3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7975 3131
M727913 May 2013
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3i Group plc
Annual report and
accounts 2013
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Private Equity
Infrastructure
Debt Management
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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
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Directors’ report
Pages 2 to 75 comprise the Directors’ report and pages
76 to 85 comprise the Directors’ remuneration report,
both of which are presented in accordance with English
company law. The liabilities of Directors in connection
with these reports shall be subject to the limitations and
restrictions provided by such law. These reports are
intended to provide information to shareholders and are
not designed to be relied upon by any other party or for
any other purpose.
Disclaimer
This Annual report and accounts may contain state-
ments about the future, including certain statements
about the future outlook for 3i Group plc and its
subsidiaries (“3i”). These are not guarantees of future
performance and will not be updated. Although we
believe our expectations are based on reasonable
assumptions, any statements about the future outlook
may be influenced by factors that could cause actual
outcomes and results to be materially different.
Contents
Overview
Performance highlights
Our business
Chairman’s statement
Strategy and business model
Chief Executive’s review
Our strategic goal
The 3i Value Build
Delivering our strategic goal
Our strategic priorities and progress
Business review
Group overview
Financial data and key performance indicators
Market environment
Assets under management
Investment and realisations
Business lines – Private Equity
Business lines – Infrastructure
Business lines – Debt Management
Financial review
Risk
Principal risks and risk management
Overview of risk management process
and governance structure
Review of principal risks
Risk factors, oversight and operation
3i Group plc Annual report and accounts 2013
1
Corporate responsibility
2
4
6
Our approach and values
Organisation and governance
Our people
Environmental, Social and Governance standards
External benchmarking
Governance
Introduction
Board of Directors and Executive Committee
Board and Committees
Statutory and corporate governance information
Corporate governance statement
Directors’ remuneration report
Financial statements
Statement of comprehensive income
Consolidated statement of changes in equity
Company statement of changes in equity
Statement of financial position
Cash flow statement
Significant accounting policies
Notes to the financial statements
Independent auditor’s report
Portfolio and other information
Portfolio valuation – an explanation
Fifty large investments
Information for shareholders
9
16
17
18
19
20
21
22
24
25
28
35
39
44
50
51
52
54
56
56
56
57
58
59
60
62
65
68
76
86
87
88
89
90
91
97
123
124
126
128
Overview 2
3i Group plc Annual report and accounts 2013
Overview
Performance highlights
Our performance for the year to 31 March 2013 (FY2013)
Strategic and restructuring highlights
Significantly outperformed
cost savings target
Achieved £51 million of run-rate operating cost reduction
by 31 March 2013, 28% ahead of the original target of £40 million
£51m
cost savings
Substantial gross debt reduction,
with target achieved ahead
of schedule
Gross debt of £1,081 million at 31 March 2013
Gross debt of £917 million at 30 April 2013, representing a 44%
reduction from £1,623 million at 31 March 2012
44%
gross debt reduction
by 30 April 2013
Strong Private Equity realisations
Delivered realised profits over opening value of £190 million,
a significant increase compared to £22 million in FY2012,
and representing an uplift to opening value of 49% and a
money multiple of 2.1x
uplift to opening value
49%
2.1x
money multiple
Growth in assets under management
Total AUM growth of 23% to £12.9 billion, including growth
in third-party AUM of 45% to £9.2 billion
23%
total AUM growth
3i Group plc Annual report and accounts 2013
3
Financial highlights
Material improvement in total return
Total return of £373 million representing 14.2% on opening
shareholders’ funds, a significant improvement on the prior
year loss of £(656) million and negative return of (19.5)%
Robust NAV growth
NAV per share of 311 pence, up 11.5% over the period, after taking
into account implementation costs and dividends in the period of
5.8 pence and 8.1 pence per share respectively
Strong total shareholder return
Since the announcement of 3i’s future strategy, 3i has generated a
total shareholder return of 67%, with an increase in share price from
191 pence at close of 28 June 2012 (day before the announcement)
to 316 pence at close on 28 March 2013 (last trading day of FY2013)
and an interim dividend of 2.7 pence paid in January 2013
14.2%
total return on opening
shareholders’ funds
NAV per share
311p
11.5%
NAV growth over year
67%
total shareholder return
Rebased dividend
Proposed final dividend of 5.4 pence per share, bringing total
dividend for FY2013 to 8.1 pence per share, in line with the rebased
dividend policy
8.1p
total dividend per share
Overview 4
3i Group plc Annual report and accounts 2013
Our business
Private Equity
Infrastructure
Mid-market private equity business
focused on investing in northern Europe,
North America and Brazil.
102 3i portfolio companies
£2,707m of 3i portfolio value
£4,851m of total AUM
35% third-party capital
Infrastructure investor focused on
investing in utilities, transportation
and social infrastructure in Europe.
10 3i portfolio companies
£507m of 3i portfolio value
£1,579m of total AUM
70% third-party capital
as at 31 March 2013
as at 31 March 2013
Investment funding model
Investments have been made through a series of limited partner
funds focused on either majority or minority interests. These
funds include the €5bn European buyout fund, Eurofund V, and
the €1.2bn Growth Capital Fund.
Following the end of the investment periods for these funds,
we will invest using a combination of proprietary capital and
third-party co-investment. We have established framework
arrangements with a number of leading investors for investing
alongside 3i.
Investment funding model
Investments are made through 3i Infrastructure plc (“3iN”),
a listed vehicle in which the Group has a 34% shareholding,
which focuses on investing in core infrastructure and social
infrastructure projects in the developed world and, in particular,
in northern Europe.
3i also manages the 3i India Infrastructure Fund, a US$1.2bn
limited partner fund to which the Group has a US$250m
commitment. This Fund ended its investment period in
November 2012.
Assets under management
Assets under management
Northern Europe, North America,
Brazil as at 31 March (£m)
Asia, southern Europe, Other1
as at 31 March (£m)
Europe
as at 31 March (£m)
India
as at 31 March (£m)
2013
2012
2011
3,901
4,019
2013
2012
950
1,382
5,322
2011
2,342
2013
2012
2011
1,175
2013
404
1,144
1,047
2012
2011
590
589
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
1 Other includes 25 legacy investments, previously disclosed as non-core,
with a total AUM of £43m.
Highlights of the year
nn Strong portfolio performance; delivered gross portfolio
return of 19.7%
Highlights of the year
nn European portfolio continued to perform well and generated
a strong level of portfolio income
nn Re-focused new investment activity on northern Europe,
nn 3iN’s share price increased by 7% and 3iN paid a dividend
North America and Brazil
of £18m to 3i Group
nn Substantially implemented programme of asset management
nn In May 2013, 3iN increased its annual distribution yield target
improvement initiatives
nn Strong realisations of £575m achieved at an uplift of 49%
on opening value and a money multiple of 2.1x
nn Completed three new investments, two in Brazil and one
in Germany
nn Established framework arrangements with leading investors
to co-invest alongside 3i on future transactions
to 5.5% of opening NAV from 5.0%
nn Sale of 3i’s stake in Elenia for £30m
For more on Private Equity, please go to page 28
For more on Infrastructure, please go to page 35
3i Group plc Annual report and accounts 2013
5
Debt Management
Group
Loan manager specialising in the
management of third-party capital,
invested in non-investment grade debt
in Europe and the US.
24 funds
£81m of 3i portfolio value
£6,440m of total AUM
99% third-party capital
as at 31 March 2013
Leading international manager of
third-party and proprietary capital
with three strong and complementary
investment businesses.
£3.3bn of 3i portfolio value
£12.9bn of total AUM
71% third-party capital
as at 31 March 2013
Investment funding model
Investments are made through 24 funds, 15 in Europe and nine
in the US. There are 18 CLO funds and, as at 31 March 2013,
12 of these funds remain within their re-investment period.
Across these funds, 3i has invested proprietary capital
equivalent to 1% of AUM.
Investment funding model
Investments are made using a combination of third-party
and proprietary capital depending on the business line,
in order to achieve a blend of capital and income-
based returns.
Assets under management
Assets under management
Europe
as at 31 March (£m)
US
as at 31 March (£m)
as at 31 March (£m)
2013
2012
2011
4,398
2013
2,042
3,358
3,386
2012
2011
–
–
2013
2012
2011
12,870
10,493
12,686
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Highlights of the year
nn Good fund performance in Europe, maintaining strong
track record
nn Acquisition of Invesco’s European CLO management contracts
and subsequent performance enhancement
nn Established US platform, through a strategic transaction
with Fraser Sullivan
nn Launch of two US CLOs since establishing the US platform,
raising c.US$1bn
nn Grew AUM by 92% to £6.4bn at 31 March 2013
Highlights of the year
nn Significantly outperformed cost savings target;
achieved £51m of run-rate operating cost reduction
nn Substantial gross debt reduction with target achieved
ahead of schedule. Gross debt of £917m at 30 April 2013,
a 44% reduction from £1,623m at 31 March 2012
nn Total AUM growth of 23% to £12.9bn, including growth
in third-party AUM of 45% to £9.2bn
nn Material improvement in total return to £373m (2012: £(656)m),
representing 14.2% on opening shareholders’ funds (2012: (19.5)%)
nn NAV per share of 311p, up 11.5%
For more on Debt Management, please go to page 39
Overview
6
3i Group plc Annual report and accounts 2013
Chairman’s statement
I am pleased to announce a strong set of
results showing improved performance
across our business.
FY2013 has been a year of significant
change for 3i. We have made substantial
and rapid progress and this has
established solid foundations for the
next phase of our strategic plan.
Sir Adrian Montague
Chairman
Highlights
23%
Growth in total AUM
14.2%
Total return on opening
shareholders’ funds
8.1p
Total dividend per share
Over 12 months ago, commencing
in January 2012, I undertook several
rounds of discussions with our major
shareholders which focused on 3i’s
performance at that time and the
prevailing discount of 3i’s share price
to NAV.
Following the announcement in March 2012 of Michael Queen’s
intention to resign as Chief Executive, I was again in contact with our
shareholders regarding the process to select Michael’s successor.
This culminated in the appointment in May 2012 of Simon Borrows
as 3i’s new Chief Executive with a clear mandate from the Board
to pursue his strategic plan.
On 29 June 2012, within six weeks of his appointment, Simon and his
management team had undertaken a strategic review of the Group
and announced the future strategy for 3i, including an extensive
restructuring plan. Since then, the management team has made rapid
progress in executing this wide-ranging restructuring plan which the
Board believes has now established solid foundations for 3i’s future
growth and success over the longer term.
3i Group plc Annual report and accounts 2013
7
Restructuring and
strategic progress
FY2013 has been a year of significant organisational change at 3i,
the first step of which was a major cost reduction programme to bring
down the Group’s operating costs to be more in line with our annual
cash income.
Alongside this, our Private Equity business has been restructured and
re-focused. This has included the implementation of a comprehensive
programme of initiatives to bring greater focus, consistency and
discipline to its investment processes and asset management
approach. These changes are already making a real difference as
evidenced by the materially improved performance of the Private
Equity investment portfolio as well as a series of realisations at strong
uplifts to book value and healthy cash profits.
In addition to re-shaping our Private Equity business, we have
announced several important initiatives to grow and develop
our Debt Management business.
We have almost doubled third-party AUM in Debt Management
from £3.3 billion at 31 March 2012 to £6.4 billion at 31 March 2013.
This growth has included the acquisition of European CLO
management contracts from Invesco and the strategic transaction
with Fraser Sullivan, a leading specialist US debt manager, to establish
3i’s US debt management platform.
Infrastructure continued to generate strong portfolio income
and deliver steady underlying asset performance in its core
European market. The value of the Group’s 34% shareholding in
3i Infrastructure plc (“3iN”), increased by 7.1% in the year. In addition,
3iN recently announced that following its strategic review and
rebalancing of risk and reward, it will increase its annual distribution
yield objective from 5.0% to 5.5% of opening NAV.
Overall, this demonstrates good progress towards our objective of
growing our third-party fund management activities and generating
a sustainable annual operating profit over time.
Overview 8
3i Group plc Annual report and accounts 2013
Chairman’s statement
Performance and results
Summary and outlook
Over the last year, our focus has been on restructuring the business
and delivering against each of the strategic priorities and targets
that we set ourselves in June 2012. We have made substantial and
rapid progress in this respect and we believe that this effort has
established solid foundations for the next phase of our strategic plan.
In particular, the materially improved performance of our Private
Equity portfolio and the growth of our Debt Management business
provide positive momentum going into this next phase of 3i’s
development. We have set out a clear strategic plan to maximise
shareholder value and we will continue to work hard to deliver this.
All of this is against an economic backdrop that remains uncertain
and volatile. However, we are confident that the substantial progress
that we have already made will ensure that 3i delivers value to
its shareholders.
Throughout this period of significant change, 3i’s employees have
risen to the challenge and shown both resilience and commitment.
On behalf of the Board, I would like to thank all of our employees for
their hard work in helping to deliver a strong set of results in such
challenging conditions.
I have been fortunate to have the support of a hard working,
committed and very capable Board throughout this period of change.
With the progress that has been achieved, however, Willem Mesdag,
who has served most ably as Chair of our Valuations Committee,
feels able to step down and focus his attention on his US interests.
He will be leaving us later this year, with my grateful thanks, and
I expect over time progressively to continue the renewal of the Board.
Sir Adrian Montague
Chairman
Despite continuing difficult macroeconomic conditions and a subdued
M&A market, the Group’s financial results for the year to 31 March
2013 show significant improvement compared to the prior year.
In the year to 31 March 2013, total AUM grew by 23% to £12.9 billion
(2012: £10.5 billion), reflecting the material growth in our Debt
Management business in the period. Third-party AUM grew
by 45% to £9.2 billion (2012: £6.3 billion), representing 71% of total
AUM (2012: 60%).
Total return for the Group in the period was a profit of £373 million
representing 14.2% on opening shareholders’ funds, a significant
improvement on the prior year loss of £(656) million and a negative
return of (19.5)%. Good growth in portfolio earnings and strong
realisations above book value in our Private Equity business
contributed to a gross portfolio return for the Group of £546 million
in the period compared to a loss of £(329) million in the prior year.
At the time of our half-yearly results announcement in November
2012, the Board declared an interim dividend of 2.7 pence per share
and announced its intention to propose a total dividend for the year
of 8.1 pence per share. The Board is therefore recommending a final
dividend of 5.4 pence per share, subject to the approval of
shareholders at the AGM.
In May 2012, the Board announced a strengthened distribution policy
designed to give shareholders a direct share in the success of the
Group’s realisation activities by adopting a policy of returning to
shareholders a share of gross cash realisations subject to certain
conditions. Under this new policy, the aggregate distribution to
shareholders, including the annual base dividend, will be at least
15% and up to 20% of gross cash realisation proceeds, provided that
gearing is less than 20% and provided that 3i is on track to reduce
gross debt to less than £1 billion. Given that these criteria have now
been satisfied following the receipt of proceeds from the sale of
Mold-Masters, we intend to initiate additional shareholder distributions
above the annual base dividend in respect of the financial year ending
31 March 2014.
I am pleased to report that for the year ended 31 March 2013,
NAV grew by 11.5% to 311 pence per share after taking into account
implementation costs and dividends in the period representing
5.8 pence and 8.1 pence per share respectively. In particular,
in the three months to 31 March 2013, NAV grew by 8.7% from
286 pence per share at 31 December 2012.
Since the announcement of 3i’s future strategy, there has been
a material appreciation in 3i’s share price, and the discount of
3i’s share price to reported NAV has been eliminated. 3i’s share
price increased by 65% from 191 pence at close of business on
28 June 2012 (the day before the announcement) to 316 pence
at close of business on 28 March 2013 (the last trading day of
the financial year). Over this same period, the premium/discount
of 3i’s share price to last reported NAV has moved from a
material discount of 31% to a premium of 10%. This is pleasing
and demonstrates the growing confidence in our team and an
endorsement of the new strategic plan. However, significant work
remains and we will continue to work hard to achieve our strategic
goal and further re-build value for our shareholders.
Strategy and business model
3i Group plc Annual report and accounts 2013
9
We have made significant progress
in the turnaround of 3i and this is
demonstrated by our strong results.
We are only one year into our three year
strategic plan and there is plenty more
that we are doing to drive performance
and generate further shareholder value.
Simon Borrows
Chief Executive
Our strategic priorities
1 Create a leaner
organisation with
a cost base more
closely aligned
with its income
2 Improve
consistency
and discipline
of investment
processes
and asset
manage ment
approach
For more on our strategy, please go to page 16
3 Re-focus
and re-shape
the Private
Equity business
4 Grow third-party
AUM and income 5 Improve capital
allocation,
focusing on
enhanced
shareholder
distributions and
re-investment
in our business
Strategy and business model 10
3i Group plc Annual report and accounts 2013
Chief Executive’s review
On 29 June 2012, following a strategic
review of the business, I announced the
future strategy for 3i, the first step of
which involved the launch of a major cost
reduction programme and restructuring
of the business.
We are only one year into our three year strategic plan and
I am pleased to report that we have made significant and rapid
progress in the turnaround of 3i. We have delivered against all of
the immediate priorities and targets for financial year 2013 that
we set out in our plan in June last year. These actions are described
in more detail in the following pages.
During this period of considerable change at 3i, and against
a backdrop of difficult and volatile economic conditions, we have
delivered a strong set of Group results for the year to 31 March 2013.
These results underline the substantial progress that we have
already made through implementing the first phase of our multi-year
strategic plan.
We are focused on executing the next phase of our plan, and there
is plenty more that we are doing to drive performance and generate
further shareholder value.
Strategic goal
and the 3i Value Build
3i’s strategic goal is to be a leading international manager of
third-party and proprietary capital with three strong investment
businesses delivering top quartile cash investment returns over
the longer term:
nn Focused mid-market Private Equity;
nn Class-leading Infrastructure; and
nn Growing Debt Management.
Each of these businesses has different drivers and return
characteristics. Together, they provide an attractive balance
of income and capital returns. We believe that the combination
of our asset management skills across these three complementary
platforms, together with our strong balance sheet and access
to permanent capital, represents a differentiated and attractive
value proposition.
At 3i’s half-yearly results and strategy update in November last year,
I set out the key phases of our plan to deliver this strategic goal
by financial year 2016. These are outlined on page 18.
We have executed successfully the first phase of this strategic plan
(the year of “Restructuring”), and we are already making strong
progress towards delivering the full benefits of this in financial years
2014 and 2015 (the years of “Transition and delivery”).
The clear objective of this multi-year strategic plan is to improve
business performance and maximise value for 3i, its shareholders
and its fund investors – we call this the “3i Value Build” and
it comprises:
nn Growing Private Equity investment portfolio earnings through the
asset management improvement initiatives, and in turn, increasing
the value of our portfolio;
nn Realising investments at values representing good uplifts to book
value and strong cash-on-cash multiples, thereby optimising value
from the portfolio and enhancing its valuation rating;
nn Generating a sustainable annual operating profit from our fund
management activities through growth in third-party income
combined with a right-sized cost base;
nn Utilising our strong balance sheet and permanent capital to take
advantage of further value-creating growth opportunities across
our businesses; and
nn Increasing shareholder distributions through our enhanced
distribution policy which provides shareholders with a direct share
of our realisation proceeds above the base annual dividend level.
3i Group plc Annual report and accounts 2013
11
Strategic priorities and
progress in FY2013
In June last year, when I announced the future strategy for 3i, we set
out our immediate priorities and targets for the business in the first
phase of our strategic plan. Our progress against each of these
priorities is described on the following pages.
1. Create a leaner organisation with a cost base
more closely aligned with its income
My first priority was to create a fitter and more efficient 3i.
In June 2012, we set out key targets for the reduction of operating
costs, including reducing staff and consolidating our international
network of offices. The table below sets out these key targets
for financial year 2013 and our progress against each of them.
We have significantly outperformed our 31 March 2013 cost reduction
target through a combination of over-achievement against the
previously identified operating cost savings as well as the
identification of further areas of efficiency as we have been
implementing the restructuring. By 31 March 2013, we achieved
annualised run-rate operating cost savings of £51 million,
28% ahead of our original target of £40 million. To achieve these
savings, we have incurred implementation costs (including the costs
of associated redundancies) of £30 million in financial year 2013,
consistent with the limit that we set ourselves when we launched
the restructuring.
It is in this context that we have set a more ambitious cost reduction
target for financial year 2014. We are now targeting cumulative
annualised run-rate operating cost savings of £60 million by
31 March 2014, on a like-for-like basis with the opening run-rate
operating cost base of £185 million as at 31 March 2012. This
represents a significant upwards revision by 33% from the original
cost reduction target of £45 million by 31 March 2014. To realise
these additional cost reductions, we expect to incur up to £7 million
of further implementation costs in financial year 2014. Please see
page 47 for further information.
The overall objective is for the Group’s annual cash income to cover
its annual operating costs. To help you measure our progress against
this objective, we have introduced a new key performance indicator
called “Annual operating cash profit”. This is defined in more detail on
page 48, but in summary it is the difference between our annual cash
income (cash fees from managing third-party funds and cash income
from our investment portfolio) and our annual operating expenses,
excluding restructuring costs. In the past, 3i has operated at a material
deficit on this measure, and our target is to eliminate this deficit on
a run-rate basis by 31 March 2014.
Key targets announced on 29 June 2012 1
Reduce staff
Headcount reduction of over 160 staff
by 31 March 2013.
Consolidate office
network
Re-shape the international network with
the closure of offices in Barcelona,
Birmingham, Copenhagen, Hong Kong,
Milan and Shanghai, reducing the total
number of offices from 19 to 13.
Progress in FY2013
Net headcount reduction of 168 staff at
31 March 2013, before the Debt Management
strategic acquisitions.
Represents a reduction of 39% of the Group’s
total headcount of 435 at 31 March 2012.
All of these office closures were completed
during FY2013. Total number of offices
reduced from 19 to 13.
Additional run-rate operating cost savings
achieved from reducing office space in
London and New York.
Operating
cost savings
Targeted annualised run-rate operating
cost savings of £40m to be achieved by
31 March 2013.
Achieved annualised run-rate operating
cost savings of £51m at 31 March 2013,
28% ahead of original £40m target.
These cost savings were set against
a base-line of annualised run-rate operating
costs of £185m at 31 March 2012.
Given timing effects and implementation
costs incurred, actual reported operating
costs in FY2013 were expected to be at
a similar level to FY2012.
This reduction represents 28% of the
base-line operating costs at 31 March 2012.
Actual reported operating costs of £170m,
below the level in FY2012 of £180m, and
include implementation costs and additional
operating costs from the acquired Debt
Management businesses.
1 As stated in 3i’s announcement on 29 June 2012, the headcount and operating cost reduction targets exclude the impact of certain corporate transactions
which were completed subsequently and which relate to our Debt Management business. These transactions are: i) the acquisition of certain European CLO
management contracts from Invesco (completed in August 2012); and ii) the establishment of 3i’s Debt Management platform in the US through a transaction
with Fraser Sullivan (completed in September 2012). These transactions added 15 staff to the Group’s headcount.
Strategy and business model 12
3i Group plc Annual report and accounts 2013
Chief Executive’s review
As part of bringing greater cost efficiency and focus across
the business, we have removed organisational complexity and
bureaucracy. This has included rationalising the numerous existing
committee structures, de-layering the organisation and streamlining
processes. Shortly after I announced 3i’s future strategy in June 2012,
in order to drive the change programme effectively, I put in place a
new leadership team, the Executive Committee, which is the principal
day-to-day decision-making body in respect of managing the Group
(see page 61).
All of these actions have led to a simpler organisational structure
with shorter lines of communication, and this in turn is transforming
the culture of 3i to be much more energised and dynamic. This is
enabling faster and more consistent decision-making across the
business in order to effect the changes that are necessary to deliver
improved performance.
2. Improve consistency and discipline of investment
processes and asset management approach
In June last year, I announced six asset management improvement
initiatives, covering all aspects of 3i’s investment and asset
management processes within Private Equity. In particular, these
initiatives were designed to ensure a highly selective and consistent
approach to new investment, earlier identification of potential issues
with existing portfolio companies, and well constructed exit strategies
that maximise value in realisation processes. This programme of
initiatives has been substantially implemented and is already making
a real difference. I believe that further benefits will be seen in the
performance of our Private Equity portfolio over time. Examples
of these initiatives include:
Investment review process: we have streamlined our investment
review process, including rationalising the previously separate
Investment Committee and Portfolio Committee structures, each
of which considered investments at different points in their lifecycle.
In July 2012, we moved to a new single Investment Committee which
considers the full spectrum of decisions from investment through
to divestment. The new process brings greater central control and
oversight. As a result, the Investment Committee is more involved
in the early stages of investment processes and has formal oversight
of material changes and other value impacting events between
investment and divestment, including refinancings and senior
management changes.
Management assessment: following a systematic assessment
of key management of our Private Equity portfolio companies, we
have replaced a number of chairmen and chief executives, particularly
in situations where we have underperforming investments. At the
same time, we have reviewed the portfolio company board appointees
from our own investment teams to ensure that we have the right
people and allocation of resource.
Performance monitoring dashboards: we have overhauled our
monthly portfolio reporting processes within Private Equity and
introduced new performance dashboards across our portfolio
companies. These include key financial, operational and strategic
metrics and commentary. The Group’s Investment Committee
and Private Equity Partners now meet monthly to review these
dashboards and to decide on actions and the appropriate allocation
of resources. This initiative has transformed the way we manage
our Private Equity investment portfolio.
Exit planning: since March 2012, we have been working closely
with our Private Equity portfolio companies to develop clear and well
constructed exit strategies for each of our investments. These plans
are reviewed and refined on an ongoing basis in response to,
for example, market developments or unsolicited approaches.
This is all done in the context of maximising the value to 3i’s
shareholders and fund investors of any realisation activity, as well
as optimising capital allocation and resource across our business.
The fruits of this effort have already been evidenced by recent
realisations at attractive prices, including for example, Civica, Hyperion,
Mold-Masters, NORMA and Quintiles, and there are a number of other
investments in exit processes that are well advanced.
Vintage control policy and capital allocation: last year, we
implemented a new vintage control policy for the Group’s own balance
sheet investments. This is designed to minimise the risk of over-
investing at the top of the private equity cycle in the future. In addition
to monitoring investment and capital allocation within Private Equity,
we have extended this approach to the rest of the Group and have
combined it with our broader risk management framework which
assesses and monitors other key risks for the Group. This forms part
of our refined risk management approach which is more closely
linked to our new strategic objectives. Further information can
be found on pages 50 to 55.
3i Group plc Annual report and accounts 2013
13
3. Re-focus and re-shape the Private Equity business
4. Grow third-party AUM and income
As well as consolidating the international office network, we have
re-focused our Private Equity business on mid-market investing
in sectors where we have real expertise, and in our core northern
European markets, North America and Brazil. We have suspended
new private equity investment in Asia and Spain, where the focus
of our investment teams is on managing intensively 3i’s
existing investments.
During financial year 2013, we have made a number of important
realisations with aggregate proceeds to 3i of £575 million.
These include EUSA Pharma, Giraffe, HILITE, Mold-Masters and
NORMA. In aggregate, Private Equity realisations in financial year
2013 have generated an uplift of 49% over opening book value and
a money multiple of 2.1x. Many of these realisations were based
on the detailed exit plans that we put in place a year ago in order
to optimise the value of those investments, and we will continue
to execute our realisation plans in this way.
Over the next two years, the focus of our investment teams
will continue to be on managing intensively the existing portfolio.
We will continue to drive performance improvement and value-
building strategies and to seek realisations where conditions are right
to maximise proceeds. This will further demonstrate the quality
of our asset management approach and the value of our Private
Equity portfolio, and is a key part of re-establishing our investment
track record.
At the same time, we are pursuing a highly selective and measured
approach to new investment. We will only focus on sourcing
investment opportunities in the sectors and geographies where
we believe that we have demonstrable competitive advantage.
While the level of new opportunities being reviewed by our investment
teams has increased materially over the last year, our investment in
the last year has been low as we continue to see a wide gap between
buyers’ and sellers’ price expectations.
Over time, 3i aims to generate more third-party income through the
raising of further third-party funds under management. Despite the
current tough fundraising environment, we have made good progress,
growing third-party funds by 45% in financial year 2013. Third-party
funds now represent 71% of our total assets under management,
compared with 60% a year ago.
Private Equity: we are investing through a combination of third-party
and proprietary capital.
nn In March 2013, 3i announced it had completed its second Brazilian
investment with the acquisition of leading Brazilian eyewear retailer,
Óticas Carol. The 3i led consortium included institutional investors
Neuberger Berman and Siguler Guff.
nn 3i has established framework arrangements with a number of
leading investors to invest alongside 3i in mid-market European
private equity buy-out opportunities. These arrangements include
fees and carry payable to 3i. We believe that these innovative
arrangements with market-leading institutions demonstrate
confidence in 3i’s investment capabilities as well as providing
access to additional investment capital.
Infrastructure: the European portfolio continued to perform well
and generate a strong level of portfolio income.
nn Infrastructure is a key contributor to the Group’s annual cash
income through both third-party fees and portfolio income.
In addition, the value of the Group’s 34% shareholding in
3i Infrastructure plc increased by 7.1% during financial year 2013.
nn There is strong demand for infrastructure assets as investors seek
yield, and we are seeing a number of interesting investment
opportunities in our core markets. In addition, we are continuing
to explore opportunities to grow our existing infrastructure platform
and product offering.
Debt Management: we have almost doubled third-party AUM over
the past 12 months from £3.3 billion at 31 March 2012 to £6.4 billion
at 31 March 2013.
nn We have made significant progress in growing our Debt
Management business through a number of initiatives, including
through the strategic transaction last year with Fraser Sullivan
to establish 3i’s US debt management platform. This transaction
closed in September 2012, and in November 2012 we launched
a new US$450 million CLO (Jamestown I) in the US, and then in
February 2013, we refinanced an existing CLO in the US, upsizing
it to US$500 million (Jamestown II).
nn We continue to see a number of attractive opportunities for further
growth and development of our Debt Management business
through fund launches and bolt-on acquisitions.
Overall, this demonstrates good progress towards our strategic
objective of growing profitably our third-party fund management
activities and generating a sustainable annual operating profit.
We believe that over the medium term, this will create material
additional value for our shareholders, over and above the value
of our proprietary investments.
Strategy and business model 14
3i Group plc Annual report and accounts 2013
Chief Executive’s review
5. Improve capital allocation, focusing on enhanced
shareholder distributions and re-investment in
our business
A key component of our new strategy is to change fundamentally
3i’s capital allocation approach so that over time the Group uses less
capital to pay operating costs, funding costs and debt repayments,
and instead directs more capital towards shareholder distributions
and re-investment in our core investment businesses.
As well as achieving a significant reduction in operating costs in
financial year 2013, we have also substantially reduced our gross
debt and funding costs. Since 31 March 2012, gross debt has reduced
from £1,623 million to £1,081 million as at 31 March 2013 and to
£917 million by 30 April 2013, representing a total reduction of 44%.
Therefore, 3i has met ahead of schedule its target of reducing gross
debt to below £1 billion by June 2013. As a result, in financial year
2014, we expect gross interest costs to be less than £60 million
(excluding the costs of any further early debt repayment), which
is 42% lower than the level in financial year 2012 of £103 million.
The Group’s balance sheet is in a very strong position with low
gearing and high levels of liquidity. As announced in May last year,
we have strengthened the Group’s distribution policy in order to give
shareholders a direct share in the success of the Group’s realisation
activities provided that gearing is less than 20% and gross debt is less
than £1 billion. We have now satisfied these conditions, and we expect
to initiate additional shareholder distributions above the annual base
dividend in respect of financial year 2014. Specifically, for the
purposes of the distribution calculation in financial year 2014, we will
include the proceeds of £222 million from the sale of Mold-Masters,
which were received in March 2013.
A further dimension of our improved capital allocation strategy relates
to the structure of our compensation arrangements. In the past,
I believe that annual compensation costs as a proportion of the
Group’s income have been too high and have not represented an
equitable split of returns between 3i’s shareholders and employees.
It is also critical that compensation is not viewed just as a cost to the
business, but it should also be seen as a key tool to deliver our
strategic objectives and drive performance. Therefore, in July 2012,
we launched a Group-wide review of 3i’s compensation arrangements
with the following key objectives:
nn Ensure a fair and transparent split of returns between 3i’s key
stakeholders, including between shareholders and employees.
nn Closer alignment of our compensation arrangements with our
key strategic objectives.
nn Clearer link between shareholder returns and compensation,
including a greater proportion of compensation in 3i Group
shares.
nn Greater differentiation between individuals based on their relative
personal performance and contribution.
Following discussions with shareholders and employees, we designed
new compensation arrangements to achieve these objectives, and we
are now implementing them. Further information is provided in the
Directors’ remuneration report on pages 76 to 85.
Performance and results
Last year was another challenging year for our sector and for the
broader financial services industry as we navigated difficult economic
conditions and a changing regulatory landscape. On top of this, it was
also a year of considerable change at 3i as we implemented a major
restructuring plan. We have stayed focused on our objectives
throughout all of this, and I am delighted to report that we have met
or exceeded all of the targets that we set ourselves for financial year
2013 and we have delivered a strong set of Group results.
In the 12 months to 31 March 2013, total gross portfolio return for
the Group was £546 million compared to a loss of £(329) million
in the previous year. Each of our three business lines contributed
to this result, delivering improved performances compared to last
year. Private Equity was the largest contributor with a gross portfolio
return of £518 million this year compared to a loss of £(341) million
last year.
During financial year 2013, we achieved a series of strong realisations
within our Private Equity business. This delivered total realised profits
over the last valuation of £190 million, a significant increase compared
to £22 million in financial year 2012, and representing an uplift of
49% on the opening portfolio value of those investments realised.
This is an excellent result and further evidence of the inherent value
of our investment portfolio.
The Group’s net portfolio return this year was £432 million compared
to a loss of £(425) million in financial year 2012. Again, this represents
a material improvement in performance compared to last year.
This is despite the fall in third-party fee income from Private Equity,
reflecting the impact of the Growth Capital Fund and Eurofund V
coming to the end of their investment periods.
The fall in fee income from Private Equity was partly off-set by the
significant progress we have made in reducing the Group’s operating
cost base. We significantly exceeded our cost reduction target for
31 March 2013, and materially reduced the deficit between the Group’s
annual cash income and its annual operating costs. As a result of the
actions we have taken, we now expect that Group cash income will
cover operating costs by 31 March 2014 on a run-rate basis. This is
not just about cost cutting; it also requires us to grow cash income,
both from third-party funds under management as well as from
our investment portfolio, particularly in our Debt Management and
Infrastructure businesses. We have already made a good start in this
respect by growing total third-party AUM by 45% in financial year 2013
from £6.3 billion to £9.2 billion. This was largely driven by growth
in Debt Management, including the strategic acquisition of Fraser
Sullivan. However, cash investment levels were low in the period,
falling to £172 million in financial year 2013 from £464 million in
the previous year. This reflects a number of factors, not least the
continued low levels of M&A activity in Europe as well as our highly
selective approach to new investment in the current environment.
3i Group plc Annual report and accounts 2013
15
Outlook
While economic conditions continue to be challenging across
a number of our key markets, we have made significant and rapid
progress in executing the first phase of our turnaround plan, and
this is already delivering improved performance. The actions we
have taken have put 3i in a strong position to withstand future
economic headwinds and uncertainty, and importantly, to take
advantage of emerging opportunities. Our strong balance sheet and
access to permanent capital represent a key competitive advantage.
With a clear strategy and strong management team, we look to the
future with confidence as we execute the next phase of our strategic
plan. Our objective is simple; it is to drive improved business
performance and generate further shareholder value over the
coming years.
It has been a busy and demanding period for everyone at 3i over
the last year with many changes and new initiatives. Much of what
we have accomplished is down to their hard work and commitment
and I would like to thank all of our employees for their dedication
and endurance through this challenging period for 3i.
Simon Borrrows
Chief Executive
During the period, NAV per share grew by 11.5% to 311 pence
at 31 March 2013 after taking into account implementation costs
and dividends in the period representing 5.8 pence and 8.1 pence
per share respectively. In particular, strong growth was seen in the
last three months of the financial year, with NAV per share growing
by 8.7% from 286 pence at 31 December 2012.
In summary, these are strong results and show a marked
improvement in performance compared to last year. Between
28 June 2012 (the day before the announcement of 3i’s future strategy)
and 28 March 2013 (the last trading day of financial year 2013),
3i delivered a total shareholder return of 67%. This is top quartile
performance compared to the FTSE All-share index, which delivered
an average total shareholder return of 22% over the same period.
Strategic objectives and
priorities for FY2014–15
We have made rapid progress in executing the restructuring plan
during financial year 2013, and we expect the full benefits of these
actions to come through during the next phase of our strategic plan
in financial years 2014 and 2015 – Transition and delivery. In this next
phase, our overall strategic objectives are:
nn Cover operating costs with annual cash income.
nn Grow third-party income and generate a sustainable annual
operating profit from our fund management activities.
nn Improve capital allocation strategy, focusing on enhanced
shareholder distributions and re-investment in our core
investment businesses.
To achieve these key objectives, our priorities and targets
for financial years 2014 and 2015 are set out on page 19.
The clear objective of all of these steps is to improve business
performance and maximise value for the Group, our shareholders
and our fund investors. This is the 3i Value Build.
Our business model is evolving. Historically, 3i was a private equity
investor with returns dominated by realised gains from investment
sales and unrealised portfolio value growth. Our new strategy is
moving the business towards being a more balanced combination
of Private Equity, Infrastructure and Debt Management. Together,
these three investment platforms provide an attractive balance
of annual income and capital returns. In particular, we believe that
the combination of our asset management skills across these three
complementary platforms, together with our strong balance sheet
and access to permanent capital, represents a differentiated and
attractive value proposition for shareholders.
While the value of our proprietary investments is the principal driver
of our market value today, we believe that our fund management
platform is capable of generating sustainable and growing annual
profits over the medium term. We believe that this model is capable
of generating significant additional shareholder value.
Strategy and business model 16
3i Group plc Annual report and accounts 2013
Our strategic goal
Clear vision and strategy
3i’s strategic goal is to be a leading international manager of third-party and proprietary capital
with three strong investment businesses delivering top quartile cash investment returns over
the longer term:
n Focused mid-market Private Equity;
n Class-leading Infrastructure; and
n Growing Debt Management.
Each of these businesses has different drivers and return characteristics.
Together, they provide an attractive balance of income and capital returns.
We believe that the combination of our asset management skills across these three
complementary platforms, together with our strong balance sheet and access to permanent
capital, represents a differentiated and attractive value proposition.
Three strong and complementary business lines
Private Equity
Infrastructure
Debt Management
Illustrative
capital allocation
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Proprietary capital
Third-party capital
Key return drivers
1. Portfolio returns
2. Portfolio income
3. Fee income
1. Portfolio income
2. Fee income
3. Portfolio returns
1. Fee income
2. Portfolio income
3. Portfolio returns
Key characteristics
and sensitivity to
market cycle
nn Pro-cyclical asset class
nn Realised and unrealised
capital gains and
carried interest
nn Counter-cyclical asset class
nn Income from investment
portfolio
nn Recurring annual fee
income from permanent
capital vehicle
nn Low exposure to volatility
of underlying assets
nn Recurring annual third-party
fee income
nn Proprietary capital “light”
For more on our business lines, please go to pages 28 to 43
The 3i Value Build
3i Group plc Annual report and accounts 2013
17
The clear objective of all of the steps within our multi-year strategic plan is
to improve business performance and maximise value for 3i, its shareholders
and its fund investors – we call this the “3i Value Build” and it comprises:
Grow Private Equity
investment portfolio earnings
n Grow NAV
Realise investments at good
uplifts to book value and
strong cash-on-cash multiples
n Optimise value of existing
portfolio and enhance
P/NAV rating
Generate a sustainable annual
operating profit from our fund
management activities
n Add value beyond NAV
Utilise strong balance sheet
and permanent capital
n Invest in value-creating
growth opportunities
Increase shareholder
distributions through our
enhanced distribution policy
n Greater capital efficiency;
focus on shareholder
distributions and attractive
re-investment opportunities
Strategy and business model 18
3i Group plc Annual report and accounts 2013
Delivering our strategic goal
Our future strategy
On 29 June 2012, following a strategic review of the business, we announced
the future strategy for 3i and our immediate priorities for the business.
The first step in FY2013 was an extensive organisational change and cost reduction
programme – the year of “Restructuring”. We have made significant and rapid
progress with this restructuring plan and we have met or exceeded all of our
targets for the business in FY2013.
We believe that these actions have established solid foundations for 3i’s future
growth and success, and we expect to see further benefits coming through
in FY2014 and FY2015 – the years of “Transition and delivery”.
Key phases of our strategic plan
FY2013
Restructuring
Immediate priorities:
n Reduce operating costs;
create a leaner organisation
n Reduce gross debt and
funding costs materially
n Achieve greater central
control and business focus
n Improve consistency and
discipline in investment
and asset management
n Re-focus and re-shape
the Private Equity business
n Review Group-wide
compensation and define
new arrangements
FY2014–15
Transition
and delivery
FY2016+
Strategic goal
Key objectives:
n Cover operating costs
with annual cash income
n Grow third-party income and
generate a sustainable annual
operating profit from our fund
management activities
n Improve capital allocation,
focusing on enhanced
shareholder distributions and
re-investment in our core
investment businesses
Clear strategic goal:
To be a leading international
manager of third-party and
proprietary capital with three
strong investment businesses
delivering top quartile cash
investment returns over the
longer term:
n Focused mid-market
Private Equity
n Class-leading Infrastructure
n Growing Debt Management
Our strategic priorities and progress
3i Group plc Annual report and accounts 2013
19
Strategic priorities
Progress in FY2013
Priorities for FY2014–15
1
Create a leaner
organisation with
a cost base more
closely aligned
with its income
n Net reduction of 168 staff before Debt Management acquisitions;
ahead of target reduction of more than 160 staff
n Re-shaped international network with closure of six offices,
reducing network to 13 offices
n Achieved greater central control and business focus through removal
of organisational complexity and bureaucracy
n £51m of run-rate operating cost reduction; 28% ahead of £40m target
n New target of £60m of cumulative
run-rate operating cost reduction
by 31 March 2014; 33% increase
from original target of £45m
n Cover operating costs with annual
cash income by 31 March 2014
on a run-rate basis
2
Improve
consistency
and discipline
of investment
processes
and asset
management
approach
3
Re-focus and
re-shape the
Private Equity
business
4
Grow third-party
AUM and income
n Substantially implemented programme of six asset management
n Grow Private Equity investment
improvement initiatives across Private Equity
– Investment review process
– People: governance and resourcing
– Operational capabilities, knowledge management and networks
– Monitoring and performance tracking
– Valuation process, exit strategy and planning
– Systems upgrade and reporting
n Implemented new vintage control policy
portfolio earnings through
asset management
improvement initiatives
n Continue to re-establish investment
track record through improved
performance and new investment
n Roll-out of upgraded Private
Equity system
n Combined into single business unit
n Re-focused Private Equity on mid-market investing in our core
northern European markets, North America and Brazil
n Continued to manage intensively the existing portfolio with total
realisations of £575m, representing an uplift to opening value of 49%
and a money multiple of 2.1x
n Private Equity
– Established framework arrangements with a number of leading
investors to invest alongside 3i in Europe
– Completed second Brazilian investment alongside co-investors
n Infrastructure
– European portfolio continued to perform well and generated
a strong level of portfolio income
n Debt Management
– Substantial increase in third-party AUM from £3.3bn to £6.4bn
– Acquisition of Invesco European CLO management contracts
– Strategic transaction with Fraser Sullivan, to establish US debt
management platform
– Launched two US CLOs, raising c.US$1bn
n Continue to manage intensively
the existing portfolio and realise
investments at values representing
good uplifts to book value and strong
cash-on-cash multiples, thereby
optimising the value of the portfolio for 3i,
its shareholders and its fund investors
n Selective investing in our core
markets using a combination of
proprietary capital and third-party
co-investment
n nContinue to explore opportunities
to further grow and develop our
three fund management platforms
n Grow annual operating profit
from fund management activities,
demonstrating additional value
beyond NAV
5
Improve capital
allocation, focusing
on enhanced
shareholder
distributions and
re-investment
in our business
n Announced strengthened distribution policy in May 2012
to give shareholders a direct share of our realisation proceeds
n Achieved gearing of less than 20% and gross debt reduction ahead
of schedule to less than £1bn
– 44% reduction in gross debt from £1.6bn to £0.9bn by 30 April 2013
(31 March 2013: £1.1bn)
n Reviewed Group-wide compensation arrangements. Established new
principles and designed new arrangements
n Initiate additional shareholder
distributions above the annual
base dividend in respect of FY2014
n Reduce gross interest payable to
less than £60m, excluding costs
of early debt repayment
n Implement new compensation
arrangements across the Group
Strategy and business model 20
3i Group plc Annual report and accounts 2013
Business review
We continue to make progress in restructuring
the business and balance sheet.
Julia Wilson
Finance Director
Group overview
3i Group is an international investor with
three complementary business lines.
All three business lines invest using
a combination of proprietary capital from
the Group’s own balance sheet and
third-party capital. Total assets under
management (“AUM”) were £12.9 billion at
31 March 2013, an increase of £2.4 billion
or 23% in the year (2012: £10.5 billion).
This business review provides detail
on our performance for the 12 months
to 31 March 2013 (“the period”) as well
as our financial position as at that date,
together with comment on our markets
and principal risk factors.
The Group’s performance for the period resulted in a total return
of £373 million, or a profit on opening shareholders’ funds of 14.2%,
a significant improvement on the prior year (2012: £(656) million,
(19.5)%). Portfolio performance was good in the year, with improved
earnings growth and strong realisations above March 2012 valuations,
generating a gross portfolio return of £546 million or 17.0% of opening
portfolio value (2012: £(329) million, (8.2)%). Operating expenses and
net interest costs were at similar levels to the prior year but include
£55 million of charges and items (£30 million re-organisation
implementation and £25 million of accelerated interest) linked to the
implementation of the strategic priorities announced in June 2012.
We end the year with a substantially lower cost base, with an annual
run-rate of £140 million, including the annualised costs of acquired
businesses, compared with £185 million at 31 March 2012, the benefit
of which will be seen in the next financial year.
Two acquisitions were completed in the period. The acquisition
of Invesco’s European CLO management contracts in August 2012
added £1.1 billion of AUM. The transaction with Fraser Sullivan
in September 2012 established 3i’s Debt Management platform
in the US and added £2.0 billion of AUM by the year end.
Realisations were achieved at good uplifts to the March 2012 value,
generating proceeds of £606 million, an uplift of 47% over opening
book value.
Investment levels were low in subdued mergers and acquisitions
(“M&A”) markets, with cash investment of only £172 million
(2012: £464 million), primarily in our Private Equity and Debt
Management businesses.
We used net realisations in the period to reduce gross debt to
£1.1 billion at 31 March 2013 (2012: £1.6 billion) and, since the year
end, have repaid a further £164 million. Consequently, at 30 April 2013,
gross debt was £917 million, a reduction of £706 million and
significantly ahead of our target to reduce gross debt to below
£1.0 billion by June 2013. The one-off costs associated with this total
reduction in gross debt offset the interest cost savings in the period.
We therefore expect a material reduction in gross interest costs
in the next financial year, to below £60 million, excluding the costs of
any further early debt repayment (2013: £97 million). Net debt also
reduced in the year to £335 million, with a consequent reduction in
gearing to 11% at 31 March 2013 (2012: £464 million, 18%).
In June 2012, we set an objective to improve the operating cash flow
of the Group so that fees and portfolio income cover costs over time.
As a result of the growth in Debt Management and the Group
restructuring programme, the position has improved, with operating
cash losses of £(8) million in the year (2012: £(20) million). We have
added this disclosure into the Financial review on page 48. We expect
this to improve further in the next financial year as we benefit from
a full year of income from Fraser Sullivan and the Invesco fund
management contracts and the full year effect of our cost reduction
programme. Consequently, we have now set a target for cash income
to cover operating expenses by 31 March 2014 on a run-rate basis.
The performance set out above resulted in an NAV per share of
311 pence (2012: 279 pence) after taking into account a 5.8 pence
reduction for implementation costs and the payment of 8.1 pence
in dividends per share relating to last year’s final dividend and this
year’s interim dividend.
3i Group plc Annual report and accounts 2013
21
Financial data and key performance indicators
The table below summarises our financial results and our key performance indicators. The rest of this section of the report includes more detail
on the performance in the year.
Returns
Gross portfolio return
Gross portfolio return on opening portfolio value
Net portfolio return
Net portfolio return on opening portfolio value
Total return
Total return on opening shareholders’ funds
Dividend per ordinary share
Actual operating expenses
Run-rate operating expenses
Operating expenses as a percentage of assets under management1
Annual operating cash profit/(loss)
Assets under management (“AUM”)
Proprietary capital
Third-party capital
Total assets under management
Balance sheet
3i portfolio value
Gross debt
Net debt
Gross interest payable
Net interest payable
Gearing
Liquidity
Net asset value
Diluted net asset value per ordinary share
Investment activity
Cash investment
Realisations
Year to/as at
31 March 2013
Year to/as at
31 March 2012
£546m
17.0%
£432m
13.5%
£373m
14.2%
8.1p
£170m
£140m
1.3%
£(8)m
£(329)m
(8.2)%
£(425)m
(10.6)%
£(656)m
(19.5)%
8.1p
£180m
£185m
1.6%
£(20)m
£3,694m
£9,176m
£4,173m
£6,320m
£12,870m
£10,493m
£3,295m
£1,081m
£335m
£97m
£91m
11.4%
£1,082m
£2,934m
311p
£3,204m
£1,623m
£464m
£103m
£91m
17.7%
£1,653m
£2,627m
279p
£172m
£606m
£464m
£771m
1 Actual operating expenses, excluding implementation costs of £30 million in the year to 31 March 2013, as a percentage of closing assets under management.
Business review 22
3i Group plc Annual report and accounts 2013
Market environment
Macroeconomic conditions
The macroeconomic environment in Europe remained challenging
in the period, restricting the ability of certain Eurozone countries
to return to growth, while balancing austerity measures. Financial
markets and M&A activity, particularly in Europe, reflected this in
contrast to a recovery in activity in the US, Asia and Latin America.
Global M&A activity in 2012 was up 5% year-on-year, while European
volume fell 3% (source: Capital IQ). The final quarter of 2012 was
stronger, with global growth of 12% and growth of 7% in Europe,
compared to the third quarter. However, notwithstanding the increase,
the final quarter of 2012 in Europe was still 4% below the same
period in 2011.
Stock markets in our core markets of the UK, Europe and the US
staged a strong rally since late 2012 with the FTSE 100, Eurostoxx50
and S&P up 11%, 6% and 9% respectively between 1 November 2012
and 31 March 2013. Currency markets experienced high volatility in
the second half of the financial year, with a 6% weakening of sterling
against both the euro and US dollar.
Investment and
fundraising conditions
Private Equity
European private equity activity followed a similar pattern to wider
M&A activity. Annual figures, reported by the unquote” Private Equity
Barometer, showed deal volumes were down 14% in 2012 compared
to 2011, with value down 21%. However, the private equity market saw
an increase in activity in the final quarter, with deal volumes up 21%
and value up 82% quarter-on-quarter. In particular, the increase
in larger transactions reflects a gradual recovery in the health
of the debt markets.
Notwithstanding the increase in activity in the final quarter, deal flow
remains at an historically low level and we expect 2013 to be another
year of slow improvement as market conditions gradually recover.
The US and Latin American markets have seen a different trend.
The US, in particular, regained momentum through 2012. Company
trading, debt availability and therefore market conditions for
investment have been improving and a key trend of the year was
positive US bank support for transaction activity involving companies
with exposure to North America. 3i benefited from this improved
sentiment with the sale of Canada based Mold-Masters in the year
and the IPO of US based Quintiles, shortly after the period end.
Brazil also recovered well from a low in 2011, with a conducive M&A
environment offsetting macro and currency concerns. Transaction
activity was strong, with deal value up 78% in 2012, according to the
Emerging Markets Private Equity Association.
Private equity activity in Asia fell 38% in the year as macroeconomic
concerns, political uncertainty and regulatory obstacles made
investors question investing in the region.
Global private equity fundraising remained stable in 2012, although
at much lower levels than pre-crisis and many firms have scaled
back ambitious fund targets. There continues to be considerable
competition for capital globally; in May 2013, according to Preqin,
264 buyout funds are collectively targeting US$236 billion in
commitments, giving private equity investors the opportunity
to be highly selective when making allocations.
Chart 1: Global Private Equity fundraising 2002 to 2012 US$bn
US$bn
300
250
200
150
100
50
0
400
350
300
250
200
150
100
50
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Capital raised US$bn
Number of funds closed
Source: Preqin.
3i Group plc Annual report and accounts 2013
23
Debt Management
As with M&A activity and private equity, there was a marked
difference between debt management market conditions in the US
and Europe. New Collateralised Loan Obligations (“CLO”) issuance,
to support a resurgence in private equity activity, has been strong
in the US and the market gained momentum throughout the year.
There were 116 CLOs launched in the US in 2012, raising
US$53.5 billion, an increase of over four times on the US$12.2 billion
raised in 2011. Indeed, the final quarter of 2012 alone saw
US$23.5 billion raised and this momentum has continued into 2013,
with 52 new CLOs issued, raising US$26.3 billion. An interesting trend
is the increasing size of issuance through the year, with first quarter
2013 CLOs averaging above US$500 million in size compared with
US$433 million in the third quarter of 2012.
New leveraged loan issuance in Europe in 2012 was €28.5 billion,
down 34% from the 2011 total, with ongoing macro uncertainties and
a lack of primary loan issuance restricting activity. The focus for the
market in Europe was on larger players looking to increase market
share through the acquisition of management contracts and teams
and diversifying into smaller, more flexible, debt funds focused
on secondary trading, high yield bonds and secondary senior debt
markets. Increased private equity deal flow in the final quarter of 2012
and slow recovery in the health of the debt markets across Europe is
expected to improve the market dynamics for CLO issuance in 2013.
Indeed, the first quarter of 2013 saw a small handful of CLO launches
providing evidence of prospects for a nascent recovery in this core
market, after four years of no CLO issuance.
Private equity remains an attractive asset class, but there is a broader
range of alternatives over which investors are able to allocate their
capital. Whilst there is a suggestion that some limited partners will
increase their allocations to private equity in 2013 and 2014, the trends
towards reducing the number of managers with whom they invest will
ensure that the fund-raising market will remain highly competitive
in the near to medium term.
Infrastructure
Infrastructure as an asset class is becoming increasingly attractive
in a persistently low interest rate environment, as investors seek
opportunities that can deliver a stable income. This has resulted
in strong demand for infrastructure assets not only from specialist
infrastructure investors, but also from direct investors such as large
pension funds or sovereign wealth funds. Transaction activity in the
infrastructure market, however, has remained muted and, as demand
for infrastructure assets has continued to increase, price points have
risen, reducing projected returns.
We continue to see good investment opportunities in core
infrastructure, as corporates and financial institutions sell non-core
assets to refocus on their core businesses or to comply with capital
adequacy regulations.
We also believe that the PPP market is likely to provide interesting
opportunities in the future. Investment in social and energy
infrastructure is a core strategy of Europe-wide government agendas
to stimulate economic growth and private sector funding is key to
the success of those ambitions. Over time, we expect resource-
constrained governments throughout Europe to privatise or open
up essential infrastructure markets through PPP-style transactions.
Infrastructure transaction volumes in India have reduced, as a result
of lower GDP growth rates, a growing fiscal deficit, currency volatility
and persistently high inflation. The 3i India Infrastructure Fund
reached the end of its investment period in November 2012 and,
against challenging economic conditions, we have suspended
any new fundraising in this market at present.
Chart 2: Global M&A deals 2002 to 2012 US$bn
US$bn
1,600
1,400
1,200
1,000
800
600
400
200
0
16,000
12,000
8,000
4,000
0
1
Q
3
2
Q
Q
2002
4
Q
1
Q
2
3
Q
Q
2003
4
Q
1
Q
2
3
Q
Q
2004
4
Q
1
Q
4
Q
1
Q
2
3
Q
Q
2005
2
3
Q
Q
2006
4
Q
1
Q
2
3
Q
Q
2007
4
Q
1
Q
4
Q
1
Q
2
3
Q
Q
2008
2
3
Q
Q
2009
4
Q
1
Q
2
3
Q
Q
2010
4
Q
1
Q
2
3
Q
Q
2011
4
Q
1
Q
4
Q
2
3
Q
Q
2012
Deal value US$bn Volume
Source: Dealogic, M&A review, Capital IQ, 3i.
Business review 24
3i Group plc Annual report and accounts 2013
Assets under management
Total AUM grew by £2,377 million to £12,870 million in the period.
This reflected significant growth in Debt Management AUM following
the Invesco and Fraser Sullivan transactions and the subsequent
successful raisings of the Jamestown I and Jamestown II CLOs in
the US. Debt Management AUM was £6,440 million at 31 March 2013,
up 92% in the period from £3,358 million at 31 March 2012.
This growth was partially offset by net divestment activity in
Private Equity. There was also a reduction in AUM as a result
of the investment periods for the India Infrastructure Fund and
the Growth Capital Fund coming to an end, when fees are charged
on invested rather than committed capital and the calculation of
our AUM reflects this change.
The table below summarises the key movements in the period.
Fund by fund listings are shown in the relevant business line sections
of this business review.
Table 1: Reconciliation of movements in assets under management by business line
AUM at 31 March 2012
of which proprietary capital
of which third-party capital
Investment (cost)
Divestment/Distributions (cost)
3i Infrastructure plc NAV movement
Change from committed to invested capital basis
Acquisitions
New funds raised
Foreign exchange movements and other
AUM at 31 March 2013
of which proprietary capital
of which third-party capital
Private Equity
£m
5,401
3,578
1,823
390
(503)
–
(421)
–
–
(16)
4,851
3,145
1,706
Infrastructure
£m
Debt Management
£m
1,734
547
1,187
19
(1)
32
(181)
–
–
(24)
1,579
481
1,098
3,358
48
3,310
23
(50)
–
–
2,471
626
12
6,440
68
6,372
Total
£m
10,493
4,173
6,320
432
(554)
32
(602)
2,471
626
(28)
12,870
3,694
9,176
Chart 3: External investor base for non-listed funds managed
and advised by geographical location as at 31 March 2013
Chart 4: External investor base for non-listed funds managed
and advised by type of investor as at 31 March 2013
North America
UK
Rest of Europe
Asia
Rest of World
4%
9%
29%
11%
Financial institutions
Insurance companies
Funds of funds
Pension funds
47%
Government agencies
Other
Private individuals
Endowments
7%
10%
11%
14%
1%
2%
1%
54%
Investment and realisations
3i Group plc Annual report and accounts 2013
25
Table 2: Investment activity – proprietary capital and third-party
capital year to 31 March
Proprietary capital
Third-party capital
2013
£m
606
(172)
434
(98)
336
2012
£m
771
(464)
307
(182)
125
2013
£m
186
(92)
94
(72)
22
2012
£m
470
(496)
(26)
(78)
(104)
Realisations
Cash investment
Net cash divestment/
(investment)
Non-cash investment
Net divestment/
(investment)
Infrastructure invested £5 million in one new investment, Supreme
Roads in India, in the year (2012: £70 million).
Debt Management invested £31 million in the year in a number of new
initiatives (2012: £36 million). This included, in Europe, the purchase
of European CLO contracts from Invesco for £5 million and net new
investment of £8 million in Palace Street I, the European Credit
Opportunities Fund. In the US, we invested £6 million in each of the
Jamestown I and Jamestown II CLOs and a further £6 million into
the 3i US Senior Loan Fund.
Table 4: Investment by business line for the year to 31 March
Realisations in the year generated cash proceeds of £606 million (2012:
£771 million), offset by cash investment of £172 million (2012: £464 million),
resulting in net cash inflow of £434 million (2012: £307 million). A further
£98 million of investment was in non-cash form (2012: £182 million) and
total investment was £270 million (2012: £646 million). Further detail on
investment and realisations by business line and type is included in
Tables 4, 5 and 6, and by investment in Tables 3 and 7.
Private Equity
of which non-cash
Infrastructure
of which non-cash
Debt Management
of which non-cash
2013
£m
234
113
5
–
31
(15)1
270
2013
£m
128
2
35
7
172
98
270
2012
£m
540
163
70
–
36
19
646
2012
£m
374
12
17
61
464
182
646
Total gross investment
1 Includes net investment in Palace Street I.
Table 5: Investment type for the year to 31 March
New/first investment
Acquisition finance
Other portfolio investment1
Other
Total cash investment
Non-cash investment2
Total gross investment
1 Includes net investment in Palace Street I and syndicated investments in
Private Equity.
2 Includes capitalised interest and unsettled trades in Palace Street I.
Investment
The reduced level of M&A activity in the Group’s markets
led to a lower level of investment activity in the year of £270 million
(2012: £646 million). Total cash investment in the year was only
£172 million (2012: £464 million).
Private Equity invested a total of £234 million in the year (2012:
£540 million). This included £100 million in three new investments: Geka
(£57 million), a German cosmetic packaging business; Blue Interactive
(£29 million), the Brazilian cable television service provider; and Óticas
Carol (£14 million), a Brazilian eyewear retailer. The Private Equity
business also provided £2 million of acquisition finance to existing
portfolio companies to support their growth plans (2012: £12 million) and
£13 million to support restructurings (2012: £9 million). Other non-cash
investment includes capitalised interest of £113 million recognised
in the loan portfolio (2012: £163 million). This included £7 million (2012:
£8 million) of interest which was recognised in the prior year and now
capitalised and £75 million (2012: £87 million) of interest provided
against as a result of the principal loan value being below par.
The reduction in value of Geka relative to cost reflects early
operational issues experienced in the turnaround of this investment.
Performance improved markedly in the first quarter of 2013 following
the implementation of 3i’s investment plan and a change in CEO.
Table 3: New investment in the year to 31 March 2013
Investment
Geka
Blue Interactive
Óticas Carol
3i US Senior Loan Fund LP
Jamestown I
Jamestown II
Supreme Roads
Invesco Funds
Total
Business line
Private Equity
Private Equity
Private Equity
Debt Management
Debt Management
Debt Management
Infrastructure
Debt Management
Country
Germany
Brazil
Brazil
US
US
US
India
UK
Sector
Industrials & Energy
TMT
Consumer
Financial services
Financial services
Financial services
Infrastructure
Financial services
Date
April 2012
July 2012
March 2013
October 2012
November 2012
February 2013
June 2012
August 2012
3i
investment
£m
57
29
14
6
6
6
5
5
128
Value at
31 March
2013
£m
39
29
14
6
6
7
6
6
113
Business review Table 6: Realisations by type for the year to 31 March
Trade sales
Secondaries
Loan repayment
Quoted asset sales
Other
Total
2013
£m
362
54
6
117
67
606
2012
£m
291
349
18
76
37
771
26
3i Group plc Annual report and accounts 2013
Investment and realisations
Realisations
The Group received cash proceeds from realisations of £606 million
in the year to 31 March 2013 (2012: £771 million). These realisations
were achieved at a strong average uplift over opening portfolio value
of 47% (2012: 3%).
Sales to strategic trade buyers were the primary exit routes,
with strong company balance sheets facilitating this activity.
Private Equity generated proceeds of £575 million (2012: £770 million)
at a 49% uplift over opening portfolio value (2012: 3%). Notable exits
included the sale of Mold-Masters, which generated proceeds of
£222 million and an uplift over opening portfolio value of 93%; the sale
of our remaining quoted holding in NORMA for £106 million and a
6% uplift on opening portfolio value; and the sale of EUSA Pharma,
a transatlantic healthcare business, which generated proceeds
of £72 million and an uplift of 157% over opening portfolio value.
The realisations from the Private Equity portfolio generated
a money multiple of 2.1x.
Infrastructure realisations generated proceeds of £31 million,
which primarily reflected the sale of a direct stake in Elenia, the
Finnish electricity distribution and heating business, for £30 million.
3i had taken a position in Elenia prior to syndication to facilitate
3i Infrastructure plc’s investment. A small profit of £1 million was
achieved on this exit.
The Debt Management business is focused on creating value
through earning fees from the provision of fund management
services, so its performance is not driven by the realisation of the
Group’s portfolio investments in the business line. However, realised
profits of £5 million from trading activities within Palace Street I,
the European Credit Opportunities Fund, were achieved in the year.
Further details of the realisations in the year are included in Table 7.
3i Group plc Annual report and accounts 2013
27
Table 7: Realisations in the year to 31 March 2013
Calendar
year
invested
31 March
2012
value
£m
3i realised
proceeds
£m
Profit/(loss)
in the year1
£m
Uplift on
opening
value2
%
Money
multiple
over
cost3
Investment
Country
Private Equity
Mold-Masters
NORMA
Canada
Germany
EUSA Pharma
UK
HILITE4
Mayborn4
Esmalglass
Giraffe
MWM5
Germany
UK
Spain
UK
Germany
Monitise (incl Morse) UK
Halti
VNU/Vouvray
Finland
Benelux
MDY Healthcare4
UK
The Japan Fund
Singapore
ABX5
Instone
Benelux
Nordic
Other investments6
n/a
Infrastructure
Elenia
Other
Finland
n/a
2007
2006
2007
2011
2007
2002
2007
2007
1995
2005
2007
2006
2005
2006
2003
n/a
2012
n/a
Debt Management
Palace Street I
Europe
2011
Total
115
103
28
42
32
21
6
–
12
6
4
3
–
–
–
13
385
29
2
31
n/a
n/a
416
222
106
72
42
32
23
15
13
11
5
4
3
3
2
1
21
575
30
1
31
–
–
107
6
43
–
–
4
9
13
(1)
(1)
–
1
3
2
1
3
190
1
(1)
–
5
5
606
195
93%
6%
157%
–
–
21%
150%
100%
(8)%
(17)%
–
50%
100%
100%
100%
17%
49%
3%
(50)%
–
n/a
n/a
47%
2.7x
5.8x
2.3x
1.6x
2.9x
1.4x
1.5x
3.1x
4.9x
1.4x
0.1x
0.4x
0.7x
5.9x
3.1x
0.2x
2.1x
1.0x
0.7x
1.0x
n/a
n/a
n/a
IRR
22%
39%
18%
36%
19%
4%
7%
31%
84%
4%
(38)%
(6)%
(8)%
139%
40%
n/a
n/a
5%
n/a
n/a
n/a
n/a
n/a
1 Profit/(loss) for the year includes the impact of foreign exchange movements from 31 March 2012 to the date of the sale.
2 Cash proceeds in the period over opening value.
3 Cash proceeds (including income) over cash invested.
4 For partial divestments and recapitalisations, valuations of any remaining investment are included in the money multiple over cost calculation.
5 Deferred consideration.
6 Other investments in Private Equity include the realisation of investments with a cost of £186 million.
Business review 28
3i Group plc Annual report and accounts 2013
Business lines Private Equity
Strong returns performance, delivered
through continued focus on the portfolio
and selective realisations, positions us well
for further new investments.
Alan Giddins
Managing Partner, Private Equity Co-head
Menno Antal
Managing Partner, Private Equity Co-head
Introduction
Business model
3i’s Private Equity business operates across Europe, North America,
Brazil and Asia. At 31 March 2013, the Private Equity portfolio
consisted of 102 companies with operations in over 70 countries.
Assets under management at 31 March 2013 were £4.9 billion (2012:
£5.4 billion). The value of 3i’s proprietary capital invested in the Private
Equity portfolio at 31 March 2013 was £3.1 billion (2012: £3.6 billion).
The announcement of 3i’s new strategy in June 2012 re-focused the
business on the regions where 3i has the most competitive advantage,
with the consequent closure of five investing offices and the scaling
back of resources to focus on portfolio management in a further four
offices. The six key asset management initiatives also announced in
June last year have now been substantially implemented.
We have a team of 74 investment professionals. The team is focused
on making new investments in northern Europe, North America
and Brazil, while actively managing our existing portfolio of assets.
The team in Europe also manages 25 legacy investments, all of which
are minority investments previously disclosed as non-core, with
a total value of £75 million at 31 March 2013.
Having reached the end of the investment period for the 3i Growth
Capital Fund in December 2012 and for Eurofund V in November 2011,
3i has established arrangements with a number of market leading
investors to invest alongside 3i on future transactions in return
for management and other fees and carried interest.
3i’s Private Equity business is focused on investing in mid-market
private equity transactions.
The strategy is built around the following components:
nn identifying and investing annually in five to seven leading mid-
market businesses in northern Europe, North America and Brazil;
nn utilising 3i’s local knowledge and investment disciplines to select
attractive assets, purchase them at the right price and then finance
them appropriately;
nn building these businesses through organic growth, international
expansion and acquisitions, as well as optimising their operations
in partnership with top class management teams;
nn maximising value through timely and well-executed exit
strategies; and
nn generating management fees and carried interest from managed
third-party capital invested alongside 3i’s proprietary capital.
The main driver of performance is investment returns, supplemented
by management fees and carried interest on third-party capital.
During the year, the team reviewed a range of opportunities across
each of our core geographies. From these, two investments were
completed in Brazil and one in Germany. The team completed 24 full
exits, as well as a number of partial returns of capital, generating
proceeds of £575 million at uplifts of 49% over opening value.
3i Group plc Annual report and accounts 2013
29
Mold-Masters
In February 2013, 3i realised
£222 million through the sale
of Mold-Masters, a leading
manufacturer of melt delivery
and control systems for the plastics
industry. The proceeds from the
sale represent a 93% uplift over
the March 2012 opening value
of £115 million and a 2.7x money
multiple on 3i’s initial investment
in October 2007.
More at www.3i.com
Carefully planned exit
During the summer of 2012, working closely
with the company and its management
team, 3i developed a detailed exit plan for
Mold-Masters. An auction process was
initiated in late 2012 which led to interest
from a wide range of private equity and
strategic buyers. Management
presentations were arranged with nine
potential acquirers in January 2013 and,
after careful planning, a second round was
launched. Eight bids were received in the
second round, seven above the original
mid-point of offers, and in February 2013,
3i entered into a definitive agreement to sell
Mold-Masters to Milacron, a leading plastics
processing solutions provider, for
CAD$975 million.
Significant value creation
3i supported the company in substantially
growing market share and turnover
between 2009 and 2012. Turnover grew
from CAD$168 million to CAD$271 million,
representing a CAGR of 17%, reinforcing the
company’s position as a global leader in its
sector. Leveraging 3i’s extensive active
partnership approach enabled the company
to accelerate its organic growth in Asia,
Europe and South America. The company
made a number of add-on acquisitions to
expand its geographical reach and product
offering and 3i supported it through a range
of performance enhancements including:
improving its sales force effectiveness;
optimising its global manufacturing
footprint; new product introductions;
upgrading financial management and
controls; and de-leveraging in 2009,
leading to significant value creation
during the period of 3i’s investment.
Positioned for growth
Headquartered in Georgetown, Canada,
Mold-Masters designs and manufactures
the plastic industry’s most advanced hot
runner systems, temperature controllers
and auxiliary equipment. Since 1963,
Mold-Masters has invested heavily in
research and development. With over
900 granted and pending patents,
Mold-Masters has created many technology
breakthroughs and enabled countless new
ways of molding parts with hot-runners.
From its manufacturing facilities in Canada,
China, Germany, India and the UK,
Mold-Masters serves a diverse and global
customer base across high growth end
markets. These include consumer
electronics, medical devices, personal care
consumer products, telecommunications,
packaging and automotive. The company
is an attractive business, well positioned
for continued growth as part of Milacron.
Business review 30
3i Group plc Annual report and accounts 2013
Business lines – Private Equity
Performance for the year
Table 8: Returns from Private Equity
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
Gross portfolio return
Gross portfolio return %
Fees receivable from external funds
Net carried interest
Operating expenses
Net portfolio return
Net portfolio return %
2013
£m
190
250
78
518
2012
£m
22
(488)
125
(341)
19.7%
(9.7)%
19
(7)
(114)
416
32
–
(132)
(441)
15.8% (12.5)%
Gross portfolio return
Gross portfolio return was strong at £518 million, or 19.7% on
opening portfolio value (2012: £(341) million, (9.7)%). The portfolios
in northern Europe, North America and Brazil generated
£543 million profit, 26.7% on opening portfolio value (2012:
£(78) million, (2.9)%). The Asia portfolio experienced a more
challenging year, with a return of £(29) million, or (8.2)% on opening
portfolio value (2012: £(74) million, (16.8)%). In India, in particular,
the portfolio faced the combined challenges of a slowing macro-
economy and currency devaluation.
Overall, the portfolio experienced good value growth of £250 million
(2012: £(488) million), supported by robust earnings growth. Strong
realisations, at good uplifts to the March 2012 valuations, added
£190 million to returns (2012: £22 million).
Income from the portfolio fell in the year to £78 million
(2012: £125 million) as a result of net divestment of the portfolio,
a re-negotiation of terms on specific investments and a small
number of loans, particularly in Spain and France, where interest
is currently being provided against.
Net portfolio return
After deducting operating expenses and net carry payable, and
including fee income from third-party capital managed, the net
portfolio return was £416 million or 15.8% on opening portfolio value
(2012: £(441) million, (12.5)%).
Fee income reduced in the period to £19 million (2012: £32 million)
as the Growth Capital Fund ended its investment period and
started charging fees on invested rather than committed capital.
The reduction also reflects the full year impact of Eurofund V ending
its investment period in November 2011, after which fees were also
reduced to a lower rate and received on invested capital.
Following the announcement of a significant restructuring in June
2012, operating expenses have been materially reduced and totalled
£114 million, including one-off implementation costs of £23 million
relating to the restructuring. The benefit of this lower cost base
is expected to be seen in the next financial year.
Operating expenses as a percentage of AUM, excluding
implementation costs, fell to 1.9% from 2.4% in the last financial year.
Portfolio valuations
Unrealised value growth was good at £250 million (2012: £(488) million),
with the performance of the portfolio being the primary driver. Robust
earnings growth and a consequent reduction in net debt were further
supported by an increase in the multiples used to value the portfolio.
The majority of the portfolio (77% by value) grew earnings in the
year and on a value weighted basis earnings grew by 10% (2012: 9%).
The larger investments continue to perform strongly. Chart 5 below
shows earnings growth rates across the portfolio.
Chart 5: Portfolio earnings growth1
1,000
800
600
400
200
13*
12*
9*
5*
8*
13*
<(20)%
(20)-(11)%
(10)-(1)%
0-9%
10-20%
>20%
3i carrying value at 31 March 2013
* Number of companies
1 This represents 87% of the Private Equity portfolio, being those companies
valued on an earnings basis.
Although performance overall was good, there were a small number
of investments, particularly in Asia and France, where earnings
growth was disappointing against worsening economic conditions
in these regions and values reduced. Forecast earnings, used
when the forecast EBITDA outlook is lower than the last 12 months’
data, were used in 11 investments, 22% of the portfolio by number
(2012: 5, 8%) and 11% by value (2012: 2%).
In the case of one company, Action, which is experiencing significant
growth due to its store roll-out programme, a run-rate adjustment
was made to its earnings to reflect the profitability of opened stores
for valuation purposes.
The net debt position of the portfolio further improved in the period,
with the average ratio of net debt to EBITDA, for those assets valued
on an earnings basis, reducing to 3.2x at 31 March 2013 (2012: 3.4x).
Refinancings within the portfolio during the year also extended the
maturity of portfolio debt, with 78% of the debt repayable in 2015
or later (2012: 68%). Chart 6 shows the ratio of net debt to EBITDA
weighted by portfolio value.
Chart 6: Ratio of net debt to EBITDA – Private Equity portfolio
weighted by March 2013 carrying values1
as at 31 March 2013
1,000
800
600
400
200
590
586
434
536
297
<1x
1-2x
2-3x
3-4x
4-5x
1 This represents 96% of the Private Equity portfolio,
being those investments where net debt is relevant.
–
5-6x
151
>6x
3i Group plc Annual report and accounts 2013
31
The combination of earnings growth and net debt reduction
(“performance”) led to a value increase of £141 million. Following the
stock market rises seen since late 2012, the multiples used to value
the portfolio increased by 7% in the year. The average EBITDA multiple
used to value the Private Equity portfolio on an earnings basis was
8.8x before marketability discount (2012: 8.2x) and 7.9x after
marketability discount (2012: 7.5x). This translated into a positive
movement in the period of £37 million (2012: £(267) million).
These multiples remain below those seen in relevant sector and
geographic public markets. Table 9 details the EBITDA multiples
used to value the portfolio and the FTSE 250 index.
Table 9: EBITDA multiples for the year to 31 March
Priorities for the year ahead
The key focus of the team is to continue to manage intensively the
existing portfolio by implementing clear value-building strategies and
realising investments well through carefully planned and executed
exit strategies.
We will continue to make new investments selectively in the focus
markets of northern Europe, North America and Brazil to further build
our track records in these regions.
We will work with co-invest partners on new investments to build
those relationships and further expand the group of investors we will
work with.
FTSE 250
3i pre-discount
3i post-discount
2013
11.1x
8.8x
7.9x
2012
9.6x
8.2x
7.5x
Movements
in the year
16%
7%
5%
The multiple increase is lower than the increase in broader market
indices as, in a small number of cases, multiples used for valuations
have been linked to a cross-cycle level, or adjusted to reflect
challenges in particular markets, or to reflect the small size of
the portfolio business relative to comparable quoted companies.
Assets under management
As all the funds in Table 10 are now past the investment
period, AUM is calculated using the remaining cost of the
underlying investments.
AUM reduced to £4,851 million at 31 March 2013 (2012: £5,401 million)
as a result of the Growth Capital Fund switching from a committed
capital basis to remaining cost and the net divestment of the portfolio,
offset by the weakening of sterling against the euro.
During the year, 3i established framework arrangements with
a number of leading investors to invest alongside 3i in future
transactions in return for management and other fees and
carried interest.
Table 10: Assets under management
Private Equity
3i Eurofund III
3i Eurofund IV
3i Eurofund V
3i Growth Capital Fund
Other
Total Private Equity AUM
Close date
Original
fund size
Original 3i
commitment
Remaining 3i
commitment
at March 2013
% invested at
March 2013
Gross money
multiple1 at
March 2013
July 1999
June 2004
Nov 2006
March 2010
various
€1,990m
€3,067m
€5,000m
€1,192m
various
€995m
€1,941m
€2,780m
€800m
various
€90m
€78m
€389m
€376m
n/a
91%
96%
86%
53%
n/a
2.1x
2.3x
0.9x
1.0x
n/a
AUM
€11m
€406m
€3,700m
€655m
€972m
£4,851m
1 Gross money multiple is the cash returned to the fund plus value as at 31 March 2013, as a multiple of cash invested.
Business review 32
3i Group plc Annual report and accounts 2013
Business lines – Private Equity
Óticas Carol
3i led a consortium with Neuberger
Berman and Siguler Guff to invest
R$108 million (£35 million) to
support the acquisition of Óticas
Carol in March 2013. 3i invested
R$43 million (£14 million) directly
in its second Brazilian investment
since establishing the team in 2011.
More at www.3i.com
Óticas Carol has built a successful business
model that has grown rapidly and is well
positioned in an attractive market.
Successful business model
The company was established in 1997 and
is the second largest eyewear retailer in
Brazil, selling a broad range of prescription
glasses, sunglasses and related eyewear
accessories. The company operates a
franchising model that has successfully
attracted optical retailers thanks to the
strength of its brand, its strong relationships
with suppliers and its dedicated laboratory
offering, which provides access to an
exclusive range of high quality, own-
label lenses.
The strength of this model has resulted in
the company operating 490 stores across
19 of the 26 states in Brazil, including Rio de
Janeiro and São Paulo. The investment will
support the company management
team’s plan to extend its store network
throughout Brazil, with 3i working closely
with management as an active partner,
providing retail sector expertise and
international best practice in strategy,
operations and governance.
Attractive market
The eyewear market in Brazil is highly
fragmented and grew at a 15% CAGR
between 2006 and 2012. The market is
expected to continue to expand significantly
above GDP in the coming years due
to strong domestic demand fuelled by
increasing levels of income per capita, low
unemployment, an ageing population, more
people wearing prescription glasses and
the increased use of eyewear as a fashion
statement. This represents an excellent
opportunity for the company to continue
its growth, supported by 3i.
3i Group plc Annual report and accounts 2013
33
Long-term performance
The long-term performance of the Private Equity business’ buyout and growth capital investments are shown in Tables 11 and 12. The 2012
Buyout performance, at this early stage, has been very strong, with an IRR of 43%, reflecting excellent earnings growth in the majority of these
investments. The 2012 Growth Capital investments have not performed as well, mainly reflecting the higher exposure to more challenging
economic markets compared to Buyout investments made in the same period.
The 2008 to 2011 vintages continue to improve as we manage these investments to maximise value for shareholders and fund investors.
Table 11: Long-term performance – Private Equity: Buyouts
New investments made in
financial years to 31 March
vintage year
Cash
investment
£m
Return
flow
£m
Value
remaining
£m
IRR to
31 March
2013
IRR to
31 March
2012
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
57
269
271
–
328
715
563
437
326
295
–
46
–
–
6
368
516
1,176
1,047
707
39
420
322
–
306
253
182
–
47
–
n/a1
43%
8%
–
(1)%
(4)%
7%
48%
62%
35%
n/a
n/a
5%
–
(13)%
(7)%
9%
48%
63%
35%
1 The 2013 vintage IRR is not meaningful as the assets in the vintage are less than 12 months old.
Table 12: Long-term performance – Private Equity: Growth Capital
New investments made in
financial years to 31 March
vintage year
Cash
investment
£m
Return
flow
£m
Value
remaining
£m
IRR to
31 March
2013
IRR to
31 March
2012
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
43
70
21
46
211
1,004
553
441
171
289
–
–
–
–
49
720
255
629
314
530
43
66
27
27
80
444
257
54
–
–
n/a1
(3)%
14%
(19)%
(13)%
3%
(2)%
22%
26%
26%
n/a
n/a
20%
(52)%
(16)%
(1)%
(1)%
23%
25%
26%
1 The 2013 vintage IRR is not meaningful as the assets in the vintage are less than 12 months old.
Business review 34
3i Group plc Annual report and accounts 2013
Business lines – Private Equity
Portfolio
The Private Equity portfolio is concentrated in our focus regions,
with 81% of the Private Equity portfolio by value in northern Europe,
North America and Brazil. We continued to build our presence in Brazil
in the year, where we now hold two investments. The Group’s direct
exposure by sector remains well diversified, with no one sector
accounting for more than a third of the portfolio.
As shown in Chart 9, the direct value of the portfolio in the 2007 to
2009 vintages is still high and accounts for over half the Private Equity
portfolio. This section of the portfolio is being managed to maximise
returns and has shown an improvement in performance in the year
with a number of investments entering exit processes.
Chart 7: Direct portfolio by value by region and number
as at 31 March 2013
UK1
Northern Europe
North America
Brazil
Asia
Southern Europe
6%
10
24%
32
13%
17
2%
2
7%
5
1 Includes 25 legacy investments, previously
disclosed as non-core, with a total value of £75 million.
36
48%
Chart 8: Direct portfolio by value by sector and number
as at 31 March 2013
Business & Financial Services
Consumer
Healthcare
Industrials & Energy
21%
27
TMT
8%
11
31%
33
16
16%
15
24%
Chart 9: Direct portfolio by value by vintage year
and number as at 31 March 2013
2013
2012
2011
2010
2009
2008
2007
7%
37
3%
3
18%
7
18%
18
2006 and prior
22
26%
6
13%
1%
1
8
14%
Note:
The number of portfolio companies is shown inside the segments of the above
pie charts.
Business lines Infrastructure
3i Group plc Annual report and accounts 2013
35
The portfolio in Europe continues to perform well,
providing a solid platform for future development.
Cressida Hogg
Managing Partner, Infrastructure
Introduction
The Infrastructure business line currently
operates in Europe and India, investing
proprietary and third-party capital.
The business managed or advised assets
of £1.6 billion at 31 March 2013, primarily
through 3i Infrastructure plc (“3iN”) a listed
investment company, with net assets
of £1.1 billion and a market capitalisation
of £1.2 billion at that date and the 3i India
Infrastructure Fund (the “India Fund”),
a limited partner fund. 3i’s infrastructure
investments were valued at £507 million
at 31 March 2013 (2012: £528 million).
The Infrastructure business has a team of 18 investment
professionals based in London, Mumbai and Delhi and is invested
in seven businesses in Europe and seven in India, mostly through
the funds it manages or advises. The India Fund reached the end
of its investment period in November 2012. In light of the impact
of volatile macroeconomic and market conditions on the Fund’s
performance, the Group does not, at present, intend to raise
a successor fund in this market.
3i’s stated strategic intention is to increase third-party fee
income through growth in assets under management. Growth in
Infrastructure AUM will focus on Europe where we have a market-
leading track record.
Business model
3i’s Infrastructure business invests in core infrastructure companies
and social infrastructure projects in Europe, with a particular focus
on the UK and northern Europe, and manages the existing portfolios
in Europe and India.
The strategy is built around the following components:
nn investing in core and social infrastructure in the developed world
and, in particular, in northern Europe;
nn driving value and yield from its European investments by improving
their operational performance over time, working with portfolio
companies to implement strategies that deliver value over the
long term;
nn maximising value in the existing portfolio of road, power and port
investments in India, working with the local promoters to maximise
value in the realisation phase; and
nn generating fee income by raising third-party capital to grow assets
under management in Europe.
Mature infrastructure businesses tend to generate returns through
income and an element of capital growth. They typically have a strong
market position underpinning revenues, a degree of inflation linkage,
they are capital intensive and tend to have lower volatility across
economic cycles.
Returns for 3i from the Infrastructure business line are generated
from dividend income and capital growth from its holding in 3iN,
capital returns from its investment in the India Fund and advisory,
management and performance fees from managing and advising
third-party capital.
3i’s primary investing vehicle in Europe, 3iN, has permanent capital
and can hold investments over the long term. Its objective, updated
in May 2013, is to generate a total return of 10% per annum, of which
5.5% is through a distribution yield, by investing in core and social
infrastructure. 3iN has delivered an annualised asset IRR since IPO
in 2007 of 16% and an annual total return in the year to 31 March 2013
of 8.6%.
Core infrastructure businesses are dynamic enterprises which tend
to own their own asset base, such as utilities, not concessions with
a finite life. An engaged asset management approach is therefore key
to maximising value.
Business review 36
3i Group plc Annual report and accounts 2013
Business lines – Infrastructure
Social infrastructure investing, usually through public private
partnership (“PPP”) projects, typically involves investing in finite
concessions where the investor receives a payment in return
for making an asset or facility available over a period of time, such
as a school or hospital. This type of investment tends to have high
inflation correlation, stable revenues backed by governments
or related entities and a strong yield when fully operational.
Performance for the year
Table 13: Returns from Infrastructure
For the year to 31 March
Realised profits over value on the disposal
of investments
Unrealised losses on the revaluation
of investments
Portfolio income
Gross portfolio return
Gross portfolio return %
Fees receivable from external funds
Net carried interest
Operating expenses
Net portfolio return
Net portfolio return %
2013
£m
2012
£m
–
(2)
18
16
–
(7)
18
11
3.0%
2.4%
21
(1)
(24)
12
25
(6)
(17)
13
2.3%
2.8%
The Infrastructure business line generated a gross portfolio return
of £16 million in the year to 31 March 2013 (2012: £11 million). This was
driven principally by portfolio income of £18 million (2012: £18 million),
which was partially offset by an unrealised value loss of £2 million
(2012: £(7) million).
The value of the Group’s 34% holding in 3iN increased by 7.1% in the
year to 31 March 2013, generating an unrealised value gain for the
Group of £24 million for the year. This increase was underpinned
by the strong performance of 3iN’s European portfolio, which also
continued to generate good levels of income. In particular, 3iN’s
holdings in AWG and Oystercatcher saw good value increases.
These were supported, in the case of AWG, by the business’ continued
good operational performance and by favourable market and
transaction multiples in the UK water sector and, in the case
of Oystercatcher, by resilient operational performance and the
refinancing of the acquisition debt facility.
Table 14: Assets under management
The valuation of the Group’s India investments, however, continued
to be affected by a number of macroeconomic and market factors,
resulting in an unrealised value loss of £27 million, which more than
offset the gain generated by 3iN. The Indian power investments, in
particular, have experienced issues around fuel supply and costs and
their ability to pass increased fuel costs to their customers. The road
investments faced challenges in project execution due to delays
relating to land acquisitions and environmental clearances.
In addition to value growth, 3iN paid dividends of £18 million in the
year, which makes up the portfolio income balance (2012: £18 million).
Fees receivable totalled £21 million (2012: £25 million). The year-on-
year decline is due to 3iN paying a lower advisory fee of 1.25% for
investments held for more than five years (compared to 1.5% for
investments under five years old). The lower advisory fee rate was
applicable to 40% of 3iN’s portfolio during the year. In addition, having
reached the end of its investment period, the India Fund now charges
fees based on the remaining cost of the investments, rather than
committed capital.
In the year to 31 March 2013, the Group also received a performance
fee of £1.4 million from 3iN, as its total return exceeded the
8% performance hurdle, which it recognises as carried interest
receivable. This was offset by performance payments to the team.
Assets under management
The Infrastructure business line had assets under management
of £1.6 billion at 31 March 2013 (2012: £1.7 billion).
The India Fund reached the end of its investment period in November
2012 and consequently its contribution to total AUM is now based
on the remaining cost of its investments, rather than on committed
capital. This change in methodology accounts for the year-on-year
decline in AUM. 3iN is a permanent capital vehicle and its
contribution to AUM is calculated on the basis of its net asset
value, which increased by 3% in the year, net of dividend receipts.
Close date
Original
fund size
Original 3i
commitment
Remaining 3i
commitment
at March 2013
% invested at
March 2013
Gross money
multiple1 at
March 2013
Infrastructure
3i India Infrastructure Fund
March 2008 US$1,195m
US$250m
US$38m
3i Infrastructure plc
March 2007
£1,072m3
Other
various
various
£366m4
various
73%
n/a
n/a
0.8x
n/a
n/a
Total Infrastructure AUM
AUM
US$689m2
£1,072m
£103m
£1,579m
1 Gross money multiple is the cash returned to the Fund plus value as at 31 March 2013, as a multiple of cash invested.
2 Adjusted to reflect 3i Infrastructure plc’s US$250 million share of the Fund.
3 Based on latest published NAV (ex-dividend).
4 3i Group’s proportion of latest published NAV.
3i Group plc Annual report and accounts 2013
37
Elenia
3i sold its holding in Elenia to a
third-party pension fund investor
in July 2012, for a small profit over
carrying value. Our Infrastructure
team retains responsibility for
managing that holding (alongside
the 39% holding in Elenia owned by
3iN) and generates fees from this.
The investment exemplifies the
smart use of our permanent capital,
our ability to raise third-party AUM
against an existing investment, as
well as our ability to leverage our
international network to execute
the transaction.
More at www.3i.com
A strong business with
clear infrastructure characteristics
Elenia owns the second-largest electricity
distribution business in Finland, serving
around 410,000 customers and with
a c.12% market share. This business is
regulated on a four-year cycle, delivering
a set return on its regulated asset base.
It also owns and operates 16 local district
heating networks, each with strong market
shares in their local area. District heating,
which involves the pumping of hot water
directly into homes and businesses from
central hubs, is not regulated in Finland.
The electricity distribution business
operates in a stable and transparent
regulatory environment. The new regulatory
period began in January 2012, providing
clarity over the medium term. The
framework encourages investment,
providing opportunities for value-accretive
growth, as well as network development
and innovation.
Finland is among the largest per capita
electricity consumers in Europe, with
demand expected to grow steadily. The
market is fragmented and Elenia could
leverage its operational efficiencies and
technical superiority to act as a consolidator
in its market. The first small bolt-on
acquisition was completed in August 2012.
Elenia generates high EBITDA margins,
supporting a strong yield over the long term.
Returns from the electricity distribution
business are linked to inflation and the
heating business has been able to increase
its charges at least in line with inflation.
An efficient use of our balance sheet
Elenia was acquired from Vattenfall AB in
January 2012 by a consortium comprising:
nn 3iN (39% share) and 3i (6% share);
nn GS Infrastructure Partners (45%
share); and
nn Ilmarinen Mutual Pension Insurance
Company (10% share).
Using its own permanent capital, 3i invested
alongside 3iN to facilitate its investment and
deliver 3i’s strategy to grow its assets under
management. 3iN’s own investment
concentration limits prevented it from taking
a larger stake, to match that of the other
senior member of the consortium,
GS Infrastructure Partners.
In July 2012, 3i sold its 6% holding in Elenia
to a third-party pension fund investor for
£30 million, generating a £1 million profit
over the carrying value. This 6% stake
is held by this third party through
an intermediary limited partnership,
3i Networks Finland LP, managed separately
by 3i’s Infrastructure team for an ongoing
management fee. This is a great example
of 3i raising third-party assets under
management against existing investments.
Leveraging our network
While our Infrastructure team does not have
anyone on the ground in the Nordic region,
it was able to leverage the resources of 3i’s
Private Equity team in Stockholm to execute
the transaction. The Stockholm team provided:
nn its knowledge of the local market and the
help of native Finnish and Swedish speakers;
nn access to the best local corporate finance
and legal advisers; and
nn access to local banks, to put together
a financing package.
Business review 38
3i Group plc Annual report and accounts 2013
Business lines – Infrastructure
Priorities for the year ahead
Delivering on the Group’s key strategic objective of increasing
third-party AUM will be a key priority for the year. We will aim
to achieve this by making new investments through 3iN, but will
also consider inorganic opportunities.
In Europe, we will maintain our rigorous investment approach,
focusing our activity in core and social infrastructure in the
UK and northern Europe, building on our market-leading track record
of returns. This will be key to positioning 3iN for future capital raisings.
At present we do not intend to raise a successor fund in India.
Our team in India is therefore incentivised to manage the portfolio
to maximise value in the realisation phase.
Portfolio
3i’s investment exposure to infrastructure assets is primarily through
its shareholding in 3iN and its commitment to the India Fund. 3i owns
34% of the equity of 3iN, which is a listed investment company with
an independent board of directors, and is exposed not only to the
operational and financial performance of the underlying investments,
but also to the fluctuations in 3iN’s share price. The direct exposure
to the underlying investments is shown in the charts that follow.
The underlying infrastructure portfolio is weighted to the UK and
Europe, with 68% of the underlying portfolio value in those regions.
The exposure to Asia reduced in the period to 31 March 2013 as a
result of the challenges faced by the Indian portfolio, primarily driven
by volatile macroeconomic and market conditions in India. The three
largest underlying investments are AWG, an English water supply
and wastewater company, Elenia, a Finnish electricity distribution
business, and Eversholt, a leading UK rail rolling stock company.
Chart 10: 3i Group plc Infrastructure business line
portfolio by region as at 31 March 20131
UK
Continental Europe
Asia
32%
7
5
40%
3
28%
Chart 11: 3i Group plc Infrastructure business line continental
European and UK portfolio by sector as at 31 March 20131
Social infrastructure
Transportation
Utilities
11%
3
54% 3
2
35%
Chart 12: 3i Group plc Infrastructure business line India
portfolio by sector as at 31 March 20131
Transportation
Utilities
38%
3
4
62%
1 The underlying portfolio exposure is calculated by allocating 3iN’s
31 March 2013 value across its portfolio of investments in addition to
3i Group investments in India and directly held in Europe.
Note:
The number of portfolio companies is shown inside the segments of the
above pie charts.
Business lines Debt Management
3i Group plc Annual report and accounts 2013
39
The establishment of our US platform positions
us well for future growth.
Jeremy Ghose
Managing Partner and CEO, 3i Debt Management
Introduction
3i’s Debt Management business operates
across Europe and established a presence
in North America in the year. At 31 March
2013, the Debt Management team
managed 24 funds and accounted for
£6.4 billion of assets under management,
in which 3i’s investment was valued at
£81 million.
Debt Management’s returns are consequently driven by fee income
from managing third-party capital. The profitable growth in AUM
seen in this business line is a key contributing factor to improving
3i’s ability to cover operating expenses with cash income.
The Fraser Sullivan transaction, completed in September 2012,
established a 3i Debt Management platform in the US and added
US$3.1 billion of AUM from transferred funds and two new fund
launches. Access to the attractive, and liquid, US market is important
in developing Debt Management into a leading global manager of credit.
The team of 45, including 28 investment professionals, is currently
based in London and New York and invests in the debt of c.550
businesses at any one time across Europe and North America.
3i intends to increase its investment in Debt Management funds to
c.10% of the assets under management in this business line over time,
from the 1.1% at 31 March 2013.
Business model
3i Debt Management specialises in the management of third-party
capital, investing in non-investment grade debt issued by medium
and large European and North American companies.
The strategy is built around the following components:
nn gaining access to investment opportunities through relationships
with primary debt providers and private equity sponsors;
nn in-depth credit analysis of each opportunity and close monitoring
of the existing portfolio using analysts specialised by sector; and
nn generating management fee income and incentive fees for
strong performance by raising third-party capital to grow assets
under management.
The main driver of returns is fees earned from managing the
underlying CLOs and debt funds, supplemented by the returns on
3i’s investment in those funds. During the year, the Invesco and Fraser
Sullivan transactions added significant additional revenue streams.
Business review 40
3i Group plc Annual report and accounts 2013
Business lines – Debt Management
Performance for the year
Table 15: Returns from Debt Management
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
Gross portfolio return
Gross portfolio return %
Fees receivable from external funds
Net carried interest
Operating expenses
Net portfolio return
Net portfolio return %
2013
£m
2012
£m
5
2
5
12
1
(3)
3
1
28.0%
7.1%
31
(7)
(32)
4
32
1
(31)
3
9.5%
21.4%
Debt Management returns are driven by fee income rather than
capital returns. However, gross portfolio return was strong as the
underlying investments continued to perform well and the demand
for yield by investors drove valuations higher. A gross portfolio return
of £12 million, or 28.0% of opening portfolio, was higher than the
previous year (2012: £1 million, 7.1%) and was driven from only
£74 million of proprietary capital invested.
Realised profits of £5 million relate to realised trading gains within
Palace Street I, the European Credit Opportunities Fund. Portfolio
income of £5 million (2012: £3 million) increased as a result of
increased distributions from our holdings in the CLO funds.
Unrealised profits at 31 March 2013, primarily based on broker
quotes, were positive at £2 million (2012: £(3) million) due to improved
underlying performance in the CLO funds.
This portfolio performance added to the growing underlying profits
from managing the debt funds. Fees of £31 million were in line with
the prior year (2012: £32 million) although grew on an underlying basis.
Fees included £6 million of catch-up fees relating to improved
fund performance as performance hurdles were met and accrued
subordinated fees became payable. We received £11 million of similar
fees in the prior period. We do not expect to receive material similar
fees in the future. Fee income of £31 million included £4 million
relating to fee income earned on the CLO contracts acquired from
Invesco in August 2012 and £3 million of income from Fraser Sullivan
contracts. Since the establishment of the US platform in August 2012,
we successfully launched two CLOs, Jamestown I, a US$450 million
CLO, and Jamestown II, a US$500 million refinancing of an existing
CLO. These two fund launches are expected to increase fee income
by c.US$3 million per annum. A detailed review of 3i’s US expansion
is shown on the opposite page.
Costs of £32 million included £6 million of non-cash amortisation
costs and £2 million of due diligence costs relating to acquisitions.
Underlying costs continue to be managed closely and include the
addition of investor relations resource to the team in the year as
we pursue expansion in this business line. On an accounting basis,
the Debt Management business is operationally neutral, with
operating expenses of £32 million exceeding fees of £31 million
by £(1) million (2012: £1 million). However, at an underlying level,
excluding non-cash accounting adjustments for amortisation and
one-off due diligence costs, fees exceeded operating expenses
by £7 million (2012: £9 million).
3i Group plc Annual report and accounts 2013
41
Debt Management – 3i’s US business
Following the acquisition of the
European CLO business in February
2011, the acquisition of a similar
US business was identified as
critical to develop a leading global
debt management business.
An attractive market opportunity
The US is a highly attractive credit market
given its size and liquidity. The CLO market
in the US has recovered strongly since
the credit crisis and issuance in 2012 at
US$53.5 billion was the highest level in four
years. New issuance in Q1 2013 continued
this momentum at US$26.3 billion.
A strong platform
Following an in-depth analysis of the
US market over 18 months, and having
considered a number of other opportunities,
we entered into a strategic transaction with
Fraser Sullivan, a leading specialist US CLO
manager. This established 3i’s Debt
Management platform in the US. At the
time of the transaction, Fraser Sullivan
was managing US$2.5 billion of assets,
comprising six CLO funds, one credit
opportunity fund and one senior loan fund.
Fraser Sullivan was founded in 2005 and
has an experienced team of investment
professionals that has largely worked
together since the firm’s inception,
led by John Fraser and Tighe Sullivan.
The company was at the forefront of the
US CLO market recovery and has raised
seven new issue CLOs since 2009.
We were all deeply saddened to hear of the
tragic passing of Tighe Sullivan in October
2012. Tighe had joined 3i in August 2012 as
co-head of the US business and was excited
to be part of 3i. The growth in AUM since
then is a testament to the strength of the
team John and Tighe had built.
Immediate growth
3i Debt Management US was established in
August 2012 and the transaction with Fraser
Sullivan was completed in September 2012.
In November 2012, we launched our first US
CLO, Jamestown I, a US$450 million CLO,
followed by Jamestown II, a US$500 million
CLO in February 2013. Jamestown I is a new
fund while Jamestown II is a refinancing of
Fraser Sullivan CLO V, a US$400 million CLO
launched in February 2011 that had reached
the end of its two-year reinvestment period.
The refinancing extended the investment
period of the CLO fund, increased its size
by US$100 million and improved the fee
economics for 3i. This early growth
demonstrates the strength of our platform
and our capabilities to successfully launch
and close new funds.
As at 31 March 2013, 3i Debt Management
US had US$3.1 billion of assets under
management, comprising seven CLO funds,
one credit opportunity fund and one senior
loan fund. All funds previously managed
by Fraser Sullivan are now managed
by 3i Debt Management US. We expect
fee income of approximately £8 million
in the next financial year and for this to
be substantially greater than costs.
Well positioned
3i Debt Management is well positioned
to grow, with a leading track record and
a strong brand. The US business provides
3i the opportunity to raise new CLO funds
and managed accounts, and to diversify
into complementary products, to generate
increased fee income.
John is Managing Partner of 3i Debt
Management US and joined 3i in September
2012 following the establishment of
3i’s Debt Management platform in the US.
John co-founded Fraser Sullivan with
Tighe Sullivan in 2005.
Before joining Angelo, Gordon & Co., L.P.,
John gained deep leverage loan experience
at Cypress Tree Investment Management,
Merrill Lynch Asset Management and
Chase Manhattan Bank.
John Fraser
Managing Partner, 3iDM US,
Debt Management
More at www.3i.com
Prior to co-founding Fraser Sullivan,
John was a Managing Director and
Partner with Angelo, Gordon & Co., L.P.
from 1997 to 2005, where he started
the firm’s leveraged loan investment
management business and served
as portfolio manager of five leveraged
loan funds since their inception.
Business review 42
3i Group plc Annual report and accounts 2013
Business lines – Debt Management
Table 16: Assets under management
European CLO funds
Harvest CLO I
Harvest CLO II
Harvest CLO III
Harvest CLO IV
Harvest CLO V
Windmill CLO I
Petrusse CLO
Alzette CLO
Garda CLO
Coniston CLO
Axius CLO
US CLO funds
Fraser Sullivan CLO I
Fraser Sullivan CLO II
COA Caerus CLO
Fraser Sullivan CLO VI
Fraser Sullivan CLO VII
Jamestown CLO I
Jamestown CLO II
Other funds
Vintage I
Vintage II
Palace Street I
Friday Street
COA Fund
Senior Loan Fund
Total
Closing date
Reinvestment
period end
Maturity
date
Par value of
fund at
launch 1
Realised
equity money
multiple 2
Apr-04
Apr-05
Apr-06
Jun-06
Apr-07
Oct-07
Jun-04
Dec-04
Feb-07
Aug-07
Oct-07
Mar-06
Dec-06
Dec-07
Nov-11
Apr-12
Nov-12
Feb-13
Mar-09
May-12
Jun-13
Jul-13
May-14
Dec-14
Sep-09
Dec-10
Apr-13
Jun-13
Nov-13
Mar-12
Dec-12
n/a
Nov-14
Apr-15
Nov-16
Jan-17
Mar-17
May-20
Jun-21
Jul-21
May-24
Dec-29
Dec-17
Dec-20
Apr-22
Jul-24
Nov-23
€514m
€540m
€650m
€750m
€632m
€500m
€295m
€362m
€358m
€409m
€350m
Mar-20
US$400m
Dec-20
Dec-19
Nov-22
Feb-21
Nov-24
Jan-25
US$485m
US$242m
US$409m
US$450m
US$450m
US$500m
0.7x
1.0x
0.6x
0.7x
0.2x
0.3x
0.4x
0.6x
1.0x
0.6x
0.2x
1.3x
1.2x
1.1x
0.2x
0.1x
n/a
n/a
Annualised
equity cash
yield3, 4, 5
7.8%
12.9%
9.6%
10.6%
4.1%
6.1%
4.8%
7.5%
15.8%
11.4%
4.1%
AUM
€198m
€492m
€615m
€716m
€607m
€477m
€74m
€150m
€333m
€367m
€312m
£3,670m
Average:
8.6%
US$364m
US$483m
US$244m
US$402m
US$452m
US$450m
US$500m
£1,907m
19.9%
22.7%
23.1%
16.4%
18.0%
n/a
n/a
Average:
20.0%
Closing date
Reinvestment
period end
Maturity
date
Original
fund size
Realised
equity money
multiple2
Annualised
equity cash
AUM
yield3, 4, 5
Mar-07
Nov-11
Aug-11
Aug-06
Nov-07
Jul-09
Mar-09
Sept-13
n/a
Jan-22
€500m
n/a
n/a
US$400m
n/a
Aug-08
Aug-14
€300m
n/a
n/a
n/a
n/a
n/a
n/a
1.8x
n/a
0.4x
0.1x
n/a
n/a
€492m
US$263m
€75m
€114m
US$148m
US$57m
£863m 6
£6,440m
4.6x
1.3x
17.6%
2.0%
(4.2)%
10.0%
1 Includes par value of assets and principal cash amount.
2 Multiple of total equity distributions over par value of equity at launch.
3 Average annualised returns since inception of CLOs calculated as annualised cash distributions over par value of equity. Excludes unrealised equity
remaining in CLO.
4 Vintage I & II returns is shown as gross money multiple which is cash returned to the Fund plus value as at 31 March 2013, as a multiple of cash invested.
5 The annualised returns for the COA fund and Senior Loan Fund are the annualised net returns of the Funds since inception.
6 The COA Fund AUM excludes the market value of investments the fund has made in 3i US Debt Management CLO funds (US$131 million as at 31 March 2013).
3i Group plc Annual report and accounts 2013
43
Assets under management
The AUM for the Debt Management funds is typically based on the
period end net asset value of the fund. The exception is Palace Street I,
where AUM is based on the commitment to the Fund. AUM grew
strongly to £6.4 billion (2012: £3.4 billion).
In August 2012, 3i acquired five CLO contracts from Invesco, which
added £1.1 billion of AUM. Two of these funds are now past their
reinvestment period and AUM reduced, following distributions,
to £1.0 billion at 31 March 2013.
The establishment of a US platform in September 2012 led to
additional AUM of US$359 million relating to the US Senior Loan
Fund and the COA Fund. Since establishing the platform, two
new vehicles were launched, Jamestown I, a new US$450 million CLO,
and Jamestown II, which was a refinancing of an existing Fraser
Sullivan CLO on preferential terms and with an enlarged size.
During March 2013, we also completed the investor consent process
for Fraser Sullivan’s remaining funds and transferred a further five
CLOs to 3i’s management. At 31 March 2013, the AUM of the US
platform was £2.0 billion.
Priorities for the year ahead
Following the successful launch of Jamestown I and II in the year,
further launches of CLOs in the US and, potentially, Europe
are a priority.
In addition to CLOs, the Debt Management team intends to diversify
into other debt funds, raising additional capital through the
European Credit Opportunities Fund and the US Senior Loan Fund.
A focus on costs will continue to ensure fees exceed
operating expenses.
Finally, consideration will be given to further inorganic growth
opportunities where fee income from acquired management
contracts or platforms would be incrementally profitable.
Portfolio
The portfolios of non-investment grade debt held by the European and
US managed CLOs are predominantly held in northern European and
North American companies. Chart 13 details the underlying portfolio
by region. Exposure in both value and number to the more challenging
markets of southern Europe is limited. The portfolio is well diversified
by sector with no single sector accounting for more than one third
of the portfolio. Chart 14 details the underlying portfolio by sector.
Chart 13: Portfolio by value by geography and number
as at 31 March 2013
UK
Northern Europe
Southern Europe
North America
Rest of World
3%
14
13%
51
44%
338
140
36%
15
5%
Chart 14: Direct portfolio by value by sector and number
as at 31 March 2013
Business & Financial Services
Consumer
Healthcare
Industrials & Energy
TMT
15%
79
16%
93
30%
185
142
26%
59
11%
Note:
The number of portfolio companies is shown inside the segments
of the above pie charts.
Business review
44
3i Group plc Annual report and accounts 2013
Financial review
Returns
The gross portfolio return measures 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 running our business
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 balance sheet factors.
Each of these aspects of our returns is considered in greater detail
in this review.
Table 17: 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
Fees receivable
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 gain/(loss)
Other (including taxes)
Total comprehensive income (“Total return”)
Total return on opening shareholders’ funds
Total return for the Group was £373 million, which represented
a 14.2% return on opening shareholders’ funds and a significant
improvement on the prior year (2012: £(656) million, (19.5)%).
Gross portfolio return of £546 million (2012: £(329) million)
demonstrated the better performance of the Group’s portfolio,
supported by good cash realisations above opening valuations.
The Group also benefited from the weakening of sterling against the
euro and dollar during the year and recognised net foreign exchange
gains in the year of £30 million (2012: £(49) million). Finally, total return
included the one-off cost of reorganising the Group (£30 million) and
the costs of accelerating the gross debt reduction (£25 million).
2013
£m
195
250
43
54
4
546
71
4
(19)
(170)
432
(91)
(6)
30
17
(9)
2012
£m
23
(498)
47
95
4
(329)
89
(15)
10
(180)
(425)
(91)
(19)
(49)
(67)
(5)
373
14.2%
(656)
(19.5)%
3i Group plc Annual report and accounts 2013
45
Improvements in the performance of the portfolio valued on
an earnings basis resulted in an increase in value of £141 million
(2012: £3 million). This was driven by an aggregate increase in
earnings used to value the portfolio of 1% and reductions in leverage 1
to 3.2x from 3.4x at the beginning of the year. Value weighted
earnings, the most relevant measure of NAV impact, increased
by 10% in the year, demonstrating that the portfolio’s largest assets
are delivering strong improvements in performance.
Multiple movements
Multiples used to value the portfolio showed improvement in the
latter part of the financial year, following the general recovery in
stock markets. The weighted average EBITDA multiple increased to
8.8x pre-marketability discount (2012: 8.2x) and to 7.9x post discount
(2012: 7.5x). This 7% increase in the year generated an increase
in value of £36 million (2012: £(267) million) for those assets valued
on an earnings basis.
Provisions
A provision is recognised where we anticipate that there is a 50% or
greater chance that the Group’s investment in the portfolio company
will fail within the next 12 months. The £4 million net reversal of
provisions in the period is attributable to the improvement in outlook
for one company which had previously been provided for, resulting
in a modest increase in value, offset by the impact of two companies
which were written down to nil. Each movement is less than
£10 million.
Uplift to imminent sale
Portfolio companies which are currently in a negotiated sales process
are valued on an uplift to imminent sale basis. At 31 March 2013, three
portfolio companies were in an advanced sales process, generating
a value increase of £24 million (2012: nil). Cash has since been
received for one of these portfolio companies, with the cash expected
on the other two portfolio companies following regulatory approval.
Discounted Cash Flow
The Discounted Cash Flow (DCF) valuation basis is used to value
portfolio companies with predictable and stable cash flows, typically
infrastructure investments. As at 31 March 2013, there were
11 portfolio companies valued using the DCF valuations basis, the
majority of which relate to the Group’s Indian portfolio. The continued
challenging environment in India has contributed to an unrealised
loss for investments valued using DCF models of £41 million in the
year (2012: £(1) million).
1 Net debt to EBITDA used to value portfolio companies.
Gross portfolio return
Realised profits
Realised profits at £195 million in the year to 31 March 2013 (2012:
£23 million) demonstrated the strong performance of the portfolio
in the year and were achieved at an uplift over opening value
of 47% (2012: 3%).
Table 7 on page 27 details realisations in the period and sets out the
accounting uplift reflected in the annual total return and the longer
term cash-to-cash results. The Private Equity realisations completed
in the year produced a money multiple of 2.1x.
Unrealised value movements
Table 18: Unrealised profits/(losses) on revaluation
of investments year to 31 March
Private Equity and Infrastructure
Earnings based valuations
Performance
Multiple movements
Other bases
Provisions
Uplift to imminent sale
Discounted Cash Flow
Other movements
on unquoted investments
Quoted portfolio
Debt Management
Broker quotes
Total
2013
£m
2012
£m
141
36
4
24
(41)
73
11
2
250
3
(267)
(138)
–
(1)
(72)
(20)
(3)
(498)
Note: The table above no longer allocates value movements between loan and
equity instruments as we believe it gives a clearer view of performance to
combine the two under the “Earnings based valuations” heading. The split of
value movement between loans and equity instruments is still shown in note 3
to the accounts. Value movements in loan instruments were previously labelled
as impairments.
Performance
The performance category measures the impact of earnings and net
debt movements for the portfolio companies valued on an earnings
basis. In general, when valuing a portfolio investment on an earnings
basis, the earnings used in the 31 March 2013 valuations are the last
12 months’ management accounts data to December 2012, unless
the current year forecast indicates a lower maintainable earnings
level. Where appropriate, adjustments are made to earnings on
a pro forma basis for acquisitions, disposals and non-recurring items.
In the case of one company, Action, which is experiencing significant
growth due to its store roll-out programme, a run-rate adjustment
was made to its earnings to reflect profitability of opened stores
for valuation purposes.
Business review
46
3i Group plc Annual report and accounts 2013
Financial review
Other
Where a different valuation basis is more appropriate for a portfolio
company, the “other” category is used to determine fair value, for
example, the sum of the parts of the business or industry specific
methods. The total “other” increase in value was £73 million in the
year to 31 March 2013 (2012: £(51) million), predominantly driven by
a value increase in one company, which was supported by a market
valuation metric.
Quoted portfolio
The quoted portfolio was valued at £431 million and now represents
13% (2012: 17%) of the Group’s total portfolio, following the sale of
Norma in the period. The Group’s 34% investment in 3i Infrastructure
plc represents the majority of the quoted portfolio at £398 million.
3i Infrastructure plc’s share price increased by 7% in the year,
resulting in value growth of £24 million. However, this was partially
offset by a £13 million value reduction in the remaining quoted
portfolio, resulting in a net increase in the quoted portfolio value
of £11 million in the year to 31 March 2013 (2012: £(20) million).
Broker quotes
The Debt Management business line has investments in a number
of the CLOs which the Group manages, as well as in the Credit
Opportunities Fund, Palace Street I. These assets, valued using broker
quotes, increased in value by £2 million in the year (2012: £(3) million).
Table 19: Proportion of portfolio value by valuation basis
as at 31 March 2013
Earnings
Imminent sale
Quoted
Discounted Cash Flow
Other
Broker quotes
%
67
2
13
7
9
2
Portfolio income
Table 20: Portfolio income year to 31 March
Dividends
Income from loans and receivables
Net fees receivable
Portfolio income
Received as cash
Cash income/opening portfolio
(“cash income yield”)
2013
£m
2012
£m
43
54
4
101
62
47
95
4
146
60
1.9%
1.5%
Income from the portfolio was £101 million in the year to 31 March
2013 (2012: £146 million). Dividends of £43 million were received
(2012: £47 million), including £18 million from 3i Infrastructure plc,
£10 million from Quintiles, a US Private Equity healthcare investment,
and £4 million from Debt Management investments. Interest income
was materially lower in the period at £54 million (2012: £95 million)
due to the net divestment position for Private Equity, the effect of
restructurings and a small number of investments, particularly in
Spain, where the interest accruing was provided for as the fair value of
the investment was judged to be below that of the principal loan value.
A further £4 million in net deal fees was received in the year
(2012: £4 million), principally relating to fees received on
completing new investments and annual monitoring fees paid
by portfolio companies.
Portfolio income received as cash in the year was £62 million
(2012: £60 million), reflecting the relatively high proportion of
capitalised interest generated by the Private Equity portfolio.
Net portfolio return
Table 21: Net portfolio return year to 31 March
Gross portfolio return
Fees receivable from external funds
Net carried interest and performance
fees payable
Operating expenses
Net portfolio return
2013
£m
546
71
(15)
(170)
432
2012
£m
(329)
89
(5)
(180)
(425)
Fees receivable from external funds
Fees earned from external funds of £71 million in the period were
lower than the prior year (2012: £89 million).
Our managed Private Equity funds generated fee income of
£19 million (2012: £32 million), the decline reflecting the Growth Capital
Fund coming to the end of its investment period in December 2012
and the full year effect of Eurofund V’s investing period ending
in November 2011.
Our Debt Management business line continued to generate
strong fund fee income of £31 million, in line with the prior year
(2012: £32 million). Fee income grew on an underlying basis due to
the one-off catch up of deferred subordinated fees as a result of the
strong performance of the CLOs in the prior year. The £31 million fee
income includes £4 million of fees generated from the acquisition of
five CLO management contracts from Invesco in the year. The impact
from the Fraser Sullivan transaction was relatively small as the
transaction completed part way through the year and was offset
by due diligence and other acquisition costs. We recognised the
subordinated fees on 16 out of 18 CLO funds at 31 March 2013,
demonstrating their continuing solid performance.
Advisory and management services to 3i Infrastructure plc and the
3i India Infrastructure Fund generated £21 million of fee income in
the year (2012: £25 million). This was lower than last year as a result
of lower investment activity by 3i Infrastructure plc and the 3i India
Infrastructure Fund reaching the end of its investment period in
November 2012.
3i Group plc Annual report and accounts 2013
47
Net carried interest and performance fees payable
Carried interest and performance fees are accrued on the realised
and unrealised profits generated, taking relevant performance
hurdles into consideration.
Net carried interest and performance fees payable in the year
were lower than might be expected given the improved portfolio
performance and realisations, with a net payable amount of
£15 million (2012: £5 million payable), as the portfolio value movement
in the period was primarily in assets where the performance hurdle
has not yet been achieved. The prior year period reflected a net
reversal of carry payable and receivable given the gross portfolio
loss in that period.
Operating expenses
Table 22: Operating expenses year to 31 March
Operating expenses
Operating expenses excluding
implementation costs
Run-rate operating expenses at 31 March
Run-rate operating expenses/AUM1
Operating expenses/AUM1
(excluding implementation costs)
2013
£m
170
140
140
1.1%
2012
£m
180
171
185
1.8%
1.3%
1.6%
1 Run-rate or actual operating expenses as a percentage of closing AUM.
Operating expenses were £170 million (2012: £180 million)
and included implementation costs of £30 million in respect
of redundancy, office closures and organisational changes
(2012: £9 million). The reduction in costs and the result of the
Invesco and the Fraser Sullivan transactions and two new
US CLOs launched in the year resulted in operating expenses
per AUM decreasing to 1.3% (2012: 1.6%).
Run-rate expenses are calculated to exclude implementation
costs and the timing effect of changes taking place part way through
the year. By doing so, the run-rate reflects the ongoing annual cost
of running the business, assuming no further changes.
We have achieved annualised run-rate cost savings of £51 million
at 31 March 2013. This represents a reduction of 28% against
the annualised run-rate costs of £185 million at 31 March 2012.
However, during the year, we entered into several corporate
transactions and consequently the perimeter of 3i’s operating cost
base has changed. The acquisition of European CLO management
contracts from Invesco and the establishment of a Debt Management
platform in the US through the transaction with Fraser Sullivan have
increased the annualised run-rate operating costs at 31 March 2013
by £7 million. These additional costs are expected to be more than
offset by the aggregate of the cash income generated by these
additional business activities.
Run-rate expenses on a like-for-like basis, excluding the Invesco and
Fraser Sullivan transactions, are £134 million, significantly lower than
the target of £145 million set out in June 2012. The total run-rate at
March 2013, including the corporate transactions, was £140 million,
or 1.1% of closing AUM.
Business review 48
3i Group plc Annual report and accounts 2013
Financial review
Annual operating cash profit
Total return
Table 23: Annual operating cash profit year to 31 March
Third party capital fees
Cash portfolio fees
Cash portfolio dividends and interest
Cash income
Operating expenses1
Less: Restructuring costs
Annual operating cash profit/(loss)
2013
£m
2012
£m
70
4
58
132
170
(30)
140
(8)
91
7
53
151
180
(9)
171
(20)
1 Operating expenses include accruals, the effect of which is not
considered material.
In June 2012, the Group set an objective of generating cash income,
from third-party fees and portfolio income, sufficient to cover the
operating expenses incurred in the year, prior to restructuring costs.
We call this “Annual operating cash profit”.
The full benefits of the cost reduction programme will be seen in the
next financial year, with the implementation costs and timing effects
largely negating the immediate savings in the year to 31 March 2013.
The annualised run-rate operating expenses of the business at
31 March 2013 are £140 million, or 1.1% of closing AUM. This includes
the annual costs relating to corporate transactions completed
in the period which are expected to be more than offset by the
corresponding fee income.
Headcount at the end of 31 March 2013 reduced by 168 to 267
(2012: 435) prior to the increases in headcount from strategic
transactions in Debt Management. This exceeds the target, set
in June 2012, to reduce staff by more than 160 by 31 March 2013.
Total headcount, including additional employees added from strategic
transactions in Debt Management, was 282 at 31 March 2013.
The annual operating cash profit position improved from a loss
of £20 million in the year to 31 March 2012 to a loss of £8 million
in the year to 31 March 2013.
Net interest payable
Net interest payable for the year was £91 million (2012: £91 million)
and included an additional £25 million of interest cost which was
accelerated into the period as a result of the early settlement of bonds
which were scheduled to mature in later periods.
Interest receivable reduced to £6 million (2012: £12 million) in the year,
as a result of the lower level of cash and deposits held by the Group.
Having reduced gross debt to £1,081 million at 31 March 2013 and
further to £917 million at 30 April 2013, the gross interest cost in the
year to 31 March 2014 is expected to be below £60 million, a reduction
of 42% compared to FY2012.
Derivative movements
The Group used foreign exchange contracts as part of its general
hedging programme. There was a £6 million loss recognised from
the fair value movement of the derivatives during the year (2012:
£19 million loss), principally relating to long-term legacy interest
rate swaps.
Net foreign exchange movements
The Group maintained its partial hedging policy through the year,
using core currency borrowings and derivatives as appropriate.
The hedging ratio of the euro denominated portfolio at 31 March 2013
reduced to 49% (2012: 89%) as a result of the reduction in euro
denominated debt. Hedging of the US dollar portfolio also reduced
to 54% (2012: 65%). The net foreign exchange gain of £30 million
(2012: £49 million loss) was driven by the weakening of sterling
against the unhedged element of the euro (1.5%) and US dollar (5.5%).
The outcome of a review of hedging strategy during the year
is discussed on page 49.
Pensions
The IAS 19 valuation of the Group’s UK defined benefit pension
scheme was negatively impacted by a reduction in the discount rate,
driven by a reduction in AA corporate bond yields and an increase
in inflation rates, resulting in an increase in the value of the scheme’s
liabilities. This was, however, offset by the strong performance
of equity markets and resulted in an actuarial gain of £17 million
(2012: £(67) million) for the year. A total of £36 million was paid
to the fund in April 2012, being the final payment in relation to the
last triennial funding review, which was finalised in September 2011.
The accounting effect of this payment on total return was included in
the year to 31 March 2012. As part of the same review, in April 2012,
the Group finalised the terms of a guarantee to the scheme in relation
to contingent assets, as detailed in note 31 on page 119. The next
triennial valuation will be carried out shortly, with an effective date
of 30 June 2013.
3i Group plc Annual report and accounts 2013
49
Balance sheet
Portfolio value
Table 24: Portfolio value movement by business line
Business lines
Private Equity 2
Debt Management 3
Infrastructure
Total
Opening
portfolio
value
1 April
2012
£m
2,634
42
528
3,204
Investment
£m
Value
disposed
£m
Unrealised
value
movement
£m
Other
movement 1
£m
234
31
5
270
(385)
5
(31)
(411)
250
2
(2)
250
(26)
1
7
(18)
Closing
portfolio
value
31 March
2013
£m
2,707
81
507
3,295
1 Other relates to foreign exchange and the provisioning of capitalised interest.
2 Non-core has been combined with Private Equity.
3 The Palace Street 1 Fund presents investment net of realisations.
Strong realisations in the year were offset by investment of
£270 million and unrealised value growth of £250 million, resulting
in a modest increase in the total portfolio value to £3,295 million
at 31 March 2013 (2012: £3,204 million).
Table 25: Gearing and borrowings as at 31 March
Gross debt
Net debt
Gearing
2013
2012
£1,081m £1,623m
£335m £464m
11%
18%
The Group further reinforced its conservative balance sheet approach,
with gross debt reducing by a third in the year to £1,081 million
(2012: £1,623 million). Gross debt reduced primarily due to the
repayment of £223 million of the €500 million floating rate note,
early repayments of £283 million of private placements, £15 million
market purchases of the €350 million bond and repayment
of a £50 million term loan drawn under a £200 million bilateral
credit facility.
Net debt at £335 million reduced following net divestment (2012:
£464 million). Gearing consequently reduced to 11% at 31 March 2013
(2012: 18%) as a result of both the decrease in net debt and the
increase in shareholders’ funds to £2,934 million (2012: £2,627 million)
following the total return of £373 million in the year to 31 March 2013.
Since the end of March, we repaid a further £164 million of debt which
resulted in a gross debt balance of £917 million as at 30 April 2013,
significantly ahead of the target to reduce gross debt to below
£1 billion by 30 June 2013. This repayment has no impact on net
debt or gearing.
Foreign exchange hedging
As a result of the reduction in gross debt, and the increased
concentration of the portfolio into a smaller number of individually
significant assets, the hedging strategy was reviewed during the year.
The use of derivatives to hedge currency movements on a portfolio
basis will be reduced over time. Foreign exchange risk will now be
considered as an integral part of the investment process rather than
managed at the Group level via structural hedging programmes.
Specific hedging on entry or exit of an investment may be used
as appropriate.
Liquidity
Liquidity reduced in the year to £1,082 million (2012: £1,653 million).
This comprised cash and deposits of £746 million (2012: £1,159 million)
and undrawn facilities of £336 million (2012: £494 million). The cash
balance reduced primarily as a result of the repayment of debt
in the year, with cash inflows from divestment activity being offset
by investment and other operating cash flows. The repayment
of £164 million of gross debt after the period end had no impact
on liquidity as it was the repayment of drawings under one
of the committed facilities, providing a currency hedge. Cash
reduced by £164 million and undrawn facilities increased by
a corresponding amount.
Diluted NAV
The diluted NAV per share at 31 March 2013 was £3.11 (2012: £2.79).
This was driven by the total return in the year of £373 million
(2012: £(656) million), and partially offset by dividend payments
in the year of £76 million (2012: £49 million).
Business review 50
3i Group plc Annual report and accounts 2013
Risk
Principal risks and risk management
The Group faces a range of risks and
uncertainties which could materially affect
its financial performance and/or the
achievement of its strategic objectives.
This section describes our approach
to risk management and the process
and governance framework that we have
in place to identify, manage and monitor
risks. This is followed by a summary
description of the principal risk areas
facing the Group and the corresponding
mitigating actions that are in place.
Approach to risk management
Risk is a part of doing business. We identify the risks involved and
ensure that these are carefully considered and that the level of risk
taken is appropriate in relation to its potential impact on the Group’s
financial performance and the achievement of the Group’s strategic
objectives. Ultimately, we seek to achieve an appropriate balance
between taking risk and generating returns for our shareholders.
Our approach to risk management is therefore closely aligned
with the Group’s strategy and objectives. When considering the
Group’s strategic direction, the Board reviews the level of risk
to be taken. Adherence to this level of risk appetite is monitored
by the Group Risk Committee.
On 29 June 2012, following a strategic review of the Group, the future
strategy of 3i was announced. This included the launch of a major
restructuring and cost reduction programme. Further information
on this can be found in the Strategy and business model section of this
report. The risk review framework and governance structure have
been modified and refined to reflect the new strategic objectives
and the changes to the organisational structure of the Group.
These changes are described below.
Risk management process
and governance structure
3i’s risk management process and associated governance structure
are designed to ensure that there is an effective process and a clear
organisational structure with well defined responsibilities to identify,
manage and monitor risk.
The process of identifying, managing and monitoring risks, and
assessing their potential impact, occurs at a number of levels
throughout the Group.
The Board is ultimately responsible for risk management, which
includes the Group’s risk governance or oversight structure,
and for maintaining an appropriate internal control framework.
Responsibility for oversight of risk management is delegated to the
Group Risk Committee which considers the Board’s appetite for risk
and any specific limits set. The Group Risk Committee maintains the
Group risk review, which summarises the Group’s principal risks and
associated mitigating actions.
The Group risk review is a result of thought and input from both
management and professionals across the Group, including the
Executive Committee. The Group risk review is considered and refined
at meetings of the Group Risk Committee and is reviewed by the Audit
and Compliance Committee on a quarterly basis. It is also reviewed
by the Board with a particular focus on the potential impact on the
setting and execution of the Group’s strategy.
The Audit and Compliance Committee is updated at each meeting
on the outputs of the latest Group Risk Committee meeting and has
the opportunity to contribute views or raise questions.
The Group’s risk management process and governance structure
are outlined in the diagram shown on page 51. Members of each
of the Committees are listed on page 63.
The Group’s reporting cycle and the dates of key meetings are
co-ordinated to ensure that appropriate risk and strategic reviews are
performed in alignment with the timetable for meetings of the Board
and of the Audit and Compliance Committee.
Further details on the risk management framework can also be found
in 3i’s Pillar 3 disclosures at www.3i.com.
Changes and improvements
During the year, the Group has continued to refine and strengthen its
risk management framework and process, particularly in light of the
strategic review and the announcement of the Group’s new strategy
and objectives in June last year.
For example, a key part of our programme of asset management
improvement initiatives has been the strengthening of our investment
review process with the introduction of a new single Investment
Committee which considers the full spectrum of decisions from
investment through to divestment of portfolio companies. The Group
has also implemented a new vintage control policy in respect of its
own balance sheet investing activity. This is designed to minimise the
risk of over-investing at the top of the private equity cycle in the future.
In addition, a number of improvements have been made to our
reporting and monitoring processes, including the introduction of
new monthly portfolio performance dashboards within Private Equity.
The Group’s Investment Committee and Private Equity Partners now
meet monthly to review these dashboards and to decide on actions.
As part of the new strategy, the Group’s organisational structure has
been simplified and processes have been streamlined. A number
of committee structures have been rationalised in order to reduce
organisational complexity and to enable better and more efficient
decision-making. A new leadership team, the Executive Committee,
has been established by the Chief Executive as the principal day-to-
day decision-making body in respect of managing the business.
3i Group plc Annual report and accounts 2013
51
In addition, we have designed new dashboards which track our
financial performance and progress against our new strategic
objectives at a Group level and for each of our business lines.
These dashboards are now updated and reported monthly. Going
forward, these will help the Group Risk Committee assess each risk
and highlight whether risks are increasing or decreasing. We expect
that this process will continue to be refined, and for example, we are
currently reviewing our risk management approach in the context of
the European AIFM Directive, which comes into force on 22 July 2013.
Furthermore, the Treasury Management Committee was
discontinued, and replaced with a Treasury Transactions Committee
of the Board to provide formal approval for specific treasury related
transactions. Day-to-day treasury matters are handled by the Finance
Director and Group Treasurer, within the limits delegated by the Board.
Key treasury and funding risks continue to be overseen by the Group
Risk Committee. The Operational Risk Forum was similarly
discontinued and its responsibilities assumed by the Group Risk
Committee. Finally, the responsibilities of the Corporate Responsibility
Committee were assumed by the Brand and Values Committee.
The Group Risk Committee continues to meet quarterly, to coincide
with meetings of the Executive Committee. The quarterly Group risk
review has recently been enhanced with a clearer link between
the identified risks and the Group’s strategic objectives, as well
as the monitoring of key financial and strategic metrics which are
indicators of those risks. This includes the application of the vintage
control policy and associated analysis and asset allocation data.
Overview of risk management process and governance structure
Conflicts Committee
nn Deals with conflict issues.
nn Meets periodically and as required.
Board
nn Determines Group’s risk appetite as part
of strategy setting.
nn Overall responsibility for maintaining
a system of internal control that ensures
an effective risk management and oversight
process operates across the Group.
nn Dedicated Brand and Values Committee to
monitor reputational risks and brand issues.
Chief Executive
Audit and Compliance
Committee
nn Receives reports from the Director
of Internal Audit on the Group’s risk
management processes and system
of internal controls.
nn Receives reports from the Director
of Group Compliance on regulatory
and compliance matters.
nn Updated at each meeting on the outputs
of the latest Group Risk Committee meeting
with the opportunity to contribute views
or raise questions.
nn Meets four times a year.
Investment Committee
Executive Committee
Group Risk Committee
nn Considers risk in context of individual
portfolio investments and divestments.
nn Meets as required.
nn Principal decision-making body in respect
of managing the business.
nn Quarterly Group Risk Committee
meetings coincide with Executive
Committee meetings.
Key
Committees of the Board
Committees of the Chief Executive
Independent review of conflict issues
Delegated responsibility for risk management and oversight
Risk reporting to Audit and Compliance Committee
nn Delegated responsibility for risk
management and oversight across the
Group, reflecting the Board’s appetite
for risk and any specific limits set.
nn Maintains the Group risk review, which
summarises the Group’s risk exposure
and associated mitigation or response
plan based on risks identified.
nn Meets at least four times a year to consider
the Group risk review, including adequacy
of risk mitigation and controls.
nn Chairman provides update at each meeting
of the Audit and Compliance Committee.
Risk 52
3i Group plc Annual report and accounts 2013
Principal risks and risk management
Review of principal risks
The disclosures on the following pages
should not be regarded as an exhaustive
list of risks and uncertainties faced by
the Group, but rather a summary of those
principal risks which the Group currently
faces and which the Board believes have
the potential to materially impact the
Group’s financial performance and/or the
achievement of its strategic objectives.
External
The key external risks affecting 3i over the course of the financial
year remain centred on the impact of the continuing challenging
macroeconomic and market conditions, especially in Asia and Europe.
Specific areas of risk considered by the Group Risk Committee include
ongoing Eurozone instability, the impact of government austerity
measures and slowing of growth rates in parts of Asia and Europe.
These uncertain conditions impact 3i’s operating environment
in different ways and to varying degrees, reflecting both 3i’s
geographical diversity and the different economic drivers of its
three investment platforms: Private Equity, Infrastructure and
Debt Management.
Fundraising conditions are difficult for the Private Equity industry
as a whole, owing to a combination of a funding overhang, which
continues to underpin high prices for transactions, underperformance
of some recent vintages and more selective investors. General M&A
activity remains relatively subdued in Europe, partly reflecting
companies’ preference for high levels of liquidity over investment.
This also has consequences for the level of activity in the debt
markets, which currently remains limited in Europe.
The integrity and transparency of financial services firms, as well
as their Responsible Investing principles, are of high importance to
investors. Firms that are able to differentiate themselves positively in
these areas are likely to be at an advantage in the future. In recognition
of this, 3i has comprehensive policies and processes. Further
information is set out in the section on Corporate responsibility.
Regulatory developments continue to be monitored closely. The key
development affecting 3i is the European AIFM Directive, which comes
into force on 22 July 2013. This introduces a number of regulatory
requirements for applicable firms and will likely require some
modifications to 3i’s related policies and processes. This is expected
to result in additional costs to the business; however, the effect on
3i is not expected to be disproportionate in the context of its sector.
Strategic
3i undertook a strategic review following the appointment of
Simon Borrows as 3i’s Chief Executive in May 2012, the results
of which were communicated to shareholders in June 2012.
This has involved a major organisational change and cost reduction
programme. A key focus for the Board and the Group Risk Committee
has been the assessment, mitigation and monitoring of the
associated risks.
Other key strategic risks are broadly similar to last year. These include
investment performance at this point of the economic cycle and the
Group’s funding strategy, factoring in the current external fundraising
environment, expected investment and realisation levels and balance
sheet management. The growth of the Debt Management business
line has also been an area of focus from a risk management
perspective, as it has expanded its geographical footprint and assets
under management.
3i Group plc Annual report and accounts 2013
53
Investment
The Group’s key investment risks remain closely linked to the
economic and market conditions, described earlier.
Treasury and funding
The Group continues to maintain a conservative financial structure,
supported by balance sheet targets and a strong control framework.
The Group continues to target a reduction of the overall gross debt
level over time. Funding requirements are evaluated on a rolling
12-month outlook, in the context of the Group’s investment and capital
allocation strategies, to ensure the appropriate balance between
liquidity benefits against the cost of funding and to monitor the full
range of refinancing options in advance of debt maturities. 3i’s current
credit rating is BBB stable/Baa2 stable.
Liquidity continues to be monitored on a weekly basis and there is
close review of counterparty exposures. The majority of funds are
placed with AAA liquidity funds and selected banking counterparties.
The AAA liquidity funds are regularly evaluated to understand
the nature of the underlying counterparty exposures and
geographical mix.
The Group has historically used core currency borrowing to act as
a natural hedge against foreign exchange exposures in the portfolio,
primarily in euro and US dollars, and supplemented this by the use of
derivatives. However, with the reduction in the Group’s gross debt and
the associated funding costs, this strategy will be less effective in the
future. The Board has therefore reviewed 3i’s hedging strategy in the
context of the Group’s strategic objectives, market conditions and
funding requirements and has concluded that the level of currency
hedging should be reduced and the derivative programme closed
down over time. Instead, the Group will look to hedge specific cash
transactions, such as specific currency investment and divestment
decisions, with specific hedging instruments. Currency risk will be
assessed at the investment, rather than the Group, level. The Board
will continue to review currency volatility and uncertainty and this
strategy on a periodic basis.
Operational
The key operational risks facing the Group during the year relate
mainly to the significant level of organisational change and cost
reduction following the announcement in June 2012 of 3i’s future
strategy. This has included significant headcount reductions, the
outsourcing of a number of functions, most notably in the area of
IT services, as well as systems changes and upgrades. Associated
with this have been a number of process changes and reallocation
of responsibilities, which have required close monitoring to ensure
appropriate management of the transition risks and maintenance
of a robust internal control environment.
The Private Equity business line is the largest in terms of proprietary
balance sheet investment. Returns can be cyclical in nature and given
the current macroeconomic environment, the ability to deliver target
returns can be challenging. Specific risks include the pricing of new
investment opportunities, potential operational underperformance
of portfolio companies impacting earnings growth and valuations,
exposure to movements in quoted multiples used to derive valuations,
and, for more highly leveraged assets, the ability to meet debt
covenant tests.
A cautious and selective approach has continued to be applied to new
investment over the year. The overall health and performance of the
Private Equity investment portfolio has improved compared to the
previous financial year and has been comparatively stable. However,
portfolio companies in some geographies, in particular southern
Europe, where economic recovery remains challenged, and Asia,
where economies have slowed significantly, have been impacted
by market conditions. Accordingly, some valuation reductions were
required during the year. The Group’s investment portfolio has also
become relatively more concentrated over time, with increasing
exposure to the performance of a smaller number of investments.
Covenant tests and refinancing requirements across the portfolio
continue to be actively monitored and managed and there has been
a steady reduction in the portfolio leverage level over the year.
The Group’s strategic review included the implementation of six key
asset management improvement initiatives aimed at enhancing the
Private Equity portfolio management processes and capabilities.
Investment returns in the Infrastructure business line are driven
by a combination of portfolio income and advisory and management
fees, as well as capital returns. The valuation of the portfolio is
influenced by the underlying performance of individual assets,
the resulting estimates of future cash flows, discount rates applied,
and the level of income distributed from those assets. There are
two quoted assets in the portfolio, which are marked to market and,
therefore subject to fluctuation, and also some exposure to foreign
exchange rate movements, notably through the 3i India Infrastructure
Fund. The portfolio, which covers a range of sectors with different
economic cycles, has shown steady operational progress in the
current macroeconomic environment.
The main driver of returns for the Debt Management business line
is fees earned from managing the underlying Collateralised Loan
Obligation (“CLO”) and other debt funds. Ongoing portfolio
management is a critical area of focus. Analysts are organised
by sector and the performance of each investment is monitored
to ensure any issues are identified early. The various funds are
well diversified by sector. The establishment of a US platform with
Fraser Sullivan, a US based business, in September 2012, broadens
the geographical coverage of the business beyond Europe. The impact
of the economic downturn on debt markets has been particularly
pronounced in Europe, where there has been a lack of primary loan
issuance. Consequently, the business has not launched any new CLO
funds in Europe in the last financial year, although has increased AUM
through the acquisition of existing CLO management contracts from
Invesco in August 2012. By contrast, US market conditions are more
favourable and the business launched two CLO funds in the US in
November 2012 and February 2013.
Risk 54
3i Group plc Annual report and accounts 2013
Risk factors, oversight and operation
Risk type
External
Risk areas
nn External stakeholders
nn Reputational
nn Government/regulation
nn Market/economic
Strategic
nn Strategic delivery
nn Meeting key targets
nn New business opportunities
nn Managing communications
Investment
nn Profitable growth of assets under
management
nn New investment and exit decisions
nn Portfolio performance
nn Valuations
Treasury
and funding
nn Liquidity
nn Debt levels and refinancing
nn Foreign exchange
nn Counterparties
Operational
nn People, processes and systems
nn Legal and regulatory compliance
nn Reputational
Inherent risks
nn Changes in macroeconomic variables
nn General health of capital markets
nn Exposure to new markets and
investment products
nn Regulatory developments
nn Changes in government policy
nn Reputational risks
Risk mitigation
nn Three distinct and complementary
investment platforms
nn Diversified investment portfolio in a range
of sectors, with different economic cycles,
across geographical markets
nn Close monitoring of relevant regulatory and
fiscal developments by in-house specialists
and external advisers
nn Due diligence when entering new markets
or business areas
nn Understanding and analysis of risks
and rewards
nn Periodic strategic reviews
nn Regular monitoring of key risks by Group
nn Appropriateness of choice of business
Risk Committee and the Board
model and strategy
nn Unexpected changes in the Group’s
operating environment
nn Monitoring of a range of key financial and
strategic performance indicators and
forecasts
nn Unanticipated outcomes versus
nn Periodic updates of plans and underlying
assumptions and announced targets
nn Potential loss of key staff in areas critical
assumptions
nn Disciplined management of key
to the Group’s strategic delivery
strategic projects
nn Market competition and asset pricing
nn Fund raising capability
nn Access to new investment opportunities
nn Investor capability and investment
discipline
nn Asset valuations
nn Over exposure to a particular sector,
geography or small number of assets
nn Limited influence over minority
investments
nn Investment performance track record
nn Reputational risks arising from portfolio
related events
nn Maintaining appropriate levels of liquidity
nn Capital adequacy
nn Managing debt levels and maturity
profiles
nn Credit rating and access to funds
nn Counterparty management
nn Foreign exchange exposure
nn Interest rate exposure
nn Impact of volatility of investment
valuations
nn Rigorous investment appraisal and
approval process
nn Monthly asset reviews and risk
assessments, based on up-to-date reports
nn Consistent application of detailed valuation
guidelines and review processes
nn Monitoring of investment concentration
nn Representation by a 3i executive on
the boards of Private Equity investee
companies
nn Implementation of asset management
initiatives
nn Responsible Investing guidelines
incorporated into investment procedures
nn Application of vintage control policy and
asset allocation analysis
nn Weekly detailed cash flow forecasts,
tracked against minimum liquidity
headroom
nn Monitoring of gross debt against
target limits
nn Monitoring of material debt maturities
within a 12 month rolling period
nn Periodic review of currency volatility
and use of hedging
nn Use of “plain vanilla” derivatives
where appropriate
nn Board reviews of the Group’s
treasury policy
nn Resource balance, including recruitment,
retention and development of
capable people
nn Alignment of remuneration and
incentives
nn Framework of core values, global policies,
a code of business conduct and delegated
authorities
nn Detailed policies and procedures
nn Rigorous staff recruitment, vetting, review
nn Appropriate systems, processes and
and appraisal processes
procedures
nn Adherence to tax regulations, including
permanent establishment risk
nn Change management
nn Complexity of regulatory operating
environment and ability to influence
regulatory change
nn Potential exposure to litigation
nn Reputational risks arising from
operational risk incidents
nn Exposure to fraud
nn Business disruption
nn Appropriate remuneration structures
nn Succession planning
nn Close monitoring of legal, regulatory and
tax developments by specialist teams
nn Internal Audit and Compliance functions
carry out independent periodic reviews
nn Business continuity and
contingency planning
nn Implementation of asset management
initiatives
nn Controls over information security,
confidentiality and conflicts of interest
nn Anti-fraud programme
nn Group-wide compensation review
Key developments
Management reports
Board reporting
nn Continuing uncertain economic conditions,
nn Interim updates and results announcements
nn Board – pre-publication
particularly in Asia and Europe
nn Group management report – market review;
nn Board – monthly
nn Regulatory developments which may impose
additional costs, in particular AIFMD
investor relations
nn Group risk review
nn Review of brand and trends affecting reputation
nn Brand and Values Committee – annually
nn Reputational risk log
nn Brand and Values Committee – three times
per annum
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
nn Continued challenging market and economic
nn Group management report – financial
nn Board – monthly
conditions which could impact investment
performance and, therefore, strategic delivery
nn Continued caution on the part of third-party
investors to commit to new funds
nn Emergence of activist shareholders
performance and strategic progress dashboards
nn New business proposals and business cases
nn Board – as required
nn Group risk review
nn Group Risk Committee and Audit and Compliance
nn Strategic plan and updates
Committee – quarterly
nn Board – annual update or refresh
nn Reduced Private Equity investment levels owing
nn Valuations Committee report
nn Valuations Committee and Board – quarterly
to a selective and measured approach to new
nn Group management report – portfolio update; fund
nn Board – quarterly
investments
nn Continued impact of current economic
environment on the growth of Private Equity
portfolio companies’ earnings and level of activity
in European debt markets
nn Subdued M&A market conditions
performance; new investments
nn Long-term vintage performance update
nn Board – two times per annum
nn Periodic business updates
nn Monthly portfolio monitoring dashboard
nn Board – as required
nn Board – monthly
nn Portfolio overview (including ESG matters)
nn Group Risk Committee and Audit and Compliance
nn Group risk review
Committee – two times per annum
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
nn Continued uncertainty within the Eurozone
nn Group management report – key financial
nn Board – monthly
nn Increase in currency volatility
nn Reduced gross debt levels
nn Reducing derivative hedging programme over time
highlights; financial performance; capital adequacy
nn Group risk review
nn Group Risk Committee and Audit and Compliance
nn Annual budget (and rebase)
nn Financial forecasts
nn Capital adequacy
nn Ad hoc reporting on key treasury matters
nn Board – as required
Committee – quarterly
nn Board – two times per annum
nn Board – three times per annum
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
nn Further acquisitions in the Debt Management
nn Risk log summary
nn Group Risk Committee and Audit and Compliance
nn Changes in applicable tax and regulatory
nn Group risk review
nn Group Risk Committee and Audit and Compliance
nn Downsizing in response to business needs
nn Litigation summary
nn Group Risk Committee and Audit and Compliance
business requiring integration
requirements eg AIFMD
and to manage costs
nn New outsourcing arrangements
eg IT services
nn New IT system implementations
nn Review of 3i values
nn Compliance update reports
nn Brand and Values Committee – annually
nn Group Risk Committee and Audit and Compliance
nn Internal control effectiveness review
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
Committee – quarterly
Committee – quarterly
Committee – quarterly
Committee – annually
3i Group plc Annual report and accounts 2013
55
Key developments
nn Continuing uncertain economic conditions,
particularly in Asia and Europe
nn Regulatory developments which may impose
additional costs, in particular AIFMD
Management reports
nn Interim updates and results announcements
nn Group management report – market review;
Board reporting
nn Board – pre-publication
nn Board – monthly
investor relations
nn Group risk review
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
nn Review of brand and trends affecting reputation
nn Reputational risk log
nn Brand and Values Committee – annually
nn Brand and Values Committee – three times
per annum
nn Continued challenging market and economic
conditions which could impact investment
performance and, therefore, strategic delivery
nn Continued caution on the part of third-party
investors to commit to new funds
nn Emergence of activist shareholders
nn Group management report – financial
nn Board – monthly
performance and strategic progress dashboards
nn New business proposals and business cases
nn Group risk review
nn Board – as required
nn Group Risk Committee and Audit and Compliance
nn Strategic plan and updates
Committee – quarterly
nn Board – annual update or refresh
nn Reduced Private Equity investment levels owing
to a selective and measured approach to new
investments
nn Continued impact of current economic
environment on the growth of Private Equity
portfolio companies’ earnings and level of activity
in European debt markets
nn Subdued M&A market conditions
nn Valuations Committee report
nn Group management report – portfolio update; fund
nn Valuations Committee and Board – quarterly
nn Board – quarterly
performance; new investments
nn Long-term vintage performance update
nn Periodic business updates
nn Monthly portfolio monitoring dashboard
nn Portfolio overview (including ESG matters)
nn Group risk review
nn Board – two times per annum
nn Board – as required
nn Board – monthly
nn Group Risk Committee and Audit and Compliance
Committee – two times per annum
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
Treasury
and funding
nn Foreign exchange
nn Counterparties
nn Liquidity
nn Maintaining appropriate levels of liquidity
nn Weekly detailed cash flow forecasts,
nn Debt levels and refinancing
nn Capital adequacy
nn Continued uncertainty within the Eurozone
nn Increase in currency volatility
nn Reduced gross debt levels
nn Reducing derivative hedging programme over time
nn Group management report – key financial
nn Board – monthly
highlights; financial performance; capital adequacy
nn Group risk review
nn Group Risk Committee and Audit and Compliance
nn Annual budget (and rebase)
nn Financial forecasts
nn Ad hoc reporting on key treasury matters
nn Capital adequacy
Committee – quarterly
nn Board – two times per annum
nn Board – three times per annum
nn Board – as required
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
Operational
nn People, processes and systems
nn Legal and regulatory compliance
nn Reputational
nn Resource balance, including recruitment,
nn Framework of core values, global policies,
retention and development of
a code of business conduct and delegated
capable people
authorities
nn Alignment of remuneration and
nn Detailed policies and procedures
nn Further acquisitions in the Debt Management
nn Risk log summary
nn Group Risk Committee and Audit and Compliance
business requiring integration
Committee – quarterly
nn Changes in applicable tax and regulatory
nn Group risk review
nn Group Risk Committee and Audit and Compliance
requirements eg AIFMD
Committee – quarterly
nn Rigorous staff recruitment, vetting, review
nn Downsizing in response to business needs
nn Litigation summary
nn Group Risk Committee and Audit and Compliance
and to manage costs
nn New outsourcing arrangements
eg IT services
nn New IT system implementations
nn Review of 3i values
nn Compliance update reports
Committee – quarterly
nn Brand and Values Committee – annually
nn Group Risk Committee and Audit and Compliance
Committee – quarterly
nn Internal control effectiveness review
nn Group Risk Committee and Audit and Compliance
Committee – annually
Risk type
External
Risk areas
nn External stakeholders
nn Reputational
nn Government/regulation
nn Market/economic
Strategic
nn Strategic delivery
nn Meeting key targets
nn New business opportunities
nn Managing communications
Investment
nn Profitable growth of assets under
nn Market competition and asset pricing
nn Rigorous investment appraisal and
management
nn New investment and exit decisions
nn Portfolio performance
nn Valuations
Inherent risks
Risk mitigation
nn Changes in macroeconomic variables
nn Three distinct and complementary
nn General health of capital markets
nn Exposure to new markets and
investment products
nn Regulatory developments
nn Changes in government policy
nn Reputational risks
investment platforms
nn Diversified investment portfolio in a range
of sectors, with different economic cycles,
across geographical markets
nn Close monitoring of relevant regulatory and
fiscal developments by in-house specialists
and external advisers
nn Due diligence when entering new markets
or business areas
nn Understanding and analysis of risks
nn Periodic strategic reviews
nn Regular monitoring of key risks by Group
and rewards
model and strategy
nn Appropriateness of choice of business
Risk Committee and the Board
nn Monitoring of a range of key financial and
nn Unexpected changes in the Group’s
strategic performance indicators and
operating environment
forecasts
nn Unanticipated outcomes versus
nn Periodic updates of plans and underlying
assumptions and announced targets
assumptions
nn Potential loss of key staff in areas critical
nn Disciplined management of key
to the Group’s strategic delivery
strategic projects
nn Fund raising capability
nn Access to new investment opportunities
nn Investor capability and investment
discipline
nn Asset valuations
nn Over exposure to a particular sector,
geography or small number of assets
nn Limited influence over minority
investments
nn Investment performance track record
nn Reputational risks arising from portfolio
related events
nn Managing debt levels and maturity
profiles
nn Credit rating and access to funds
nn Counterparty management
nn Foreign exchange exposure
nn Interest rate exposure
nn Impact of volatility of investment
valuations
approval process
nn Monthly asset reviews and risk
assessments, based on up-to-date reports
nn Consistent application of detailed valuation
guidelines and review processes
nn Monitoring of investment concentration
nn Representation by a 3i executive on
the boards of Private Equity investee
nn Implementation of asset management
companies
initiatives
nn Responsible Investing guidelines
incorporated into investment procedures
nn Application of vintage control policy and
asset allocation analysis
tracked against minimum liquidity
nn Monitoring of gross debt against
headroom
target limits
nn Monitoring of material debt maturities
within a 12 month rolling period
nn Periodic review of currency volatility
and use of hedging
nn Use of “plain vanilla” derivatives
where appropriate
nn Board reviews of the Group’s
treasury policy
nn Appropriate systems, processes and
and appraisal processes
incentives
procedures
nn Adherence to tax regulations, including
permanent establishment risk
nn Change management
nn Complexity of regulatory operating
environment and ability to influence
regulatory change
nn Potential exposure to litigation
nn Reputational risks arising from
operational risk incidents
nn Exposure to fraud
nn Business disruption
nn Appropriate remuneration structures
nn Succession planning
nn Close monitoring of legal, regulatory and
tax developments by specialist teams
nn Internal Audit and Compliance functions
carry out independent periodic reviews
nn Business continuity and
contingency planning
nn Implementation of asset management
initiatives
nn Controls over information security,
confidentiality and conflicts of interest
nn Anti-fraud programme
nn Group-wide compensation review
Risk 56
3i Group plc Annual report and accounts 2013
Corporate responsibility
Our people
A spirit of co-operation is encouraged to ensure the highest
standards of integrity and professionalism. Fair and open
communication is a high priority.
3i has comprehensive global and regional policies to help ensure
that employees treat their colleagues and others with courtesy
and respect.
Training and development
We encourage the continuous development of our staff, with the
objective of maximising both the overall performance of the business
and their career potential. We aim to ensure that our working
environments are attractive and stimulating places to work.
Compliance training
It is a legal and regulatory requirement that all executives involved
in making or managing investment transactions receive anti-money
laundering training and periodic refresher training.
Our Compliance team has developed a series of e-based training
courses, including financial crime, anti-bribery, confidential
information and regulatory refresher/induction training. It is
mandatory for all staff to complete and pass these courses.
Health and safety
Promotion of health and safety at work is an essential responsibility
of managers and staff at all levels, as is working safely.
At 3i, we ensure staff can go about their everyday business at 3i’s
offices safely and without risks to their health. We have a good record
and our high standards of health and safety apply to all our
employees, visitors, clients and contractors.
We have redesigned our workstation training and assessment
software, making it more interactive and relevant to employees.
All new employees are asked to complete the training and
assessment programme.
We ensure we have competent health and safety advice, and regularly
monitor how well we are performing.
For further details of our Health and Safety policy, please visit the
CR section of our website at www.3i.com/corporate-responsibility
Our approach and values
For 3i, corporate responsibility is about
being a responsible investor, as well
as a responsible company. We take
responsibility for our actions, carefully
consider how others will be affected by
our choices and ensure that our values
and ethics are integrated into our formal
business policies, practices and plans.
Our approach to corporate responsibility is underpinned by our values
of ambition, courage, responsibility, collaboration and integrity, which
together commit us to doing the right thing in the right way.
All employees have a responsibility to be aware of, and to abide by,
3i’s policies and procedures, which have been developed to guide staff
and regulate the conduct of the day-to-day operations of the business.
These policies and procedures include 3i’s environmental, ethical and
social policies, which set out a number of common sense operating
principles to guide staff and to underpin 3i’s values and its reputation
for acting with integrity, ethically and within the law. These policies are
available to all employees through 3i’s portal, a web-based knowledge
system. Employees are encouraged to make suggestions to improve
our policies and procedures. These recommendations are formally
reviewed and updated, where appropriate, on an annual basis.
Organisation and governance
3i has a policy of seeking to comply with established best practice
in the field of corporate governance. The Board has adopted and
promotes corporate values and Group standards, which set out the
behaviour expected of employees in their dealings with shareholders,
customers, colleagues, suppliers and others who engage with 3i.
Brand and Values committee
The Board’s Brand and Values Committee oversees the Group’s brand,
corporate values, reputation, ethical approach and behaviours,
together with its approach to corporate responsibility, and considers
and provides recommendations and advice to the Board on broad
strategy, positioning and standards concerning the Company’s values
and reputation.
The Brand and Values Committee comprises Sir Adrian Montague
(Chairman), Simon Borrows (Chief Executive) and Kevin Dunn
(General Counsel and Company Secretary), together with two
or more non-executive Directors determined by the Board from
time to time. Relevant other members of the Executive Committee
are also invited to attend meetings, as required.
3i Group plc Annual report and accounts 2013
57
In the year to 31 March 2013 our reported emissions were
2000.29 tCO2e. 3i reduced total carbon emissions by 951.87 tCO2e
from the year 1 April 2011 to 31 March 2012, a reduction of 32%.
This significant reduction in emissions can be attributed principally
to the overall reduction in staff numbers during the year, a reduction
in business travel, closure of offices and rationalisation of services
in the Palace Street office. For example, the Palace Street office has
achieved significant carbon reductions by lowering building emissions
by 58% (549.03 tCO2e), mainly due to the removal of gas sources from
the site in May 2012. For a breakdown of emissions by source for the
year to 31 March 2013, please visit the CR section of our website at
www.3i.com.
3i’s employees attach importance to working for a company which
acts responsibly on environmental matters. Since the beginning
of 2013, our Palace Street office has taken part in a sustainability
project in conjunction with our landlords, Land Securities, and Planet
First, an organisation which supports businesses in improving their
sustainability performance. The programme has a different focus
each month, covering the environmental impacts of how we source our
food, consume water and energy in our buildings and use transport.
Transparency
We take an open and straightforward approach to doing business.
Our Annual and Half-yearly reports and our website, www.3i.com,
provide significant disclosure on 3i and on our underlying investments.
Prompt payment code
During the year, 3i became a signatory of the Prompt Payment Code.
The Code encourages and promotes best practice between
organisations and their suppliers. Signatories to the Code commit
to paying their suppliers within clearly defined terms, and to ensuring
there is a proper process for dealing with any issues that may arise.
Environmental, Social and
Governance standards
Risk management
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
financial performance and/or the achievement of the Group’s strategic
objectives. This includes risks with an environmental, social and/or
governance aspect.
Our principal risks and risk management process are explained on
pages 50 to 55 of this Report. Details can also be found in the Pillar 3
disclosures on our website, www.3i.com. The most significant
corporate responsibility related risks arising from our investment
activity relate to environmental, ethical, governance and social issues.
We believe that companies with high environmental, social and
governance standards (“ESG”) are typically better run, have fewer
business risks and ultimately deliver better value.
Responsible investing
We are signatories to the UN Principles for Responsible Investing (“RI”)
and have embedded RI policies and procedures in our investment and
in our portfolio company review processes. The Board, through both
its Brand and Values Committee and its Audit and Compliance
Committee, receives regular updates on RI policy and procedure,
and compliance with it, as well as broader reputational risks arising
from our investment activities.
The environment
We endeavour to minimise our impact, wherever possible, and have
established procedures to reduce our environmental footprint.
In London, which is where the majority of our employees are based,
the carbon intensity per employee has reduced by 57% compared
with the previous year. Our procedures include:
nn powering off lights, computers and other equipment during
evenings and weekends;
nn recycling office waste; and
nn rationalising business travel through a set of clear guidelines.
Our travel policy clearly states that people should only travel
when the use of alternate conferencing methods does not meet
business needs.
Corporate responsibility Bridges Ventures
3i is proud to be a founding investor in Bridges Ventures, a privately
owned UK venture capital company with a social mission.
Bridges was founded in 2002 and has since made equity
investments totalling over £77 million in 35 businesses employing
1,693 people, almost 240 of whom came out of unemployment.
In December 2011, 3i invested £5 million into Bridges Ventures
Fund III bringing 3i’s total commitment to over £7 million.
Give As You Earn
In the UK, we promote the Give As You Earn scheme, administered
by the Charities Aid Foundation.
Subject to an individual cap (currently £400 per month) and a monthly
cap of £10,000 in aggregate, 3i currently matches amounts donated
by UK staff under the Give As You Earn scheme.
Fundraising events
3i has a policy of matching the amount raised by UK staff through
sponsorship by family and friends of their fundraising efforts for
UK registered charities.
External benchmarking
3i has been a member of the Dow Jones Sustainability World Index
(“DJSI”) since 2002 and has been reporting to the Carbon Disclosure
Project (an independent not-for-profit organisation working to drive
greenhouse gas emissions reduction and sustainable water use by
business and cities) for the last seven years.
58
3i Group plc Annual report and accounts 2013
Corporate responsibility
Community
We focus our charitable activities on the disadvantaged, on young
people and on education. Charities are supported on the basis of their
effectiveness and impact.
Our charitable giving for the year to 31 March 2013 totalled £198,000.
We match employees’ fundraising and in the UK we promote the Give
As You Earn scheme, administered by the Charities Aid Foundation.
The Passage, which is based very near to our London office, has
a high impact on the local community. 3i funds The Passage’s
education, training and employment department, which provides
homeless and insecurely housed people with support to find a way
back into employment and explore training and educational options.
Enterprise Education Trust was founded by 3i 35 years ago and
we have supported the charity as it has grown and developed.
The Trust focuses on improving the financial literacy of 16 to
19 years olds, raising their aspirations and attainment levels, with
a particular focus on business, preparing them for further and
higher education, training and employment, and promoting links
between schools and businesses.
Community Links is based in Newham, one of the most deprived
boroughs in London. Community Links provides ”early action” work,
which includes running youth clubs and safe play areas, through
to providing advice on debt, welfare benefits, form filling etc.
It also carries out specialist intervention work when people are
experiencing severe problems such as exclusion from school
and prolonged periods of unemployment.
Historic Royal Palaces is an independent charity that looks after
the Tower of London, Hampton Court Palace, the Banqueting House,
Kensington Palace and Kew Palace. 3i helps fund the Outreach and
Community Involvement team, in Kensington Palace, which works
with the local community to engage them in activities in and around
the Palace. Despite Kensington & Chelsea being one of the
wealthiest boroughs in the UK, it also contains pockets of
substantial deprivation. The team engages with the local
community in a number of ways, including illustrated talks,
storytelling and practical workshops and works with a variety
of groups, including elderly people, young people not in education,
employment or training, children from disadvantaged backgrounds
and the disabled. It also provides the use of community rooms
within the palace for local groups to develop their own activities.
Governance
3i Group plc Annual report and accounts 2013
59
The Board has been very focused on strategy and
delivering clear and measurable improvement in
shareholder returns.
Sir Adrian Montague
Chairman
This section of the report describes how
3i is governed and managed. It explains
how the Board is organised and operates,
including the roles and composition of
each of its Committees, and provides
details on our Board and Executive
Committee members. It also explains
the division of responsibilities between
the Directors, including between the
Chairman and Chief Executive. This
section also includes the Directors’
remuneration report.
Introduction
Good corporate governance is fundamental to 3i and its activities.
Governance and oversight of the Group’s business model and strategy
are critical to the delivery of value to the Group’s stakeholders. This is
more important than ever given the current challenging and uncertain
economic environment that the Group faces and the changing
regulatory landscape across our sector.
The Board is responsible to shareholders for the overall management
and oversight of the Group and for its long-term success. In particular,
the Board is responsible for agreeing the Group’s strategy, monitoring
financial performance, setting and monitoring the Group’s risk
appetite and maintaining an effective system of internal controls.
It is the Board’s responsibility to ensure that the Group has a clear
strategy and that the necessary people, resources and structures
are in place to support the delivery of this strategy.
Appointment of the Chief Executive
During the last year, a key role of the Board was the appointment of a
new Chief Executive of 3i. Following the announcement in March 2012
of Michael Queen’s intention to resign as Chief Executive, the Board
consulted with shareholders regarding the process to select Michael’s
successor. The Nominations Committee and the Board followed
a rigorous process that considered a strong field of both external
and internal candidates. This culminated in the appointment on
17 May 2012 of Simon Borrows as 3i’s new Chief Executive with
a strategic mandate from the Board to pursue a clear and concrete
set of measures to maximise shareholder value over the longer term.
The key areas of immediate focus for the strategic review of the
business were as follows:
nn determining the best shape and investment strategy for the
business going forward;
nn improving the consistency and discipline of the Group’s asset
management approach and ensuring that the Group’s investment
capabilities were of a high quality; and
nn ensuring that the operating cost base and liquidity costs were
consistent with the Group’s investment and asset management
strategy and with the prudent maintenance of the balance sheet.
On 29 June 2012, following the strategic review, the future strategy for
3i was announced. The Board continues to meet regularly to review,
discuss and debate the Group’s strategic objectives and its progress
towards achieving these. As part of this, in December 2012, the Board,
together with members of the Executive Committee, met for a full day
to review and discuss progress against the Group’s strategy.
Governance 60
3i Group plc Annual report and accounts 2013
Board of Directors and Executive Committee
Board of Directors
Sir Adrian Montague
Julia Wilson
Alistair Cox
Willem Mesdag
Simon Borrows
Jonathan Asquith
Richard Meddings
Martine Verluyten
Non-executive Directors
Jonathan Asquith
Non-executive Director since March 2011. Chairman
of AXA Investment Managers and Dexion Capital plc.
A non-executive director of Citibank International plc
and Citigroup Global Markets Limited.
Previous experience
Non-executive director of Ashmore Group plc
2008–2012. Executive director of Schroders plc
from 2002 until 2008, during which time he was
Chief Financial Officer and later Vice-Chairman.
Previously spent 18 years in investment banking
with Morgan Grenfell and Deutsche Bank.
Alistair Cox
Non-executive Director since 2009. Chief Executive
of Hays plc.
Previous experience
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 and Senior
Independent Director since October 2010. Group
Finance Director of Standard Chartered PLC since
2006, having joined the Board of Standard Chartered
PLC as a Group Executive Director in 2002. A member
of the Governing Council of the International Chamber
of Commerce, United Kingdom.
Previous experience
Chief Operating Officer, Barclays Private Clients, Group
Financial Controller at Barclays PLC and Group
Finance Director of Woolwich PLC.
Willem Mesdag
Non-executive Director since 2007. Managing
Partner of Red Mountain Capital Partners LLC.
Previous experience
A Partner and Managing Director of Goldman,
Sachs & Co.
Martine Verluyten
Non-executive Director since January 2012. A
non-executive director of Thomas Cook Group plc,
STMicroelectronics NV and Groupe Bruxelles Lambert.
Previous experience
Chief Financial Officer of Umicore, a Brussels-based
listed materials technology group, from 2006 to
December 2011. Before joining Umicore was Group
Controller and then Chief Financial Officer of Mobistar.
Chairman
Sir Adrian Montague
Chairman
Chairman since 2010. Chairman of Anglian Water
Group. A non-executive director of Aviva plc, Skanska
AB and CellMark AB.
Previous experience
Chairman of Michael Page International plc, London
First, Friends Provident PLC, British Energy Group PLC,
Cross London Rail Links Ltd (Crossrail) and Deputy
Chairman of Network Rail and the UK Green
Investment Bank plc.
Executive Directors
Simon Borrows
Chief Executive
Chief Executive since May 2012, and an Executive
Director since he joined 3i in October 2011. Chairman
of the Group Risk Committee, the Executive Committee
and the Group’s Investment Committee. Also a
non-executive director at Inchcape plc and The British
Land Company Public Limited Company.
Previous experience
Formerly Chairman of Greenhill & Co International LLP,
having previously been Co-Chief Executive Officer
of Greenhill & Co, Inc. Before founding the European
operations of Greenhill & Co in 1998 he was the
Managing Director of Baring Brothers
International Limited.
Julia Wilson
Group Finance Director
Group Finance Director and member of the Executive
Committee since 2008. A member of the Group’s
Investment Committee since July 2012. Joined 3i
in 2006 as Deputy Finance Director, with responsibility
for the Group’s finance, taxation and treasury
functions. Also a non-executive director at
Legal & General Group Plc.
Previous experience
Group Director of Corporate Finance at Cable &
Wireless plc.
3i Group plc Annual report and accounts 2013
61
Executive Committee
Menno Antal
Jeremy Ghose
Cressida Hogg
Kevin Dunn
Alan Giddins
Ben Loomes
Executive Committee
Menno Antal
Managing Partner, Private Equity
A member of the Executive Committee and the Group’s
Investment Committee since 2010.
Alan Giddins
Managing Partner, Private Equity
A member of the Executive Committee and the Group’s
Investment Committee since 2010.
Previous experience
Joined 3i in 2000 and Managing Director, Benelux,
since 2003. Prior to joining 3i, held a broad range of
international managerial positions within Heineken.
Previous experience
Joined 3i in 2005. Prior to joining 3i, spent 13 years in
investment banking, latterly as a Managing Director
at Société Générale.
Kevin Dunn
General Counsel, Company Secretary and
Head of Human Resources
Responsible for 3i’s legal, compliance, internal audit,
human resources and company secretarial functions.
A member of the Executive Committee since joining
3i in 2007.
Cressida Hogg
Managing Partner, Infrastructure
A member of the Executive Committee and the Group’s
Investment Committee since 2010. Responsible for
the Infrastructure business line and for leading the
advisory relationship with the independent Board of
3i Infrastructure plc.
Previous experience
Prior to joining 3i, was 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.
Jeremy Ghose
Managing Partner and CEO of 3i
Debt Management
A member of the Executive Committee since joining
3i in February 2011 on 3i’s acquisition of Mizuho
Investment Management (UK) Limited from Mizuho
Corporate Bank.
Previous experience
Prior to joining 3i, was with Mizuho Corporate Bank
(formerly The Fuji Bank) since 1988 and on its
executive board since 2005. Founder of Mizuho’s
Leveraged Finance business in 1988 and of the
third-party independent debt fund management
business in 2005.
Previous experience
Joined 3i in 1995. Co-founded 3i’s Infrastructure
business in 2005 and became Managing Partner,
Infrastructure in 2009.
Ben Loomes
Group Strategy Director
A member of the Executive Committee and the Group’s
Investment Committee since July 2012.
Previous experience
Joined 3i in April 2012. Prior to joining 3i, was an
Executive Director within Morgan Stanley’s UK
investment banking business and before that was a
Principal of Greenhill & Co. International, focusing
on European mergers and acquisitions, financing
advisory and restructuring. Began career at
Goldman Sachs International within its European
investment banking division.
Governance 62
3i Group plc Annual report and accounts 2013
Board and Committees
Board and Committees structure
How the Board operates
It is the Board’s responsibility to ensure that there is an effective
organisational and reporting structure in place such that there
are clear reporting lines within the Group and well defined roles and
responsibilities. This is to ensure that the right decisions are being
made with involvement from the right people.
The Chairman is responsible for leadership of the Board and ensuring
its effectiveness. He is also responsible for organising the business of
the Board and setting its agenda. In addition to the Chairman, there
are currently five independent non-executive Directors who have
a range of strong and complementary skills.
The Board is assisted by various standing Committees of the Board
which report regularly to the Board. In undertaking its duties, the
Board delegates certain authorities and decisions to its Committees.
The Board committee structure, including a summary of the roles and
composition of the Committees, is outlined in the diagram on page 63.
The membership of these Committees is regularly reviewed by the
Board. When considering Board Committee membership and
chairmanship, the Board aims to ensure that undue reliance is not
placed on particular Directors.
These Board Committees all have clearly defined terms of reference.
The terms of reference of the Audit and Compliance Committee,
the Brand and Values Committee, the Nominations Committee,
the Remuneration Committee and the Valuations Committee are
available at www.3i.com.
Day-to-day management of the Group is the responsibility of the
Chief Executive. To assist him in this role, the Chief Executive has
established a number of additional Committees. These are also
outlined in the diagram on page 63.
As part of the new strategy announced in June last year, the Group’s
organisational structure has been simplified and processes have been
streamlined. A number of committee structures were rationalised in
order to reduce organisational complexity and to enable better and
more efficient decision-making. A new leadership team, the Executive
Committee, was established by the Chief Executive as the principal
day-to-day decision-making body for the management of the Group.
A new Group Investment Committee was also put in place, responsible
for the acquisition, management and disposal of investments.
The table set out on page 69 provides details of attendance at full
meetings of the Board and its Committees during the last year.
In addition to those full meetings, a number of ad hoc meetings
were held to deal with specific items as they arose.
Prior to each full meeting of the Board and its Committees, and as
required for ad hoc meetings, relevant reports and papers, including
financial performance data and detailed updates on the progress and
implementation of the strategic plan where appropriate, are circulated
to Directors.
The Board has the opportunity to discuss these reports and updates
and to challenge directly the Executive Directors and other senior
management, who attend all or part of the Board meetings.
The key responsibilities and areas of focus for the Board are:
nn Strategy – contribute to the development of, and agree, the Group’s
strategy. This includes through review and discussion of reports
and updates at Board meetings as well as through the annual
strategy review meeting which is attended by the Board and
members of the Executive Committee.
nn Group financial and operational performance – review and
monitor the performance of the Group, including through regular
reporting and discussions with the Executive Committee and other
senior management.
nn Senior management – ensure that the Executive Committee has
the skills and resources to deliver the strategy and that appropriate
succession and contingency planning is in place.
nn Evaluation and composition – review the performance of the Board
and its Committees to ensure that they are effective. Ensure that
the Board and its Committees comprise competent and capable
individuals with a range of skills and experience who bring
independent views to the decisions being made.
nn Internal controls – maintain an appropriate internal control
framework.
nn Risk – ensure that there are effective risk management policies
and processes in place and an appropriate governance structure.
To help the Board discharge its duties, it has approved a formal
schedule of matters reserved to it and its duly authorised Committees
for decision. This is described on page 69. Matters delegated by the
Board to management include implementation of the Board approved
strategy, day-to-day management and operation of the business,
the appointment and remuneration of all staff below the Executive
Committee and the formulation and implementation of risk
management policies and processes.
3i Group plc Annual report and accounts 2013
63
Overview of Committees of the Board and Chief Executive
3i Group plc Board
Board level Committees
Audit and Compliance
Committee
Remuneration
Committee
Brand and Values
Committee
Nominations
Committee
Valuations
Committee
Financial reporting,
risk and internal controls
Richard Meddings
(Chairman)
Jonathan Asquith
Alistair Cox
Martine Verluyten
Director and senior
management
remuneration and Group
remuneration structure
Jonathan Asquith
(Chairman)
Alistair Cox
Willem Mesdag
Corporate values,
ethical approach,
brand and reputation
Sir Adrian Montague
(Chairman)
Simon Borrows
Kevin Dunn
All non-executive Directors
are invited to attend and
participate in the
Committee’s meetings.
Board appointments,
and size, balance
and composition
of the Board
Sir Adrian Montague
(Chairman)
Jonathan Asquith
Simon Borrows
Alistair Cox
Richard Meddings
Willem Mesdag
Martine Verluyten
Valuation policy and
investment valuations
Willem Mesdag
(Chairman)
Sir Adrian Montague
Simon Borrows
Julia Wilson
Chief Executive
Chief Executive’s Committees
Executive Committee
Investment Committee
Group Risk Committee
Conflicts Committee
Principal decision-making body in
respect of managing the business
Acquisition, management
and disposal of investments
Oversees the Group’s risk
management framework
Independent review
of conflict issues
Simon Borrows (Chairman)
Julia Wilson
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Cressida Hogg
Ben Loomes
Simon Borrows (Chairman)
Julia Wilson
Menno Antal
Alan Giddins
Cressida Hogg
Ben Loomes
Ian Lobley (Senior Private
Equity Partner)
Simon Borrows (Chairman)
Julia Wilson
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Cressida Hogg
Ben Loomes
Director, Group Compliance
Director, Internal Audit
Kevin Dunn (Chairman)
Julia Wilson
Ben Loomes
Governance 64
3i Group plc Annual report and accounts 2013
Division of responsibilities
The table below summarises the division of responsibilities between the Directors, including the Chairman and
Chief Executive, which has been approved by the Board.
Role of the Chairman
Role of the Chief Executive
Role of non-executive Directors
nn Leads the Board in setting its agenda,
agreeing strategy, monitoring financial
and operational performance, and
establishing the Group’s risk appetite.
nn 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.
nn Responsible for organising the business
of the Board, ensuring its effectiveness,
and maintaining an effective system of
internal controls.
nn Leads the Executive Committee to develop
and implement the Group’s strategy and
manage risk and the internal control
framework.
nn Ensures that non-executive Directors
nn Reports to the Board on financial and
operational performance and progress
in delivering the strategic objectives.
nn Scrutinise the performance of
management in meeting agreed objectives
and monitor the reporting of performance.
nn Seek assurance on the integrity of the
financial information and that financial
controls and systems of risk management
are robust and defensible.
nn Determine appropriate levels of
remuneration for Executive Directors and
have a prime role in appointing Directors
and in succession planning.
nn Regularly engages with shareholders
nn Constructively challenge and help develop
and other key stakeholders on the Group’s
activities and progress.
proposals on strategy; this occurs at
meetings of the Board, and in particular at
the annual review meeting to discuss
ongoing strategy, the most recent of which
took place in December 2012.
receive relevant and accurate information
to facilitate an open and effective
discussion. This includes ensuring that the
non-executive Directors receive regular
reports on shareholders’ views on
the Group.
nn Responsible for the composition of the
Board and facilitates the effective
contribution of non-executive Directors and
constructive relations between Executive
and non-executive Directors.
Effectiveness
During the year, the Board conducted its annual evaluation of its own
performance and that of its Committees and individual Directors.
The process was led by the Chairman and externally facilitated
by Dr Tracy Long of Boardroom Review Limited. The results of the
evaluation process were reported to, and discussed by, the Board.
The Board performance evaluation considered the overall functioning
of the Board including how discussion on key topics could most
effectively be encouraged and managed, the culture of the
organisation, and how non-executive Directors could both further
increase their knowledge of the Group’s investments and engage
further with the Group’s investment business without impinging on
areas delegated to management. Recent enhancements to regular
Board reports were agreed to have improved the Board’s insight into
day-to-day performance of portfolio companies, and it was decided
all non-executive Directors would attend each year a number of
management’s regular internal in-depth review discussions on
individual portfolio companies. Further opportunities were identified
for non-executive Directors to engage with the teams which manage
the Group’s investments.
The Board evaluation process also included consideration of the size,
balance and composition of the Board, including its diversity, including
as to gender.
In his role as Senior Independent Director, Mr R H Meddings led
a review by the Directors of the performance of the Chairman and
subsequently reported back to the Board.
Statutory and corporate governance information
3i Group plc Annual report and accounts 2013
65
Principal activity of the Group
The Group is an international investor focused on private equity,
infrastructure and debt management, investing in Europe, Asia
and the Americas.
Group investment policy
3i’s investment policy, which as a closed-ended investment fund
it is required to publish, is as follows:
nn 3i is an investment company which aims to provide its shareholders
with quoted access to private equity, infrastructure and debt
management investment returns. Currently, its main focus is on
making quoted and unquoted equity and/or debt investments in
businesses and funds across Europe, Asia and the Americas.
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.
nn 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.
nn 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.
During the year, the Company has continued its approach of
conservative balance sheet management. 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 currently exceed
£1 billion and may at times be significantly below this limit.
As a consequence, gearing, which is a function of both net debt
and asset values, is expected to be in the range of 0%–30% for the
immediate future. 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 1158 of the
Corporation Tax Act 2010 and the Company directs its affairs to
enable it to continue to remain so approved.
Regulation
3i Investments plc, 3i Debt Management Investments Limited,
3i Europe plc and 3i Nordic plc, subsidiaries of the Company, are
authorised and regulated by the Financial Conduct Authority 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 comprehensive income for the year was £373 million (2012:
£(656) million). An interim dividend of 2.7p per ordinary share in
respect of the year to 31 March 2013 was paid on 9 January 2013.
The Directors recommend a final dividend of 5.4p per ordinary share
be paid in respect of the year to 31 March 2013 to shareholders on the
Register at the close of business on 21 June 2013.
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 2013, its
position at that date and the Group’s likely future development are
detailed in the Chairman’s statement, the Chief Executive’s review
and the Business review.
Governance 66
3i Group plc Annual report and accounts 2013
Statutory and corporate governance information
Share capital
The issued share capital of the Company as at 31 March 2013
comprised 971,405,127 ordinary shares of 73 19/22p each and
4,635,018 B shares (cumulative preference shares of 1p each),
representing 99.99% and 0.01% respectively of the Company’s
issued share capital by nominal value.
Ordinary shares
The issued ordinary share capital of the Company as at 1 April 2012
was 971,069,281 ordinary shares and increased over the year to
31 March 2013 by 335,846 ordinary shares on the issue of shares
to the trustee of the 3i Group Share Incentive Plan. At the Annual
General Meeting (“AGM”) on 29 June 2012, the Directors were
authorised to repurchase up to 97,000,000 ordinary shares in the
Company (representing approximately 10% of the Company’s issued
ordinary share capital as at 16 May 2012) until the Company’s AGM
in 2013 or 28 September 2013, if earlier. This authority was not
exercised in the year.
B shares
The issued B share capital of the Company as at 1 April 2012 was
4,635,018 B shares. No B shares were issued in the year to 31 March
2013. At the AGM on 29 June 2012, the Directors were authorised
to repurchase up to 4,635,018 B shares in the Company until
the Company’s AGM in 2013 or 28 September 2013, if earlier.
This authority was not exercised in the year.
Directors’ interests
In accordance with FCA Listing Rule 9.8.6(R)(1), interests of Directors
and their connected persons in the shares of the Company (in respect
of which transactions are notifiable to the Company under FCA
Disclosure and Transparency Rule 3.1.2(R)) as at 31 March 2013 are
shown below:
Ordinary shares
B shares
Sir Adrian Montague
J P Asquith
S A Borrows
A R Cox
R H Meddings
W Mesdag
M G Verluyten
J S Wilson
70,772
5,000
8,238,245
17,400
20,960
339,053
2,500
65,949
0
0
0
0
0
0
0
1,038
The share interests shown for Mrs J S Wilson include shares held
in the 3i Group Share Incentive Plan. The share interests shown
exclude share option and long-term share awards detailed in the
Directors’ remuneration report. From 1 April 2013 to 10 May 2013,
Mrs J S Wilson became interested in an additional 111 ordinary shares
and there were no other changes to Directors’ share interests.
Debentures
As detailed in note 21 to the Accounts, as at 31 March 2013
the Company had in issue Notes issued under the 3i Group plc
£2,000 million Note Issuance Programme.
Directors’ conflicts of interests
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 year.
Employment
The policy of the Group 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.
3i 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 support to job applicants who happen to be disabled and
who respond to requests to inform the Company of any requirements.
Should an employee become disabled during their employment,
efforts would be made to retain them in their current employment
or to explore the opportunities for their retraining or redeployment
within 3i. Financial support is also provided by 3i to support disabled
employees who are unable to work, as appropriate to local
market conditions.
3i’s principal means of keeping in touch with the views of its
employees is through employee appraisals, informal consultations,
team briefings, and staff conferences. Managers throughout 3i
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.
3i is an equal opportunities employer and has clear grievance and
disciplinary procedures in place. 3i 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.
3i’s employment policies are designed to provide a competitive reward
package which will attract and retain high quality staff, whilst ensuring
that the relevant costs remain at an appropriate level.
Remuneration policy is reviewed by the 3i Group plc Remuneration
Committee, comprising 3i Group plc non-executive Directors.
3i’s remuneration policy is influenced by 3i’s financial and other
performance conditions and market practices in the countries in
which it operates. All employees receive a base salary and are
also eligible to be considered for a performance-related annual
variable incentive award. For those members of staff receiving
higher levels of annual variable incentive awards, a proportion of such
awards are delivered in 3i shares, vesting over a number of years.
3i Group plc Annual report and accounts 2013
67
Where appropriate, employees are eligible to participate in 3i share
schemes to encourage employees’ involvement in 3i’s performance.
Investment executives in the Private Equity business line may also
participate in carried interest schemes, which allow executives
to share directly in any future profits on investments. Similarly,
investment executives in the Infrastructure and Debt Management
business lines may participate in asset-linked and/or fee-linked
incentive arrangements. 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 2013
amounted to £197,500. Of this approximately 30% was to match staff
charitable giving and fundraising activities and approximately 70%
was devoted to charities supporting the young, the disadvantaged
and education.
In line with Group policy, during the year to 31 March 2013 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 became a signatory to the Prompt Payment Code in
the year and its 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. The Group had trade creditors outstanding at the
year end representing on average 18.9 days’ purchases.
Significant agreements
As at 31 March 2013 the Company was party to the following
agreements that are subject to a renegotiation period on a change
of control of the Company following a takeover bid:
(a) £450 million multi-currency Revolving Credit Facility Agreement
dated 30 June 2011, between the Company, 3i Holdings plc,
Lloyds TSB Bank plc and 12 other banks. Under this agreement,
the Company would be required to notify Lloyds TSB Bank plc,
as agent for the banks, within five days, of any change of control.
This would open a 20-day negotiation period 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 repayable and the facility
cancelled; and
(b) £50 million multi-currency Revolving Credit Facility Agreement
dated 29 September 2011, between the Company, 3i Holdings plc
and Nordea Bank Finland PLC London Branch. Under this
agreement, the Company would be required to notify the lender,
within five days, of any change of control. This would open a 20-day
negotiation period to determine whether the lender would be
willing to continue the facility and, if so, on what terms. Failing
agreement, and if so required by the lender amounts outstanding
would be repayable and the facility cancelled.
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
(“IFRSs”) 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 International
Accounting Standard 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.
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 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 FCA’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 in the
Board of Directors and Executive Committee section.
Governance 68
3i Group plc Annual report and accounts 2013
Statutory and corporate governance information
Going concern
The Directors have acknowledged their responsibilities in relation
to the financial statements for the year to 31 March 2013.
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.
Corporate governance statement
This section of the Directors’ report contains the corporate
governance statement required by FCA Disclosure and Transparency
Rule 7.2.
Corporate governance
Throughout the year, the Company complied with the provisions of the
UK Corporate Governance Code (the “Code”) published by the Financial
Reporting Council in May 2010.
The Company’s approach to corporate governance
The Company seeks 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.
The Board’s responsibilities and processes
The Board’s key responsibilities are described on page 62. It 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 deal with or dispose of the Company’s
shares as the Board may decide. The Companies Act 2006
authorises the Company to make market purchases of its own
shares if the purchase has first been authorised by a resolution
of the Company.
At the AGM in June 2012, shareholders renewed the Board’s authority
to allot ordinary shares and to repurchase ordinary shares on behalf
of the Company subject to certain limits and also renewed the Board’s
authority to repurchase B shares on behalf of the Company subject
to certain limits. Details of the authorities which the Board will be
seeking at the 2013 AGM are set out in the 2013 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.
3i Group plc Annual report and accounts 2013
69
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:
nn The appointment of the new Chief Executive;
nn The strategic review and cost reduction plans;
nn The revised strategic model and related KPIs;
nn Resolutions proposed by shareholders for the 2012 AGM;
nn The budget, financial resources and FX hedging strategy;
nn Regular reports from the Chief Executive;
nn Regular reports from the Board’s committees;
nn The recommendations of the Valuations Committee on valuations
of investments; and
nn The business model and its application by different business lines.
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.
Further details are given on page 64.
nn Approval of the Group’s overall strategy, strategic plan and
annual operating budget;
nn Approval of the Company’s half-yearly and annual financial
statements and changes in the Group’s accounting policies
or practices;
nn Changes relating to the capital structure of the Company
or its regulated status;
nn Major capital projects;
nn Major changes in the nature of business operations;
nn Investments and divestments in the ordinary course of business
above certain limits set by the Board from time to time;
nn Adequacy of internal control systems;
nn Appointments to the Board and the Executive Committee;
nn Principal terms and conditions of employment of members
of the Executive Committee; and
nn 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 the Executive Committee and the formulation and execution
of risk management policies and procedures.
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.
Attendance at Board and Committee Meetings
The table below shows the number of full meetings of the Board and its committees attended by Directors during the year to 31 March 2013
and, in brackets, the number of such meetings they were eligible to attend. In addition to these meetings a number of ad hoc meetings were held
to deal with specific items as they arose.
Total meetings held
Number attended:
Sir Adrian Montague
S A Borrows1
J S Wilson
J P Asquith
A R Cox
R H Meddings
W Mesdag
M G Verluyten
M J Queen2
Audit and
Compliance
Committee
Nominations
Committee
Remuneration
Committee
Valuations
Committee
Brand and
Values
Committee
6
–
–
–
6 (6)
6 (6)
6 (6)
–
6 (6)
–
3
3 (3)
1 (1)
–
3 (3)
3 (3)
3 (3)
2 (3)
3 (3)
–
8
–
–
–
8 (8)
8 (8)
–
8 (8)
–
–
4
4 (4)
3 (3)
4 (4)
–
–
–
4 (4)
–
1 (1)
3
3 (3)
3 (3)
–
3 (3)3
3 (3)3
3 (3)3
3 (3)3
3 (3)3
–
Board
12
12 (12)
12 (12)
12 (12)
12 (12)
12 (12)
12 (12)
10 (12)
12 (12)
2 (3)
1 Appointed to Valuations Committee and Nominations Committee upon becoming Chief Executive on 17 May 2012.
2 Resigned on 16 May 2012.
3 Although not members of the Brand and Values Committee each of these non-executive Directors was invited to attend and participate in the Committee’s meetings.
Governance 70
3i Group plc Annual report and accounts 2013
Statutory and corporate governance information
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.
Under the Company’s Articles of Association the minimum number of
Directors is two and the maximum is 20, unless otherwise determined
by the Company by ordinary resolution. Directors are appointed by
ordinary resolution of the Company’s shareholders or by the Board.
Directors retire by rotation at an AGM if they were appointed
by the Board since the preceding AGM, they held office during the
two preceding AGMs but did not retire at either of them, 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, or they choose
to retire from office. Shareholders have the power to remove any
Director by special resolution.
Subject to the Company’s Articles of Association, retiring Directors are
eligible for reappointment. The office of Director shall be vacated if the
Director resigns, becomes bankrupt or is prohibited by law from being
a Director or where the Board so resolves following the Director
suffering from mental ill-health or being absent from Board meetings
for 12 months without the Board’s permission.
In accordance with the Code all Directors choose to submit to
reappointment every year. Accordingly at the AGM to be held on
18 July 2013 all the Directors will retire from office. All the Directors
are eligible for and seek reappointment. The Board’s recommendation
for the reappointment of Directors is set out in the 2013 Notice of AGM.
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. Their roles are described on page 64.
Mr R H Meddings has served as Senior Independent Director since
October 2010, to whom, in accordance with the Code, concerns can
be conveyed.
Directors
The Board currently comprises the Chairman, five independent
non-executive Directors and two Executive Directors. Biographical
details for each of the Directors are set out in the Board of Directors
and Executive Committee section. Sir Adrian Montague served
as Chairman and Mr J P Asquith, Mr S A Borrows, Mr A R Cox,
Mr R H Meddings, Mr W Mesdag, Ms M G Verluyten and Mrs J S Wilson
served as Directors throughout the year under review. Mr M J Queen
served as a Director until 16 May 2012.
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. Directors are expected
to make available sufficient time to meet the requirements of the
appointment. The average time commitment for a non-executive
Director is expected to be around 15 days a year together with
additional time for serving on the Board’s committees.
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.
Further details of the role and responsibilities of non-executive
Directors are set out on page 64.
3i Group plc Annual report and accounts 2013
71
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 Code in the year to 31 March 2013.
The Board’s Committees
As described on page 63, the Board is assisted by various standing
committees of the Board which report regularly to the Board.
The Board’s Committees are described below and on the next page.
The Board reviews the independence of 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.
Directors’ employment contracts
Details of Executive Directors’ employment contracts are set out
in the Directors’ remuneration report.
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.
Audit and Compliance Committee
The Audit and Compliance Committee comprises Mr R H Meddings
(Chairman), Mr J P Asquith, Mr A R Cox and Ms M G Verluyten, all of
whom are independent non-executive Directors and served throughout
the year. The Board is satisfied that the Committee Chairman,
Mr R H Meddings, has recent and relevant financial experience.
During the year, the Committee:
nn Reviewed the effectiveness of the internal control
environment of the Group and the Group’s compliance with
its regulatory requirements;
nn 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;
nn Received the reports of the Valuations Committee on the valuation
of the Group’s investment assets and recommended valuations
to the Board;
nn Reviewed portfolio management processes and tax compliance
arrangements;
nn Received regular reports and updates on the audit plan from the
Group’s internal audit function, monitored its activities and reviewed
its effectiveness;
nn Received regular reports from Group Risk Committee and
the Group’s regulatory compliance function;
nn 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;
nn Met separately with the Finance Director, the Director, Internal Audit,
the Director, Group Compliance and the external auditors in the
absence of management; and
nn Received regular reports on litigation involving the Group, on the
Group’s regulatory capital position, on developments in regulation and
accounting standards, on bank covenants and third-party liabilities,
and on Directors’ and Executive Committee members’ expenses.
Remuneration Committee
The Remuneration Committee comprises Mr J P Asquith (Chairman),
Mr A R Cox and Mr W Mesdag, all of whom are independent
non-executive Directors and served throughout the year.
The work of the Remuneration Committee is described in the
Directors’ remuneration report.
Governance 72
3i Group plc Annual report and accounts 2013
Statutory and corporate governance information
Nominations Committee
The Nominations Committee comprises Sir Adrian Montague
(Chairman), Mr S A Borrows, Mr J P Asquith, Mr A R Cox,
Mr R H Meddings, Mr W Mesdag and Ms M G Verluyten, all of whom
served throughout the year, save for Mr S A Borrows who served from
his appointment as Chief Executive on 17 May 2012. Mr M J Queen was
a member of the Committee until he ceased to be Chief Executive on
16 May 2012, although he did not attend meetings which considered
the appointment of his successor.
During the year, the Nominations Committee:
nn Considered candidates for appointment as Chief Executive and
recommended to the Board the appointment of Mr Borrows; and
nn Considered the size, balance, diversity (including gender) and
composition of the Board and put in train arrangements for
selecting further candidates for recommendation to the Board
for appointment as non-executive Director.
The Company has a formal, rigorous and transparent process
for the appointment of Directors 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 by the Committee,
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.
Further to the publication of the Davies Report on Women on Boards,
and Code Provision B.2.4 which will take effect for financial years
commencing on or after 1 October 2012, the Board strongly supports
the principle of boardroom diversity, of which gender is one important
aspect. The Board’s aim is to have a broad range of approaches,
backgrounds, skills and experience represented on the Board and to
make appointments on merit and against objective criteria, including
diversity. Search agents engaged by the Company are instructed to
put forward for all Board positions a diversity of candidates including
women candidates.
Valuations Committee
The Valuations Committee comprises Mr W Mesdag (Chairman),
Sir Adrian Montague, Mr S A Borrows and Mrs J S Wilson, all of whom
served throughout the year except Mr Borrows who served from his
appointment as Chief Executive on 17 May 2012. Mr M J Queen was
a member of the Committee until he ceased to be Chief Executive
on 16 May 2012.
During the year, the Valuations Committee considered and made
recommendations to the Audit and Compliance Committee and the
Board on the quarterly valuations of the Group’s investments.
Brand and Values Committee
The Brand and Values Committee comprises Sir Adrian Montague
(Chairman), Mr S A Borrows and Mr K J Dunn, all of whom served
throughout the year, save for Mr S A Borrows who served from
17 May 2012. Mr M J Queen served as a member of the Committee
until 16 May 2012. In addition, all of the Company’s non-executive
Directors are invited to attend meetings of the Committee and
participate in its discussions.
During the year, the Brand and Values Committee considered and
made recommendations on a range of matters pertaining to the Group’s
reputation, and its approach as a responsible investor and a responsible
business. The Committee considered reports on Responsible
Investment policy, the environmental, social and governance risks
identified through the Company’s portfolio company review process
and specific reputational risk incidents arising from investments.
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.
Major interests in ordinary shares
Notifications of the following major voting interests in the Company’s
ordinary share capital (which are notifiable in accordance with
Chapter 5 of the FCA’s Disclosure and Transparency Rules and
section 793 Companies Act 2006) had been received by the Company
as at 31 March 2013 and 10 May 2013 as shown in the table below.
Major interests in ordinary shares
BlackRock, Inc
UBS Global Asset Management
Artemis Investment Management LLP
Sherborne Investors (Guernsey) B Limited
Legal and General Group plc and/or its subsidiaries
As at 31
March 2013
% of issued
share capital
As at 10 May
2013
% of issued
share capital
107,675,564
11.08 106,956,376
11.01
Nature of
holding
Indirect
46,794,770
44,857,331
43,179,838
29,204,206
4.82
4.62
4.44
3.00
46,526,752
45,186,900
47,915,366
30,591,441
4.79
4.65
4.93
3.15
Direct
3i Group plc Annual report and accounts 2013
73
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 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 Chairman and the Chief Executive.
The Chairmen of the Remuneration, Audit and Compliance,
and Nominations Committees are generally available to answer
shareholders’ questions.
The 2012 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.
Rights and restrictions attaching to shares
A summary of the rights and restrictions attaching to shares as at
31 March 2013 is set out below.
The Company’s Articles of Association may be amended by special
resolution of the shareholders in general meeting. Holders of ordinary
shares and B shares enjoy the rights set out in 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 and to appoint proxies and, in the case of
corporations, corporate representatives to attend, speak and vote at
such meetings on their behalf. To attend and vote at a 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. 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 reorganisation) 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 notice of or to attend, speak
or vote at general meetings 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 reorganisation) 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 2001; a transfer to more
than four joint holders; a transfer of certificated shares which is
not in respect of only one class of share; a transfer which is not
accompanied by the certificate for the shares to which it relates; a
transfer which is not duly stamped in circumstances where a duly
stamped instrument is required; or a transfer 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.
Governance 74
3i Group plc Annual report and accounts 2013
Statutory and corporate governance information
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.
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.
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 and budget on an annual
basis and receives regular updates. 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 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 2013 and up to the date of this report. Details of the
risk management framework can be found in the Risk section.
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 Code issued by the
Turnbull Committee. The process established for the Group includes:
Policies
nn Core values and global policies together comprising the Group’s
high level principles and controls, with which all staff are expected
to comply;
nn Manuals of policies and procedures, applicable to all business units,
with procedures for reporting weaknesses and for monitoring
corrective action; and
nn A code of business conduct, with procedures for reporting
compliance therewith.
Processes
nn Appointment of experienced and professional staff, both by
recruitment and promotion, of the necessary calibre to fulfil
their allotted responsibilities;
nn A planning framework which incorporates a Board approved
strategic plan, with objectives for each business unit;
nn Formal business risk reviews performed by management which
evaluate the potential financial impact and likelihood of identified
risks and possible new risk areas;
nn The setting of control, mitigation and monitoring procedures and
the review of actual occurrences, identifying lessons to be learnt;
nn 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 indicators
and regular re-forecasting;
nn Regular reports to the Board, which analyse funding requirements,
track the generation and use of capital and the volume of liquidity,
measure the Group’s exposure to exchange rate movements and
record the level of compliance with the Group’s funding objectives;
nn A Group Compliance function whose role is to integrate regulatory
compliance procedures and best practices into the Group’s
systems; and
nn 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 Annual report and accounts 2013
75
Verification
nn An Internal Audit function which undertakes periodic examination
of business units and processes and recommends improvements
in controls to management;
nn The external auditors who are engaged to express an opinion
on the annual financial statements; and
nn 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 and Group Compliance, which operate on an international basis
and report 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 with reference
to 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.
Financial reporting
In the context of the above internal control framework, there are
specific processes in place in relation to Financial Reporting, including:
nn Comprehensive system of key control and oversight processes,
including regular reconciliations, line manager reviews and
systems’ access controls;
nn Updates for consideration by the Audit and Compliance Committee
of accounting developments, including draft and new accounting
standards and legislation;
nn A separate Valuations Committee which considers the Group’s
investment valuation policies, application and outcome;
nn Approval of the Group’s budget by the Board and regular updates
on actual and forecast financial performance against budget;
nn Reports from Internal Audit on matters relevant to the financial
reporting process, including periodic assessments of internal
controls, processes and fraud risk;
nn Independent updates and reports from the external auditors
on accounting developments, application of accounting standards,
key accounting judgements and observations on systems and
controls; and
nn Regular risk reviews, including an assessment of risks to reliable
financial reporting covering people, processes and systems, and
updates on the management of identified risks or actual incidents.
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:
nn 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;
nn 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
nn 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.
By order of the Board
K J Dunn
Company Secretary
15 May 2013
Registered Office:
16 Palace Street, London SW1E 5JD
Governance 76
3i Group plc Annual report and accounts 2013
Directors’ remuneration report
The Committee has worked to align future rewards
more closely with shareholder returns and to tailor
performance measures to reflect progress in
implementing Group strategy.
Jonathan Asquith
Chairman, Remuneration Committee
Remuneration Committee
Committee members during the year
J P Asquith (Chairman)
A R Cox
W Mesdag
Meetings
attended in
the year
Meetings
eligible to
attend in
the year
8
8
8
8
8
8
The Committee’s terms of reference are available on the
Company’s website.
Advice received by the Committee during the year
During the year, the Committee received external, independent
advice from Kepler Associates, who did not provide any
services to the Group during the year other than to the
Remuneration Committee. Kepler Associates is a signatory
to the Code of Conduct for Remuneration Consultants.
The Committee also received advice from Mr S A Borrows (Chief
Executive from 17 May 2012) and Mr M J Queen (Chief Executive
until 16 May 2012), neither of whom advised the Committee on
their own remuneration.
Statement by the Remuneration
Committee Chairman
As Remuneration Committee Chairman, I am pleased to introduce
the Directors’ remuneration report for the financial year 1 April 2012
to 31 March 2013 (“the year”) and to provide some details of the
background against which the Committee’s decisions have been taken
in the year. References to “the current year” relate to the financial year
1 April 2013 to 31 March 2014.
Background
Mr Borrows was appointed Chief Executive on 17 May 2012 and in
June 2012, following a strategic review, announced 3i’s future strategy
including a major restructuring and cost reduction programme.
As part of the restructuring programme, management and the
Committee undertook a review of 3i’s remuneration arrangements,
including those of the Executive Directors.
Remuneration review objectives
The key objectives of the remuneration review were to ensure:
nn a fair and transparent split of returns between our key stakeholders,
including between shareholders and employees;
nn closer alignment of remuneration arrangements with our key
strategic objectives;
nn clearer links between shareholder returns and compensation,
including a greater proportion of compensation in shares; and
nn greater differentiation between individuals based on their relative
personal performance and contribution.
As part of the review, the Board wished to ensure that the Group’s
new strategic objectives were clearly supported by a set of incentives,
including measures and targets, that related directly to those
objectives.
3i Group plc Annual report and accounts 2013
77
Remuneration Policy for the
current and future years
Chairman and non-executive Directors
Remuneration policy for the Chairman and non-executive
Directors for the current year is as set out below.
Remuneration
type
Directors’ fees
Benchmarking
Policy objective
Competitive with fees
paid by companies
of comparable size and
by listed financial
services companies.
To attract and retain
Directors of the
calibre required.
In line with best practice the Chairman
and non-executive Directors are not
eligible for bonuses, long-term incentives,
pensions or performance-related
remuneration.
To preserve
independence.
No changes to remuneration policy for the Chairman and
non-executive Directors are expected for subsequent years.
Chairman and non-executive Director annual fees are as set
out below.
Chairman fee
£265,000 plus £30,000
of 3i shares
Non-executive Directors:
– Board membership fee
– Senior Independent Director fee
£50,000 plus 2,500 3i shares
£10,000
Committee fees:
– Chairman
– Member
£20,000
£4,000
Committee fees are payable in respect of the Audit and
Compliance Committee, Remuneration Committee and
Valuations Committee.
The fees shown above took effect from 1 April 2011 and are
to remain unchanged for the current year.
Outcome of the review
Following the Group-wide remuneration review, the following
principles were adopted:
nn align employees’ interests with those of shareholders and fund
investors – including encouraging staff share ownership and
introducing shareholding targets for senior staff;
nn support key strategic objectives – it needs to be clear to employees
what they need to deliver and what they will be paid for doing so;
nn attract, retain and motivate the right talent throughout the
organisation;
nn ensure affordability in the short and long term – ensuring the
economics of the business drive total reward;
nn promote sound risk management practices; and
nn arrangements to be simple and cost effective to administer.
Whilst this review did not result in the Committee proposing any
changes to the quantum of the short- and long-term incentives for
Executive Directors, it led to a refocusing of the measures attached to
long-term incentives to support the Group’s strategy and to a change
in the policy on deferring bonus into shares. Going forward:
nn Performance share awards to be granted in calendar year 2013
onwards will vest based on three-year performance against a
combination of stretching absolute total shareholder return targets
and the achievement of a balanced scorecard of measures linked
closely to our stated strategic objectives, including covering
operating costs with annual cash income.
nn 40% of Executive Directors’ annual bonuses will be deferred into
shares vesting in equal instalments over four years, compared to
the current policy (which applies to the year just ended) of deferring
the excess of bonus over 100% of base salary into shares vesting
after three years. This principle will also be applied to all other
members of the Executive Committee.
nn Higher-earning members of staff below Executive Committee will
also have a portion of their bonus deferred into shares vesting in
equal instalments over a three-year period, compared to the
current policy where such bonuses are paid 100% in cash.
nn Shareholding targets for staff have been extended or, for some staff
members, introduced for the first time. The share ownership and
retention policy will require affected staff to build up over time,
and thereafter maintain, a shareholding in the Company’s shares
equivalent to at least three times salary for the Chief Executive,
one and a half times salary for the Finance Director and all other
members of the Executive Committee and one times salary for staff
designated as “partners” in the Group’s businesses.
This report will be the subject of a resolution at our forthcoming AGM
which I hope you will support.
Jonathan Asquith
Chairman, Remuneration Committee
15 May 2013
Governance
78
3i Group plc Annual report and accounts 2013
Directors’ remuneration report
Executive Directors
As part of the Group-wide remuneration review referred to above, and following consultation with shareholders, the Committee adopted
a new remuneration policy for Executive Directors for the current year as set out in the summary table below.
Remuneration element
Base salary
Pension
Annual bonus
Operation for the current year to 31 March 2014
Objective
At 1 April 2013, Mr Borrows’ annual base salary was £550,000
and Mrs Wilson’s was £400,000. These have not increased since
their appointments to their current positions, being May 2012
for Mr Borrows and October 2008 for Mrs Wilson.
Base salaries are to remain unchanged for the year to
31 March 2014.
To provide the basis for
a competitive package.
Employer contribution of 12% of pensionable base salary pa
or a cash allowance in lieu.
To provide the basis for
a competitive package.
Maximum bonus opportunity remains unchanged at 400%
of base salary for the Chief Executive and 250% of base salary
for the Finance Director.
The Committee retains discretion to make adjustments to bonus
arrangements in appropriate circumstances.
40% of any bonus earned in respect of performance in the
current year will be deferred into shares vesting in equal
instalments over four years. Deferred shares carry the right
to receive dividends or other distributions. Deferred elements
are subject to clawback as summarised in Clawback policy
on page 80.
Bonus is assessed against a balanced scorecard agreed by the
Committee at the start of each financial year.
Alignment with Group strategic
objectives and performance.
Deferral into shares to balance
delivery of short-term results
with long-term value creation
and to create alignment
with shareholders.
Long-term incentive plan
Annual performance share awards with a face value of up to
400% of base salary for the Chief Executive and 250% of base
salary for the Finance Director.
Alignment of reward with long-
term, sustainable company
performance.
Awards will be subject to a three-year performance condition.
To the extent shares vest, they will be released six months
following the end of the performance period together with
a sum equivalent to dividends or other distributions.
In appropriate exceptional circumstances the Committee can
also grant restricted shares, with no performance condition
but subject only to leaver conditions. A one-off award was
made to Mr Borrows on his appointment as a Director in
recognition of awards forfeited on leaving previous employment.
This award is detailed on page 82.
The combination of strategic
performance measures and
absolute total shareholder
return targets balance
internal and external
perspectives of performance,
and align participants with
shareholders’ interests.
As outlined above, variable remuneration comprising annual bonus and long-term incentives is intended to form a substantial proportion
of Executive Directors’ total potential remuneration.
Pay and employment conditions of other employees in the Group is one of the factors taken into account in determining the Executive
Directors’ remuneration including base pay increases, if any, and the quantum of annual bonus and long-term incentive awards. During
the year, the Committee’s decisions on Executive Directors were informed by a comprehensive Group-wide remuneration review.
No changes to remuneration policy for the Executive Directors are expected for subsequent years although the scorecard for assessing
performance for annual bonus and the performance condition attached to long-term incentive awards will be reviewed at the start of each
cycle to ensure it continues to reflect strategic priorities. Details of any future changes to the scorecard will be disclosed in future Directors’
remuneration reports.
3i Group plc Annual report and accounts 2013
79
Base salary
Executive Director base salaries are as shown in the table opposite.
For the current year, Executive Director base salaries will remain
frozen at these levels, following a review by the Committee and taking
into account pay and conditions across the Group as a whole.
Annual bonus
The final bonuses for Executive Directors for the year were awarded
against a balanced scorecard agreed by the Committee following
Mr Borrows’ appointment as Chief Executive which is described below.
% of bonus
opportunity Measure
22%
22%
22%
34%
nn Undertaking strategic review of the business.
nn Announcement and implementation of new strategy.
nn Reduction in complexity of organisation.
nn Improving engagement with shareholders.
nn Reducing discount to NAV from 31 March 2012 level.
Achievement of targets announced to the market
on 29 June 2012 relating to headcount, operating
costs and gross debt reduction.
Implementation of the six asset management
initiatives announced on 29 June 2012 and of the
Group-wide compensation review.
Deliverables relating to the Private Equity,
Infrastructure and Debt Management businesses.
The Committee uses the scorecard as a prompt and guide to
judgement and considers it in the wider context of risk, market
and other factors.
In determining bonus levels for the year the Committee determined
the level of achievements against the measures contained in the
balanced scorecard as well as other matters, including risk and
market factors, which it considered relevant. As can be seen from the
information set out on page 19, the Group’s progress during the year
has been exceptional, with all targets in the first three categories
noted above in the balanced scorecard used for the year having
been met or exceeded. The Committee also concluded that the year
demonstrated strong performance in both the Private Equity and the
Debt Management businesses, with the Infrastructure business also
performing well.
The individual performances of both Executive Directors were judged
by the Committee to be exceptional, with each of them scoring highly
against the measures and factors in the balanced scorecard.
Mr Borrows was judged to have made a very strong start as Chief
Executive, having announced on 29 June 2012 a clear strategy and
immediate priorities for the Group, and subsequently ensuring the
Group delivered exceptionally against those priorities. The Committee
considered that he has shown very strong leadership of the Group
through the year since his appointment as Chief Executive. As a result
of this assessment, Mr Borrows was awarded a bonus of 360%
of base salary being 90% of his maximum bonus opportunity.
The Committee considered that Mrs Wilson had also demonstrated
exceptional performance during the year, particularly in her
contributions to the extensive organisational changes, and in her
management of the Group’s initiatives to achieve the gross debt and
gearing targets and funding cost reductions announced on 29 June
2012. Accordingly, and as a result of the Committee’s assessment
of her performance in the year, Mrs Wilson was awarded a bonus of
200% of base salary being 80% of her maximum bonus opportunity.
In accordance with the bonus deferral policy applicable to the year,
which was set out in the 2012 Directors’ remuneration report, bonus
in excess of 100% of base salary is deferred into shares vesting after
three years.
For the current year to 31 March 2014, Executive Directors’
annual bonuses will be determined on the following revised
balanced scorecard:
% of bonus
opportunity Measure
50%
30%
20%
Targets relating to:
nn operating costs;
nn gross interest costs;
nn annual operating cash profit;
nn Private Equity realisations; and
nn shareholder distributions.
nn deliverables relating to the Private Equity,
Infrastructure and Debt Management businesses.
nn developing the strategic vision for the Group;
nn transformation of the Group’s culture;
nn re-articulating people strategy; and
nn maintaining good engagement with investors and
maintaining the quality of the shareholder register.
The Committee uses the scorecard as a prompt and guide to
judgement and considers it in the wider context of risk, market
and other factors.
Governance Performance graphs
TSR graph:
This graph compares the Company’s total shareholder return for the
five financial years to 31 March 2013 with the total shareholder return
of the FTSE All-Share Index. The FTSE All-Share Index is a widely used
performance comparison for UK companies.
3i total shareholder return versus FTSE All-Share
total return (cumulative)
140
120
100
80
60
40
20
3i
2008
2009
2012
FTSE All-Share Rebased at 100 at 1 April 2008
2010
2011
2013
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. 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
2009
2010
3i diluted NAV (with dividends reinvested)
2011
2012
FTSE All-Share
2013
80
3i Group plc Annual report and accounts 2013
Directors’ remuneration report
Long-term incentives
The performance condition attached to Performance Share awards
made in the year which were granted in July 2012 is set out in note 4
to the Long-term share awards table on page 82. The performance
condition was chosen so as to align Executive Directors with
shareholders’ interests by linking a significant part of their potential
remuneration to Total Return on Equity measured over three years.
As part of its remuneration review, the Committee adopted a new
performance condition to apply to Performance Share awards to
be granted in 2013 and amended the vesting arrangements so that
to the extent shares vest they will be released in full six months
following the end of the three year performance period.
Category and weighting
Performance measure
Absolute TSR
50% Absolute TSR measured over three
years from 1 April 2013:
nn 0% vesting below 10% pa TSR
nn 20% vesting at 10% pa TSR
nn Straight-line vesting between
10% and 18%
nn 100% vesting at 18% pa TSR
Aligning costs with
income and
improving capital
allocation
25% Progress achieved towards
strategic objective of covering
the Group’s operating costs with
annual cash income.
25% Progress achieved towards
specified target relating to
reducing remuneration costs
relative to fee income.
Remuneration Committee can reduce any award which would
otherwise vest if gross debt or gearing targets are missed.
This scorecard has been chosen so as to link half of the Executive
Directors’ longer term incentives to total shareholder return whilst at
the same time linking half of it to strategic objectives set by the Board.
No executive share options have been granted since calendar
year 2010.
Clawback policy
The Committee has agreed a “clawback” policy, which applies to
long-term incentive awards and share bonus awards made during
the year to Executive Directors (and certain other senior executives).
Under this policy awards are subject to forfeiture or reduction
(prior to vesting) in such exceptional circumstances as the
Committee considers fair, reasonable and proportionate. This would
include material misstatement of Group financial statements,
dismissal for cause, or cases where an individual is deemed to
have caused a material loss for the Group as a result of reckless,
negligent or wilful actions or inappropriate values or behaviour.
Promoting share ownership
The Company’s share ownership and retention policy requires
Executive Directors to build up over time, and thereafter maintain,
a shareholding in the Company’s shares equivalent to at least
3.0 times salary in the case of the Chief Executive and 1.5 times
salary for the Finance Director. In addition, shareholding targets
have been introduced for other members of Executive Committee at
the 1.5 times salary level and for partners in the Group’s businesses
at 1.0 times salary. Details of Directors’ interests in the Company’s
shares are shown in the Directors’ report on page 66.
3i Group plc Annual report and accounts 2013
81
Directors’ remuneration during the year
(note 1)
(note 2)
(note 3)
Salary
and fees
£’000
Cash
Bonus for
the year
£’000
Deferred
share
bonus
£’000
Cash
benefits
£’000
Benefits
In kind
£’000
Total
remuneration
year to
31 March
2013
£’000
Total
remuneration
year to
31 March
2012
£’000
Pay in
lieu of
notice
£’000
Executive Directors
S A Borrows
J S Wilson
Chairman and non-executive Directors
(note 5)
Sir Adrian Montague (Chairman)
J P Asquith
A R Cox
R H Meddings
W Mesdag
M G Verluyten
Former Directors
M J Queen (until 16 May 2012) (note 4)
Total
541
400
295
81
65
87
81
61
113
1,724
550
400
1,430
400
–
–
–
–
–
–
–
–
–
–
–
–
–
–
950
1,830
28
14
–
–
–
–
–
–
39
81
3
2
–
–
–
–
–
–
2
7
–
–
–
–
–
–
–
–
2,552
1,216
444
732
295
295
81
65
87
81
61
77
62
85
79
13
275
275
429
4,867
640
2,427
Notes:
1. Deferred share bonuses relating to the year to 31 March 2013 will be paid in ordinary shares of the Company deferred for three years.
2. “Cash benefits” for Mr Borrows included car allowance (£12k) and salary supplement in lieu of pension contributions (£14k). Cash benefits for Mrs Wilson included
car allowance (£12k). Cash benefits for Mr Queen included car allowance (£7k) and salary supplement in lieu of pension contributions (£30k).
3. “Benefits in kind” relate to the provision of health insurance.
4. On ceasing to be a Director and an employee on 16 May 2012 Mr Queen received pay in lieu of his six months notice period as shown in the table above.
In December 2012 3i Investments plc entered into a consultancy agreement with Thames Bridge Capital Limited, a company associated with Mr Queen, pursuant
to which that company provided reports to 3i’s Board of Directors concerning areas relevant to the Group’s business and in which Mr Queen had particular
knowledge and expertise. Thames Bridge Capital Limited completed the consultancy work during the year and was paid a total of £293k, comprising a fee
of £240k plus VAT and out-of-pocket expenses. It is not anticipated that any further work will be commissioned from Thames Bridge Capital Limited.
5. Salary and fees for the Chairman and non-executive Directors include fees used to purchase 3i shares.
6. In addition to the fees shown above, Mrs Wilson retained director’s fees of £65k from Legal & General Group Plc and Mr Borrows retained director’s fees of £61k
from The British Land Company PLC and £60k from Inchcape plc.
Governance
82
3i Group plc Annual report and accounts 2013
Directors’ remuneration report
Long-term share awards held by Directors during the year
S A Borrows
J S Wilson
M J Queen
(until 16 May 2012)
Date of award
15.11.11
30.11.11
10.07.12
15.06.09
17.06.10
28.07.11
10.07.12
15.06.09
17.06.10
28.07.11
Held at
1 April
2012
823,917
513,261
–
Granted
during the
period
–
–
1,116,751
1,337,178
1,116,751
147,058
203,389
360,724
–
711,171
202,205
540,677
793,593
1,536,475
–
–
–
507,614
507,614
–
–
–
–
Lapsed during
the period
–
–
–
–
147,058
–
–
–
147,058
202,205
540,677
793,593
1,536,475
Held at
31 March
2013
(or cessation
if earlier)
823,917
342,174
1,116,751
Released
during the
period
–
171,087
–
171,087
2,282,842
–
–
–
–
–
–
–
–
–
203,389
360,724
507,614
1,071,727
–
–
–
–
Market price
on date of
grant
£
Date of
vesting
2.02
1.90
1.97
15.11.14–16
17.10.12–14
10.07.15–17
2.72
2.95
2.77
1.97
15.06.12
17.06.13
28.07.14–16
10.07.15–17
2.72
2.95
2.77
15.06.12
17.06.13
28.07.14–16
Notes:
1. The above awards are Performance Shares granted subject to performance
conditions save for the 30 November 2011 award to Mr Borrows which was
a recruitment award in recognition of awards forfeited on leaving previous
employment. Vesting is subject to continued service and to the clawback
policy, but is not subject to a performance condition. The award vested as to
one-third on 17 October 2012 (when the price of a share was £2.22) and will
vest as to a further one-third on 17 October 2013 and as to the balance on
17 October 2014. The gains on long-term share awards made by the highest
paid Director and by the Directors in aggregate in the year were £380k
(2011: £nil).
2. Save to the extent they lapsed earlier in the year awards held by Mr Queen
lapsed on the cessation of his employment on 16 May 2012.
3. The performance condition for Performance Shares granted in 2009 and
2010 compares the growth in value of a shareholding in the Company over
three years (averaged over a 60-day period) with the FTSE 100 Index (both
with dividends re-invested) as shown in the table below. This performance
condition was chosen to align executive Directors’ longer-term incentives
to the Company’s share price performance compared to the FTSE 100 Index.
Growth in value for Company versus FTSE 100
(as described above)
% of award vesting
Below the FTSE 100
Same as the FTSE 100*
8% p.a. above the FTSE 100*
* Between these levels, awards vest pro rata.
Zero
35%
100%
4. The performance condition for Performance Shares granted in 2011 and 2012
is measured over a three-year performance period and is based on annualised
three-year Total Return on Equity as shown in the table below. Total Return
on Equity is equivalent to growth in net asset value with dividends deemed
reinvested. This performance condition was chosen to align executive
Directors’ longer-term incentives to growth in the Company’s net assets
recognising that this is a key driver of shareholder return.
Annualised three year total return on equity
% of award vesting
Below 10% pa
10%
11%
12%
13%
14%
15%
16%
17%
18%
0.0%
20.0%
27.5%
35.0%
45.0%
60.0%
75.0%
85.0%
92.5%
100.0%
Between these levels awards vest pro rata.
To the extent the performance condition is satisfied, then subject to continued
service and the clawback policy, shares are released as to 50% on the
third anniversary of grant, 25% on the fourth anniversary and 25% on the
fifth anniversary.
5. The Committee determines the fulfilment of the performance conditions based
on calculations designed to be appropriate to the particular condition.
3i Group plc Annual report and accounts 2013
83
Share options held by Directors during the year
J S Wilson
M J Queen
(until 16 May 2012)
Date of grant
11.01.06
15.06.09
17.06.10
27.06.02
25.06.03
23.06.04
21.06.05
09.02.09
15.06.09
17.06.10
Held at
1 April
2012
21,057*
288,808
406,779
716,644
211,337
91,884
143,808
71,835
1,503,371
595,667
1,118,644
Lapsed during
the period
–
288,808
–
288,808
211,337
91,884
143,808
71,835
1,503,371
595,667
1,118,644
3,736,546
3,736,546
Held at
31 March
2013
(or cessation
if earlier)
21,057*
–
406,779
427,836
–
–
–
–
–
–
–
–
Exercise
price
£
Earliest
normal
exercise date
5.58
2.77
2.95
4.19
3.54
3.76
4.32
2.18
2.77
2.95
11.01.09
15.06.12
17.06.13
27.06.05
25.06.06
23.06.07
21.06.08
31.03.12
15.06.12
17.06.13
Expiry
date
10.01.16
14.06.19
16.06.20
26.06.12
24.06.13
22.06.14
20.06.15
08.02.19
14.06.19
16.06.20
* Awarded before appointment as a Director.
Notes:
1. No options were granted to or exercised by Directors during the year. Options were granted for nil consideration. The market price of ordinary shares in the
Company at 31 March 2013 was £3.16 and the range during the period 1 April 2012 to 31 March 2013 was £1.69 to £3.25. No gains were made by the highest paid
Director (2011: nil) or by the Directors in aggregate (2011: nil).
2. Save to the extent they lapsed earlier in the year options held by Mr Queen lapsed on the cessation of his employment on 16 May 2012.
3. Options were granted subject to a three-year performance condition relating to annual percentage compound growth in net asset value per share with dividends
re-invested, relative to the annual percentage change in RPI, as shown below. The performance conditions were chosen to align executive Directors’ longer term
incentives to shareholders’ interest in net asset value growth and was altered over time to reflect changing market conditions. The Committee determines the
fulfilment of the performance conditions based on calculations designed to be appropriate to the particular condition.
Award granted
NAV growth required
for minimum vesting
% vesting
NAV growth required
for maximum vesting
% vesting
Since 31 March 2005
RPI + 3 percentage points
In year to 31 March 2005
RPI + 3 percentage points
Before 31 March 2004
RPI + 5 percentage points
30%
50%
50%
RPI + 8 percentage points
RPI + 8 percentage points
RPI + 10 percentage points
100%
100%
100%
For NAV growth between
minimum and maximum
vesting levels
The grant vests pro rata
The grant vests pro rata
The grant vests pro rata
Share Incentive Plan
Participants in the HMRC approved Share Incentive Plan (“SIP”) 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 for other “qualifying reasons”) within three years of grant. Dividends are reinvested in further
ordinary shares (“Dividend Shares”).
Held at
31 March 2012:
Partnership Shares
Held at
31 March 2012:
Matching Shares
Held at
31 March 2012:
Dividend Shares
Held at
31 March 2013
(or cessation
if earlier):
Partnership Shares
Held at
31 March 2013
(or cessation
if earlier):
Matching Shares
Held at
31 March 2013
(or cessation
if earlier):
Dividend Shares
Ord
2,347
B
Ord
344
4,694
B
690
Ord
256
B
4
Ord
3,030
B
Ord
344
6,060
B
690
Ord
549
B
4
3,038
975
6,074
1,998
704
20
3,105
975
6,208
1,998
704
20
J S Wilson
M J Queen
(until 16 May 2012)
Notes:
1. From 1 April 2013 to 1 May 2013, Mrs Wilson acquired a further 37 Partnership and 74 Matching ordinary shares.
2. Ordinary shares were awarded in the year at prices between £1.72 and £3.13 per share, with an average price of £2.27 per share. B shares held within the plan
result from the bonus issues of B shares in 2006 and 2007. Shares within the SIP are held by a nominee on behalf of participants. The nominee exercises the votes
on such shares on the participants’ instructions.
Governance 84
3i Group plc Annual report and accounts 2013
Directors’ remuneration report
Pension arrangements
Mrs Wilson was a member of the 3i Group Pension Plan, a defined benefit contributory scheme, in the year to 31 March 2013. Pension accrual
ceased for all members with effect from 5 April 2011 although a link to final salary is maintained for existing accrual up to the date of leaving the
Company. Further details of the Plan are set out in note 9 to the financial statements on pages 102 to 104.
(note 1)
(note 2)
(note 3)
(note 1)
(note 2)
(note 4)
(note 4)
Increase in
accrued
pension
(excluding
inflation)
during the
year to
31 March
2013
£’000 p.a.
Director’s own
contributions
(excluding
AVCs) paid
into the plan
during the
year to
31 March
2013
£’000 p.a.
Increase in
accrued
pension
(including
inflation)
during the
year to
31 March
2013
£’000 p.a.
Total
accrued
pension at
31 March
2013
£’000 p.a.
Transfer
value of the
accrued
benefits at
31 March
2013
£’000
Transfer
value of the
accrued
benefits at
31 March
2012
£’000
Complete
years of
pensionable
service at
31 March
2013
Age at
31 March
2013
Difference
between
transfer
values at
start and
end of the
accounting
year, less
Director’s
contribution
£’000
Transfer
value at the
end of the
year of the
increase in
accrued
benefits
during the
year less
Director’s
contribution
£’000
J S Wilson
45
5
0.5
14.3
0.0
0.8
387.3
360.6
26.7
10.5
Notes:
1. The Plan closed to future accrual on 5 April 2011 and pensionable service ceased at this date. No member contributions were paid into the Plan during the year.
2. The increase in accrued pension shown reflects the difference between deferred pensions on leaving, payable from age 60.
3. The pension shown is a deferred pension payable from the Normal Retirement Age of 60.
4. The transfer values have been calculated in accordance with regulations 7 to 7E of the Occupational Pension Schemes (Transfer Values) Regulations 1996.
5. Additional voluntary contributions are excluded from the above table.
Mrs Wilson joined the 3i Retirement Plan, a defined contribution stakeholder pension scheme, with effect from 6 April 2011. During the year
the Company made contributions of £55k to this plan in respect of Mrs Wilson.
Directors’ service contracts
The main terms of the service contracts of the Executive Directors who served in the year were as follows:
Dates of
contracts
Mr S A Borrows:
Mrs J S Wilson:
Mr M J Queen:
17 May 2012
1 October 2008
31 March 2009
Notice period
– by the Director
– by the Company
– 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.
Termination
payments
There were no provisions for compensation of Executive Directors on early termination save that:
(a) Mr Borrows’ and Mr Queen’s contracts entitle 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.
The Chairman and the non-executive Directors do not have service contracts or contracts for services. Their appointment letters provide for
no entitlement to compensation or other benefits on ceasing to be a Director.
3i Group plc Annual report and accounts 2013
85
Arrangements relating to Mr Queen’s previous responsibilities
Mr Queen, who resigned as Chief Executive on 16 May 2012, had interests in arrangements relating to his previous roles as Managing Partner,
Infrastructure and Managing Partner, Growth Capital.
M J Queen
Until 16 May 2012
Amounts co-invested
Scheme interests, being the percentage of the relevant pool of
investments in respect of which the participant is entitled to
participate in the realised profits
Invested
during the
period
£’000
Total
invested to
16 May 2012
£’000
As at
1 April 2012
(%)
Awarded in
period
(%)
Forfeited in
period
(%)
As at
16 May 2012
(%)
Amounts
receivable in
respect of
scheme
interests in
period
£’000
Accrued
value of
scheme
interests
as at
16 May 2012
£’000
End of
period over
which
interests
may vest
Global Growth
Co-invest
2006–08 plans
Pan-European
Growth Capital
2005–06
Infrastructure
2005–06
Primary
Infrastructure
2005–06
Global Growth
2006–08 plans
Global Growth
08–10
India Infrastructure
07–10
–
–
–
–
–
–
–
97
0.023
–
–
–
–
18
285
0.44
0.69
0.53
0.34
0.03
1.00
–
–
–
–
–
–
–
–
–
0.023
31.07.08
0.44
31.03.10
0.69
–
16.05.10
–
0.53
19.08.10
0.34
0.01
0.10
–
31.03.11
0.02
31.03.13
0.90
30.09.12
nil
nil
nil
nil
nil
nil
nil
nil
268
nil
161
nil
nil
nil
Notes:
1. As a result of the cessation of his employment on 16 May 2012, a proportion of Mr Queen’s interest in the Global Growth 08–10 and India Infrastructure 07–10 plans
was forfeited. As the Infrastructure 2005–06 and Global Growth 2006–08 plans were liquidated during the year, Mr Queen’s entire interests in these plans
terminated. During the year but after the termination of his employment Mr Queen received £27k from the Pan-European Growth Capital Fund and £5k from
the Infrastructure 2005–06 Fund. It is anticipated that in the current year Mr Queen will receive a payment of £171k (less termination expenses) plus a return of
a capital commitment of £5k in relation to the Primary Infrastructure 2005–06 Fund, which will represent his entire interest in that fund which will then terminate.
2. Accrued values of plan interests are calculated on the basis set out in note 5 on page 99. Accrued values can increase and decrease with investment valuations
and other factors and will not necessarily lead to an actual payment to the participant. Accrued values as at 16 May 2012 shown above are the same as the
accrued values as at 31 March 2012 since as at 16 May 2012 no revaluation of the scheme interests had taken place.
Audit
The tables in this report (including the notes thereto) on pages 81 to 85 have been audited by Ernst & Young LLP.
By Order of the Board
Jonathan Asquith
Chairman, Remuneration Committee
15 May 2013
Governance
86
3i Group plc Annual report and accounts 2013
Financial statements
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
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 (loss)/income
Profit/(loss) before tax
Income taxes
Profit/(loss) for the year
Other comprehensive income
Exchange differences on translation of foreign operations
Actuarial gain/(loss)
Other comprehensive income for the year
Total comprehensive income/(loss) for the year (“Total return”)
Earnings per share
Basic (pence)
Diluted (pence)
Notes
2
3
4
1
1
5
5
6
1
10
10
11
12
9
27
27
2013
£m
195
250
445
43
54
4
546
71
4
(19)
(170)
432
6
(97)
(6)
(143)
(3)
189
(6)
183
173
17
190
373
19.5
19.4
2012
£m
23
(498)
(475)
47
95
4
(329)
89
(15)
10
(180)
(425)
12
(103)
(19)
(243)
1
(777)
(6)
(783)
194
(67)
127
(656)
(82.8)
(82.8)
3i Group plc Annual report and accounts 2013
87
Consolidated statement of changes in equity
for the year to 31 March
2013 Group
Total equity at the start
of the year
Income/(loss) for the year
Exchange differences on
translation of foreign operations
Actuarial gain
Total comprehensive
income for the year
Share-based payments
Release on forfeiture
of share options
Loss on sale of own shares
Ordinary dividends
Issue of ordinary shares
Total equity at the end
of the year
2012 Group
Total equity at the start
of the year
(Loss)/income for the year
Exchange differences on
translation of foreign operations
Actuarial loss
Total comprehensive
income/(loss) for the year
Release on lapse of equity
settled call options
Share-based payments
Release on forfeiture
of share options
Purchase of own shares
Loss on sale of own shares
Ordinary dividends
Issue of ordinary shares
Total equity at the end
of the year
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
Capital
reserve
£m
Revenue
reserve
£m
Other
reserves
£m
Own
shares
£m
717
780
43
11
457
–
–
–
173
173
–
9
(3)
233
107
17
124
(1)
491
76
76
3
(76)
–
(105)
–
–
1
1
718
780
43
17
630
356
494
–
(104)
2,934
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
Capital
reserve
£m
Revenue
reserve
£m
Other
reserves
£m
Own
shares
£m
717
779
43
17
263
1,093
(786)
526
3
5
(86)
–
–
–
–
5
(11)
194
(67)
194
(853)
3
5
(12)
11
(49)
–
(5)
–
(656)
–
5
–
(31)
–
(49)
1
(31)
12
1
780
717
43
11
457
233
491
–
(105)
2,627
Total
equity
£m
2,627
183
173
17
373
9
–
–
(76)
1
Total
equity
£m
3,357
(783)
194
(67)
Financial statements 88
3i Group plc Annual report and accounts 2013
Company statement of changes in equity
for the year to 31 March
2013 Company
Total equity at the start of the year
Profit for the year
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
2012 Company
Total equity at the start of the year
Loss for the year
Total comprehensive loss for the year
Release on lapse of equity settled call options
Share-based payments
Release on forfeiture of share options
Ordinary dividends
Issue of ordinary shares
Total equity at the end of the year
Share
capital
£m
717
Share
premium
£m
780
Capital
redemption
reserve
£m
43
–
–
–
Share-
based
payment
reserve
£m
11
–
9
(3)
Capital
reserve
£m
936
400
400
Revenue
reserve
£m
232
(15)
(15)
3
(76)
1
718
780
43
17
1,336
144
Share
capital
£m
717
Share
premium
£m
779
Capital
redemption
reserve
£m
43
–
–
–
Share-
based
payment
reserve
£m
17
–
5
(11)
Capital
reserve
£m
1,614
(683)
(683)
5
Revenue
reserve
£m
291
(21)
(21)
11
(49)
Other
reserves
£m
–
–
–
Other
reserves
£m
5
–
(5)
717
1
780
43
11
936
232
–
Total
equity
£m
2,719
385
385
9
–
(76)
1
3,038
Total
equity
£m
3,466
(704)
(704)
–
5
–
(49)
1
2,719
Statement of financial position
as at 31 March
3i Group plc Annual report and accounts 2013
89
Assets
Non-current assets
Investments
Quoted equity investments
Unquoted equity investments
Loans and receivables
Investment portfolio
Carried interest receivable
Interests in Group entities
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Derivative financial instruments
Deferred income taxes
Total non-current assets
Current assets
Traded portfolio
Other current assets
Derivative financial instruments
Deposits
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance fees payable
Loans and borrowings
B shares
Retirement benefit deficit
Derivative financial instruments
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Loans and borrowings
Derivative financial instruments
Current income taxes
Deferred income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Translation reserve
Capital reserve
Revenue reserve
Own shares
Total equity
Sir Adrian Montague
Chairman
15 May 2013
Notes
Group
2013
£m
Group
2012
£m
Company
2013
£m
Company
2012
£m
431
1,566
1,250
3,247
20
–
32
120
7
–
3
3,429
48
85
4
90
656
883
4,312
(39)
(855)
(6)
(14)
(55)
(3)
(8)
(980)
(192)
(29)
(164)
(5)
(2)
(1)
(5)
(398)
(1,378)
2,934
718
780
43
17
630
356
494
(104)
2,934
535
1,392
1,242
3,169
36
–
17
56
13
6
2
3,299
35
102
7
441
718
1,303
4,602
(45)
(1,358)
(6)
(10)
(41)
(5)
(2)
(1,467)
(225)
(40)
(231)
–
(3)
(1)
(8)
(508)
(1,975)
2,627
717
780
43
11
457
233
491
(105)
2,627
243
798
645
1,686
9
1,681
–
–
–
–
–
3,376
–
118
4
90
573
785
4,161
(9)
(855)
(6)
–
(55)
–
–
(925)
(193)
–
–
(5)
–
–
–
(198)
(1,123)
3,038
718
780
43
17
–
1,336
144
–
3,038
392
299
179
870
24
2,324
–
–
4
6
–
3,228
–
105
7
441
541
1,094
4,322
–
(1,152)
(6)
–
(41)
–
–
(1,199)
(173)
–
(231)
–
–
–
–
(404)
(1,603)
2,719
717
780
43
11
–
936
232
–
2,719
13
14
16
9
17
20
12
13
18
20
21
9
20
12
23
22
21
20
12
12
23
24
25
25
25
25
25
26
Financial statements
90
3i Group plc Annual report and accounts 2013
Cash flow statement
for the year to 31 March
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Net (purchase)/proceeds from traded portfolio
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest received
Carried interest and performance fees paid
Operating expenses
Interest received
Interest paid
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Purchase of own shares
Dividend paid
Repayment of short-term borrowings
Repayment of long-term borrowings and convertible bond
Repurchase of long-term borrowings
Net cash flow from derivatives
Net cash flow from financing activities
Cash flow from investing activities
Acquisition of management contracts and other Debt Management business development
Purchase of property, plant and equipment
Proceeds on sale of property, plant and equipment
Net cash flow from deposits
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of year
Group
2013
£m
Group
2012
£m
Company
2013
£m
Company
2012
£m
(149)
606
(23)
15
43
4
70
20
(30)
(190)
7
(118)
(7)
248
–
(76)
(304)
–
(267)
11
(636)
(18)
(1)
1
351
333
(55)
718
(7)
656
(447)
771
(17)
9
44
7
91
30
(40)
(240)
12
(101)
(7)
112
(31)
(49)
–
(169)
(201)
(5)
(455)
–
(2)
1
119
118
(225)
961
(18)
718
(259)
639
–
5
30
(1)
–
19
–
(53)
7
(114)
–
273
–
(76)
(253)
–
(267)
11
(585)
–
–
1
351
352
40
541
(8)
573
(704)
828
–
3
24
–
–
29
–
(85)
11
(97)
–
9
–
(49)
–
(169)
(184)
(5)
(407)
–
–
–
119
119
(279)
836
(16)
541
Significant accounting policies
3i Group plc Annual report and accounts 2013
91
3i Group plc (the “Company”) is a company registered in England and Wales. The consolidated financial statements for the year to 31 March 2013
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 15 May 2013.
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:
IFRS 7
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IAS 19
IAS 27
IAS 28
IAS 32
Amendment to offsetting financial assets and liabilities
Financial instruments – classification and measurement
Consolidated financial statements
Joint arrangements
Disclosure of interest in other entities
Fair value measurement
Amendment to employee benefits
Amendment to separate financial statements
Amendment to Investments in associates and joint ventures
Amendment to offsetting financial assets and financial liabilities
Effective for period beginning on or after
1 January 2013
1 January 2015
1 January 2014
1 January 2014
1 January 2014
1 January 2013
1 January 2013
1 January 2014
1 January 2014
1 January 2014
With the exception of IFRS 10, 11, 12 and IAS 27 and 28 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.
The initial application of IFRS 10 and 12 could have a material effect on the financial statements of the Group. The principle potential impact is
the consolidation of the portfolio investments and funds managed by 3i in the Group financial statements. In October 2012 the IASB announced
amendments to these standards. The amendments define an Investment Entity and require a parent that is an investment entity to measure its
investments in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments instead of consolidating
those subsidiaries in its consolidated and separate financial statements. As currently drafted, we expect that 3i Group plc will qualify as an
Investment Entity. However we will not be able to adopt this standard until it has been endorsed by the EU.
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 judgements, estimates and assumptions that
affect the application of policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily
apparent from other sources. The most significant estimates relate to the fair valuation of the investment portfolio and the actuarial valuation
of the defined benefit pension scheme. These are further disclosed in accounting policies C, E and K and notes 9 and 13. The 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 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.
Financial statements 92
3i Group plc Annual report and accounts 2013
Significant accounting policies
C Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Company has the power, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain 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 statement of financial position 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 venturer’s interests held by venture capital organisations to be excluded from
its scope where those investments are designated, upon initial recognition, as at fair value through profit or loss 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.
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 investment income
and capital appreciation from changes in the 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 (IPEV), details of which are in the section
called Portfolio valuation – an explanation.
Other investments includes loan investments, bonds and fixed income shares. 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. The fair value of loans and
receivables is not anticipated to be substantially different to the holding value.
3i Group plc Annual report and accounts 2013
93
The traded portfolio includes investments in loans and associated investments which are traded on a regular basis within Palace Street I, the
Credit Opportunities Fund. These loans are measured at fair value through profit or loss upon initial recognition and classified as held for trading
in accordance with IAS 39.
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.
Interest bearing loans accrue interest which is either settled in cash or capitalised on a regular basis and included as part of the principal loan
balance. The capitalisation of accrued interest is treated as part of investment additions during the year. If the fair value of an investment is
assessed to be below the principal value of the loan the Group recognises a provision against any interest income accrued from the date of the
assessment going forward. “Capitalisation at nil value” is the term used to describe the capitalisation of accrued interest which has been fully
provided for. These transactions are disclosed as additions to portfolio cost with an equal reduction in portfolio value.
(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 or losses 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, traded loans 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 or losses 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:
nn Dividends from equity investments are recognised in the statement of comprehensive income when the shareholders’ rights to receive
payment have been established.
nn Income from loans and receivables and the traded portfolio 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. When the fair value of an investment is assessed to be below the principal value of a loan the
Group recognises a provision against any interest accrued from the date of the assessment going forward until the investment is assessed
to have recovered in value.
nn 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, infrastructure and debt management funds. 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 and infrastructure 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.
Financial statements 94
3i Group plc Annual report and accounts 2013
Significant accounting policies
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 Intangible assets
Fund management contracts, such as those acquired by the Group in connection with the acquisition of a subsidiary, are stated at their fair value
at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is charged to the statement of comprehensive
income on a straight-line basis over the estimated useful life of the fund management contract, typically five to 10 years.
I 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.
(iv) Leasehold improvements
Leasehold improvements are depreciated by equal annual instalments, over the shorter of their estimated useful lives and the lease term.
Assets are reviewed for impairment where events or changes in circumstances indicate that the carrying value may not be recoverable.
J Treasury assets and liabilities
Short-term treasury assets and short and long-term treasury liabilities are used in order to manage cash flows and overall costs of borrowing.
Financial assets and liabilities are recognised in the balance sheet when the relevant Group entity becomes a party to the contractual provisions
of the instrument. De-recognition occurs when rights to cash flows from a financial asset expire, or when a liability is extinguished.
3i Group plc Annual report and accounts 2013
95
(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) Derivative financial instruments
Derivative financial instruments are used to manage the risk associated with foreign currency fluctuations of the investment portfolio and
changes in interest rates on its borrowings. This is achieved by the use of foreign 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.
K 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
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 has equity-settled and cash settled share-based payment transactions with certain employees. Equity settled schemes 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.
Liabilities arising from cash settled share based payment transactions are recognised in the statement of comprehensive income over the
vesting period. They are fair valued at each reporting date. The cost of cash settled share based payment transactions is adjusted for the
forfeitures of the participants rights that no longer meet the plan requirements as well as for early vesting.
Financial statements 96
3i Group plc Annual report and accounts 2013
Significant accounting policies
L Other assets
Assets, other than those specifically accounted for under a separate policy, are stated at their cost less impairment losses. They are reviewed at
each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount
is estimated based on expected discounted future cash flows. Any change in the level of impairment is recognised directly in 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.
M Other liabilities
Liabilities, other than those specifically accounted for under a separate policy, are stated based on the amounts which are considered to be
payable in respect of goods or services received up to the balance sheet date.
N 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.
O Provisions
Provisions are recognised when the Group has a present obligation of uncertain timing or amount as a result of past events, and it is probable
that the Group will be required to settle that obligation and a reliable estimate of that obligation can be made. The provisions are measured
at the Directors’ best estimate of the amount to settle the obligation at the balance sheet date, and are discounted to present value if the effect
is material. Changes in provisions are recognised in the statement of comprehensive income for the period.
P Income taxes
Income taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited in the
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.
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.
Notes to the financial statements
3i Group plc Annual report and accounts 2013
97
1 Segmental analysis
Operating segments are components of the entity whose results are regularly reviewed by the entity’s chief operating decision-maker to make
decisions about resources to be allocated to the segment and to assess its performance. The chief operating decision-maker for the Group is
considered to be the Chief Executive Officer. The Group’s operating segments have been defined as the Group’s business lines, namely Private
Equity, Infrastructure and Debt Management. The business lines are determined with reference to market focus, geographic focus, and
investment funding model.
The performance of operating segments is assessed based on the net portfolio return, principally comprising gains and losses on investments
and investment income, fees received from management of external funds and the associated costs of the business line. Segmental assets are
represented by the investment portfolio value for each business line.
Year to 31 March 2013
Gross portfolio return
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)
Net portfolio return
Fees receivable from external funds
Carried interest receivable from external funds
Carried interest and performance fees payable
Operating expenses
Net divestment/(investment)
Realisations
Cash investment
Balance sheet
Value of investment portfolio at the end of the year
1 The Private Equity business line now includes Non-core investments which were previously disclosed separately.
Year to 31 March 2012
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised losses on the revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable/(payable)
Net portfolio return
Fees receivable from external funds
Carried interest receivable from external funds
Carried interest and performance fees payable
Operating expenses
Net divestment/(investment)
Realisations
Cash investment
Balance sheet
Value of investment portfolio at the end of the year
1 The Private Equity business line now includes Non-core investments which were previously disclosed separately.
Private
Equity1
£m
Infrastructure
£m
Debt
Management
£m
190
250
22
52
4
518
19
4
(11)
(114)
416
575
(121)
454
–
(2)
18
–
–
16
21
1
(2)
(24)
12
31
(5)
26
2,707
507
5
2
3
2
–
12
31
(1)
(6)
(32)
4
–
(46)
(46)
81
Private
Equity1
£m
Infrastructure
£m
Debt
Management
£m
22
(488)
27
94
4
(341)
32
(13)
13
(132)
(441)
770
(377)
393
–
(7)
18
–
–
11
25
(14)
8
(17)
13
1
(70)
(69)
2,634
528
1
(3)
2
1
–
1
32
12
(11)
(31)
3
–
(17)
(17)
42
Total
£m
195
250
43
54
4
546
71
4
(19)
(170)
432
606
(172)
434
3,295
Total
£m
23
(498)
47
95
4
(329)
89
(15)
10
(180)
(425)
771
(464)
307
3,204
Financial statements
98
3i Group plc Annual report and accounts 2013
1 Segmental analysis (continued)
Year to 31 March 2013
Gross portfolio return
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Net divestment/(investment)
Realisations
Cash investment
UK
£m
56
86
44
186
150
(4)
146
Balance sheet
Value of investment portfolio at the end of the year
1,048
1,542
Continental
Europe
£m
The
Americas
£m
30
197
40
267
231
(102)
129
107
27
14
148
222
(61)
161
262
Year to 31 March 2012
Gross portfolio return
Realised (losses)/profits over value on the disposal of investments
Unrealised losses on the revaluation of investments
Portfolio income
Net divestment/(investment)
Realisations
Cash investment
UK
£m
(19)
(36)
66
11
76
(55)
21
Continental
Europe
£m
The
Americas
£m
40
(351)
59
(252)
670
(373)
297
1
(4)
21
18
9
(18)
(9)
Balance sheet
Value of investment portfolio at the end of the year
1,029
1,421
278
2 Realised profits over value on the disposal of investments
Realisations
Valuation of disposed investments
Investments written off
Realisations
Valuation of disposed investments
Investments written off
2013
Unquoted
equity
£m
351
(166)
(4)
181
2012
Unquoted
equity
£m
557
(517)
–
40
2013
Quoted
equity
£m
120
(113)
–
7
2012
Quoted
equity
£m
1
(2)
–
(1)
2013
Loans and
receivables
£m
135
(133)
–
2
2012
Loans and
receivables
£m
213
(197)
(33)
(17)
Asia
£m
3
(61)
2
(56)
3
(5)
(2)
437
Asia
£m
1
(107)
–
(106)
16
(18)
(2)
470
Rest of
World
£m
(1)
1
1
1
–
–
–
6
Rest of
World
£m
–
–
–
–
–
–
–
6
2013
Traded
portfolio
£m
–
5
–
5
2012
Traded
portfolio
£m
–
1
–
1
Total
£m
195
250
101
546
606
(172)
434
3,295
Total
£m
23
(498)
146
(329)
771
(464)
307
3,204
2013
Total
£m
606
(407)
(4)
195
2012
Total
£m
771
(715)
(33)
23
Notes to the financial statements 3i Group plc Annual report and accounts 2013
99
3 Unrealised profits/(losses) on the revaluation of investments
Movement in the fair value of equity and traded loans
Provisions recovered, loan impairments and other movements
Movement in the fair value of equity and traded loans
Provisions, loan impairments and other movements
2013
Unquoted
equity
£m
215
–
215
2012
Unquoted
equity
£m
(160)
(64)
(224)
2013
Quoted
equity
£m
11
–
11
2012
Quoted
equity
£m
(20)
–
(20)
2013
Loans and
receivables
£m
–
25
25
2012
Loans and
receivables
£m
–
(253)
(253)
2013
Traded
portfolio
£m
(1)
–
(1)
2012
Traded
portfolio
£m
(1)
–
(1)
2013
Total
£m
225
25
250
2012
Total
£m
(181)
(317)
(498)
Provisions have been recognised only on investments where it is considered there is a greater than 50% risk of the Group’s investment failing.
All other equity value movements are included within the movement in the fair value of equity.
4 Fees receivable
Fees receivable
Deal-related costs
2013
£m
6
(2)
4
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 on aborted deals and fees incurred in the process of acquiring an investment.
5 Carried interest and performance fees payable
Carried interest receivable from external funds
Carried interest and performance fees payable
2013
£m
4
(19)
(15)
2012
£m
12
(8)
4
2012
£m
(15)
10
(5)
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 and performance fees payable represents the amount payable to executives from the Group’s carried interest schemes and
also includes the fees payable to Infrastructure and Debt Management executives that are based on fund performance. 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.
6 Operating expenses
Operating expenses include the following amounts:
Depreciation of property, plant and equipment
Amortisation of fund management contracts
Audit fees
Staff costs (note 7)
Restructuring and redundancy costs
2013
£m
1
6
2
84
30
2012
£m
3
4
2
98
9
Financial statements 100
3i Group plc Annual report and accounts 2013
6 Operating expenses (continued)
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)
2013
£m
1.3
0.5
0.2
–
2.0
0.2
0.1
0.1
2.4
2012
£m
1.2
0.5
0.2
0.1
2.0
0.1
0.4
0.2
2.7
Non-audit services
These services are services that could be provided by a number of firms and include general consultancy work. Work is allocated to the auditors
only if it does not impact the independence of the audit firm.
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 (2012: less than £0.1 million).
7 Staff costs
Wages and salaries
Social security costs1
Share-based payment costs (note 8)
Pension costs
2013
£m
66
9
4
5
84
2012
£m
72
12
6
8
98
1 Excludes £4m of social security cost included in restructuring and redundancy costs.
The average number of employees during the year was 358 (2012: 472).
Wages and salaries shown above include salaries paid in the year, bonuses and portfolio incentive schemes relating to the year. These costs are
included in operating expenses. The table below analyses these costs between fixed and variable elements.
Fixed staff costs
Variable staff costs
8 Share-based payments
The total cost recognised in the statement of comprehensive income is shown below:
Share options1
Share awards included as operating expenses1
Share awards included as carried interest1
Share incentive plan
Cash settled share awards
Accrual for share-based bonus
1 Credited to equity.
2013
£m
52
32
84
2013
£m
(1)
4
6
–
1
–
10
2012
£m
69
29
98
2012
£m
(1)
6
–
1
(1)
1
6
The features of the Group’s share schemes are set out on pages 101 and 102. For legal, regulatory or practical 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. The carrying amount of liabilities arising from share-based payment transactions at 31 March 2013 is £2 million (2012:
£1 million). The intrinsic value of liabilities arising from share-based payment transactions which have vested by 31 March 2013 is £nil (2012: £nil).
Notes to the financial statements
3i Group plc Annual report and accounts 2013
101
8 Share-based payments (continued)
The following information shows details of the share-based payment awards made during the year.
Grant date
Vesting period
Life of the award
Valuation methodology
Weighted average fair value of awards granted
Share awards
June 2012,
July 2012,
August2012
2–3 years
10 years
Share price at grant
2.01
Cash settled share awards
July 2012,
August 2012
2–3 years
10 years
Share price at grant
2.11
Share options
Options granted under the 3i Group Discretionary Share Plan are normally exercisable between the third and tenth anniversaries of the date
of grant to the extent a performance condition has been met over a performance period of three years from the date of grant. Details of the
performance conditions to which unvested options are subject are set out in the Directors’ remuneration report.
Details of share options outstanding during the year are as follows:
Outstanding at the start of the year
Lapsed
Expired
Outstanding at the end of year
Exercisable at the end of year
2013
Number
of share
options
9,739,142
(5,577,357)
(589,204)
3,572,581
3,165,802
2013
Weighted
average
exercise price
(pence)
341
308
416
380
391
2012
Number
of share
options
15,608,993
(5,869,851)
–
9,739,142
5,063,933
2012
Weighted
average
exercise price
(pence)
366
408
–
341
395
Included within the total number of share options are no options over shares that were granted on or before 7 November 2002 and therefore have
not been recognised in accordance with IFRS 2. (2012: 1 million options).
The range of exercise prices for options outstanding at the year end was:
Grate date:
year to 31 March
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
Weighted
average
exercise price
(pence)
–
356
372
435
–
–
–
–
295
380
2012
Weighted
average
exercise price
(pence)
417
355
373
434
–
–
–
277
295
341
2013
Number
–
813,203
1,206,616
1,145,983
–
–
–
–
406,779
3,572,581
2012
Number
819,294
1,068,850
1,652,911
1,522,878
–
–
–
3,149,786
1,525,423
9,739,142
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 (2012: nil). The options outstanding at the end of the year have a weighted average contractual life of 2.02 years
(2012: 4.67 years). The cost of share options has been spread over the vesting period of three to five years. No options were granted during the year.
Share awards
Details of share awards outstanding during the year are as follows:
Outstanding at the start of the year
Granted
Exercised
Lapsed
Outstanding at the end of year
2013
16,698,893
2,746,884
(171,087)
(5,500,856)
13,773,834
2012
9,867,630
12,341,866
(2,859,857)
(2,650,746)
16,698,893
The awards outstanding at the end of the year have a weighted average contractual life of 6.95 years (2012: 8.84 years). The cost of share awards
is spread over the vesting period of two to three years.
Financial statements 102
3i Group plc Annual report and accounts 2013
8 Share-based payments (continued)
A summary of the vesting conditions of share awards is as follows:
Performance share awards (market condition)
The performance condition for Performance shares issued before July 2011 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 de-listings over that
period.
Performance share awards (non market condition)
Performance shares issued after June 2011 will vest, subject to a vesting scale, if the annualised growth of the Group’s return on opening equity
during the three year performance period equals or exceeds 10% per annum.
Performance-based awards
Performance-based share awards are made to certain investment executives. These plans operate in a similar format to a carry scheme where
a percentage of shares will vest once a realised profit hurdle has been achieved on a defined group of assets.
Deferred share bonus
Certain employees receive an element of their bonus as a conditional award of shares which vest after two or three years. The awards
are not subject to a performance condition. The fair value of the deferred shares is the share price at the date of the award.
Deferred share awards
Certain employees receive awards of deferred Shares which vest after two or three years subject to continued service for that period.
These awards are not subject to a performance condition. The fair value of the deferred shares is the share price at the date of the award.
Share incentive plan
Eligible UK employees may participate in a HM Revenue and Customs 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 invested 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
for certain permitted reasons) within three years of grant.
Employee Trust
The Group has established the 3i Group Employee Trust which holds shares in 3i Group plc which can be used to meet its obligations under
certain share schemes. The Trustee has full discretion as to the application of trust assets. However, in accordance with IAS 27 Consolidated
and Separate Financial Statements, 3i Group plc is considered the ultimate controlling party for accounting purposes and the operations
of the 3i Group Employee Trust are fully consolidated by the Group.
9 Retirement benefits
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. 3i Europe plc’s French branch is required to contribute a specific percentage
of payroll costs to the retirement benefit scheme to fund these benefits.
The total expense recognised in the statement of comprehensive income is £4 million (2012: £4 million), which represents the contributions
payable to these plans. There were no outstanding payments due to these plans at the balance sheet date.
(ii) Defined benefit schemes
The Group operates a final salary defined benefit plan for qualifying employees of its subsidiaries in the UK (“the Plan”). The Plan has not been
offered to new employees joining 3i since 1 April 2006. The Plan was closed to the future accrual of benefits by members with effect from
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 6 April 2011. The defined benefit plan is a funded scheme, the assets of which are independent
of the Company’s finances and are administered by the Trustees. As the fund is now closed to future accrual, measures have been taken
to de-risk the fund through changes to its investment policy.
Notes to the financial statements 3i Group plc Annual report and accounts 2013
103
9 Retirement benefits (continued)
The last full actuarial valuation as at 30 June 2010 was updated on an IAS 19 basis by an independent qualified actuary as at 31 March 2013.
The principal assumptions made by the actuaries and used for the purpose of the year end valuation of the Plan were as follows:
Discount rate
Expected rate of salary increases
Expected rate of pension increases
Retail Price Index (RPI) inflation
Consumer Price Index (CPI) inflation
Expected return on the Plan assets
2013
4.4%
5.8%
3.4%
3.3%
2.6%
n/a
2012
4.6%
5.7%
3.4%
3.2%
2.5%
4.6%
IAS 19 (Revised) will be implemented by 3i from 1 January 2013. The main effect will be that the expected returns on pension scheme assets will
no longer be recognised in the income statement. Expected returns will be replaced by income calculated using the same discount rate as that
used to measure the pension obligations.
The post-retirement mortality assumption used to value the benefit obligation at 31 March 2013 is 80% of the PNA00 tables allowing for
improvements from 2000 in line with the CMI 2009 core projections with a long-term annual rate of improvement of 1.5% (31 March 2012: 80%
of the PNA00 tables allowing for improvements from 2000 in line with the CMI 2009 core projections with a long-term annual rate of future
improvement of 1.5%). The life expectancy of a male member reaching age 60 in 2033 (2012: 2032) is projected to be 33.2 (2012: 33.1) years
compared to 30.7 (2012: 30.6) years for someone reaching 60 in 2013.
The amount recognised in the statement of financial position in respect of the Group’s defined benefit schemes are as follows:
Present value of funded obligations
Fair value of the Plan assets
Asset restriction
Retirement benefit surplus in respect of the Plan
Retirement benefit deficit in respect of other defined benefit schemes
2013
£m
720
(904)
64
(120)
14
2012
£m
693
(798)
49
(56)
10
The asset restriction relates to tax that would be deducted at source in respect of the Plan surplus together with the surplus that arises from the
present value of supplementary contributions to the Plan agreed by the Plan trustees.
Amounts recognised in the statement of comprehensive income in respect of the Plan are as follows:
Included in operating costs
Current/past service cost
Included in interest payable (note 10)
Expected return on the Plan assets
Interest on obligation
Included in other comprehensive income
Actuarial (gain)/loss
Asset restriction
Total actuarial (gain)/loss and asset restriction
Total
Changes in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Current/past service cost
Interest cost
Actuarial loss
Benefits paid
Closing defined benefit obligation
2013
£m
–
(38)
31
(35)
15
(20)
(27)
2013
£m
693
–
31
33
(37)
720
2012
£m
2
(40)
32
56
10
66
60
2012
£m
587
2
32
90
(18)
693
Financial statements
104
3i Group plc Annual report and accounts 2013
9 Retirement benefits (continued)
Changes in the fair value of the Plan assets were as follows:
Opening fair value of the Plan assets
Expected returns
Actuarial gain
Contributions
Benefits paid
Closing fair value of the Plan assets
Contributions paid to the 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
Corporate bonds
Gilts
Other
2013
£m
798
38
68
37
(37)
904
2013
£m
318
235
341
10
904
2012
£m
670
40
34
72
(18)
798
2012
£m
272
193
332
1
798
The actual return on the Plan assets for the year was a gain of £106 million (2012: £74 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
Asset restriction
(Surplus)/deficit
Experience adjustments on the Plan liabilities
Experience adjustments on the Plan assets
2013
£m
720
(904)
64
(120)
–
8%
2012
£m
693
(798)
49
(56)
1%
(4)%
2011
£m
587
(670)
39
(44)
(2)%
–
2010
£m
593
(587)
22
28
2%
16%
2009
£m
437
(419)
–
18
2%
(26)%
The cumulative actuarial losses recognised in other comprehensive income are £147 million (2012: £168 million). This includes £64 million (2012:
£49 million) in respect of the asset restriction.
As the Plan was closed to future accrual of benefits by members with effect from 5 April 2011 the Group ceased to make regular contributions
to the Plan in the year to 31 March 2012. The triennial actuarial funding valuation as at 30 June 2010 was completed in September 2011.
This resulted in an actuarial deficit of £130 million. The Group has paid contributions to the Plan to fund this deficit. Under an agreed schedule
of contributions, the Group paid contributions of £36 million (2012: £72 million) during the year, included within operating expenses in the Group
cash flow statement. In addition a contingent asset arrangement was entered into during the period, details of which are provided in note 31.
No more additional contributions are due in relation to the funding of the deficit. The next triennial actuarial funding valuation exercise will
commence shortly, based on the financial position as at 30 June 2013.
Other retirement schemes
Employees in Germany and Spain are entitled to a pension based on their length of service. 3i Deutschland GmbH and the German and Spanish
branches of 3i Europe plc contribute to individual investment policies for their employees and have 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 £3 million
(2012: £4 million) and the future liability calculated by German and Spanish actuaries is £17 million (2012: £14 million). The Group has recognised
cumulative actuarial losses of £3 million (2012: £1million) and £1 million (2012: £1 million) in the statement of comprehensive income in respect
of these schemes.
Notes to the financial statements 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
Net finance (expense)/income on pension plan
Net interest payable
11 Movement in the fair value of derivatives
Interest-rate swaps
Call options
Forward foreign exchange contracts
3i Group plc Annual report and accounts 2013
105
2013
£m
6
6
(103)
–
–
6
(97)
(91)
2013
£m
(8)
–
2
(6)
2012
£m
12
12
(109)
(1)
(1)
8
(103)
(91)
2012
£m
(19)
(1)
1
(19)
Exchange movements in relation to forward foreign exchange contracts are included within exchange movements in the statement of
comprehensive income. During the year, an £11 million loss (2012: £16 million gain) was recognised in exchange movements in relation to forward
foreign exchange contracts.
12 Income taxes
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income taxes in the statement of comprehensive income
2013
£m
(9)
3
(6)
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 24% (2012: 26%), and the differences are
explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax in the UK of 24% (2012: 26%)
Effects of:
Permanent differences
Short-term timing differences
Non-taxable dividend income
Foreign tax
Capital losses/profits
Excess tax losses arising in the period
Total income taxes in the statement of comprehensive income
2013
£m
189
(45)
(9)
–
10
(4)
67
(25)
(6)
2012
£m
(8)
2
(6)
2012
£m
(777)
202
12
(12)
2
(4)
(206)
–
(6)
The Group’s realised profits, fair value adjustments and impairment losses are primarily included in the Company, the affairs of which are
directed so as to allow it to be approved as an investment trust. An investment trust is exempt from tax on capital gains, therefore the Group’s
capital return will be largely non-taxable.
Financial statements 106
3i Group plc Annual report and accounts 2013
12 Income taxes (continued)
Deferred income taxes
Opening deferred income tax liability
Tax losses
Income in accounts taxable in the future
Deferred tax recognised on acquisition
Other
Recognised through statement of comprehensive income
Tax losses utilised
Income in accounts taxable in the future
Amortisation of intangible asset
Other
Closing deferred income tax liability
Tax losses
Income in accounts taxable in the future
Deferred tax recognised on acquisition
Other
2013
£m
10
(12)
(4)
2
(4)
–
–
1
2
3
10
(12)
(3)
4
(1)
2012
£m
25
(26)
(5)
–
(6)
(15)
14
1
2
2
10
(12)
(4)
2
(4)
At 31 March 2013 the Company had tax losses carried forward of £1,084 million (2012: £977 million). It is unlikely that the Group will generate
sufficient taxable profits in the foreseeable future to utilise these amounts and therefore no deferred tax asset has been recognised in respect
of these losses. Deferred income taxes are calculated using an expected rate of corporation tax in the UK of 23% (2012: 24%).
13 Investment portfolio
Non-current
Opening book value
Additions
– Of which loan notes with nil value
Disposals, repayments and write-offs
Revaluation
Provisions and loan impairments
Other movements
Closing book value
Quoted
Unquoted
Closing book value
Group
2013
Equity
investments
£m
1,927
89
–
(283)
225
–
39
1,997
431
1,566
1,997
Group
2013
Loans and
receivables
£m
1,242
173
(75)
(133)
–
25
18
1,250
–
1,250
1,250
Group
2013
Total
£m
3,169
262
(75)
(416)
225
25
57
3,247
431
2,816
3,247
Group
2012
Equity
investments
£m
2,539
98
–
(519)
(180)
(64)
53
1,927
535
1,392
1,927
Group
2012
Loans and
receivables
£m
1,454
512
(87)
(230)
–
(253)
(154)
1,242
–
1,242
1,242
Group
2012
Total
£m
3,993
610
(87)
(749)
(180)
(317)
(101)
3,169
535
2,634
3,169
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 £112 million (2012: £163 million) in interest received by way of loan notes, of which £75 million (2012:
£87 million) has been written down in the year to nil. Included within the statement of comprehensive income is £54 million (2012: £95 million)
of interest income, which reflects the net additions after write downs noted above and £14 million of cash income, non-capitalised accrued
income and the capitalisation of prior year accrued income £3 million (2012: £19 million).
Other movements include foreign exchange and conversions from one instrument into another.
Included within the statement of comprehensive income are foreign exchange losses of £143 million (2012: £243 million loss). 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 £35 million (2012: £83 million).
Palace Street I was launched in August 2011 and started trading loans on a regular basis. The investments within this fund are classified
as current assets and held for trading and are included here as the Traded portfolio.
Notes to the financial statements 13 Investment portfolio (continued)
Current
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Other movements
Closing book value
3i Group plc Annual report and accounts 2013
107
Group
2013
Traded
portfolio
£m
35
171
(157)
(1)
–
48
Group
2012
Traded
portfolio
£m
–
78
(42)
(1)
–
35
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
Quoted prices (unadjusted) from active markets
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
Financial instruments
Quoted equity instruments
Unquoted equity instruments and loan instruments included in the
traded portfolio (Palace Street I)
Unquoted equity instruments and debt instruments included in the traded portfolio are measured in accordance with the International Private
Equity and Venture Capital 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 Group’s investment portfolio for equity instruments and traded portfolio through Palace Street I are classified by the fair value hierarchy
as follows:
Quoted equity
Unquoted equity
Traded portfolio
Total
Quoted equity
Unquoted equity
Total
Group
2013
Level 1
£m
431
–
–
431
Company
2013
Level 1
£m
243
–
243
Group
2013
Level 2
£m
–
–
–
–
Company
2013
Level 2
£m
–
–
–
Group
2013
Level 3
£m
–
1,566
48
1,614
Company
2013
Level 3
£m
–
798
798
Group
2013
Total
£m
431
1,566
48
2,045
Company
2013
Total
£m
243
798
1,041
Group
2012
Level 1
£m
535
–
–
535
Company
2012
Level 1
£m
392
–
392
Group
2012
Level 2
£m
–
–
–
–
Company
2012
Level 2
£m
–
–
–
Group
2012
Level 3
£m
–
1,392
35
1,427
Company
2012
Level 3
£m
–
299
299
Group
2012
Total
£m
535
1,392
35
1,962
Company
2012
Total
£m
392
299
691
There were no transfers between Level 1, Level 2 or 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 20
for further details.
Level 3 fair value reconciliation
Opening book value
Additions
Disposals, repayments and write-offs
Revaluation
Other movements
Closing book value
Group
2013
£m
1,427
249
(327)
214
51
1,614
Group
2012
£m
2,139
143
(559)
(225)
(71)
1,427
Company
2013
£m
299
514
(84)
55
14
798
Company
2012
£m
589
40
(288)
(69)
27
299
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 £179 million (2012: £40 million), dividend income of £23 million (2012: £29 million) and foreign
exchange losses of £37 million (2012: £48 million).
Level 3 inputs are sensitive to assumptions made when ascertaining fair value as described in the Portfolio valuation – an explanation section.
A reasonable 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 unquoted equity portfolio of £125 million (2012: £100 million) or 8% (2012: 7%).
Financial statements 108
3i Group plc Annual report and accounts 2013
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 33.
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
Company
2013
Equity
investments
£m
51
285
–
(49)
(9)
–
278
Company
2012
Equity
investments
£m
95
37
–
(76)
(5)
–
51
Company
2013
Loans and
receivables
£m
2,273
272
374
(2,165)
771
(122)
1,403
Company
2012
Loans and
receivables
£m
2,619
873
112
(852)
(377)
(102)
2,273
Company
2013
Total
£m
2,324
557
374
(2,214)
762
(122)
1,681
Company
2012
Total
£m
2,714
910
112
(928)
(382)
(102)
2,324
15 Business combination
On the 28 September 2012 3i Debt Management US LLC, a newly formed entity (“3i DM US”), entered into a strategic transaction with WCAS Fraser
Sullivan Investment Management (“FSIM”) to set up a US debt management platform. At the time of the transaction FSIM, a specialist US debt
management company, was managing US$2.5 billion of AUM, comprising six CLO funds, one credit opportunity fund and one senior loan fund.
Following completion of the transaction, the fund management of the Senior Loan Fund and the Credit Opportunities Fund transferred across
to 3i DM US. The senior loan fund was renamed 3i US Senior Loan Fund. FSIM continued to manage the existing CLO funds until investor approval
was granted to change the fund manager to 3i DM US in March 2013. As part of the strategic transaction the FSIM team were initially employed
by both FSIM and by 3i DM US, following the transfer of all FSIM funds to 3i DM US all employees are now employed solely by 3i DM US.
3i DM US has acquired certain of the assets and liabilities of FSIM. 3i DM US entered into a services agreement with FSIM which was classified
as an intangible asset. Following the transfer of existing CLO fund management to 3i DM US in March 2013 this agreement has been replaced
and 3i DM US will now directly manage the CLO funds.
This strategic transaction is judged to have key features of a business combination and accordingly has been classified as a business
combination under IFRS3: Business Combinations. The Group subscribed for 80% of the equity of 3i DM US for cash consideration of £8 million.
The management team of FSIM subscribed for the remaining 20% of the equity of 3i DM US. The Group has entered into agreements to purchase
this remaining 20% from the management team by March 2016, with the price subject to the performance of 3i DM US.
The purchase of the management team’s equity holding or “earn-out” is made up of two parts:
nn £2 million deferred consideration, for the transfer of the remaining 20% of the shares held by FSIM management by March 2016. This has been
recognised on acquisition and will be carried as a liability on the Group balance sheet.
nn The remaining amount is contingent on the management team remaining in employment with 3i DM US and raising new funds. The amount
will be determined by the performance of 3i DM US during the three year period and will be recognised in the statement of comprehensive
income as carried interest and performance fees payable.
Notes to the financial statements 3i Group plc Annual report and accounts 2013
109
15 Business combination (continued)
The fair value of the identifiable assets and liabilities of FSIM as at the date of entering into the strategic transaction and the consideration
paid were:
Fair value of assets received
Intangible assets (fund management contracts and service agreement)
Total fair value of assets received
Fair value of liabilities assumed
Creditors
Total fair value of liabilities assumed
Total identifiable net assets at fair value
Consideration
Cash
Deferred consideration
Total consideration
Goodwill
Net cash outflow arising on acquisition
Cash consideration paid
Cash and cash equivalents acquired
Net cash flow on acquisition
Fair value
recognised
£m
2
2
(1)
(1)
1
8
2
10
9
(8)
–
(8)
From the date of acquisition to 31 March 2013, 3i DM US contributed £3 million to management fees, and incurred operating expenses and
amortisation of the fund management contracts of £2 million, which resulted in an overall profit of £1 million to the net profit before tax of the Group.
16 Intangible assets
Fund management contracts
Opening cost
Acquisitions
Closing cost
Opening accumulated amortisation
Charge for the year
Closing accumulated amortisation
Net book amount
Group
2013
£m
22
12
34
5
6
11
23
The amortisation charge for the year of £6 million (2012: £4 million) has been recognised in operating expenses in the statement
of comprehensive income.
The acquisitions in the year relate to the purchase of five European CLO management contracts from Invesco Asset Management Limited,
acquired on 30 August 2012 and the fair value attributed to the management contracts acquired as part of the strategic transaction with
Fraser Sullivan Investment Management LLC.
Group
2012
£m
22
–
22
1
4
5
17
Group
2012
£m
–
–
–
Group
2013
£m
–
9
9
Goodwill
Opening value
Acquisitions
Closing value
17 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 (2012: £nil) following the sale of an administrative office property in Birmingham, held by
the company, in December 2012.
Group
2013
£m
4
–
(4)
–
–
–
Group
2012
£m
5
–
(1)
–
4
4
Company
2013
£m
4
–
(4)
–
–
–
Company
2012
£m
4
–
–
–
4
4
Financial statements 110
3i Group plc Annual report and accounts 2013
17 Property, plant and equipment (continued)
Plant and equipment
Opening cost or valuation
Additions at cost
Disposals
Closing cost or valuation
Opening accumulated depreciation
Charge for the year
Disposals
Closing accumulated depreciation
Net book amount
Group
2013
£m
33
1
(7)
27
24
1
(5)
20
7
Group
2012
£m
32
2
(1)
33
22
3
(1)
24
9
Company
2013
£m
–
–
–
–
–
–
–
–
–
Company
2012
£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.
18 Other current assets
Prepayments
Other debtors
Amounts due from subsidiaries
19 Financial risk management
Group
2013
£m
4
81
–
85
Group
2012
£m
6
96
–
102
Company
2013
£m
–
15
103
118
Company
2012
£m
–
24
81
105
Introduction
A review of the Group’s objectives, policies and processes for managing and monitoring risk is set out in 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, long term borrowing and shareholders’ equity. The type
and maturity of the Group’s borrowings are analysed further in note 21 and the Group’s equity is analysed into its various components in the
statement of changes in equity. Capital is managed with the objective of maximising long-term return to shareholders, whilst 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 liabilities1
Net debt
Total equity
Gearing (net debt/total equity)
1 Includes £60 million of derivative financial liabilities.
Group
2013
£m
750
(1,085)
(335)
2,934
11%
Group
2012
£m
1,172
(1,636)
(464)
2,627
18%
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/regulatory 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 Group’s regulated capital requirement is reviewed regularly by the Board of 3i Investments plc, an investment firm that is regulated by
the FSA (which has since changed to the Financial Conduct Authority). 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.3i.com.
Notes to the financial statements 3i Group plc Annual report and accounts 2013
111
19 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, traded portfolio, receivables, derivatives cash and deposits. The Group’s cash and deposits are
held with a variety of counterparties with circa 72% 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.
Credit risk
As at 31 March 2013
Loans and receivables and Traded
Portfolio 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
As at 31 March 2012
Loans and receivables and Traded
Portfolio 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
Group
not past due
£m
Group up to
12 months
past due
£m
Group more
than 12 months
past due
£m
Group
Total
£m
Company
not past due
£m
Company
up to
12 months
past due
£m
Company
more than
12 months
past due
£m
Company
Total
£m
1,847
(99)
(537)
1,211
90
–
(7)
83
85
2,022
981
(22)
(121)
(44)
(59)
4
(603)
1,298
(379)
558
90
–
(7)
83
84
1,155
(22)
(66)
(58)
4
(444)
645
Group
not past due
£m
Group up to
12 months
past due
£m
Group more
than 12 months
past due
£m
Group
Total
£m
Company
not past due
£m
Company
up to
12 months
past due
£m
Company
more than
12 months
past due
£m
Company
Total
£m
1,841
104
(142)
–
(436)
1,263
(90)
14
27
–
(27)
–
1,972
213
(142)
(34)
(553)
1,277
–
179
–
–
–
–
8
–
(8)
–
221
(34)
(8)
179
The credit quality of the traded portfolio is based on the credit rating of the loans traded. Credit risk is carefully managed with the aim of
generating profits from market opportunities. At 31 March 2013 the value of the traded portfolio was £48 million (2012: £35 million) and was
invested in non-investment grade loans in the range BB to B- (2012: B+ to B-).
Financial statements 112
3i Group plc Annual report and accounts 2013
19 Financial risk management (continued)
Movements on loan impairment and provisions are shown below:
Balance as at 31 March 2011
Other movements
Charged to income statement in the year1
Balance as at 31 March 2012
Other movements
(Charged)/credited to income statement in the year
Balance as at 31 March 2013
Group
provisions
£m
(110)
36
(68)
(142)
17
4
(121)
Group
impairments
£m
(396)
29
(186)
(553)
(70)
20
(603)
Group
Total
£m
(506)
65
(254)
(695)
(53)
24
(724)
Company
provisions
£m
(41)
22
(15)
(34)
(38)
6
(66)
Company
impairments
£m
(16)
20
(12)
(8)
(493)
57
(444)
Company
Total
£m
(57)
42
(27)
(42)
(531)
63
(510)
1 Included within impairments for the Group and Company is a £1 million value decrease in relation to the traded portfolio (2012: £1 million decrease).
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 (excluding forward foreign exchange contracts)
As at
31 March 2013
Gross
commitments:
Fixed loan notes
Committed
multi-currency
facility
Interest rate
swaps
Carried interest
payable within
one year
Trade and other
payables
Total
Group
due
within
1 year
£m
51
167
5
29
192
444
Group
due
between
1 and 2
years
£m
Group
due
between
2 and 5
years
£m
Group
due
more
than 5
years
£m
Company
due
within
1 year
£m
Group
Total
£m
Company
due
between
1 and 2
years
£m
Company
due
between
2 and 5
years
£m
Company
due
more
than 5
years
£m
Company
Total
£m
51
417
967
1,486
51
51
417
967
1,486
2
5
–
–
58
2
40
–
–
459
–
–
–
171
50
29
–
967
192
1,928
2
5
–
193
251
2
5
–
–
58
2
40
–
–
459
–
–
–
6
50
–
–
967
193
1,735
Forward foreign exchange contracts
As at
31 March 2013
Gross amount
receivable from
forward foreign
exchange
contracts
Gross amount
payable for
forward foreign
exchange
contracts
Total amount
payable
Group
due
within
1 year
£m
Group
due
between
1 and 2
years
£m
Group
due
between
2 and 5
years
£m
Group
due
more
than 5
years
£m
Company
due
within
1 year
£m
Group
Total
£m
Company
due
between
1 and 2
years
£m
Company
due
between
2 and 5
years
£m
Company
due
more
than 5
years
£m
Company
Total
£m
319
152
(321)
(160)
(2)
(8)
–
–
–
–
–
–
471
325
153
(481)
(10)
(327)
(2)
(161)
(8)
–
–
–
–
–
–
478
(488)
(10)
Notes to the financial statements 3i Group plc Annual report and accounts 2013
113
19 Financial risk management (continued)
Financial liabilities (excluding forward foreign exchange contracts)
Group
due
between
1 and 2
years
£m
Group
due
between
2 and 5
years
£m
Group
due
more
than 5
years
£m
Company
due
within
1 year
£m
Group
Total
£m
Company
due
between
1 and 2
years
£m
Company
due
between
2 and 5
years
£m
Company
due
more
than 5
years
£m
Company
Total
£m
As at
31 March 2012
Gross
commitments:
Fixed loan notes
Variable loan
notes
Committed
multi-currency
facility
Interest rate
swaps
Carried interest
payable within
one year
Trade and other
payables
Total
Group
due
within
1 year
£m
53
249
9
5
40
225
581
–
–
26
–
–
1,106
Group
due
more
than 5
years
£m
–
–
–
54
262
9
5
–
–
330
456
–
218
13
–
–
687
1,080
1,643
53
249
–
5
–
511
236
49
40
225
2,704
173
480
54
262
–
5
–
–
321
456
1,080
1,643
–
–
13
–
–
469
–
–
26
–
511
–
49
–
–
1,106
173
2,376
Forward foreign exchange contracts
As at
31 March 2012
Gross amount
receivable from
forward foreign
exchange
contracts
Gross amount
payable for
forward foreign
exchange
contracts
Total amount
payable
Group
due
within
1 year
£m
Group
due
between
1 and 2
years
£m
Group
due
between
2 and 5
years
£m
301
263
(293)
(256)
8
7
–
–
–
Company
due
within
1 year
£m
Group
Total
£m
Company
due
between
1 and 2
years
£m
Company
due
between
2 and 5
years
£m
Company
due
more
than 5
years
£m
Company
Total
£m
564
307
269
(549)
(299)
(262)
15
8
7
–
–
–
–
–
–
576
(561)
15
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, based on the closing balance sheet position over a 12 month period, would lead to an
approximate increase in total comprehensive income of £21 million (2012: £21 million increase (restated)) for the Group and £22 million (2012:
£21 million increase (restated)) for the Company. This increase arises principally from changes in interest receivable and payable on floating rate
instruments, including cash, deposits and floating rate debt, and change in fair value of the interest rate swap. In addition the Group and Company
have indirect exposure to interest rates through changes to the financial performance and valuation of portfolio companies caused by interest
rate fluctuations.
Financial statements 114
3i Group plc Annual report and accounts 2013
19 Financial risk management (continued)
(ii) Currency risk
The Group’s net assets in euro, US dollar, Swedish krona, Indian rupee, Chinese renminbi and all other currencies combined is shown in the table
below. This sensitivity analysis is performed based on the sensitivity of the Group and Company’s net assets to movements in foreign currency
exchange rates assuming a 10% movement in exchange rates against sterling. The figures presented as at 31 March 2012 have been restated
to reflect a change in the sensitivity assumption from 5% to 10%, which provides a more appropriate assessment of the sensitivity given the
market fluctuations in the year.
The Group manages currency risk on a consolidated basis. Further information on how currency risk is managed is provided in the Risk section.
As at 31 March 2013
Net assets
Sensitivity analysis
Assuming a 10% 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
As at 31 March 2013
Net assets
Sensitivity analysis
Impact on exchange movements
in the statement of comprehensive
income assuming a 10% movement
in exchange rates against sterling
Total
As at 31 March 2012
Net assets
Sensitivity analysis
Assuming a 10% 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
Group
sterling
£m
870
Group
euro
£m
871
Group
US
dollar
£m
863
Group
Swedish
krona
£m
14
Group
Indian
rupee
£m
78
Group
Chinese
renminbi
£m
62
Group
Other
£m
176
Group
Total
£m
2,934
n/a
n/a
n/a
19
43
62
69
(25)
44
35
(25)
10
–
7
7
–
5
5
15
–
15
138
5
143
Company
sterling
£m
1,642
Company
euro
£m
445
Company
US
dollar
£m
541
Company
Swedish
krona
£m
206
Company
Indian
rupee
£m
27
Company
Chinese
renminbi
£m
–
Company
Other
£m
177
Company
Total
£m
3,038
n/a
n/a
Group
sterling
£m
1,174
n/a
n/a
n/a
10
10
Group
euro
£m
643
142
(102)
40
34
34
Group
US
dollar
£m
532
46
(26)
20
25
25
Group
Swedish
krona
£m
16
32
(22)
10
2
2
Group
Indian
rupee
£m
103
–
10
10
–
–
Group
Chinese
renminbi
£m
74
18
18
Group
Other
£m
85
89
89
Group
Total
£m
2,627
–
8
8
(16)
204
24
8
(108)
96
Notes to the financial statements 3i Group plc Annual report and accounts 2013
115
19 Financial risk management (continued)
As at 31 March 2012
Net assets
Sensitivity analysis
Impact on exchange movements
in the statement of comprehensive
income assuming a 10% movement
in exchange rates against sterling
Total
Company
sterling
£m
1,097
Company
euro
£m
1,006
Company
US
dollar
£m
382
Company
Swedish
krona
£m
131
Company
Indian
rupee
£m
25
Company
Chinese
renminbi
£m
–
Company
Other
£m
78
Company
Total
£m
2,719
n/a
n/a
40
40
12
12
22
22
2
2
–
–
10
10
86
86
(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 15% change in the fair value of those investments would have the following direct impact on the statement of comprehensive
income:
Group
Company
2013
Quoted
equity
£m
65
36
2013
Unquoted
equity
£m
235
120
2013
Traded
portfolio
£m
7
–
2013
Total
£m
307
156
2012
Quoted
equity
£m
80
59
2012
Unquoted
equity
£m
209
45
2012
Traded
portfolio
£m
5
–
2012
Total
£m
294
104
The figures presented as at 31 March 2012 have been updated to reflect a change in the sensitivity assumption from 5% to 15%, which provides
a more appropriate assessment of the sensitivity given the market fluctuations in the year.
In addition, other price risk arises from carried interest balances.
20 Derivative financial instruments
Non-current assets
Forward foreign exchange contracts
Current assets
Forward foreign exchange contracts
Non-current liabilities
Forward foreign exchange contracts
Interest rate swaps
Current liabilities
Forward foreign exchange contracts
Group
2013
£m
Group
2012
£m
Company
2013
£m
Company
2012
£m
–
–
4
4
(7)
(48)
(55)
(5)
(5)
6
6
7
7
(1)
(40)
(41)
–
–
–
–
4
4
(7)
(48)
(55)
(5)
(5)
6
6
7
7
(1)
(40)
(41)
–
–
Forward foreign exchange contracts
The contracts entered into by the Group are principally denominated in the currencies of the geographic areas in which the Group operates.
The fair value of these contracts is recorded in the balance sheet and is determined by discounting future cash flows at the prevailing market
rates at the balance sheet date. No contracts are designated as hedging instruments, as defined in IAS 39, and consequently all changes in fair
value are taken to profit and loss.
The Group continues its use of derivatives to hedge exchange movements on its US dollar and euro portfolio during the year although the hedging
policy has been reviewed and the use of derivatives will reduce during the course of the next financial year.
At the balance sheet date, the notional amount of outstanding forward foreign exchange contracts was £481 million (2012: £549 million).
Financial statements 116
3i Group plc Annual report and accounts 2013
20 Derivative financial instruments (continued)
Interest rate swaps
The Group has one interest rate derivative. The fair value of this contract is recorded in the balance sheet and is determined by discounting future
cash flows at the prevailing market rates at the balance sheet date. This contract is not designated as a hedging instrument, 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 outstanding of the fixed rate to variable rate swap was £150 million.
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.
21 Loans and borrowings
Loans and borrowings are repayable as follows:
Within one year1
In the second year
In the third year
In the fourth year
In the fifth year
After five years
Principal borrowings include:
Issued under the £2,000 million note issuance programme
Fixed rate
£200 million notes (public issue)
£400 million notes (public issue)
€350 million notes (public issue)
Other
Variable rate
€500 million notes (public issue)
Other
Committed multi-currency facilities
£200 million
£50 million
£450 million1
Total loans and borrowings
1 Repaid on 18 April 2013.
Group
2013
£m
164
–
–
280
–
575
1,019
Group
2013
£m
200
375
280
–
–
–
855
–
–
164
164
1,019
Group
2012
£m
231
250
50
–
448
610
1,589
Group
2012
£m
200
375
292
35
231
250
1,383
50
–
156
206
1,589
Company
2013
£m
Company
2012
£m
–
–
–
280
–
575
855
231
250
–
–
292
610
1,383
Company
2013
£m
Company
2012
£m
200
375
280
–
–
–
855
–
–
–
–
855
200
375
292
35
231
250
1,383
–
–
–
–
1,383
Rate
Maturity
6.875%
5.750%
5.625%
EURIBOR
+0.200%
LIBOR+3.75%
LIBOR+1.50%
LIBOR+1.00%
2023
2032
2017
2012
2014
2016
2016
The £200 million multi-currency facility was cancelled in March 2013.
The Group is subject to a financial covenant on its committed multi-currency facilities, the Asset Cover Ratio, defined as total assets (including
cash) divided by loans and borrowings plus derivative financial liabilities. The Asset Cover Ratio limit is 1.45 at 31 March 2013 (2012: 1.45), the
Asset Cover Ratio at 31 March 2013 is 4.00 (2012: 2.82).
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 £1,087 million (2012: £1,581 million), determined
where applicable with reference to their published market price.
Notes to the financial statements 22 Trade and other payables
Other accruals
Amounts due to subsidiaries
23 Provisions
Opening balance
Charge for the year
Utilised in the year
Closing balance
Opening balance
(Release)/charge for the year
Utilised in the year
Closing balance
3i Group plc Annual report and accounts 2013
117
Group
2013
£m
192
–
192
Group
2013
Property
£m
4
3
–
7
Group
2012
Property
£m
7
(2)
(1)
4
Group
2012
£m
225
–
225
Company
2013
£m
30
163
193
Company
2012
£m
46
127
173
Group
2013
Redundancy
£m
6
19
(21)
4
Group
2013
Restructuring
£m
–
8
(6)
2
Group
2012
Redundancy
£m
1
11
(6)
6
Group
2012
Restructuring
£m
–
–
–
–
Group
2013
Total
£m
10
30
(27)
13
Group
2012
Total
£m
8
9
(7)
10
The provision for redundancy relates to staff reductions announced prior to 31 March 2013. More detail on the Group restructuring is discussed
in the Chief Executives statement on page 11. 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 13 years.
24 Issued capital
Issued and fully paid
Ordinary shares of 73 19/22p
Opening balance
Issued under employee share plans
Closing balance
2013
Number
2013
£m
2012
Number
971,069,281
335,846
971,405,127
717 970,650,620
418,661
971,069,281
1
718
2012
£m
717
–
717
During the year to 31 March 2013, no options to subscribe for ordinary shares were exercised (2012: nil).
25 Equity
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. Following changes to the Companies Act the
Company amended its Articles of Association at the 2012 Annual General Meeting to allow these profits to be distributable by way of a dividend.
Revenue reserve
The revenue reserve recognises all profits that are revenue in nature or have been allocated to revenue.
Financial statements 118
3i Group plc Annual report and accounts 2013
26 Own shares
Opening cost
Additions
Disposals
Closing cost
2013
£m
105
–
(1)
104
2012
£m
86
31
(12)
105
Own shares consists of shares in 3i Group plc held by the 3i Group Employee Trust. As at 31 March 2013 the Trust held 31,395,645 shares
in 3i Group plc (2012: 32,968,465 ). The market value of these shares at 31 March 2013 was £103 million (2012: £71 million). The Trust is funded
by an interest-free loan from 3i Group plc.
27 Per share information
The earnings and net assets per share attributable to the equity shareholders of the Company are based on the following data:
As at 31 March
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit/(loss) for the year attributable to equity holders of the Company
As at 31 March
Weighted average number of shares in issue
Ordinary shares
Own shares
Effect of dilutive potential ordinary shares
Share options and awards
Diluted shares
As at 31 March
Net assets per share (£)
Basic
Diluted
Net assets (£m)
Net assets attributable to equity holders of the Company
As at 31 March
Number of shares in issue
Ordinary shares
Own shares
Effect of dilutive potential ordinary shares
Share options and awards
Diluted shares
28 Dividends
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Proposed final dividend
2013
19.5
19.4
183
2012
(82.8)
(82.8)
(783)
2013
2012
971,257,376
(31,582,481)
939,674,895
970,832,567
(25,156,748)
945,675,819
3,253,409
942,928,304
2,245,376
947,921,195
2013
3.12
3.11
2012
2.80
2.79
2,934
2,627
2013
2012
971,405,127
(31,395,645)
940,009,482
971,069,281
(32,968,465)
938,100,816
3,613,318
943,622,800
2,827,365
940,928,181
2013
pence per share
2013
£m
2012
pence per share
2012
£m
5.4
2.7
8.1
5.4
51
25
76
51
2.4
2.7
5.1
5.4
23
26
49
51
Notes to the financial statements
3i Group plc Annual report and accounts 2013
119
29 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
Group
2013
£m
7
24
21
52
Group
2012
£m
9
26
27
62
Company
2013
£m
–
–
–
–
Company
2012
£m
–
–
–
–
The Group leases a number of its offices under operating leases. None of the leases include contingent rentals.
During the year to 31 March 2013 £11 million (2012: £10 million) was recognised as an expense in the statement of comprehensive income
in respect of operating leases. Income recognised in the statement of comprehensive income in respect of subleases was £nil (2012: £nil).
The total future sublease payments expected to be received under non-cancellable subleases is £7 million (2012: £3 million).
30 Commitments
Equity and loan investments
Equity and loan investments
Group
2013
due
within
1 year
£m
6
Company
2013
due
within
1 year
£m
5
Group
2013
due
between
2 and 5
years
£m
12
Company
2013
due
between
2 and 5
years
£m
8
Group
2013
due
over 5
years
£m
–
Company
2013
due
over 5
years
£m
–
Group
2013
Total
£m
18
Company
2013
Total
£m
13
Group
2012
due
within
1 year
£m
38
Company
2012
due
within
1 year
£m
38
Group
2012
due
between
2 and 5
years
£m
13
Company
2012
due
between
2 and 5
years
£m
8
Group
2012
due
over 5
years
£m
–
Company
2012
due
over 5
years
£m
–
Group
2012
Total
£m
51
Company
2012
Total
£m
46
For commitments to funds managed and advised by the Group refer to pages 31, 36 and 42.
31 Contingent liabilities
Contingent liabilities relating to guarantees available to third parties
in respect of investee companies
Group
2013
£m
4
Group
2012
£m
37
Company
2013
£m
Company
2012
£m
4
10
The Company has guaranteed the payment of principal and interest on amounts drawn down by 3i Holdings plc under the committed
multi-currency facilities. At 31 March 2013, 3i Holdings plc had drawn down £164 million (2012: £206 million) under these facilities. This has since
been repaid by 3i Holdings plc in April 2013.
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. On 4 April 2012 the Company transferred eligible assets (£150 million of ordinary shares in 3i Infrastructure
plc as defined by the agreement) to a wholly-owned subsidiary of the Group. The Company will retain all income and capital rights in relation to
the 3i Infrastructure plc shares, as eligible assets, unless the Company becomes insolvent or fails to comply with material obligations in relation
to the agreement with the Trustees, all of which are under its control. The fair value of eligible assets at 31 March 2013 was £160 million
(2012: £150 million).
3i Corporation, a 3i Group subsidiary, has provided an indemnification against an existing personal guarantee by the management of Fraser
Sullivan Investment Management on the lease of a New York office taken over by 3i DM US LLC, a subsidiary of 3i Corporation. 3i Corporation
is in the process of taking over this guarantee. The guarantee covers lost rental income the landlord would suffer if 3i DM US LLC reneged
on its lease obligations.
The current lease runs to October 2014 and the maximum exposure that 3i Corporation could be exposed to is US$900k.
At 31 March 2013, there was no material litigation outstanding against the Company or any of its subsidiary undertakings.
Financial statements 120
3i Group plc Annual report and accounts 2013
32 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
Statement of financial position
Carried interest receivable
Group
2013
£m
6
25
Group
2013
£m
10
Group
2012
£m
(24)
41
Group
2012
£m
27
Company
2013
£m
4
–
Company
2013
£m
9
Company
2012
£m
(24)
–
Company
2012
£m
27
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/(loss) over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Statement of financial position
Quoted equity investments
Unquoted equity investments
Loans and receivables
Group
2013
£m
118
299
82
Group
2013
£m
398
1,087
1,159
Group
2012
£m
(4)
(370)
122
Group
2012
£m
480
853
1,141
Company
2013
£m
42
134
44
Company
2013
£m
239
584
591
Company
2012
£m
15
(57)
37
Company
2012
£m
377
169
121
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. These transactions are made on an arm’s length basis.
Advisory arrangements
The Group acts as an adviser to 3i Infrastructure plc, which is listed on the London Stock Exchange. The following amounts have been included
in respect of this advisory relationship:
Statement of comprehensive income
Unrealised profits on the revaluation of investments
Fees receivable from external funds
Carry receivable from external funds
Dividends
Group
2013
£m
24
15
1
18
Group
2012
£m
22
17
–
18
Company
2013
£m
15
–
1
18
Company
2012
£m
22
–
–
18
Notes to the financial statements 3i Group plc Annual report and accounts 2013
121
32 Related parties (continued)
Statement of financial position
Quoted equity investments
Group
2013
£m
398
Group
2012
£m
375
Company
2013
£m
239
Company
2012
£m
375
Key management personnel
The Group’s key management personnel comprise the members of the Executive Committee, which replaced the Leadership Team in July 2012,
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 bonuses1
Increase in accrued pension
Carried interest and performance fees payable
Share based payments
Termination benefits2
1 For further detail, see Directors’ remuneration report.
2 No termination benefits were paid to Executive Directors during the year.
Statement of financial position
Bonuses and deferred share bonuses
Carried interest and performance fees payable within one year
Carried interest and performance fees payable after one year
Deferred consideration included within trade and other payables1
Group
2013
£m
6
4
–
5
2
1
Group
2013
£m
7
2
11
11
Group
2012
£m
7
3
–
6
3
1
Group
2012
£m
4
4
11
11
1 Deferred consideration relates to the acquisition of Mizuho Investment Management Limited on 15 February 2011.
Carried interest paid in the year to key management personnel was £6 million (2012: £6 million).
Subsidiaries
Transactions between the Company and its subsidiaries, which are related parties of the Company, are eliminated on consolidation.
Details of related party transactions between the Company and its subsidiaries are detailed below.
Management, administrative and secretarial arrangements
The Company has appointed 3i Investments plc, a wholly-owned subsidiary of the Company incorporated in England and Wales, as investment
manager of the Group. 3i Investments plc received a fee of £23 million (2012: £23 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 £105 million (2012: £86 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 the year to 31 March 2013
to £nil (2012: £nil).
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 (2012: £nil).
Financial statements 122
3i Group plc Annual report and accounts 2013
33 Group entities
Significant subsidiaries
Name
3i Holdings plc
Country of incorporation
England and Wales
Issued and fully paid share capital
1,000,000 ordinary shares of £1
Principal activity
Holding company
Registered office
16 Palace Street
London SW1E 5JD
England and Wales
3i International Holdings
3i plc
England and Wales
3i Debt Management Limited England and Wales
England and Wales
3i Debt Management
Investments Limited
3i Investments plc
3i Europe plc
3i Nordic plc
Gardens Pension Trustees
Limited
3i Corporation
England and Wales
England and Wales
England and Wales
England and Wales
USA
3i Debt Management US LLC USA
3i Deutschland Gesellschaft
für Industriebeteiligungen
GmbH
Germany
2,715,973 ordinary shares of £10
110,000,000 ordinary shares of £1 Services
1,000,000 ordinary shares of £1
12,000,000 ordinary shares of £1
Holding company
Investment manager
Holding company
10,000,000 ordinary shares of £1
500,000 ordinary shares of £1
500,000 ordinary shares of £1
100 ordinary shares of £1
Investment manager
Investment adviser
Investment adviser
Pension fund trustee
15,000 shares of common stock
(no par value)
Investment manager
100 shares of common stock
(no par value)
€25,564,594
Investment manager
Investment manager
Suite 9C
401 Madison Avenue
New York
NY 10017
Bockenheimer
Landstrasse 2-4 60306
Frankfurt am Main,
Germany
The list above comprises the principal subsidiary undertakings as at 31 March 2013 all of which were wholly-owned, with the exception of 3i Debt
Management Limited, which is 60% owned and is in turn the 100% owner of 3i Debt Management Investments Limited and 3i Debt Management
US LLC which is 80% owned. The Group has entered into agreements to purchase the remaining 40% of the equity of 3i Debt Management
Limited and 20% of 3i Debt Management US LLC, currently owned by management, over the next four years. 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 2013, the entire issued share capital of 3i Holdings plc, 60% of the issued share capital of 3i Debt Management Limited was held
by the Company. The entire issued share capital of all the other principal subsidiary undertakings and 80% of 3i Debt Management US LLC listed
above was held by subsidiary undertakings of the Company.
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.
Notes to the financial statements Independent auditor’s report
3i Group plc Annual report and accounts 2013
123
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 2013 which comprise the Statement of comprehensive
income, the Group and parent company Statement of changes in equity,
the Group and parent company Statement of financial position, the
Group and parent company Cash flow statements and the related notes
1 to 33. 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 auditor
As explained more fully in the Statement of Directors’ responsibilities
set out on page 67 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 and express an opinion
on 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 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 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. In addition, we read
all the financial and non-financial information in the annual report to
identify material inconsistencies with the audited financial statements.
If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
nn the financial statements give a true and fair view of the state
of the Group’s and parent company’s affairs as at 31 March 2013
and of the Group’s profit for the year then ended;
nn the Group financial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union;
nn 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
nn 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:
nn the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
nn 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:
nn 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
nn 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
nn certain disclosures of Directors’ remuneration specified by law
are not made; or
nn we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
nn the Directors’ statement, set out on page 68, in relation
to going concern;
nn the part of the Corporate Governance Statement relating to the
Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
nn certain elements of the report to the shareholders by the Board
on Directors’ remuneration.
Andrew McIntyre (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
15 May 2013
Financial statements 124
3i Group plc Annual report and accounts 2013
Portfolio and other information
Portfolio valuation – an explanation
Policy
The valuation policy is the responsibility of the Board, with additional
oversight and annual review from the Valuation’s Committee. Our policy
is to value 3i’s investment portfolio at fair value and we achieve this
by valuing investments on an appropriate basis, applying a consistent
approach across the portfolio. The policy ensures that the portfolio
valuation is compliant with the fair value guidelines under IFRS and,
in so doing, is also compliant with the guidelines issued by the
International Private Equity and Venture Capital valuation board
(the “IPEV guidelines”). The policy covers the Group’s Private Equity,
Infrastructure and Debt Management investment valuations.
Fair value is the underlying principle and is defined as “the price that
would be received to sell an asset in an orderly transaction between
market participants at the measurement date” (IPEV guidelines,
December 2012). Fair value is therefore an estimate and, as such,
determining fair value requires the use of judgement.
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
if they are “in the money”, 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.
Other factors
In applying this framework, there are additional considerations that
are factored into the valuation of some assets.
Private Equity valuation
Determining enterprise value
To arrive at the fair value of the Group’s Private Equity 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
at 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 recent
reported relevant transactions.
As unquoted investments are not traded on an active market, the
Group adjusts the estimated enterprise value by a marketability or
liquidity discount. The marketability or liquidity discount is applied
to the total enterprise value and 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 on the opposite page 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, 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 accordingly.
3 If the value attributed to a specific shareholder 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 and hence
we may choose not to recognise the shortfall.
Assets classified as “terminal”
If we believe 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.
It is important to distinguish between our investment failing and the
business failing; the failure of our investment does not always mean
that the business has failed, just that our recoverable value has
dropped significantly. This would generally result in the equity and
loan components of our investment being valued at nil. Value
movements in the period relating to investments classified as
terminal are classified as provisions in our value movement analysis.
Infrastructure valuation
The primary valuation methodology used for infrastructure
investments is the discounted cash flow method (“DCF”). Fair value
is estimated by deriving the present value of the investment using
reasonable assumptions of expected future cash flows and the
terminal value and date, and the appropriate risk-adjusted discount
rate that quantifies the risk inherent to the investment. The discount
rate is estimated with reference to the market risk-free rate, a risk
adjusted premium and information specific to the investment or
market sector.
Debt Management valuation
The Group’s Debt Management business line typically invests in
traded debt instruments and the subordinated notes that it is required
to hold in the debt funds which it manages. The traded debt
instruments and the subordinated notes are valued using an average
of broker quotes available, reflecting the best available market
observable data.
Where broker quotes are unavailable or deemed unreliable for
subordinated notes, in the absence of an orderly market or where
transactions take place in a market where the motivations of buyers
and sellers is not fully transparent, then the fair value of the
instrument is determined with reference to the performance of the
underlying portfolio of the fund, typically with reference to the original
arranging bank’s models.
Methodology
Earnings
(Private Equity)
Description
Most commonly used
Private Equity valuation
methodology
Used for investments
which are profitable
and for which we can
determine a set of listed
companies and precedent
transactions, where
relevant, with similar
characteristics
Quoted
(Infrastructure/
Private Equity)
Imminent sale
(Infrastructure/
Private Equity)
Fund
(Infrastructure/
Private Equity/
Debt Management)
Specific industry
metrics
(Private Equity)
Used for investments
in listed companies
Used where an asset
is in a sales process,
a price has been agreed
but the transaction has
not yet settled
Used for investments in
unlisted funds
Used for investments in
industries which have well
defined metrics as bases
for valuation – eg book
value for insurance
underwriters, or regulated
asset bases for utilities
Discounted
Cash Flow
(Infrastructure/
Private Equity)
Appropriate for businesses
with long-term stable cash
flows, typically in
infrastructure
Broker quotes
(Debt Management/
Infrastructure)
Other
(Private Equity)
Used to value traded debt
instruments
Used where elements
of a business are valued
on different bases
Inputs
Earnings multiples are applied to the earnings of
the company to determine the enterprise value
Earnings
Reported earnings adjusted for non-recurring
items, such as restructuring expenses, for
significant corporate actions and, in exceptional
cases, run-rate adjustments to arrive at
maintainable earnings
Most common measure is earnings before interest,
tax, depreciation and amortisation (“EBITDA”)
Earnings used are usually the management
accounts for the 12 months to the quarter end
preceding the reporting period, 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 or relevant market transaction
multiples
We select companies in the same industry and,
where possible, with a similar business model
and profile in terms of size, products, services and
customers, growth rates and geographic focus
We adjust for changes in the relative performance
in the set of comparables
Closing bid price at balance sheet date
Contracted proceeds for the transaction, or best
estimate of the expected proceeds
Net asset value reported by the fund manager
We create a set of comparable listed companies
and derive the implied values of the relevant metric
We track and adjust this metric for relative
performance, as in the case of earnings multiples
Comparable companies are selected using
the same criteria as described for the
earnings methodology
Long-term cash flows are discounted at a rate
which is benchmarked against market data, where
possible, or adjusted from the rate at the initial
investment based on changes in the risk profile
of the investment
Broker quotes obtained from banks which trade
the specific instruments concerned
3i Group plc Annual report and accounts 2013
125
% of portfolio
valued on this basis
67%
Adjustments
A marketability or liquidity
discount is applied to the
enterprise value, typically
between 5% and 15%,
using factors such as
our alignment with
management and other
investors and our
investment rights
in the deal structure
No adjustments or
discounts applied
A discount of typically 2.5%
is applied to reflect any
uncertain adjustments
to expected proceeds
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
No discount is applied
13%
2%
1%
5%
7%
2%
3%
Values of separate elements prepared on one
of the methodologies listed above
Discounts applied to
the separate elements,
as above
For a small proportion of our smaller investments (less than 1% of the portfolio value), the valuation is determined by a more mechanical
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.
Portfolio and other information 126
3i Group plc Annual report and accounts 2013
Fifty large investments
The list below provides information on 50 of our largest investments in respect of the Group’s holding, excluding any managed or advised external funds.
These do not include seven investments that have been excluded for commercial reasons.
Investment
3i Infrastructure plc
Action
ACR
Element Materials Technology
Foster + Partners1
Hilite International
Quintiles
Mayborn
Mémora
Civica
Description of business
Quoted investment company, investing in infrastructure
Non-food discount retailer
Pan-Asian non-life reinsurance
Testing and inspection
Architectural services
Fluid control component supplier
Clinical research outsourcing solutions
Manufacturer and distributor of baby products
Funeral service provider
Public sector IT and services
AES Engineering
Eltel Networks
Tato2
Amor
Phibro Animal Health Corporation
Trescal
Palace Street I
Hobbs
OneMed Group
Hyperion Insurance Group
Manufacturer of mechanical seals and support systems
Infrastructure services for electricity and telecoms networks
Manufacture and sale of speciality chemicals
Distributor and retailer of affordable jewellery
Animal healthcare
Calibration services
Debt management (Credit Opportunities Fund)
Retailer of women’s clothing and footwear
Distributor of consumable medical products, devices and technology
Specialist insurance intermediary
Business line
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Debt Management
Private Equity
Private Equity
Private Equity
Geka
Lekolar
Etanco
LHI Technology
Krishnapatnam Port
Inspecta
Blue Interactive
BVG India
Refresco
Azelis
TouchTunes Interactive Networks
Navayuga
Polyconcept
Agent Provocateur
SLR Management
MKM Building Supplies
Loxam
Consultim Finance
John Hardy
Soya Concept
UFO Moviez
KMC Roads
Adani Power
Environmental Scientifics Group (ESG)
GVK Energy
Joyon Southside
Óticas Carol
Indiareit Offshore Fund
Gain Capital
GO Outdoors
Manufacturer of brushes, applicators and packaging systems for the cosmetics industry
Distributor of pedagogical products and educational materials
Designer, manufacturer and distributor of fasteners and fixing systems
Medical cable assemblies
India port
Supplier of Testing, Inspection and Certification (TIC) services
Cable TV and broadband provider
Business services
Manufacturer of private label juices and soft drinks
Distributor of specialty chemicals, polymers and related services
Out of home interactive media and entertainment network
Engineering and construction
Supplier of promotional products
Women’s lingerie and associated products
Specialist environmental consultancy
Builders’ merchant
Professional equipment rental
Wholesaler of rental real estate
Designer jewellery business
Fashion design company
Provider of digital cinema services
Road BOT project construction
Power generation
Testing, inspection and compliance
Power generation
Real estate
Designer sunglasses business
Indian real estate fund
Retail online forex trading
Retailer of outdoor equipment, tents, clothing and footwear
Private Equity
Private Equity
Private Equity
Private Equity
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Infrastructure
Infrastructure
Private Equity
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
1 The residual cost of this investment cannot be disclosed per a confidentiality agreement in place at investment.
2 Previously disclosed as non-core.
3 Managed in the UK, but has investments in Europe, North America and the UK.
First
invested in
Proportion
of equity
shares held
Residual cost
March 2012
Residual cost
March 2013
Valuation
March 2012
Valuation
March 2013
Geography
UK
Benelux
Singapore
Benelux
UK
Germany
UK
Spain
UK
North America
Finland
UK
UK
Germany
North America
France
UK3
UK
UK
Sweden
North America
Germany
Sweden
France
China
India
Finland
Brazil
India
Benelux
Benelux
India
Benelux
UK
UK
UK
France
France
China
Denmark
India
India
India
UK
India
China
Brazil
India
UK
North America
2007
2011
2006
2010
2007
2011
2008
2006
2008
2008
1996
2007
1989
2010
2009
2010
2011
2004
2011
2008
2012
2007
2011
2008
2009
2007
2012
2011
2010
2007
2011
2006
2005
2007
2008
1998
2011
2007
2007
2007
2007
2011
2007
2007
2010
2007
2013
2006
2008
2011
Industry metric
Valuation
basis
Quoted
Earnings
Earnings
Other
Earnings
Earnings
Earnings
Earnings
Earnings
46% of
total portfolio
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Broker quotes
Imminent sale
63% of
total portfolio
Industry metric
DCF/Earnings
Earnings
Earnings
Earnings
Earnings
DCF
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
DCF
Quoted
Earnings
DCF
DCF
Earnings
Fund
Quoted
Earnings
84% of
total portfolio
%
34.1%
21.1%
23.9%
42.8%
40.0%
25.4%
4.9%
44.7%
34.7%
40.2%
39.5%
42.6%
26.1%
42.1%
29.9%
23.5%
100.0%
47.0%
30.5%
19.1%
45.7%
33.3%
30.3%
37.5%
3.0%
39.2%
44.0%
19.6%
10.7%
47.5%
9.4%
10.0%
13.0%
34.5%
25.9%
30.3%
4.9%
20.0%
23.5%
45.0%
27.6%
6.9%
1.6%
38.0%
2.8%
49.9%
39.0%
20.0%
14.0%
16.5%
1,576
n/a
£m
302
115
105
63
99
74
103
116
92
n/a
30
85
2
46
89
31
36
74
93
21
30
72
16
24
51
21
46
51
18
23
43
49
23
15
21
24
15
13
11
15
26
32
23
8
n/a
13
24
17
1,069
1,049
1,286
1,500
113
21
1,604
1,774
2,066
£m
302
107
105
70
54
74
87
128
93
30
87
2
49
89
35
50
79
57
33
74
16
24
63
29
21
46
66
18
23
48
49
23
16
21
12
15
13
11
15
26
40
23
8
14
13
23
17
£m
375
143
118
90
112
115
86
105
74
68
n/a
n/a
63
68
59
55
41
38
35
49
46
34
36
67
30
31
13
25
17
56
22
61
29
13
23
21
23
20
9
23
14
16
28
21
22
20
n/a
12
13
13
£m
398
280
121
112
108
107
103
97
90
84
79
74
63
57
57
51
48
47
47
43
39
36
34
32
32
31
29
27
27
27
27
26
24
24
23
23
21
20
20
20
19
17
17
16
15
15
14
12
12
12
2,299
2,460
2,452
2,757
The list below provides information on 50 of our largest investments in respect of the Group’s holding, excluding any managed or advised external funds.
These do not include seven investments that have been excluded for commercial reasons.
Investment
3i Infrastructure plc
Action
ACR
Element Materials Technology
Foster + Partners1
Hilite International
Description of business
Quoted investment company, investing in infrastructure
Non-food discount retailer
Pan-Asian non-life reinsurance
Testing and inspection
Architectural services
Fluid control component supplier
Clinical research outsourcing solutions
Manufacturer and distributor of baby products
Funeral service provider
Public sector IT and services
Manufacturer of mechanical seals and support systems
Infrastructure services for electricity and telecoms networks
Manufacture and sale of speciality chemicals
Distributor and retailer of affordable jewellery
Phibro Animal Health Corporation
Animal healthcare
Calibration services
Hyperion Insurance Group
Specialist insurance intermediary
Debt management (Credit Opportunities Fund)
Retailer of women’s clothing and footwear
Distributor of consumable medical products, devices and technology
Manufacturer of brushes, applicators and packaging systems for the cosmetics industry
Distributor of pedagogical products and educational materials
Designer, manufacturer and distributor of fasteners and fixing systems
Medical cable assemblies
India port
Cable TV and broadband provider
Business services
Supplier of Testing, Inspection and Certification (TIC) services
Manufacturer of private label juices and soft drinks
Distributor of specialty chemicals, polymers and related services
TouchTunes Interactive Networks
Out of home interactive media and entertainment network
Engineering and construction
Supplier of promotional products
Women’s lingerie and associated products
Specialist environmental consultancy
Builders’ merchant
Professional equipment rental
Wholesaler of rental real estate
Designer jewellery business
Fashion design company
Provider of digital cinema services
Road BOT project construction
Power generation
Power generation
Real estate
Designer sunglasses business
Indian real estate fund
Retail online forex trading
Retailer of outdoor equipment, tents, clothing and footwear
Environmental Scientifics Group (ESG)
Testing, inspection and compliance
1 The residual cost of this investment cannot be disclosed per a confidentiality agreement in place at investment.
2 Previously disclosed as non-core.
3 Managed in the UK, but has investments in Europe, North America and the UK.
Quintiles
Mayborn
Mémora
Civica
AES Engineering
Eltel Networks
Tato2
Amor
Trescal
Palace Street I
Hobbs
OneMed Group
Geka
Lekolar
Etanco
LHI Technology
Krishnapatnam Port
Inspecta
Blue Interactive
BVG India
Refresco
Azelis
Navayuga
Polyconcept
Agent Provocateur
SLR Management
MKM Building Supplies
Loxam
Consultim Finance
John Hardy
Soya Concept
UFO Moviez
KMC Roads
Adani Power
GVK Energy
Joyon Southside
Óticas Carol
Indiareit Offshore Fund
Gain Capital
GO Outdoors
Business line
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Debt Management
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Infrastructure
Infrastructure
Private Equity
Infrastructure
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
3i Group plc Annual report and accounts 2013
127
Geography
UK
Benelux
Singapore
Benelux
UK
Germany
North America
UK
Spain
UK
UK
Finland
UK
Germany
North America
France
UK3
UK
Sweden
UK
Germany
Sweden
France
China
India
Finland
Brazil
India
Benelux
Benelux
North America
India
Benelux
UK
UK
UK
France
France
China
Denmark
India
India
India
UK
India
China
Brazil
India
North America
UK
First
invested in
2007
2011
2006
2010
2007
2011
2008
2006
2008
2008
1996
2007
1989
2010
2009
2010
2011
2004
2011
2008
2012
2007
2011
2008
2009
2007
2012
2011
2010
2007
2011
2006
2005
2007
2008
1998
2011
2007
2007
2007
2007
2011
2007
2007
2010
2007
2013
2006
2008
2011
Valuation
basis
Quoted
Earnings
Industry metric
Earnings
Other
Earnings
Earnings
Earnings
Earnings
Earnings
46% of
total portfolio
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Broker quotes
Earnings
Earnings
Imminent sale
63% of
total portfolio
Earnings
Earnings
Earnings
Earnings
DCF
Earnings
Industry metric
Earnings
Earnings
Earnings
Earnings
DCF/Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
DCF
Quoted
Earnings
DCF
DCF
Earnings
Fund
Quoted
Earnings
84% of
total portfolio
Proportion
of equity
shares held
%
34.1%
21.1%
23.9%
42.8%
40.0%
25.4%
4.9%
44.7%
34.7%
40.2%
39.5%
42.6%
26.1%
42.1%
29.9%
23.5%
100.0%
47.0%
30.5%
19.1%
45.7%
33.3%
30.3%
37.5%
3.0%
39.2%
44.0%
19.6%
10.7%
47.5%
9.4%
10.0%
13.0%
34.5%
25.9%
30.3%
4.9%
20.0%
23.5%
45.0%
27.6%
6.9%
1.6%
38.0%
2.8%
49.9%
39.0%
20.0%
14.0%
16.5%
Residual cost
March 2012
£m
302
115
105
63
Residual cost
March 2013
£m
302
107
105
70
99
74
103
116
92
1,069
30
85
2
46
89
31
36
74
93
21
1,576
n/a
30
72
16
24
51
n/a
21
46
51
18
23
43
49
23
15
21
24
15
13
11
15
26
32
23
8
n/a
13
24
17
2,299
54
74
87
128
93
1,049
30
87
2
49
89
35
50
79
113
21
1,604
57
33
74
16
24
63
29
21
46
66
18
23
48
49
23
16
21
12
15
13
11
15
26
40
23
8
14
13
23
17
2,460
Valuation
March 2012
£m
375
143
118
90
112
115
86
105
74
68
1,286
Valuation
March 2013
£m
398
280
121
112
108
107
103
97
90
84
1,500
63
68
59
55
41
38
35
49
46
34
1,774
n/a
36
67
30
31
13
n/a
25
17
56
22
61
29
13
23
21
23
20
9
23
14
16
28
21
22
20
n/a
12
13
13
2,452
79
74
63
57
57
51
48
47
47
43
2,066
39
36
34
32
32
31
29
27
27
27
27
26
24
24
23
23
21
20
20
20
19
17
17
16
15
15
14
12
12
12
2,757
Portfolio and other information 128
3i Group plc Annual report and accounts 2013
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
19 June 2013
21 June 2013
18 July 2013
26 July 2013
November 2013
January 2014
* The 2013 Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 18 July 2013 at 11.00am. For
further details please see the Notice of Annual General Meeting 2013.
Information on ordinary shares
Shareholder profile: Location of investors at 31 March 2013
UK
North America
Continental Europe
Other international
Share price
Share price at 31 March 2013
High during the year (18 March 2013)
Low during the year (24 May 2012)
Dividends paid in the year to 31 March 2013
2011/2012 Final dividend, paid 20 July 2012
2012/2013 Interim dividend, paid 9 January 2013
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
76.9%
12.9%
7.5%
2.7%
316.0p
324.6p
168.8p
5.4p
2.7p
%
0.78
1.73
1.91
10.77
33.90
50.91
100.00
Number of holdings
Individuals
15,510
5,911
194
23
0
0
21,638
Number of holdings
Corporate Bodies
601
1,115
399
279
117
20
2,531
Balance as at
31 March 2013
7,540,020
16,847,417
18,583,797
104,634,179
329,288,913
494,510,801
971,405,127
The table above provides details of the number of shareholdings within each of the bands stated in the register of members at 31 March 2013.
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:
nn always ensure the firm is on the Financial Conduct Authority (“FCA”)
Register and is allowed to give financial advice before handing over
your money. You can check at www.fca.org.uk/register;
nn 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 FCA Register. This is important as there have been
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;
nn check the FCA’s list of known unauthorised overseas firms.
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 FCA Register;
nn if you have any doubts, call the Financial Conduct Authority
Consumer Helpline on 0800 111 6768. If you deal with an
unauthorised firm, you will not be eligible to receive payment
under the Financial Services Compensation Scheme.
Annual and reports and Half-yearly reports online
If you would prefer to receive shareholder communications
electronically in future, including 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 2013 half-yearly report will be available online only.
Please register to ensure you are notified when it becomes available.
More general information on electronic communications is available
on our website at
www.3i.com/investor-relations/shareholder-information
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:
Investor relations
3i Group plc
16 Palace Street
London SW1E 5JD
Telephone +44 (0)20 7975 3131
email IRTeam@3i.com
or visit the Investor relations section of our website at
www.3i.com/investor-relations, for full up-to-date investor relations
information, including the latest share price, 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.
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its portfolio and the latest news, please visit:
www.3i.com
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Directors’ report
Pages 2 to 75 comprise the Directors’ report and pages
76 to 85 comprise the Directors’ remuneration report,
both of which are presented in accordance with English
company law. The liabilities of Directors in connection
with these reports shall be subject to the limitations and
restrictions provided by such law. These reports are
intended to provide information to shareholders and are
not designed to be relied upon by any other party or for
any other purpose.
Disclaimer
This Annual report and accounts may contain state-
ments about the future, including certain statements
about the future outlook for 3i Group plc and its
subsidiaries (“3i”). These are not guarantees of future
performance and will not be updated. Although we
believe our expectations are based on reasonable
assumptions, any statements about the future outlook
may be influenced by factors that could cause actual
outcomes and results to be materially different.
3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7975 3131
M727913 May 2013
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Website www.3i.com
3i Group plc
Annual report and
accounts 2013
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Private Equity
Infrastructure
Debt Management