
Contents
Directors’ report
Pages 1 to 79, comprise the Directors’ report and pages 80 to 90
comprise the Directors’ remuneration report, both of which are
presented in accordance with English company law and the
liabilities of Directors in connection with these reports shall be
subject to the limitations and restrictions provided by such law.
1. Overview
Our business
Key financial data
Chairman’s statement
At a glance
Our strategy and priorities
Chief Executive’s statement
01-12
02
04
05
06
08
10
2. Business review
Introduction to the Group
Market conditions
Group investment policy
3i’s Investment approach
Investment activity
Development of 3i’s fund management and advisory business
Business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
13-32
14
15
16
16
18
20
20
20
25
30
32
3. Case studies
New investments
Realisations
Infrastructure
4. Financial review
Returns
Portfolio and assets under management
Capital structure, gearing and liquidity
5. Risk
Risk management framework
Risk factors
Review of risks
33-36
34
35
36
37-46
38
43
46
47-52
48
49
52
6. Corporate responsibility
Core values
Corporate responsibility at 3i
Corporate responsibility in our investment activity
Corporate responsibility as a company
7. Governance
Board of Directors and Management Committee
Statutory and corporate governance information
Directors’ remuneration report
53-64
54
54
55
58
65-90
66
68
80
8. Financial statements
Independent auditors’ report to the members of 3i Group plc
Income statement
Statement of recognised income and expense
Reconciliation of movements in equity
Balance sheet
Cash flow statement
Significant accounting policies
Notes to the financial statements
91-120
92
93
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94
95
96
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101
9. Portfolio and additional information
Portfolio valuation – an explanation
Ten largest investments
Forty other large investments
Assets under management
3i portfolio
Investment
Realisations
Private equity – a lexicon
Returns and IRRs – an explanation
Carried interest – an explanation
3i and Transparency
Information for shareholders
Investor relations and general enquiries
Investor relations website – 3igroup.com
121-144
122
124
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129
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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.
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.
Further information
You will see these symbols used throughout this report.
They point you towards further information either
within the report or on our website. We hope you find
them useful.
Information in this report
Information online
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3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7928 3131
Fax +44 (0)20 7928 0058
Website www.3igroup.com
M65409 May 2009
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If you would prefer to receive shareholder
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and notices of meetings, please visit our Registrars’
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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
3i Group plc
Report and accounts
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