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
M68110 May 2010
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3i Group plc
Report and accounts 2010
3i Group plc
Report and accounts 2010
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For all investor relations and general enquiries about 3i Group plc, including requests for further copies
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Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone 0871 384 2031
Calls to this number are charged at 8p per minute from a BT landline,
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(International callers +44 121 415 7183)
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.
Additional information online...
Transparency
A full report on 3i and Transparency.
/transparency
Chief Executive’s video
Michael Queen describes
3i’s business model.
/chiefexecutive
In-depth case studies
Our portfolio is the key
to our success.
There are more examples online.
/casestudies
Full corporate responsibility report
Corporate responsibility is central to our
business model.
/corporateresponsibility
Other information about 3i
– Assets under management
– 3i portfolio
– Investment and realisations
/other3i
Other information about our industry
– Private equity – an explanation
– Returns and IRRs – an explanation
– Carried interest – an explanation
/otherindustry
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Contents of this report…
Overview
Introduction
Key financial data
Chairman’s statement
3i at a glance
Chief Executive’s statement
Business
review
Business review
Introduction to the Group
Key Group performance measures
Our strategy
3i’s Business model
Financial review
Business lines
Case
studies
Realisations
Portfolio companies
Risk
Review of risks
Risk factors
Risk governance framework
Corporate
responsibility
Corporate responsibility at 3i
As an investor
As a company
Governance
Board of Directors and
Management Committee
Statutory and corporate
governance information
Directors’ remuneration report
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Directors’ report
Pages 2 to 79, comprise the Directors’ report and
pages 80 to 88 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.
Disclaimer
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.
Financial
statements
Statement of comprehensive income 90
91
Statement of changes in equity
92
Balance sheet
93
Cash flow statement
94
Significant accounting policies
98
Notes to the financial statements
128
Independent auditor’s report
Portfolio
and other
information
Portfolio valuation – an explanation 130
132
Ten largest investments
134
Forty other large investments
136
Information for shareholders
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Report and accounts 2010
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Transparency
For over 60 years, 3i’s objective
has been to take an open and
straightforward approach to
doing business.
When it comes to transparency
we have found that it is in our
interest to go considerably
further than what is formally
required, whether as a public
company or as an investor.
This year we have provided
even more information online.
3i is fully compliant with the Walker Guidelines on
transparency and disclosure in private equity.
Please go online to see a full report on 3i and transparency
/transparency
3i Group plc
Report and accounts 2010
3
Overview
Introduction
Key financial data
Chairman’s statement
3i at a glance
Chief Executive’s statement
3-10
4
4
5
6
8
An overview of our business and our performance
for the year to 31 March 2010.
3i Group plc
Report and accounts 2010
Overview
4 4
Introduction
We are an international investor focused on
buyouts, growth capital and infrastructure,
investing in Europe, Asia and North America.
Key financial data
Year to/as at
31 March 2010
Year to/as at
31 March 2009
£999m
£386m
£968m
£1,385m £1,308m
£340m
£843m £(2,206)m
(36.7)%
20.9%
£407m £(2,150)m
(53.0)%
16.2%
6.3p
3.0p
Investment activity
Investment
Realisations
Net divestment
Returns
Gross portfolio return
Gross portfolio return on opening portfolio value1
Total return
Total return on opening shareholders’ funds2
Dividend per ordinary share
Assets under management3
3i
External funds
Total assets under management
Balance sheet
3i portfolio value
Net debt
Gearing
Net asset value
Diluted net asset value per ordinary share
1 Opening portfolio value is the weighted average of the opening portfolio value, less the opening portfolio value of 3i’s share of 3i Quoted
£3,517m £4,050m
£258m £1,912m
103%
£3,068m £1,862m
£2.794
£5,787m £6,909m
£3,846m £3,871m
£9,633m £10,780m
£3.21
8%
Private Equity plc (“3i QPEP”), plus the value of investments transferred from 3i QPEP to 3i Group plc.
2 Opening shareholders’ funds is the weighted average of opening shareholders’ funds and the equity value following the liquidation of 3i QPEP
and the nine for seven rights issue.
3 Assets under management has been re-defined and 2009 restated. The new definition is detailed on page 19.
4 Adjusted to reflect the impact of the rights issue and issue of shares related to the acquisition of 3i QPEP.
3i Group plc
Report and accounts 2010
Further information on
Assets under management
Investment and realisations
Total return
Gross portfolio return
Balance sheet
P19
P21
P23
P24-27
P30
5
Chairman’s statement
“ A transformed financial position, improved
performance, and a substantial increase in
funds available to invest have put 3i in a strong
competitive position.”
The past year has seen a transformation in 3i’s finances
and a marked improvement in performance. Net debt
has been reduced from £1,912 million at 31 March
2009 to £258 million at 31 March 2010 and total
return recovered to 16.2%. As I come to the end of my
time as Chairman of 3i Group, I would like to thank the
shareholders, management and staff of 3i for their part
in turning round the Company’s fortunes after the worst
crisis in financial services, and the sharpest economic
downturn, in its history. 3i’s recovery, at a time when
many have foundered, is a tribute to them all.
My thanks go first to our shareholders for a major
element in the restoration of 3i’s finances, which came
from their tremendous response to our £732 million
rights issue in June 2009. This support was given on
the clear understanding that it would be matched by
self-help. So I would also like to express the Board’s
thanks to the 3i team for cutting costs and achieving
realisations totalling £1,385 million during the year.
Our portfolio did not escape unscathed from the
recession. The Buyouts business suffered two significant
failures – both provided for as part of the sharp drop in
valuations during 2008-09 – and our Growth Capital
business suffered one significant failure. However, even
after allowing for this, realisations were achieved at
a 19% uplift to values at the end of March 2009.
And thanks to our active engagement with portfolio
companies and the quality of their management, overall
portfolio performance improved markedly in the second
half of the year.
We continue to take a cautious view of the earnings in
the portfolio, so valuations tend to lag the recovery in
stock markets. But even so, gross portfolio returns in
the year to March 2010 were 38% in Buyouts, 11% in
Growth Capital and 27% in Infrastructure. With net debt
now significantly below the £1 billion target that we set
for the end of 2009-10, the Board has decided to
recommend a final dividend of 2.0p, reflecting our
commitment to return to a progressive approach
following the rebasing last year.
Michael Queen, who became Chief Executive shortly
before the start of the financial year on which we
report today, has positioned 3i to take advantage of
opportunities during the next phase of the economic
cycle. He and his team are also continuing to build the
platform for growth in international markets. With the
new Growth Capital Fund, all business lines can now
deploy external funds alongside 3i Group capital.
Michael has strengthened his management committee
to provide consistent investment disciplines across all
business lines, and reviewed 3i’s capabilities in all our
key markets in Asia, Europe and the United States.
My thanks go to him for his excellent management of
3i through a challenging period.
During 2009-10 we also saw some further changes on
the Board. Robert Swannell became Senior Independent
Director and Oliver Stocken, our long-serving Deputy
Chairman, retired from the Board, as did Lord Smith
of Kelvin. John Allan, Chairman of DSG International,
and Alistair Cox, Chief Executive of Hays, joined in
September and October 2009. Julia Wilson, our Finance
Director, came back from maternity leave at the end of
2009-10; a welcome return, although Stephen Halliwell
has ably filled in for her through this year. My thanks go
to all members of the Board, for their contributions and
commitment to 3i.
And at the end of 2009, the Nominations Committee
established a sub-committee of non-executive
Directors to undertake the search for my successor.
Having taken up my new role as Chairman of the
Financial Reporting Council, I will be handing over to
Sir Adrian Montague at the AGM. I am delighted that
Adrian has been appointed. He brings a wide range of
relevant experience to the Chairmanship of 3i, and will
I know provide the Board with first-rate leadership in
the years ahead.
Since I joined the Board in 1997, there have been huge
shifts in the geopolitical landscape, trade and economic
power. We have had sharp reminders of how global
markets can magnify threats as well as opportunities,
most recently with the explosion and collapse of
the world debt markets. But in that time too, 3i has
transformed itself to compete in today’s investment
world. No longer a domestic company with some
European business, 3i has established itself in China
and India and has a position in the United States
as well. The Chief Executives I have worked with during
my 13 years on the Board each played a part in building
the new 3i.
The after-shocks from the credit crunch continue to
destabilise financial markets, as they wait with
decreasing patience for governments to repair their
fiscal deficits. But 3i has a great ability to adapt, a brand
built on its reputation as an investment partner,
committed and engaged shareholders, and is strongly
placed to deploy these advantages in fast-changing
markets. And I am confident that 3i will enjoy strong
leadership in the years ahead.
Baroness Hogg Chairman
12 May 2010
3i Group plc
Report and accounts 2010
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6 6
3i at a glance
Our vision is to be recognised as a leading international
investor based on the value we add to our portfolio,
the returns we deliver to our investors and our
responsible approach and style of investing.
Group
Portfolio by business line1 (%)
as at 31 March 2010
Buyouts
Growth Capital
Infrastructure
Non-core activites
Portfolio by sector1 (%)
as at 31 March 2010
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
Infrastructure
Portfolio by geography1 (%)
as at 31 March 2010
Continental Europe
UK
Asia
North America
Rest of World
1 Balance sheet investment value.
46
38
11
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20
9
10
29
12
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2
2
11
39
38
14
8
1
3i Group plc
Report and accounts 2010
Business model
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
Investment funding model
Investments made with 3i’s own
balance sheet capital and funds
managed or advised by 3i.
Value creation
3i’s objective is to generate returns
through a combination of:
– realised and unrealised growth
in the value of investments held
by the Group
– portfolio income and fees from the
funds that it manages or advises
Assets under management (£m)
as at 31 March
10,780
9,633
386
1,385
218
458
167
843
21%
59
2009
2010
3i
External funds
Financial performance (£m)
year to 31 March 2010
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
Gross portfolio return ("GPR")
GPR (%)
Fees receivable from external funds
More on Group P12
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Buyouts
Business model
Market focus
Leading mid-market transactions,
with an enterprise value of typically
up to €1 billion.
Geographic focus
Europe and Asia.
Investment funding model
Investments made with a
combination of funds managed by
3i and 3i’s own balance sheet.
Value creation
Actively working with our portfolio
to systematically deliver step
improvements in performance.
Growth Capital
Business model
Market focus
Minority investments, typically
between €25 million and
€150 million in established,
profitable and international
businesses.
Geographic focus
Europe, Asia and North America.
Investment funding model
Investments to date made
principally from 3i’s own balance
sheet. New investments to be made
with funds managed by 3i and 3i’s
own balance sheet.
Value creation
Actively working with our portfolio
to systematically deliver step
improvements in performance.
Infrastructure
Business model
Market focus
Investing in infrastructure assets,
principally in social infrastructure,
transportation and utilities.
Geographic focus
Europe, India and North America.
Investment funding model
Investments made by funds
managed and advised by 3i as well
as from 3i’s own balance sheet
commitment to these funds.
Value creation
Actively working with our portfolio
to enhance performance through
increased efficiencies and business
development.
Assets under management (£m)
as at 31 March
Assets under management (£m)
as at 31 March
Assets under management (£m)
as at 31 March
2009
2010
3i
External funds
5,690
5,227
2009
2010
2,267
2,585
2009
2010
3i
External funds
3i
External funds
Financial performance (£m)
year to 31 March 2010
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
GPR
GPR (%)
Fees receivable from external funds
Financial performance (£m)
year to 31 March 2010
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
GPR
GPR (%)
Fees receivable from external funds
243
467
223
249
78
550
38%
39
Financial performance (£m)
year to 31 March 2010
Investment
Realisation proceeds
Realised profits
Unrealised value movement
Portfolio income
GPR
GPR (%)
Fees receivable from external funds
121
578
(14)
145
63
194
11%
–
More on Buyouts P31
More on Growth Capital P37
More on Infrastructure P43
3i Group plc
Report and accounts 2010
1,671
1,627
2
46
–
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16
100
27%
20
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Overview
8 8
Chief Executive’s statement
“ I am confident we will see some outstanding
opportunities in the next three years and
believe we are now well placed, with a
focused business model, good liquidity and a
strong balance sheet to invest in and build
some great businesses”.
Michael Queen Chief Executive
Our vision
To be recognised as a leading international investor based on:
– the value we add to our portfolio
– the returns we deliver to our investors
– our responsible approach and style of investing
Our values
In all our activities we will:
– be commercial and fair
– respect the needs of shareholders, investors,
our people and the companies in which we invest
– maintain our integrity and professionalism
– strive for continual improvement and innovation
3i Group plc
Report and accounts 2010
9
Last year I set out that our key priorities were to ensure
that 3i was both financially robust and operationally agile.
In the last 12 months we have made significant progress
in both these objectives. A combination of strong
shareholder support for the rights issue in June last year
and decisive management action means that net debt is
now well within the limits we have set, the business has
been reshaped to focus on our competitive strengths and
we now have choices about the future direction of 3i.
This could not have been achieved without the
determination and commitment of everyone that works
at 3i. I am grateful for their support and confident that
we have a strong platform to take 3i forward in what
remains a challenging environment, albeit one for which
3i’s competitive advantages and business model are
well suited.
Market environment
Stock markets rallied strongly through 2009,
anticipating the end of the recession in developed
countries. Private equity activity also recovered but at
a much slower rate. Investment levels in 2009 were
the lowest for a decade and, while 2010 looks to be
stronger, total investment is likely to be well short of
that in the period from 2005 to 2007.
Banks have regained some confidence and debt is
increasingly available for transactions, although this
is a mixed picture, with tough negotiations between
portfolio companies and banks being a common
occurrence. Pricing for those transactions completing
has been high, with significant private equity competition
for those deals that have been completed. This can
be partly explained by the fact that the private equity
industry is well funded and is largely incentivised
to deploy capital rather than returning uninvested
commitments to investors.
Our market positioning has ensured that we have
had the option to consider many of the investment
opportunities arising in our market, but we have
adopted a cautious approach, judging that many of
the deals being completed did not offer good value.
As the pace of recovery has been slow, corporations
have continued to focus on de-gearing their balance
sheets and we have not yet seen a strong demand for
growth capital. However, there are some positive signs
that this is now changing.
Performance
A total return of 16% (2009: (53)%) represents a
significant recovery from last year. We benefited from
stock market recovery as we use market multiples to
value assets, but we also saw some strong realised
profits on exit, as well as more positive earnings
performance in many of our portfolio companies.
Our approach to valuation means much of the strong
recoveries in earnings that are visible in forecasts and
budgets of portfolio companies will not be reflected
in our reported performance until those anticipated
earnings improvements are actually achieved.
Manufacturing businesses saw the strongest recovery
– particularly those based in continental Europe with
export-led business models. European consumer-facing
businesses found life harder and we would expect this to
continue as European governments start to reduce fiscal
deficits and personal disposable income comes under
pressure as interest rates and taxation rise.
In the context of weak M&A markets, realisations held
up well at £1.4 billion (2009: £1.3 billion), with the
uplift on sales over the opening valuations being 19%.
There were two new investments in new portfolio
companies in the year. This reflected our focus on the
existing portfolio, as well as our perception that there
were few investment opportunities offering good
value, for reasons noted. We have, however, been
keen to support our portfolio and helped them make
16 acquisitions in aggregate during the year, which we
believe will be value accretive to the portfolio companies
themselves and to 3i.
Last year I highlighted that we may have needed to
invest heavily to protect our portfolio from the impact
of covenant breaches on bank debt. The amount
required of £52 million turned out to be much less
than anticipated due to some outstanding work by our
teams and the management in our portfolio companies.
However, we have seen some losses. The failure of
British Seafood in February 2010 was our largest single
loss in the year. Two significant investments in the
Buyouts portfolio effectively failed in the year, although
the financial impact from these had been recognised in
full in the previous financial year. Overall, our portfolio is
performing well and showing both resilience and good
upside potential as earnings recover.
As can be seen from the business line reviews, the
Buyouts business has recovered strongly this year.
Jonathan Russell and his team had moved early to ensure
that costs were taken out in portfolio companies and
that new market opportunities were explored. The case
studies in this report and in our online reporting centre
provide examples of this.
The sale of Ambea for £212 million in February was a
notable achievement and was delivered through the
combination of an active buy-and-build strategy and
improvements in the margins and operating model of
the business.
Growth Capital raised a dedicated fund for the first time,
raising around €400 million of external capital which,
together with €800 million of balance sheet capital,
provides a good platform for investment in the next two
years. Guy Zarzavatdjian and Paul Waller led this effort
in what was a very tough fundraising environment. This
now means all three of our core business lines invest a
mixture of balance sheet capital and third-party funds.
Infrastructure delivered a good performance with a gross
portfolio return of 27%. This largely reflected the increase
in the 3i Infrastructure plc share price from its depressed
level in March 2009. The underlying asset performance
in Infrastructure was solid, further demonstrating the
consistency and low volatility of returns that make
infrastructure such an attractive asset class.
We sold the bulk of our Venture portfolio during the
year at what we considered was an attractive price,
recovering most of our last balance sheet value. The
remaining non-core Venture portfolio and SMI assets
now account for less than 5% of the total portfolio.
3i Group plc
Report and accounts 2010
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Overview Chief Executive’s statement
10 10
Balance sheet
Having restored the Group to financial health, we intend to
maintain a conservative balance sheet. We do not intend to
have significant leverage at the Group balance sheet level
and so will no longer focus on gearing as a key financial
target in its own right. Instead, we will continue to focus on
limiting the absolute level of net debt, reducing gross debt
and managing its maturity profile and maintaining liquidity,
thereby ensuring we are well placed to take advantage of
investment opportunities as they arise.
These elements enable us to have access to the best
investment opportunities in the markets we choose to
focus on. The combination of excellent opportunities with
innovative financial solutions creates the potential to build
great companies delivering good investment returns.
These returns are only achieved if we work closely with
companies, ensuring they achieve their full potential.
Delivering strong investment returns gives us access to
multiple capital sources and provides shareholders with a
combination of dividends and capital growth.
This year, the combination of strong realisations in the
second half and low investment means that we finish
the year with net debt of only £258 million. I expect
this to increase next year as we increase our investment
level, but we will stay below our £1 billion limit.
Operating costs
We have taken some difficult decisions during the
year to ensure that we have the right cost base for
the business. A further 148 employees left during the
year, with headcount at the end of the year being 488.
We also decided, after a comprehensive consultation
process with affected employees, to close the UK
defined benefit pension scheme to future accrual for
current members with effect from 5 April 2011. Taking
steps such as these creates the flexibility to increase
resource in areas of strategic importance, such as Asia,
without a corresponding increase in overall costs.
Vision, Business model and Strategy
Last year, on becoming Chief Executive, I set out a
short-term strategy based on restoring the business
to financial health. In this Annual Report we have
articulated a longer term vision and strategy as well as
setting out the key elements of our business model and
the values that are fundamental to 3i.
3i’s business is investment and our vision is to be
recognised as a leading international investor. I believe we
should be judged not only on the returns we deliver to
our shareholders and third-party investors, which should
reflect the value we add to companies in which we
invest, but also on our responsible approach to investing.
Our purpose is to work with talented management
teams and entrepreneurs to build great companies,
thereby generating outstanding investment returns for
our shareholders and third-party investors. The terms on
which we invest are, of course, critical and we will at all
times be highly disciplined in ensuring that we invest well.
The diagram in the next column highlights the key
elements of our business model, emphasising the way
a self-reinforcing virtuous circle develops if we get
the separate elements right. The different parts of the
model are described in detail on pages 16 and 17, but a
brief summary follows.
Everything 3i does is based on a set of core values that
we believe are enduring, and our brand and the values
others associate with it are intended to be the outward
representation of this.
Our model is predicated on investment in our network
of offices, our people and our relationships, as well as the
maintenance and enhancement of our sector knowledge.
Secure access
to capital from
multiple sources
Build
great companies
and deliver
outstanding
returns
Invest in
our network,
people and
knowledge
Core values
Brand
Achieve full
potential through
active partnership
See the best
investment
opportunities
Create
innovative
financial
solutions and
ensure excellent
execution
Looking forward
3i’s strategy is focused on continuous improvement
to each element of our business model. We intend to
strengthen our network, particularly in Asia, and to deepen
our sector focus and build our capabilities to support our
portfolio companies through our “Active Partnership”
programme. All of this will strengthen our market position
and build sustainable competitive advantage.
We are already seeing significant opportunities to build
on 3i’s current business through growth into adjacent
areas and extension of our geographical presence.
While it is our intention to expand the business over
the next few years, the absolute priority remains the
delivery of attractive returns to shareholders through
achieving the full potential of current activities.
I am confident we will see some outstanding
opportunities in the next three years and believe we
are now well placed, with a focused business model,
good liquidity and a strong balance sheet to invest in
and build some great businesses.
Finally, I would like to record my own thanks to Sarah
Hogg. Sarah joined the Board in 1997 and has been
Chairman for eight years. The test of any Board is how
it deals with difficult times and tough decisions, and
Sarah has shown remarkable resilience, good judgment
and integrity throughout. She has provided wise counsel
to the executive management team at 3i and has helped
me considerably in moving into my current role as Chief
Executive. Everyone connected with 3i is indebted to
her and, on behalf of them, I would like to thank her and
wish her well for the future.
Michael Queen Chief Executive
12 May 2010
3i’s Business model P16-17
3i Group plc
Report and accounts 2010
11
Business review
Business review
Introduction to the Group
Key Group performance measures
Our strategy
3i’s Business model
Financial review
Business lines
11-44
12
12
13
14
16
23
31
A review of our main activities and principal markets,
our key performance measures and our performance
against them.
Business review
12
Business review
Introduction to the Group
3i is an international investor focused on buyouts,
growth capital and infrastructure, investing in Europe,
Asia and North America. Our vision, values and
strategy are set out on pages 8 to 10.
3i is a focused investment business with a portfolio of
198 investments, well diversified by geography, sector
and business line. This diversity can be seen from the
detailed information provided on pages 6 and 7 and the
schedule of some of our largest investments on pages
132 and 134. A selection of case studies is available on
pages 46 to 50, as well as in our online reporting centre.
Following the announcement of the launch of the
€1.2 billion Growth Capital Fund on 25 March 2010,
all three of 3i’s business lines invest using a mix of the
Group’s own balance sheet capital and external capital.
Total assets under management at 31 March 2010,
including 3i’s commitments to funds, were £9.6 billion
(2009: £10.8 billion), including £3.8 billion (2009:
£3.9 billion) advised or managed on behalf of others.
Corporate responsibility and risk management are
central to our strategy and there are reports on each
of these important aspects of our business on pages
57 and 51.
The Group’s total return is generated by the realised and
unrealised returns we achieve from our portfolio, the
fees we receive from advising or managing external
funds, less the operating expenses and funding costs
of the business.
The key financial performance measures on the page
opposite relate to the year ending 31 March 2010.
As our business develops, we have defined two
additional measures that will be reported from 1 April
2010: net portfolio return; and operating costs as a
percentage of assets under management. These are
described in more detail in the relevant sections of this
Business review.
Our key non-financial performance measures are
employee engagement and environmental impact.
Employee engagement is important to 3i as an
international investor employing a relatively small
number of people in total, in a highly competitive
market. Although 3i’s environmental footprint is
relatively low, we aim to minimise our impact on
the environment and this also supports employee
engagement.
A detailed review of our performance at a Group and
business line level for the year to 31 March 2010 is set
out in this review. The key business line performance
measures are set out on the opposite page.
/casestudies
/corporateresponsibility
3i Group plc
Report and accounts 2010
Further information on
Assets under management
Total return
Business lines
Case studies
Risk
Corporate responsibility
P19
P23
P31-44
P45
P51
P57
13
Key Group performance measures
Financial
Total return
Gross portfolio return
Cost efficiency
Gearing
Net asset value per share movement¹
1 Growth in NAV is stated before dividends, other distributions to shareholders, the rights issue and the 3i QPEP transaction. The 2009
2010
16.2%
20.9%
4.1%
8%
£0.43
2009
(53.0)%
(36.7)%
3.0%
103%
£(5.64)
comparative has not been restated for the rights issue and the 3i QPEP transaction.
Non-financial
Employee engagement
Environmental impact (CO2)¹
1 Tonnes per year equivalent emissions.
Key business line performance measures
– Gross portfolio return
– Portfolio health
– Long-term IRRs by vintage
Performance information for each business line is set out on pages 31 to 44.
2010
74%
7,232
2009
83%
8,428
Further information on
Total return
Gross portfolio return
Gearing
Portfolio value movement
Further information on
Cost efficiency
Business lines
Corporate responsibility
P23
P24
P30
P29
P28
P31-44
P57-62
3i Group plc
Report and accounts 2010
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Business review
14
Our strategy
We know from being an investor that a clear strategy
is fundamental to success but it is not enough. It is
the delivery that makes a strategy real. So here are
the key elements of our strategy and how we plan to
deliver them.
The key elements of our strategy...
To invest
– in growing companies that fit with our values
– with management teams and entrepreneurs,
working with them to deliver their full potential
– in our own people, knowledge and networks
To grow
our business
– in areas consistent with our skills
– by strengthening our international network and
building our sector capabilities
– with a conservative financial structure accessing
multiple sources of capital
To grow our
reputation
– as a respected and responsible investor
– by continuing to improve and innovate
To maintain
a “One 3i”
culture
– with a shared set of values across the Group
– with a consistent approach to the way
we do business
– with a commitment to excellence
in all our activities
3i Group plc
Report and accounts 2010
15
...and how we will deliver them
– Further strengthen the market access we
gain through each and every aspect of our
network
– Ensure that those companies we back
have strong boards and management
teams with aligned interests to 3i
– Increase deal flow through our focused
origination plans for business lines, sectors
and countries
– Develop further the range and delivery
of our Active Partnership programmes
– Strengthen our presence in existing
markets where there is opportunity
to grow
– Investigate new markets and
opportunities, including managing assets
for others, where there is a natural fit with
our strengths
– Use our financial strength to invest in
our people, network and capabilities
– Deploy greater cross-business line
resource to achieve full potential from
our investments
– Continue to invest in our brand through
the training and development of our
people and the importance that we place
on developing long-term relationships
– Build on our heritage, both as a company
and as an investor, of pioneering on
corporate responsibility issues and
transparency
– Use our conservative financial structure
and risk management processes to balance
risk and returns
– Build on our culture of operating as
one company across business lines,
geographies and sectors
– Further increase our emphasis on good
internal communications and knowledge
management
3i Group plc
Report and accounts 2010
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Business review
16
3i’s Business model
Our approach to investing has evolved over many
years. It is based on the values set out on page 8 and
a belief that 3i’s reputation with those we work with
at each stage of the investment life cycle is key to our
future success.
A strong investment track record as a responsible
investor is critical to gaining access to capital. Our record
of delivering value to portfolio companies and being a
good and active partner is vital in winning business.
3i’s reputation as an employer is also crucial to
attracting and retaining the talent required to deliver
our strategy.
The diagram opposite shows, by investing in our
network of relationships around the world, our people
and our knowledge base, we aim to create access to the
best investment opportunities. In a competitive market,
converting these opportunities into high potential
portfolio companies depends upon creating innovative
financial solutions as well as excellent execution.
In order to help these portfolio companies deliver their
full potential and become great companies which deliver
outstanding investment returns, we actively engage
with them to drive value creation through a range of
specific programmes. It is this overall approach that
delivers the investment track record which, when
combined with the Group’s focus on managing
relationships, corporate responsibility and risk
management, provides the platform to raise capital
from multiple sources.
Further information on
Risk
Corporate responsibilty
P51
P57
3i Group plc
Report and accounts 2010
17
Secure access to capital from
multiple sources
As a FTSE 100 company with its own capital
and a manager or adviser to external funds,
3i has access to multiple sources of capital.
Such access provides a source of resilience
and sustainability for 3i, as can be seen from
the recent rights issue and Growth Capital
Fund launch.
Gaining access to capital depends upon
performance, transparency and a long-term
approach to managing relationships.
Invest in our network, people
and knowledge
3i’s international reach is central to providing
market access and insight. We have a strong
culture of working across borders and
harnessing skills and knowledge from across
the world. Operating with an international
mindset requires constant investment in our
people, systems and communications.
Combining this approach with the strength of
our sector and business line teams creates the
pool of talent necessary to assemble what we
call the “best team for the job” for each phase
of the investment life cycle.
See the best investment
opportunities
Access to high quality investment opportunities
is critical to future value growth. Investment
over many decades in our network, people and
knowledge provides 3i with the relationships
and insights to deliver this.
Our marketing approach is tailored for each
geography, business line and sector and relies
upon our track record, as well as the direct
experiences people have of working with 3i.
Building relationships with businesses and
business leaders, long before a specific
opportunity emerges, is an approach which
3i has adopted for many years.
Secure access
to capital from
multiple sources
Build
great companies
and deliver
outstanding
returns
Invest in
our network,
people and
knowledge
Core values
Brand
Achieve full
potential through
active partnership
See the best
investment
opportunities
Create
innovative
financial
solutions and
ensure excellent
execution
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Build great companies and deliver
outstanding returns
Achieve full potential through
active partnership
The three largest realisations in the year,
Ambea, Telecity and Venture Production, which
are profiled on pages 46 and 47 are good
examples of portfolio companies delivering
outstanding returns from fundamental business
growth. Each of these businesses delivered
strong and sustained growth in earnings in
competitive markets.
Creating value through effective portfolio
management is at the heart of our performance
and reputation. We have developed a rigorous
methodology for effecting business change.
This active partnership approach is delivered
by bringing together three complementary
elements; operational and functional expertise,
sector and strategic insight and market-leading
governance standards.
The case studies on pages 46 to 50 are
examples of this active partnership approach
delivering value.
Create innovative financial
solutions and ensure excellent
execution
3i has a strong heritage of successfully aligning
interests and delivering innovative financial
solutions in each of the geographies, sectors
and business lines in which we operate. Our
scale, culture, experience, and training are
central to sustaining this.
3i’s debt advisory team, a centre of excellence
within 3i for best practice and market
knowledge on arranging and managing debt for
3i’s portfolio companies is an example of this.
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3i Group plc
Report and accounts 2010
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Business review
1818
Investment funding model
Introduction
Access to multiple sources of capital to fund investment
is a strength of 3i’s business model. 3i invests from its
own balance sheet and also with funds that it manages
or advises for others. 3i is currently well funded for
investment through the strength of its balance sheet,
its liquidity and from the undrawn commitments made
by the external investors in its funds.
The management of external funds enhances returns to
the Group through fees and carried interest receivable.
This section of the Annual Report provides a summary
of the development of 3i’s fund management and
advisory business during the year both at a Group and
business line level. Table 1 and Charts 1, 2 and 3, also
provide details on each of the individual funds managed
or advised as well as information about the composition
of the investors in these funds. Further information is
also provided at a business line level on pages 31 to 44.
Fund management fees and carried interest are earned
on co-investment funds such as Eurofund V and the 3i
India Infrastructure Fund. Advisory fees are earned
through advising 3i Infrastructure plc. Fee levels vary by
fund and also usually over the life of the fund. Fees are
based on either committed capital for active investing
funds such as Eurofund V, or invested capital, as in the
case of 3i Infrastructure plc. When a fund passes the
investing phase, fees are earned on the residual portfolio
cost being managed.
Following the announcement of the launch of the
€1.2 billion Growth Capital Fund on 25 March 2010,
all three of 3i’s business lines invest using a mix of
external and the Group’s capital. As can be seen from
Table 1, at 31 March 2010 total assets owned,
managed or advised by 3i were £9.6 billion (2009:
£10.8 billion), with external funds accounting for 40%
(2009: 36%) of this total.
3i seeks alignment of interest between shareholders and
fund investors in a range of ways, including significant
investment or commitment by the Group in each of the
funds that it manages or advises.
Development of 3i’s fund management
and advisory business by business line
Buyouts
3i has used limited partnership funds for buyouts since
1994. 3i manages these funds and, as can be seen from
Table 1, it has a significant co-investment commitment
in each.
The latest Buyouts fund, the €5 billion Eurofund V,
was raised in November 2006 and was 54% invested
as at 31 March 2010 (2009: 53%). A slower rate of
investment in the last two years has resulted in less
funds being deployed than initially anticipated at this
stage. The performance on Eurofund IV continues to
remain strong.
Fee income from managed funds for Buyouts totalled
£39 million in the year (2009: £45 million).
Growth Capital
The major development during the year to 31 March
2010 was the launch of a limited partnership Growth
Capital Fund of €1.2 billion just before the year end.
At 31 March 2010, investors from Asia, Europe, the
Middle East and North America had committed circa
€400 million to the Fund. As part of its €800 million
commitment, 3i contributed a seed portfolio of Growth
Capital investments valued at €339 million. Until this
point, Growth Capital investment was funded principally
from the 3i balance sheet.
The Growth Capital Fund will continue 3i’s existing
Growth Capital strategy to make minority investments
in growing businesses across Europe, Asia and North
America. It is intended that the Fund will be invested
in around 20 mid-market companies and will invest
between €25 million and €150 million of equity in
each opportunity. The Fund’s first new investment
was announced on 25 March 2010.
Infrastructure
3i’s own capital was originally used to launch the
Infrastructure business line in Europe and in India.
In 2007, a £703 million listed company, 3i
Infrastructure plc (“3iN”) was launched. The Group’s
initial investment in 3iN was £325 million and the
Group subsequently invested a further £25 million in
a £115 million placing and open offer. In September
2007, 3i launched the $1.2 billion 3i India Infrastructure
Fund in which 3i and 3iN made individual commitments
of $250 million.
At 31 March 2010 3iN had invested 86% of its raised
capital and the 3i India Infrastructure Fund was 42%
invested (2009: 77% and 41%).
Fee income from infrastructure funds managed or
advised by 3i totalled £20 million in the year to
31 March 2010 (2009: £26 million).
Further information about the external funds deployed
in our Buyouts, Growth Capital and Infrastructure
business lines can be found on pages 31 to 44.
3i Group plc
Report and accounts 2010
19
Assets under management
Assets owned, managed and advised by 3i
The Group defines its assets under management
(“AUM”) as the total commitments, including the
Group’s, to its active managed and advised funds, as
well as the residual cost of investments in funds that
are already invested and the cost of any other
investments owned directly by 3i. As at 31 March
2010, the Group had total AUM of £9,633 million
(2009: £10,780 million).
This definition has been updated from that used in
previous years as each business line now invests
alongside and has 3i commitments aligned to external
funds. The new AUM measure therefore incorporates
3i’s commitments in order to report a total AUM
amount which is in line with industry practice.
An 11% reduction in assets under management during
the year to £9,633 million at 31 March 2010 (2009:
£10,780 million) was principally the result of a
reduction in the underlying portfolio cost of non-fund
investments following strong realisations in the year and
the solvent liquidation of 3i QPEP. This was partially
offset by the launch of the Growth Capital Fund.
Chart 1: Breakdown of AUM (%)
as at 31 March 2010
Commitments to
active funds managed
and advised
Residual cost of
invested funds
Cost of 3i non-fund
investments
74
10
16
Chart 2: External investor base for non-listed funds
managed and advised by geographic location (%)
as at 31 March 2010
Continental Europe
North America
UK
Asia
Middle East
33
27
16
14
10
Chart 3: External investor base for non-listed funds
managed and advised by type of investor (%)
as at 31 March 2010
Pension funds
Fund of funds
Government agencies
Insurance companies
Financial institutions
Endowments
Private individuals
Other
30
21
20
16
8
3
1
1
Table 1: Assets under management
Business line
Close date
Original
fund size
Original 3i
commitment
% invested
at March
2010
Residual
cost
AUM
Active investing managed funds
3i Eurofund V
Buyouts
November 2006 €5,000m €2,780m
3i India Infrastructure Fund
Infrastructure
March 2008 $1,195m
3i Growth Capital Fund
Growth Capital
March 2010 €1,192m
$250m
€800m
54%
42%
35%
n/a €5,000m
n/a
$945m1
n/a €1,192m
Active investing advised funds
3i Infrastructure plc
Infrastructure
March 2007
£928m2
£308m3
n/a
n/a
£928m2
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3i Eurofund III
3i Eurofund IV
Other invested funds
Other assets
Buyouts/
Growth Capital
Buyouts
Various
3i owned (non-fund)
Buyouts
Growth Capital
Infrastructure
Non-core
July 1999 €1,990m
€995m
91%
€96m
€96m
June 2004 €3,067m €1,941m
95%
€640m €640m
Various
Various
Various
Various
£364m £364m
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£93m
£1,269m £1,269m
£1m
£1m
£168m £168m
£9,633m
Total AUM (in sterling)
1 Adjusted to reflect 3i Infrastructure plc’s $250 million commitment to the Fund.
2 Based on latest published NAV (ex-dividend).
3 3i Group’s proportion of latest published NAV.
3i Group plc
Report and accounts 2010
Investment
European private equity investment at €29 billion was
66% lower in 2009 than in 2008 (source: unquote”).
However, investment of approximately €10 billion in
the final quarter of 2009, and a similar level in the
first quarter of 2010, evidenced signs of a recovery.
Mid-market buyout investment (deals between
€100 million to €1 billion) accounted for two thirds
of first quarter 2010 investment (source: unquote”).
New private equity investment in “Asia Pacific”, which
includes the three main areas in which 3i is active
(India, China and South East Asia), was 37% lower in
2009 (source: Asia Venture Capital Journal “AVCJ”).
The latest AVCJ data shows that a recovery in the final
quarter of 2009 was sustained into the first quarter
of 2010.
Detailed descriptions of the market conditions for each
of our Buyouts, Growth Capital and Infrastructure
business lines are contained within the business line
reviews on pages 31 to 44.
Business review
2020
Market conditions
This section provides commentary on the broader
environment in which 3i operated during the year.
After the near collapse in the market in late 2008 and
early 2009, conditions for private equity fundraising,
investment and realisations in 3i’s key markets of
Europe, Asia and North America were more encouraging
in the second half of the financial year to 31 March
2010. An improved macroeconomic environment and
increased confidence in equity markets were key
reasons for this. However, both remain fragile and
conditions are highly variable from country to country.
It is also as yet unclear what the impact will be of the
unwinding of measures taken by governments in many
countries to alleviate the global financial crisis.
Mergers and acquisitions
Conditions in mergers and acquisitions (“M&A”) markets
influence the environment for both investment and
realisations across the Group. Global M&A activity
for 2009 was at its lowest level since 2004 (source:
Dealogic) with European activity some 44% lower than
in the previous year. However, data from the same
source showed that deal volume for the six months to
31 March 2010 was starting to recover and was 15%
higher than in the six months to 31 March 2009.
New listings (IPOs)
New listings, or IPO activity, started to pick up in the
second half of 2009 but was still down 24% on the year
(source: Ernst & Young Global IPO update). Asia and
South America accounted for 72% of total IPO value in
2009. In North America and Europe activity was very
subdued. Global IPO activity in the first quarter of
2010, with 267 deals globally worth $53.2 billion,
showed substantial improvement over the first quarter
of 2009, which has been the lowest quarter for a
decade (52 deals $1.4 billion). Asia accounted for
some 66% total global IPO fundraising in the first
quarter of 2010.
Fundraising
Fundraising by private equity firms during 2009 was
also the lowest since 2004 (source: Preqin). Aggregate
capital raised by private equity funds worldwide was
$246 billion, down 61% from 2008. However, buyout
funds still raised $102 billion in 2009. Although 56%
lower than the previous year, this fundraising added
significantly to funds raised in earlier years, supporting
an active market for secondary transactions and a
competitive environment for new investments.
Global fundraising for infrastructure slowed during
2009 to $6.3 billion, with fundraising in North
America and Europe aggregating to $2.9 billion.
The infrastructure market continued to be affected by
tight credit markets.
3i Group plc
Report and accounts 2010
21
Investment and realisations
Table 2: Investment activity – own balance sheet and
external funds
year to 31 March
Realisations
Investment
Net divestment/
(investment)
3i’s own
balance sheet
2009
£m
1,385 1,308
2010
£m
External funds
2009
£m
360
2010
£m
157
386
968
325
678
999
340
(168)
(318)
As Table 2 shows, 3i’s realisation proceeds were
strong in the year to 31 March 2010. This, combined
with a highly selective approach to new investment
throughout the year, enabled the Group to deliver net
divestment of £1.0 billion.
Investment
Total investment for the year to 31 March 2010 was
£386 million (2009: £968 million). This low level
of investment included £21 million of new investment
and reflected a significantly reduced level of market
activity, as well as our focus on supporting the
development and growth of portfolio companies.
Chart 4 illustrates the split of total investment in the
year by nature of investment. Given the economic
conditions experienced during the year, our portfolio
required a range of financial support. Several portfolio
companies were able to capitalise on growth
opportunities and we invested £18 million in these
businesses to support them in financing acquisitions.
Others needed funding to support restructurings.
We invested a total of £83 million in restructurings,
which was lower than anticipated at the start of the
year. In addition, £64 million was drawn down from
existing commitments. The majority of this, £42 million,
was for new investments made within the Debt
Warehouse. As in previous years, an element of gross
investment was non-cash through capitalised interest.
This amounted to £183 million in the year to March
2010 (2009: £127 million).
Chart 5 shows investment by business line.
At £243 million (2009: £519 million), Buyouts
accounted for 63% of total investment, including
£137 million of capitalised interest through the PIK
note loan instrument commonly used in Buyout
transactions. Investment in Buyout restructurings at
£44 million was at a low level, given the size of the
portfolio. Investment in Growth Capital totalled
£121 million (2009: £343 million), which included
£21 million in the first new investment of the Growth
Capital Fund.
Non-core investment in the year of £20 million
(2009: £56 million) was minimal and was focused
on meeting existing commitments, or investing to
strengthen positions ahead of sale.
As shown by Chart 6, continental Europe and the UK
accounted for 88% of gross investment in the year.
3i Group plc
Report and accounts 2010
In addition to 3i’s own balance sheet investment,
a further £325 million was invested on behalf of our
managed and advised funds, which included new
investment made by 3i Infrastructure plc.
Further detail on investment activity within each of our
business lines can be found on pages 31, 37 and 43.
Chart 4: Total investment (£m)
for the year to 31 March 2010
Total investment: £386 million
New/first investment
Acquisition finance
Restructurings
Capitalised interest1
Drawdown on existing
commitments
Other
21
18
83
183
64
17
1 Includes PIK notes.
A Payment in Kind (“PIK”) note is a loan instrument whereby, at pre-agreed dates, interest
accrued is capitalised and rolled into the value of the principal of the loan and is payable
at the loan repayment date. This capitalised interest is included within the definition of
gross investment.
Chart 5: Investment by business line (£m)
for the year to 31 March 2010
Total investment: £386 million
Buyouts
Growth Capital
Infrastructure
Non-core activites
243
121
2
20
Chart 6: Investment by geography (£m)
for the year to 31 March 2010
Total investment: £386 million
UK
Continental Europe
Asia
North America
Rest of World
222
118
25
19
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Chart 7: Realisations by business line (£m)
for the year to 31 March 2010
Total realisations: £1,385 million
Buyouts
Growth Capital
Infrastructure
Non-core activities
467
578
46
294
Chart 8: Realisations by geography (£m)
for the year to 31 March 2010
Total realisations: £1,385 million
UK
Continental Europe
Asia
North America
Rest of World
621
542
134
84
4
Chart 9: Realisations by type (£m)
for the year to 31 March 2010
Total realisations: £1,385 million
Trade
Secondaries
Quoted1
Loan
IPO
Other
184
425
422
19
35
300
1 Realisations of Quoted investments
include trade sales of £145 million.
Realisations
Proceeds from realisations of balance sheet investments
in the year to 31 March 2010 of £1,385 million
(2009: £1,308 million) were marginally ahead of
last year but at a substantially higher average uplift
to opening value of 19% (2009: 5%). This was driven
by a strong level of realisations in the second half
of the year, during which we realised a number
of investments at good uplifts to their opening values.
Realisations generated realised profits of £205 million
in the second half at a 30% uplift on 31 March 2009
valuations (previous six months to 30 September 2009:
£13 million, 3%).
The proportion of these realisations by business line,
geography and type of realisation is shown in Charts
7, 8 and 9.
Buyouts and Growth Capital accounted for 34% and
42% of realisation proceeds respectively. Growth
Capital realisations of £578 million include £96 million
of proceeds received on the partial sale of the seed
portfolio to external investors in the Growth Capital
Fund, as well as the sell down of non-core assets
transferred from 3i Quoted Private Equity plc
(“3i QPEP”) (£56 million).
The nature and age profile of infrastructure investments
and the structure of 3i’s investment in 3i Infrastructure
plc mean that realisations during the year were minimal
and were comprised almost entirely of the sale of the
majority of the Group’s remaining own balance sheet
holding in Anglian Water Group (“AWG”) (£45 million).
Non-core portfolio realisations of £294 million (2009:
£236 million), marginally ahead of their carrying value,
reduced the non-core portfolio to less than 5% of the
Group’s total portfolio. These non-core realisations do
not include £110 million of cash received by the Group
in respect of the 3i QPEP transaction, completed in
April 2009.
Continental Europe and the UK accounted for 84% of
total realisations (2009: 82%), including the largest
three realisations in the year, Ambea (Buyouts:
£212 million), Venture Production (Growth Capital:
£145 million) and Telecity (Buyouts: £142 million).
These realisations are profiled on pages 46 and 47.
As Chart 9 shows, 3i has a range of realisation routes
and there was a good spread by type of divestment
during the year.
3i Group plc
Report and accounts 2010
23
Financial review
Returns
year to 31 March 2010
Gross portfolio return
Net portfolio return
Total return
Realised profits
£218m
Unrealised value movement £458m
£167m
Portfolio income
Gross portfolio return
Fees receivable
Net carried interest
Operating expenses
£843m
£59m
£(58)m
£(221)m
Net portfolio return
Net interest payable
Exchange movements
Other
Gross portfolio return
£843m
Net portfolio return
£623m
Total return
£623m
£(112)m
£(35)m
£(69)m
£407m
Gross portfolio return
£843m
Net portfolio return
£623m
Total return
£407m
Return on opening portfolio
20.9%
Return on opening portfolio
15.5%
Return on opening equity
16.2%
The diagram above illustrates how the Group presents its financial returns. Gross portfolio return represents the
performance of the investment portfolio. Net portfolio return includes additional income generated from managing
external funds, through management fees and carried interest receivable, less the costs of our operating expenses
and carried interest paid to our investment teams. Finally, total return is the net portfolio return, less our funding
costs and the impact of foreign exchange and other factors.
Each of these aspects of our returns is considered in greater detail in this review. An explanation of our valuation
methodology is contained on pages 130 and 131.
Table 3: Total return
year to 31 March
Realised profits over value on disposal of investments
Unrealised profits/(losses) on revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Net fees payable
Gross portfolio return
Fees receivable from external funds
Carried interest receivable from external funds
Carried interest and performance fees payable
Operating expenses
Net portfolio return
Net interest payable
Movement in the fair value of derivatives
Net foreign exchange movements
Pension actuarial loss
Other (including taxes)
Total comprehensive income (“Total return”)
2010
£m
218
458
59
110
(2)
843
59
30
(88)
(221)
623
(112)
9
(35)
(71)
(7)
407
2009
£m
63
(2,440)
65
108
(2)
(2,206)
75
(3)
56
(250)
(2,328)
(86)
(38)
315
(8)
(5)
(2,150)
Portfolio valuation – an explanation P130 to P131
3i Group plc
Report and accounts 2010
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2424
Table 4 : Total return by year
year to 31 March
2010
2009
2008
2007
2006
%
16.2
(53.0)
18.6
26.8
22.5
Total return (%) comprises the total comprehensive income stated as a percentage of
opening shareholders’ funds where opening shareholders' funds is the weighted average
of opening shareholders’ funds and the equity value following the liquidation of 3i QPEP
and the rights issue.
The Group generated a total return of £407 million for
the year (2009: £(2,150) million), which represents a
16% return over opening shareholders’ funds. Stronger
realised profits of £218 million (2009: £63 million)
and good growth in the value of the portfolio of
£458 million (2009: £(2,440) million) were the main
drivers of these returns.
The total return achieved during the year is a significant
turnaround from last year and begins to bring the
Group back into line with historic return levels as shown
in Table 4.
Gross portfolio return
Table 5: Gross portfolio return by year
year to 31 March
2010
2009
2008
2007
2006
%
20.9
(36.7)
23.9
34.0
24.4
Gross portfolio return (%) comprises the income and capital return (both realised and
unrealised value movement) generated from the portfolio and is stated as a percentage of
opening portfolio value.
Gross portfolio return for the year to 31 March 2010
totalled £843 million (2009: £(2,206) million), a 21%
return over opening portfolio value (2009: (37)%).
Buyouts, Growth Capital and Infrastructure, our core
business lines, generated a combined gross portfolio
return of £844 million (2009: £(1,763) million), which
represented a 24% return on opening portfolio value.
3i Group plc
Report and accounts 2010
Table 6: Gross portfolio return by business line
year to 31 March
Buyouts
Growth Capital
Infrastructure
Non-core activities
Gross portfolio
return
2009
£m
(678)
2010
£m
550
Return as a % of
opening portfolio
2009
%
(34)
2010
%
38
194 (1,035)
100
(50)
(1)
(443)
11
27
–
21
(44)
(10)
(39)
(37)
Gross portfolio return
843 (2,206)
The Buyouts business performed very well, generating
a gross portfolio return of £550 million (2009:
£(678) million). This represented a 38% return (2009:
(34)%), driven by both strong realised profits and a
recovery in the underlying valuations of the portfolio.
This included a return of £110 million from the Debt
Warehouse, which is accounted for within the Buyouts
business line.
Growth Capital also returned to profit, with the majority
of portfolio companies performing well. However, the
overall return was impacted by significant losses on a
small number of investments.
Infrastructure delivered a high return, at 27% (2009:
(10)%), driven by the increase in 3i Infrastructure plc’s
share price and the growth of the value of the Group’s
investment in the 3i India Infrastructure Fund.
Non-core activities generated a return of £(1) million
(2009: £(443) million) reflecting the continued disposal
of the portfolio at close to its book value.
Realised profits
Overall, the Group achieved realised profits in the year
of £218 million (2009: £63 million) at an average uplift
to opening book value of 19% (2009: 5%).
Buyouts generated good realised profits of £223 million
(2009: £255 million), driven by a strong second half of
the year. The sales of Ambea and Telecity generated
realised profits over their opening values of £102 million
and £47 million respectively.
The Growth Capital business generated realised losses
of £(14) million (2009: £(66) million). This included a
realised loss on British Seafood of £72 million. The seed
portfolio of Growth Capital investments transferred to
the new Growth Capital Fund generated realised profits
of £5 million.
Realisations from our non-core portfolio were made at
a modest uplift to opening carrying value generating a
realised profit of £9 million, a good result given
prevailing pricing for sales of private equity portfolios.
25
Unrealised value movements
The unrealised value movement of £458 million (2009:
£(2,440) million) reflects the recovery in asset values
during the 12 months to 31 March 2010. The recovery
in global equity markets led to an increase in earnings
multiples used to value the portfolio. Tough economic
conditions throughout the year continued to put
pressure on earnings. However, there was some
improvement in the underlying earnings of the portfolio
in the second half of the year. The methodology
applied in valuing the portfolio incorporates the new
International Private Equity and Venture Capital (“IPEV”)
Valuation Guidelines issued in 2009.
Table 7 shows the unrealised value movement for each
category of valuation. The most significant category
relates to investments valued on an earnings and
multiple basis. These accounted for 71% of the portfolio
by value at 31 March 2010 (2009: 48%).
Table 7: Unrealised profits/(losses) on revaluation
of investments
year to 31 March
Earnings and multiples based valuations
Equity – Earnings multiples
– Earnings
Loans – Impairments (earnings basis)
First-time movements from cost
Market adjustment to earnings basis
Other bases
Provisions
Uplift to imminent sale
Loans – Impairments (other basis)
Other movements on unquoted
investments
Quoted portfolio
Total
2010
£m
2009
£m
536
(412)
(171)
14
76
–
(8)
(620)
(584)
–
(24)
(28)
16
(16)
77
(156)
(140)
(228)
(188)
(126)
458 (2,440)
3i Group plc
Report and accounts 2010
Impact of earnings multiple movements
The strong recovery in equity markets during the year
increased the earnings multiples applied in valuing
the portfolio. This contributed £536 million (2009:
£(412) million) in unrealised value growth in the equity
of those investments that were valued on an earnings
basis at both 31 March 2009 and 31 March 2010.
EBITDA* multiples were used to value 90% (2009:
79%) of the portfolio valued on an earnings basis as at
31 March 2010. This equates to almost two-thirds of
the total portfolio value. The weighted average EBITDA
multiple before discount used to value the portfolio was
9.5x at 31 March 2010 (2009: 7.1x).
The 34% increase in multiples used in valuations was
lower than the overall equity market increases during
the year. This was largely due to the specific company
quoted comparables used to determine the appropriate
multiple for valuation. Total European mid-cap market
weighted average EBITDA multiples increased by
41% to 8.6x at 31 March 2010 from 6.1x at
31 March 2009.
Consistent with IPEV guidelines, we apply a
marketability and liquidity discount to each asset in
determining the valuation. The weighted average
discount applied at 31 March 2010 was 7.4%, resulting
in a weighted average EBITDA multiple post discount
used to value the portfolio at 31 March 2010 of 8.8x.
Earnings movements
When valuing a portfolio investment on an earnings
basis, the earnings used are the most recent
management accounts for the last 12 months, unless
the portfolio company’s forecast is lower or we believe
that a lower figure from the latest audited accounts
would provide a more reliable picture of maintainable
earnings performance.
Maintainable earnings, derived using this methodology,
were 8% lower than last year. However, this comprised
a 13% decrease in the first half of the year to
30 September 2009 and a 5% increase since
September, as many of our companies began to
show earnings recovery in the second half of the year.
Overall earnings, without the adjustments made to
determine maintainable earnings, were down only 5%
for the year (based on historical data of all 2009
company year ends) across the core portfolio.
The proportion of accounts used to value the portfolio
as at 31 March 2010 was: management accounts 79%
(2009: 42%), forecast 14% (2009: 21%) and audited
7% (2009: 37%). The significant reduction in the use of
forecast earnings at March 2010, compared to the
position at September 2009 (39%), also supports the
improved outlook for earnings.
The equity value movement in relation to earnings
was a reduction of £(171) million (2009: £14 million).
The majority of value reductions continue to be
attributable to a small number of companies in sectors
and geographies particularly impacted by the economic
downturn.
*Earnings before interest, tax, depreciation and amortisation.
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2626
Loan impairments
Where the net attributable enterprise value of a
portfolio company is less than the cost of any 3i loans
provided, a shortfall is recognised against the value of
the loan. This movement is classified as an impairment.
Impairments for the year to 31 March 2010 were
a net positive £92 million. This contrasts with an
£(848) million unrealised value loss in the year to
31 March 2009. Of the £92 million movement,
£76 million is attributed to investments valued on an
earnings basis, with £16 million being for investments
valued on other valuation bases.
The Debt Warehouse, which is described in detail on
page 36 and which includes several impaired loans,
generated an improvement in the aggregate value of
these impaired loans of £45 million during the year.
At the beginning of the year, there were 31 core
portfolio investments that were valued at nil following
the full impairment of their loan value. Since March
2009, seven investments, with a total cost of
£191 million, returned to a combined positive value
of £89 million. Several of these benefited from debt
restructuring and a total of £38 million of further
investment by 3i. Fourteen investments were either
written off or sold. The remaining 10 investments still
held at nil value have a residual cost of £122 million.
First time movements from cost and market adjustment
As reported at the time of our results to 31 March
2009, the Group’s valuation policy had historically been
to value investments that were less than 12 months old
at cost. However, given the unprecedented level of
volatility at that time, no assets were held at cost at
31 March 2009 and a market adjustment category was
introduced. Consequently, this year, there have been no
“First time movements from cost”. A small unrealised
loss of £(8) million is recorded for assets moving from a
market adjustment basis to an earnings basis for the
first time.
Other bases of valuation
Provisions
A provision is recognised where we anticipate that there
is a 50% or greater chance that a company may fail
within the next 12 months. Total provisions for the year
are below last year at £24 million (2009: £156 million).
Provisions do not include assets written off in the year,
which are recorded as realised losses. Write-offs for the
year totalled £78 million (2009: £18 million).
Uplift to imminent sale
Imminent sale includes all investments currently in a
negotiated sales process or for which the proceeds have
been received since the year end. Investments valued on
an imminent sale basis resulted in an unrealised value
movement of £(28) million (2009: £(140) million),
largely attributable to the value reduction of a single
investment.
Other
The other category, which largely represents
investments valued on different valuation bases such
as discounted cash flow or an industry specific measure,
had an overall value movement of £(16) million
(2009: £(188) million).
Impact of adopting new IPEV Guidelines
The updated IPEV Valuation Guidelines, issued in 2009,
were incorporated in our valuation methodology for the
first time at 31 March 2010. The main change is the
assessment and application of the marketability and
liquidity discount. The average discount applied in
generating our valuations is 11% (Buyouts 5%, Growth
Capital 15%). This change in methodology has resulted
in a £37 million value increase in the year, 1% of the
total portfolio value at 31 March 2010.
3i Group plc
Report and accounts 2010
27
Quoted portfolio
The total quoted equity movement for the 12 months
to 31 March 2010 was £77 million, which compares to
an unrealised value loss of £(126) million for the
12 months to 31 March 2009. At 31 March 2010,
the total quoted portfolio was valued at £312 million
(2009: £611 million). The significant reduction in the
size of the quoted portfolio is largely attributable to the
solvent liquidation of 3i Quoted Private Equity plc and
the sales of Telecity and Venture Production.
3i’s 33% holding in 3i Infrastructure plc was valued at
£300 million at 31 March 2010 (2009: £228 million)
and accounted for 96% of the total quoted portfolio
value. The increase of £72 million in value during the
year was as a result of its share price rising from 84p at
the start of the year to 110p at 31 March 2010.
Chart 10: Proportion of portfolio
value by valuation basis (%)
as at 31 March 2010
Earnings
Imminent sale
Market adjustment
Net assets
Quoted
Other1
71
1
–
1
9
18
1 Other includes industry measures and DCF.
Portfolio income
Table 8: Portfolio income
year to 31 March
Dividends
Income from loans and receivables
Net fees payable
Portfolio income
Portfolio income/opening portfolio
(“income yield”)
2010
£m
59
110
(2)
167
2009
£m
65
108
(2)
171
4.1%
2.8%
As can be seen from Table 8, portfolio income for the
year to 31 March 2010 was broadly in line with that of
the previous year. The yield, at 4.1% (2009: 2.8%),
was higher due to a lower opening portfolio value.
Due to the high proportion of capitalised interest, total
portfolio income received as cash was £73 million
(2009: £88 million).
Although lower than the previous year, dividend income
of £59 million for the year has benefited from good
levels of dividend receipts in the Growth Capital
business, and dividends received from 3i’s investment
in 3i Infrastructure plc.
Net portfolio return
Net portfolio return is an important measure for 3i as it
incorporates the economic benefits provided through
our asset management capabilities and captures our
ability to drive cost efficiency. We will be reporting net
portfolio return as a key performance measure from
1 April 2010.
For the year to 31 March 2010, net portfolio return
was £623 million (2009: £(2,328) million), or 15%
(2009: (39)%) of opening portfolio value.
Net operating expenses (operating expenses less
fees receivable from external funds) reduced to
£162 million from £175 million in 2009, or 4.0% of
opening portfolio value (2009: 2.9%). Dilution from net
carried interest was £58 million, or 1.4% of opening
portfolio value.
Fees receivable from external funds
Fees receivable from external funds in the year to
31 March 2010 were £59 million (2009: £75 million).
The Group received total management and advisory
fees from its Buyouts and Infrastructure funds of
£56 million (2009: £61 million) and performance
fees of £2 million (2009: £8 million).
Fund management fees were lower at £47 million
(2009: £53 million) as older funds generated lower fees
or reached the end of their fee generating life. Advisory
fee income of £9 million is marginally lower than the
previous year (2009: £11 million), following the closure
of 3i QPEP in 2009. A performance fee is also received
from 3i Infrastructure plc, which is based on the net
asset value growth per share of the company in excess
of an 8% hurdle. During the year, £2 million was
recognised (2009: £8 million).
Net carried interest and performance fees payable
By focusing on cash-to-cash returns, carried interest
seeks to align 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.
3i receives carried interest from the external funds it
manages, whereas 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 and receivable based on both the
realised profits generated and unrealised value
movements.
3i Group plc
Report and accounts 2010
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Business review Financial review
2828
Net carried interest and performance fees payable in
the 12 months to 31 March 2010 were a cost of
£(58) million (2009: £53 million credit). The charge
reflects both the uplift over value on realisations, as well
as the unrealised value growth in the portfolio in general.
In particular, a number of investments made between
2004 and 2006, with strong value increases, are in
carried interest schemes which are through the
performance hurdle. In addition, the performance of the
underlying investments in the 3i India Infrastructure
Fund has also been good. The performance fee and
a share of the advisory fees generated from 3i
Infrastructure plc are payable to 3i investment staff.
The carried interest expense compares with a
£53 million credit in the year to 31 March 2009, a
consequence of the unrealised losses generated during
that period.
Operating expenses
Table 9: Cost efficiency
year to 31 March
Operating expenses
Fees receivable from external funds*
Net operating expenses
Net operating expenses/opening
portfolio (“cost efficiency”)
2010
£m
221
(57)
164
2009
£m
250
(67)
183
4.1%
3.0%
* Net of £2 million performance fee from 3i Infrastructure plc in 2010 (2009: £8 million).
Cost reduction continued to be a priority and the Group
achieved a further 12% reduction in total operating
expenses to £221 million during the year to 31 March
2010 (2009: £250 million). A key driver of this
improvement in operating expenses was a 20%
reduction in staff numbers from 607 at the beginning
of the year to 488 at 31 March 2010, including the
significant reduction in non-core activities. The year
on year reduction in underlying costs was 16%.
The Group’s cost efficiency measure is defined as
operating costs net of management and advisory
fee income as a percentage of opening portfolio value.
Despite the reduction in operating costs, the lower
opening portfolio value from the prior year led to an
increase in the measure from 3.0% at 31 March 2009
to 4.1% at 31 March 2010.
During the year the Group reviewed its cost efficiency
measures and, as a result we will, in future, also measure
and report operating expenses as a proportion of
assets under management as a key group financial
performance measure. This is aligned to the industry
standard measure used in private equity. This new
measure was 2.3% for the year to 31 March 2010.
Total return
Net interest payable
Net interest payable increased during the year from
£86 million to £112 million. Despite a significant
increase in cash balances and deposits during the year,
interest receivable of £12 million (2009: £34 million)
reduced, given the prevailing low interest rates.
Interest payable has increased marginally to £124 million
(2009: £120 million) during the year as the Group
re-negotiated its facilities and extended maturities.
Exchange movements
The Group continues to use core currency borrowings
to hedge the portfolio but has not implemented any
additional hedging through derivatives during the year.
As a consequence, 76% of European and Nordic euro
and krona denominated portfolios and 32% of the
North American and Asian US dollar portfolios are now
hedged through borrowings. The foreign exchange
movement of £(35) million in the year was largely
driven by the weakening of the euro and US dollar
against sterling in the year.
Pensions
A loss of £71 million in the year to 31 March 2010
(2009: £8 million) relates to the Group’s UK defined
benefit pension scheme. Rising equity markets in the
period resulted in an increase in the value of the plan’s
assets. However, a fall in corporate bond yields, reducing
the discount factor used to determine the present value
of the scheme’s obligations, and an increase in inflation,
has led to an actuarial loss of £49 million. Additionally,
the planned closure of the defined benefit pension
scheme to future accrual resulted in the recognition of
a potential future liability of £22 million.
3i Group plc
Report and accounts 2010
29
Table 11: 3i direct portfolio value by sector
as at 31 March
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
Infrastructure
QPE
Total
2010
£m
694
303
335
1,020
427
177
71
83
407
–
2009
£m
749
327
265
764
545
214
253
391
371
171
3,517
4,050
The most significant movements in the value of
the portfolio by sector were in General Industrials,
Healthcare, Oil, Gas and Power and Technology.
General Industrial increased as a percentage of the
total portfolio, from 19% to 29% during the year,
driven in part by a recovery in performance and
resulting increased valuations of a number of
investments in this sector.
The largest three realisations in the year, Ambea
(Healthcare), Venture Production (Oil, Gas and Power)
and Telecity (Technology) resulted in reductions in
value in these sectors.
Portfolio value
Portfolio assets directly owned by the Group
As a result of the good level of realisations in the year,
the value of the Group’s directly owned investments
was lower at £3,517 million (2009: £4,050 million),
despite unrealised value growth of £458 million (2009:
£(2,440) million). The opening value of investments
realised was £1,167 million.
The Buyout portfolio grew in value during the year
through unrealised value growth of £249 million as the
levels of investment matched the carrying value of
assets disposed. The Growth Capital portfolio reduced
in size as, despite the transfer of assets from 3i QPEP
at the start of the year, the significant levels of asset
disposals outweighed the combined increases from
investment and value growth. Non-core portfolios
reduced to £165 million as these portfolios were sold
down in the year.
Table 10: 3i direct portfolio value by geography
as at 31 March
Continental Europe
UK
Asia
North America
Rest of World
Total
2010
£m
1,381
2009
£m
1,618
1,327
1,719
509
294
6
491
209
13
3,517
4,050
The proportion of the portfolio value in the UK and
continental Europe was lower following strong
realisations in these geographies. The portfolio in North
America grew as a percentage of the total portfolio due
to the increase in the underlying value of investments in
this region. A broadly stable portfolio value in Asia over
the period led to a slight increase in its proportion of
total portfolio value.
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Core business lines
Buyouts
Growth Capital
Infrastructure
Non-core activities
Total
Opening
Portfolio value
1 April 2009
£m
Impact of
3i QPEP
liquidation
£m
New
investment
£m
Value
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£m
Unrealised
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£m
Other
movement
£m
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Portfolio value
31 March 2010
£m
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1,574
371
3,412
638
4,050
–
151
–
151
(171)
(20)
243
121
2
366
20
(244)
(592)
(46)
(882)
(285)
386 (1,167)
249
145
84
478
(20)
458
(101)
(68)
(4)
(173)
(17)
(190)
1,614
1,331
407
3,352
165
3,517
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Report and accounts 2010
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Business review Financial review
3030
In March 2010, the Group issued a €350 million bond
at 5.625% with a seven year maturity, which enabled
the Group to further extend the maturity profile of its
debt at attractive terms, ahead of the £430 million
convertible bond coming due in May 2011. After the
year end, the Group announced that it has made market
purchases of the convertible bond. At the end of April,
purchases of a total of £145 million had been made.
The purchased bonds will be cancelled and, following
cancellation, there will remain £285 million in
convertible bonds outstanding.
Liquidity
Liquidity at 31 March 2010 increased significantly to
£2,731 million from £1,020 million at 31 March 2009,
and comprises £2,252 million of cash and deposits and
undrawn facilities of £479 million. This increase resulted
from cash generated from realisations, the rights issue
and new debt issuance.
Diluted NAV
The diluted NAV of £3.21 at March 2010 (2009:
£4.96, restated: £2.79) includes the impact of the
rights issue and 3i Quoted Private Equity plc
transactions. The rights issue diluted net asset value per
share by 194p. The liquidation of 3i Quoted Private
Equity plc had a further 23p reduction in net asset value
per share as new shares were issued to partially fund the
transaction. The total return of £407 million added 43p
per share to net asset value.
Balance sheet
Table 13: Balance sheet
as at 31 March
Shareholders’ funds
Net debt
Gearing
Diluted net asset value per share
2010
2009
£3,068m £1,862m
£258m £1,912m
8%
£3.21
103%
£2.791
1 Adjusted to reflect the impact of the rights issue and shares issued as part of the
acquisition of the assets of 3i QPEP.
Gearing and borrowings
The Group made significant progress in strengthening its
balance sheet by reducing net debt from £1.9 billion at
31 March 2009 to £258 million at 31 March 2010.
Several factors, including the £732 million rights
issue in June 2009, strong realisations from the core
portfolio, as well as the continued sale of quoted and
non-core investments, contributed to the reduction in
net debt. The reduction in net debt, combined with an
increase in shareholders’ funds to £3,068 million,
reduced gearing to 8% at 31 March 2010 from 103%
at the start of the year.
The Group’s focus on the management of the overall
gross debt position, and the extension of its maturity
profile, has also resulted in changes to the overall
composition of the Group’s borrowings during the year.
In some cases this has meant issuing new debt ahead
of a maturity.
The Group refinanced its revolving credit facilities during
the year and replaced its £150 million multicurrency
bilateral facility with a new £100 million facility,
extending its maturity to autumn 2012. A £300 million
forward start facility was agreed during the year.
This extends the maturity of the existing £486 million
facility to October 2012. In addition, the Group has
agreed a further multicurrency revolving credit facility
(a five year £200 million bilateral facility) which
commenced in November 2009 and matures in
November 2014.
As a result, facilities previously due within the year
from 31 March 2010 have been extended and will
mature within the next three years, and long-term
debt repayments due within one year are reduced to
£33 million.
3i Group plc
Report and accounts 2010
31
Business lines
Buyouts
Business model
3i’s mid-market Buyouts business is focused on leading
or co-leading mid-market buyout transactions in
companies with an enterprise value typically of up to
€1 billion.
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 external funds which we manage alongside
3i’s own balance sheet commitments.
The 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.
Our investment criterion 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. Our active partnership
approach systematically seeks to identify, implement
and realise opportunities for value growth and
operational improvements in each portfolio company.
Chart 11 shows our success in delivering earnings
growth. As at 31 March 2010, for the 66 investments
made since 1 January 2001 that have been 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.
Chart 11: Buyouts sources of
value creation from realised investments (%)
15
29
56
Total equity
value at entry
Earnings
growth
Multiple
enhancement
Debt
reduction
Total equity
value at exit
The above shows the change in total equity value of the 66 exited investments made
through our Eurofunds since 1 January 2001.
The market
The 2009 calendar year saw a low level of new deal
activity as the buyout market struggled to recover from
the debt crisis and from the ongoing effects of a
recessionary environment. In Western Europe there
were 54 reported new buyout transactions of a deal
size between €100 million and €1 billion (source:
unquote/3i). This was significantly down on the market
peak in the 2007 calendar year of 233 transactions.
Activity levels did start to pick up in the second half of
2009 and this trend has continued into 2010, with 18
transactions announced in the quarter to 31 March
2010 (source: unquote/3i; preliminary data). There
remains significant amounts of undrawn private equity
capital in funds raised since 2006. This has kept
competition and pricing levels high for the lower levels
of new deals coming to the market. The first quarter of
2010 has also seen some signs of improved exit activity
returning to the market.
The leverage market has significantly improved over
the last 12 months, but the availability of credit remains
some way short of its pre-debt crisis peak. Some
underwriting capacity has returned, and deals over
€1 billion can now be financed, provided they meet a
more disciplined approach to credit assessment and
pricing. The number of active providers of leverage for
buyout transactions remains relatively low, although
some new entrants have come into the market.
In-house banking expertise therefore remains critical to
managing banking relationships, both for completing
new deals and for the ongoing management of existing
portfolios. Increased regulation, combined with a
number of other structural factors such as sovereign
debt levels and refinancing profiles in existing corporate
debt structures, are likely to present an ongoing mix of
opportunity and risk.
New buyout funds announced in 2009 raised €69 billion
globally, significantly down on the €146 billion
announced in 2008 (source: Preqin). Most industry
commentators are expecting 2010 to remain a difficult
environment for raising new funds. Many limited
partners continue to have significant undrawn
commitments to existing funds, while some have also
scaled back the number of general partners they are
prepared to invest with going forward. The time and
effort necessary to raise new money has increased as
limited partners have increased their due diligence
requirements before they are prepared to commit
fresh capital.
Looking forward to the next financial year, we expect
ongoing change to our market environment, as some
uncertainty remains over the wider economic outlook.
Although competition levels are likely to remain high,
we anticipate that there will be more opportunities to
originate attractive new investments than we have seen
in the last 12 months, although this may not materialise
in the near term.
3i Group plc
Report and accounts 2010
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Business review Business lines
3232
Priorities and opportunities for 3i
The main priorities for the Buyouts business line are
to originate and invest in attractive new investment
opportunities, to maximise the returns generated from
the existing portfolio and to prepare for the next stage
of fundraising.
We are well placed to identify attractive investment
opportunities, often ahead of the wider market,
through the combination of our brand, network,
sector expertise and geographic presence in our
chosen markets. This should position us favourably
relative to the competition.
We aim to continue to improve the operational
efficiency of our portfolio companies through our
active partnership approach, driving growth in the
underlying earnings.
Our current portfolio companies have considerable
potential for growth. Where appropriate, we will make
further investments in the portfolio to enhance its
overall return potential.
We will divest those portfolio companies where our
value plan has been substantially delivered and where
good terms can be achieved in the current market
environment.
Finally, we will continue to develop proactively our
limited partner relationships for future new funds.
Investment activity
Table 14: Buyouts investment and realisations
year to 31 March
Realisation proceeds
Investment
Net divestment/(investment)
2010
£m
467
2009
£m
494
(243)
(519)
224
(25)
Realisation proceeds of £467 million were generated in
the year to 31 March 2010, compared to £494 million
in the prior year. The principal realisations included the
sale of Ambea, generating proceeds of £212 million,
and the sale of our remaining holdings in Telecity,
generating proceeds of £142 million, and Dockwise,
generating proceeds of £27 million.
No new investments were completed during the year.
Although general market activity was low, we did
review a number of potential transactions, but
ultimately decided not to pursue these. The signing
of Vedici, a French acute healthcare provider, was
announced in March 2010, however the completion
of this transaction remains subject to competition
clearance. It is therefore not included in the results
to 31 March 2010.
Of the £243 million of gross investment in the year,
£42 million was invested in the Debt Warehouse,
£52 million was used to support portfolio companies
either through investing into a new capital structure
following a balance sheet restructuring, targeted equity
cures, buying debt below par or supporting capital
expenditure, and £12 million was used to support
acquisitions made by our portfolio companies in the
year. The remaining £137 million of gross investment
in the year was capitalised interest.
Performance
Gross portfolio return
Table 15: Returns from Buyouts
year to 31 March
Realised profits over value on the disposal
of investments
Unrealised profits/(losses) on the
revaluation of investments
Portfolio income
Gross portfolio return
Gross portfolio return %
Fees receivable from external funds
2010
£m
2009
£m
223
255
249 (995)
78
62
550 (678)
38%
39
(34)%
45
The Buyouts portfolio has generated a strong gross
portfolio return of £550 million, or 38% of opening
portfolio value (2009: £(678) million loss, (34)%).
Realised profits of £223 million in the year were driven
principally by the sale of Ambea, which generated profits
of £102 million, representing a 93% uplift over its
March 2009 valuation, as well as by good uplifts on the
realisations of Telecity and Dockwise, which generated
realised profits in the year of £47 million and £10 million
respectively.
The unrealised value gain of £249 million was
underpinned by a robust performance across the
portfolio, with the majority of portfolio companies
growing in value.
Portfolio income of £78 million in the year was largely
attributable to accrued interest and was higher than
in 2009, principally due to a lower level of provisions
required against this income.
The gross portfolio return of £550 million includes a
£110 million contribution from the Debt Warehouse.
Further details on the performance of the Debt
Warehouse can be found on page 36.
3i Group plc
Report and accounts 2010
33
Portfolio performance
The performance of the portfolio has stabilised in
the year, with the second half showing a more
encouraging trend.
We have continued to work proactively to improve the
operational effectiveness of many of our portfolio
companies through our active partnership approach.
During the period, our portfolio companies grew their
margins in aggregate across the portfolio, despite many
facing weaker market conditions.
The improvements to their operating models should
position these portfolio companies well to capitalise on
improved market conditions in the future.
Portfolio earnings
For 2009 portfolio company year ends, aggregate
earnings in the year decreased by 9% on 2008 portfolio
company year end levels. This is a reflection of the
tougher trading environments experienced in much of
2009. However, many of our portfolio companies saw
improved performance starting to come through in the
final quarter of 2009 and this has continued into 2010.
Portfolio leverage
Financing structures 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
underlying portfolio companies, committed working
capital facilities are typically in place.
The contracted repayment profile of acquisition debt in
the Buyouts portfolio is shown in Chart 12 below.
Chart 12: Contracted repayment profile of
acquisition debt in the Buyouts portfolio (%)
as at 31 March 2010
Repayment index weighted by 3i carrying value
As at 31 March 2010, we were in negotiations with the
loan providers of seven portfolio companies, as a result
of covenant breaches up to that date (2009: 16
portfolio companies).
Of these seven portfolio companies, four are ongoing
cases from 31 March 2009. These four are smaller,
older investments – their total gross investment cost is
£30 million and each is over five years old. Although
their underlying performance is such that they remain in
breach of covenants, for each of these cases we have
agreed a stand still agreement with the respective
lenders to enable us to work through turnaround plans
to improve their performance.
Of the remaining 12 portfolio companies that were in
breach of covenants at 31 March 2009, 10 have either
undergone a successful restructuring, or have received
“equity cures” to solve the covenant breach, and have
subsequently seen an improvement in performance.
Two investments that were in breach of covenants at
31 March 2009, Global Garden Products (“GGP”) and
Ultralase, were written off during the year. Both were
valued at £nil at 31 March 2009, hence their write-offs
did not have an impact on the gross portfolio return
for the year to 31 March 2010. In both cases 3i held
extensive negotiations with senior lenders, proposing
to inject new equity to reduce the overall levels of
leverage. These proposals were refused by the lenders,
which decided instead to take the two assets under
direct ownership.
The three new portfolio companies that breached
covenants during the year had an aggregate cost of
£132 million, but were valued at £4 million as at
31 March 2010. In each case, discussions with lenders
remain ongoing, and we continue to work towards
solutions with the assistance of our in-house
banking team.
80
70
60
50
40
30
20
10
0
2.9
3.8
4.4
5.0
13.0
2010
2011
2012
2013
2014
2015 on
Acquisition debt in breach of covenants at 31 March 2010
Acquisition debt not in breach of covenants at 31 March 2010
Note: Index weighted by 3i Group carrying value at 31 March 2010.
Repayment profile reflects gross acquisition debt as at 31 March 2010.
Excludes working capital lines, leasing and cash on balance sheet.
Underperformance in an investment can trigger a
covenant breach on a loan, which may imply that a
loan requires refinancing earlier, if an agreement over
the effect of the breach cannot be reached with the
loan providers.
3i Group plc
Report and accounts 2010
70.9
Chart 13 shows the range of leverage across the
Buyouts portfolio at 31 March 2010, weighted by 3i
carrying value. It is worth noting that higher leverage
levels do not necessarily correlate to underperformance.
Portfolio health
The year to 31 March 2010 saw a significantly lower
level of negative value movements compared to the
prior year. Write-offs in the year had £nil impact on
gross portfolio return, as the gross investment cost that
had been written off during the year of £347 million
had already been valued at £nil at 31 March 2009.
At 31 March 2010, 65% of the portfolio based on cost
was classified as “healthy”; an improvement from the
60% recorded at 30 September 2009 and broadly in
line with the position at 31 March 2009 (67% healthy).
Investments are only moved back to “healthy” status
when their performance and valuation demonstrates
that a recovery of our invested capital is probable.
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Chart 13: Ratio of net debt to EBITDA – Buyouts portfolio
Weighted by 3i Group carrying value (£m)
400
300
200
100
0
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334
305
293
147
84
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<1x
1-2x
2-3x
3-4x
4-5x
5-6x
>6x
Net debt/EBITDA segmentation
Note: The above has been calculated in line with 31 March 2010 3i Group valuations and
excludes the Debt Warehouse.
Portfolio valuations
The unrealised value growth in the Buyouts portfolio
in the year to 31 March 2010 was £249 million
(2009: £(995) million loss). This positive value uplift
was driven principally by an increase in the multiples
used to value portfolio companies, as well as by the
portfolio’s underlying earnings performance in the
second half of the year.
At 31 March 2010, 92% of the Buyouts portfolio
(excluding the Debt Warehouse) was valued on an
earnings basis. The weighted average EBITDA multiple
pre discount was 9.1x and the ratio of net debt to
EBITDA was 4.5x for these companies.
The positive valuations movement was stronger in
the second half than in the first half of the year.
Value growth totalled only £8 million in the first half,
compared to £196 million in the second half (excluding
the Debt Warehouse).
The three largest contributors to the overall value
growth during the year were Norma (£57 million),
Axellia (£51 million) and MWM (£39 million).
The largest negative value movement was Eltel
(£(45) million).
This £249 million uplift includes a value recovery
of £45 million on the Debt Warehouse, which had
been valued at £nil at 31 March 2009 on a first loss
mark-to-market basis.
Long-term performance
Table 16 shows the performance of each vintage year
since 2002 to 31 March 2010. The vintages to 2007
continue to show IRRs above 20%. The IRR of the 2006
vintage has increased to 49% (2009: 46%) due to the
successful realisations of Ambea and Telecity in the year
to 31 March 2010.
The IRR of the 2008 vintage, which included GGP and
Ultralase, remains negative, albeit it had improved to
(18)% at 31 March 2010 from (30)% at 31 March
2009. The improvement in performance over the year
to 31 March 2010 was largely due to increases in the
valuations of Inspicio, MWM and Scandlines.
The 2009 vintage, although still relatively immature,
recorded a 9% IRR to 31 March 2010, with Axellia and
LHi being the two largest contributors to this
performance to date.
Table 16: Long-term performance – Buyouts
New investments made in the financial years ended 31 March
Vintage year
2010
2009
2008
2007
2006
2005
2004
2003
2002
Total
investment1
£m
–
359
682
612
508
372
330
277
186
Return
flow
£m
–
1
20
321
1,137
953
523
664
441
Value
remaining
£m
–
365
381
507
48
90
108
21
–
IRR to
31 March
2010
–
9%
(18)%
25%
49%
62%
34%
49%
61%
IRR to
31 March
2009
–
n/a
(30)%
25%
46%
62%
34%
49%
61%
Analysis excludes investment in Debt Warehouse.
1 Total investment includes capitalised interest.
3i Group plc
Report and accounts 2010
35
Portfolio composition
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 value of our 46 investments at 31 March 2010
was £1,614 million (2009: £1,467 million). The three
largest investments by valuation at 31 March 2010
were Inspicio (£147 million), Enterprise (£144 million)
and MWM (£127 million).
Buyouts ‒ Direct portfolio by value
as at 31 March 2010
Total portfolio value £1,614 million
By geography (%)
Buyouts ‒ Direct portfolio by number
as at 31 March 2010
Total number of companies 46
By geography (%)
Continental Europe
UK
Asia
North America
Rest of World
By sector (%)
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
By vintage year (%)
2010
2009
2008
2007
2006
2005
2004
2003
2002 and before
56
42
2
–
–
29
11
5
39
8
2
2
4
‒
23
28
31
3
6
7
1
1
Continental Europe
UK
Asia
North America
Rest of World
By sector (%)
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
By vintage year (%)
2010
2009
2008
2007
2006
2005
2004
2003
2002 and before
55
41
2
‒
2
26
17
9
31
7
4
2
4
–
15
22
19
11
13
9
2
9
3i Group plc
Report and accounts 2010
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Fund management
The latest Buyouts fund, Eurofund V, a €5 billion fund
which was raised in November 2006, was 54% invested
as at 31 March 2010, compared to 53% invested at
31 March 2009. During the year, Eurofund V sold its
remaining holding in Dockwise, generating a 2.1x money
multiple over the life of the investment.
Eurofund IV, which had its final close in 2004, continues
to perform strongly. At 31 March 2010 the fund
portfolio had generated 1.88x of its gross commitments,
up from 1.76x at 31 March 2009, driven by the
realisations of Ambea and Daalderop in the year.
Eurofund III, a 1999 vintage fund, is almost fully
realised, with only five assets remaining. There were no
realisations from the fund in the year and at 31 March
2010, the fund portfolio had generated 1.89x of
its gross commitments, in line with its position at
31 March 2009.
Fee income from managed funds totalled £39 million
in the year (2009: £45 million), underpinned by fee
income from Eurofund V.
As can be seen from Chart 14, there is a diverse mix
of investors in 3i’s buyout funds.
Chart 14: Buyout investor base for non-listed funds
managed and advised by type of investor (%)
as at 31 March 2010
Pension funds
Fund of funds
Insurance companies
Financial institutions
Government agencies
Endowments
Private individuals
31
25
19
10
10
4
1
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. Investments
are made through a Debt Warehouse facility, provided
by Lloyds Bank. This facility was recently renewed, and
now matures in October 2012. There was an increase in
the first loss percentage to 40% (previously 30%) and a
reduction in the facility size to €325 million (previously
€550 million). 3i has committed up to €130 million on a
first loss basis.
As at 31 March 2010, the Debt Warehouse had
invested €259 million of which 3i’s commitment was
€103 million. The credit quality of the portfolio is
satisfactory and is focused on a diversified portfolio of
large businesses in diversified sectors. As at 31 March
2010, the Debt Warehouse was in full compliance with
all its covenants.
During the financial year, the total size of the underlying
portfolio of the Debt Warehouse was reduced from
€445 million to €259 million, as we took advantage
of rising secondary loan pricing to sell out of loans at
a profit.
The impact of the Debt Warehouse on 3i’s financial
results in the year to 31 March 2010 was realised
profits of £55 million (2009: nil), unrealised value
growth of £45 million (2009: unrealised loss of
£(112) million) and income and fees of £10 million
(2009: £4 million).
3i Group plc
Report and accounts 2010
37
Growth Capital
Chart 15: Growth Capital sources of value creation from
realised investments (%)
Business model
3i’s 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 mainly
international businesses.
The Group’s international presence, sector knowledge,
networks and broader resources create the premium
market access to companies that are “not for sale”.
Over the last three years, 65% of the new investments
completed have been proprietary. These resources
also provide the ability to benchmark investment
opportunities globally, match resources to opportunities
on a “best team for the job” basis and to work actively
with high-growth companies to maximise value through
a mix of capital realisations on exit and portfolio income.
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.
3i has historically carried out its Growth Capital activity
using own balance sheet funds, and has not in the past
managed external funds. In March 2010, however, the
Group announced the closure of its first Growth Capital
Fund, raising €1.2 billion, including €800 million of
commitments from 3i and €392 million from external
investors. This fund was seeded with a portfolio of
seven investments, worth €339 million from the
Group’s current balance sheet, allowing external
investors to have immediate exposure to this growing
segment of the private equity market from the outset
of the Fund. This enhances returns to 3i Group through
management fees and carried interest. All new Growth
Capital investments will be made through this Fund.
An important aspect of our business model is the way in
which we generate growth in the value of our portfolio
companies. As can be seen from Chart 15, 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. Systemic multiple
enhancement on realisation in Growth Capital portfolio
companies is driven by three factors: improvement in
the strategic positioning of portfolio companies;
professionalising businesses, making what was “hard to
buy, easy to sell”; and the fact that whilst investments
are made on minority valuations, exits tend to occur
when a majority of the company is sold or listed.
The portfolio is well diversified by geography and sector
and has a low reliance on leverage to produce returns.
As can be seen from Chart 15, no value creation for
this Growth Capital portfolio can be attributed to
debt reduction.
38
(13)
75
Total equity
value at entry
Earnings
growth
Multiple
enhancement
Debt
reduction
Total equity
value at exit
The above shows the change in value of the 32 realised investments since 1 January 2003.
The market
Activity levels in the global growth capital markets were
exceptionally low in 2009 compared to recent years.
The number of growth capital transactions completed in
Europe in 2009 fell to just over 50, compared to nearly
250 in 2007, with no change in the average transaction
value. The trend in North America and Asia was similar.
However, we expect activity levels in the growth
capital market to materially increase in 2010. With the
availability of credit remaining subdued, the growth
capital approach to investing – with its emphasis on
lower leverage and value adding partnership – is ideally
suited to the current environment, and we have seen it
grow its share of the private equity market over the
course of the year.
We have already seen an increase in deal activity over
the last six months, as entrepreneurs and business
owners regain their appetite for expansion and value
creation, shifting their focus away from business
preservation as economies stabilise and recover.
The current economic environment will also provide
the opportunity to invest in buy-and-build situations,
employing slightly higher leverage, as market leading
businesses target competitors weakened by the
economic crisis.
The market for raising new funds was challenging in
2009, with many limited partners continuing to have
significant undrawn commitments to existing funds.
However, within this context, there has been an increase
in industry comment on growth capital and it is a
segment of the private equity market which, due to its
low reliance on leverage, is attracting more limited
partner attention.
Priorities and opportunities for 3i
Having raised a new Growth Capital Fund, origination
and new investment is a key area of focus for our
team. From a competitor perspective, Growth Capital
is an ill-defined and poorly addressed market.
Our specialisation of investing in businesses “not for
sale”, combined with our strong brand and international
presence, positions us well against competitors with a
broader remit. We focus on maintaining a strong
network of relationships with entrepreneurs and their
advisors in our chosen markets to ensure investment
will continue to be selective.
3i Group plc
Report and accounts 2010
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However, we will continue to invest selectively to ensure
optimal returns for 3i and for the investors in our Fund.
Our investment strategy has been tightened to focus on
a smaller subset of investment types, which allow us to
work in partnership with entrepreneurs to drive value
creation via earnings growth. As part of this strategy,
we will continue to explicitly avoid investments which
do not ensure alignment with management and other
shareholders, where we would hold a public equity
investment at the outset or where we were investing
in a fund or project structure.
We aim to drive future returns from the existing
portfolio through our active partnership approach and
the implementation of operational improvements in
portfolio companies. We expect that the focus of these
initiatives will change during 2010 to support revenue
growth projects, including funding acquisitive growth,
where appropriate, as well as continuing to drive
efficiency in the portfolio.
The newly raised Growth Capital Fund will provide
additional capacity to continue 3i’s existing Growth
Capital strategy of making minority investments in
growing businesses across Europe, Asia and North
America. The Fund will make investments of €25 million
to €150 million in around 20 mid-market companies.
Investment activity
Table 17: Growth Capital investment and realisations
year to 31 March
Realisation proceeds
Investment
Net divestment/(investment)
2010
£m
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(121)
457
2009
£m
461
(343)
118
The Growth Capital business line adopted a cautious
and selective approach to investment during the past
year. A modest amount of £121 million was invested
in the 12 months to 31 March 2010, compared to
£343 million in the year to March 2009.
Of this amount, £21 million was invested in Refresco
– the only new investment to be completed this year,
and the first new investment made since the launch of
the Growth Capital Fund. The transaction, announced on
25 March 2010, involved the acquisition of newly
issued shares in Refresco, representing 20% of the share
capital of the company and a commitment to invest up
to a further £26 million. Refresco, a European market
leader in the production of private label fruit juices and
soft drinks, will use the funds to pursue its buy-and-
build growth strategy. This marks the second time that
3i has invested in Refresco, having supported a
management buyout in 2003. After a period of active
management, geographic expansion and significant
profitable growth for the company, 3i generated an
excellent return on its investment in Refresco when it
was sold in April 2006.
The balance of £100 million was invested in the existing
portfolio (2009: £137 million), of which £5 million was
to support acquisitions (2009: £86 million), £16 million
was working capital to fund further growth (2009:
£26 million), and £33 million was in support of strong
businesses which were adversely impacted by the
economic downturn (2009: £21 million). The balance
of the investment into the portfolio related to non-cash,
capitalised interest on loans held by 3i.
The pipeline of investment opportunities has been
improving steadily over the past six months, and
we expect investment activity to increase over the
coming year.
Realisation activity was strong and ahead of last year.
Realisation proceeds of £578 million were generated
during the year from 42 exits (2009: £461 million, 39).
We have continued to focus on the sale of older,
non-core investments which diluted the overall return
of the portfolio, while at the same time opportunistically
exiting larger investments where attractive returns can
be generated, such as PCD, DNA and Venture
Production. Additionally, we sold a share of seven
investments to new investors in the Growth Capital
Fund generating £96 million of proceeds.
The sale of Venture Production, a listed, UK-based oil
and gas company, was the largest realisation in the year,
generating proceeds of £145 million and realised profits
of £4 million over the 31 March 2009 value.
Performance
Gross portfolio return
Table 18: Returns from Growth Capital
year to 31 March
Realised (losses)/profits over value on the
disposal of investments
Unrealised profits/(losses) on the
revaluation of investments
Portfolio income
Gross portfolio return
Gross portfolio return %
2010
£m
2009
£m
(14)
(66)
145 (1,029)
63
60
194 (1,035)
11% (44)%
Fees receivable from external funds
–
1
The Growth Capital business line generated a gross
portfolio return of £194 million in the year to 31 March
2010, or 11% of opening portfolio value, compared
to £(1,035) million, or (44)%, in the year to
31 March 2009.
While the majority of portfolio companies have
performed well and earnings at an aggregate level were
stable, the overall return for the year was materially
impacted by large losses on a small number of
investments and the ongoing priority to realise
non-core and legacy investments.
3i Group plc
Report and accounts 2010
39
The main contributor to the gross portfolio return was
the impact of unrealised valuation movements of
£145 million. The unrealised value gain was driven
principally by multiple expansion, with the average
multiple (before discount) up from 7.4x in 2009 to
10.3x in 2010, while underlying earnings were down
only marginally by 2% year-on-year.
Realised losses of £14 million for the year to 31 March
2010 were lower compared to last year (2009:
£(66) million) and reflect a small number of large
realised losses, as well as our continued priority to
pursue exits of our non-core and legacy portfolio.
The placing of UK-based fish importer British Seafood
into administration in February 2010 crystallised a loss
of £72 million, while the sale of the Korea Global Fund,
a Korea-based investment vehicle, crystallised a loss
of £27 million. These losses, however, were offset
by realised gains of £22 million, £24 million and
£17 million on the sales of PCD Stores, Welspun and
DNA respectively.
Portfolio income of £63 million for the year to
31 March 2010 was broadly in line with last year
(2009: £60 million), but benefited from a special
distribution from Quintiles of £23 million following a
strong trading performance and debt raising in 2009.
Portfolio performance
The portfolio performed well in the year, with EBITDA
down only (2)% in a challenging environment.
We have worked to improve the earnings with many of
our portfolio companies using our active partnership
approach to focus on operational efficiency.
Leverage across the portfolio has increased marginally
to 2.2x EBITDA (2009: 2.0x EBITDA) as earnings have
stayed flat and companies have taken on debt to pursue
buy-and-build strategies. In addition, we have exited a
number of larger, lower debt, investments.
Valuations have recovered strongly in the second half of
the year, primarily due to the global market recovery
and associated impact on the multiples we use to value
the portfolio.
Portfolio earnings
For 2009 company year ends, aggregate earnings in the
portfolio were greater than £1.5 billion and were down
only marginally (by 2%) on prior year levels. This minor
fall in aggregate earnings was attributable principally to
a reduction in margins, which was offset almost entirely
by improvements to operational effectiveness from
initiatives implemented by 3i and management teams
across the portfolio.
We expect 2010 to be a more positive year for
company earnings, with a return to revenue growth
and stabilising margins expected for almost all of the
companies in the portfolio.
3i Group plc
Report and accounts 2010
Portfolio leverage
In line with the Growth Capital business model, leverage
is low across the portfolio. The average entry level of
debt on new investments over the last five years has
been 1.7x EBITDA. The current debt across the
portfolio is marginally higher at 2.2x EBITDA. Debt is
often raised alongside our equity investment to fund
acquisition strategies.
Levels of leverage vary across the portfolio, depending
upon the specific nature of the business, international
profile, and the phase of development. Chart 17 shows
the range of leverage (net debt to EBITDA multiples)
across the portfolio as at 31 March 2010. By number,
34 of the 67 investments in the portfolio have leverage
below 1 times EBITDA.
Chart 16: Debt repayment profile –
Growth Capital portfolio
as at 31 March 2010
Repayment index weighted by 3i carrying values (%)
100
75
50
25
0
89
4
2010
3
2011
4
2012
2013 on
Note: Index weighted by 3i Group carrying value as at 31 March 2010.
Chart 17: Ratio of net debt to EBITDA –
Growth Capital portfolio
Weighted by 3i Group carrying value (£m)
500
400
300
200
100
0
414
309
208
154
77
21
21
<1x
1-2x
2-3x
3-4x
4-5x
5-6x
>6x
Net debt/EBITDA segmentation
Note: The above has been calculated in line with 31 March 2010 3i Group valuations.
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Long-term performance
The Growth Capital long-term performance improved
for the more recent vintages of 2008 and 2009, while
the more mature vintages remained in line with last year.
The improvement in performance for the more recent
vintages was due to improved valuations and strong
realisations in the year. However, we do not expect
these vintages to achieve the returns seen in earlier
years, as they have been more heavily impacted by the
current economic conditions.
The IRR of the 2008 vintage, which includes British
Seafood, remains negative, albeit improving to (3)% at
31 March 2010 from (16)% at 31 March 2009.
The improvement in performance over the year to
31 March 2010 was largely due to increases in the
valuations of Mold-Masters and Quintiles and to the
realised profit achieved on the sale of Welspun, offset by
the loss on British Seafood.
Portfolio health
The year to 31 March 2010 saw a significantly lower
level of negative value movements compared to the
prior year. However, we experienced a small number of
significant deteriorations in performance resulting in
write-offs, the largest being the placing of British
Seafood into administration in February 2010.
Write-offs in the year had a £(72) million impact on
gross portfolio return (2009: £(2) million).
As at 31 March 2010, 74% (2009: 81%) of the
portfolio was classified as healthy, based on cost.
This reduction in the health of the portfolio reflects the
harsher trading environment seen during the course of
2009. We would expect this to improve in 2010 as the
economy recovers.
Portfolio valuations
The improvement in global equity markets over the year
has helped generate value growth of £145 million
(2009: £(1,029) million loss) as the majority of the
portfolio is valued with reference to an external
benchmark (typically EBITDA multiples).
Earnings in the portfolio, at an aggregate level, were
stable overall at (2)%, in line with expectations.
The average multiple used to value investments which
were valued on an earnings basis at 31 March 2010
was 10.3x, a 39% improvement from the 7.4x used
at 31 March 2009.
The three largest increases in value in the year were
Mold-Masters (£53 million), Quintiles (£51 million)
and Navayuga Engineering (£41 million).
Table 19: Long-term performance – Growth Capital
New investments made in the financial years to 31 March
Vintage year
2010
2009
2008
2007
2006
2005
2004
2003
2002
Total
investment1
£m
21
208
1,042
553
443
179
297
231
498
Return
flow
£m
–
42
394
185
594
250
487
411
716
Value
remaining
£m
21
IRR to
31 March
2010
n/a
144
557
342
89
48
13
31
6
(7)%
(3)%
(2)%
24%
25%
25%
24%
12%
IRR to
31 March
2009
n/a
n/a
(16)%
(2)%
23%
27%
25%
25%
12%
1 Total investment includes capitalised interest.
3i Group plc
Report and accounts 2010
41
Portfolio composition
As can be seen from the charts below, the Growth
Capital portfolio is well diversified by sector and
geography, both in terms of value and number of
portfolio companies.
The total book value of our 67 investments as
at 31 March 2010 was £1,331 million (2009:
£1,574 million).
The largest three investments are the Group’s
investments in ACR Capital Holdings Pte Limited
(£149 million), Quintiles (£128 million), and
Foster + Partners (£113 million).
Growth Capital ‒ Direct portfolio by value
as at 31 March 2010
Total portfolio value £1,331 million
By geography (%)
Growth Capital ‒ Direct portfolio by number
as at 31 March 2010
Total number of companies 67
By geography (%)
Continental Europe
Asia
UK
North America
Rest of World
By sector (%)
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
By vintage year (%)
2010
2009
2008
2007
2006
2005
2004
2003
2002 and before
34
28
16
22
–
15
9
19
23
20
10
3
1
1
11
42
31
7
4
1
2
1
Continental Europe
Asia
UK
North America
Rest of World
By sector (%)
Business Services
Consumer
Financial Services
General Industrial
Healthcare
Media
Oil, Gas and Power
Technology
By vintage year (%)
2010
2009
2008
2007
2006
2005
2004
2003
2002 and before
49
25
18
8
–
16
16
13
28
8
9
5
5
2
5
25
24
10
10
6
3
15
3i Group plc
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4242
Fund management
Historically, 3i’s Growth Capital investments have
typically been funded through the balance sheet, with
limited external funds involved. However, on 25 March
2010, 3i announced the closing of its first Growth
Capital Fund, at €1.2 billion. 3i committed €800 million
to the Fund, while investors from Asia, Europe, the
Middle East and North America committed €392 million
to the Fund. As part of its €800 million commitment,
3i contributed a seed portfolio of seven investments
valued at €339 million being all new investments made
since 1 January 2008 remaining in the portfolio. Of this,
£96 million was the proportion sold to new investors.
The Growth Capital Fund will continue 3i’s existing
Growth Capital strategy and make minority investments
in growing businesses across Europe, Asia and North
America. The Fund will invest in around 20 mid-market
companies, typically investing €25 million to
€150 million of equity.
Chart 18: Growth Capital investor base for non-listed
funds managed and advised by type of investor (%)
as at 31 March 2010
Government agencies
Pension funds
Insurance companies
Financial institutions
61
23
13
3
3i Group plc
Report and accounts 2010
43
Infrastructure
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 Europe, India and
North America and a sectoral focus on the utilities,
transport and social infrastructure sectors.
Infrastructure investments are made through two
vehicles: 3i Infrastructure plc, a global infrastructure
fund listed in London, and through the 3i India
Infrastructure Fund, a limited partnership focusing on
investing in Indian infrastructure.
Priorities for 3i
We aim to strengthen our position as a leading
participant in the infrastructure market through the
ongoing investment of our funds in a portfolio of robust
assets, which will continue to generate attractive
returns for shareholders and limited partners.
We will maintain a rigorous investment approach,
using our proprietary sector knowledge and our
broad network of contacts in our chosen sectors and
geographies to originate transactions that contribute to
the delivery of the return objectives of the two funds
advised or managed. This will be key in positioning the
business line for future fundraisings.
Managing the existing portfolio to generate attractive
returns will also remain a priority for the Infrastructure
team. The assets in the two funds are performing well,
and the team’s portfolio management expertise, as well
as the broader resources of 3i Group, will be leveraged
to continue to drive value from those assets.
Opportunities for 3i
3i is well positioned in the infrastructure market, with
a strong brand and robust track record of generating
attractive returns through 3i Infrastructure plc and
through the 3i India Infrastructure Fund.
The 3i India Infrastructure Fund, a $1.2 billion fund is
42% invested and has a strong pipeline of investment
opportunities. The macroeconomic outlook in India is
favourable, with strong projected growth, and the
fundamentals for infrastructure investment remain
attractive, with the current infrastructure deficit in the
country providing significant opportunity for private
investment. Our team on the ground in India has a
well-established presence in the market, with a broad
network of contacts and an agreement with the India
Infrastructure Corporation Ltd providing access to a
wide range of opportunities. The undrawn funds
committed to the 3i India Infrastructure Fund are likely
to be deployed over the next 12 to 18 months, which
could present an opportunity to raise a successor fund
should market conditions allow.
Conditions for investment are improving more gradually
in developed markets, however the opportunity for
infrastructure investment is significant, driven by
balance sheet restructuring and the sale of non-core
assets in the private sector, and by budgetary
constraints in the public sector. The Infrastructure team
is building up the pipeline of investment opportunities
submitted to 3i Infrastructure plc, which currently has
ample liquidity to invest in new assets.
The market
Infrastructure market activity slowed down considerably
in 2008 and 2009, with many market participants
unwilling to transact due to significant pricing volatility
and market instability, as well as the uncertain
macroeconomic outlook.
The market for infrastructure investment, however,
is improving, and 2010 should see a pick up in activity.
Asset prices are stabilising, the macroeconomic outlook
is increasingly positive and a return to growth should
have a positive impact across the asset class, and in
particular on more pro-cyclical sectors such as
transport, which should benefit from demand growth.
As many governments have had to intervene heavily
in the economy to avoid a recession, budgetary
constraints should result in new private investment in
new infrastructure, as well as in the privatisation of
existing state-held infrastructure assets. Opportunities
for investment should also arise from the private sector,
where the necessity to restructure balance sheets is
likely to result in the divestiture of non-core assets from
certain banks and large corporates.
The competitive environment remains relatively
benign since the market shake out of 2008/2009.
While there are still significant undrawn funds available
for investment, the increasing importance of operational
expertise in managing infrastructure assets is posing a
significant barrier to entry for emerging players.
3i Infrastructure plc
3i holds a 33.2% investment in 3i Infrastructure plc,
which is an investment company listed on the London
Stock Exchange and a component of the FTSE 250.
The company raised £703 million at IPO in 2007 and
£115 million through a subsequent Placing and Open
Offer in July 2008.
3i Infrastructure plc is based in Jersey, is governed by an
independent board of directors, and targets a 12% net
return through NAV growth, of which 5% is returned to
shareholders through dividends.
3i Group plc, through 3i Investments plc, a wholly-
owned subsidiary, acts as investment adviser to
3i Infrastructure plc and in return receives an annual
advisory fee of 1.5% of the invested capital (excluding
cash balances) 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 has its own dedicated investor
relations website, www.3i-infrastructure.com.
3i Group plc
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Business review Business lines
4444
3i India Infrastructure Fund
The 3i India Infrastructure Fund is a $1.2 billion limited
partnership fund established by 3i to invest in Indian
infrastructure, with a particular focus on ports, airports,
roads and power assets. 3i and 3i Infrastructure plc each
have a $250 million commitment to the Fund.
The Fund closed in March 2008 with a target
investment horizon of two to four years and, as at
31 March 2010, had invested 42% of total
commitments.
3i earns management fees and carry from all
limited partners in the Fund, with the exception of
3i Infrastructure plc.
Chart 19: Investor base for 3i India Infrastructure Fund
by type of investor (%)
as at 31 March 2010
Pension funds
Government agencies
Fund of funds
Other
Financial institutions
Endowments
40
33
17
7
2
1
Other Infrastructure assets
Over the year, 3i Group has continued to reduce its
holdings in infrastructure assets held directly on its own
balance sheet. 3i Group’s holding in 3i Osprey LP, the
vehicle through which 3i Group and 3i Infrastructure plc
own their stake in AWG, was further reduced in the
year, resulting in a total portfolio held directly by 3i
of £6 million (excluding the Group’s holdings in
3i Infrastructure plc and the 3i India Infrastructure Fund).
Performance
Gross portfolio return and fee income
Table 20: Returns from Infrastructure (£m)
year to 31 March
Realised profits/(losses) over value on
the disposal of investments
2010
–
2009
(20)
Unrealised profits/(losses) on the
revaluation of investments
Portfolio income
Gross portfolio return
Gross portfolio return
Fees receivable from external funds
84
(62)
16
100
27%
20
32
(50)
(10)%
26
The infrastructure business line generated a gross
portfolio return of £100 million in the year to
31 March 2010 (2009: £50 million loss). The return
was determined by a strong unrealised value gain of
£84 million (2009: £62 million loss) and strong
portfolio income of £16 million (2009: £32 million).
The unrealised value gain was driven principally by the
strong mark-to-market gain on the Group’s holding in
3i Infrastructure plc, which was up 32% year on year,
generating an unrealised gain of £72 million (2009:
£74 million loss). The remainder of the unrealised gain is
attributable in large part to the £10 million revaluation
of the holding in the 3i India Infrastructure Fund (2009:
£14 million).
Portfolio income of £16 million was down year on year,
as the 2009 figure included a special dividend received
from AWG. 3i Group’s direct holding in AWG has now
been substantially divested. Dividends received on the
holding in 3i Infrastructure plc were up marginally
compared to last year.
Fees receivable from 3i Infrastructure plc and the
3i India Infrastructure Fund amounted to £19 million,
broadly in line with 2009.
Investment and realisations
The infrastructure business line invests principally
through 3i Infrastructure plc and the 3i India
Infrastructure Fund. Both vehicles invested cautiously
during the year, reflecting the volatile market
environment and a decline in overall transaction
volumes in the infrastructure market.
The 3i India Infrastructure Fund drew £2 million
from 3i Group to fund a small additional investment in
Adani Power Private Limited, one of its holdings, ahead
of its IPO in August 2009.
3i Group plc
Report and accounts 2010
45
Case studies
Realisations
– Ambea
– Telecity Group Plc
– Venture Production plc
Portfolio companies
– ACR
– Inspicio
– AWG
45-50
46
46
47
47
48
48
49
50
Our three largest realisations in the year and
the largest portfolio company from each of our
business lines.
Case studies
4646
Realisations
Our top three realisations in the year, reflecting
both our approach and our performance.
Go online to see further case studies
/casestudies
Ambea
Buyouts Healthcare Sweden
www.ambea.com
Nature of business
Ambea is a leading provider of healthcare and care services
with operations in Sweden, Finland and Norway, focused on
privately and publicly funded care and healthcare services.
3i’s investment
3i’s Eurofund IV invested a total of £46 million in the buyout
of Carema in July 2005. The investment case was to back a
highly responsible growth oriented team in a growing market.
Eurofund IV invested a further £49 million in 2006, to support
the acquisition of Finnish based Mehilainen. The combined
group was named Ambea.
3i Group plc’s investment
Cost
Valuation
Proceeds
Equity interest
Income in the year
March 2010
£m
–
March 2009
£m
20
–
212
–
–
102
–
44.7%
–
Developments since 3i invested
Driven by the strength of its offering, reputation for quality
and strong operational performance, as well as a number
of acquisitions, Ambea has grown substantially since 3i first
invested. As a result, in 2009, Ambea employed 10,300 staff
and handled almost two million patient visits. This success
has delivered strong financial performance, with sales rising
an average of 15% per year to SEK 7.3 billion and EBITDA
growing by 31% per year to SEK 624 million.
In addition to building a strong board, 3i added considerable
value to Ambea through its knowledge and expertise,
particularly in international development and acquisitions.
On 23 February 2010, 3i announced the agreement of
the sale of Ambea to Triton for €850 million, delivering an
overall IRR of 42% for 3i and Eurofund IV investors. 3i Group’s
proceeds from this sale were £212 million. As a result of
this, Ambea delivered an uplift over cost of £188 million, a
recapitalisation in 2007, and a realised profit of £102 million.
3i Group plc
Report and accounts 2010
47
Telecity Group Plc
Buyouts Technology, Media & Telecoms UK
www.telecitygroup.com
Venture Production plc
Growth Capital Oil and Gas UK
www.vpc.co.uk
Nature of business
Operating from 23 sites in prime city centre locations,
Telecity is the leading provider of premium network
independent data centres in Europe.
Nature of business
Venture Production was a UK North Sea oil and gas producer,
focusing on development and enhancement of discovered and
producing oil and gas fields.
3i’s investment
3i initially backed Venture Production in 1997 before its IPO and
realised its investment in 2002. In 2006, 3i became a minority
shareholder again in Venture Production when it received
shares as partial consideration on the sale of a portfolio
company, CH4. 3i then invested a further £110 million in
Venture Production during August 2007. The investment case
was to support the company’s growth and, in particular, its
development in the UK and Netherlands sectors of the
North Sea.
3i Group plc’s investment
Cost
Valuation
Proceeds
Equity interest
Income in the year
March 2010
£m
–
March 2009
£m
110
–
145
–
2
140
5
5.4%
3
Developments since 3i invested
Venture Production continued its strong growth from 2006
through acquisitions and adding interests in new discoveries
and exploration prospects. This market development was
translated into strong financial performance and its last
published accounts, before its acquisition by Centrica plc in
July 2009 illustrate growth since 2006.
3i realised its equity and loan investments in Venture
Production in July 2009, delivering total proceeds of
£145 million. As a result of this and other cash flows since
2006, 3i’s equity investment in Venture Production delivered a
profit over cost of £35 million and realised profit of £4 million.
3i’s investment
3i first invested in the company as a start up in 1998, however
the relevant investment for this case study was made in 2005
to support the “take private” of Telecity. The company had not
achieved its potential as a public company, in part because the
internet data centre market, which it had pioneered, had failed
to deliver the growth anticipated through the “dot com” bubble.
However, 3i had a clear view about the potential attractiveness
of this market if there was consolidation in the sector.
Concluding that this strategy could more effectively be
executed in the private domain, 3i teamed up with US
investment firm Oak Hill Capital Partners to de-list Telecity for
£60 million and invested £30 million to support this.
3i Group plc’s investment
Cost
Valuation
Proceeds
Equity interest
Income in the year
March 2010
£m
–
March 2009
£m
16
–
142
–
–
95
–
22.6%
–
Developments since 3i invested in 2005
The agreed merger in 2005 with Redbus, a key European
competitor was Telecity’s first consolidation step. Following
this and the acquisition of another UK competitor, Globix, the
three companies were successfully rationalised and integrated.
This led to significantly improved financial performance
allowing Telecity to enter an investment phase again.
The re-listing of the business in October 2007 raised further
funds to support the build out of a new generation of data
centres across Europe. In the year to 31 December 2009,
Telecity achieved revenues of £169 million and EBITDA of
£64 million – over 10 times its level of profitability before the
take private in 2005.
Telecity has also been a leader in good environmental practice
in its industry, winning a number of industry awards including
“Best Leadership and Innovation in Environmental Policy” in the
2009 Data Centre Europe Awards.
In addition to a partial disposal of shares for £30 million in
May 2009, 3i realised its remaining 16.5% stake in February
2010 for £112 million. Total proceeds since the re-listing
of £153 million represent a five-fold return on the 2005
investment.
3i Group plc
Report and accounts 2010
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Case studies
4848
Portfolio companies
Our largest Buyouts and Growth Capital investments,
together with AWG, a 3i Infrastructure plc investment.
Go online to see further case studies
/casestudies
ACR
Growth Capital Financial Services Singapore
www.asiacapitalre.com
Nature of business
ACR is an independent re-insurer focusing on specialty lines
of re-insurance across Asia in the “large risks” segment for
aviation, casualty, marine, energy, property and engineering
projects. ACR delivers a combination of Asian dedicated
capacity, global underwriting standards and expertise, as well
as in-depth knowledge of the needs and dynamics of Asian
insurance markets to its clients.
3i’s investment
3i invested US$200 million in November 2006, out of a
total capital raising of US$620 million, to create Asia’s first
exclusively pan-Asian focused independent reinsurer.
The investment case was fundamentally to back a proven
team to take advantage of a high growth market opportunity
and build an industry leader. ACR is now 3i’s second largest
investment by value and its valuation is based upon a
multiple of the book value as a reinsurance industry specific
valuation method.
3i Group plc’s investment
Cost
Valuation
Equity interest
Income in the year
March 2010
£m
105
March 2009
£m
105
149
31.2%
–
125
31.6%
–
Developments since 3i invested
Since 3i invested, ACR has developed into a sizeable pan-Asian
business, with gross written premiums of approximately
US$500 million. In 2007, ACR created a joint venture in
Malaysia with Khazanah Nasional Berhad. In 2008, ACR
invested US$60 million as part of a US$300 million Islamic
reinsurance joint venture created to serve the growing
Retakaful sector. This, and a number of other initiatives to
deliver growth and diversify risk, have proven successful,
despite a more challenging environment for both premium
and investment income.
3i works closely with management to evaluate M&A proposals
and strategic investments, and provides input on risk and
investment management.
Current trading
ACR now has a widely diverse portfolio spanning over 50
countries and 600 clients. ACR has a financial strength rating
from A.M. Best of A- (Excellent) and from Standard & Poor’s of
A- (Strong). These ratings reflect ACR’s adequate capitalisation,
well balanced portfolio with diversified geographic risk,
adequate reserves and strong risk management capabilities.
3i Group plc
Report and accounts 2010
49
Inspicio
Buyouts Business Services UK
www.inspicioplc.com
Nature of business
Inspicio is a market-leading provider of commodity, food and
environmental testing, inspection and certificating services.
It operates in over 120 countries across the world and employs
8,000 people.
3i’s investment
3i’s Eurofund V invested £164 million in February 2008 to
enable the public-to-private buyout of Inspicio. The investment
case was based upon underlying market growth and the
opportunity for further sector consolidation. Eurofund V
invested a further £15 million in 2010 to fund the acquisition
of GTS and to buyout Inspicio’s Indian joint venture partner.
Inspicio is now 3i’s third largest investment by value and is
valued on an earnings basis.
3i Group plc’s investment
Cost
Valuation
Equity interest
Income in the year
March 2010
£m
133
March 2009
£m
107
147
38.2%
17
105
38.2%
14
Developments since 3i invested in 2008
A significant capital expenditure programme was put in
place to accelerate laboratory developments and increase
Inspicio’s offerings to customers. In addition to GTS, 10 further
acquisitions have been made since the original buyout.
Current trading
Despite challenging market conditions during 2009, Inspicio
was able to achieve growth in revenue and EBITDA of 14%
and 17% respectively in the year to 31 December 2009,
with revenues of £334 million and EBITDA of £42 million.
Inspicio has a good financial position and no banking
covenant issues.
3i Group plc
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Case studies Portfolio companies
5050
3i Group plc
Report and accounts 2010
AWG
Infrastructure Utilities UK
www.awg.com
This investment is held by 3i Infrastructure plc.
Nature of business
AWG is the parent company of Anglian Water, the fourth
largest water supply and waste water company in England and
Wales as measured by regulatory capital value. The majority
of the group’s revenue is earned through tariffs regulated by
Ofwat and linked to RPI. The group also includes Morrison
Facilities Services, a support services business focused on the
local authorities and housing sectors, and a small property
development business.
3i Infrastructure’s investment
AWG has strong infrastructure characteristics, with a regulated
near-monopoly position in its geographical area for the
provision of water supply and sewerage treatment, stable
and predictable earnings through RPI-linked tariffs and largely
predictable operating costs.
Developments since initial investment
3i initially invested in AWG in 2006, taking the company
private in partnership with a consortium of international
investors. Approximately half of this initial investment was then
transferred to 3i Infrastructure as part of its seed portfolio at
IPO. Since then, 3i has further reduced its direct holding in
AWG through a sale to the consortium members, in which
3i Infrastructure plc also participated, increasing its holding in
AWG from 9% to 10.3%. 3i holds a small residual holding in
AWG of 0.3%.
Current trading
AWG continues to perform well operationally. For the year
ending 31 March 2010, EBITDA for the group had increased
by 7.1% over the prior year. The core water business, Anglian
Water, was ranked in the top two places in Ofwat’s Overall
Performance Assessment for the third year running.
In November 2009, Ofwat published its Final Determination,
setting out price limits and capital expenditure allowances
for the period from 2010 to 2015. The outcome of the Final
Determination was slightly more favourable than the proposals
set out in the Draft Determination, and confirmed the position
of Anglian Water as among the most efficient of the water
supply and waste water companies.
AWG complies with the Walker Code and its report and
accounts are available on www.awg.com.
51
Risk
Review of risks
Risk factors
Risk governance framework
51-56
52
54
56
A description of our risk management framework, key
risks and our approach to risk mitigation.
Risk
Risk
5252
This section provides a
review of the evolution and
management of the Group’s
key risks during the year,
together with a description of
the main inherent risk factors
facing the Group. This is
followed by an overview of
the main elements of 3i’s risk
governance framework.
Further details on the
management of key risks, and
related results and outcomes,
can be found in the relevant
sections of this Annual Report
following the references shown
under “Further information” and
in the section on risk factors.
Review of risks
External
The key external risks identified by the Group at the
start of the financial year fell into three broad categories:
the impact of the continuing adverse market and
economic conditions; the wider reputational impact
on the financial services sector of the banking and
financial crisis; and the potential for wide-ranging
regulatory changes.
The current market and economic uncertainty continues
to impact the market in which 3i operates in a number
of ways. Fundraising conditions, for example, remain
challenging and investors have become more discerning.
Notwithstanding this background, 3i successfully closed
its first Growth Capital Fund in March 2010.
The lack of M&A activity over the past 18 months
combined with a private equity funding overhang and
improved debt terms have tended to fuel high prices
for transactions. These market imbalances continue to
create uncertainty around the overall market outlook.
Economic conditions also present risks for 3i’s portfolio
companies and therefore overall performance and
valuations, as described under Investment risk opposite.
The reputation of the wider financial services sector
remains low. In this context, there is a trend towards
closer scrutiny of the integrity and transparency of firms
and a greater emphasis on socially responsible investing.
Firms that are able to differentiate themselves in these
areas are likely to be at an advantage in the future.
Regulatory changes could bring higher costs in
the form of onerous disclosures for private equity
owned companies, putting private equity firms at
a disadvantage compared with other owners.
The European AIFM directive, as currently drafted, has
the potential to restrict investment by non-European
investors in European managed funds and could trigger
retaliatory measures from other countries if deemed
unfair or anti-competitive.
The ICSA Hermes Transparency
in Governance Awards 2009
– Winner
FTSE 100: Best practice disclosure
on risk management and internal
control.
Further information on
Overview: Chief Executive’s statement and Our strategy
Business review: Market conditions
Corporate responsibility
P8 and P12
P20
P57
3i Group plc
Report and accounts 2010
53
Strategic
At the start of the year, 3i undertook a number of key
strategic projects, focused primarily on improving the
Group’s financial position. These included the rights issue
and solvent liquidation of 3i QPE plc, both of which were
successfully completed. Completion of these and other
related projects has reduced significantly the Group’s
gearing, funding and liquidity risks, as described under
Treasury and funding risks.
The Group’s human resource base has reduced
following restructurings during the past two financial
years, leaving the risk that it may not be able to take
full advantage of improving market opportunities.
A strategic review by the Board has identified specific
measures to ensure 3i has the necessary capability
in place.
Investment
Several of the Group’s key investment risks at the start
of the financial year resulted from a combination of
adverse economic and market conditions, described
earlier, combined with the constraints of the Group’s
financial position. Risks included the potential need to
sell assets at the wrong time or price, low levels of new
investment and potential underperformance of portfolio
companies impacting valuations.
The overall health of the portfolio has shown signs
of stabilisation in the second half of the financial year.
Notwithstanding this, some further valuation write-
downs have been necessary during the year owing
to under performance.
Some refinancing difficulties have been experienced
by individual portfolio companies, which in most
cases have been resolved, but with increased borrowing
costs or other less favourable debt terms. In isolated
cases, portfolio companies have had to scale back
expansion plans. More detail on this can be found in
the business line reviews, which start on page 31.
Treasury and funding
Improving the Group’s financial position has been a top
priority in the course of the financial year. This has
included improving liquidity, the reduction of net debt
levels and refinancing of maturing debt. As a result of
the actions taken over the course of the year, including
the successful rights issue, the risks associated with
the Group’s financial structure at the start of the year
are much reduced. The Group aims to maintain a
conservative financial structure and has instituted
tighter controls and targets to support this, for example,
in relation to limits on the proportion of debt maturing
in any one year.
The uncertainty around the funding of the Group’s main
defined benefit pension plan has been reduced with the
decision to close the plan to future accrual of benefits by
members from 1 April 2011.
Following the Board’s decision in 2008 to unwind
forward contracts used to hedge currency assets
largely denominated in euros and US dollars, the Group
currently only uses core currency borrowing to hedge
foreign exchange exposures in the portfolio. The limited
availability of currency funding at times during the year
meant that the Group’s US dollar and euro positions
were exposed to the impact of adverse currency
movements. As gross debt is reduced, and more of the
portfolio is invested outside of the UK, the exposure to
foreign exchange risk could also increase.
Operational
The key operational risks facing the Group during the
year relate mainly to people. In common with many
other businesses, headcount reductions, cost pressures,
low levels of investment activity and change in the
external business environment have all contributed to
a degree of uncertainty for staff. More specific risks
include key man retention (specifically in relation to
managed funds), alignment to a different and difficult
operating environment and the balance of skills and
resources to meet these challenges. A people plan has
been developed to enable 3i to deliver its business
strategy and vision by addressing these and other
people risks.
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Further information on
Chief Executive’s statement
Business review
Our strategy
Business review: Market conditions
Case studies
Further information on
Financial review
Corporate responsibility: Corporate responsibility as a company
Financial statements
Portfolio and other information
P23
P61
P90-93
P129
P8-10
P12
P14-15
P20
P45
3i Group plc
Report and accounts 2010
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Risk
5454
Risk factors
Risk type
Inherent risks
External
Risks arising from external factors
including political, legal, regulatory,
economic and competitor changes which
affect the Group’s operations
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
– Changes in macroeconomic variables,
eg rates of growth
– General health of capital markets,
eg conditions for initial public offerings
– Exposure to new and emerging markets
– Regulatory developments
– Changes in government policy, eg taxation
– Reputational risks
– Understanding and analysis of risks and rewards
– Appropriateness of business model
– Changes in the Group’s operating environment
– Unanticipated outcomes versus assumptions
Risk mitigation
– Diversified investment portfolio in a range of
sectors, with different economic cycles, across
geographical markets
– Close monitoring of regulatory and fiscal
developments in main markets
– Due diligence when entering new markets or
business areas
– Periodic strategic reviews
– Regular monitoring of key risks by Group Risk
Management Committee and the Board
– Monitoring of a range of key performance
indicators, forecasts and periodic updates
of plans and underlying assumptions
– Disciplined management of key strategic
– Regular Group Risk Management Committee
projects
and Board reviews to anticipate, assess and act
upon external developments and consider
reputational risks
Key developments
– Continuing adverse economic and market
conditions
– Regulatory developments which may
be unfavourable
– Reputational risk in portfolio companies
– Organisational changes, including changes
to senior management
– Risks from corporate projects diminished
– Potential loss of key staff in certain areas
Further
information
Overview
– Chairman’s statement, 3i at a glance,
Chief Executive’s statement
Business review
– Our strategy, Market conditions
Overview
– Chairman’s statement, 3i at a glance,
Chief Executive’s statement
Business review
– Our strategy, 3i’s Business model,
Market conditions
3i Group plc
Report and accounts 2010
55
Investment
Risks in respect of specific asset
investment decisions, the subsequent
performance of an investment or
exposure concentrations across business
line portfolios
– Market competition, eg number of participants
and availability of funds
– Asset pricing and access to deals,
eg on a proprietary basis
– Investor experience and key man retention
– Alignment of remuneration
– Underlying asset performance, eg earnings
growth; cash headroom
– Asset valuations
– Overexposure to a particular sector, geography
or small number of assets
– Investment performance track record
– Reputational risks arising from portfolio
related events
– In-depth market and competitor analysis,
supported by an international network of
sector and industry specialists
– Rigorous investment appraisal and approval
process
– Guidelines on responsible investing
incorporated into investment procedures
– Regular asset reviews, including risk
assessment, based on up to date management
accounts and reporting
– Consistent application of detailed valuation
guidelines and review processes
– Representation by a 3i executive on the boards
of investee companies
– Setting of investment concentration limits
– Periodic portfolio reviews to monitor exposure
to sectors, geographies and larger assets
Treasury and funding
Risks in relation to changes in market
prices and rates; access to capital markets
and third-party funds; and the Group’s
capital structure
Operational
Risk arising from inadequate or failed
processes, people and systems or from
external factors affecting these
– Liquidity
– Level of gearing
– Debt levels and maturity profile
– Credit rating and access to funds
– Counterparty risk
– Foreign exchange exposure
– Interest rate exposure
– Impact of volatility of investment valuations
– Resource balance, including recruitment
and retention of capable people
– Appropriate systems, processes and
procedures
– Adherence to tax regulations
– Complexity of regulatory operating
environment
– Potential exposure to litigation
– Reputational risks arising from operational
risk incidents
– Exposure to fraud
– Business disruption
− Weekly detailed cash flow forecasts, tracked
against a minimum liquidity headroom
− Net debt limit and monitoring of gearing range
− Use of currency borrowings to reduce
structural currency exposures
− Use of ‘plain vanilla’ derivatives where
appropriate, eg interest rate swaps
− Regular reviews of liquidity, gearing, net debt
and large currency exposures
− Regular Board reviews of the Group’s financial
resources and treasury policy, eg currency
hedging
– Framework of core values, global policies,
a code of business conduct and delegated
authorities
– Procedures and job descriptions setting
out line management responsibilities for
identifying, assessing, controlling and reporting
operational risks
– Rigorous staff recruitment, vetting, review
and appraisal processes
– Appropriate remuneration structures
– Succession planning
– Close monitoring of legal, regulatory and tax
developments by specialist teams
– Internal Audit and Compliance functions carry
out independent periodic reviews
– Business continuity and contingency planning
– Controls over information security,
confidentiality and conflicts of interest
– Anti-fraud programme
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– Significantly reduced investment and
realisation levels
– Impact of current economic environment on
portfolio companies’ earnings causing
valuations to lag public markets
– Liquidity position strengthened
– Funding of Group pension plan
– Foreign exchange risk
– Organisational changes, including
headcount reductions
– Risks from key corporate projects
eg rights issue diminished
Overview
– 3i at a glance
Business review
– Assets under management, Investment
and realisations, Financial review (Returns),
Business lines
Financial statements
Portfolio and other information
Overview
– Chief Executive’s statement
Business review
– Investment funding model, Assets under
management, Market conditions,
Financial review (Balance sheet)
Financial statements
Business review
Corporate responsibility report
Governance
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Report and accounts 2010
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Risk
5656
Each of the committees has met on a quarterly
basis, with two exceptions. A sub-committee of the
Group Risk Management Committee met monthly
during the financial year to monitor key risks and related
management actions. This was considered necessary
in the context of continued market and economic
uncertainty. The Portfolio Risk Committee has met
twice. This Committee is closely linked to the Group’s
Investment Committee, which itself has undergone
refinements following the creation of the new role of
Chief Investment Officer in 2009. The respective roles
of these Committees have been reviewed and clarified
as part of the wider review of 3i’s investment processes.
Related committees
The Corporate Responsibility Committee considers
and reviews corporate responsibility issues relevant to
3i’s business, reporting to the Board. This includes
identifying and assessing the significant risks and
opportunities for 3i arising from corporate responsibility
issues. Any reported risks are also considered by the
Operational Risk Committee or Group Risk Management
Committee as appropriate.
Risk governance framework
3i’s risk governance framework provides a structured
process to oversee the identification, assessment and
approach to mitigation in respect of those risks which
could materially impact the Group’s strategic objectives
or execution.
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 or oversight 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 Risk Management Committee
provides support to the Board in maintaining oversight
of the effectiveness of risk management across the
Group. The risk governance framework and the
responsibilities of the main committees involved
are shown below. Further details can also be found
in the Governance section (Pillar 3 disclosures) at
www.3igroup.com.
Operation during the year
The framework outlined above has been in operation
since the start of the financial year, following a review
aimed at simplifying and enhancing its effectiveness.
This review, concluded in March 2009, was driven by
the practical experience of operating through a
prolonged period of heightened risks, in the context of
deteriorating and uncertain market and economic
conditions, and the desire to improve risk oversight in
relation to balance sheet management and the
investment portfolio. A similar review was conducted in
February 2010, with the overall conclusion that the
current framework remains fit for purpose.
Group Risk Management Committee
Chairman: Chief Executive
– Oversight of the Group’s overall risk management processes
– Monitors changes in the Group’s external and strategic risk profile
– Reviews reports from each of the Treasury Management, Portfolio Risk and Operational Risk Committees
– Assesses the adequacy of risk mitigation steps put in place in respect of higher level risks
– Reports to the Audit and Compliance Committee
Treasury Management
Committee
Chairman: Chief Executive
– Oversees management of funding,
gearing, liquidity, interest rate and
foreign exchange exposures in
relation to policies agreed by
the Board
Operational Risk
Committee
Chairman: Group Communications
Director
– Oversees the key operational risks
facing the Group, including changes
to the operational risk profile and
new and emerging risks
Portfolio Risk
Committee
Chairman: Managing Partner/
Chief Investment Officer
– Oversees risks arising from
investment portfolio concentration
by vintage, geography, sector
and size
3i Group plc
Report and accounts 2010
57
57
57-62
Corporate responsibility
Corporate responsibility at 3i
– as an investor
– as a company
58
60
61
Information about 3i’s approach to corporate
responsibility and our performance in the year.
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Report and accounts 2010
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Corporate responsibility
5858
Corporate responsibility at 3i
This section has been extracted from 3i’s full Corporate
responsibility report, which is available in the 2010
Reporting centre www.2010reportingcentre.3igroup.com
and in the Corporate responsibility (“CR”) section of our
Investor relations website, www.3igroup.com.
This extract focuses primarily on CR in
our investment business, 3i’s core activity.
Also included are the results of our recent
employee engagement survey and 3i’s direct
environmental impacts.
Please go online to see a full report on CR
www.2010reportingcentre.3igroup.com
CR Committee
Kevin Dunn
Deepak Bagla
Douwe Cosijn
Patrick Dunne
Company Secretary and Chairman of the Committee
Director in 3i’s India Infrastructure investment business
Head of Investor Relations
Group Communications Director
Jan-Peter Onstwedder
Head of Risk
Tony Wang
Phil White
Associate Director in 3i’s Asia investment business
Partner in 3i’s Infrastructure business line
The Committee’s membership reflects the balance of 3i’s business with representation from a range
of business line and Group activities.
Contact us
For more information please contact Kevin Dunn at KevinDunnCR@3i.com
3i Group plc
Report and accounts 2010
59
“The focus for our CR development this year has been
on 3i as an investor. We have further strengthened our
investment process and worked more closely with our
portfolio companies to understand in more detail how
they manage CR.”
Kevin Dunn Group Company Secretary and General Counsel
Our approach
– 3i’s approach to CR, both as an investor and a company,
is commercially driven
– An active approach to CR means more to 3i than simply
retaining our licence to operate or reducing risk
− We believe that our approach to CR provides genuine
competitive advantage and helps maximise long-term returns
− We also think it is important to review our approach to CR
every year and to keep innovating in this important area
Our 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 shareholders, investors,
our people and the companies in which we invest
– maintain our integrity and professionalism
– strive for continual improvement and innovation
The following information illustrates our commitment to CR and provides
detail on our CR performance.
3i Group plc
Report and accounts 2010
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Corporate responsibility
6060
Corporate responsibility
as an investor
3i’s approach to CR in its
investment activities must
been seen in the context of
3i’s business model described
on pages 16 to 17. This approach
to CR is embedded in our
investment processes and is an
important aspect of how we
approach investing.
CR in our investment activity
During the year, we significantly updated our global
CR investment policies. These provide guidance and
procedures for our investment teams to help them
appraise CR issues in the companies in which we invest.
Additionally, we conducted a review of a number of our
largest portfolio companies to improve our
understanding of how they manage CR in their
businesses.
As an investor, we view CR from two perspectives;
opportunity and risk. We believe that an active approach
to CR has the potential to bring a wide variety of
business benefits to our portfolio companies.
The most significant CR 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
attractiveness of our portfolio companies to others.
A Group-wide review of our business needs and
policies in relation to CR was conducted in 2008.
This review identified the need for further development
of our policy and accompanying operational procedures.
This need was driven by several factors, including
increased globalisation, 3i’s own international growth,
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.
A new Group-wide CR policy was developed and
rolled out across our investment business during the
year. The main features of this new policy, to which
all employees have online access, include:
− a single, short policy document with a clear overall
corporate goal, supplemented by a set of broad
aspirations and commitments;
− 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, employee
training and a new CR web-based portal, was designed
to provide 3i employees with a clear framework, as well
as the tools to think about and manage issues relating to
CR throughout the investment process.
CR in our portfolio
During the year, a project was conducted to assess how
3i’s portfolio companies are managing the most relevant
CR issues for their company. A sample of investments
across a range of sectors, geographies and business lines
was as part of the initial review.
The portfolio review was designed to benchmark
how companies in the portfolio are managing their
most relevant CR issues. The key issues that were
benchmarked were environment, climate change, labour
issues, human rights, business ethics and corruption, and
finally, transparency. Each of these issues was assessed
for materiality and level of engagement and a summary
analysis prepared for each company.
The benchmarking exercise also considered the strength
of the policies and systems that the company had in
place to manage these issues as well as the strength of
monitoring processes.
This project, through engagement with portfolio
companies and 3i investment executives, has:
− increased awareness within 3i and within the
companies of material CR issues;
− produced more examples of best CR practice that
can be used by other portfolio companies; and,
− highlighted key risks and opportunities to strengthen
portfolio companies CR policies and processes.
3i intends to build on the work in this project and
broaden and deepen its engagement with portfolio
companies on CR issues.
Business review P11-44
Business review
Business review
3i Group plc
Report and accounts 2010
61
Summary of 3i CR 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 policy
and procedures are designed to help employees
understand and manage the impact they and
our portfolio 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 CR in our industry 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 good
corporate 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 CR materiality test for all investments, and a
requirement for employees 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.
/transparency
3i Group plc
Report and accounts 2010
Corporate responsibility
as a company
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.
In 2009, 3i again participated in the annual Business in
the Community’s (”BitC”) Corporate Responsibility Index
and were included in BitC’s “Top 100 Companies that
Count”. In particular, the integration of our CR principles
and management into our investment processes were
recognised.
As a private equity business with fewer than 500
employees world-wide, 3i has a relatively small footprint
on many CR 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
internationally, and as one of the few publicly listed
private equity firms, 3i is differentiated within our
industry and has been actively involved in the evolution
of the CR 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 a former chairman of
the BVCA, as well as a former chairman of the EVCA.
3i is compliant with the Walker Guidelines on disclosure
for private equity firms and their portfolio companies.
More detailed information on 3i’s approach to
transparency can be found in our online Reporting centre.
In this section, we provide commentary and detailed
information on the Group’s two key non-financial
performance measures – our employee engagement
and direct environmental impact. Many other aspects
of how we manage our CR, the roles and responsibilities,
staff training and diversity, health and safety, procurement
etc, are covered in detail in the CR section of
www.3igroup.com and in the full CR report in
our online Reporting centre.
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Corporate responsibility
6262
Employee engagement
Employee survey
3i regularly surveys 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 survey 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 web-based survey, a
comprehensive telephone poll survey was conducted
this year by Ipsos MORI, which was open to all staff.
It was conducted in January and February 2010.
The previous comprehensive survey was held in 2008.
The response rate for the 2010 survey was high
with 96% of employees participating in the survey,
significantly greater than last year’s web-based poll in
2009 (56%). 3i’s web-based polls traditionally achieve
lower response rates than telephone surveys (2008:
92%). The 2010 poll was conducted following a highly
turbulent time in our markets and for the company,
with staff numbers falling from 739 at 31 March 2008
to 488 at 31 March 2010.
The results for this key non-financial performance
measure were encouraging in that the overall employee
engagement score was stable at 74% (2008: 83%)
over the previous year. Advocacy, which has traditionally
been high at 3i, remained so at 82%, although it was
lower than in 2008 (90%). 81% of staff taking part said
that they were proud to work for 3i. 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
March 2010 and a number of actions have been taken
as a result.
Environment
As a financial services business employing less than
500 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. To achieve this we have improved the
measurement and modelling of our carbon emissions,
reduced the energy intensity of our operations and
invested in carbon offsets. We have chosen to offset
our emissions by purchasing European Union Emissions
Allowances and retiring them via UK Government
assured offsetting.
In 2009/10, 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.
3i global operations ‒
Breakdown of emissions by source (%)
Premises
Business travel
Company owned vehicles
Other
49.0
48.3
2.6
0.1
Reported emissions for the year to 31 March 2010
were 15% lower than the previous year at 7232 CO2e
(t/yr).This decrease is largely explained by our work in
this area, particularly reducing energy usage and
improving our data capture techniques. The climate
change impact assessment table outlines this amount
as a percentage of each emission type.
In the forthcoming year, we will continue to endeavour
to reduce our energy use and have set targets to help us
achieve this which can be found on 3i’s CR pages at
www.3igroup.com.
Results of the 2010 employee survey
Measuring employee engagement and giving
employees an opportunity to give feedback is a key
objective for 3i. Every second year, 3i employees
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 96%
– An employee engagement score of 74%
– 81% of staff are proud to work for 3i
– High employee advocacy, with 82% of those
surveyed saying they would speak highly of 3i
– High commitment to helping 3i achieve
its objectives (94%)
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
– Only 57% of employees feel valued and recognised
for the work that they do
– Qualitative feedback also suggested that there was
room to improve communication of strategy
Action
– The results were communicated to all staff in March
– All issues relating to specific parts of the business
have been communicated and are being followed up
– Our increased commitment to communication with
staff will address the other areas for improvement
3i Group plc
Report and accounts 2010
63
Governance
Board of Directors and Management Committee
Statutory and corporate governance information
Directors’ remuneration report
63-88
64
66
80
Profiles of our Board and Management Committee,
statutory and corporate governance information,
together with our Directors’ remuneration report.
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Governance
6464
Board of Directors and Management Committee
Willem Mesdag
Non-executive Director since 2007.
Managing Partner of Red Mountain
Capital Partners LLC. Formerly a Partner
and Managing Director of Goldman,
Sachs & Co.
Christine Morin-Postel
Non-executive Director since 2002.
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.
Robert Swannell
Non-executive Director since 2006 and
Senior Independent Director since April
2009. Chairman of HMV Group plc and
Senior Independent Director of The British
Land Company PLC. Formerly Chairman
of Citi’s European Investment Bank and
Vice-Chairman Citi Europe. A member of
the Takeover Panel Appeal Board, and a
trustee of Career Academies UK.
Baroness Hogg Chairman
Chairman since 2002 and a non-executive
Director since 1997. Chairman of the
Financial Reporting Council, Senior Adviser
to the Financial Services Authority and
Member of the Takeover Panel. Chairman
of Frontier Economics Limited and Senior
Independent Director of BG Group plc.
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.
Michael Queen Chief Executive
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.
Julia Wilson Group Finance Director
Group Finance Director and member of
the Management Committee since 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. During
her absence on maternity leave from
April 2009 to March 2010 her major
responsibilities were managed by Stephen
Halliwell, Chief Financial Officer of the
Group's infrastructure business, and by
Ian Nolan.
Non-Executive Directors
John Allan
Non-executive Director since September
2009. Chairman of DSG International since
September 2009. A non-executive
Director of ISS A/S and National Grid plc
and a member of the University of
Edinburgh Campaign Board. Formerly CFO
of Deutsche Post, having been appointed
to the Management Board following its
acquisition of Exel plc in December 2005
where he had been Chief Executive since
1994. Formerly Chairman of Samsonite
Corporation and a non-executive Director
of PHS Group plc, Wolseley plc, Hamleys
plc and Connell plc.
Alistair Cox
Non-executive Director since October
2009. Chief Executive of Hays plc.
Formerly Chief Executive of Xansa plc
from 2002 to 2007, and Regional
President of Asia and Group Strategy
Director at Lafarge (formerly Blue Circle
Industries) between 1994 and 2002.
Richard Meddings
Non-executive Director since 2008.
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.
Baroness Hogg
John Allan
Willem Mesdag
Michael Queen
Alistair Cox
Christine Morin-Postel
Julia Wilson
Richard Meddings
Robert Swannell
3i Group plc
Report and accounts 2010
65
Management Committee
Kevin Dunn
General Counsel and Company Secretary
responsible for 3i’s legal, compliance,
internal audit, human resources and
company secretarial functions. A member
of the Management Committee since
joining 3i in 2007. Formerly a Senior
Managing Director, running GE’s
European Leveraged Finance business
after serving as European General Counsel
for GE. Prior to GE, was a partner at
the law firms Travers Smith and Latham
& Watkins.
Ian Nolan
Managing Partner, Investments
(Chief Investment Officer). A member
of the Management Committee since
February 2009 and the Group’s
Investment Committee since 2006.
Formerly Managing Director UK Buyouts.
Joined 3i in 1987.
Jonathan Russell
Managing Partner, Buyouts. A member
of the Management Committee and
the Group’s Investment Committee since
1999. Joined 3i in 1986. Past Chairman of
the European Private Equity and Venture
Capital Association.
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 2008. Spent
15 years with GE Capital Corporation,
most recently President and CEO of
GE Corporate Finance EMEA.
Paul Waller
Managing Partner, Funds. A member
of the Management Committee since
1999 and the Group’s Investment
Committee since 1997. Joined 3i in 1978.
Past Chairman of the European Private
Equity and Venture Capital Association.
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.
Board Committees
Audit and Compliance Committee
Robert Swannell (Chairman)
John Allan
Alistair Cox
Richard Meddings
Christine Morin-Postel
Remuneration Committee
John Allan (Chairman)
Baroness Hogg
Willem Mesdag
Christine Morin-Postel
Nominations Committee
Baroness Hogg (Chairman)
John Allan
Alistair Cox
Richard Meddings
Willem Mesdag
Christine Morin-Postel
Michael Queen
Robert Swannell
Valuations Committee
Baroness Hogg (Chairman)
Willem Mesdag
Michael Queen
Robert Swannell
Julia Wilson
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Bob Stefanowski
Ian Nolan
Paul Waller
Jonathan Russell
Guy Zarzavatdjian
3i Group plc
Report and accounts 2010
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Stephen Halliwell
During Julia Wilson’s maternity leave in
the year many of her responsibilities were
managed by Stephen Halliwell, who has been
Chief Financial Officer for 3i’s infrastructure
investment business since 2007, responsible
for its operational, financial and reporting
requirements. Previously Head of Financial
Planning and Analysis in the Group’s Finance
function. Joined 3i in 1998.
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Governance
6666
Statutory and corporate governance information
This section of the Directors’ report contains statutory
and corporate governance information for the year to
31 March 2010 (“the year”).
Principal activity
3i Group plc is an international investor focused on
buyouts, growth capital and infrastructure, investing
in Europe, Asia and North America. The principal activity
of the Company and its subsidiaries (“the Group”) is
investment.
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
2009, the Board also stated that it would reconsider the
appropriateness of the previously stated optimum
gearing ratio range of 30% to 40% across the cycle in
light of the then occurring dislocation in the debt
markets and the substantial changes in the pricing and
availability of debt finance.
The Board has decided that in current circumstances
it is appropriate to adopt a more conservative financing
structure. The Board recognises the current need to
manage liquidity and gross and net debt levels on a
conservative basis such that the Company should be
well-placed to deal with external events, take advantage
of opportunities and manage its investment and
divestment activities in a flexible manner. The Board has
decided that net debt should not exceed £1 billion in the
next three years and may at times be significantly below
this limit. As a consequence, during that period, gearing,
which is a function of both net debt and asset values,
is expected to be in the range of 0%–30%. It should be
noted that (subject always to the formal gearing limit
in the Company’s investment policy statement set out
above) the actual gearing level at any point in time will
fluctuate since it is a function of, among other things,
asset valuations and the timing of investment and
realisation cash flows. The Board anticipates that the
Company may be in a net cash position during certain
periods (for example during periods of high valuations
where realisations might be expected to exceed
investment) but may have net debt in other periods
(for example where valuations are relatively low or after
periods of low return flows).
Tax and investment company status
The Company is an investment company as defined by
section 833 of the Companies Act 2006. 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
2009. 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.
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.
Results and dividends
Total recognised income and expense for the year was
£407 million (2009: £(2,150) million). An interim
dividend of 1.0p per ordinary share in respect of the
year to 31 March 2010 was paid on 13 January 2010.
The Directors recommend a final dividend of 2.0p per
ordinary share be paid in respect of the year to
31 March 2010 to shareholders on the Register at
the close of business on 18 June 2010.
3i Group plc
Report and accounts 2010
67
The trustee of The 3i Group Employee Trust (“the
Employee Trust”) has waived (subject to certain minor
exceptions) dividends declared by the Company after
26 May 1994 on shares held by the Employee Trust.
Business review
The Group’s development during the year to 31 March
2010, its position at that date and the Group’s likely future
development are detailed in the Chairman’s statement on
page 5, the Chief Executive’s statement on pages 8 to 10
and the Business review on pages 11 to 44.
Share capital
The issued share capital of the Company as at 31 March
2010 comprised 970,381,476 ordinary shares of
7319/22p each and 4,635,018 B shares (cumulative
preference shares of 1p each), which represented 99.99%
and 0.01% respectively of the nominal value of the
Company’s issued share capital. During the year, the issued
share capital of the Company altered as set out below.
Ordinary shares
The issued ordinary share capital of the Company as
at 1 April 2009 was 383,970,880 ordinary shares.
During the year to 31 March 2010 this increased by
586,410,596 ordinary shares as a result of the
Company’s rights issue, the issue of shares to the trustee
of the 3i Group Share Incentive Plan, the issue of shares in
connection with the Employee Share Investment Plan and
the issue of shares in connection with the 3i Quoted
Private Equity plc acquisition.
At the Annual General Meeting (“AGM”) on 8 July
2009, the Directors were authorised to repurchase
up to 96,000,000 ordinary shares in the Company
(representing approximately 22.8% of the Company’s
issued ordinary share capital as at 8 May 2009) until
the Company’s AGM in 2010 or 7 October 2010, if
earlier. This authority was not exercised in the year to
31 March 2010.
B shares
The issued B share capital of the Company as at 1 April
2009 was 9,305,993 B shares. No new B shares were
issued in the year to 31 March 2010. At the AGM
on 8 July 2009, the Directors were authorised to
repurchase up to 9,305,993 B shares in the Company
until the Company’s AGM in 2010 or 7 October 2010,
if earlier. In the year to 31 March 2010, the Company
repurchased and cancelled 4,670,975 B shares
(representing 0.01% of the nominal value of the
Company’s total called-up share capital as at 1 April
2010) pursuant to this authority for £5,932,138.
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 2010 are shown below:
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J M Allan
A R Cox
R H Meddings
W Mesdag
C J M Morin-Postel
M J Queen
R W A Swannell
J S Wilson
Ordinary
shares
83,328
933
800
14,360
115,885
19,851
B shares
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6,227
36,685
45,877
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1,038
The share interests shown for Mr M J Queen and
Mrs J S Wilson include shares held in the 3i Group Share
Incentive Plan (see the table on page 86) and share
bonus awards under the 3i Group Deferred Bonus Plan.
The share interests shown exclude share option,
performance share and super-performance share
awards detailed in the Directors’ remuneration report.
From 1 April 2010 to 1 May 2010, Mr M J Queen and
Mrs J S Wilson became interested in an additional 138
ordinary shares each and there were no other changes
to Directors’ share interests.
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
2010 and 1 May 2010:
Ameriprise Financial, Inc. and its group
AXA S.A. and its group
BlackRock, Inc.
Deutsche Bank AG
Lloyds Banking Group Plc
Legal & General Group plc and/or its subsidiaries 38,620,595
Schroders Plc
Standard Life Investments plc
The Goldman Sachs Group, Inc
48,480,507
50,093,084
22,865,000
1 Indirect, and Financial Instruments with similar economic effect to Qualifying Financial Instruments.
2 Direct, and Qualifying Financial Instruments.
3i Group plc
Report and accounts 2010
As at
31 March
2010
22,069,504
% of issued
share capital
5.24
As at
1 May
2010
22,069,504
% of issued
share capital
Nature of holding
5.24 Direct and indirect
15,580,556
4.06
15,580,556
4.06 Direct and indirect
146,283,947
15.08 146,283,947
15.08 See Note 1 below
36,145,173
20,160,720
3.72
4.78
3.98
4.99
5.16
5.97
36,145,173
20,160,720
38,620,595
48,553,167
50,093,084
3.72 See Note 2 below
4.78 Direct and indirect
3.98
5.00
Direct
Indirect
5.16 Direct and indirect
22,865,000
5.97
Indirect
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Governance Statutory and corporate governance information
6868
Rights and restrictions attaching to shares
A summary of the rights and restrictions attaching to
shares as at 31 March 2010 is set out below.
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.
The 2010 Notice of AGM contains a special resolution
proposing the adoption of new Articles of Association.
If this resolution is passed, the rights and restrictions
attaching to shares will be altered as set out in the
form of Articles of Association submitted to the AGM.
A summary of the differences between the current and
proposed Articles of Association is set out in the 2010
Notice of AGM.
Holders of ordinary shares and B shares enjoy the rights
accorded to them under the 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 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. The Board may
decline to register a transfer of uncertificated shares in
the circumstances set out in the Uncertificated
Securities Regulations or where a transfer is to more
than four joint holders. The Board may decline to
register any transfer of certificated shares 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 information required within the specified time.
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). Since 14 July 2009 the Company has
been entitled to appoint a person to execute a transfer
on behalf of all holders of B shares in acceptance of an
offer, paying the holders such amount as they would
have been entitled to on a winding-up of the Company.
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, (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 relevant shares
and pending such transfer the rights and privileges
attaching to those shares would be suspended.
To attend and vote at a Company general meeting
a shareholder must be entered on the register of
members at such time (not being earlier than 48 hours
before the meeting) as stated in the notice of general
meeting.
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.
3i Group plc
Report and accounts 2010
69
Debentures
As detailed in notes 19 and 20 on pages 117 and 118
respectively, as at 31 March 2010 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.
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 20, 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; and
(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.
Notwithstanding the provisions of the Articles of
Association for the periodic retirement of Directors, in
accordance with emerging best practice the Board has
decided it would be appropriate for all Directors to
submit to reappointment every year. Accordingly at the
AGM to be held on 7 July 2010 all the Directors will
retire from office at the Annual General Meeting as will
Sir Adrian Montague who has been appointed a Director
with effect from 1 June 2010. All these Directors,
including Sir Adrian Montague, are eligible for, and, save
for Baroness Hogg who is stepping down as Chairman at
the conclusion of the Annual General Meeting, seek,
reappointment.
The Board’s recommendation for the reappointment of
Directors is set out in the 2010 Notice of AGM.
Directors’ conflicts of interest
Directors have a statutory duty to avoid conflicts of
interest with the Company. The Company’s Articles
of Association enable Directors to approve conflicts of
interest and include 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.
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 relevant costs remain at an appropriate level.
3i Group plc
Report and accounts 2010
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Governance Statutory and corporate governance information
7070
(b) £300 million Revolving Credit Facility Agreement
dated 15 July 2009, between the Company,
3i Holdings plc and Lloyds TSB Bank plc,
The Royal Bank of Scotland plc, Société Générale,
Commerzbank AG, London Branch, Standard
Chartered Bank, UBS Limited, Bank of Ireland and
JPMorgan Chase Bank N.A., London Branch in relation
to the provision of a multi-currency revolving credit
facility to the Company and 3i Holdings plc. 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 20 days (from the date of the
change of control) to determine whether the
Majority Lenders (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 Lenders, amounts
outstanding would be required to be repaid and the
facility cancelled;
(c) £100 million Revolving Credit Facility Agreement
dated 17 September 2009, between the Company,
3i Holdings plc and Nordea Bank AB (publ) in relation
to the provision of a multi-currency revolving credit
facility to the Company and 3i Holdings plc. 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 20 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;
(d) £200 million Revolving Credit Facility Agreement
dated 4 November 2009, between the Company,
3i Holdings plc and Lloyds TSB Bank plc in relation to
the provision of a multi-currency term and revolving
credit facility to the Company and 3i Holdings plc.
Under this agreement, the Company would be
required to notify Lloyds TSB Bank plc within five
days of any change of control of the Company. Such
notification would open a negotiation period of 20
days (from the date of the change of control) to
determine whether Lloyds TSB Bank plc would be
willing to continue to make available the facility and,
if so, on what terms. Failing agreement and if so
required by Lloyds TSB Bank plc, amounts
outstanding would be required to be repaid and the
facility cancelled;
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 any future profits on investments. Employees
participate in local state or company pension schemes as
appropriate to local market conditions.
Charitable and political donations
Charitable donations made by the Group in the year to
31 March 2010 amounted to £407,490. Detail on these
donations is provided in the full Corporate responsibility
report, which can be found in the Additional information
section of our Reporting centre and in the CR section of
our Investor relations website, www.3igroup.com.
In line with Group policy, during the year to 31 March
2010 no donations were made to political parties or
organisations, or independent election candidates, and
no political expenditure was incurred.
Policy for paying creditors
The Group’s policy is 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 11.5 days’ purchases.
Significant agreements
As at 31 March 2010 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 the 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;
3i Group plc
Report and accounts 2010
71
(e) 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;
(f) Limited Partnership Agreements dated 24 March
2010, between 3i GC GP Limited, the Company,
other 3i entities 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 Growth Capital Fund. 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
(g) 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.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual
Report and the Group financial statements in accordance
with applicable United Kingdom law and those
International Financial Reporting Standards which have
been adopted by the European Union.
Under Company Law the Directors must not approve
the Group financial statements unless they are satisfied
that they present fairly the financial position, financial
performance and cash flows of the Group for that
period. In preparing the Group financial statements the
Directors:
(a) select suitable accounting policies in accordance with
IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors and then apply them
consistently;
(b) present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information;
(c) provide additional disclosures when compliance with
the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular
transactions, other events and conditions on the
Group’s financial position and financial performance;
(d) state that the Group has complied with IFRSs,
subject to any material departures disclosed and
explained in the financial statements; and
(e) make judgements and estimates that are reasonable
and prudent.
The Directors have a responsibility for ensuring that
proper accounting records are kept which are sufficient
to show and explain the Group’s transactions and
disclose with reasonable accuracy at any time the
financial position of the Group and enable them to
ensure that the Group financial statements comply with
the Companies Act 2006. They also 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.
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 64 and 65.
3i Group plc
Report and accounts 2010
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Governance Statutory and corporate governance information
7272
Going concern
The Directors have acknowledged their responsibilities
in relation to the financial statements for the year to
31 March 2010.
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 including, in particular, 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
continuing 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. 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 418(2) of the Companies Act 2006,
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 489 of the Companies Act
2006, 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
12 May 2010
Registered Office:
16 Palace Street, London, SW1E 5JD
3i Group plc
Report and accounts 2010
73
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 2008.
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 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 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 2009, shareholders renewed the
Board’s authority to allot ordinary shares and to buy-back
ordinary shares on behalf of the Company subject to
certain limits. At the AGM in July 2009, shareholders
authorised the Board to buy-back B shares on behalf of
the Company subject to certain limits. Details of the
authorities which the Board will be seeking at the 2010
AGM are set out in the 2010 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.
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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”.
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Attendance at Board and Committee Meetings
The table below shows the number of scheduled
meetings attended by Directors during the year to
31 March 2010 and, in brackets, the number of
meetings they were eligible to attend. In addition to
these meetings a small number of ad hoc meetings were
held to discuss specific items as they arose.
Name
Total meetings held
Number attended:
Baroness Hogg
M J Queen
J M Allan1
A R Cox2
R H Meddings
W Mesdag3
C J M Morin-Postel
Lord Smith of Kelvin4
O H J Stocken5
R W A Swannell
Audit and
Compliance
Committee
4
Board
6
Nomination
Committee
2
Remuneration
Committee
7
Valuations
Committee
3
6(6)
6(6)
4(4)
3(3)
6(6)
6(6)
6(6)
2(3)
4(4)
6(6)
–
–
2(2)
2(2)
4(4)
–
4(4)
1(2)
–
4(4)
2(2)
2(2)
1(1)
1(1)
1(2)
1(2)
1(2)
0(1)
0(1)
2(2)
7(7)
–
3(3)
–
–
7(7)
7(7)
4(4)
–
–
3(3)
3(3)
–
–
–
1(1)
–
–
2(2)
3(3)
–
J S Wilson6
1 Appointed to the Board on 1 September 2009 and to Remuneration Committee, Nominations Committee and Audit and Compliance Committee on 1 October 2009.
2 Appointed to the Board and Nominations Committee on 1 October 2009 and to Audit and Compliance Committee on 1 November 2009.
3 Appointed to Valuations Committee on 1 January 2010.
4 Retired on 31 October 2009.
5 Retired on 31 December 2009.
6 On leave of absence for maternity from 7 April 2009 to 1 March 2010.
2(2)
–
–
–
3i Group plc
Report and accounts 2010
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Governance Statutory and corporate governance information
7474
Matters reserved for the Board
The Board has approved a formal schedule of matters
reserved to it and its duly authorised Committees for
decision. These include:
Meetings of the Board
The principal matters considered by the Board during
the year (in addition to matters formally reserved to the
Board) included:
– approval of the Group’s overall strategy, strategic plan
– the strategic plan, budget and financial resources;
and annual operating budget;
– approval of the Company’s half-yearly and annual
financial statements and changes in the Group’s
accounting policies or practices;
– changes relating to the capital structure of the
Company or its regulated status;
– major capital projects;
– major changes in the nature of business operations;
– investments and divestments in the ordinary course
of business above certain limits set by the Board from
time to time;
– adequacy of internal control systems;
– appointments to the Board and Management
Committee;
– principal terms and conditions of employment of
members of Management Committee; and
– changes in employee share schemes and other
long-term incentive schemes.
Matters delegated 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 succession and contingency plan for executive
leadership 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.
– the Group’s capital structure, including the Company’s
rights issue;
– regular reports from the Chief Executive;
– the recommendations of the Valuations Committee
on valuations of investments;
– the Board's risk appetite and risk tolerance;
– the business model and its application by different
business lines; and
– independence of non-executive Directors.
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 evaluation was
externally facilitated by The Zygos Partnership and the
results of the process formally reported to the Board.
The Board performance evaluation included
consideration of the overall functioning of the Board
including strategic planning, risk management processes,
Board balance and succession issues including the
criteria for identifying a successor to the Chairman,
who had announced her intention to retire during 2010.
The evaluation found a strong correlation of views on
the topics considered and clearly shared goals between
the executive and non-executive Directors. The Board
continued to identify areas where its working practices
could be developed further.
In his role as Senior Independent Director,
Mr R W A Swannell led a review by the Directors
of the performance of the Chairman and subsequently
reported back to the Board.
3i Group plc
Report and accounts 2010
75
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.
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 R W A Swannell served as
Senior Independent Director, to whom, in accordance
with the Combined Code, concerns were able to be
conveyed.
Directors
The Board comprises the Chairman, six independent
non-executive Directors and two executive
Directors. Biographical details for each of the
Directors are set out on page 64. Baroness Hogg
(Chairman), Mr R H Meddings, Mr W Mesdag,
Mme C J M Morin-Postel, Mr M J Queen,
Mr R W A Swannell and Mrs J S Wilson served
throughout the period under review. Mr J M Allan
and Mr A R Cox served as Directors from 1 September
2009 and 1 October 2009 respectively. Lord Smith
of Kelvin and Mr O H J Stocken served as Directors
until 31 October 2009 and 31 December 2009
respectively.
In addition to fulfilling their legal responsibilities as
Directors, non-executive Directors are expected to bring
an independent judgement to bear on issues of strategy,
performance, resources and standards of conduct,
and to help the Board provide the Company with
effective leadership. They are also expected to ensure
high standards of financial probity on the part of the
Company and to monitor the effectiveness of the
executive Directors.
The Board’s discussions, and its approval of the Group’s
strategic plan and annual budget, provide the non-
executive Directors with the opportunity to contribute
to and validate management’s plans and assist in the
development of strategy. The non-executive Directors
receive regular management accounts, reports and
information which enable them to scrutinise the
Company’s and management’s performance against
agreed objectives.
Directors’ independence
All the non-executive Directors (other than the
Chairman, who was independent on appointment)
were considered by the Board to be independent
for the purposes of the Combined Code in the
year to 31 March 2010 with the exception of
Mr O H J Stocken who served as a Director until
31 December 2009 and who was considered
non-independent having served as a non-executive
Director for in excess of nine years.
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.
3i Group plc
Report and accounts 2010
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Governance Statutory and corporate governance information
7676
Directors’ employment contracts
Details of executive Directors’ employment contracts
are set out in the Directors’ remuneration report on
page 87.
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.
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 J M Allan, Mr A R Cox, Mr R H Meddings, and
Mme C J M Morin-Postel, all of whom served
throughout the period, save for Mr J M Allan and
Mr A R Cox who served from 1 October 2009 and
1 November 2009 respectively. Lord Smith of
Kelvin served as a member of the Committee
until 31 October 2009. 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, the Committee:
– reviewed the effectiveness of the internal control
environment of the Group and the Group’s
compliance with its regulatory requirements and
received reports on bank covenants, third-party
liabilities and off balance sheet liabilities;
– reviewed and recommended to the Board the
accounting disclosures comprised in the half-yearly
and annual financial statements of the Company and
reviewed the scope of the annual external audit plan
and the external audit findings;
– received the reports of the Valuations Committee on
the valuation of the Group’s investment assets;
– received regular reports from the Group’s internal
audit function, monitored its activities and
effectiveness, and agreed the annual internal
audit plan;
– received regular reports from 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 2010
77
Remuneration Committee
The Remuneration Committee comprises Mr J M Allan
(Chairman), Baroness Hogg, Mr W Mesdag and
Mme C J M Morin-Postel, all of whom served
throughout the period, save for Mr J M Allan who
served from 1 October 2009. Lord Smith of Kelvin
served as Chairman and member of the Committee until
31 October 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.
Details of the work of the Remuneration Committee are
set out in the Directors’ remuneration report.
Valuations Committee
The Valuations Committee comprises Baroness Hogg
(Chairman), Mr M J Queen, Mr W Mesdag,
Mr R W A Swannell and Mrs J S Wilson, all of whom
served throughout the year save for Mr W Mesdag who
served from 1 January 2010. Mr O H J Stocken served
as a member until 31 December 2009.
During the year, the Valuations Committee considered
and made recommendations to the Audit and
Compliance 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.
Nominations Committee
The Nominations Committee comprises
Baroness Hogg (Chairman), Mr M J Queen,
Mr J M Allan, Mr A R Cox, Mr R H Meddings,
Mr W Mesdag, Mme C J M Morin-Postel and
Mr R W A Swannell, all of whom served throughout the
year, save for Mr J M Allan and Mr A R Cox who served
from 1 October 2009. Lord Smith of Kelvin and
Mr O H J Stocken served as members of the Committee
until 31 October 2009 and 31 December 2009,
respectively.
During the year, the Nominations Committee:
– established a sub-committee to consider candidates
to succeed Baroness Hogg as Chairman;
– considered and recommended two candidates for
appointment as non-executive Directors of the
Company, being Mr J M Allan and Mr A R Cox; and
– considered the size, balance and composition of
the Board.
A formal, rigorous and transparent process for the
appointment of Directors has been established with the
objective of identifying the skills and experience profile
required of new Directors and identifying suitable
candidates. The procedure includes the appraisal and
selection of potential candidates, including (in the case
of non-executive Directors) whether they have
sufficient time to fulfil their roles. Specialist recruitment
consultants assist the Committee to identify suitable
candidates for appointment. The Committee’s
recommendations for appointment are put to the full
Board for approval.
The Company 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 Chairman of the Audit and Compliance Committee
and the Company Secretary to discuss matters of
corporate governance and corporate responsibility
relevant to the Company and its shareholders.
The 2009 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.
3i Group plc
Report and accounts 2010
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Governance Statutory and corporate governance information
7878
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 regularly 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
2010 and up to the date of this report.
The Group Risk Management Committee’s activities are
supported by the activities of Treasury Management
Committee as well as the Portfolio Risk Committee and
Operational Risk Committee. Details of the risk
management framework can be found in the Risk
section on pages 51 to 56.
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;
3i Group plc
Report and accounts 2010
79
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
Internal Audit, the external auditors and Group
Compliance on a regular basis.
The internal control system is monitored and supported
by Internal Audit which operates on an international
basis and reports to management and the Audit and
Compliance Committee on the Group’s operations.
The work of Internal Audit is focused on the areas of
greatest risk to the Group determined on the basis of
the Group’s risk management process.
The external auditors independently and objectively
review the approach of management to reporting
operating results and financial condition. In co-ordination
with Internal Audit, they also review and test the system
of internal financial control and the information
contained in the annual financial statements to the
extent necessary for expressing their opinion.
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 101.
3i Group plc
Report and accounts 2010
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Governance
8080
Directors’ remuneration report
Note: References in this report to “the year” relate to
the financial year 1 April 2009 to 31 March 2010.
References to "the current year" relate to the financial
year 1 April 2010 to 31 March 2011.
Executive Directors
The Company’s policy for executive Directors (being
the Chief Executive and Finance Director only during the
year) is that:
Remuneration Committee
Remuneration Committee:
– during the year comprised Mr J M Allan
(Committee Chairman and member from
1 November 2009), Baroness Hogg, Mr W Mesdag,
Mme C J M Morin-Postel and Lord Smith of Kelvin
(Committee Chairman and member until 31 October
2009), all of whom were independent non-executive
Directors, save for Baroness Hogg (Chairman of the
Board) who was independent on appointment; and
– has terms of reference which are available on the
Company’s website.
During the year, the Committee:
– held seven regular scheduled meetings (all of which
were attended by all members of the Committee) 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.
Assistance to the Committee:
The Committee was materially assisted with advice on
Directors’ remuneration in the year by Kepler Associates
(external remuneration advisers appointed by the
Committee) and Mr M J Queen (Chief Executive), who
did not advise the Committee on his own remuneration.
Kepler Associates did not provide any other services to
the Group during the year.
– remuneration and other benefits should be sufficient
to attract, retain and motivate executives of the
calibre required;
– variable remuneration linked to performance
(currently comprising discretionary annual cash
bonuses, deferred share bonuses and long-term
incentives) is intended to form a substantial
component of total remuneration; and
– remuneration for the Chief Executive and Finance
Director should be competitive with FTSE 100
companies and FTSE 100 financial services
companies of broadly similar size.
Whilst no changes to remuneration policy for executive
Directors are currently planned for the current or
subsequent financial years, the Committee is conscious
that the Company operates in the private equity
industry where remuneration and incentive
arrangements often differ from those found in listed
companies. As mentioned below the Committee intends
to review executive Directors' long-term incentive
arrangements during the course of the current year .
The Committee has also revised the corporate
performance indicators relating to bonuses to be used
in the current year.
Share ownership
The Company’s share ownership and retention policy
requires executive Directors to build up over time, and
thereafter maintain, a shareholding equivalent to at least
1.5 times salary in the Company’s shares.
Remuneration policy – overall framework
Remuneration policy – components of pay
Chairman and non-executive Directors
Fees are reviewed regularly by the Board (or, in the case
of the Chairman’s fee, by the Committee) and are
intended to be competitive with fees paid by FTSE 100
companies and FTSE 100 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. No changes to remuneration policy
for the Chairman and non-executive Directors are
expected for the current or subsequent years.
Chairman and non-executive Directors
Chairman fee
Non-executive Directors:
Board membership fee
Deputy Chairman fee
Senior Independent Director fee
Committee fees*:
Chairman
Member
Fees for
2009-10
£260,000
plus 8,000
shares
£48,000 plus
1,600 shares
£30,000
£10,000
£20,000
£3,000
* Fees are payable in respect of Audit and Compliance Committee and Remuneration
Committee only.
3i Group plc
Report and accounts 2010
81
Executive Directors
(a) Salaries
The Committee’s remuneration advisers assist in
reviewing salary benchmarks for the Chief Executive
and Finance Director. When considering pay increases,
the Committee is also sensitive to wider issues, including
pay and employment conditions elsewhere in the Group.
In common with the vast majority of the Group’s staff,
the Chief Executive and Finance Director received no
increases in their base salaries during the year.
(b) Bonuses
Framework:
– Executive Directors are eligible for non-pensionable
discretionary annual bonuses.
– Target bonuses are determined by the Committee,
expressed as a multiple of salary, together with a
target split between cash and deferred shares.
– Maximum bonus payable is twice the target bonus.
– Awards are determined on the basis of corporate and
personal performance. Bonuses above target are
given only for outstanding performance.
– The Committee retains discretion to make
adjustments to bonus arrangements in appropriate
circumstances.
Bonus arrangements during the year were as follows:
– Target bonus in respect of the year for the Chief
Executive was 125% of base salary and the
maximum bonus was set at 250%.
– Target bonus for the Finance Director was 100%
of base salary and the maximum bonus was set
at 200%.
– Generally that part of any bonus which exceeds
100% of salary is receivable in shares deferred for
two years.
– The indicators used as a guide to the corporate
performance element for the year reflected the
Company’s short-term priorities and included 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.
For the current year the performance indicators to be
used as a guide to corporate performance will be based
on operating expenses, together with cost efficiency,
costs relative to assets under management, net carried
interest, gross portfolio return, total return, gross debt,
net debt, gearing and liquidity.
3i Group plc
Report and accounts 2010
(c) Long-term incentives
Long-term incentive arrangements during the year for
the Chief Executive and Finance Director consisted of
share options and Performance Share awards under
the 3i Group Discretionary Share Plan:
– Share options and/or Performance Share awards
could be awarded based on factors including market
practice, individual performance, the specific
circumstances facing the Company and calculations
of the fair values of awards.
– The annual maximum for an award of:
(a) share options was an award with an aggregate
exercise price of six times salary; and
(b) Performance Shares was an award with an
aggregate market value of three times salary.
– The combination of all share-based awards should
not have a fair value of more than 2.5 times salary
in any year. Fair values are calculated by the
Committee's remuneration advisers.
– Options may normally be exercised from the third
until the tenth anniversaries of grant and
Performance Shares normally vest on the third
anniversary of grant.
– Vesting is normally subject to an appropriate
performance condition which is calculated over
a three-year performance period. Performance
conditions are regularly reviewed to determine
whether they are appropriate to current market,
commercial and Company-specific conditions.
The 10 year life of the Group’s current share-based
long-term incentive plan will expire in 2011 and
accordingly the Committee plans during the current
year to review future long-term incentive arrangements
for executive Directors. Awards in the year to 31 March
2011 are intended to be made in accordance with the
existing arrangements described above.
The Committee may also make grants of restricted
shares, subject only to a forfeiture condition on
departure from the Company within a specified period.
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8282
(d) Co-investment and carried interest plans
3i’s co-investment and carried interest plans provide
long-term incentives for senior executives other than
the Chief Executive and Finance Director. The Chief
Executive and Finance Director are not currently eligible
to participate, although Mr Queen has retained certain
interests acquired prior to his appointment as Chief
Executive, details of which are provided on pages
87 and 88.
(e) Employee Share Investment Plan
As part of the arrangements for the Company’s rights
issue, the Committee approved an Employee Share
Investment Plan to create alignment between
employees and shareholders. The plan allowed
employees who took up their rights and agreed to
subscribe for additional shares at full market price to
receive an award of matching shares, subject to a three
year performance condition. Executive Directors were
able to acquire shares in the Company at full market
price but were not eligible to receive the award of
matching shares.
Performance graphs
1 TSR graph:
This graph compares the Company’s total shareholder return (“3i TSR”) for the five financial years to 31 March
2010 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.
3i total shareholder return versus FTSE All-Share total return
(cumulative)
180
140
100
60
20
3i
2005
2006
2007
2008
2009
2010
FTSE All-Share
Rebased at 100 at 1 April 2005
2 Diluted NAV graph:
This graph compares percentage changes in the Company’s diluted net asset value (“NAV”) per share over each of
the last five financial years (with dividends reinvested) with the FTSE All-Share Index total return over the same
periods. This has been included as NAV growth is one of the tests used in the Company’s long-term incentive
schemes. NAV prior to June 2009 has been adjusted to reflect the rights issue in June 2009.
3i diluted NAV versus FTSE All-Share total return
% (non-cumulative)
60
40
20
0
-20
-40
-60
2006
2007
2008
2009
2010
3i diluted NAV (with dividends reinvested)
FTSE All-Share
3i Group plc
Report and accounts 2010
83
Directors’ remuneration during the year
(note 1)
(note 2)
Salary and
fees
£’000
Bonus for
the year
£’000
Deferred share
bonus
£’000
Benefits
in kind
£’000
(note 3)
Award deferred
from prior
periods
£’000
Total
remuneration
year to
31 March 2010
£’000
Total
remuneration
year to
31 March 2009
£’000
Executive Directors (note 5)
M J Queen
J S Wilson
Chairman and non-executive Directors (note 7)
Baroness Hogg
J M Allan (from 1 September 2009)
A R Cox (from 1 October 2009)
R H Meddings
W Mesdag
C J M Morin-Postel
R W A Swannell
Former Directors
S P Ball (until 30 November 2008)
Lord Smith of Kelvin (until 30 October 2009)
F G Steingraber (until 9 July 2008)
O H J Stocken (until 31 December 2009) (note 6)
P E Yea (until 27 January 2009) (note 4)
570
291
282
41
27
55
55
58
82
–
44
–
73
–
550
481
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
1,578
550
481
2
2
–
–
–
–
–
–
–
–
–
–
–
–
4
375
–
–
–
–
–
–
–
–
–
–
–
–
–
1,978
293
1,252
207
282
287
41
27
55
55
58
82
–
44
–
73
–
–
–
32
63
60
71
568
75
17
109
927
375
2,988
3,668
Notes:
1 Deferred share bonuses relating to the year to 31 March 2010 will be paid in ordinary shares in the Company, deferred for two years.
2 “Benefits in kind” were health insurance (Mr M J Queen and Mrs J S Wilson).
3 The £375,000 award shown for Mr M J Queen represented the exceptional payment deferred from 2007/08 described in note 2 on page 88 and paid in July 2009.
4 Amounts payable to former Directors were as follows: Mr P E Yea, £853,600 (comprising amounts payable post-cessation of employment in accordance with his
employment contract) and Dr P Mihatsch, £35,414 (Chairman of the Company’s German Advisory Board).
5 As at 31 March 2010, executive Directors’ salaries were as follows: Mr M J Queen, £550,000 per annum and Mrs J S Wilson, £400,000 per annum. Mrs Wilson was on
leave of absence for maternity during part of the year.
6 Fees for Mr O H J Stocken (to 31 December 2009) included £11,250 as Chairman of Gardens Pension Trustees Limited, a trustee of the 3i Group Pension Plan.
7 During the year, non-executive Directors took part of their basic fee in ordinary shares; for the Chairman this amounted to 8,000 shares and for non-executive Directors
1,600 shares (pro-rated for Directors who did not serve the full year). Figures in the table include the market value at the date of receipt in November 2009.
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Report and accounts 2010
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Governance Directors’ remuneration report
8484
Share options over ordinary shares held by Directors during the year:
M J Queen
Date of grant
06.07.99
Held at
1 April
2009
36,002
Granted during
the year
–
28.06.00
30,795
27.06.02
131,603
25.06.03
23.06.04
21.06.05
57,218
89,552
44,733
09.02.09
936,170
15.06.09
–
1,326,073
J S Wilson
11.01.06
13,113**
14.06.06
8,433**
18.06.07
21,303**
23.06.08
26,537**
12.11.08
249,739
15.06.09
–
319,125
–
–
–
–
–
–
595,667
595,667
–
–
–
–
–
288,808
288,808
Adjustment
during the
year (rights
issue)
21,812
18,657
79,734
34,666
54,256
27,102
567,201
–
–
–
–
–
–
49,452
211,337
91,884
143,808
71,835
– 1,503,371*
–
595,667
803,428
57,814
2,667,354
7,944
5,109
12,906
16,078
151,310
–
–
21,057
13,542
–
–
–
–
–
34,209
42,615
401,049
288,808
193,347
13,542
787,738
Lapsed during
the year
57,814
Held at
31 March
2010
–
Exercise price
£
4.53
Earliest normal
exercise
date
06.07.02
Expiry date
05.07.09
8.56
4.19
3.54
3.76
4.32
2.18
2.77
5.58
5.21
7.31
5.16
2.99
2.77
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
15.06.12
14.06.19
11.01.09
10.01.16
14.06.09
13.06.16
18.06.10
17.06.17
23.06.11
22.06.18
12.11.11
11.11.18
15.06.12
14.06.19
No options were exercised by Directors during the year.
The performance condition has not been met for those options shown in blue.
* The exercise price of these options was set approximately 50% above the market price at date of grant.
**Awarded before appointment as a Director.
Notes
1 Options granted before 1 April 2001 vested provided a performance condition was met over a rolling three-year period. This required adjusted net asset value per share
(with dividends reinvested) 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 vest subject to a performance condition, measured over a three-year performance period, relating to annual percentage compound
growth in net asset value per share with dividends reinvested, relative to the annual percentage change in RPI, as shown below. For options granted after 31 March 2004
there is no opportunity for the performance condition to be retested after the three-year period. The Committee determines the fulfilment of performance conditions
based on calculations independently reviewed by the Company’s auditors.
Award granted
Since 31 March 2005
NAV growth required
for minimum vesting
RPI + 3 percentage points
% vesting
30%
In year to
31 March 2005
Between
1 April 2001 and
31 March 2004
RPI + 3 percentage points
RPI + 5 percentage points
50%
50%
NAV growth required
for maximum vesting
RPI + 8
percentage points
RPI + 8
percentage points
RPI + 10
percentage points
For NAV growth between
minimum and maximum
vesting levels
The grant vests pro rata
% vesting
100%
100%
The grant vests pro rata
100%
The grant vests pro rata
3 Fair values of awards granted in the year (calculated by the remuneration adviser using a Black-Scholes valuation) were as follows: Mr M J Queen, £280,500 and
Mrs J S Wilson, £136,000. The fair value of the share options granted during the year was calculated as 17% of the market value at the date of grant of the shares
under option.
4 The market price of ordinary shares in the Company at 31 March 2010 was 291.2p and the range during the period 1 April 2009 to 31 March 2010 (adjusted for the
rights issue) was 310.7p to 175.5p. No gains were made by the highest paid Director (2009: nil) or by the Directors in aggregate (2009: nil).
5 As at 31 March 2010:
– 18.74 million ordinary shares had been issued or remained issuable in respect of executive (discretionary) schemes within the past 10 years. This was within the 5%
dilution limit suggested by the Association of British Insurers.
– 20.89 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 suggested by the Association of British Insurers.
6 Options granted before June 2009 were adjusted, in connection with the Company’s nine for seven rights issue in June 2009, on the basis that option holders should be
neither advantaged nor disadvantaged by the rights issue. The number of shares under option was increased by a factor of 1.605875 and the exercise price per share was
reduced by a factor of 0.622713.
3i Group plc
Report and accounts 2010
85
Performance and Super-performance Shares awards held by Directors during the year:
Date of
award
Held at
1 April 2009
B
Ord
Granted/Issued
during the year
B
Ord
Adjustment
during the year
(rights issue)
B
Ord
Lapsed during
the year
B
Ord
Held at
31 March 2010
B
Ord
(a) Performance Shares
M J Queen 06.02.09 702,127
–
–
– 425,401
15.06.09
–
– 202,205
–
–
702,127
– 202,205
– 425,401
J S Wilson 23.06.08 46,988*
12.11.08 124,869
–
–
–
–
– 28,468
– 75,655
15.06.09
–
– 147,058
–
–
171,857
– 147,058
– 104,123
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,127,528
–
202,205
– 1,329,733
–
–
–
–
75,456
200,524
147,058
423,038
(b) Super-performance Shares
M J Queen 29.11.06
70,175 113,518
70,175 113,518
No awards vested during the year.
*Awarded before appointment as a Director.
–
–
–
–
–
–
– 70,175 113,518
– 70,175 113,518
–
–
–
–
–
–
–
–
–
–
–
Market
price on
date of
grant
£
Ord
Date of
vesting
2.35 06.02.12
2.72 15.06.12
8.29 23.06.11
4.81 12.11.11
2.72 15.06.12
9.69 29.11.11
Notes
1 The fair values (calculated using a Monte Carlo simulation) of Performance Shares awards made in the year were as follows: Mr M J Queen, £242,000 and Mrs J S Wilson,
£176,000. The fair value of the Performance Shares awarded during the year was calculated as 51% of the market value at the date of award of the shares subject to
the award.
2 The performance condition relating to Performance Shares awards is based on a 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 reinvested), as below:
Growth in value for Company versus FTSE 100 (as described above)
Below the FTSE 100
Same as the FTSE 100*
8% p.a. above the FTSE 100*
*Between these levels, awards vest pro rata.
% of award vesting
Zero
35%
100%
3 The Super-performance Shares award shown above was subject to a particularly challenging performance condition and lapsed unvested during the year.
4 Awards granted before June 2009 were adjusted, in connection with the Company’s nine for seven rights issue in June 2009, on the basis that award holders should be
neither advantaged nor disadvantaged by the rights issue. The number of shares comprised in relevant awards was increased by a factor of 1.605875.
5 B shares comprised in the Super-performance Shares award shown above resulted from the bonus issue of B shares in 2007.
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Report and accounts 2010
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Governance Directors’ remuneration report
8686
Share Incentive Plan
Participants in the HM Revenue & Customs approved Share Incentive Plan 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
reinvested in further ordinary shares (“dividend shares”). Directors’ participation is shown below:
Held at
1 April 2009:
Partnership
Shares
Held at
1 April 2009:
Matching
Shares
Held at
1 April 2009:
Dividend
Shares
Held at
31 March 2010:
Partnership
Shares
Held at
31 March 2010:
Matching
Shares
Held at
31 March 2010:
Dividend
Shares
M J Queen
J S Wilson
Ord
B
1,282
1,527
642
344
Ord
2,562
1,284
B
3,082
689
Ord
415
60
B
490
4
Ord
1,830
1,139
B
975
344
Ord
3,658
2,278
B
1,998
690
Ord
435
71
B
20
4
Notes
1 From 1 April 2010 to 1 May 2010, Mr M J Queen and Mrs J S Wilson each acquired a further 46 partnership ordinary shares and 92 matching ordinary shares.
2 Ordinary shares were awarded in the year at prices between 239.2p and 313.2p per share, with an average price of 273.7p per share.
3 B shares held within the plan result from the bonus issues of B shares in 2006 and 2007.
Pension arrangements
The Chief Executive and Finance Director were members of the 3i Group Pension Plan, a defined benefit contributory scheme, in the year to
31 March 2010. 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. Further details of the Plan are set out in note 9 to the financial statements
on pages 104 to 106.
(note 1)
(note 2)
(note 1)
(note 3)
(note 3)
Increase in
accrued
pension
(excluding
inflation)
during the
year to
31 March
2010
£’000 pa
10.7
Total accrued
pension at
31 March
2010
£’000 pa
242.7
Director’s
own
contributions
(excluding
AVCs) paid
into the Plan
during the
year to
31 March
2010
£’000 pa
20.0
Increase in
accrued
pension
(including
inflation)
during the
year to
31 March
2010
£’000
10.7
Transfer
value of the
accrued
benefits at
31 March
2010
£’000
4,395.7
Difference
between
transfer
values at start
and end
of the
accounting
year, less
Director’s
contribution
£’000
449.4
Transfer
value of the
accrued
benefits at
31 March
2009
£’000
3,926.3
Transfer value
at the end of
the year of
the increase
in accrued
benefits
during the
years less
Director’s
contribution
£’000
170.3
Complete
years of
pensionable
service at
31 March
2010
22
Age at
31 March
2010
48
42
4
2.9
10.5
4.7
2.9
144.6
98.2
41.7
34.7
M J Queen
J S Wilson
Notes
1 The increase in accrued pension shown reflects the difference between deferred pensions on leaving, payable from age 60.
2 The pensions shown are deferred pensions payable from the Normal Retirement Age of 60.
3 The transfer values have been calculated on the basis of actuarial advice in accordance with pensions regulations.
4 Additional voluntary contributions are excluded from the above table.
3i Group plc
Report and accounts 2010
87
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 as follows:
Dates of contracts
Notice period – by the Director
– by the Company
Termination payments
Mr M J Queen:
Mrs J S Wilson:
31 March 2009
1 October 2008
– 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 are no provisions for compensation of executive Directors on early termination save as
follows: (a) the contract for Mr Queen contains 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 entitle the Company to give pay in lieu of notice.
Arrangements relating to Mr Queen’s previous responsibilities
Before appointment as Chief Executive in January 2009 Mr Queen had been awarded interests in arrangements relating to his
responsibilities as Managing Partner, Infrastructure and, before that, Managing Partner, Growth Capital. These are set out below. Mr Queen
is no longer eligible to receive awards under the Infrastructure Incentive Plan or to participate in future carried interest and co-investment
arrangements.
Plan interests, being the percentage of the bonus pool in which
the participant is interested
Award as at
1 April 2009
(%)
Awarded in year
(%)
As at
31 March 2010
(%)
End of period
over which
interests
may vest
Amounts received
in respect
of plan
interests in year
£’000
Amounts receivable
in respect of
plan interests
in future years
£’000
M J Queen
Infrastructure Incentive Plan
Vintage year 2007/08
Vintage year 2008/09
22.34
15.5
–
–
22.34
15.5
Fully vested
Fully vested
762
643
762
643
Note
Under the Infrastructure Incentive Plan executives are granted a percentage interest in a bonus pool, provided they invest certain of their own monies in 3i Infrastructure plc
shares. Mr Queen has invested £1 million since March 2007. Since his appointment as Chief Executive in January 2009, Mr Queen has not been eligible to receive further
awards under this plan. Amounts receivable under plan interests are payable as follows: for vintage year 2007/08, 50% was paid in July 2008 and 50% was deferred across
the two following financial years; for vintage year 2008/09, 50% was paid in July 2009 and 50% was deferred across the two following financial years.
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Report and accounts 2010
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Governance Directors’ remuneration report
8888
Amounts co-invested
Plan 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
2010
£’000
As at
1 April 2009
(%)
Awarded in
year
(%)
Forfeited in
year
(%)
As at
31 March
2010
(%)
End of period
over which
interests
may vest
Amounts
receivable in
respect of
plan interests
vested in
year
£’000
Accrued
value of plan
interests as
at 31 March
2010
£’000
M J Queen
Co-investment plans
Global Growth Co-invest
2006-08 plans
Carried interest plans
Pan-European Growth Capital
2005/06
Infrastructure 2005/06
Primary Infrastructure
2005/06
Global Growth
2006-08 plans
–
–
–
–
–
Combined carried interest and co-investment plans
Global Growth 2008-10
India Infrastructure 2007-10
0
57
Notes
1 Co-investment plans
–
–
–
–
7
191
97
0.023
0.44
0.69
0.53
0.34
0.03
1.00
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.023
31.07.08
Nil
Nil
0.44
0.69
31.03.10
16.05.10
0.53
19.08.10
0.34
31.03.11
0.03
1.00
31.03.13
30.09.12
222
267
Nil
Nil
Nil
Nil
94
196
108
Nil
Nil
687
Mr Queen ceased to be eligible to make any further related co-investment in the Global Growth Co-invest 2006-08 plans with effect from April 2007, following his
appointment as Managing Partner, Infrastructure.
2 Carried interest plans
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. 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 third payment as part of this arrangement, in respect of 2009/10, is set out in note 3 to
the table on page 83.
3 Combined carried interest and co-investment plans
Following his appointment as Chief Executive in January 2009, Mr Queen forfeited a proportion of his interests in the Global Growth 08-10 and India Infrastructure
07-10 plans.
4 General
Accrued values of plan interests are calculated on the basis set out in note 5 on page 100. Accrued values can increase and decrease with investment valuations and other
factors and will not necessarily lead to an actual payment to the participant.
Audit
The tables in this report (including the notes thereto) on pages 83 to 88 have been audited by Ernst & Young LLP.
By Order of the Board
John Allan Chairman, Remuneration Committee
12 May 2010
3i Group plc
Report and accounts 2010
89
Financial statements
Statement of comprehensive income
Statement of changes in equity
Balance sheet
Cash flow statement
Significant accounting policies
Notes to the financial statements
Independent auditor’s report to the members of 3i Group plc
89-128
90
91
92
93
94
98
128
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Notes
2
3
4
1
1
5
5
10
10
11
2010
£m
218
458
676
59
110
(2)
843
59
30
(88)
(221)
623
12
(124)
9
(359)
(2)
2009
£m
63
(2,440)
(2,377)
65
108
(2)
(2,206)
75
(3)
56
(250)
(2,328)
34
(120)
(38)
505
3
159
(1,944)
12
(5)
(4)
154
(1,948)
324
–
(71)
253
407
97
(14)
324
407
17.2
17.1
(190)
(4)
(8)
(202)
(2,150)
99
(2,059)
(190)
(2,150)
(318.7)1
(318.7)1
9
28
28
Financial statements
9090
Statement of comprehensive income
for the year to 31 March
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable/(payable)
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
Profit/(loss) before tax
Income taxes
Profit/(loss) for the year
Other comprehensive income
Exchange differences on translation of foreign operations
Revaluation of own-use property
Actuarial loss
Other comprehensive income for the year
Total comprehensive income for the year (“Total return”)
Analysed in reserves as:
Revenue
Capital
Translation reserve
Earnings per share
Basic (pence)
Diluted (pence)
1 Restated to reflect the impact of the bonus elements of the rights issue and the acquisition of 3i QPEP.
The rates and amounts of dividends paid and proposed are shown in note 29.
3i Group plc
Report and accounts 2010
91
Statement of changes in equity
for the year to 31 March
Total equity at the start of the year
Profit/(loss) for the year
Exchange differences on translation of foreign operations
Revaluation of own-use property
Actuarial loss
Total comprehensive income for the year
Equity settled call option
Share-based payments
Own shares
Ordinary dividends
Issues of ordinary shares
Total equity at the end of the year
Notes
26
26
26
26
26
26
26
29
26
Group
2010
£m
1,862
154
324
–
(71)
407
–
9
(9)
(9)
808
3,068
Group
2009
£m
4,057
(1,948)
(190)
(4)
(8)
Company
2010
£m
2,278
111
–
–
–
Company
2009
£m
3,930
(1,602)
–
(3)
–
(2,150)
111
(1,605)
5
3
2
(64)
9
–
–
–
(9)
808
5
3
–
(64)
9
1,862
3,188
2,278
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Report and accounts 2010
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Financial statements
9292
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
Convertible bonds
B shares
Subordinated liabilities
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest payable
Loans and borrowings
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
12 May 2010
3i Group plc
Report and accounts 2010
Notes
Group
2010
£m
Group
2009
£m
Company
2010
£m
Company
2009
£m
13
13
13
14
15
16
18
19
20
21
22
9
12
24
23
19
18
24
25
26
26
26
26
26
26
26
27
312
1,818
1,387
3,517
75
–
17
611
1,970
1,469
4,050
44
–
22
312
423
313
1,048
75
2,347
4
551
715
303
1,569
44
2,641
4
3,609
4,116
3,474
4,258
74
–
728
1,524
2,326
5,935
70
10
59
675
814
4,930
227
–
713
1,427
2,367
5,841
176
10
26
545
757
5,015
(61)
(51)
–
–
(1,964)
(1,793)
(1,721)
(1,522)
(363)
(384)
(6)
–
(28)
(2)
(10)
(12)
(7)
(18)
–
(18)
(363)
(6)
(384)
(12)
–
–
–
–
–
–
–
–
(2,434)
(2,283)
(2,090)
(1,918)
(176)
(70)
(125)
(52)
(3)
(7)
(255)
(61)
(349)
(112)
(3)
(5)
(386)
(358)
–
(125)
(52)
–
–
–
(349)
(112)
–
–
(433)
(785)
(563)
(819)
(2,867)
(3,068)
(2,653)
(2,737)
3,068
1,862
3,188
2,278
717
779
43
24
145
959
482
5
(86)
284
405
42
20
(179)
968
394
5
(77)
717
779
43
20
–
1,328
296
5
–
284
405
42
20
–
1,256
266
5
–
3,068
1,862
3,188
2,278
Notes
Group
2010
£m
Group
2009
£m
Company
2010
£m
Company
2009
£m
(190)
1,315
(827)
1,308
(354)
1,417
(777)
1,072
28
28
16
59
(2)
56
3
(57)
(251)
(3)
946
110
732
(33)
18
(9)
(6)
(9)
12
(124)
–
–
351
(205)
(77)
(144)
(34)
(669)
(87)
(1)
–
(1)
858
675
(9)
1,524
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
11
36
–
–
3
–
(184)
(1)
928
110
732
(33)
18
–
(6)
(9)
11
(121)
–
–
351
(152)
(77)
(144)
(34)
(687)
(41)
–
–
–
887
545
(5)
1,427
14
46
–
–
43
–
(144)
–
254
–
–
–
9
–
(9)
(64)
28
(79)
(78)
29
686
(566)
–
(46)
(249)
(1)
(340)
–
–
–
(86)
611
20
545
93
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 paid
Fees received from external funds
Carried interest received
Carried interest paid
Operating expenses
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Net proceeds from liquidation of 3i QPEP
Proceeds from nine for seven rights issue
Fees paid for the nine for seven rights issue
Proceeds from issues of share capital
(Purchase)/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
Repurchase 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
Purchase of property, plant and equipment
Sale of property, plant and equipment
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of the year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of the year
3i Group plc
Report and accounts 2010
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Financial statements
9494
Significant accounting policies
3i Group plc (the “Company”) is a company incorporated in Great Britain and registered in England and Wales. The consolidated financial statements for the year to
31 March 2010 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 12 May 2010.
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 2006.
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:
IAS 27
IAS 39
IFRS 3
Amendment – Consolidation and Separate Financial Statements
Eligible Hedged Items
Business Combinations (Revised)
IFRIC 17
Distributions of Non-Cash Assets to Owners
Effective for period beginning on or after
1 July 2009
1 July 2009
1 July 2009
1 July 2009
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 adopt early.
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), note 13 and note 17.
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. The statement of comprehensive
income of the Company has been omitted from these financial statements in accordance with section 408 of the Companies Act 2006.
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
statement of comprehensive income 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 venturers’ 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 are accounted for in accordance with IAS 39, with changes in fair value recognised in the
statement of comprehensive income in the period of the change.
3i Group plc
Report and accounts 2010
95
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 statement of comprehensive income. 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 in other comprehensive income and accumulated within 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 statement of comprehensive income when the shareholders’ rights to receive payment have been
established.
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.
3i Group plc
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Financial statements Significant accounting policies
9696
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 recognised in other comprehensive income and credited to the Capital reserve
except to the extent that it reverses a previous valuation deficit on the same asset recognised in profit or loss in which case the surplus is recognised in profit or loss 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 recognised in the statement of comprehensive income.
Depreciation on revalued buildings is charged in the statement of comprehensive income 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 statement of comprehensive income 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 exchange 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 statement of comprehensive income.
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 statement of comprehensive income. Interest payable on
subordinated liabilities is charged as it accrues by reference to the principal outstanding and the effective interest rate applicable.
3i Group plc
Report and accounts 2010
97
J Employee benefits
(i) Retirement benefit costs
Payments to defined contribution retirement benefit plans are charged to the statement of comprehensive income 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 statement of comprehensive income. Actuarial gains or losses are recognised in full as they arise in other
comprehensive income.
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 statement of comprehensive income 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 statement of comprehensive income, 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 statement of comprehensive income. 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 statement of
comprehensive income 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 statement of comprehensive
income, except where it relates to items charged or credited directly to equity, in which case the tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year. This may differ from the profit included in the statement of comprehensive income because it
excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. 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.
3i Group plc
Report and accounts 2010
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Financial statements
9898
Notes to the financial statements
1 Segmental analysis
Year to 31 March 2010
Gross portfolio return1
Realised profits/(losses) over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable/(payable)
Fees receivable from external funds
Net (investment)/divestment
Realisations
Investment
Balance sheet
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Portfolio
£m
223
249
–
78
–
550
39
467
(243)
224
(14)
145
36
29
(2)
194
–
578
(121)
457
–
84
15
1
–
100
20
46
(2)
44
–
–
–
–
–
–
–
–
–
–
–
Total
£m
218
458
59
110
(2)
843
59
1,385
(386)
999
15
8
8
2
–
33
–
69
(1)
68
(6)
(28)
–
–
–
(34)
–
225
(19)
206
Value of investment portfolio at the end of the year
1,614
1,331
407
107
58
3,517
Year to 31 March 2009
Gross portfolio return1
Realised profits/(losses) 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/(payable)
Fees receivable from external funds
Net (investment)/divestment
Realisations
Investment
Balance sheet
Buyouts
£m
Growth
Capital
£m
Infrastructure
£m
Quoted
Private
Equity
£m
Smaller
Minority
Investments
£m
Venture
Portfolio
£m
Total
£m
255
(66)
(995)
(1,029)
1
64
(3)
25
33
2
(678)
(1,035)
45
1
494
(519)
(25)
461
(343)
118
(20)
(62)
26
6
–
(50)
26
117
(50)
67
–
26
–
–
–
26
3
–
(3)
(3)
4
(68)
9
2
–
(53)
–
27
–
27
(110)
(312)
63
(2,440)
4
3
(1)
65
108
(2)
(416)
(2,206)
–
75
209
(53)
156
1,308
(968)
340
Value of investment portfolio at the end of the year
1,467
1,574
371
171
153
314
4,050
1 The segmental profit or loss reported in accordance with IFRS 8 Operating Segments, is defined as gross portfolio return.
The Group organises its activity by business line and these are defined as the Group’s reportable segments under IFRS 8, Operating Segments. The business lines are
determined with reference to market focus, geographic focus and investment funding model as defined on page 7.
The assets within the Quoted Private Equity business line were transferred to the Growth Capital business line in the year to 31 March 2010 as part of the solvent
liquidation of 3i Quoted Private Equity plc. Details of this transaction can be found in note 28.
3i Group plc
Report and accounts 2010
Value of investment portfolio at the end of the year
1,327
1,381
509
294
99
1 Segmental analysis (continued)
Year to 31 March 2010
Gross portfolio return
Realised profits/(losses) over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Fees receivable from external funds
Net (investment)/divestment
Realisations
Investment
Balance sheet
Year to 31 March 2009
Gross portfolio return
Realised profits/(losses) over value on the disposal of investments
Unrealised losses on the revaluation of investments
Portfolio income
Fees receivable from external funds
Net (investment)/divestment
Realisations
Investment
Balance sheet
UK
£m
Continental
Europe
£m
Asia
£m
North
America
£m
Rest of World
£m
41
201
104
346
41
621
(222)
399
150
115
35
300
9
542
(118)
424
27
75
2
104
9
134
(25)
109
1
69
26
96
–
84
(19)
65
UK
£m
Continental
Europe
£m
51
185
(660)
(1,195)
38
Asia
£m
(60)
(238)
13
North
America
£m
Rest of World
£m
(113)
(331)
5
(16)
(2,440)
–
171
R
i
s
k
115
(494)
47
280
(316)
(36)
(972)
(285)
(439)
(16)
(2,206)
19
9
–
795
(539)
256
127
(46)
81
106
(63)
43
–
–
(4)
(4)
75
1,308
(968)
340
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Total
£m
218
458
167
843
59
1,385
(386)
999
3,517
Total
£m
63
(1)
(2)
–
(3)
–
4
(2)
2
6
–
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Value of investment portfolio at the end of the year
1,719
1,618
491
209
13
4,050
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Report and accounts 2010
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Financial statements Notes to the financial statements
100100
2 Realised profits over value on the disposal of investments
Realisations
Valuation of disposed investments
Investments written off
2010
Unquoted
equity
£m
701
(527)
(32)
142
2010
Quoted
equity
£m
389
(279)
–
110
2010
Loans and
receivables
£m
2010
Total
£m
295
1,385
(283)
(1,089)
(46)
(34)
(78)
218
2009
Unquoted
equity
£m
1,023
(896)
(14)
113
2009
Quoted
equity
£m
172
(214)
–
(42)
2009
Loans and
receivables
£m
2009
Total
£m
113
1,308
(117)
(1,227)
(4)
(8)
(18)
63
Loans and receivables include net proceeds of £64 million (2009: £nil) and realised profits of £55 million (2009: £nil) from variable funding notes relating to the
Debt Warehouse.
3 Unrealised profits/(losses) on the revaluation of investments
Movement in the fair value of equity
Provisions, loan impairments and other movements1
2010
Unquoted
equity
£m
321
(24)
297
2010
Quoted
equity
£m
2010
Loans and
receivables
£m
77
–
77
–
84
84
2010
Total
£m
398
60
458
2009
Unquoted
equity
£m
(1,323)
(110)
2009
Quoted
equity
£m
(126)
–
(1,433)
(126)
2009
Loans and
receivables
£m
2009
Total
£m
–
(1,449)
(881)
(881)
(991)
(2,440)
1 Included within loan impairments is a £45 million value increase for variable funding notes relating to the Debt Warehouse (2009: £112 million value reduction).
Provisions have been recognised only on investments where it is considered there is a greater than 50% risk of failure. All other equity value movements are included
within the movement in the fair value of equity.
4 Fees receivable/(payable)
Fees receivable
Deal-related costs
2010
£m
5
(7)
(2)
2009
£m
13
(15)
(2)
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 of acquiring an investment.
5 Carried interest
Carried interest receivable from external funds
Carried interest and performance fees payable
2010
£m
30
(88)
(58)
2009
£m
(3)
56
53
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.
In the year to March 2009 the performance in some schemes resulted in a reversal of the accrual previously recognised resulting in a £56 million credit.
3i Group plc
Report and accounts 2010
101
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
Other assurance services
Investment due diligence
Tax services (compliance and advisory services)
2010
£m
5
2
137
13
2009
£m
7
2
110
45
2010
£m
2009
£m
0.7
0.7
0.3
0.2
1.9
0.7
0.1
0.5
3.2
0.6
0.5
0.4
0.1
1.6
–
0.3
0.2
2.1
Non-audit services
These services are services that could be provided by a number of firms, including rights issue advisory work and 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 20% 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 (2009: less than £0.1 million).
7 Staff costs
Wages and salaries
Social security costs
Share-based payment costs (note 8)
Pension costs
2010
£m
110
14
3
10
2009
£m
73
11
12
14
137
110
The average number of employees during the year was 530 (2009: 702).
Wages and salaries shown above include salaries paid in the year, bonuses and portfolio incentive schemes relating to the year. In the year to 31 March 2009 a minimal
bonus was accrued, reflecting the performance of the Group. These costs are included in operating expenses.
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Report and accounts 2010
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Financial statements Notes to the financial statements
102102
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 statement of comprehensive income is shown below:
Share options1
Performance shares1
Share incentive plan
Deferred bonus shares2
2010
£m
2009
£m
–
–
1
2
3
1
2
1
8
12
1 Credited to equity.
2 Deferred bonus shares in 2009 have since been transferred through 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 the start of the year
Granted
Exercised
Lapsed
Outstanding at the end of year
Exercisable at the end of year
2010
Number of
share options
21,077,816
3,390,270
–
(6,689,584)
17,778,502
7,434,393
2010
Weighted
average
exercise price
(pence)
472
277
–
468
436
445
2009
Number of
share options1
20,197,287
5,020,705
(1,980,794)
(2,159,382)
21,077,816
11,906,040
2009
Weighted
average
exercise price
(pence)1
486
414
412
534
472
444
Included within the total number of share options are options over 2 million (20091: 3 million) shares that have not been recognised in accordance with IFRS 2 as the
options were granted on or before 7 November 2002.
1 Both the number of options and their respective share prices have been restated to reflect the 12 June 2009 rights issue using the adjustment factor of 0.6227.
3i Group plc
Report and accounts 2010
103
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
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010
Weighted
average
exercise
price
(pence)
–
845
557
417
355
373
434
603
725
413
277
436
2010
Number
–
791,154
4,978
1,123,898
1,341,421
2,080,419
2,036,659
55,864
2,013,373
4,965,014
3,365,722
2009
Weighted
average
exercise
price
(pence)1
518
844
557
403
356
371
430
523
725
413
–
2009
Number1
657,068
1,104,367
14,935
1,599,279
1,547,557
3,312,650
3,670,184
2,162,688
2,023,552
4,985,536
–
17,778,502
472
21,077,816
1 Both the number of options and their respective exercise prices have been restated to reflect the 12 June 2009 rights issue using the adjustment factor of 0.6227.
Options are exercisable at a price based on the market value of the Company’s shares on the date of grant.
No options were exercised during the year. The weighted average share price at the date of exercise in 2009 was 872p. The options outstanding at the end of the
year have a weighted average contractual life of 6.45 years (20091: 6.33 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 124p (20091 : 241p). 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 (%)
2010
268
52
8.5
3.9
2.4
20091
636
47
8.5
4.6
3.6
1 The fair value of options and the assumptions for 2009 have not been adjusted for the rights issue.
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.
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3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
104104
8 Share-based payments (continued)
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 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 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).
Employee Share Investment Plan
As part of the rights issue, eligible employees could subscribe to between £5,000 and £1.5 million of ordinary shares. Employees would then be granted one matching
share for every two ordinary shares purchased, which are normally subject to forfeiture if the employee ceases to be employed (other than by reason of retirement)
within three years of grant. The matching shares are also subject to the condition that fully diluted NAV per share grows by 35% or more between 31 March 2009 and
31 March 2012.
Deferred Bonus Share Plan
Certain employees receive an element of their bonus as shares. These shares are held in trust for two years by the trustee of the 3i Group Employee Trust in a nominee
capacity. The fair value of the deferred shares is the share price at date of the award.
Employee Trust
The Group has established the 3i Group Employee Trust which holds shares in 3i Group plc to meet its obligations under certain share schemes. The share schemes which
use this trust are the 3i Group Discretionary Share Plan and the Deferred Bonus Share Plan.
9 Retirement benefit deficit
Retirement benefit plans
(i) Defined contribution plans
The Group operates a number of defined contribution retirement benefit plans for qualifying employees throughout the Group. The assets of these plans are held
separately from those of the Group. The employees of the Group’s subsidiaries in France are members of a state-managed retirement benefit plan operated by the
country’s government. The French subsidiary is required to contribute a specific percentage of payroll costs to the retirement benefit scheme to fund the benefits.
The total expense recognised in profit or loss is £3 million (2009: £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 will close to the future accrual of benefits by members with effect 5 April 2011, although the final salary link will be maintained on existing accruals.
Members of the plan have been invited to join the Group’s defined contribution plan with effect from 5 April 2011. 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 2010.
3i Group plc
Report and accounts 2010
105
9 Retirement benefit deficit (continued)
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 the Plan assets
2010
5.5%
6.1%
3.8%
3.6%
6.2%
2009
6.7%
5.7%
3.6%
3.2%
6.2%
The post-retirement mortality assumptions used to value the benefit obligation at 31 March 2010 are based on 80% PNA medium cohort (2009: 80%) with 1.5% pa
minimum annual improvement “PA00 medium cohort table” (2009: 1.5% PA00 medium cohort table). The life expectancy of a male member reaching age 60 in 2030
(2009: 2029) is projected to be 34.0 (2009: 33.8) years compared to 30.5 (2009: 30.3) years for someone reaching 60 in 2010.
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 the Plan assets
Retirement benefit deficit
2010
£m
615
(587)
28
2009
£m
437
(419)
18
Included within the present value of funded obligations is £22 million in relation to the asset restriction. Amounts recognised in the statement of comprehensive income
in respect of the defined benefit plan are as follows:
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Included in operating costs
Current service cost
Included in finance costs (note 10)
Expected return on the Plan assets
Interest on obligation
Included in other comprehensive income
Actuarial loss
Asset restriction
Total actuarial loss and asset restriction
Total
The asset restriction relates to tax that would be deducted at source in respect of the surplus that arises from the present value of supplementary contributions to the
Plan agreed by the Plan trustees in excess of the Plan liabilities at 31 March 2010.
Changes in the present value of the defined benefit obligation were as follows:
2010
£m
437
5
29
145
22
1
(24)
615
2009
£m
515
8
31
(102)
–
1
(16)
437
Opening defined benefit obligation
Current service cost
Interest cost
Actuarial loss/(gain)
Asset restriction
Contributions
Benefits paid
Closing defined benefit obligation
3i Group plc
Report and accounts 2010
2010
£m
2009
£m
5
8
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49
22
71
77
(30)
31
8
–
8
17
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Financial statements Notes to the financial statements
106106
9 Retirement benefit deficit (continued)
Changes in the fair value of the Plan assets were as follows:
Opening fair value of the Plan assets
Expected returns
Actuarial gain/(loss)
Contributions
Benefits paid
Closing fair value of the Plan assets
Contributions paid to the Group Pension Plan are related party transactions as defined by IAS 24 Related party transactions.
The fair value of the Plan assets at the balance sheet date is as follows:
Equities
Gilts
Other
2010
£m
419
28
96
68
(24)
587
2010
£m
326
262
(1)
587
2009
£m
477
30
(110)
38
(16)
419
2009
£m
216
204
(1)
419
The actual return on the Plan assets for the year was a gain of £124 million (2009: loss of £79 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
the 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 the Plan assets
Deficit
Experience adjustments on the Plan liabilities
Experience adjustments on the Plan assets
2010
£m
615
(587)
28
2%
2009
£m
437
(419)
18
2%
2008
£m
515
2007
£m
480
2006
£m
472
(477)
(479)
(455)
38
1%
1
(2)%
–
17
–
11%
16%
(26)%
(6)%
The cumulative actuarial losses recognised in equity are £123 million (2009: losses £52 million).
The Group expects to make regular contributions of approximately £9 million to the Plan in the year to 31 March 2011. The triennial actuarial funding 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. In addition in April 2009 the Group agreed to provide additional contributions of £25 million per annum to the Plan until 31 March 2011.
Other retirement schemes
Employees in Germany and Spain are entitled to a pension based on their length of service. 3i Deutschland GmbH and 3i Europe Spanish branch 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 these investment
policies intended to cover pension liabilities is £10 million (2009: £11 million) and the future liability calculated by German and Spanish actuaries is £14 million (2009:
£15 million). The Group carries both the asset and liability in its consolidated financial statements and has recognised a cumulative actuarial loss of £3 million (2009:
£5 million loss). The Group recognised £1 million (2009: £1 million) in the statement of comprehensive income in respect of these schemes.
3i Group plc
Report and accounts 2010
107
10 Net interest payable
Interest receivable
Interest on bank deposits
Interest payable
Interest on loans and borrowings
Interest on convertible bonds
Amortisation of convertible bonds
Subordinated borrowings1
Net finance expense on pension plan
Net interest payable
1 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.
2010
£m
2009
£m
12
12
(85)
(16)
(21)
(1)
(1)
(124)
(112)
2010
£m
–
7
3
(1)
9
34
34
(84)
(17)
(20)
2
(1)
(120)
(86)
2009
£m
4
(46)
58
(54)
(38)
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Report and accounts 2010
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Financial statements Notes to the financial statements
108108
12 Income taxes
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income taxes in the statement of comprehensive income
2010
£m
2009
£m
(3)
(2)
(5)
(6)
2
(4)
Reconciliation of income taxes in the statement of comprehensive income
The tax charge for the year is different to the standard rate of corporation tax in the UK, currently 28% (2009: 28%), and the differences are explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax in the UK of 28% (2009: 28%)
Effects of:
Permanent differences
Short-term timing differences
Non-taxable 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 statement of comprehensive income
2010
£m
159
(45)
2009
£m
(1,944)
544
5
3
13
(3)
–
22
(5)
3
4
5
(6)
3
(557)
(4)
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 statement of comprehensive income
Tax losses utilised
Income in accounts taxable in the future
Closing deferred income tax liability
Tax losses
Income in accounts taxable in the future
2010
Group
balance
sheet
£m
2009
Group
balance
sheet
£m
9
(9)
–
8
(10)
(2)
17
(19)
(2)
5
(7)
(2)
4
(2)
2
9
(9)
–
At 31 March 2010 the Group had tax losses carried forward of £775 million (2009: £751 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% (2009: 28%).
3i Group plc
Report and accounts 2010
109
13 Investment portfolio
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Provisions and loan impairments
Other movements
Closing book value
Quoted
Unquoted
Closing book value
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Provisions and loan impairments
Other movements
Closing book value
Quoted
Unquoted
Closing book value
Group
2010
Equity
investments
£m
2,581
61
Group
2010
Loans and
receivables
£m
1,469
325
Group
2010
Total
£m
4,050
386
(838)
(329)
(1,167)
398
(24)
(48)
2,130
312
1,818
2,130
Group
2009
Equity
investments
£m
4,098
489
(1,124)
(1,449)
(110)
677
2,581
611
1,970
2,581
–
84
398
60
(162)
(210)
1,387
–
1,387
1,387
Group
2009
Loans and
receivables
£m
1,918
479
3,517
312
3,205
3,517
Group
2009
Total
£m
6,016
968
(881)
74
1,469
–
1,469
1,469
(991)
751
4,050
611
3,439
4,050
(121)
(1,245)
–
(1,449)
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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 £183 million (2009: £4 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, and the impact of the solvent liquidation of 3i QPEP.
Included within the statement of comprehensive income are foreign exchange losses of £359 million (2009: £505 million gain). This includes exchange movements on
non-monetary items (eg equity investment portfolio) and on monetary items (eg non-sterling loans and borrowings). Of this, foreign exchange losses on monetary items
not measured at fair value total £105 million (2009: £231million).
Fair value hierarchy
The Group classifies financial instruments measured at fair value in the investment portfolio according to the following hierarchy:
Level
Level 1
Level 2
Level 3
Fair value input description
Financial instruments
Quoted prices (unadjusted) from active markets
Quoted equity instruments
Inputs other than quoted prices included in Level 1 that
are observable either directly (ie as prices) or indirectly
(ie derived from prices)
Inputs that are not based on observable market data
Unquoted equity instruments, variable funding note
Unquoted equity instruments are measured in accordance with the International Private Equity Valuation guidelines with reference to the most appropriate information
available at the time of measurement. Further information regarding the valuation of unquoted equity instruments can be found in the section Portfolio valuation –
an explanation.
The variable funding note relating to the Debt Warehouse is included within the loans and receivables balance and at 31 March 2010 had a carrying value of £75 million
(2009: £nil). In accordance with the fair value hierarchy the variable funding note is classified as Level 3. Within the year, the variable funding note had investment of
£42 million, revaluation of £45 million and foreign exchange movements of £3 million. The variable funding note also had interest income and fees of £10 million in
the year.
3i Group plc
Report and accounts 2010
Financial statements Notes to the financial statements
110110
13 Investment portfolio (continued)
The Group’s investment portfolio for equity instruments and the variable funding note is classified by the fair value hierarchy as follows:
Quoted equity
Unquoted equity
Variable funding note
Total
Group
2010
Level 1
£m
312
–
–
312
Group
2010
Level 2
£m
–
–
–
–
Group
2010
Level 3
£m
–
Group
2010
Total
£m
312
1,818
1,818
75
75
1,893
2,205
There were no transfers between Level 1, Level 2 nor Level 3 during the year.
This disclosure only relates to the investment portfolio. The fair value hierarchy also applies to derivative financial instruments, see note 18 for further details.
Level 3 fair value reconciliation
Opening book value
Additions
Disposals, repayments, write-offs
Revaluation
Other movements
Closing book value
Group
2010
£m
1,970
102
(568)
342
47
1,893
Unquoted equity investments valued using Level 3 inputs also had the following impact on the statement of comprehensive income; realised profits over value on disposal
of investment of £163 million, dividend income of £43 million and foreign exchange losses of £64 million.
Level 3 inputs are sensitive to assumptions made when ascertaining fair value as described in the Portfolio valuation – an explanation section. A reasonably possible
alternative assumption would be to apply a standard marketability discount of 5% for all assets rather than the specific approach adopted. This would have a positive
impact on the portfolio of £94 million or 5% of total unquoted equity value.
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
3i Group plc
Report and accounts 2010
Company
2010
Equity
investments
£m
Company
2010
Loans and
receivables
£m
Company
2010
Total
£m
127
2,514
2,641
38
–
(33)
(44)
–
88
445
(225)
(722)
306
(59)
483
(225)
(755)
262
(59)
2,259
2,347
Company
2009
Equity
investments
£m
Company
2009
Loans and
receivables
£m
Company
2009
Total
£m
231
35
–
(89)
(50)
–
127
2,909
3,140
547
494
582
494
(611)
(700)
(1,268)
(1,318)
443
2,514
443
2,641
111
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 (2009: £nil).
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
Group
2010
£m
Group
2009
£m
Company
2010
£m
Company
2009
£m
5
–
–
(1)
4
4
Group
2010
£m
50
1
(14)
37
33
5
(14)
24
13
Group
2010
£m
–
–
–
Group
2010
£m
–
–
9
–
–
(4)
5
5
4
–
–
–
4
4
8
–
–
(4)
4
4
Group
2009
£m
Company
2010
£m
Company
2009
£m
49
4
(3)
50
28
7
(2)
33
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Group
2009
£m
Company
2010
£m
Company
2009
£m
1
–
1
Group
2009
£m
1
–
–
–
–
–
–
–
Company
2010
£m
Company
2009
£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.
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3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
112112
16 Other current assets
Prepayments
Other debtors
Amounts due from subsidiaries
Group
2010
£m
12
62
–
74
Group
2009
£m
12
58
–
70
Company
2010
£m
Company
2009
£m
2
19
206
227
6
10
160
176
17 Financial risk management
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 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 optimise the return to shareholders
while maintaining a capital base to allow the Group 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
2010
£m
2,252
(2,510)
(258)
3,068
8%
Group
2009
£m
744
(2,656)
(1,912)
1,862
103%
Capital is managed on a consolidated basis and the gearing key performance measure 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. The Group’s capital requirement is updated annually following
approval of the Group’s Internal Capital Adequacy Assessment Process (ICAAP) report by the Board of 3i Investments plc. The 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 www.3igroup.com.
3i Group plc
Report and accounts 2010
113
17 Financial risk management (continued)
Financial risks
Concentration risk
The Group’s exposure to and mitigation of concentration risk is explained within the “investment” and ”treasury and funding” sections in the Risk section. Quantitative data
regarding the concentration risk of the portfolio across geographies can be found in note 1, segmental analysis.
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 45% 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 an appropriate
loan impairment is recorded to reflect the valuation shortfall. Further information on how credit risk is managed is given in the Risk section. In accordance with IFRS 7, 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 are 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 are 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
Movements on loan impairments and provisions are shown below.
Balance as at 31 March 2008
Other movements
Charged to income statement in year
Balance as at 31 March 2009
Other movements
Credited to income statement in year1
Balance as at 31 March 2010
Group
2010
not past
due
£m
1,541
Group
2010
up to
12 months
past due
£m
146
Group
2010
more than
12 months
past due
£m
Group
2010
Company
2010
Total
£m
52
1,739
not past
due
£m
319
(20)
(7)
(2)
(29)
(12)
(246)
1,275
(64)
75
(13)
37
(323)
1,387
(55)
252
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
Group
2009
Company
2009
Total
£m
82
2,246
not past
due
£m
401
(37)
(3)
(6)
(46)
(13)
(421)
1,291
(280)
132
(30)
46
(731)
1,469
(158)
230
Group
Provisions
£m
Group
Impairments
£m
(85)
85
(46)
(46)
17
–
(71)
175
(835)
(731)
324
84
Group
Total
£m
(156)
260
(881)
(777)
341
84
Company
2010
up to
12 months
past due
£m
Company
2010
more than
12 months
past due
£m
57
(6)
(3)
48
25
(2)
(10)
13
Company
2009
up to
12 months
past due
£m
Company
2009
more than
12 months
past due
£m
99
(3)
(48)
48
55
(6)
(24)
25
Company
2010
Total
£m
401
(20)
(68)
313
Company
2009
Total
£m
555
(22)
(230)
303
Company
Provisions
£m
Company
Impairments
£m
Company
Total
£m
(44)
33
(11)
(22)
2
–
(66)
77
(241)
(230)
114
48
(68)
(110)
110
(252)
(252)
116
48
(88)
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1 Included within impairments for the Group and Company is a £45 million value increase for variable funding notes relating to the Debt Warehouse (2009: £112 million decrease).
3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
114114
17 Financial risk management (continued)
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 gross contractual liabilities.
Financial liabilities
As at 31 March 2010
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
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
Group
Total
£m
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
Company
Total
£m
91
17
11
7
92
19
–
70
307
88
19
396
7
–
10
–
–
193
732
–
307
–
8
–
–
1,436
–
–
–
–
7
–
–
1,808
768
407
321
92
44
–
70
91
17
11
3
92
19
–
–
88
19
396
3
–
10
–
–
193
732
–
61
–
8
–
–
1,436
–
–
–
–
7
–
–
1,808
768
407
67
92
44
–
–
520
1,240
1,443
3,510
233
516
994
1,443
3,186
In the year to 31 March 2010, the Group closed out its remaining currency swaps and forward foreign exchange contracts. An analysis of gross amounts receivable and
payable under currency swaps and forward foreign currency contracts as at 31 March 2009 can be found in the 3i Group plc report and accounts 2009.
Financial liabilities
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
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
Group
Total
£m
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
Company
Total
£m
41
142
15
7
240
10
–
61
516
76
21
15
349
–
14
–
–
475
184
691
438
–
–
11
2
–
1,161
1,462
–
–
–
–
8
–
–
854
468
356
240
43
2
61
1,326
1,169
3,486
41
142
15
2
240
10
–
61
511
76
21
15
73
–
14
–
–
199
184
691
438
–
–
11
2
–
1,161
–
–
–
–
8
–
–
1,462
854
468
75
240
43
2
61
1,326
1,169
3,205
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 £4 million (2009: £5 million) for the Group and £1 million (2009: £3 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.
3i Group plc
Report and accounts 2010
115
17 Financial risk management (continued)
(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 statement of
comprehensive income
Impact on the translation of foreign operations in
other comprehensive income
Total
Net assets
Sensitivity analysis
Impact on exchange movements in the statement of
comprehensive income assuming a 5% movement in
exchange rates against sterling
Net assets
Sensitivity analysis
Assuming a 5% movement in exchange rates against sterling:
Impact on exchange movements in the statement of
comprehensive income
Impact on the translation of foreign operations in
other comprehensive income
Total
Net assets
Sensitivity analysis
Impact on exchange movements in the statement of
comprehensive income assuming a 5% movement in
exchange rates against sterling
Group
2010
Sterling
£m
1,836
Group
2010
Euro
£m
436
Group
2010
US dollar
£m
575
n/a
n/a
n/a
68
81
(44)
24
(52)
29
Company
2010
Sterling
£m
1,558
Company
2010
Euro
£m
606
Company
2010
US dollar
£m
852
Group
2010
Swedish
krona
£m
(113)
14
(9)
5
Company
2010
Swedish
krona
£m
125
45
45
7
7
Group
2010
Indian rupee
£m
Group
2010
Swiss franc
£m
94
(27)
Group
2010
Other
£m
267
Group
2010
Total
£m
3,068
–
5
5
–
1
1
3
4
7
166
(95)
71
Company
2010
Indian rupee
£m
Company
2010
Swiss franc
£m
–
–
–
2
–
–
Company
2010
Other
£m
45
Company
2010
Total
£m
3,188
2
2
85
85
Group
2009
US dollar
£m
707
Group
2009
Swedish
krona
£m
Group
2009
Indian rupee
£m
Group
2009
Swiss franc
£m
(75)
97
(8)
Group
2009
Other
£m
215
Group
2009
Total
£m
1,862
58
107
(11)
(2)
30
(46)
12
(79)
28
10
(1)
7
5
(30)
–
n/a
n/a
–
182
(138)
44
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
n/a
14
40
5
–
(8)
7
58
31
31
Group
2009
Euro
£m
176
n/a
n/a
Group
2009
Sterling
£m
750
n/a
n/a
n/a
(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 statement of comprehensive income:
Group
Company
2010
Quoted
equity
£m
16
16
2010
Unquoted
equity
£m
91
21
2010
Total
£m
107
37
2009
Quoted
equity
£m
30
28
2009
Unquoted
equity
£m
96
33
2009
Total
£m
126
61
In addition, other price risk arises from carried interest balances and the derivative element of the convertible bonds.
3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
116116
18 Derivative financial instruments
Current assets
Forward foreign exchange contracts
Call options
Current liabilities
Forward foreign exchange contracts
Currency swaps
Interest rate swaps
Derivative element of convertible bonds
Call options
Group
2010
£m
Group
2009
£m
Company
2010
£m
Company
2009
£m
–
–
–
–
–
(52)
–
–
7
3
10
(2)
(46)
(59)
(3)
(2)
–
–
–
–
–
(52)
–
–
7
3
10
(2)
(46)
(59)
(3)
(2)
(52)
(112)
(52)
(112)
Forward foreign exchange contracts and currency swaps
In the year to 31 March 2010, the Group closed out its remaining currency swaps and forward foreign exchange contracts. The Group is maintaining its policy of only
using core currency borrowings to hedge the investment portfolio.
In previous years the contracts entered into by the Group were principally denominated in the currencies of the geographic areas in which the Group operates. The fair
value of these contracts was recorded in the balance sheet and was determined by discounting future cash flows at the prevailing market rates at the balance sheet date.
No contracts were designated as hedging instruments, as defined in IAS 39, and consequently all changes in fair value were taken to the statement of comprehensive
income.
At the balance sheet date there were no notional amounts of outstanding forward foreign exchange contracts:
Currency swaps
Forward foreign exchange contracts
2010
£m
–
–
–
2009
£m
259
198
457
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 statement of comprehensive income.
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
2010
£m
605
150
755
2009
£m
634
150
784
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 statement of comprehensive income. In accordance with the fair value hierarchy described in note 13, derivative financial instruments are measured using
Level 2 inputs.
3i Group plc
Report and accounts 2010
117
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:
Group
2010
£m
125
33
726
268
50
887
Group
2009
£m
Company
2010
£m
Company
2009
£m
349
379
35
500
279
600
125
33
483
268
50
887
349
108
35
500
279
600
2,089
2,142
1,846
1,871
Rate
Maturity
Group
2010
£m
Group
2009
£m
Company
2010
£m
Company
2009
£m
Issued under the £2,000 million note issuance programme
Fixed rate
£200 million notes (public issue)
£400 million notes (public issue)
€350 million notes (public issue)
Other
Variable rate
6.875%
5.750%
5.625%
2023
2032
2017
€500 million notes (public issue)
EURIBOR+0.200%
2012
Other
Committed multi-currency facilities
£150 million
£100 million
£486 million
£200 million
Other
Euro commercial paper
Finance lease obligations
Total loans and borrowings
LIBOR+0.175%
LIBOR+3.00%
LIBOR+1.5938%
LIBOR+3.75%
2010
2012
2012
2014
200
375
312
99
436
268
200
400
–
105
465
389
200
375
312
99
436
268
200
400
–
105
465
389
1,690
1,559
1,690
1,559
–
92
165
50
307
92
–
92
143
–
200
–
343
239
1
240
–
14
–
50
64
92
–
92
73
–
–
–
73
239
–
239
2,089
2,142
1,846
1,871
The £150 million multi-currency facility was re-negotiated to £100 million with the maturity date extended from 2010 to 2012.
The £92 million liability on the £100 million multi-currency facility represents a 1 billion Swedish krona drawing re-translated at the year end exchange rate. The undrawn
commitment fee on the £100 million committed bilateral facility is 50% of the margin.
The £486 million multi-currency facility was refinanced in the year by way of a £300 million forward start facility, which extended the repayment maturity from 2010 to
2012. The undrawn commitment fee on the £300 million forward start facility is 50% of the margin. The rate will be LIBOR + 300 basis points.
During the year a new £200 million multi-currency facility was agreed with Lloyds Bank and matures in November 2014. £50 million of this facility was drawn at 31
March 2010. This facility has an undrawn commitment fee of 50% of the margin.
The Group is now subject to a financial covenant relating to its Asset Cover Ratio; defined as total assets (including cash) divided by gross debt. The Asset Cover Ratio
limit is 1.35 at 31 March 2010 increasing to 1.45 from September 2011, the Asset Cover Ratio at 31 March 2010 is 2.35.
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 £1,959 million (2009: £1,922 million), determined where applicable with reference to their
published market price.
3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
118118
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
Repurchase during the year
Closing balance
Group
2010
£m
384
–
21
–
–
–
(42)
363
Group
2009
£m
433
4
16
(3)
(434)
368
–
384
Company
2010
£m
384
Company
2009
£m
433
–
21
–
–
–
(42)
363
4
16
(3)
(434)
368
–
384
On 29 May 2008 a £430 million three year 3.625% convertible bond was raised. The derivative element of the £430 million convertible bond is cash settled. The Group
share price on issue was £8.86 and the conversion price for bondholders was £11.32. Following the rights issue the conversion price for bondholders reduced to £7.51.
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 2010 was £391 million (2009: £341 million), determined by its published market price and classified as
Level 1 in the fair value hierarchy.
As at 30 April 2010, the Group announced the intention to cancel £145 million convertible bonds. Further details can be found in note 34, post balance sheet events.
21 B shares
Opening balance
Repurchased and cancelled
Closing balance
On 10 August 2009 the Company repurchased and subsequently cancelled 4,670,975 B shares.
22 Subordinated liabilities
Subordinated liabilities are repayable as follows:
After five years
Group
2010
£m
12
(6)
6
Group
2009
£m
Company
2010
£m
Company
2009
£m
21
(9)
12
12
(6)
6
21
(9)
12
Group
2010
£m
Group
2009
£m
–
7
Subordinated liabilities comprised limited recourse funding from Kreditanstalt für Wiederaufbau (“KfW”), a German federal bank. Repayment of the funding, which
individually financed investment assets, was dependent upon the disposal of the associated assets. This funding was subordinated to other creditors of the German
subsidiaries to which these funds were advanced and in certain circumstances became non-repayable should assets fail. The associated assets were disposed of during
the year to 31 March 2010.
There were no subordinated liabilities for the Company (2009: £nil).
23 Trade and other payables
Other accruals
Amounts due to subsidiaries
Group
2010
£m
176
–
176
Group
2009
£m
255
–
255
Company
2010
£m
Company
2009
£m
29
357
386
144
214
358
3i Group plc
Report and accounts 2010
119
24 Provisions
Opening balance
Charge for the year
Utilised in the year
Closing balance
Opening balance
Charge for the year
Utilised in the year
Closing balance
Group
2010
Property
£m
Group
2010
Redundancy
£m
10
5
(3)
12
13
4
(12)
5
Group
2009
Property
£m
Group
2009
Redundancy
£m
7
7
(4)
10
7
11
(5)
13
Group
2010
Total
£m
23
9
(15)
17
Group
2009
Total
£m
14
18
(9)
23
The provision for redundancy relates to staff reductions announced prior to 31 March 2010. 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
2010
Number
1,102,899,402
660,000,000
1,000,000
2010
£m
815
2009
Number
555,076,720
7
660,000,000
0.1
1,000,000
2009
£m
410
7
0.1
* The concept of authorised share capital was abolished by the Companies Act 2006 with effect from 1 October 2009. The previous authorised share capital remains a limit on the Directors’ authority to allot shares until altered
by shareholders in general meeting.
Issued and fully paid
Ordinary shares of 7319/22p
Opening balance
Issued under employee share plans
Nine for seven rights issue
Issue for acquisition of assets of 3i Quoted Private Equity plc
Closing balance
2010
Number
2010
£m
2009
Number
383,970,880
6,745,260
542,060,391
37,604,945
970,381,476
284
382,741,094
5
400
28
1,229,786
–
–
717
383,970,880
284
2009
£m
283
1
–
–
During the year to 31 March 2010, no options to subscribe for ordinary shares were exercised. Issued under employee share plans includes 6,380,198 ordinary shares
subscribed by employees under the Employee Share Investment Plan in June 2009.
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3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
On 12 June 2009, 3i Group plc raised £699 million net of £33 million of expenses by way of a rights issue.
120120
26 Equity
Year to 31 March 2010
Group
Total equity at the start of the year
Profit for the year
Exchange differences on translation
of foreign operations
Actuarial loss
Total comprehensive income for
the year
Share based payments
Own shares
Release on forfeiture of share
options
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
Year to 31 March 2009
Group
Total equity at the start of the year
(Loss)/profit for the year
Exchange differences on translation
of foreign operations
Revaluation of own-use property
Actuarial loss
Total comprehensive income for
the year
Equity settled call option
Share based payments
Own shares
Release on exercise/forfeiture of
share options
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
Year to 31 March 2010
Company
Total equity at the start of the year
Profit for the year
Revaluation of own-use property
Share
Capital
£m
284
Share
Premium
£m
405
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
Translation
reserve
£m
42
20
(179)
324
Revenue
reserve
£m
394
97
Capital
reserve
£m
968
57
(71)
Other
reserves
£m
Own shares
£m
Total equity
£m
5
(77)
1,862
154
324
(71)
–
–
–
–
9
(5)
324
(14)
97
–
–
407
5
(9)
(9)
9
(9)
–
(9)
808
433
717
374
779
1
43
24
145
959
482
5
(86)
3,068
Share
Capital
£m
283
Share
Premium
£m
397
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
42
21
Translation
reserve
£m
11
Capital
reserve
£m
3,026
(2,047)
Revenue
reserve
£m
359
99
Other
reserves
£m
–
Own shares
£m
Total equity
£m
(82)
4,057
–
–
–
(190)
(4)
(8)
(190)
(2,059)
99
–
5
1
(64)
–
3
(4)
1
284
8
405
42
20
(179)
968
394
5
(77)
1,862
(1,948)
(190)
(4)
(8)
–
(2,150)
2
3
5
3
2
–
(64)
9
Share
Capital
£m
284
Share
Premium
£m
405
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
42
20
Capital
reserve
£m
1,256
72
72
Revenue
reserve
£m
266
39
39
(9)
–
20
1,328
296
Other
reserves
£m
5
–
5
Total
equity
£m
2,278
111
–
111
(9)
808
3,188
Total comprehensive income for the year
–
–
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
433
717
374
779
–
1
43
3i Group plc
Report and accounts 2010
Other
reserves
£m
–
–
5
Total
equity
£m
3,930
(1,602)
(3)
(1,605)
5
3
–
(64)
9
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26 Equity (continued)
Year to 31 March 2009
Company
Total equity at the start of the year
(Loss)/profit for the year
Revaluation of own-use property
Share
Capital
£m
283
Share
Premium
£m
397
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
42
21
Capital
reserve
£m
2,877
(1,622)
(3)
Revenue
reserve
£m
310
20
Total comprehensive income for the year
–
–
–
–
(1,625)
20
Equity settled call option
Share based payments
Release on exercise/forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
1
284
8
405
3
(4)
4
(64)
42
20
1,256
266
5
2,278
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
2010
£m
77
11
(2)
86
2009
£m
82
–
(5)
77
Own shares consists of shares in 3i Group plc held by the 3i Group Employee Trust. As at 31 March 2010 the Trust held 19,758,485 shares in 3i Group plc (2009:
10,259,767). The market value of these shares at 31 March 2010 was £58 million (2009: £28 million). The Trust is funded by an interest-free loan from 3i Group plc.
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3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
122122
28 Per share information
On 28 April 2009, 3i Group plc acquired the assets of 3i Quoted Private Equity plc (3i QPEP) through a solvent liquidation of the company. The Group paid £110 million
in cash and issued 37.6 million 3i Group shares to 3i QPEP shareholders in exchange for £220 million of cash and quoted assets with a value of £147 million. The Group
paid 50p in cash and 0.1706 of new 3i Group shares for each 3i QPEP share. The earnings per share comparative has been adjusted by a rate of 0.98, being the ratio
between the theoretical ex-transaction price and the closing share price prior to the transaction.
Through the rights issue on 12 June 2009, 3i Group plc issued 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. Prior period comparatives for EPS have been adjusted by a factor of 0.6227 to reflect the bonus element inherent in the rights issue.
The factor is calculated based on the pre-issue price of 410p, the price on the last day the shares traded cum-rights. The NAV per share comparatives have been restated
by adjusting the comparative NAV by the net assets and the number of shares relating to the 3i QPEP transaction, by £90 million and 37.6 million respectively. The
adjustment factor of 0.6227 has then been applied to this adjusted NAV per share to derive the restated figure.
The earnings and net assets per share attributable to the equity shareholders of the Company are based on the following data:
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit/(Loss) for the year attributable to equity holders of the Company
Weighted average number of shares in issue
Ordinary shares
Own shares
Impact of rights issue bonus element and 3i QPEP bonus element
Effect of dilutive potential ordinary shares
Share options2
Diluted shares
Net assets per share (£)
Basic
Diluted
Net assets (£m)
Net assets attributable to equity holders of the Company
March 2010
March 20091
17.2
17.1
(318.7)
(318.7)
154
(1,948)
March 2010
March 20091
910,689,107
383,495,547
(16,310,231)
(10,465,956)
894,378,876
373,029,591
238,239,213
5,026,956
–
899,405,832
611,268,804
March 2010
March 20091
3.23
3.21
2.96
2.94
3,068
1,862
1 Restated to reflect the impact of the bonus element of the rights issue and the solvent liquidation of 3i QPEP. The net assets used to calculate the NAV per share comparatives include £90 million relating to the 37.6 million
shares issued following the 3i QPEP transaction.
2 The potential effect of share options is excluded from the 2009 dilution calculation for the period, as the impact is anti-dilutive.
3i Group plc
Report and accounts 2010
123
28 Per share information (continued)
Number of shares in issue
Ordinary shares
Own shares
Impact of rights issue bonus element and 3i QPEP
Effect of dilutive potential ordinary shares
Share options
Impact of rights issue bonus element and 3i QPEP
Diluted shares
2010
Number
2009
Number
970,381,476
383,970,880
(19,758,485)
(10,259,767)
950,622,991
373,711,113
286,821,345
950,622,991
660,532,458
6,607,673
1,399,354
893,712
957,230,664
662,825,524
NAV per share reconciliation adjusted for share issues
The nine for seven rights issue completed on 12 June 2009 and the acquisition of the assets of 3i QPEP through the issue of 37.6 million new shares has resulted in the
opening NAV per share not being directly comparable with the closing NAV per share. The following table illustrates the impact of these share issues on the opening NAV
per share.
Group basic NAV per share
31 March 2009 reported position
Impact of 3i QPEP acquisition
Impact of nine for seven rights issue1,4
31 March 2009 adjusted for share issues
Other movements2
Total comprehensive income in the year
Group diluted NAV per share
31 March 2009 reported position
Impact of 3i QPEP acquisition
Impact of nine for seven rights issue1,4
31 March 2009 adjusted for share issues
Other movements including the increase in dilutive shares in the year3
Total comprehensive income in the year
Net assets
£m
1,862
90
1,952
699
2,651
10
2,661
407
3,068
Net assets
£m
1,862
90
1,952
699
2,651
10
2,661
407
3,068
Number
of shares
373,711,113
37,604,945
411,316,058
536,306,211
947,622,269
3,000,722
950,622,991
950,622,991
950,622,991
Number
of shares
375,110,467
37,604,945
412,715,412
536,306,211
949,021,623
8,209,041
957,230,664
957,230,664
957,230,664
Basic
NAV per
share impact
£
4.98
(0.23)
4.75
(1.94)
2.81
(0.01)
2.80
0.43
3.23
Diluted
NAV per
share impact
£
4.96
(0.23)
4.73
(1.94)
2.79
(0.01)
2.78
0.43
3.21
1 The number of shares included within the impact of the nine for seven rights issue includes 542,060,391 ordinary shares issued less 5,754,180 ordinary shares issued to the 3i Group Employee Trust as part of the rights
issue, which are included in our own shares and deducted from the number of ordinary shares issued when calculating basic and diluted NAV per share.
2 Other movements relate to employee share incentive plans and dividends.
3 Includes (2) above and additional dilutive share options.
4 Net proceeds of the nine for seven rights issue were £732 million gross proceeds, less £33 million of costs.
3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
124124
29 Dividends
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Proposed final dividend
1 Restated to reflect impact of the bonus element of the rights issue and the solvent liquidation of 3i QPEP.
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
2010
pence
per share
2010
£m
2009
pence
per share1
2009
£m
–
1.0
1.0
2.0
Group
2010
£m
11
33
30
74
–
9
9
19
6.7
3.8
10.5
–
41
23
64
–
Group
2009
£m
Company
2010
£m
Company
2009
£m
14
37
37
88
–
–
–
–
–
–
–
–
The Group leases a number of its offices under operating leases. None of the leases include contingent rentals.
During the year to 31 March 2010, £13 million (2009: £15 million) was recognised as an expense in the statement of comprehensive income in respect of operating
leases. £1 million (2009: £1 million) was recognised as income in the statement of comprehensive income in respect of subleases. The Group has £3 million of future
sublease income receivable under non-cancellable subleases.
Group
2010
due
within
one year
£m
204
Group
2009
due
within
one year
£m
331
Company
2010
due
within
one year
£m
61
Company
2009
due
within
one year
£m
143
Group
2010
due
2-5 years
£m
1
Group
2010
due
over 5 years
£m
–
Group
2009
due
2-5 years
£m
57
Group
2009
due
over 5 years
£m
2
Company
2010
due
2-5 years
£m
–
Company
2010
due
over 5 years
£m
–
Company
2009
due
2-5 years
£m
31
Company
2009
due
over 5 years
£m
2
Total
£m
205
Total
£m
390
Total
£m
61
Total
£m
176
31 Commitments
Equity and loan investments
Equity and loan investments
Equity and loan investments
Equity and loan investments
Commitments represent guarantees or commitments made by the Group and Company to portfolio companies.
3i Group plc
Report and accounts 2010
125
32 Contingent liabilities
Contingent liabilities relating to guarantees available to third parties in respect of investee companies
Group
2010
£m
5
Group
2009
£m
6
Company
2010
£m
–
Company
2009
£m
1
The Company has guaranteed the payment of principal and interest on amounts drawn down by 3i Holdings plc under the £100 million bilateral facility, £486 million and
£200 million revolving credit facilities. At 31 March 2010, 3i Holdings plc had drawn down £78 million (2009: £72 million) under the first facility and £165 million
(2009: £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 2010, 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 external 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:
Statement of comprehensive income
Carried interest receivable
Fees receivable from external funds
Balance sheet
Carried interest receivable
Group
2010
£m
30
47
Group
2010
£m
75
Group
2009
£m
(3)
53
Group
2009
£m
44
Company
2010
£m
Company
2009
£m
30
–
(3)
–
Company
2010
£m
75
Company
2009
£m
44
The Group partially sold seven seed portfolio investments to the Growth Capital Fund for £96 million in the year.
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:
Statement of comprehensive income
Realised profit over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Balance sheet
Quoted equity investments
Unquoted equity investments
Loans and receivables
Group
2010
£m
58
327
126
Group
2010
£m
302
1,267
1,264
Group
2009
£m
151
(1,372)
138
Group
2009
£m
496
1,224
1,219
Company
2010
£m
Company
2009
£m
19
136
41
2
(421)
45
Company
2010
£m
Company
2009
£m
302
329
205
487
502
8
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.
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3i Group plc
Report and accounts 2010
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Financial statements Notes to the financial statements
126126
33 Related parties (continued)
Advisory arrangements
The Group acts as an adviser to 3i Infrastructure plc, which is listed on the London Stock Exchange, and acted as adviser to 3i Quoted Private Equity plc prior to its solvent
liquidation. The following amounts have been included in respect of these advisory relationships:
Statement of comprehensive income
Unrealised profits/(losses) on the revaluation of investments
Fees receivable from external funds
Dividends
Group
2010
£m
72
12
15
Group
2009
£m
(47)
19
17
Company
2010
£m
72
12
15
Company
2009
£m
(47)
19
17
The Group entered into two separate transactions with 3i Infrastructure plc during the year. Under the first transaction, 3i Osprey LP sold 1.1% of its interest in Anglian
Water Group to an unrelated third party. The net proceeds of the sale (£21 million) were distributed to 3i Group in exchange for a reduction of 6.2% in its interest in
3i Osprey LP. Under the second transaction, 3i Group sold 8.8% of its limited partnership interest in 3i Osprey LP to 3i Infrastructure plc. The net consideration for the
second transaction was £23 million. As a result of both transactions, 3i Group has been left with a limited partnership interest of 2.3% in 3i Osprey LP.
Balance sheet
Quoted equity investments
Group
2010
£m
300
Group
2009
£m
395
Company
2010
£m
300
Company
2009
£m
395
Key management personnel
The Group’s key management personnel comprises the members of Management Committee and the Board’s non-executive Directors. The following amounts have been
included in respect of these individuals:
Statement of comprehensive income
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
2010
£m
Group
2009
£m
4
8
–
11
1
–
Group
2010
£m
7
8
7
6
1
–
(1)
2
3
Group
2009
£m
1
4
7
Carried interest paid in the year to key management personnel was £6 million (2009: £14 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 £21 million (2009: £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 £184 million (2009: £143 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 2010 to £nil (2009: £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 statement of
comprehensive income are £nil (2009: £nil).
3i Group plc
Report and accounts 2010
127
34 Post balance sheet events
As at 30 April 2010 the Group had purchased a total of £145 million of its convertible bonds on the open market for £148 million. The Group confirmed via RNS
announcements on 14, 15 and 30 April 2010 that the bonds would be cancelled, leaving the Group with an outstanding convertible bond liability of £285 million at
maturity. This cancellation has since been confirmed and the impact on the statement of comprehensive income is a £1 million gain.
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
Country of incorporation
Issued and fully paid share capital
Principal activity
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
1,000,000 shares of £1
2,715,973 shares of £10
Holding company
Holding company
110,000,000 shares of £1
Services
10,000,000 ordinary shares of £1
Investment manager
500,000 ordinary shares of £1
Investment adviser
500,000 ordinary shares of £1
Investment adviser
140,000 ordinary shares of £1
Investment adviser
Gardens Pension Trustees Limited
England and Wales
100 ordinary shares of £1
Pension fund trustee
3i Corporation
USA
15,000 shares of common stock
(no par value)
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 2010 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 2010, 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 4 to The Large and
Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 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 (Accounts) Regulations 2008 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.
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3i Group plc
Report and accounts 2010
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Financial statements
128128
Independent auditor’s report to the members of 3i Group plc
We have audited the financial statements of 3i Group plc for the year ended 31 March 2010 which comprise the Statement of comprehensive income, the Group and
parent company Statement of changes in equity, the Group and parent company Balance sheets, the Group and parent company Cash flow statements and the related
notes 1 to 35. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 auditor’s 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
As explained more fully in the Directors’ responsibilities statement set out on page 71, the Directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s
and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by
the Directors; and the overall presentation of the financial statements.
Opinion on financial statements
In our opinion:
– the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2010 and of the Group’s profit for the
year then ended;
– the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
– the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with
the provisions of the Companies Act 2006; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
– the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
– the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
– the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and
returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
– the Directors’ statement, set out on page 72, in relation to going concern; and
– the part of the Corporate Governance statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for
our review.
Andrew McIntyre (Senior statutory auditor)
for and on behalf of Ernst & Young LLP statutory auditor
London
12 May 2010
3i Group plc
Report and accounts 2010
129
Portfolio and
other information
Portfolio valuation – an explanation
Ten largest investments
Forty other large investments
Information for shareholders
Investor relations and general enquiries
129-IBC
130
132
134
136
IBC
Portfolio and other information
130130
Portfolio valuation – an explanation
Policy
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 approach across the portfolio. The Group’s valuation policy is owned by the Board and periodically reviewed by the Board’s
Valuations Committee. The policy ensures that the portfolio valuation complies with all relevant accounting standards and is fully consistent
with IFRS and the guidelines issued by the International Private Equity Valuation Board (the “IPEV guidelines”).
Fair value is defined as “the price at which an orderly transaction would take place between market participants at the reporting date” (IPEV
guidelines, September 2009). Fair value is therefore an estimate, and as such determining fair value requires the use of judgments.
Determining enterprise value
To arrive at the fair value of the Group’s investments, we first estimate the entire value of the Company we have invested in – the enterprise
value. This enterprise value is determined using one of a selection of methodologies depending on the nature, facts and circumstances of the
investment.
Where possible we use methodologies which draw heavily on observable market prices, whether listed equity markets or reported merger
and acquisition transactions.
The quoted assets in our portfolio are valued at their closing bid price on the balance sheet date. The majority of the rest of our portfolio,
however, is represented by unquoted investments. These are valued, in the vast majority of cases, with reference to market comparables,
or to reported transactions. As unquoted investments are less easily sold than quoted investments, the Group adjusts the estimated
enterprise value by a marketability or liquidity discount. The marketability or liquidity discount applied has changed in line with the update
IPEV guidelines, September 2009. The discount is now applied to the total enterprise value, rather than as previously applied to the total
enterprise value after the deduction of senior debt. This had a £37 million impact on the core portfolio in the year. We apply a higher discount
rate for investments where there are material restrictions on our ability to sell at a time of our choosing.
The table opposite outlines in more detail the range of valuation methodologies available to us, as well as the inputs and adjustments
necessary for each.
Apportioning the enterprise value between 3i, other shareholders and lenders
Once we have estimated the enterprise value using one of the methodologies outlined in the table opposite, the following steps are taken:
1 We subtract the value of any claims, net of free cash balances, that are more senior to the most senior of our investments;
2 The resulting attributable enterprise value is apportioned to the Group’s investment, and equal ranking investments by other parties,
according to contractual terms and conditions, to arrive at a fair value of the entirety of the investment. The value is then distributed
amongst the different loan, equity and other financial instruments in line with IFRS.
3 If the value attributed to a specific loan investment in a company is less than its par or nominal value, a shortfall is implied, which is
recognised in our valuation. In exceptional cases we may judge that the shortfall is temporary; to recognise the shortfall in such a scenario
would lead to unrepresentative volatility in our accounts and hence we may choose not to recognise the shortfall.
Other factors
In applying this framework, there are additional considerations that are factored into the valuation of some assets:
Impacts from structuring
Structural rights are instruments convertible into equity or cash at specific points in time or linked to specific events. For example, where a
majority shareholder chooses to sell and we have a minority interest, we may have the right to a minimum return on our investment.
Debt instruments in particular may have structural rights. In the valuation it is assumed third parties such as lenders or holders of convertible
instruments fully exercise any rights they might have, and that the value to the Group may therefore be reduced by such rights held by third
parties. The Group’s own rights are valued on the basis they are exercisable on the reporting date.
Assets classified as “terminal”
If we believe a business in which we hold an investment has more than a 50% probability of failing in the 12 months following the valuation
date, we value the investment on the basis of its expected recoverable amount in the event of failure. This would generally result in the equity
and loan components of our investment being valued at nil.
3i Group plc
Report and accounts 2010
131
Methodology
Earnings
Description
Inputs
– Most commonly used valuation
methodology
Earnings multiples are applied to the earnings of the
company to determine the enterprise value.
– Used for investments which are
profitable and for which we can
determine a set of listed companies
with similar characteristics
Earnings
– Reported earnings adjusted for non-recurring items,
such as restructuring expenses, and for significant
corporate actions, to arrive at maintainable earnings
– Most common measure is earnings before interest,
tax, depreciation and amortisation (“EBITDA”)
– Earnings used are latest management accounts for the
latest 12 months available, unless data from forecasts
or the latest audited accounts provides a more reliable
picture of maintainable earnings
Earnings multiples
– The earnings multiple is derived from comparable
listed companies
– We select companies in the same industry, where
possible with a similar business model and profile in
terms of size, products, services and customers, and
where possible in the same geographic region
– We track the multiple paid at our initial investment
against this set of comparable companies, taking into
account a relative premium or discount where the
underlying risk and earnings growth rate support that
relative ranking
– We adjust for changes in the relative performance in
the set of comparables
Quoted
– Used for investments in listed
– Closing bid price at balance sheet date
companies
Imminent sale
– Used where an asset is in a sales
– Contracted proceeds for the transaction, or best
process, a price has been agreed but
the transaction has not yet settled
estimate of the expected proceeds
Further round
– Used for early-stage investments,
if a third party has made a further
investment
– Implied valuation from further investment
Fund
– Used for investments in
– Net asset value reported by the fund manager
unlisted funds
Specific industry metrics – Used for investments in industries
which have well defined metrics as
bases for valuation
– We create a set of comparable listed companies and
derive the implied values of the relevant metric
– We track and adjust this metric as in the case of an
– Eg book value for insurance
earnings multiple
underwriters, or regulated asset
bases for utilities
– Comparable companies are selected using the same
criteria as described for the Earnings methodology
Discounted cash flow
– Appropriate for businesses with
long-term stable cash flows, typically
in infrastructure
– Long-term cash flows are discounted at a rate which
is tested against market data, where possible, or
adjusted from the rate at the initial investment based
on changes in the risk profile of the investment
Net assets
– Used for businesses that are loss
– Assets are valued at the best estimate of the proceeds
making, or where the probability of
liquidation is high
in a liquidation scenario
% of portfolio
valued on this
basis
71%
Adjustments
– A marketability or
liquidity discount
is applied to the
enterprise value,
typically between 5%
and 15%, depending
on the specific
investment
– No adjustments or
discounts applied
– A discount of typically
10% is applied to
reflect the uncertainty
over the ultimate
outcome
– No adjustments or
discount applied
– Typically no further
discount applied in
addition to that applied
by the fund manager
– An appropriate
discount is applied,
depending on the
valuation metric used
– Discount already
implicit in the discount
rate applied to long-
term cash flows – no
further discounts
applied
– A discount is applied to
reflect the uncertainty
over the ultimate
outcome
9%
1%
1%
4%
4%
1%
1%
8%
Other
– Used where elements of a business
– Values of separate elements prepared on one
– No further discount
are valued on different bases
of the methodologies listed above
is applied
For a small proportion of our smaller investments (less than 3% of the portfolio), the valuation is determined by a more mechanistic approach using information from the
latest audited accounts. Equity shares are valued at the higher of an earnings or net assets methodology. Fixed income shares and loan investments are measured using
amortised cost and any implied impairment, in line with IFRS.
Consistent with IPEV guidelines, all equity investments are held at fair value using the most appropriate methodology and no investments are held at historical cost.
3i Group plc
Report and accounts 2010
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Portfolio and other information
132132
Ten largest investments
The list below provides information on our ten largest investments in respect of the Group’s holding, excluding any
managed or advised external funds.
UK
Infrastructure
2007
Quoted
33.2%
£270m
£300m
Singapore
Growth
2006
Industry metric
31.2%
£105m
£149m
3i lnfrastructure plc
Geography:
Quoted investment
company, investing in
infrastructure
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
ACR Capital Holdings Pte Limited
Reinsurance in large
risk segments
Geography:
Business line:
Inspicio Sarl
Global testing
and inspection
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
Geography:
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
UK
Buyout
2008
Earnings
38.2%
£133m
£147m
UK
Buyout
2007
Earnings
32.2%
£145m
£144m
US
Growth
2008
Earnings
4.9%
£70m
£128m
Enterprise Group Holdings Limited
Geography:
UK utilities and public
sector maintenance
outsourcing
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
Quintiles Transnational Corporation
Geography:
Clinical research
outsourcing solutions
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
3i Group plc
Report and accounts 2010
3i-infrastructure.com
asiacapitalre.com
inspicioplc.com
enterprise.plc.uk
quintiles.com
133
MWM GmbH
Provider of
decentralised
power generation
systems
Geography:
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
Foster + Partners1
Architectural
services
Geography:
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Valuation:
Germany
Buyout
2007
Earnings
41.3%
£69m
£127m
UK
Growth
2007
Earnings
40.0%
£113m
1 The residual cost of this investment cannot be disclosed per a confidentiality agreement in place at
investment.
Mémora Servicios Funerarias
Funeral service
provider
Geography:
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
Spain
Buyout
2008
Earnings
38.1%
£99m
£103m
3i India Infrastructure Holdings Limited
Fund investing in
Indian infrastructure
Geography:
Business line:
India
Infrastructure
mwm.net
fosterandpartners.com
memora.es
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First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
2007
Fund
21.2%
£59m
£99m
There is no website for 3i India Infrastructure Holdings Limited.
Hyva Investments BV
Geography:
Branded hydraulics for
commercial vehicles
Business line:
First invested in:
Valuation basis:
Proportion of equity shares held:
Residual cost:
Valuation:
Netherlands
Buyout
2004
Earnings
44.2%
£14m
£98m
3i Group plc
Report and accounts 2010
hyva.com
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Portfolio and other information
134134
Forty other large investments
In addition to the ten largest investments shown on pages 132 and 133, detailed below are forty other large investments which are
substantially all of the Group’s investments valued over £13 million. This does not include 10 investments that have been excluded for
commercial reasons.
Investment
NORMA Group Holding GmbH
normagroup.com
Description of business
Provider of engineered joining
technology
Otnortopco AS (Axellia/Alpharma)
alpharma.com
Developer and supplier of specialist
active pharmaceutical ingredients
Business
line
Buyout
Geography
Germany
First
invested in
Valuation
basis
Proportion
of equity
shares held
Residual
cost
£m
Valuation
£m
2005
Earnings
31.2%
Buyout
Norway
2008
Earnings
46.3%
27
70
41
78
23
85
65
73
2
31
31
26
11
30
22
46
30
16
37
30
97
89
87
85
76
70
68
66
52
46
41
39
38
37
36
34
33
31
31
29
Sortifandus, S.L.
(GES – Global Energy Services)
services-ges.com
Mayborn Group Plc
mayborngroup.com
Navayuga Group
necltd.com
Mold-Masters Luxembourg Holdings
S.A.R.L.
moldmasters.com
Labco SAS
labco.eu
Cornwall Topco Limited (Civica)
civica.co.uk
Tato Holdings Limited1
Scandferries Holding GmbH (Scandlines)
scandlines.de
Azelis Holding S.A.
azelis.com
Joyon Southside1
Beijing Digital Telecom Co. Limited
dixintong.com
Radius Systems Limited
radius-systems.com
KemFine Oy
kemfine.com
Inspecta Holding Oy
inspecta.fi
Everis Participaciones S.L.
everis.com
Asia Strategic Medtech Holdings
(Mauritius) Limited (LHI)
lhitechnology.com
Ålö Intressenter AB
alo.se
AES Engineering Limited
aesseal.co.uk
1 No company website available for this investment.
2 Smaller Minority Investments.
Wind power service provider
Buyout
Spain
2006
Earnings
42.8%
Manufacturer and distributor of
baby products
Buyout
UK
2006
Earnings
37.9%
Engineering and construction
Growth
India
2006
Earnings
10.0%
Plastic processing technology provider
Growth
Canada
2007
Earnings
49.3%
Clinical laboratories
Growth
France
2008
Earnings
12.3%
Public sector IT and services
Manufacture and sale of speciality
chemicals
Buyout
SMI2
UK
UK
2008
Earnings
40.6%
1990
Earnings
26.0%
Ferry operator in the Baltic Sea
Buyout
Germany
2007
Other
22.7%
Distributor of speciality chemicals,
polymers and related services
Real estate
Mobile phone retailer
Manufacture of thermoplastic pipe
systems for gas and water distribution
Buyout
Luxembourg
2007
Earnings
32.1%
Growth
Growth
China
China
2007
DCF
49.9%
2006
Earnings
17.4%
Buyout
UK
2008
Earnings
31.6%
Manufacturer of fine chemicals
Buyout
Finland
2004
Earnings
35.0%
Supplier of testing and inspection
services
Buyout
Finland
2007
Earnings
39.2%
IT consulting business
Growth
Spain
2007
Earnings
18.3%
Medical cable assemblies
Buyout
China
2008
Earnings
37.5%
Manufacturer of front end loaders
Growth
Sweden
2002
Earnings
35.2%
Manufacturer of mechanical seals and
support systems
Growth
UK
1996
Earnings
40.8%
3i Group plc
Report and accounts 2010
135
Investment
RBG Limited
rbgltd.com
Description of business
Oil and gas service provider
Business
line
Buyout
Geography
First
invested in
Valuation
basis
Proportion
of equity
shares held
Residual
cost
£m
Valuation
£m
UK
1996
Earnings
39.5%
Periclimenco, SL (Panreac Quimica, S.A.)
panreac.com
Manufacturer of chemicals
for analysis
Buyout
Spain
2005
Earnings
27.7%
DC Druck Chemie GmbH
druckchemie.com
Franklin Offshore International Pte
Limited
franklin.com.sg
Hobbs Holding No. 1 Limited
hobbs.co.uk
Kneip Communication SA
kneip.com
Soya Concept AS
soyaconcept.com
Boomerang TV, S.A.
grupoboomerangtv.com
Business services
Buyout
Germany
2008
Earnings
44.3%
Manufacture, installation and
maintenance of mooring and
rigging equipment
Retailer of women’s clothing
and footwear
Outsourced publication of
investment fund data
Growth
Singapore
2007
Earnings
30.9%
Buyout
UK
2004
Earnings
42.2%
Growth
Luxembourg
2007
Earnings
42.9%
Fashion design company
Growth
Denmark
2007
Earnings
44.1%
Production of audiovisual contents
Growth
Spain
2008
Earnings
34.1%
Goromar XXI, S.L. (Esmalglass)
esmalglass.com
Manufacture of frites, glazes and
colours for tiles
Buyout
Spain
2002
Earnings
21.6%
Refresco Group B.V.
refresco.com
Consultim Finance SAS
cerenicimo.fr
Polyconcept Investments B.V.
polyconcept.com
Hyperion Insurance Group Limited2
hyperiongrp.com
Pearl (AP) Group Limited
(Agent Provocateur)
agentprovocateur.com
Indiareit Offshore Fund1
MKM Building Supplies
(Holdings) Limited
mkmbs.co.uk
La Sirena
lasirena.es
Mosaicon S.p.A.1
Dirickx Groupe SA
dirickx.com
Shearings Group Limited
shearings.com
Manufacturer of private label juices,
still drinks and carbonated drinks
Growth
Netherlands
2010
Earnings
12.7%
Wholesaler of rental real estate
Growth
France
2007
Earnings
20.0%
Supplier of promotional products
Growth
Netherlands
2005
Earnings
13.0%
Specialist insurance intermediary
Growth
Women’s lingerie and associated
products
Indian real estate fund
Building material supplier
Buyout
Growth
Growth
UK
UK
India
UK
2008
Other
19.1%
2007
Other
39.0%
2006
Fund
20.0%
1998
Earnings
30.3%
Specialist frozen food retailer
Buyout
Spain
2006
Earnings
47.3%
Designer and retailer of affordable
luxury branded leather accessories
Manufacture and distribution of fences
and security equipment
Buyout
Italy
2008
Earnings
35.8%
Growth
France
2004
Sale
12.9%
Tour operator
Buyout
UK
1997
Earnings
36.6%
1 No company website available for this investment.
2 Reflects the partial sale of Hyperion to the Growth Capital Fund which is subject to regulatory approval.
3i Group plc
Report and accounts 2010
4
15
26
16
55
25
13
23
20
21
12
21
22
35
21
13
36
52
4
1
28
27
26
26
26
26
25
22
21
21
21
21
19
18
17
17
15
14
13
13
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Portfolio and other information
136136
Information for shareholders
Financial calendar
Ex-dividend date
Record date
Annual General Meeting*
Final dividend to be paid
Half-year results (available online only)
Interim dividend expected to be paid
16 June 2010
18 June 2010
7 July 2010
16 July 2010
November 2010
January 2011
* The 2010 Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 7 July 2010 at 11.00am. For further details please see the Notice of Annual
General Meeting 2010.
Information on ordinary shares
Shareholder profile Location of investors at 31 March 2010
UK
US
Continental Europe
Other international
Share price
Share price at 31 March 2010
High during the year (9 September 2009)
Low during the year (1 April 2009)
Dividends paid in the year to 31 March 2010
2009/2010 Interim dividend, paid 13 January 2010
Balance analysis summary
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
76.0%
9.4%
9.6%
5.0%
291.2p
310.7p
175.5p
1p
%
0.92
1.98
1.86
12.46
33.90
48.88
Number of holdings
Individuals
Number of holdings
Corporate bodies
17,949
6,971
193
18
1
0
966
1,297
360
325
117
23
Balance as at
31 March 2010
8,880,247
19,245,423
18,086,716
120,896,398
328,952,612
474,320,080
25,132
3,088
970,381,476
100.00
The table above provides details of the number of shareholdings within each of the bands stated in the register of members at 31 March 2010.
– check the FSA’s list of known unauthorised overseas firms at
www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml. However,
these firms change their name regularly, so even if a firm is not listed it does not
mean they are legitimate. Always check that they are listed on the FSA Register;
– if you have any doubts, call the FSA Consumer Helpline on 0845 606 1234 with
details, or complete the Unauthorised Firms Reporting Form at www.fsa.gov.uk/
pages/doing/regulated/law/alerts/form.shtml. If you deal with an unauthorised
firm, you will not be eligible to receive payment under the Financial Services
Compensation Scheme. More detailed information on this or similar activity can
be found on the FSA website at www.moneymadeclear.org.uk. You should also
report any approach to Operation Archway, an initiative by the City of London
Police in conjunction with the FSA, the Serious Fraud Office, the Serious Organised
Crime Agency and police forces within the UK, by email to: operationarchway@
cityoflondon.pnn.police.uk
Unsolicited telephone calls
In the past, some of our shareholders have received unsolicited telephone
calls or correspondence concerning investment matters from organisations or
persons claiming or implying that they have some connection with the Company.
These are typically from overseas based “brokers” who target UK shareholders
offering to sell them what often turn out to be worthless or high risk shares in UK or
overseas investments. Shareholders are advised to be very wary of any unsolicited
advice, offers to buy shares at a discount or offers of free reports into the Company.
These approaches are operated out of what is more commonly known as a “boiler
room”. You may also be approached by brokers offering to purchase your shares for
an upfront payment in the form of a broker fee, tax payment or de-restriction fee.
This is a common secondary scam operated by the boiler rooms.
If you receive any unsolicited investment advice:
– always ensure the firm is on the Financial Services Authority (“FSA” Register) and is
allowed to give financial advice before handing over your money. You can check at
www.fsa.gov.uk/pages/register;
– double-check the caller is from the firm they say they are – ask for their name
and telephone number and say you will call them back. Check their identity
by calling the firm using the contact number listed on the FSA Register. This is
important as the FSA has seen instances where an authorised firm’s website has
been cloned but with a few subtle changes, such as a different phone number or
false email address;
3i Group plc
Report and accounts 2010
More content online…
www.2010reportingcentre.3igroup.com
Throughout the report we have truncated some web addresses.
Where this occurs please use:
www.2010reportingcentre.3igroup.com followed by the path.
…register nline
Annual reports online
To receive shareholder communications electronically in future,
including your annual reports and notices of meetings, please go to:
www.3igroup.com/e-comms to register your details.
The 2010 half-yearly report will only be available online.
Please register to ensure you are notified when it becomes available.
Annual and half-yearly reports online
If you would prefer to receive shareholder communications electronically in future, including
your annual reports and notices of meetings, please visit our Registrars’ website at
www.shareview.co.uk/clients/3isignup and follow the instructions there to register. The 2010 half-yearly
report will only be available online. Please register to ensure you are notified when it becomes available.
More general information on electronic communications may also be found on our website at
www.3igroup.com/e-comms
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
Calls to this number are charged at 8p per minute from a BT landline,
other telephony provider costs may vary. Lines are open from 8.30am to 5.30pm, Monday to Friday.
(International callers +44 121 415 7183)
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.
Additional information online...
Transparency
A full report on 3i and Transparency.
/transparency
Chief Executive’s video
Michael Queen describes
3i’s business model.
/chiefexecutive
In-depth case studies
Our portfolio is the key
to our success.
There are more examples online.
/casestudies
Full corporate responsibility report
Corporate responsibility is central to our
business model.
/corporateresponsibility
Other information about 3i
– Assets under management
– 3i portfolio
– Investment and realisations
/other3i
Other information about our industry
– Private equity – an explanation
– Returns and IRRs – an explanation
– Carried interest – an explanation
/otherindustry
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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
M68110 May 2010
Shareholder communications
– print or online?
It’s quick and easy online...
It’s more environmentally friendly online...
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It’s where you’ll find additional information.
Why not try online?
View our online report and accounts 2010,
and additional information at:
www.2010reportingcentre.3igroup.com
To register for electronic communications
If you would prefer to receive shareholder
communications electronically in the future,
including your annual reports and notices of
meetings, please visit our Registrars’ website at
www.shareview.co.uk/clients/3isignup
and follow the instructions there to register.
For investor relations information,
please visit:
www.3igroup.com
For other information on 3i, please visit:
www.3i.com
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3i Group plc
Report and accounts 2010
3i Group plc
Report and accounts 2010