Annual report and
accounts 2015
3i Group plc
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Disclaimer
The Annual report and accounts have been prepared solely to provide information to shareholders. They should
not be relied on by any other party or for any other purpose.
The Strategic report on pages 4 to 45, the Directors’ report on pages 46 to 64, and the Directors’ remuneration
report on pages 72 to 81 have been drawn up and presented in accordance with and in reliance upon English
company law and the liabilities of the Directors in connection with those reports shall be subject to the limitations
and restrictions provided by that law.
This Annual report may contain statements 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
02 Performance highlights
03 Chairman’s statement
STRATEGIC REPORT
05 Chief Executive’s review
10 Our Business model
11 What we do
12 Key Performance Indicators
14 Business review
Business lines
15 Private Equity
18 Infrastructure
19 Debt Management
21 Financial review
30
31
Investment basis statement of
comprehensive income
Investment basis statement of
financial position
32
Investment basis cash flow statement
33 Reconciliation of Investment basis to IFRS
38 Key risks and mitigations
44 Corporate responsibility
CORPORATE GOVERNANCE
Board of Directors and Executive Committee
47 Governance – Chairman’s introduction
48
50 Board and Committees
53
Statutory and corporate governance
information
57 Corporate governance statement
65
Audit and Compliance
Committee report
69 Valuations Committee report
72 Directors’ remuneration report
AUDITED FINANCIAL
STATEMENTS
83
Consolidated statement of
comprehensive income
84
Consolidated statement of financial position
85 Consolidated statement of changes in equity
86 Consolidated cash flow statement
87 Company statement of financial position
88
Company statement of changes in equity
89 Company cash flow statement
Significant accounting policies
90
93 Notes to the accounts
129 Independent Auditor’s report
PORTFOLIO AND OTHER
INFORMATION
134 25 large investments
136 Portfolio valuation – an explanation
138 Directors’ remuneration policy
145 Information for shareholders
147 Glossary
FOR DEFINITIONS OF OUR FINANCIAL TERMS, USED THROUGHOUT
THIS REPORT, PLEASE SEE OUR GLOSSARY ON PAGES 147 AND 148
The financial data presented in the Overview and Strategic report is taken from the Investment basis financial
statements. The Investment basis is described on page 33 and the differences from, and the reconciliation to,
the IFRS Audited financial statements are detailed on pages 33 to 37.
01
OVERVIEW3i Group Annual report and accounts 2015
Performance highlights
FOR THE YEAR TO 31 MARCH 2015
The financial data presented in the Overview and Strategic
report is taken from the Investment basis financial
statements. The Investment basis is described on page 33
and the differences from, and the reconciliation to, the IFRS
Audited financial statements are detailed on pages 33 to 37.
The key measures of total return and NAV are equal under
both bases.
TOTAL RETURN
ON EQUITY
20%
ASSETS UNDER
MANAGEMENT (“AUM”)
£13.5bn
OPERATING CASH
PROFIT
£28m
The strong performance across all three
businesses generated an increase in NAV
per share to 396p (2014: 348p).
AUM increased by 4% to £13.5bn
(2014: £12.9bn) as the ongoing fundraising
momentum in Debt Management offset the net
divestment seen in Private Equity.
Cash income grew by 20% to £158m, due to
the 12% growth in Debt Management AUM,
improved portfolio income cash generation in
Private Equity and dividend proceeds from 3i
Infrastructure plc (“3iN”).
Demonstrating the improved operational
efficiency in the business, income exceeded
costs by £28m (2014: £5m).
PRIVATE EQUITY
INFRASTRUCTURE
DEBT MANAGEMENT
REALISATION PROCEEDS
GROSS INVESTMENT RETURN
AUM RAISED
£831m
CASH INVESTED
£369m
20%
CASH INCOME
£47m
£2.4bn
FEE INCOME
£34m
Good investment returns of 24% were driven
by strong earnings growth and realisations
which generated a 27% uplift over opening
value (excluding refinancings).
We continued to invest selectively, focused
on our core sectors and expertise, and
committed £369m, of which £328m was
in four new investments.
Gross investment return of £96m benefited
from a total shareholder return of 25%
delivered by 3iN, which was driven by the sale
of Eversholt Rail and value uplifts across the
Core infrastructure portfolio.
AUM growth and strong investment
performance led to a 4% increase in advisory
fee and dividend cash income to £47m.
Active fundraising with six new CLOs closed,
a €250m first close on our European Middle-
Market Loan Fund and a further $78m of
AUM added to our US Senior Loan fund.
Fee income improved by 6% to £34m
(2014: £32m) following the 12% growth
in AUM.
READ MORE
about our financial performance
in the Financial review on page 21
02
OVERVIEW3i Group Annual report and accounts 2015 Excellent progress and strong results
CHAIRMAN’S STATEMENT
“ 2015 has been another good
year and 3i continues to make
excellent progress against its
strategic plan.”
Sir Adrian Montague
Chairman
When I joined 3i in 2010, I believed that it
was fundamentally a strong business
which had not recovered purpose and
direction since the financial crisis. The
appointment of Simon Borrows as Chief
Executive in 2012, and the subsequent
strategic review, resulted in a clear set
of objectives designed to enable 3i to
generate long-term value through the
economic cycle. 3i has focused back to its
core sectors and geographies, underpinned
by a strengthened investment process
and by a disciplined approach to cost
management. I am pleased to report that
Simon and his management team have
made excellent progress against these
objectives and the 3i of today is a more
resilient and high performing operation.
PERFORMANCE
In 2015 all three businesses contributed to the good
performance. Against an unstable macro-economic
environment and geo-political landscape we generated
strong realisations of £841 million (2014: £677 million).
We added four new companies to our Private Equity
portfolio with total cash invested of £369 million
(2014: £276 million). With significant levels of capital
searching for good investment and returns as well as
the continuation of central bank measures such as
quantitative easing, we have invested selectively. We have
focused on companies where our sector expertise and
international experience can generate enhanced returns.
Our Infrastructure business performed well and our
holding in 3i Infrastructure plc delivered a 25% total
shareholder return, its strongest annual return since
its IPO in 2007. Debt Management benefited from a very
good year of fund raising in its CLO funds and, in an
important diversification, launched a €250 million
European Middle Market Loan fund.
20.0p
per share
of total
dividend
READ MORE
about our
performance
in the financial
review on page 21
DIVIDEND
The Board has declared a total dividend of 20.0p (2014:
20.0p) for 2015. This is made up of an 8.1p base dividend
and an 11.9p additional dividend, making a total of 20.0p for
the year after taking into account the interim dividend paid
in January 2015. Due to net divestment in the year and our
robust balance sheet, we have proposed an additional
dividend above the top end of our 15% – 20% distribution
range, equivalent to 23% of gross realised proceeds.
Subject to shareholder approval, we will pay the final
dividend of 14.0p (2014: 13.3p) in July 2015.
OUTLOOK
We remain cautious about the current environment.
Many financial markets are at or near all time highs and
currencies are subject to increased volatility. We are
focused on enhancing the value of our existing investment
portfolio as well as pursuing investment opportunities if
the strategic and financial case is strong.
BOARD CHANGES
I will be stepping down as Chairman after the AGM in June
2015. The Board has announced that Simon Thompson
will succeed me as Chairman. Simon is an experienced
FTSE 100 chairman and non-executive director. He joined
the Board in April and will take over from me in June. It
has been a great privilege to serve in the role of Chairman
over the last five years as 3i has progressively recovered
its poise, and I am confident that, in its 70th year, I am
leaving the Group in very capable hands.
I wish 3i, its employees, investors and all of its
stakeholders every success for the future.
Sir Adrian Montague
Chairman
03
OVERVIEW3i Group Annual report and accounts 2015
Strategic
report
05 Chief Executive’s review
10 Our Business model
11 What we do
12 Key Performance Indicators
14 Business review
Business lines
15 Private Equity
18 Infrastructure
19 Debt Management
21 Financial review
30 Investment basis statement
of comprehensive income
31 Investment basis statement
of financial position
32 Investment basis
cash flow statement
33 Reconciliation of Investment
basis to IFRS
38 Key risks and mitigations
44 Corporate responsibility
04
3i Group Annual report and accounts 2015
Delivering our strategic plan
CHIEF EXECUTIVE’S REVIEW
“ This has been a strong year for 3i with all
three of our businesses performing well.
We have reshaped our business model
and our shareholders are benefiting from
attractive returns and dividends. We look
forward with confidence.”
Simon Borrows
Chief Executive
INTRODUCTION
HOW WE PERFORMED IN THE YEAR
We are now at the end of our three-year
restructuring and have met or exceeded
all of the priorities set out in our scorecard.
Since 2012, we have made considerable
progress by streamlining and refocusing
3i into a more resilient business capable
of generating long-term value through the
economic cycle. This is reflected in this
year’s strong performance and good
progress against all of the Group’s KPIs
over the last three years.
This year’s financial results build on the momentum
established last year. 3i generated a total shareholder
return of 27%, compared to 6% for the FTSE 100. All three
of our businesses performed well and contributed to the
Group’s total return on shareholders’ funds of 20% (2014:
16%) and 14% increase in NAV per share to 396p (31 March
2014: 348p). The strong performance was achieved
despite significant foreign exchange headwinds, with the
euro alone depreciating by 13% against sterling, reducing
the NAV per share by 12 pence.
ANNUAL
RESULTS
WEBCAST
3i.com/investor-
relations/results-
reports/results-
presentations
Private Equity had another very successful year,
generating a gross investment return of £719 million,
or 24% on opening value (2014: £647 million, 24%).
This reflected strong earnings growth and a flow of
realisations ahead of our expectations at this time
last year. Earnings growth of 19% was driven by our
larger assets such as Action, Element and Basic-Fit,
and a significant reduction in investments with
declining earnings.
During the year, our Private Equity team generated
total proceeds of £831 million (2014: £669 million) from
realisations. These included £155 million returned as a
result of refinancings (2014: £59 million). Favourable debt
markets have allowed us to enhance capital structures
and introduce higher leverage in a number of our best
performing and highly cash generative assets. Despite
this, average debt to EBITDA within the portfolio remained
stable at 3.1x (2014: 3.1x). Proceeds from refinancings
are generally returned as a repayment of shareholder
loans, and do not usually generate a profit over value.
Excluding refinancings, we realised profits of £144 million
over opening valuation, an overall uplift of 27%, from a
combination of asset sales and IPOs (2014: £190 million,
45%), including sales of Hilite at 2.1x and Vedici at 2.0x
original cost.
In particular, the sustained, constructive market backdrop
for realisations has meant that we have made very good
progress in selling some of our smaller, more challenged
investments and the number of portfolio companies has
reduced to 65 at 31 March 2015 (31 March 2014: 81).
The sale of Azelis, signed in February 2015 and completed
in May 2015, is an excellent example of the potential for
recovery, when we are able to focus on more intensive
asset management. Over the last few years we have
changed the Chairman and management at Azelis
and agreed a new plan and financial structure
which has underpinned its successful recovery and exit.
We recognised £40 million of value growth in the year
against an opening value of £26 million at 31 March 2014.
05
STRATEGIC REPORT3i Group Annual report and accounts 2015
Chief Executive’s review continued
In strong equity markets, we have also had the opportunity
to IPO investments such as Eltel, Refresco and Phibro.
We generated £273 million in proceeds from quoted equity
sales at, or post, IPO. Strong performance from our quoted
portfolio, including prior listings such as Quintiles, has
meant that the Private Equity quoted portfolio generated
£177 million in value growth and realised profits of 49%
on the opening value.
Notwithstanding the strong overall performance, our
portfolio companies are not immune to wider macro
issues and we had to reduce the value of one investment
materially during the course of the year. Inspecta, which
had been impacted by the economic environment in
Finland and Russia, declined in value by £32 million during
the year. We announced the sale of Inspecta in April 2015
and expect it to complete in the first half of FY2016,
with proceeds in line with our 31 March 2015 valuation.
Although we have continued to be net divestors, we have
maintained the investment momentum started in FY2014.
Our approach remains selective, as the availability of
competing capital can quickly move prices outside our
target returns. However, our sector and market expertise
has continued to deliver attractive opportunities during the
year. We invested in two US headquartered businesses,
Q Holding and Dynatect, and a UK business, Aspen Pumps,
which have ambitious plans to grow internationally.
Together with our Eurofund V investors, we also invested
in Christ, a German-based jewellery retailer, alongside our
existing investment in Amor. During the year our portfolio
companies made over 20 acquisitions, representing a
combined enterprise value of over €400 million, funded
almost entirely out of the companies’ own finances. These
acquisitions are an important part of building the strategic
value of our portfolio companies, including delivering their
international growth potential. In total we made cash
investments of £457 million, of which £369 million was
3i’s proprietary capital (2014: £372 million, £276 million).
We continue to review a wide number of opportunities, but
many are not pursued if we judge that the sale price is
likely to move beyond where we see value.
Our longer term hold investments now account for
approximately 50% of our portfolio value, and their strong
performance, together with realisations, has led to
material improvement in Eurofund V and the Growth
Capital Fund, with multiples of 1.4x and 1.7x of invested
capital respectively (31 March 2014: 1.1x, 1.3x respectively).
Infrastructure had a good year as gross investment return
increased to £96 million, or 20% (2014: £2 million, 0%). The
European portfolio continued to perform well and the
dividends and advisory fees from 3iN generated a good
level of cash income for the Group.
3iN’s total shareholder return was 25% in the year,
following the highly successful sale of its holding in
Eversholt Rail. This transaction demonstrates how
competitive the environment for large European Core
infrastructure investments has become, as sovereign
wealth and pension funds increase their investment
appetite in the face of prolonged low interest rates. The
team achieved a good level of new investment for 3iN,
with £114 million of total investment commitments in the
year (2014: £80 million). The Infrastructure team used its
expertise gained through an existing investment in
Oystercatcher and its strong relationship with Oiltanking
to invest €107 million in two oil storage facilities in the
Netherlands and Belgium. The team also completed five
PPP deals, committing a total of £37 million.
3iN has a portfolio of high quality Core infrastructure
assets and this is reflected in significant increases in value
in addition to Eversholt Rail. Core infrastructure accounted
for 83% of 3iN’s total investments at 31 March 2015.
3i has recognised £30 million of advisory and
management fees (2014: £24 million) and £45 million of
performance fees during the period (2014: nil). £35 million
of these fees was accrued as carry payable to the
investment team (2014: nil). This carry will be paid out to
the team over a number of years.
The more favourable credit markets ensured that
Debt Management had a good year of fundraising,
launching six CLOs in Europe and North America and
increasing AUM by 12% to £7.2 billion (31 March 2014:
£6.5 billion). The team also launched a European Middle
Market Loan Fund with an investment mandate that
permits a wider range of investments, typically investing in
smaller businesses than CLOs. In the US, our Senior Loan
Fund passed the $100 million milestone which has created
more investor interest in the product. Both initiatives were
important steps in diversifying the business beyond CLOs
and generating additional fee income. In total, Debt
Management recognised fee income of £34 million in
FY2015 (2014: £32 million), as new fundraising offset the
effect of the run-off of older funds.
The CLO markets are subject to increased regulatory
change. Regulators in Europe have mandated that CLO
managers hold a minimum amount of capital investments
in their products. The US market has introduced a similar
practice although the corresponding legislation does not
come into force until December 2016. 3i is well placed to
comply with these changes given its proprietary capital.
3i supported the development of the business and invested
£79 million in new CLOs in the year (2014: £40 million).
These equity investments generate a good cash yield
which, together with the fee income, is an important
component of our operating cash profit.
06
STRATEGIC REPORT3i Group Annual report and accounts 2015 In 2012 we were operating with a substantial annual
operating cash loss and, as this was diluting capital
returns to investors, we set a KPI to achieve an
operating cash profit. We undertook a significant
transformation programme, focusing on recurring fee
income and operational efficiencies and as a result, in
FY2014, we recorded a first annual profit of £5 million.
This measure improved significantly to £28 million
in FY2015. All of the businesses have contributed to
increased cash income with additional fundraising in
Debt Management and strong portfolio income from
Private Equity and Infrastructure. Operating expenses
also declined in FY2015 to £131 million or 1.0% of AUM
(2014: £136 million, 1.0%). These costs included £12 million
relating to acquisitions made since 2012 and £1 million
of restructuring costs (2014: £6 million, £9 million).
To reflect increased activity levels, we have recruited
to support origination in both Private Equity and
Infrastructure and fundraising in Debt Management.
The Group has also now launched a Graduate Programme
and will welcome its first graduates in the Autumn.
Looking forward, further cost efficiencies are not expected
and expenses will increase marginally as the businesses
continue to grow.
Maintaining the profitability of the combined fund
management platform is a key component of operating
cash profit. This measure improved in the year, as Debt
Management’s fundraising offset the expected decline in
Private Equity fees as a result of its strong realisations.
Actual fund management profit grew strongly to
£26 million, with a margin of 21% (2014: £19 million, 15%).
Underlying profit, after restructuring and acquisition costs,
was stable at £33 million, with a margin of 26% (2014:
£33 million, 26%).
Reflecting our confidence in the future growth and cash
generation capacity of the business, we have announced a
final dividend ahead of our established guidance. We
propose to pay a total dividend for the year of 20 pence per
share (2014: 20 pence per share). This results in a final
dividend for 2015 of 14.0p, subject to shareholder approval.
Our financial performance is reviewed in more detail on
pages 21 to 32.
WHAT WE HAVE ACHIEVED IN THE LAST
THREE YEARS
To strengthen 3i both commercially and financially,
our emphasis has been on asset management, cash
generation, cost control and fund management margins.
We have now completed our transformation programme
and our performance against our June 2012 objectives
is summarised on the page overleaf and detailed below.
The six asset management initiatives were an essential
part of the strategic plan as Private Equity is, and will
continue to be, the biggest contributor to value growth for
the Group. Since 2012 we have rebalanced the Private
Equity business, selling off non-core or underperforming
assets and refocusing on a smaller number of high growth
middle-market companies. Over the longer term we aim to
have a portfolio of fewer than 40 investments and, to date,
we have made very good progress. The number of assets
has reduced to 65 at 31 March 2015 (31 March 2012: 124)
and 89% of assets by value are now held in our core
geographies of northern Europe and North America
(31 March 2012: 77%). The improvement in asset
management is also producing quantifiable results.
Unrealised value growth over the last three years has
principally been driven by earnings which have improved
to 19% in 2015 (2012: 9%). This was driven by excellent
performance in our largest assets and a material
reduction in smaller and non-core assets with negative
earnings growth. 22% of the portfolio by value at 31 March
2012 had negative earnings growth compared to 7% at
31 March 2015. Early indications on the new investments
made since 2012 are very promising.
This stronger portfolio of assets was valued at an average
of 10.5x EBITDA (post discount) at 31 March 2015
compared to 14.6x EBITDA for the FTSE 250.
The Group’s AUM has increased by 9% per annum to
£13.5 billion at 31 March 2015 (31 March 2012: £10.5 billion)
predominantly driven by Infrastructure and Debt
Management. Infrastructure acquired a PPP platform in
2013, which is delivering deal flow to 3iN, and Debt
Management expanded in the US via an acquisition in 2012.
Debt Management, in particular, has successfully raised
new funds in both Europe and the US in the last two years.
A critical part of our strategic plan was to reduce the
operating cost base in order to use shareholders’ capital
for distribution or reinvestment. Against a March 2012
run-rate cost base of £185 million, we achieved savings of
£70 million and reduced costs to 1.0% of AUM (2012: 1.6%).
Headcount reduced by 45% to 240 at 31 March 2015,
excluding acquisitions, and 276 including acquisitions
(31 March 2012: 435).
07
STRATEGIC REPORT3i Group Annual report and accounts 2015 Chief Executive’s review continued
The scorecard below reports on our achievements against the
objectives set following the Chief Executive’s strategic review as
announced in June 2012.
3i’s total shareholder return between 28 June 2012 and 31 March 2015 significantly outperformed benchmarks
3i
FTSE 250
FTSE 100
350
300
250
200
150
100
50
+177%
+72%
+36%
Jun 12
Sep 12
Dec 12
Mar 13
Jun 13
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Dec 14
Mar 15
ACHIEVEMENTS AGAINST 2012 OBJECTIVES
1
Create a leaner
organisation
with a cost
base more
closely aligned
with its income
Achieved £70m of ongoing
savings by March 2015,
compared to original
£40m target.
Headcount reduced by 37%
to 276 at 31 March 2015,
including 36 from new
acquisitions.
Actual costs, including
acquisitions, were £131m
in FY2015 (2012: £180m)
representing 1.0% of AUM
(2012: 1.6%).
3
Re-focus
and re-shape
the Private
Equity business
4
Grow third-
party AUM
and income
5
Materially
reduce gross
debt and
funding costs
2
Improve
consistency
and discipline
of investment
processes
and asset
management
approach
Monthly dashboard
monitoring of performance
across the Private Equity
portfolio.
Closed eight offices and
refocused activity in
northern Europe and
North America.
Detailed exit strategy in
place for every asset.
Controls in place to
minimise risk of over
investment at the top of
the cycle.
Significant improvement in
overall portfolio
performance with earnings
growth of 19% in FY2015
(2012: 9%).
Selective recruitment to
support future investment
activity.
Number of portfolio
companies reduced from
124 at 31 March 2012 to 65
at 31 March 2015, with a
particular focus on realising
lower value and
underperforming assets.
Eight new investments in
Germany, Benelux, US and
UK since 2012.
AUM up to £13.5bn (2012:
£10.5bn), representing a
9% CAGR.
Platform acquisitions
in US Debt Management
and European
Infrastructure added
£2.8bn of AUM.
£3.5bn of new funds raised
in last 18 months.
Gross debt of £815m at
31 March 2015 halved from
£1,623m at 31 March 2012.
Gross interest costs
reduced by 52% to £49m,
18% below the target of
£60m (2012: £103m).
RCF refinanced and term
extended to at least 2019.
Nil gearing at 31 March
2015 (2012: 18%).
08
STRATEGIC REPORT3i Group Annual report and accounts 2015 In 2012 we set out a target capital allocation model to
rebalance returns to our investors. Over the last three
years we have generated £2,124 million of realisation
proceeds, invested £766 million in new Private Equity
investments, and £189 million to support Debt
Management fundraising. Following the reduction of gross
debt of £542 million, we initiated an enhanced shareholder
distribution policy in July 2013. Including the proposed final
dividend for this year, we will have returned £506 million
of dividends to shareholders, whilst reaching a net cash
position and maintaining a robust balance sheet to support
longer term net asset growth.
At the end of our three-year restructuring, the Group
has three diverse, but complementary, businesses
underpinned by the expertise of our people and
differentiated by our selective investment approach
and disciplined focus on returns.
OUR BUSINESS TODAY
Today 3i offers a differentiated and attractive value
proposition. By combining proprietary capital investing
and the management of third-party capital, our business
model generates capital returns and recurring fund
management income. 3i is the largest single investor in its
Private Equity and Infrastructure funds and this ensures
that the interests of our shareholders, our fund investors
and co-investors are aligned. It also enables us to retain
a material share of the “alpha-generating” returns from
mid-market private equity and infrastructure investing.
Recurring management fee income contributes to the
financial resilience of the business and eliminates the
capital dilution caused by the costs of running the
business. Capital growth and regular dividends evidence
our progress and provide long-term value for our
shareholders.
In Private Equity, our strong international network of
local investment teams and proven ability to develop
businesses internationally allows us to build credibility
with management and vendors. Our proprietary capital
affords us flexibility and speed, which differentiates our
competitive position.
Combining our focus on driving operational excellence
within our portfolio companies and an institutional
approach to the process of investment management
supports our strategic objective to achieve our target of
at least 2x our money invested over three to five years.
Monetary policy across the developed world has led
to an abundance of equity and debt capital chasing
a limited supply of investment opportunities. So the
principal constraint on our activity is investment
opportunity at sensible prices. We expect to invest
in four to seven new investments a year and commit
€500 – €750 million. But we will only do this if investments
meet our demanding strategic and financial criteria.
Given the strength of the Group’s financial position,
and the scale of potential investment, we intend to fund
this activity principally from proprietary capital.
As a result, we have decided not to initiate a new
third-party fundraising in the short to medium term,
notwithstanding our improved performance.
The impact of central bank intervention on sovereign
wealth and pension fund managers’ appetite for
infrastructure investing is expected to persist. Although
the Infrastructure team is actively participating in bidding
processes, our priority, as investment adviser to 3iN, is to
maintain a disciplined approach to new investments.
The team continues to monitor and review opportunities in
adjacent markets, including new sectors and geographies.
In the meantime, significant value growth in the existing
portfolio is supporting 3iN’s NAV appreciation and the
business will continue to be an important contributor
to our fund management profitability and to operating
cash profit.
Our Debt Management business is principally a fund
management platform; its calls on 3i’s proprietary capital
are limited to regulatory requirements and seed capital for
new product development. Aided by the positive market
conditions throughout FY2014 and FY2015, our US and
European teams were very successful in raising new
funds. We expect this general environment to persist as
banks continue to actively manage their lending exposures
by syndicating assets to alternative funds such as CLOs.
The current appetite for yield is also supportive for our
new product offerings such as the European Middle
Market Loan Fund and the US Senior Loan Fund.
OUTLOOK
3i is demonstrably a more resilient business, both
commercially and financially, than it was when we started
the restructuring three years ago. The focus we have
placed on embedding institutional quality investment
management processes throughout the businesses and
our ongoing cost discipline has generated real results.
We are confident that this, along with the expertise and
integrity of our people, will underpin our aim to generate
attractive shareholder returns through the cycle.
None of this progress would have been possible without
the dedication and hard work of the 3i team. I would like
to thank them for their application and good work over the
period to bring 3i back to today’s healthy position. I would
also like to take this opportunity to thank Sir Adrian
Montague, our departing Chairman. He has been a
pleasure to work with over the last three years and he
has revamped our Board in line with the restructuring
of the Group.
We look to the future with confidence in the knowledge
that there is still much more to achieve at 3i.
Simon Borrows
Chief Executive
09
STRATEGIC REPORT3i Group Annual report and accounts 2015 Our Business model
3i is a leading international investment manager focused on
mid-market Private Equity, Infrastructure and Debt Management.
Our core investment markets are northern Europe and
North America.
3i’s sector and market expertise, combined with our proprietary and third-party
capital, differentiates our investment proposition.
Our efficient institutional investment platform ensures value creation is not diluted
and returns can be distributed to shareholders or reinvested in new assets.
By compounding returns on reinvested capital, we are capable of generating value
for our investors through the economic cycle.
Grow investment portfolio earnings
Increase the underlying value
of our investment portfolio
Realise investments at good uplifts to book
value and strong cash-on-cash multiples
Demonstrate the value of our
existing investment portfolio
and enhance our P/NAV rating
Generate a sustainable annual operating
profit from our Fund Management
activities
Generate additional value beyond
the value of our Proprietary
Capital investments
Utilise our strong balance sheet
Invest in further value-creating
growth opportunities across
our business lines
Increase shareholder distributions
through our enhanced distribution policy
Greater capital efficiency;
focus on shareholder value
10
STRATEGIC REPORT3i Group Annual report and accounts 2015 What we do
3i’s investment capability across three complementary businesses
underpins its business model and strategy.
Private Equity
Infrastructure
Debt Management
81%
20%
14%
38%
5%
42%
Proprietary Capital portfolio value
Fund Management fee income
Expertise
Majority investments in mid-market
companies with an enterprise value
of €100m–€500m at investment
Specialist investors in Business
Services, Consumer and Industrials
Driving international growth
Expertise
Focus on Core economic
infrastructure, Public Private
Partnerships (“PPP”) and low
risk energy
Expertise
Investor in senior secured loans
Specialises in the management
of CLOs and also offers alternative
risk/return products
Investment and return objectives
c. €500m–€750m pa in 4–7 new
investments
Portfolio of fewer than 40
investments
Investment and return objectives
New investment to grow 3iN
Assess opportunities to invest
or manage third-party funds in
adjacent markets
2x Money Multiple over 3–5 years
Longer term, raise new third
party funds
Investment and return objectives
Continue to grow third-party AUM
and fee income through the
issuance of CLOs
Leverage platform to broaden
the product offering and
improve margins
Private Equity employs the majority
of 3i’s proprietary capital.
By leveraging its extensive network and
sector expertise, our Private Equity
business is capable of generating
material investment returns from good
origination, asset management and
well planned exits.
Infrastructure is increasingly a
third-party fund management
business; advising 3iN on originating
and investing in Core infrastructure and
PPP opportunities, and managing
funds focused on PPP and India.
Our returns include advisory and
management fees received plus
capital returns and income from our
34% stake in 3iN.
Debt Management is the primary
driver of our third-party fund
management business, generating
management and performance
fee income.
We commit proprietary capital to
meet regulatory requirements or
support new product development.
We receive capital return and portfolio
income on this investment.
An efficient investment platform and capital model generating
material shareholder distributions and proceeds for reinvestment.
S
T
R
A
T
E
G
I
C
R
E
P
O
R
T
11
3i Group Annual report and accounts 2015
How we performed
KEY PERFORMANCE INDICATORS
GROSS INVESTMENT
RETURN (“GIR”)
% of opening portfolio value
Financial year
NET ASSET
VALUE (“NAV”)
NAV per share (p)
As at 31 March
23
396
19
20
348
311
TOTAL SHAREHOLDER
RETURN (“TSR”)
%
Financial year
54
4
50
30
4
26
27
5
22
Share price
Dividends
2013
2014
2015
2013
2014
2015
2013
2014
2015
Rationale
GIR is how we measure the performance
of proprietary investments portfolio
Rationale
NAV is a measure of the fair value of our
proprietary investments after the net costs
of operating the business
Rationale
TSR measures the return to our
shareholders through the change in
share price and dividends paid during
the period
2015 progress
Strong Private Equity performance
demonstrates the benefits of the asset
management improvement initiatives
Good flow of Private Equity realisations
delivered realised profits over opening
value of £144m representing an uplift
of 27% (excluding refinancings)
Value uplifts and realisations from the
European infrastructure portfolio led to
a material increase in the value of 3iN
Negative foreign exchange movements
in the year of £154m on our investment
portfolio
Key risks
Investment rate or quality of
investments is lower than expected
Subdued M&A activity and high pricing
in 3i’s core markets could impact the
timing of exits, cash returns and
investments
Operational underperformance
of portfolio companies impacting
earnings growth and valuations
Failure to invest in people to support
our activities
12
2015 progress
Good progression in NAV per share
to 396p, up 14% over the year
Strong Private Equity and Infrastructure
GIR, the primary contributors to 48p
NAV growth
Sterling materially strengthened against
the euro in the year, offset by its
weakening against the US dollar,
resulting in a net translation loss of
£114m on net assets in the year, which
reduced NAV by 12p
2015 progress
TSR of 27% reflecting an increase in
share price from 398p at close 28 March
2014 to 482p at close 31 March 2015,
the final FY2014 dividend of 13.3p paid
in July 2014 and the interim FY2015
dividend of 6.0p paid in January 2015
Good flow of realisations and strong
balance sheet resulted in proposed
additional dividend of 11.9p per share
for the year over base annual dividend
of 8.1p per share, bringing the total for
FY2015 to 20.0p per share
Key risks
G20 political and economic uncertainty
affects 3i’s core markets, impacts
valuations and increases foreign
exchange volatility
Unplanned increase in cost base
eg due to regulatory changes
Key risks
Lower NAV due to investment
underperformance or political and
economic uncertainty
Volatility in equity markets
The appeal of our business model
Regulatory or legal change materially
affecting one or more of the Group’s
businesses
STRATEGIC REPORT3i Group Annual report and accounts 2015
READ MORE
on Principal Risks, please see page 38
For further information on Executive
Directors’ remuneration, please see page 72
ASSETS UNDER MANAGEMENT
(“AUM”)
UNDERLYING FUND
MANAGEMENT
OPERATING CASH
PROFIT/(LOSS)
£bn
As at 31 March
12.9
9.2
12.9
9.5
13.5
10.2
Profit (£m) and Margin (%)
Financial year
£m
Financial year
£33m
£33m
28
S
T
R
A
T
E
G
I
C
R
E
P
O
R
T
26%
26%
£17m
13%
5
(8)
3.7
3.4
3.3
Proprietary
Capital
Third-party
Capital
2013
2014
2015
2013
2014
2015
2013
2014
2015
Rationale
AUM forms the basis on which
management fee income is generated.
For funds out of their reinvestment period,
this is measured at residual cost
2015 progress
Total AUM grew by 4% to £13.5bn
Growth in third-party AUM to £10.2bn
(75% of total AUM)
New funds raised in the year included
six new CLOs and the first close of a
€250m European Middle Market Loan
Fund which offset the effect of Private
Equity realisations and the normal
attrition in Debt Management as
funds mature
Proprietary Capital AUM stable at £3.3bn
as the good flow of Private Equity
realisations largely replaced with
new investments
Key risks
Portfolio performance is
weak or impacted by a legal,
macroeconomic/political
conditions and/or regulatory event
Regulatory change limits 3i’s ability
to raise third-party capital
Rationale
Underlying Fund Management profit allows
us to assess the performance of our Fund
Management business
Rationale
Covering the annual cost of running our
business with the annual cash income
eliminates capital return dilution
2015 progress
Underlying Fund Management profit
remained stable at £33m in the year,
as reduced fees from Private Equity
were offset by growth in fees from
Debt Management and Infrastructure
Divestment activity led to a reduction of
8% in Private Equity AUM and a
reduction in total fee income (including
synthetic fee) of 14%
Infrastructure fee income increased by
25% as we recognised a full year of
income from the BIFM PPP funds
Debt Management AUM increased by
12% and fee income increased by 6%
Key risks
G20 political and economic uncertainty
affects investment opportunity or
fundraising appetite
Adverse fluctuations in financial
markets impact our fee-based
businesses
Regulatory change adds to 3i’s cost base
2015 progress
Operating cash profit improved
significantly to £28m
Good cash income generated by the
Private Equity portfolio and increased
AUM in Debt Management and
Infrastructure funds
Further enhanced the Group’s
operational efficiency following the cost
reduction programme initiated in 2012
Key risks
Portfolio performance, and therefore
portfolio income, is weak due to
operational underperformance
Unplanned increase in cost base
eg due to regulatory changes
13
3i Group Annual report and accounts 2015
Business
review
This business review reports on the activity of each of our businesses.
Financial performance is summarised in the Chief Executive’s review
and reported in detail in the Financial review.
14
3i Group Annual report and accounts 2015 Private Equity
BUSINESS LINES
“ A strong performance across
all aspects of the business,
including £457 million of
investment.”
Alan Giddins and Menno Antal
Managing Partners and Co-heads of Private Equity
Private Equity is the largest contributor
to the Proprietary Capital returns;
accounting for 81% of the Proprietary
Capital portfolio at 31 March 2015
(31 March 2014: 82%). The portfolio’s
performance was strong in the year;
driven by growth of 19% in earnings
and good realisations, through sales and
IPOs as well as refinancings. The gross
investment return was £719 million for
the year, or 24% on the opening portfolio
(2014: £647 million, 24%).
INVESTMENT ACTIVITY
We increased the amount of investment in the year and
completed four new transactions. In total £457 million was
invested; including £369 million of 3i’s Proprietary Capital
(2014: three, £372 million, £276 million).
Each new investment demonstrates our origination and
investment execution strengths. We invested in Q Holding
and Dynatect, which are both leading US headquartered
industrial businesses with clear strategies to accelerate
their growth internationally. Our sector focus and proven
experience in achieving international growth and
diversification, recently demonstrated by Mold-Masters
and Hilite, were important as key differentiators against
competing US private equity firms for both investments.
We also invested in Christ, a German-based jewellery
retailer, and Aspen Pumps, a UK-based specialist
manufacturer of condensate removal pumps. Christ was
acquired through Eurofund V, alongside our investment in
Amor. We had followed Christ as a potential target since
late 2012. This positioned us well when the process
started, allowing us to move quickly and secure the
investment. Similarly, we had followed Aspen since early
2014, allowing us to develop a good understanding of the
business and broader market environment as well as build
relationships with management, which gave us good
insight when a sales process was initiated.
In June 2014, we took the opportunity to purchase a small
additional stake in Eurofund V at the 31 March 2014 NAV,
adjusted for cash flows, which further increased our
exposure to investments we know well.
An important part of building the strategic value of our
portfolio companies, including achieving international
expansion, is an active acquisition programme. Our
portfolio companies made over 20 acquisitions in the year,
with a combined enterprise value of over €400 million,
primarily funded from the companies’ own cash and
banking facilities.
Table 1: Private Equity cash investment in the year to 31 March 2015
81%
of Proprietary
Capital
£719m
gross
investment
return, 24% on
opening portfolio
value
£457m
Proprietary
and third-party
capital invested
Investment
Christ
Q Holding
Dynatect
Aspen
EFV stake
Other2
Total
Type
New1
New
New
New
Further
Further
Business description
Jewellery and watch retailer in Germany
Manufacturer of specialist moulded
rubber and silicone components
Manufacturer of engineered, mission
critical protective equipment
Manufacturer of condensate removal
pumps
Acquisition of LP stake in Eurofund V
Date
December 2014
December 2014
September 2014
February 2015
June 2014
n/a
Total
investment
£m
Proprietary
capital
investment
£m
Proprietary
capital value
at 31 March
2015
£m
173
102
66
65
27
24
457
99
100
65
64
27
14
369
165
109
71
64
n/a
n/a
1 Christ was acquired alongside Amor as a follow on investment for Eurofund V and is now recorded as a single investment “Amor/Christ”.
The value in the table above includes Amor.
2 Other includes further investment to support the portfolio, including acquisition funding or working capital.
15
STRATEGIC REPORT3i Group Annual report and accounts 2015 Private Equity continued
REALISATIONS ACTIVITY
Realisations, refinancings and IPOs generated £831 million
of proceeds during the year. Excluding refinancings of
£155 million, this represented an uplift over opening value
of £144 million, or 27% (2014: £190 million, 45%). The uplift
was lower than the prior year due to a number of
investments being valued on an imminent sales basis at
31 March 2014. Proceeds from refinancings are
usually recognised primarily as a repayment of
shareholder loans with minimal uplifts as a result.
In addition to the number of notable larger exits and IPOs,
we continued to sell smaller and non-core assets. At
31 March 2015, there were 65 investments in the Private
Equity portfolio, down from 81 at 31 March 2014. In the
longer term, we expect to hold a portfolio of fewer than 40
Private Equity investments.
£831m
realisation
proceeds
Table 2 details the Private Equity realisations activity in
the year.
Table 2: Private Equity realisations in the year to 31 March 2015
Investment
Country
Calendar
year
invested
31 March
2014
value
£m
3i realised
proceeds
£m
Profit/(loss)
in the year1
£m
Uplift on
opening
value1
%
Residual
value
£m
Money
multiple
over cost2
Full realisations
Hilite
Phibro
Vedici
LHI
John Hardy
Gain Capital
WFCI
Derprocon
Café y Te
Other investments
Partial realisations
Eltel
Foster + Partners
Quintiles
Refresco
Other investments
Refinancings
Action
Element
Amor3
Deferred
consideration
Other investments
Total
Germany
USA
France
China
Hong Kong
USA
France
Spain
Spain
n/a
Nordic
UK
USA
Benelux
n/a
Benelux
Benelux
Germany
2011
2009
2010
2008
2007
2008
2011
2000
2006
n/a
2007
2007
2008
2010
n/a
2011
2010
2010
n/a
n/a
133
93
58
33
25
12
–
5
4
–
63
66
25
15
7
95
22
21
–
677
151
122
83
40
25
10
10
7
6
2
87
66
29
25
9
113
23
19
4
831
25
27
27
8
–
(2)
10
1
2
2
24
–
4
10
2
18
1
(2)
20%
28%
48%
25%
–%
(17)%
100%
17%
50%
n/a
38%
–%
16%
67%
n/a
19%
5%
(10)%
–
–
–
2
2
–
–
–
–
–
47
40
144
47
150
592
145
55
2.1x
1.7x
2.0x
2.8x
1.6x
0.9x
0.8x
2.0x
0.5x
n/a
0.9x
1.8x
3.1x
1.6x
n/a
7.1x
3.0x
1.6x
4
161
n/a
24%
n/a
1,224
n/a
2.0x
IRR
31%
11%
17%
18%
7%
(2)%
(6)%
7%
(7)%
n/a
(1)%
10%
24%
11%
n/a
80%
31%
15%
n/a
n/a
1 Cash proceeds in the year over opening value realised.
2 Cash proceeds over cash invested. For partial realisations and refinancings, 31 March 2014 value reflects the element being disposed and
valuations of any remaining investment are included in the multiple.
3 Loss on disposal offset by income received.
16
STRATEGIC REPORT3i Group Annual report and accounts 2015
ASSETS UNDER MANAGEMENT
AUM declined to £3.8 billion at 31 March 2015 (31 March
2014: £4.1 billion) as a result of net divestment activity.
AUM is calculated as the original cost of our managed
portfolio and, while this has reduced, the value of the
portfolio has increased to £4.8 billion (2014: £4.6 billion) as
a result of strong value growth.
The performance of Eurofund V and the Growth Capital
Fund continued to improve with money multiples at
31 March 2015 of 1.4x and 1.7x respectively (31 March
2014: 1.1x, 1.3x). The investments made in the second half
of Eurofund V, post 2010, are showing a particularly
Table 3: Assets under management
strong performance, with a money multiple of 2.6x
at 31 March 2015 (31 March 2014: 2.1x).
The Group is well placed to fund the current level of
activity from current resources and future realisations.
Consequently we have no plans to initiate a new Private
Equity fundraising in the short to medium term,
notwithstanding the success of the team in improving
the performance of our most recent funds.
The results of the business have been delivered by an
internationally cohesive team, further strengthened by
recruitment at associate level in the year.
1.4x
Eurofund V
multiple
1.7x
Growth Capital
Fund multiple
Private Equity
3i Growth Capital Fund
3i Eurofund V
3i Eurofund IV
Other
Total Private Equity AUM
Close date
Mar 2010
Nov 2006
Jun 2004
Various
Original
fund size
Original 3i
commitment
Remaining 3i
commitment
at March 2015
% invested at
March 2015
Gross money
multiple1 at
March 2015
€1,192m
€5,000m
€3,067m
Various
€800m
€2,780m
€1,941m
Various
€376m
€118m
€78m
n/a
53%
94%
96%
n/a
1.7x
1.4x
2.3x
n/a
Fee income
received in
the year
£m
2
11
–
–
13
AUM
€472m
€2,310m
€471m
£1,098m
£3,785m
1 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2015, as a multiple of cash invested.
17
STRATEGIC REPORT3i Group Annual report and accounts 2015 Infrastructure
BUSINESS LINES
“The business delivered a
strong result, driven by the
performance of its investment
in 3i Infrastructure plc.”
£96m
gross
investment
return
£30m
advisory and
management
fee income
3iN PERFORMANCE
In addition to its role as investment adviser, 3i holds a 34%
(2014: 34%) stake in 3iN. 3iN performed strongly in the
year; the share price increased by 19% to 160 pence at
31 March 2015 (31 March 2014: 135 pence) and it delivered
a 25% total shareholder return in the year, the strongest
annual return since the IPO in 2007.
In total, 3i’s investment in 3iN contributed £77 million of
value growth (2014: £5 million) and £20 million of dividend
income in 2015 (2014: £21 million). This uplift was
underpinned by the exit of Eversholt Rail, and value growth
across its Core infrastructure portfolio, supported by the
continued returns compression and consequent reduction
in discount rates applied.
ASSETS UNDER MANAGEMENT
Due to the growth in 3iN’s NAV, AUM increased to
£2.5 billion (31 March 2014: £2.3 billion). 3iN’s strong
performance offset a small value reduction in the India
Infrastructure Fund following the first realisations of
investments in the Fund, and where the portfolio continues
to face a number of challenges. 3i’s share of the Indian
portfolio is now valued at £64 million (2014: £75 million).
In line with our strategy to grow Infrastructure’s
contribution to our Fund Management profits, we continue
to explore opportunities to grow AUM. Our acquisition of
BIFM in 2013 broadened the Infrastructure team’s skill set
and market access and, as the business grows, we expect
to continue to enhance both our investment and support
capabilities.
Ben Loomes and Phil White
Managing Partners and Co-heads of Infrastructure
Infrastructure generates returns for
Proprietary Capital, primarily through our
holding in 3iN, and Fund Management
returns from advisory and management
fees from 3iN, PPP funds and the legacy
India Infrastructure fund.
Infrastructure performed strongly in the year with a gross
investment return of £96 million, or 20% on the opening
portfolio (2014: £2 million, 0%). The business generated
£30 million (2014: £24 million) of advisory and
management fees across its funds and £10 million
of net performance fees (2014: nil).
INVESTMENT ADVISER TO 3iN
In its capacity as 3iN’s investment adviser, 3i advised on
six new investments including the acquisition of holdings
in two further oil storage facilities and a number of
primary PPP projects. In total, 3iN committed £114 million
to new investment in 2015 (2014: £80 million).
We also advised 3iN on the exit of its holding in Eversholt
Rail, one of the three leading rail rolling stock companies
in the UK. Eversholt Rail was acquired by 3iN in December
2010 as part of a consortium. In January 2015, all of the
consortium partners agreed to sell the business. This
resulted in proceeds of approximately £381 million for 3iN,
inclusive of a £15 million dividend received by 3iN in
December 2014. This compares to a 31 March 2014
valuation of £160 million.
In July 2014, 3iN’s shareholders approved a number of
amendments to its Investment Advisory Agreement with
3i. These included the extension of the fixed term of the
agreement for a period of four years, with one year’s
rolling notice thereafter.
Under the terms of the investment advisory agreement,
3i received an advisory fee of £17 million (2014: £16 million)
and a NAV-based performance fee of £45 million (2014:
nil), of which £34 million (2014: nil) is accrued as payable
to the team. Actual payments will be made over a number
of years. A further £1 million in performance fees payable
to the team has been accrued as a result of performance
of other reward schemes.
18
STRATEGIC REPORT3i Group Annual report and accounts 2015 Debt Management
BUSINESS LINES
“Six new CLOs and important
product diversification added
£2.4 billion of new AUM.”
Jeremy Ghose
Managing Partner and CEO, 3i Debt Management
£34m
fee income
£2.4bn
new AUM raised
REGULATORY ENVIRONMENT
The regulatory environment continues to evolve. European
regulation now in force requires CLO sponsors or
originators to retain a 5% minimum stake in each CLO
raised. Similar rules are being introduced in the US and
many new US CLOs are being structured to comply with
both the European rules and the future US rules. This is
concentrating the CLO market to those managers with
access to long-term capital, such as 3i, but it is also giving
rise to new business models and vehicles to support
future CLOs, which 3i continues to monitor.
VALUATIONS AND INCOME
Debt Management generated a negative gross investment
return of £10 million (2014: £16 million profit), primarily as
a result of an unrealised value reduction of £25 million
during the year (2014: £10 million gain). As noted above,
3i is required to hold at least 5% of the European CLOs it
manages. We typically invest in the most junior ranked
level subordinated notes, which we account for as equity
given its characteristics. During the year, we typically
invested at or near par in the most junior ranked
subordinated notes to satisfy the 5% holding requirement.
In most cases, third-party investors have invested at a
discount to 3i’s investment, which sets an external
reference point for valuation. This resulted in a fair value
reduction of £5 million in the year. Value also reduced as a
result of strong distributions from the CLO portfolio;
£16 million of income was recognised. Finally, in our older
European CLOs and Palace Street 1, there were a small
number of underlying assets that were restructured in the
year, contributing to value losses.
The performance of all of the CLOs launched in the last
two years is very good, with early performance ahead of
plan. There were no defaults and distributions are
providing an annualised yield of between 8% and 20%.
Debt Management is principally a Fund
Management business which primarily
generates returns through managing
third-party capital through CLOs and other
senior debt focused funds. We also
generate Proprietary Capital returns from
3i’s investment in funds managed by Debt
Management. Such investments are made
to support new products or for regulatory
purposes and totalled £105 million during
the year (2014: £61 million).
The Debt Management team had a good year of
fundraising, closing six new CLOs and a new €250 million
European Middle Market Loan Fund. AUM grew to
£7.2 billion at the end of the year (31 March 2014:
£6.5 billion) as £2.4 billion of new AUM was offset by
run-off and foreign exchange movements of £1.7 billion
of AUM. The business generated £34 million of fee income
in the year (2014: £32 million).
FUNDRAISING ACTIVITY
In the year the team closed three CLOs in Europe and three
in the US, raising a total of £2.2 billion new CLO AUM. We
continue to operate CLO warehouse vehicles in both
Europe and the US ahead of establishing new CLO
vehicles. We also held a first close of the European Middle
Market Loan Fund at €250 million, entirely with third-party
funds. This is a new fund established to invest in smaller
businesses than we typically target in the CLOs and is an
important diversification.
The US Senior Loan Fund, an open-ended fund, performed
strongly and outperformed its benchmarks in the year.
AUM increased to $157 million at 31 March 2015 (31 March
2014: $79 million).
The team was able to take advantage of strong CLO
markets and grow AUM without increasing resource in the
year but is likely to require some incremental additional
resource for further AUM growth, particularly as we look
to diversify and grow our non-CLO product offering.
Table 4 details Debt Management AUM.
19
STRATEGIC REPORT3i Group Annual report and accounts 2015 Debt Management continued
Table 4: Assets under management – Debt Management
Close date
Reinvestment
period end
Maturity
date
Value of fund
at launch1
Realised
equity
money
Multiple2
Annualised
equity cash
Yield3,4,5
AUM
Fee income
received in
the year
£m
European CLO funds
Harvest CLO XI
Harvest CLO X
Harvest CLO IX
Harvest CLO VIII
Harvest CLO VII
Windmill CLO I
Axius CLO
Coniston CLO
Harvest CLO V
Garda CLO
Pre 2007 CLOs
US CLO funds
Jamestown CLO VI
Jamestown CLO V
Jamestown CLO IV
COA Summit CLO
Jamestown CLO III
Jamestown CLO II
Jamestown CLO I
Fraser Sullivan CLO VII
COA Caerus CLO
Pre 2007 CLOs
Other funds
EMMF
Vintage II
Palace Street I
Senior Loan Fund
COA Fund6
Vintage I
Pre 2007 funds
European Warehouse
vehicles
Mar-15
Nov-14
July-14
Mar-14
Sep-13
Oct-07
Oct-07
Aug-07
Apr-07
Feb-07
n/a
Feb-15
Dec-14
Jun-14
Mar-14
Dec-13
Feb-13
Nov-12
Apr-12
Dec-07
n/a
Nov-14
Nov-11
Aug-11
Jul-09
Nov-07
Mar-07
n/a
Mar-19
Nov-18
Aug-18
Apr-18
Oct-17
Dec-14
Nov-13
Jun-13
May-14
Apr-13
n/a
Mar-19
Jan-19
Jul-18
Apr-15
Jan-18
Jan-17
Nov-16
Apr-15
Jan-15
n/a
Nov-17
Sept-13
n/a
n/a
n/a
Mar-09
n/a
Mar-29
Nov-28
Aug-26
Apr-26
Oct-25
Dec-29
Nov-23
Jul-24
May-24
Apr-22
n/a
€525m
€467m
€525m
€425m
€310m
€500m
€350m
€409m
€632m
€358m
€3,111m
Mar-27
Jan-27
Jul-26
Apr-23
Jan-26
Jan-25
Nov-24
Apr-23
Dec-19
US$750m
US$411m
US$618m
US$416m
US$516m
US$510m
US$461m
US$459m
US$240m
n/a US$1,000m
Nov-22
n/a
n/a
n/a
n/a
Jan-22
n/a
n/a
US$400m
n/a
n/a
n/a
€500m
€300m
n/a
n/a
n/a
n/a
Total Debt Management AUM
n/a
n/a
0.1x
0.1x
0.1x
0.6x
0.6x
1.0x
0.6x
1.3x
n/a
n/a
n/a
0.1x
0.3x
0.1x
0.4x
0.4x
0.6x
1.6x
n/a
n/a
n/a
0.9x
n/a
n/a
2.9x
n/a
n/a
n/a
n/a
19.6%
12.3%
8.3%
8.6%
8.3%
12.6%
8.1%
16.8%
n/a
n/a
n/a
16.8%
30.5%
14.9%
19.2%
18.8%
20.8%
23.7%
n/a
n/a
1.5x
1.9%
8.0%
0.4%
6.2x
n/a
n/a
€400m
€450m
€508m
€413m
€302m
€479m
€234m
€237m
€539m
€162m
€900m
£3,354m
US$750m
US$402m
US$599m
US$400m
US$499m
US$501m
US$453m
US$454m
US$240m
US$354m
£3,145m
€250m
US$201m
€3m
US$157m
US$35m
€327m
€25m
€48m
£740m
£7,239m
–
0.6
1.3
1.4
0.7
2.2
1.6
1.1
3.2
1.3
7.6
0.2
0.3
1.2
0.6
1.2
1.6
1.4
0.7
n/a
1.8
0.1
0.9
n/a
0.3
0.3
2.6
0.2
n/a
1 Includes cost 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 are shown as gross money multiple which is cash returned to the Fund plus residual value as at 31 March 2015,
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$54 million
as at 31 March 2015).
20
STRATEGIC REPORT3i Group Annual report and accounts 2015 Financial review
“All of our three businesses are
performing well as demonstrated by
these strong results.”
Julia Wilson
Group Finance Director
The Group delivered a strong result in the year. The table below summarises our key financial data under the
Investment basis.
Table 5: Summary financial data
Investment basis
Group
Total return
Total return on opening shareholders’ funds
Dividend per ordinary share
Operating expenses
As a percentage of assets under management
Operating cash profit
Proprietary Capital
Realisation proceeds
Uplift over opening book value1
Money multiple
Gross investment return2
As a percentage of opening 3i portfolio value
Operating profit 3
Cash investment
3i portfolio value
Gross debt
Net cash/(debt)
Gearing
Liquidity
Net asset value
Diluted net asset value per ordinary share
Fund Management
Total assets under management
Third-party capital
Proportion of third-party capital
Total fee income
Third-party fee income
Operating profit3
Underlying Fund Management profit3,4
Underlying Fund Management margin
Year to/as at
31 March 2015
Year to/as at
31 March 2014
£659m
19.9%
20.0p
£131m
1.0%
£28m
£841m
£145m/27%
2.0x
£805m
22.6%
£721m
£474m
£3,877m
£815m
£49m
nil
£1,214m
£3,806m
396p
£13,474m
£10,140m
75%
£125m
£80m
£26m
£33m
26%
£478m
16.3%
20.0p
£136m
1.0%
£5m
£677m
£191m/45%
1.8x
£665m
20.2%
£539m
£337m
£3,565m
£857m
£(160)m
5%
£1,197m
£3,308m
348p
£12,911m
£9,508m
74%
£127m
£76m
£19m
£33m
26%
1 Uplift over opening book value excludes refinancings. The 2014 balance has been restated from £202 million to £191 million to exclude
refinancings.
2 Gross investment return includes portfolio fees of nil (2014: £3 million) allocated to Fund Management.
3 Operating profit for the Proprietary Capital and Fund Management activities excludes carried interest and performance fees payable/
receivable, which is not allocated between these activities.
4 Excludes Fund Management restructuring costs of £1 million and amortisation costs of £6 million (2014: £8 million, £6 million).
21
STRATEGIC REPORT3i Group Annual report and accounts 2015 Financial review continued
BASIS
3i adopted IFRS 10 in 2014 as its investment entity
exception prevented the risk of investment companies,
such as 3i, having to consolidate their portfolio
investments.
However, as described in our 2014 Annual Report and
Accounts, we also report using a non-GAAP “Investment
basis” as we believe it aids users of our report to assess
the Group’s underlying operating performance. Total
return and net assets are the same under the Investment
basis and IFRS and we provide more detail on IFRS 10, as
well as a reconciliation of our Investment basis financial
statements to the audited IFRS statements, at the end of
this section.
Table 6 Total return for the year to 31 March
2015
Proprietary
Capital
£m
Investment basis
2015
Fund
Management
£m
162
684
45
62
6
(154)
805
–
(45)
(32)
3
(49)
(1)
40
721
–
–
–
–
–
–
–
80
45
(99)
–
–
–
–
26
Realised profits over value on
disposal of investments
Unrealised profits on revaluation
of investments
Portfolio income
Dividends
Income from loans and
receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses1
Interest receivable
Interest payable
Movement in the fair value
of derivatives
Exchange movements
Operating profit before carry
Carried interest and performance
fees receivable
Carried interest and performance
fees payable
Acquisition related earn-out
charges
Operating profit
Income taxes
Re-measurements of defined
benefit plans
Total comprehensive income
(“Total return”)
Total return on opening
shareholders’ funds
Total return
The Group generated a total return of £659 million, or
a profit on opening shareholders’ funds of 19.9% (2014:
£478 million or 16.3%) in 2015, reflecting further progress
and achievement of our strategic priorities. Operating
profit before carry for the Proprietary Capital business
was £721 million (2014: £539 million). Strong underlying
portfolio performance generated a gross investment
return of £805 million, despite negative foreign exchange
movements on the portfolio of £154 million (2014:
£665 million and negative £113 million). Fund Management
operating profit before carry was £26 million (2014:
£19 million). Further details regarding the performance
during the year is provided below.
2014
Proprietary
Capital
£m
2014
Fund
Management
£m
202
475
44
50
4
(113)
662
–
(51)
(28)
3
(54)
10
(3)
539
–
–
–
–
3
–
3
73
51
(108)
–
–
–
–
19
2015
Total
£m
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
2014
Total
£m
202
475
44
50
7
(113)
665
73
–
(136)
3
(54)
10
(3)
558
3
(85)
(6)
470
(3)
11
478
19.9%
16.3%
1 Includes restructuring costs of nil (2014: £1 million) and £1 million (2014: £8 million) for Proprietary Capital and Fund Management
respectively.
22
STRATEGIC REPORT3i Group Annual report and accounts 2015 PROPRIETARY CAPITAL RETURNS
Operating profit before carry on our Proprietary Capital
increased by 34% to £721 million (2014: £539 million) due
to strong value growth in the portfolio and good uplifts on
realisations. This performance is despite foreign exchange
losses of £114 million (2014: £116 million) which have
principally resulted from the weakening of the euro against
sterling.
By business line, the gross investment return on the
opening portfolio was 24% from Private Equity (2014: 24%)
and 20% from Infrastructure (2014: 0%) while Debt
Management recorded a loss of 7% (2014: profit of 20%) as
a result of mark to market movements which reduced CLO
equity valuations. Private Equity accounts for 81% of the
Proprietary Capital portfolio at 31 March 2015 (31 March
2014: 82%) and remains the primary driver of Proprietary
Capital returns.
Realised profits
Realised profits of £162 million in the year to 31 March
2015 (2014: £202 million) were driven by another year of
strong exits, with realisation proceeds totalling
£841 million (2014: £677 million). Realisations, excluding
refinancings, were achieved at an uplift over opening value
of 27%, which was lower than the 45% achieved in 2014
due to a number of assets being valued on an imminent
sales basis at the beginning of the year. This past year also
saw a higher level of refinancing activity, which results in
cash proceeds with limited realised profit but concentrates
value in the remaining investment. We continue to pursue
realisations through careful exit planning, and in the
current environment of high prices, will take advantage of
opportunities to divest should they arise.
The majority of the realisations were from the Private
Equity portfolio, which contributed £831 million (2014:
£669 million), including £155 million of refinancing
proceeds (2014: £59 million). Table 2, in the Private Equity
section, details the Private Equity realisations in the year
and sets out the accounting uplift reflected in this year’s
total return and the longer-term cash-to-cash results. The
Private Equity realisations completed in the year have
generated a money multiple of 2.0x over their
investment life.
We also made our first realisation from our Indian
Infrastructure portfolio, with the partial sale of the quoted
shares held in Adani Power. This generated £10 million of
proceeds at an uplift over the opening value of £1 million.
Unrealised value movements
Unrealised value movement was very positive in the year,
predominantly due to strong value growth from the Private
Equity portfolio. The table below summarises the
revaluation movement by category and each category is
discussed further below.
23%
gross
investment
return
£841m
realisation
proceeds
£641m
Private Equity
value growth
Table 7: Unrealised profits/(losses) on revaluation of
investments for the year to 31 March
2015
£m
2014
£m
Private Equity
Earnings based valuations
Performance
Multiple movements
Other bases
Provisions
Uplift to imminent sale
Discounted cash flow
Other movements on unquoted
investments
Quoted portfolio
Infrastructure
Quoted portfolio
Discounted Cash Flow
Debt Management
Total
417
64
–
22
89
3
46
77
(9)
(25)
684
182
216
–
9
11
(10)
70
6
(19)
10
475
Private Equity unrealised value growth
The Private Equity portfolio performed strongly with value
growth of £641 million in the year (2014: £478 million). This
was underpinned by good value weighted earnings growth
of 19% (2014: 19%) and a multiple increase of 6% (2014:
20%), following rises in quoted comparable multiples
during the year and the re-rating of a small number of
assets. Net debt remained stable at 3.1x EBITDA
notwithstanding the fact that we took advantage of
favourable debt conditions to refinance a number of our
high quality companies (2014: 3.1x). The majority of the
portfolio (93% by value, 2014: 87%) grew its earnings in the
year and the larger investments continue to perform
very well.
Consistent with good performance and strong equity
markets, our opening quoted portfolio and the successful
IPOs of Phibro, Eltel, Dphone and Refresco during the year,
resulted in unrealised value growth of £46 million in
addition to realised profits of £63 million in the year.
23
STRATEGIC REPORT3i Group Annual report and accounts 2015 Financial review continued
Performance
Improvements in the performance of the portfolio valued
on an earnings basis resulted in an increase in value of
£417 million (2014: £182 million). Value weighted earnings,
the most relevant measure of NAV impact, increased by
19% (2014: 19%) in the year. Action, as our largest asset,
with over 30% earnings growth in the 12 months, is a big
contributor to this measure. Excluding Action, the earnings
growth is still a very robust 16% and now includes all our
recent investments. Acquisitions, principally funded from
portfolio companies’ balance sheets, contributed 2% of the
19% growth.
Although performance overall was good, there were a
small number of investments where company and
geography specific issues impacted value. In total, value
reductions of £44 million, in relation to seven assets, offset
the general improvement. The largest single negative
movement related to Inspecta where performance was
impacted by the economic environment in Finland and
Russia. Inspecta reduced in value from £34 million at
31 March 2014 to £6 million at 31 March 2015. After the
year end, we agreed an exit for this investment which is in
line with the year-end valuation.
Forecast earnings, used when the forecast EBITDA outlook
is lower than the last 12 months’ data, were used for only
two investments at 31 March 2015, representing 6% of the
portfolio by number and 3% by value (2014: four, 9% by
number and 3% by value). Chart 1 shows the earnings
growth rates across the portfolio.
In the case of Action, the Dutch headquartered discount
retailer, EBITDA for valuation purposes is adjusted to
reflect a run-rate basis. Action is growing strongly due, in
part, to its successful store roll-out programme. We
believe this run-rate methodology fairly reflects the high
growth characteristics of this business, and therefore its
maintainable earnings. Following a number of IPOs by
more directly comparable businesses in the discount retail
sector in the last 18 months, we have also reviewed the
valuation comparable set for Action. We have increased
the EBITDA multiple applied to Action’s run-rate earnings
to 14.2x pre-liquidity discount and 13.5x post-discount
(2014: 13.2x, 12.5x). Based on the run-rate earnings and
capital structure at 31 March 2015, a 1x movement in the
EBITDA multiple applied would increase or decrease
Action’s value by £56 million. At £592 million (2014:
£501 million), Action is the largest Private Equity
investment by value, representing 19% of the Private
Equity portfolio (2014: 17%).
24
Chart 1: Portfolio earnings growth
weighted by March 2015 carrying values1
19%
value weighted
earnings growth
753
868
32
131
88
387
<(20)% (20)–(11)% (10)–(1)% 0–9% 10–19% 20–30% >30%
Last 12 months’ (LTM) earnings growth
3i carrying value at 31 March 2015 (£m)
1 Includes all companies valued on an earnings basis where
comparable earnings data is available. This represents 72% of the
Private Equity portfolio by value.
We took the opportunity to refinance a number of high
quality companies, both increasing and extending the
maturity of portfolio debt, with 88% of the debt now
repayable in 2017 or later (2014: 65%). Chart 2 shows the
ratio of net debt to EBITDA weighted by portfolio value.
Chart 2: Ratio of debt to EBITDA – Private Equity portfolio
weighted by March 2015 carrying values1
1,450
610
483
428
<1x
1–2x
86
2–3x
62
3–4x
4–5x
5–6x
6
>6x
Ratio of net debt to EBITDA
3i carrying value at 31 March 2015 (£m)
1 This represents 99% of the Private Equity portfolio by value.
Multiple movements
Equity markets performed strongly throughout the year
and the average EBITDA multiple in the FTSE 250
increased by 10% to 14.6x in the year (source: Capital IQ,
excluding investment companies and banks). As a matter
of policy, we select an appropriate multiple for each
investment based on a comparable set of quoted
companies and adjust these comparable multiple sets with
discounts and occasionally premiums to take account of
relevant size, sector, growth and cycle considerations as
appropriate. Against a strong market backdrop, we have
continued to apply a high level of adjustments to reflect
our caution about realistic valuation uplifts.
3.1x
net debt over
EBITDA
STRATEGIC REPORT3i Group Annual report and accounts 2015 £77m
value growth
from 3iN
The average EBITDA multiple used to value the Private
Equity portfolio increased by 6% to 11.2x before liquidity
discount (2014: 10.6x) and 10.5x after liquidity discount
(2014: 9.9x). This translated into a positive movement in the
year of £64 million (2014: £216 million), including
£45 million relating to the Action multiple change.
Excluding Action, the average EBITDA multiple increased
by 3% to 10.1x pre discount (2014: 9.8x) and 9.3x (2014: 9.0x)
post discount.
Imminent sale
Four exit processes were sufficiently progressed to value
on an imminent sales basis at 31 March 2015 and the uplift
to imminent sale was £22 million (2014: £9 million). All four
have been announced since 31 March 2015 and are: Azelis,
Inspecta, Touchtunes and Soyaconcept.
Discounted cash flow
The largest investment valued using DCF in the Private
Equity portfolio is the Danish/German ferry group,
Scandlines, which recorded value growth of £94 million.
Scandlines’ largest ferry route, Rødby-Puttgarden, is
expected to have direct competition from a new tunnel (the
Fehmarn Belt project) at some point in the future. In light of
recent public commentary around expected potential
delays to the opening of this new tunnel, we have moved
back our assumption for the likely tunnel opening date in
the latest 31 March 2015 DCF valuation of Scandlines. This
change, combined with the profitable sale of a JV route in
the year, were the primary drivers of the increase in the
value of our investment in Scandlines in the period.
Quoted portfolio
The Private Equity quoted portfolio, including IPOs in the
year, generated unrealised value growth of £46 million
(2014: £70 million). The investments in Gain and Phibro
were fully divested in the year and are noted in the
realisations table on page 16. Table 8 details the movement
in the year and closing quoted portfolio.
Infrastructure unrealised value movement
The Infrastructure portfolio primarily consists of our 34%
holding in 3iN. 3iN grew strongly in value during the year,
as a result of the divestment of Eversholt Rail and a
re-rating of a number of the remaining Core infrastructure
investments following a year of returns compression in the
market. 3iN generated value growth of £77 million for
3i Group in the year, driven by a 19% increase in the share
price to 160 pence (2014: 135 pence). This was slightly
offset by further modest falls in value of the Indian
Infrastructure portfolio as the investments continued to
face a number of challenges.
Debt Management unrealised value movement
The unrealised value movement in Debt Management
comprises mark-to-market valuations on both the CLO
equity and the direct investments held through
warehouses, the US Senior Loan Fund and Palace Street I.
Of the unrealised loss of £25 million in the year (2014:
£10 million gain), £22 million has been recognised on CLO
equity. Three factors have driven the CLO prices. Firstly, as
funds make distributions, they effectively convert value to
portfolio income; £16 million of distributions were received
by 3i in the year. Secondly, new investments into European
CLOs have typically been made by 3i, as sponsor, at par
value but other investors often invest at a discount. This
can result in a fall in value in the short term as the
independent market prices we source typically trend
towards the non-sponsor trades. This resulted in a fair
value reduction of £5 million in the year. Long-term cash
returns remain unaffected (ie the valuation volatility at the
time of issue is not considered to be an indicator of
long-term cash returns of the CLO). Finally, a number of
the older CLOs had exposure to two poorer performing
pre-crisis assets, which were restructured in the year and
further reduced value.
The remaining £3 million value loss related principally to
the wind down of Palace Street I, which had exposure to
the same two restructured assets.
Table 8: Quoted portfolio movement for the year to 31 March 2015
Investment
IPO date
Quintiles
Eltel
Phibro
Refresco
Dphone
Gain Capital Pre 31 March 2014
Pre 31 March 2014
February 2015
April 2014
March 2015
July 2014
Opening value at
1 April 2014
£m1
Disposals
at opening
book value
£m
Unrealised
value growth
£m
Other
movements
£m2
Closing value at
31 March 2015
£m
122
99
93
57
34
12
417
(26)
(62)
(95)
(15)
–
(13)
(211)
30
9
–
4
3
–
46
18
1
2
1
(2)
1
21
144
47
–
47
35
–
273
Total gross
investment
return during
the year
£m
52
63
30
31
11
(1)
186
1 For portfolio companies with an IPO during the year, this is the value pre-IPO.
2 Other movements include dividends and foreign exchange.
25
STRATEGIC REPORT3i Group Annual report and accounts 2015 Financial review continued
15%
increase in
portfolio income
£13.5bn
AUM
£33m
Underlying fund
Management
profit, 26%
margin
Portfolio income
Income from the portfolio increased by 15% and
was £113 million in the year to 31 March 2015 (2014:
£98 million) of which £80 million was received in cash
(2014: £57 million). Dividends of £45 million were received
(2014: £44 million), including £20 million from 3iN (2014:
£21 million) and £16 million from Debt Management CLO
investments (2014: £10 million). Interest income totalled
£62 million (2014: £50 million), with £56 million (2014:
£46 million) generated from Private Equity investments
and £6 million (2014: £4 million) generated from Debt
Management investments. Approximately 75% of Private
Equity interest income is capitalised and received on exit,
although activity in the portfolio during the year resulted in
a higher element of interest being received as cash.
Net foreign exchange movements
The total net foreign exchange loss of £114 million
(2014: £116 million) was driven by the strengthening of
sterling against the euro (12.5%), Brazilian real (20.9%) and
Swedish krona (15.7%) resulting in losses of £175 million,
£6 million and £13 million respectively. Sterling weakened
against the US dollar (12.4%) and Indian rupee (7.8%)
during the year, resulting in gains of £76 million and
£5 million respectively. The net foreign exchange loss
reflects losses on non-sterling denominated portfolio
assets, as well as the translation of non-portfolio net
assets, including non-sterling cash held at the balance
sheet date and gross debt.
As at 31 March 2015, a 1% movement in the euro, US dollar
and the Swedish krona would give rise to a £16 million,
£8 million and £1 million movement in total return
respectively.
The net assets of the Group by currency are shown in
Chart 3 below.
Chart 3: Net assets of the Group by currency
at 31 March 2015
33
26
1 4
%
36
Sterling, £1,271m
Euro, £1,367m
US dollar, £990m
Swedish krona, £20m
Other, £158m
Proprietary Capital costs
Proprietary Capital costs include 100% of costs in relation
to the CEO, Group Finance Director and General Counsel
and elements of finance, IT, property, legal and regulatory,
strategy and human resources. Operating expenses
increased by 14% to £32 million (2014: £28 million) as the
Group recognised the costs of regulatory changes.
Synthetic fees, as defined in the glossary, of £45 million
(2014: £51 million) reflect the lower level of Proprietary
Capital being managed as a result of net divestment
activity, predominantly in Private Equity.
Net interest payable
The gross interest paid was £49 million (2014: £54 million)
and 18% below the target set in 2012 to reduce interest
paid to £60 million per annum. Included within this year’s
expense is £1.5 million of arrangement fees in relation to
the Group’s Revolving Credit Facility (“RCF”) which were
written off when it was replaced with a new £350 million
facility. The new facility will reduce ongoing financing costs
by £1.5 million per year.
The current gross debt position is detailed further in the
Balance Sheet section of this Financial Review and in
Note 16 of the Accounts.
Cash interest received remained stable at £3 million
(2014: £3 million).
FUND MANAGEMENT RETURNS
Table 9: Fund Management underlying profit
for the year to 31 March
Fees receivable from external funds1
Private Equity
Infrastructure
Debt Management
Synthetic fees
Private Equity
Infrastructure
Debt Management
Total fee income
Fund Management operating expenses
Operating profit before carry
Restructuring costs
Amortisation costs
Underlying Fund Management profit
2015
£m
2014
£m
16
30
34
42
3
–
125
(99)
26
1
6
33
20
24
32
47
3
1
127
(108)
19
8
6
33
1 Includes nil portfolio related income in 2015 (2014: £3 million).
26
STRATEGIC REPORT3i Group Annual report and accounts 2015 The Group’s Fund Management income is driven by
total AUM, which was £13.5 billion at 31 March 2015
(31 March 2014: £12.9 billion). The launch of six CLOs,
the European Middle Market Loan Fund and further
commitments to the US Senior Loan Fund in the Debt
Management business offset a fall in AUM arising from
net divestment activity in Private Equity. The proportion
of third-party assets under management grew marginally
to 75% (2014: 74%).
An increase in third-party fee income and a fall in
operating expenses were offset by a fall in synthetic fees
applied from the Proprietary Capital business as a result
of net divestment in Private Equity.
As a result of the completion of our transformation plan,
Fund Management improved both its absolute profit and
profit margin to £26 million and 21% respectively (2014:
£19 million, 15%). Excluding restructuring and amortisation
costs, underlying operating profit and margin remained
stable at £33 million (2014: £33 million) and 26%
(2014: 26%).
TOTAL RETURN
Table 10: Summarised total return for the year
to 31 March
2015
£m
2014
£m
Proprietary Capital operating profit
before carry
Fund Management operating profit
before carry
Operating profit before carry
Carried interest and performance fees
receivable from external funds
Carried interest and performance
fees payable
Acquisition related earn-out charges
Operating profit
Tax
Re-measurement of defined
benefit plans
Total comprehensive income
(“Total return”)
Total return on opening
shareholders’ funds
721
26
747
80
(142)
(8)
677
(4)
(14)
659
539
19
558
3
(85)
(6)
470
(3)
11
478
19.9%
16.3%
NET CARRIED INTEREST AND PERFORMANCE
FEES PAYABLE
Net carried interest and performance fees payable
decreased in the year, with a net payable of £62 million
(31 March 2014: £82 million payable). On a gross basis,
carried interest and performance fees payable increased
to £142 million (2014: £85 million) and the receivable
increased to £80 million (2014: £3 million).
Our largest Private Equity fund, Eurofund V, which
includes assets purchased in 2007–12, has not yet met
the performance hurdle due to the performance of the
2007–09 vintages. Although we have seen a strong
recovery in that fund’s multiple to 1.4x (March 2014: 1.1x)
invested capital, with 2010-12 investments valued at 2.6x
(March 2014: 2.1x), the drag from these earlier investments
means that we have not yet recognised carry receivable
from this fund.
Assets in the Growth Capital Fund include Quintiles,
Refresco-Gerber, Touchtunes and BVG and, as a result of
their strong performance, its multiple on invested capital
is now 1.7x (March 2014: 1.3x). We are now recognising
carry receivable on an accruals basis and £25 million was
recognised in the year (31 March 2014: nil).
We pay carry to our Private Equity investment teams on
proprietary capital invested and share a proportion of
carry receivable from third-party funds. This total carry
payable is provided through schemes which have been
structured historically over two or three year vintages to
maximise flexibility in resource planning. The improved
performance of the Private Equity portfolio over the last
two years means that the majority of assets by value are
now held in carry payable schemes that have met their
performance hurdles, assuming the portfolio was realised
at its 31 March 2015 valuation. Carry payable typically will
increase or decrease in line with the gross investment
return at rates between 10% and 15%. The gross
investment return in Private Equity of £719 million (2014:
£647 million) resulted in an accrual of £103 million carry
payable in the year, or 14% of gross investment return
(31 March 2014: £82 million, 13%). Carry is usually only
paid once the hurdles are passed in cash terms and,
during the year, £7 million was paid (2014: £19 million).
3iN pays a performance fee on an annual basis, subject to
a hurdle rate of return and a high-water mark based on
net asset value. The strong performance of the European
assets held by 3iN, including the exit of Eversholt Rail,
resulted in an accrual of £45 million of performance
fees receivable in the year (31 March 2014: nil).
Our Infrastructure investment team shares in the
performance fee receivable from 3iN, with the majority
of individual payments deferred over a number of years.
Carry payable to the Infrastructure team of £35 million
has been accrued (2014: nil) including £34 million in
relation to the 3iN performance fee.
PENSION
The IAS19 liabilities of the Group’s defined benefit pension
schemes have been impacted by decreases in their
discount rates, driven by the AA corporate bond yields.
This resulted in a re-measurement loss of £14 million
(2014: £11 million gain) for the year. On an IAS19 basis the
pension scheme remains in a significant surplus.
The 2013 triennial valuation of the UK defined benefit
pension scheme was completed in March 2014. It resulted
in a very small surplus and consequently no further
contributions were made, or are planned, as a result
of this valuation.
27
STRATEGIC REPORT3i Group Annual report and accounts 2015 Financial review continued
OPERATING CASH PROFIT
Table 11: Operating cash profit for the year to 31 March
Third-party capital fees
Cash portfolio fees
Cash portfolio dividends and interest
Cash income
Total operating expenses1
Less: Restructuring costs
Operating expenses excluding
restructuring costs
Operating cash profit
2015
£m
78
10
70
158
131
(1)
130
28
2014
£m
75
4
53
132
136
(9)
127
5
1 Operating expenses are calculated on an accruals basis.
Third-party fees increased during the year following the
launch of six Debt Management CLOs and the European
Middle Market Loan Fund. Alongside growth in third-party
fees we have focused on generating cash income from the
portfolio. Increased investment into cash yielding Debt
Management funds has generated good income and the
Private Equity portfolio has benefited from increased deal
fees on higher levels of activity. Consequently, the Group
has been able to materially improve its operating cash
income to £158 million (2014: £132 million) despite the net
divestment activity in Private Equity.
Total operating expenses declined by 4% to £131 million
(2014: £136 million) as restructuring costs, which comprise
redundancy, office closures and organisational changes,
reduced to £1 million (2014: £9 million) as we reached the
end of our transformation plan. Excluding restructuring
costs, operating expenses increased by 2% to £130 million
(2014: £127 million) principally due to an increase in
variable compensation resulting from share based
payments. Operating expenses as a percentage of
weighted average AUM remained stable at 1.0% (2014:
1.0%), as a result of the continuing cost focus combined
CASH FLOW
Investment and realisations
with the new CLO fund launches in the year. We expect
costs to rise marginally as we look to grow the business,
increase activity and deal with increased regulation but
we expect costs to remain at c1.0% of AUM.
In total, the operating cash profit position increased
strongly to £28 million (2014: £5 million).
£28m
Operating
cash profit
BALANCE SHEET
Table 12: Simplified balance sheet as at 31 March
Investment portfolio value
Gross debt
Cash
Net cash/(debt)
Other net liabilities
Net assets
2015
£m
3,877
(815)
864
49
(120)
3,806
2014
£m
3,565
(857)
697
(160)
(97)
3,308
The Proprietary Capital portfolio increased to £3,877 million
at 31 March 2015 (31 March 2014: £3,565 million) as cash
investment of £474 million and unrealised value growth of
£684 million offset the good realisations and the negative
impact of foreign exchange movements.
The mix of the portfolio remained broadly stable. The
marginal decline in Private Equity to 81% (31 March 2014:
82%) was offset by a 1% increase in Debt Management to
5% (31 March 2014: 4%). The weighting of the Infrastructure
portfolio remained stable at 14% (31 March 2014: 14%).
Net divestment activity and an operating cash profit led
to cash on the balance sheet increasing to £864 million
(31 March 2014: £697 million). Combined with a reduction
in the sterling equivalent of the 2017 euro denominated
bond, the Group was in a net cash position of £49 million
at 31 March 2015 (31 March 2014: £160 million net debt)
ahead of paying the final dividend for FY2015.
Table 13: Investment activity – Proprietary Capital and third-party capital for the year to 31 March
Realisations
Cash investment
Net cash divestment
Non-cash investment
Net divestment
Proprietary Capital
Proprietary and
Third-party Capital
2015
£m
841
(474)
367
(140)
227
2014
£m
677
(337)
340
(167)
173
2015
£m
1,363
(562)
801
(191)
610
2014
£m
1,129
(517)
612
(279)
333
Cash proceeds from realisations of £841 million (2014: £677 million) were partly offset by cash investment of £474 million
(2014: £337 million) and resulted in net cash inflow of £367 million (2014: £340 million). A further £140 million of
investment was in non-cash form (2014: £167 million) and total investment was £614 million (2014: £504 million).
Further detail on investment and realisations is included in the relevant business line sections.
28
STRATEGIC REPORT3i Group Annual report and accounts 2015
Gearing and borrowings
Table 14: Gearing and borrowings as at 31 March
Gross debt
Net cash/(debt)
Gearing
2015
£815m
£49m
nil
2014
£857m
£(160)m
5%
Gearing reduced to nil at 31 March 2015 (31 March 2014:
5%) as the Group ended the year in a net cash position.
Overall shareholders’ funds increased to £3,806 million
(31 March 2014: £3,308 million) following the total return of
£659 million in the year to 31 March 2015.
Liquidity
Total liquidity was substantially unchanged at 31 March
2015 compared to 31 March 2014 at £1,214 million
(31 March 2014: £1,197 million). Cash and deposits
increased to £864 million (31 March 2014: £697 million) as
a result of net divestment and undrawn facilities reduced
to £350 million (31 March 2014: £500 million) following the
RCF refinancing.
Foreign exchange hedging
As a result of the reduction in non-sterling gross debt, and
the increased concentration of the portfolio into a smaller
number of individually significant assets, the use of
derivatives for portfolio value hedging purposes is less
effective. As a result, derivatives are no longer used to
hedge currency movements on a portfolio basis and
foreign exchange risk is considered as an integral part of
the investment process. Specific short-term hedging on
entry or exit of an investment may be used as appropriate.
Diluted NAV
The diluted NAV per share at 31 March 2015 was 396
pence (31 March 2014: 348 pence). This was driven by the
total return in the year of £659 million (2014: £478 million),
and partially offset by dividend payments in the year of
£183 million (2014: £114 million).
Dividend
The Board has declared a total dividend of 20.0p (2014:
20.0p) for 2015. This is made up of a 8.1p base dividend and
an 11.9p additional dividend. Due to our current net
divestment activity and robust balance sheet, we have
proposed an additional dividend above the top end of our
15%–20% distribution range, equivalent to 23% of gross
realised proceeds. Subject to shareholder approval, we
will pay the final dividend of 14.0p (2014: 13.3p) on 24 July
2015 to shareholders on the register at 19 June 2015.
Key accounting judgements
In preparing these accounts, the key accounting
judgement relates to the carrying value of our
investment assets which are stated at fair value.
Given the importance of this area, the Board has a
separate Valuations Committee to review the
valuations policies, process and application to
individual investments. However, asset valuations for
non-quoted investments are inherently subjective, as
they are made on the basis of assumptions which may
not prove to be accurate. At 31 March 2015 80% of the
investment assets were non-quoted (31 March 2014:
84%). A report on the activities of the Valuations
Committee is included in the Governance section of
this report and Note 10 of the Accounts provides
further detail on sensitivity.
Accounting for investment entities: an assessment is
required to determine the degree of control or
influence the Group exercises and the form of any
control to ensure that the financial treatment is
accurate. IFRS 10 has resulted in a number of
intermediate holding companies being presented at
fair value which has led to reduced transparency of
the underlying investment performance. As a result
the Group continues to present an alternative
non-GAAP investment basis set of financial
statements to ensure that the commentary in the
Strategic report remains fair, balanced and
understandable.
READ MORE
Further information on the Audit and
Compliance Committee’s activities can
be found on page 65
Further information on the Valuations
Committee’s activities can be found
on page 69
29
STRATEGIC REPORT3i Group Annual report and accounts 2015 Investment basis
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange (loss) on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest receivable
Interest payable
Movement in the fair value of derivatives
Foreign exchange gain/(loss)
Operating profit before carry
Carried interest
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Profit for the year
Other comprehensive income
Re-measurements of defined benefit plans
Total comprehensive income for the year (“Total return”)
Total
2015
£m
162
684
45
62
6
(154)
805
80
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
673
(14)
659
Total
2014
£m
202
475
44
50
7
(113)
665
73
(136)
3
(54)
10
(3)
558
3
(85)
(6)
470
(3)
467
11
478
30
STRATEGIC REPORT3i Group Annual report and accounts 2015 Investment basis
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investment portfolio
Carried interest and performance fees receivable
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and performance fees receivable
Other current assets
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
B shares
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Derivative financial instruments
Current income taxes
Deferred income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Other reserves
Own shares
Total equity
Total
2015
£m
Total
2014
£m
763
3,114
3,877
43
19
136
4
3
4,082
45
85
–
864
994
5,076
(214)
(10)
(815)
–
(19)
(3)
(5)
(1,066)
(169)
(13)
(17)
–
(2)
–
(3)
(204)
(1,270)
3,806
719
784
2,382
(79)
3,806
554
3,011
3,565
17
26
137
5
3
3,753
–
92
2
697
791
4,544
(106)
(18)
(849)
(6)
(14)
(2)
(5)
(1,000)
(198)
(11)
(10)
(4)
(4)
(1)
(8)
(236)
(1,236)
3,308
718
782
1,897
(89)
3,308
31
STRATEGIC REPORT3i Group Annual report and accounts 2015
Total
2015
£m
(474)
841
21
26
44
10
78
6
(13)
(10)
(117)
3
(54)
(5)
356
3
(6)
(183)
–
9
(177)
–
–
–
179
697
(12)
864
Total
2014
£m
(337)
677
14
9
44
4
75
5
(25)
–
(128)
3
(57)
(7)
277
–
–
(114)
(164)
(32)
(310)
2
90
92
59
656
(18)
697
Investment basis
CONSOLIDATED CASH FLOW STATEMENT
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash divestment 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
Acquisition related earn-out charges paid
Operating expenses
Interest received
Interest paid
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Issue of shares
Repurchase of B shares
Dividend paid
Repayment of short-term borrowings
Net cash flow from derivatives
Net cash flow from financing activities
Cash flow from investing activities
Acquisition of management contracts
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
32
STRATEGIC REPORT3i Group Annual report and accounts 2015 Reconciliation of Investment basis to IFRS
BACKGROUND TO INVESTMENT BASIS
FINANCIAL STATEMENTS
The Group makes investments in portfolio companies
directly, held by 3i Group plc, and indirectly, held through
intermediate holding company and partnership structures
(“Investment entity subsidiaries”). It also has other
operational subsidiaries which provide services and other
activities such as employment, regulatory activities,
management and advice (“Trading subsidiaries”).
The application of IFRS 10 requires us to fair value a
number of intermediate holding companies that were
previously consolidated line by line. This fair value
approach, applied at the intermediate holding company
level, effectively obscures the performance of our
proprietary capital investments and associated
transactions occurring in the intermediate holding
companies. The financial effect of the underlying portfolio
companies and fee income, operating expenses and
carried interest transactions occurring in Investment entity
subsidiaries are aggregated into a single value. Other
items which were previously eliminated on consolidation
are now included separately.
As a result we introduced separate non-GAAP “Investment
basis” Statements of comprehensive income, financial
position and cash flow in our 2014 Annual report and
accounts to aid understanding of our results. The Strategic
report is also prepared using the Investment basis as we
believe it provides a more understandable view of our
performance. Total return and net assets are equal under
the Investment basis and IFRS; the Investment basis is
simply a “look through” of IFRS 10 to present the
underlying performance. The two diagrams below
illustrate these changes, together with an illustrative
example to show how information can be aggregated.
RECENT IFRS 10 DEVELOPMENTS
The IASB issued a narrow scope amendment to IFRS 10 in
December 2014, and subsequently the Group has revisited
its initial assessment of all of its subsidiaries, resulting in a
small number of entities now being consolidated rather
than fair valued in the IFRS financial statements. The
Group has chosen to adopt the changes provided in the
narrow scope amendment, and has accounted for the
change in treatment retrospectively. The change has no
effect on total return or net asset value as reported in the
Group’s IFRS financial statements. The Investment basis
statements are unchanged, as the entities now being
consolidated in the IFRS statements have always been
consolidated in the Investment basis. Given the judgement
involved in interpreting the standard, and ongoing
discussion amongst the IASB and practitioners, similar
changes in future years remain possible.
RECONCILIATION BETWEEN INVESTMENT
BASIS AND IFRS
A detailed reconciliation from the Investment basis to
IFRS basis of the Statement of comprehensive income,
Statement of financial position and Cash flow statement
is shown on pages 34 to 37.
Investment basis/previous basis of consolidation
IFRS 10/new basis of consolidation
3i Group plc
The Group
3i Group plc
The Group
Investment
entity
subsidiaries
Portfolio
companies
Inter-company
balance
eliminated on
consolidation
Trading
subsidiaries
(regulated
investment
advisers,
employment
entities, etc.)
Portfolio
companies
(held directly
by 3i Group
plc)
Portfolio
companies
(held directly
by 3i Group
plc)
Investment
entity
subsidiaries
Portfolio
companies
Inter-company
balance
Trading
subsidiaries
(regulated
investment
advisers,
employment
entities, etc.)
ILLUSTRATIVE EXAMPLE – STATEMENT
OF COMPREHENSIVE INCOME
Realised/unrealised investment
returns
Fair value movements on
investment entity subsidiaries
Portfolio income
Operating expenses
Carry payable
Previous
basis of
consolidation
IFRS 10
consolidation
170
–
20
(50)
(10)
130
50
90
5
(10)
(5)
130
Realised/unrealised
investment returns
Portfolio income
Operating expenses
Carry payable
Investment
entity subsidiary
activity
120
15
(40)
(5)
90
33
STRATEGIC REPORT3i Group Annual report and accounts 2015 Reconciliation of consolidated statement
of comprehensive income
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
Note
IFRS
basis
2015
£m
Investment
basis
2014
£m
IFRS
adjustments
(restated)
2014
£m
IFRS
basis
(restated)
2014
£m
Realised profits over value on the
disposal of investments
Unrealised profits on the
revaluation of investments
Fair value movements on
investment entity subsidiaries
Portfolio income
Dividends
Income from loans and
receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest receivable
Interest payable
Movement in the fair value
of derivatives
Exchange movements
Income from fair value subsidiaries
Operating profit before carry
Carried interest
Carried interest and performance
fees receivable
Carried interest and performance
fees payable
Acquisition related earn-out
charges
Operating profit
Income taxes
Profit for the year
Other comprehensive income
Exchange differences on
translation of foreign operations
Re-measurements of defined
benefit plans
Total comprehensive income for
the year (“Total return”)
1, 2
1, 2
1
1, 2
1, 2
1, 3
1, 4
1, 4
1, 3
1
1, 4
1, 4
1, 3
162
684
–
45
62
6
(154)
805
80
(131)
3
(49)
(1)
40
–
747
80
(142)
(8)
677
(4)
673
–
(14)
659
(108)
(448)
530
(9)
(24)
–
105
46
–
9
–
–
–
(101)
1
(45)
–
70
–
25
2
27
(27)
–
–
54
236
530
36
38
6
(49)
851
80
(122)
3
(49)
(1)
(61)
1
702
80
(72)
(8)
702
(2)
700
(27)
(14)
202
475
–
44
50
7
(113)
665
73
(136)
3
(54)
10
(3)
–
558
3
(85)
(6)
470
(3)
467
–
11
659
478
(56)
(394)
433
(19)
(21)
–
68
11
2
–
–
–
–
(39)
8
(18)
–
68
–
50
–
50
(50)
–
–
146
81
433
25
29
7
(45)
676
75
(136)
3
(54)
10
(42)
8
540
3
(17)
(6)
520
(3)
517
(50)
11
478
Notes:
1 Applying IFRS 10 to the Statement of comprehensive income consolidates the line items of a number of previously consolidated
subsidiaries into a single line item “Fair value movements on investment entity subsidiaries”. In the “Investment basis” accounts we have
disaggregated these line items to analyse our total return as if these investment entity subsidiaries were fully consolidated, consistent
with prior years. The adjustments simply reclassify the Statement of comprehensive income of the Group, and the total return is equal
under the Investment basis and the IFRS basis.
2 Realised profits, unrealised profits, and portfolio income shown in the IFRS accounts only relate to portfolio companies that are held
directly by 3i Group plc and not those portfolio companies held through investment entity subsidiaries. Realised profits, unrealised profits,
and portfolio income in relation to portfolio companies held through investment entity subsidiaries are aggregated into the single “Fair
value movement on investment entity subsidiaries” line. This is the most significant reduction of information in our IFRS accounts.
3 Foreign exchange movements have been reclassified under the Investment basis as foreign currency asset and liability movements
within the investment entity subsidiaries are included within “Fair value movements on investment entities”.
4 Other items also aggregated into the “Fair value movements on investment entity subsidiaries” line include fees receivable from external
funds, audit fees, custodian fees, bank charges, other general and administration expenses, carried interest and tax.
34
STRATEGIC REPORT3i Group Annual report and accounts 2015 Reconciliation of consolidated statement
of financial position
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investments in investment entities
Investment portfolio
Carried interest and
performance fees receivable
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and
performance fees receivable
Other current assets
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance
fees payable
Acquisition related earn-out
charges payable
Loans and borrowings
B shares
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance
fees payable
Acquisition related earn-out
charges payable
Derivative financial instruments
Current income taxes
Deferred income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Other reserves
Own shares
Total equity
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
Note
IFRS
basis
2015
£m
Investment
basis
2014
£m
IFRS
adjustments
(restated)
2014
£m
IFRS
basis
(restated)
2014
£m
1
1
1,3
1
1
1
1
1,2
763
3,114
–
3,877
43
19
136
4
3
4,082
45
85
–
864
994
5,076
1
(214)
(10)
(815)
–
(19)
(3)
(5)
(1,066)
(169)
(13)
(17)
–
(2)
–
(3)
(204)
(1,270)
3,806
719
784
2,382
(79)
3,806
1
1
1
1
1
1
4
(364)
(1,842)
2,079
(127)
–
–
–
–
–
(127)
–
(31)
–
(3)
(34)
(161)
142
–
–
–
–
2
–
144
17
–
–
–
–
–
–
17
161
–
–
–
–
–
–
399
1,272
2,079
3,750
43
19
136
4
3
3,955
45
54
–
861
960
4,915
(72)
(10)
(815)
–
(19)
(1)
(5)
(922)
(152)
(13)
(17)
–
(2)
–
(3)
(187)
(1,109)
3,806
719
784
2,382
(79)
3,806
554
3,011
–
3,565
17
26
137
5
3
3,753
–
92
2
697
791
4,544
(106)
(18)
(849)
(6)
(14)
(2)
(5)
(1,000)
(198)
(11)
(10)
(4)
(4)
(1)
(8)
(236)
(1,236)
3,308
718
782
1,897
(89)
3,308
(296)
(1,687)
1,909
(74)
–
(1)
–
–
–
(75)
–
(16)
–
(23)
(39)
(114)
76
–
–
–
–
–
–
76
32
5
–
–
–
1
–
38
114
–
–
–
–
–
–
258
1,324
1,909
3,491
17
25
137
5
3
3,678
–
76
2
674
752
4,430
(30)
(18)
(849)
(6)
(14)
(2)
(5)
(924)
(166)
(6)
(10)
(4)
(4)
–
(8)
(198)
(1,122)
3,308
718
782
1,897
(89)
3,308
The Notes relating to the table above are on page 36.
35
STRATEGIC REPORT3i Group Annual report and accounts 2015
Reconciliation of consolidated statement of financial position continued
Notes:
1 Applying IFRS 10 to the Statement of financial position aggregates the line items into the single line item “Investment in investment
entities”. In the Investment basis we have disaggregated these items to analyse our net assets as if the investment entity subsidiaries
were consolidated. The adjustment reclassifies items in the Statement of financial position. There is no change to the net assets, although
for reasons explained below, gross assets and gross liabilities are different.
The disclosure relating to portfolio companies is significantly reduced by the aggregation, as the fair value of all investments held by
investment entity subsidiaries is aggregated into the “Investments in investment entities” line. We have disaggregated this fair value and
disclosed the underlying portfolio holding in the relevant line item, ie, quoted equity investments, unquoted equity investments or loans
and receivables.
Other items which may be aggregated are carried interest and other payables, and the Investment basis presentation again disaggregates
these items.
2 Cash balances held in investment entity subsidiaries are also aggregated into the “Investment in investment entities” line. At 31 March
2015 £3 million (2014 restated: £23 million) of cash was held in subsidiaries that are now classified as investment entity subsidiaries and
is therefore included in the “Investment in investment entities” line.
3 Intercompany balances between investment entity subsidiaries and trading subsidiaries also impact the transparency of our results
under the IFRS basis. If an investment entity subsidiary has an intercompany balance with a consolidated trading subsidiary of the
Group, then the asset or liability of the investment entity subsidiary will be aggregated into its fair value, while the asset or liability of the
consolidated trading subsidiary will be disclosed as an asset or liability in the Statement of financial position for the Group. Prior to the
adoption of IFRS 10, these balances would have been eliminated on consolidation.
4 Investment basis financial statements are prepared for performance measurement and therefore reserves are not analysed separately
under this basis.
36
STRATEGIC REPORT3i Group Annual report and accounts 2015 Reconciliation of consolidated cash flow statement
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
Note
IFRS
basis
2015
£m
Investment
basis
2014
£m
IFRS
adjustments
(restated)
2014
£m
IFRS
basis
(restated)
2014
£m
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash divestment from traded portfolio
Cash inflow from fair value subsidiaries
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest and performance
fees received
Carried interest and performance fees paid
Acquisition related earn-out charges paid
Operating expenses
Interest received
Interest paid
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Dividend paid
Repayment of short–term borrowings
Issue of shares
Repurchase of B shares
Net cash flow from derivatives
Net cash flow from financing activities
Cash flow from investing activities
Acquisition of management contracts
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
1
1
1
1
1
1
1
1
1
1
1
2
2
1
2
(474)
841
21
–
26
44
10
78
6
(13)
(10)
(117)
3
(54)
(5)
356
(183)
–
3
(6)
9
(177)
–
–
–
179
697
(12)
864
358
(571)
(21)
272
(12)
(9)
–
(1)
–
(1)
–
1
–
–
–
16
–
–
–
–
–
–
–
–
–
16
(23)
4
(3)
(116)
270
–
272
14
35
10
77
6
(14)
(10)
(116)
3
(54)
(5)
372
(183)
–
3
(6)
9
(177)
–
–
–
195
674
(8)
861
(337)
677
14
–
9
44
4
75
5
(25)
–
(128)
3
(57)
(7)
277
(114)
(164)
–
–
(32)
(310)
2
90
92
59
656
(18)
697
189
(223)
(14)
62
(3)
(19)
2
–
–
10
–
(3)
–
–
–
1
–
–
–
–
–
–
(2)
–
(2)
(1)
(23)
1
(23)
(148)
454
–
62
6
25
6
75
5
(15)
–
(131)
3
(57)
(7)
278
(114)
(164)
–
–
(32)
(310)
–
90
90
58
633
(17)
674
Notes:
1 The Consolidated cash flow statement is impacted by the application of IFRS 10 as cash flows to and from Investment entity subsidiaries
are disclosed, rather than the cash flows to and from the underlying portfolio.
Therefore in our Investment basis financial statements, we have disclosed our cash flow statement on a “look through” basis, in order to
reflect the underlying sources and uses of cash flows and disclose the underlying investment activity.
2 There is a difference between the change in cash and cash equivalents of the Investment basis financial statements and the IFRS financial
statements because there are cash balances held in investment entity subsidiary vehicles. Cash held within investment entity subsidiaries
will not be shown in the IFRS statements but will be seen in the Investment basis statements.
37
STRATEGIC REPORT3i Group Annual report and accounts 2015 Key risks and mitigations
3i Group’s Pillar 3
document can be
found at
www.3i.com
Effective risk assessment underpins the
successful delivery of our strategy. Integrity
and responsibility are central to our values
at 3i and are embedded in our approach to
risk management.
This section explains how we control and manage the risks
in our business. It outlines the key risks, our assessment of
their potential impact on our business in the context of the
current environment and how we mitigate them.
APPROACH TO RISK GOVERNANCE
The Board seeks to achieve an appropriate balance
between taking risk and generating returns for
shareholders and is responsible for risk assessment, the
risk management process and for the protection of the
Group’s reputation and brand integrity. It considers the
most significant risks facing the Group and uses
quantitative analyses, such as the vintage control and
weekly liquidity reporting, where appropriate. Non-
executive oversight of the risk management process is
exercised through the Audit and Compliance Committee
with respect to standards of integrity, financial reporting,
risk management, going concern and internal control. The
Audit and Compliance Committee’s activities are discussed
further in that Committee’s report on page 65.
The Board has delegated the responsibility for risk
oversight to the Chief Executive. He is assisted by the
Group Risk Committee (“GRC”) in managing this
responsibility, guided by the Board’s appetite for risk and
any specific limits set. The GRC maintains the Group risk
review, which summarises the Group’s principal risks,
associated mitigating actions and key risk indicators, and
identifies any changes to the Group’s risk profile. The risk
review is updated quarterly and the Chief Executive
provides an update at each Audit and Compliance
Committee meeting where the Committee members
contribute views and raise questions. The last risk
appraisal was completed in early May 2015.
Following the implementation of AIFMD in July 2014,
we further augmented risk governance with a separate
Risk Management Function. This group meets ahead of the
GRC meetings to consider separate risk reports for
each AIF managed by the Group, including areas such
as portfolio composition, operational updates and team
changes, which are then also considered by the GRC.
Assurance on the robustness and effectiveness of the
Group’s overarching risk management processes and
compliance with relevant policies is provided to the Audit
and Compliance Committee through the independent
assessment by Internal Audit and the work of Group
Compliance on regulatory risks.
In addition to the above, a number of other committees
contribute to the Group’s overall risk governance structure,
as set out in the diagram on page 39.
READ MORE
Further information on the Audit and
Compliance Committee’s activities can
be found on page 65
38
STRATEGIC REPORT3i Group Annual report and accounts 2015
3i’s RISK GOVERNANCE STRUCTURE
Overview of risk management framework and governance structure
Treasury Transactions
Committee
Board
Audit and Compliance
Committee
Considers risk implications of specific
treasury transactions as required.
Determines the Group’s risk appetite
as part of strategy setting.
A quorum of members meet
as required.
Brand and Values Committee
Considers risks to the Group’s brand,
values and reputation as required.
Meets as required.
Overall responsibility for maintaining
a system of internal controls that
ensures an effective risk management
and oversight process operates
across the Group.
Meets at least six times a year.
Receives reports from the Director
of Internal Audit on the Group’s risk
management processes and system
of internal controls.
Receives reports from the Director
of Group Compliance on regulatory
and compliance matters.
Updated at each meeting on the
outputs of the latest Group Risk
Committee meeting with the
opportunity to contribute views
or raise questions.
Meets at least six times a year.
Chief Executive
Investment Committee
Executive Committee
Group Risk Committee
Principal decision-making body in
respect of managing the business.
Meets monthly.
Considers risk in the context of
individual investments, portfolio
management decisions and
divestments.
Meets as required.
Conflicts Committee
Deals with potential conflict issues.
Meets as required.
Delegated responsibility for risk
management and oversight across the
Group, reflecting the Board’s appetite
for risk and any specific limits set.
Maintains the Group risk review, which
summarises the Group’s risk exposure
and associated mitigation or response
plan based on risks identified.
Meets four times a year to consider
the Group risk review, including
adequacy of risk mitigation
and controls.
Chairman provides update at each
meeting of the Audit and Compliance
Committee.
Committees of the Board
Committees of the Chief Executive
Independent review of potential conflict issues
Risk reporting to Audit and Compliance Committee
39
STRATEGIC REPORT3i Group Annual report and accounts 2015 Key risks and mitigations continued
Further details on
3i’s approach as a
responsible
investor are
available at
www.3i.com
RISK MANAGEMENT FRAMEWORK
RISK REVIEW PROCESS
The Group’s risk management framework is designed to
support the delivery of the Group’s strategic objectives.
The key principles that underpin risk management in the
Group are:
The Board and Group Executive Committee promote a
culture in which risks are identified, assessed and
reported in an open, transparent and objective
manner; and
The over-riding priority is to protect the Group’s
long-term viability and reputation and produce
sustainable, medium to long-term cash-to-
cash returns.
Managing the Group’s Environmental, Social and
Governance risks is central to how we do business and is
integral to our risk management framework.
Risk management is embedded within all areas of the
business. Members of the Executive Committee have
responsibility for their own business areas and the Group
expects individual behaviours to mirror the culture and
core values of the Group. All employees share the
responsibility of upholding 3i’s control culture and
supporting effective risk management to enable us to
deliver our strategy. Senior managers are required to
confirm their individual and business area compliance.
In addition, all staff are assessed on their awareness of
the Group’s values and compliance with them as part of
their annual appraisal.
In practice, the Group operates a “three lines of defence”
framework for managing and identifying risk. The first line
of defence against undesirable outcomes is the business
function and the respective Managing Partners across
Private Equity, Infrastructure and Debt Management.
Line management is supported by oversight and control
functions such as Compliance, Finance and Legal which
constitute the second line of defence. The Compliance
monitoring programme reviews the effective operation
of our processes in meeting regulatory requirements.
Internal Audit provides retrospective, independent
assurance over the operation of controls and is the third
line of defence. The internal audit programme includes
the review of risk management processes and
recommendations to improve the control environment.
The Group risk review process includes the monitoring of
key strategic and financial metrics considered to be
indicators of potential changes in its risk profile. The
review includes, but is not limited to, the following
reference data:
Financial performance and strategic dashboards;
Vintage control and asset allocation analysis;
Macroeconomic and M&A market overview;
Liquidity management;
Capital adequacy, including stress testing;
Operating expenses;
Portfolio performance reports for Private Equity,
Infrastructure and Debt Management;
Risk reports for managed Alternative Investment
Funds; and
Quarterly Group risk log.
In addition to the above, the GRC considers the impact of
any changes and developments on its risk profile, strategic
delivery and reputation quarterly.
The GRC uses the above to identify a number of key risks.
It then evaluates the impact and likelihood of each key risk,
with reference to associated measures and key
performance indicators. The adequacy of the mitigation
plans is then assessed and, if necessary, additional actions
are agreed and then reviewed at the subsequent meeting.
A number of focus topics are also agreed in advance of
each meeting. In FY2015 the GRC covered topics such as
business continuity; cyber and physical security;
Responsible Investing (“RI”)/Environmental, Social and
Governance (“ESG”) reporting; investment concentration
risk; and the Group’s progress on implementing
regulatory changes.
There were no significant changes to the Group’s approach
to risk governance or its operation in FY2015 but we have
continued to refine our framework for risk management
and reporting further to the implementation of AIFMD and
the Group’s approach to RI/ESG.
40
STRATEGIC REPORT3i Group Annual report and accounts 2015
REVIEW OF PRINCIPAL RISKS
The disclosures on the following pages are not an
exhaustive list of risks and uncertainties faced by the
Group, but rather a summary of those principal risks
which are under active review by the GRC and Board,
and have the potential to affect materially the achievement
of the Group’s strategic objectives and impact its financial
performance, reputation and brand integrity.
The Group’s risk profile and appetite remains broadly
stable. While there have been a number of emerging
external risks separately identified this year, for example
cyber crime, the Group believes that its consistent
strategy, institutional approach to investment and strong
culture have helped it to maintain its stable risk profile.
External
The external environment remains challenging. The key
economies in which the Group operates are showing signs
of recovery against a background of low interest rates
and the effects of quantitative easing in the Eurozone.
The potential for increased volatility or shocks, however,
remains; for example, from increased geopolitical
instability. In addition the regulatory environment
continues to evolve and conduct of business risk remains
in sharp focus.
The Group is subject to a range of additional regulatory
and tax reporting requirements. These include the
European Alternative Investment Fund Management
Directive (“AIFMD”), regulations under the European Market
Infrastructure Regulation (“EMIR”), Capital Requirements
Directive IV (“CRDIV”), revisions to the Client Asset rules
(“CASS”) and the introduction of the Foreign Account Tax
Compliance Act (“FATCA”). These changes have resulted
in a significant increase in reporting requirements,
operational complexity and cost to the business. However,
they have had limited practical effect on 3i’s ability to
deliver its strategy. Managing these changes has been a
key priority and the subject of regular updates to Executive
Committee and the Board. Future developments include
possible changes to the international tax system arising
from the OECD G20 Base Erosion and Profit Shifting
(“BEPS”) project.
Investment
The most significant risks are our ability to source
attractive investment opportunities, maximise the value
available from our portfolio and manage the timings of
exits and cash returns. These risks are closely linked to
the economic environment noted above. We continue to
focus on sectors and geographies where our expertise and
network can drive significant outperformance. The ability
to invest and realise successfully and to minimise the risk
of issues in the portfolio is also key to maintaining the
Group’s reputation and networks in its markets.
The Executive Committee actively monitors investments
from origination to realisation with robust monthly
management information supported by Valuation
Committee and Board oversight.
In addition there are a number of risks specific to each
business line as follows:
Private Equity
As the investment portfolio becomes more concentrated,
additional steps have been taken to increase the frequency
and scope of monitoring of the more material assets.
Individual portfolio company failures could have adverse
reputational consequences for the Group, even if the value
impact is not material.
Infrastructure
Strong investor demand for yield is challenging the
business’ ability to maintain investment rates in quality
assets. The business is adapting its strategy but remains
focused on pursuing new investments while considering
fund raising options and inorganic opportunities. Many of
the investments in the infrastructure portfolio provide
essential services to their community and the rigorous
management of their performance is therefore critical.
Debt Management
The principal risk is the ability to grow AUM profitably,
in line with its business plan. The business is also exposed
to potential volatility in the fixed income markets and the
effects of regulatory changes, including the Risk Retention
and Volcker rules (effective from 2016 and 2017 respectively)
which will impact the structure of the US CLO funds.
Specifically, during the warehouse phase of establishing
CLOs, we are exposed to market volatilities and potential
for further capital calls.
Operational
The key areas of potential operational risk include the
loss of key people and whether the investor skill sets and
business development capabilities can support the Group’s
strategic delivery. Detailed resource plans are in place at
the business line level and the Board conducts an annual
review of the Group’s organisational capability and
succession assessment. The last review was conducted
in September 2014.
The GRC also received regular updates on regulation,
currency risk and cyber security. In response to the
growing threat posed by cyber crime, we conducted
a detailed review of the threat posed by the external
environment, the adequacy of the Group’s internal control
framework and our ability to respond to such an event.
The Group also conducted a review of its business
continuity capabilities. The findings and proposed
enhancements were discussed and are being
implemented across the Group.
41
STRATEGIC REPORT3i Group Annual report and accounts 2015 Key risks and mitigations continued
Key risk factors
Consequences
Risk mitigation
2015 outcome
EXTERNAL
Economic stability
and vulnerability
to weaker growth
Significant geopolitical
uncertainty; for example
in Eastern Europe
Significant currency
movements and volatility
Limited growth or reduction in
NAV owing to contraction of
earnings and/or valuation
multiples in Private Equity or
Infrastructure
Impact on investment rates
and realisations
Impacts general market
confidence and lowers
risk appetite
Leads to economic instability
and lower growth
Unhedged foreign exchange rate
movements impact total return
and NAV
May impact portfolio performance
Monthly portfolio monitoring
to address any portfolio
issues promptly
Weekly monitoring of liquidity
and balance sheet
GIR good at 23%
Gearing has reduced to nil
Regular assessment of
exposures to geopolitical risk
across the Group’s investment
portfolio and investment pipeline
Despite increased instability,
the direct impact on 3i and
its Private Equity portfolio
companies has been limited
Monitoring of asset exposures
by currency
Regular sensitivity analysis
Specific short-term hedging on
entry or exit of investments
considered on a case by
case basis
FX impact on NAV has been
significant although remains
primarily unrealised
FX exposures at the portfolio
company level have been
monitored through existing
asset management processes
Increased volatility in equities
and fixed income markets
Increases risks with IPO exit route
Potential for large market
correction to impact valuations
and performance
Subdued M&A activity and high
pricing in 3i’s core markets
Investment and realisation
levels fall
Impact of new regulations on
3i’s new and existing business
Reduces capacity to invest and
pay enhanced shareholder
distributions
Lack of primary deal flow in the
US and European CLO market
Regulatory constraints on possible
future business development and
increased operating costs
Complexity increases risk of
non-compliance, with possible
financial or reputational
consequences
Monitoring at portfolio
company level
Focus on exit pipeline and
refinancing strategies
Close monitoring of Private
Equity performance and
valuations and capital at risk in
Debt Management
Number of successful IPOs
completed (eg Refresco
Gerber/Eltel)
Increased quoted asset
exposure; 20% of portfolio, but
largest exposure being 3iN
Increased use of adjusted
multiples for unquoted Private
Equity valuations
Active management of exit
strategies by Investment
Committee to adapt to market
conditions
Invested in four new Private
Equity assets and advised on
one Core infrastructure
investment
Regular monitoring of new
Strong exit market has enabled
investment work in progress
and market activity
the Group to dispose of a
number of non-core assets
Process to evaluate business
The changes to the UK and
impact for new investments and
business initiatives
New processes, procedures and
additional resource introduced
to support compliance
EU regulatory and tax regimes
have led to additional reporting
requirements, operational
complexity and cost to the
Group and we expect this to
continue in 2016.
Increased monitoring and
supervision by senior
management in initial
implementation phase
No practical limit, at present,
on ability to deliver strategy
KEY
42
Risk exposure has increased
No significant change in risk exposure
Risk exposure has reduced
STRATEGIC REPORT3i Group Annual report and accounts 2015
Key risk factors
Consequences
Risk mitigation
2015 outcome
INVESTMENT
Investment rate or quality is
lower than expected
Portfolio performance
is weak or is impacted
by a significant environmental,
social or governance incident
Impacts longer-term returns
Management focus on building
investment pipeline
Four new Private Equity
investments completed
Impairs ability to raise new funds
or attract new capital
Affects the Group’s reputation and
ability to operate
Reduction in NAV and realisation
potential
Increased covenant risk in weaker
Early involvement of Investment
Committee to identify key targets
Infrastructure investment rate
limited in competitive market
Regular review of vintage
control and asset allocation
Monthly portfolio monitoring
to address any portfolio
issues promptly
Good earnings growth of 19%
Refined approach
to RI/ESG investing
companies
Active management of new
Impairs track record for
fundraising purposes
Ability to grow Debt Management
AUM profitably and generate value
accretive returns
Inability to meet externally
communicated targets on revenue
and growth
Affects investors’ confidence in
the business
OPERATIONAL
Exposure to the loss of key
people
Potential to undermine investor
and/or shareholder confidence
Inability to deliver strategic plan
Organisational development,
for example people or
systems changes
Poor execution of strategic
changes impacts delivery of
stated targets
Chairman and CEO
appointments
Regular review of key
Environmental, Social and
Governance risks in portfolio
Regular review of progress
against business plan
Launched six new
CLOs in the year
Review and development of the
economics of the business and
operating model
First close of European
Mid-Market Lending
Fund at €250m
Investment Committee review
of new products, fund raising
commitments and other
proposals
Increased the size of US Senior
Loan Fund to $157m
Formal review of organisational
Board review in September 2014
capability and succession
planning
Annual remuneration review
Project governance and
management, including detailed
risk assessment and
mitigation planning
Regular progress reports to
Executive Committee
A number of key people
changes have been managed
satisfactorily
Successful implementation of
new Private Equity accounting
system
Increase in cyber security
threats
Potential loss of operation of core
systems or sensitive data
Disruption to our business and
that of our portfolio companies
Periodic cyber security
risk assessment and IT
penetration testing
Update of information security
policies, incident management
processes and staff training
Business continuity plans
reviewed
Cyber security framework
assessed and remedial actions
identified
READ MORE
READ MORE
Further information on Private Equity,
and Infrastructure and Debt
Management can be found on
pages 15 to 20
Further information on the Audit and
Compliance Committee’s report can be
found on page 65
43
STRATEGIC REPORT3i Group Annual report and accounts 2015
For full details
of 3i’s approach,
including details
of relevant
3i policies, please
visit the CR section
of our website at
www.3i.com.
Corporate responsibility
3i is committed to acting as a responsible
company, a responsible employer and a
responsible investor. 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.
A RESPONSIBLE COMPANY
Governance
Good corporate governance is fundamental to 3i and its
activities and is critical to the delivery of value to our
stakeholders. For full details of our governance structure
and processes, please see the Corporate governance
section of this report and visit the Governance section of
our website at www.3i.com.
Transparency
As a publicly-listed company, 3i operates within a
framework of formal legal and regulatory disclosure
requirements as well as meeting the high expectations for
transparency of our shareholders, fund investors, staff and
the media. We are committed to communicating both our
financial and non-financial performance in a clear, open
and comprehensive manner.
Anti-bribery and corruption
3i does not offer, pay or accept bribes and we only work
with third parties whose standards of business integrity
are substantively consistent with ours. We expect the
businesses we invest in to operate in compliance with all
applicable laws and regulations and, where appropriate,
work towards meeting relevant international standards
where these are more stringent. This includes, in
particular, upholding high standards of business integrity,
avoiding corruption in all its forms and complying with
applicable anti-bribery, anti-fraud and anti-money
laundering laws and regulations.
Environmental impact
In the year to 31 March 2015 our measured Scope 1 and 2
emissions were 411.8 tonnes CO2e. This comprised:
Scope
Emissions source
1
2
Combustion of fuel
and operation of
our facilities
Electricity, heat, and
cooling purchased
for our own use
Total
CO2e emissions
(tonnes) for
year to
31 March 2015
CO2e emissions
(tonnes) for
year to
31 March 2014
12.6
28.0
399.2
358.2
411.8
386.2
This equates to 1.52 tonnes CO2e per employee for the year
to 31 March 2015 (2014: 1.39 tonnes CO2e per employee),
based on an average number of employees during the
year of 271 (2014: 277 employees).
We have restated the emissions figures for the year to
31 March 2014 to reflect improved data collection and
analysis techniques which allows a more accurate
comparison between 2014 and 2015. Our total Scope 1
and 2 emissions have increased by 6.6% due principally
to better data coverage as well as an increase in overall
emissions from electricity usage due to business growth.
We have reported on all of the emission sources required
under the Companies Act 2006 (Strategic Report and
Directors’ Reports) Regulations 2013. These sources fall
within our consolidated financial statements.
We quantify and report our organisational greenhouse gas
emissions according to the Greenhouse Gas Protocol and
Defra’s Environmental Reporting Guidelines. Results are
reported in tCO2e although Scope 2 emissions for overseas
electricity have been calculated in tCO2 as the UK
Government’s overseas electricity emissions factors
currently account for CO2 emissions only. Emissions for all
of our sites have been included and we have chosen to
exclude fugitive Scope 1 emissions from a cooling unit
located at our London office as it is considered immaterial
to our overall footprint. The greenhouse gas sources that
constitute our operational boundary are:
- Scope 1: natural gas combustion within boilers; and
- Scope 2: purchased electricity for own use.
In some cases, missing data has been estimated using
either extrapolation of available data or data from the
previous year as a proxy. We have worked with Carbon
Credentials Energy Services to verify our greenhouse
gas emissions.
3i also reports its greenhouse gas emissions and climate
change data to the Carbon Disclosure Project.
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 and we also
support staff giving and sponsorship through matching
donations. Our charitable giving for the year to 31 March
2015 totalled £255,000.
A RESPONSIBLE EMPLOYER
Graduate scheme
We are proud to have launched our new graduate
recruitment scheme during the year which is designed to
develop our next generation of world-class investment
professionals and business leaders. Following a rigorous
process, we selected five high-quality graduates from
across Europe and a variety of disciplines to join us in
September 2015. The programme will consist of
comprehensive and high quality training followed by
rotations through each of our Private Equity, Infrastructure
and Debt Management businesses as well as our Strategy
and Finance teams. The top performers will be fast-
tracked into the business in April 2018.
44
STRATEGIC REPORT3i Group Annual report and accounts 2015
Case study:
The Passage
3i has supported The Passage for over five years
and is currently supporting the Employment Training
and Welfare Rights department
The Passage is a UK charity which aims to provide
homeless people in London with support to transform
their own lives by providing homelessness prevention
projects, resource centre services, outreach services,
hostel accommodation and supported semi-
independent accommodation.
Our donation funds the Employment Training and
Welfare Rights (“ETWR”) Department which provides
The Passage’s clients with support to find a way back
into employment as well as to explore training and
educational options.
During 2014, 390 homeless or insecurely housed
people visited the ETWR Department. The majority of
clients received benefit advice, life skills and IT skills
training, with 57 finding regular work.
The ETWR department also operates a work club
which helps clients look for work and overcome
obstacles such as a lack of relevant IT skills, given
so many jobs are now advertised online. To that end,
the ETWR department carried out 1,410 internet job
search sessions with clients. In addition, the work
club helped 15 clients prepare and study for the
Construction Skills Certification Scheme, supported
three clients who undertook work trials with local
employers in order to get used to being at work after
long periods of unemployment, and assisted 17 clients
who took part in voluntary work.
Further details
of 3i’s approach
as a responsible
investor, including
a summary of
our Responsible
Investment policy,
are available at
www.3i.com.
3i is a member of the
Dow Jones Sustainability
World Index.
FTSE Group confirms that 3i
has been independently
assessed according to the
FTSE4Good criteria, and has
satisfied the requirements to
become a constituent of the
FTSE4Good Index Series.
Created by the global index
company FTSE Group,
FTSE4Good is an equity index
series that is designed to
facilitate investment in
companies that meet globally
recognised corporate
responsibility standards.
Companies in the FTSE4Good
Index Series have met
stringent environmental, social
and governance criteria, and
are positioned to capitalise on
the benefits of responsible
business practice.
Human rights
Whilst 3i does not have a formal human rights policy, our
policies are consistent with internationally-proclaimed
human rights principles. In particular, 3i is an equal
opportunities employer and has clear grievance and
disciplinary procedures, an employee assistance
programme and an independent, external “whistle
blowing” hotline service.
3i is committed to ensuring that the businesses we invest
in comply with all applicable laws in relation to their
employees (amongst other things) and, where appropriate,
that they work towards meeting relevant international
standards (such as the ILO Fundamental Conventions)
where these are more stringent. Summaries of relevant 3i
policies, including our policies on people, recruitment and
selection, equal opportunities and diversity, health and
safety and responsible investment are available at
www.3i.com.
3i is an accredited London Living Wage Employer. This
means that every member of staff based in London,
including contracted maintenance and reception teams,
earns a “living wage” which is an hourly rate higher than
the UK minimum wage and is set independently, updated
annually and based on the cost of living in the UK.
At 31 March 2015, 3i had a total of 276 employees
(calculated under the investment basis) and this is how
they broke down by gender:
All 3i employees
3i Group plc Directors1
Senior managers2
Number
Male
Female
276
8
47
169
5
39
107
3
8
1 Includes non-executive Directors who are not 3i employees.
2 “Senior managers” excludes Simon Borrows and Julia Wilson
(who are included as Directors of 3i Group plc) and includes
28 people who were directors of undertakings included in the
consolidation, of whom 26 are male and two are female.
A RESPONSIBLE INVESTOR
We are signatories to the UN Principles for Responsible
Investment and have a clear and comprehensive
Responsible Investment policy which is embedded into our
new investment and portfolio monitoring processes.
3i Group plc has again been selected as an index
component of the Dow Jones Sustainability Indices (DJSI).
By order of the Board
Simon Borrows
Chief Executive
13 May 2015
45
STRATEGIC REPORT3i Group Annual report and accounts 2015
Corporate
Governance
47 Governance – Chairman’s
introduction
48 Board of Directors and Executive
Committee
50 Board and Committees
53 Statutory and corporate governance
information
57 Corporate governance statement
65 Audit and Compliance
Committee report
69 Valuations Committee report
72 Directors’ remuneration report
46
3i Group Annual report and accounts 2015 Governance
CHAIRMAN’S INTRODUCTION
“ Robust and effective
governance is critical to the
successful delivery of value
to the Group’s stakeholders.”
Sir Adrian Montague
Chairman
This section of the report describes how
3i is governed and managed. It gives
details on our Board and Executive
Committee members and explains how
the Board is organised and operates.
It also explains the roles and composition
of Board Committees and the division of
responsibilities between the Directors,
including between the Chairman and
Chief Executive. This section also includes
the Directors’ remuneration report, the
Audit and Compliance Committee report
and the Valuations Committee report.
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 volatile and
uncertain economic and political environment and the
changing regulatory landscape that our sector faces.
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.
Sir Adrian Montague
Chairman
47
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Board of Directors and Executive Committee
BOARD OF DIRECTORS
Sir Adrian Montague
Chairman (until
25 June 2015)
Chairman since 2010.
Chairman of Aviva plc,
The Manchester Airports
Group plc and The Point of
Care Foundation charity.
A non-executive director of
CellMark AB.
Previous experience
Chairman of Anglian Water
Group, 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. A non-executive
director of Skanska AB.
Simon Thompson
Chairman Designate
Non-executive Director since
April 2015 and appointed
Chairman with effect from
close of 2015 AGM. Chairman
of Tullow Oil plc and
non-executive director of Rio
Tinto plc. Also, until 14 May
2015, Senior Independent
director of Amec Foster
Wheeler plc.
Previous experience
Formerly a non-executive
director of Sandvik AB.
Executive director at Anglo
American plc where he
became executive director
and chairman of Tarmac
Group. Director of AngloGold
Ashanti Ltd and Newmont
Mining Corporation. Previous
career in investment banking
with N M Rothschild
and S.G. Warburg.
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. Member of the
Supervisory Board of Peer
Holding B.V., the Dutch holding
company for the Group’s and
3i Eurofund V’s investment in
Action. Also a non-executive
director at The British Land
Company PLC and, until
21 May 2015, Inchcape plc.
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.
Jonathan Asquith
Deputy Chairman since April
2015 and Senior Independent
Director since July 2014.
Non-executive Director since
2011. Chairman of Citibank
International Limited,
Citigroup Global Markets
Limited and Dexion
Capital plc.
Previous experience
Chairman of AXA Investment
Managers (to 2014). Non-
executive director of Ashmore
Group plc. Director of
Schroders plc from 2002 to
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.
Caroline Banszky
Non-executive Director since
July 2014. The Managing
Director of the Law Debenture
Corporation p.l.c. since 2002.
Previous experience
Chief Operating Officer of SVB
Holdings PLC, now Novae
Group PLC, a Lloyd’s listed
integrated vehicle from 1997
to 2002. Previously Finance
Director of N.M. Rothschild &
Sons Limited from 1995 to
1997, having joined the bank
in 1981. She originally trained
with what is now KPMG.
Alistair Cox
Non-executive Director since
2009. Chief Executive of Hays
plc since 2007.
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.
David Hutchison
Non-executive Director since
November 2013. Chief
Executive of Social Finance
Limited and a non-executive
director of the Start-Up
Loans Company.
Previous experience
Until 2009 Head of UK
Investment Banking at
Dresdner Kleinwort Limited
and a member of its Global
Banking Operating
Committee.
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.
48
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 EXECUTIVE COMMITTEE
Menno Antal
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.
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.
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 and Chairman of
the Debt Management
Investment Committee since
joining 3i in 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.
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 2005. Prior to
joining 3i, spent 13 years in
investment banking, latterly
as a Managing Director at
Société Générale. Qualified as
a chartered accountant
with KPMG.
Ben Loomes
Managing Partner,
Infrastructure and Group
Strategy Director
A member of the Executive
Committee and the Group’s
Investment Committee
since 2012.
Previous experience
Joined 3i in April 2012. Prior
to joining 3i, experience
included mergers and
acquisitions, financing
advisory and restructuring,
including roles at Goldman
Sachs, Greenhill & Co and
Morgan Stanley.
Phil White
Managing Partner,
Infrastructure
A member of the Executive
Committee and the Group’s
Investment Committee since
February 2014.
Previous experience
Joined 3i in 2007. Prior to
joining 3i, experience in
infrastructure investment,
advisory and financing,
including roles at Macquarie,
WestLB and Barclays.
49
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Board and Committees
BOARD AND COMMITTEES STRUCTURE
HOW THE BOARD OPERATES
The Board is responsible for ensuring 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 Board is assisted by various Principal Committees
of the Board which report regularly to the Board.
The Board committee structure is outlined on page 51.
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 have clearly defined terms
of reference. The terms of reference of the Audit and
Compliance 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 on page 51.
The Chairman leads the Board and ensures its effectiveness.
He also organises its business and sets its agenda.
In addition to the Chairman, there are currently six
independent non-executive Directors who have a range
of strong and complementary skills.
Attendance at meetings of the Board and its Principal
Committees during the last year is shown on page 58.
Before each Board and Committee meeting, 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 where relevant.
The key responsibilities and areas of focus for the
Board are:
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, where relevant,
members of the Executive Committee.
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.
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.
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.
Internal controls – maintain an appropriate internal
control framework.
Risk – ensure that there are effective risk management
policies and processes in place and an appropriate
governance structure.
The Board has a formal schedule of matters reserved to it
and its duly authorised Committees for decision. This is
described on page 57. 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 staff
below the Executive Committee and the formulation and
implementation of risk management policies and processes.
50
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 OVERVIEW OF COMMITTEES OF THE BOARD AND CHIEF EXECUTIVE
3i GROUP PLC BOARD
PRINCIPAL BOARD COMMITTEES
Audit and Compliance
Committee
Remuneration
Committee
Financial reporting,
risk and internal
controls
Caroline Banszky
(Chairman)
Jonathan Asquith
Alistair Cox
Director and senior
management
remuneration and Group
remuneration structure
Jonathan Asquith
(Chairman)
Alistair Cox
David Hutchison
Nominations
Committee
Board appointments,
and size, balance
and composition
of the Board
Sir Adrian Montague
(Chairman)
Jonathan Asquith
Caroline Banszky
Alistair Cox
David Hutchison
Simon Thompson
Martine Verluyten
Valuations
Committee
Valuation policy
and investment
valuations
David Hutchison
(Chairman)
Sir Adrian Montague
Simon Borrows
Martine Verluyten
Julia Wilson
In addition to its Principal Committees, the Board also has a number of other standing Committees established to
consider specific items of business on an ad hoc basis as required. These include the Treasury Transactions Committee
and the Brand and Values Committee.
CHIEF EXECUTIVE
CHIEF EXECUTIVE COMMITTEES
Executive Committee
Principal decision-
making body in respect of
managing the business
Simon Borrows (Chairman)
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Ben Loomes
Phil White
Julia Wilson
Investment Committee
Acquisition, management
and disposal of
investments
Simon Borrows (Chairman)
Menno Antal
Alan Giddins
Ben Loomes
Ian Lobley
Phil White
Julia Wilson
Group Risk Committee
Oversees the Group’s
risk management
framework
Simon Borrows (Chairman)
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Ben Loomes
Phil White
Julia Wilson
Director, Group Compliance
Director, Internal Audit
Conflicts Committee
Independent review
of conflict issues
Kevin Dunn (Chairman)
Ben Loomes
Julia Wilson
51
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Board and Committees continued
DIVISION OF RESPONSIBILITIES
The Board approved division of responsibilities between the Directors is summarised below.
Role of the Chairman
Leads the Board in setting its
agenda, agreeing strategy,
monitoring financial and
operational performance, and
establishing the Group’s risk
appetite.
Responsible for organising the
business of the Board, ensuring
its effectiveness, and
maintaining an effective system
of internal controls.
Ensures that non-executive
Directors 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.
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.
Role of the Chief Executive
Direct charge of the Group on a
Role of non-executive Directors
Scrutinise the performance of
day-to-day basis and is
accountable to the Board for the
financial and operational
performance of the Group.
Leads the Executive Committee
to develop and implement the
Group’s strategy and manage
risk and the internal control
framework.
Chairs the Investment
Committee to review the
acquisition, management and
disposal of investments.
Reports to the Board on financial
and operational performance
and progress in delivering the
strategic objectives.
Regularly engages with
shareholders and other key
stakeholders on the Group’s
activities and progress.
management in meeting agreed
objectives and monitor the
reporting of performance.
Seek assurance on the integrity
of the financial information and
that financial controls and
systems of risk management are
robust and defensible.
Determine appropriate levels of
remuneration for Executive
Directors and Executive
Committee and have a prime
role in appointing Directors and
in succession planning.
Constructively challenge and
help develop 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 2014.
EFFECTIVENESS
During the year, the Board conducted its annual evaluation
of its own performance and that of its Committees and
individual Directors. On this occasion, the process was led
by the Chairman and conducted internally; the performance
evaluation had been externally facilitated two years
previously by Dr Tracy Long of Boardroom Review Limited.
The Chairman held one-on-one discussions informed by
a checklist with all Directors and the Company Secretary.
The results of the evaluation process were reported to,
and discussed by, the Board. In addition, the Chairman
provided individual feedback to Directors.
The evaluation included consideration of the overall
composition of the Board including plans for non-executive
Director succession over time. Directors identified the
backgrounds and experiences which would be desirable in
future non-executive Directors to complement the Board’s
existing skills. The recent Board meeting held in
Amsterdam combined with visits to investee companies
was judged to have been valuable to non-executive
Directors and it was decided to hold further Board
meetings in non-UK locations in future. Directors identified
for further consideration specific topics which they
believed would be particularly relevant to the Group in the
coming year.
Following enhancements to Board processes made in
the previous year, suggestions were made for further
improvements. These included plans to improve the way
in which the Board as a whole could engage more fully in
and support the work of Valuations Committee and
Remuneration Committee.
In his role as Senior Independent Director, Mr J P Asquith
led a review by the Directors of the performance of the
Chairman and subsequently reported back to the Board
and provided feedback to the Chairman.
52
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Statutory and corporate governance information
INVESTMENT POLICY
TAX AND INVESTMENT COMPANY STATUS
The UK Listing Authority’s Listing Rules require 3i, as a
closed-ended investment fund, to publish an investment
policy. Shareholder approval is required for material
changes to this policy. Non-material changes can be made
by the Board. The current investment policy is set
out below.
The Company is an investment company under 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.
Investment policy
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.
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.
Although 3i does not set maximum exposure limits for
asset allocations, it does have a maximum exposure
limit that, save as mentioned below, no investment will
be made unless its cost does not exceed 15% of the
investment portfolio value as shown in the last
published valuation. A further investment may be
made in an existing investee company provided the
aggregate cost of that investment and of all other
investments in that investee company does not exceed
15% of the investment portfolio value as shown in the
last published valuation. A higher limit of 30% will
apply to the Company’s investment in 3i Infrastructure
plc. For the avoidance of doubt, 3i may retain an
investment even if its carrying value is greater than
15% or 30% (as the case may be) of the portfolio value
at the time of an updated valuation.
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.
REGULATION AND MANAGEMENT
ARRANGEMENTS
3i Investments plc, 3i Debt Management Investments
Limited, 3i BIFM Investments Limited, 3i Europe plc and
3i Nordic plc, all of which are subsidiaries of the Company,
are authorised and regulated by the Financial Conduct
Authority (“FCA”) under the Financial Services and Markets
Act 2000. Where applicable, certain Group subsidiaries’
businesses outside the United Kingdom are regulated
locally by relevant authorities.
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.
3i Investments plc is authorised by the FCA to, among
other things, manage Alternative Investment Funds
(“AIFs”). It is currently the Alternative Investment Fund
Manager (“AIFM”) of four AIFs, namely, 3i Group plc,
3i Growth Capital Fund, 3i Eurofund V and the 3i European
Middle Market Loan Fund. In compliance with regulatory
requirements, 3i Investments plc has ensured that a
depository has been appointed for each AIF. This is
Citibank International Limited. The Annual report and
accounts meet the investor reporting requirements as
set out in FUND 3.2.2R, 3.2.3R, 3.2.5R and 3.2.6R of the
FCA’s Investment Funds sourcebook for 3i Group plc as
a standalone entity. The Company’s profit for the year
is stated in its Statement of changes in equity and its
Financial position is shown on page 88. The Company
performs substantially all of its investment related
activities through its subsidiaries and therefore the
Group’s consolidated Statement of comprehensive
income is considered to be more useful to investors
than a Company statement.
53
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Statutory and corporate governance information continued
Furthermore, in some instances the relevant FUND
disclosures have been made in relation to the Group on a
consolidated basis rather than in respect of 3i Group plc as
a standalone entity. This is because 3i Group plc, as a
standalone entity, operates through its group subsidiaries
and therefore reporting on the Group’s activities provides
more relevant information on the Company and its
position. There have been no material changes to the
Company’s operations in the past year.
Although the disclosures required by FUND 3.2.2R, 3.2.3R,
3.2.5R and 3.2.6R of the FCA’s Investment Funds
sourcebook are covered in this Annual report they are
also, for convenience, summarised on the 3i website at
www.3i.com. This will be updated as required and
changes noted in future Annual reports.
RESULTS AND DIVIDENDS
Total comprehensive income for the year was £659 million
(2014: £478 million). An interim dividend of 6.0p
(comprising a base dividend of 2.7p and an additional
dividend of 3.3p) per ordinary share in respect of the year
to 31 March 2015 was paid on 7 January 2015. The
Directors recommend a final dividend of 14.0p (comprising
a base dividend of 5.4p and an additional dividend of 8.6p)
per ordinary share be paid in respect of the year to
31 March 2015 to shareholders on the Register at the close
of business on 19 June 2015.
The trustee of The 3i Group Employee Trust (“the
Employee Trust”) has waived (subject to certain minor
exceptions) dividends declared on shares in the Company
held by the Employee Trust and the Trustee of The 3i Group
Share Incentive Plan has waived dividends on unallocated
shares in the Company held by it.
SHARE CAPITAL AND DEBENTURES
The issued ordinary share capital of the Company as at
1 April 2014 was 971,803,122 ordinary shares and at
31 March 2015 was 972,453,819 ordinary shares of 7319/22p
each. It increased over the year by 650,697 ordinary shares
on the issue of shares to the trustee of The 3i Group Share
Incentive Plan and on the issue of shares under The 3i
Group Discretionary Share Plan.
At the Annual General Meeting (“AGM”) on 17 July 2014, 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 13 May 2014) until the Company’s AGM
in 2015 or 16 October 2015, if earlier. This authority was not
exercised in the year.
The issued B share capital of the Company as at 1 April
2014 was 4,635,018 B shares (cumulative preference
shares of 1p each). At the AGM on 17 July 2014, the
Directors were authorised to repurchase that number of
B shares in the Company until the Company’s AGM in 2015
or 16 October 2015, if earlier. In order to simplify the
Company’s capital structure, this authority was exercised
on 13 June 2014 when the outstanding 4,635,018 B shares
in issue with a total nominal value of £46,350.18 were
repurchased by the Company for an aggregate
consideration of £6,092,100.80 and subsequently
cancelled. These shares represented 0.0006% of the
Company’s called up share capital at the date of
acquisition.
As detailed in Note 16 to the Accounts, as at 31 March 2015
the Company had in issue Notes issued under the 3i Group
plc £2,000 million Note Issuance Programme.
DIRECTORS’ CONFLICTS OF INTERESTS AND
DIRECTORS’ INDEMNITIES
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.
As permitted by the Company’s Articles of Association
during the year and as at the date of this Directors’ report,
there were in place Qualifying Third-Party Indemnity
Provisions (as defined under relevant legislation) for the
benefit of the Company’s Directors and for the benefit of
Directors of one associated company.
EMPLOYMENT
The employment 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 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.
54
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 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 UK 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.
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 is
delivered in 3i shares, vesting over a number of years.
Remuneration policy is reviewed by the 3i Group plc
Remuneration Committee, comprising 3i Group plc
non-executive Directors.
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.
POLITICAL DONATIONS
In line with Group policy, during the year to 31 March
2015 no donations were made to political parties or
organisations, or independent election candidates, and
no political expenditure was incurred.
SIGNIFICANT AGREEMENTS
As at 31 March 2015, the Company was party to one
agreement that is subject to a renegotiation period on a
change of control of the Company following a takeover bid.
This agreement is a £350 million multi-currency Revolving
Credit Facility Agreement dated 5 September 2014,
between the Company, Barclays Bank PLC and 11 other
banks. The Company is required to notify Barclays Bank
PLC, as agent bank, within five days, of a change of control.
This opens a 20-day negotiation period to determine if the
Majority Lenders (as defined in the agreement) are willing
to continue the facility. Failing agreement, amounts
outstanding would be repayable and the facility cancelled.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual
report and accounts 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.
The Directors consider that this Annual report and
accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the Company’s performance,
business model and strategy. 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.
55
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Statutory and corporate governance information continued
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 Strategic 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.
GOING CONCERN
The Directors have acknowledged their responsibilities
in relation to the financial statements for the year to
31 March 2015.
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.
The Directors believe that the Group is well placed to
manage its business risks successfully. The Directors have
considered the uncertainties inherent in current and
expected future market conditions, their possible impact
upon the financial performance of the Group and a report
from the Group Finance Director on the outlook for
liquidity. 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.
INFORMATION REQUIRED BY LISTING
RULE 9.8.4
Information required by Listing Rule 9.8.4 may be found as
set out below:
Topic
Location
Capitalised interest
Share allotments
Portfolio income on page 26
Note 19
INFORMATION INCLUDED IN
STRATEGIC REPORT
In accordance with section 414 C (11) of the Companies Act
2006 the following information otherwise required to be
set out in the Directors’ report has been included in the
Strategic report: risk management objectives and policies;
post balance sheet events; likely future developments in
the business; and greenhouse gas emissions.
56
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Corporate governance statement
This section of the Directors’ report
contains the corporate governance
statement required by FCA Disclosure
and Transparency Rule 7.2.
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:
Approval of the Group’s overall strategy, strategic plan
CORPORATE GOVERNANCE
and annual operating budget;
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.
Approval of the Company’s half yearly and annual
financial statements and changes in the Group’s
accounting policies or practices;
Changes relating to the capital structure of the
Company or its regulated status;
Throughout the year, the Company complied with the
provisions of the UK Corporate Governance Code (the
“Code”) published by the Financial Reporting Council in
September 2012 and which is available on the
FRC website.
THE BOARD’S RESPONSIBILITIES
AND PROCESSES
The Board’s key responsibilities are described on page 50.
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 July 2014, 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 2015 AGM are set out in the 2015
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.
Major capital projects;
Major changes in the nature of business operations;
Investments and divestments in the ordinary course of
business above certain limits set by the Board from
time to time;
Policy on borrowing, gearing, hedging and
treasury matters;
Adequacy of internal control systems;
Appointments to the Board and the Executive
Committee;
Principal terms and conditions of employment of
members of the Executive Committee; and
Changes in employee share schemes and other
long-term incentive schemes.
Matters delegated by the Board to management include
implementation of the Board approved strategy, day-to-
day operation of the business, the appointment and
remuneration of 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.
57
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Corporate governance statement continued
MEETINGS OF THE BOARD
The principal matters considered by the Board during the
year (in addition to matters formally reserved to the Board)
included:
Changes to the Company’s Investment Policy which
were approved by the 2014 AGM;
The repurchase during the year of the Company’s
outstanding B shares;
The Group’s strategic model, related KPIs and
Review of Treasury Policy; and
annual budget;
Regular reports from the Chief Executive;
Regular reports from the Board’s committees;
The recommendations of the Valuations Committee on
valuations of investments;
Organisational capability and succession plans.
Reports and papers are circulated to the Directors in a
timely manner in preparation for Board and Committee
meetings. These papers are supplemented by information
specifically requested by the Directors from time to time.
The Annual report and accounts, half yearly report and
PERFORMANCE EVALUATION
quarterly trading updates;
Dividends;
Reviews of and updates on the Group’s Private Equity,
Infrastructure and Debt Management businesses;
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 52.
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 2015 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
C J Banszky2
A R Cox
D A M Hutchison
R H Meddings3
M G Verluyten
Audit and
Compliance
Committee
6
Board
6
6(6)
6(6)
6(6)
6(6)
3(4)
6(6)
6(6)
2(2)
6(6)
6(6)
4(5)
6(6)
1(1)
4(4)
Nominations
Committee
Remuneration
Committee
Valuations
Committee
5
5(5)
5(5)
5(5)
6
5(5)
2(2)
6(6)
6(6)
6(6)
2(2)
6(6)
4
4(4)
4(4)
4(4)
4(4)
3(4)
1 Stepped down from the Nominations Committee on 24 September 2014.
2 Appointed 17 July 2014.
3 Retired 17 July 2014.
58
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015
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
three-year term. Before the third and sixth anniversaries
of 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 shareholders or by the Board. The Company’s Articles of
Association provide for Directors to 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, 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 can remove any Director by
special resolution and appoint another person to be a
director in their place by ordinary resolution.
Subject to the Company’s Articles of Association, retiring
Directors are eligible for reappointment. The office of
Director is 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 ill-health or being absent from Board
meetings for 12 months without the Board’s permission.
In accordance with the Code, all Directors are subject to
reappointment every year. Accordingly, at the AGM to be
held on 25 June 2015, all the Directors will retire from
office. All the Directors are eligible for and seek
reappointment other than Sir Adrian Montague who will
retire as a Director at the conclusion of the AGM. The
Board’s recommendation for the reappointment of
Directors is set out in the 2015 Notice of AGM.
THE ROLES OF THE CHAIRMAN,
CHIEF EXECUTIVE AND SENIOR
INDEPENDENT DIRECTOR
The Board approved division of responsibilities between
the Chairman of the Board and the Chief Executive is
described on page 52.
During the year, Mr R H Meddings served as Senior
Independent Director until 17 July 2014 when he retired
from the Board and Mr J P Asquith served as Senior
Independent Director from that date.
DIRECTORS
Directors’ biographical details are set out on page 48. The
Board currently comprises the Chairman, six independent
non-executive Directors and two Executive Directors. Sir
Adrian Montague served as Chairman and Mr J P Asquith,
Mr S A Borrows, Mr A R Cox, Mr D A M Hutchison, Ms M G
Verluyten and Mrs J S Wilson served as Directors
throughout the year under review. Mr R H Meddings
served as a Director until 17 July 2014 and Mrs C J Banszky
served as a Director from 17 July 2014. Following the year
end, Mr S R Thompson was appointed as a non-executive
Director on 13 April 2015.
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. Further details of their role are set out on page
52. Non-executive Directors are expected to make
available sufficient time to meet the requirements of the
appointment. The average time commitment 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.
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 2015.
The Board reviews non-executive Director independence
at least annually, having regard to the potential relevance
and materiality of a Director’s interests and relationships.
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
Mr S A Borrows and Mrs J S Wilson each have
employment contracts with the Group with notice periods
of 12 months where notice is given by the Group and six
months where notice is given by the Director. Save for
these notice periods the employment contracts have no
unexpired terms. None of the other Directors has a service
contract with the Company.
59
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Corporate governance statement continued
Training and development
The Company has 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 in relation
to the performance of their duties.
THE BOARD’S COMMITTEES
As described on page 51, the Board is assisted by various
principal committees of the Board which report
regularly to it.
Audit and Compliance Committee
The membership and activities of the Audit and
Compliance Committee are described in its report on
pages 65 to 68.
Remuneration Committee
The membership and activities of the Remuneration
Committee are described in the Directors’ remuneration
report on pages 72 to 81.
Valuations Committee
The membership and activities of the Valuations
Committee are described in its report on pages 69 to 71.
Nominations Committee
The Nominations Committee comprises Sir Adrian
Montague (Chairman), Mrs C J Banszky, Mr J P Asquith,
Mr A R Cox, Mr D A M Hutchison, Mr S R Thompson, and
Ms M G Verluyten, all of whom served throughout the year,
save for Mrs Banszky who served from her appointment
as a Director on 17 July 2014 and Mr Thompson who
served from his appointment as a Director on 13 April
2015. Mr R H Meddings was a member of the Committee
until his retirement from the Board on 17 July 2014 and
Mr S A Borrows was a member of the Committee until
24 September 2014.
During the year, the Nominations Committee held six
meetings. Attendance of members at those meetings is
shown on the table on page 58. The Committee:
Considered the balance and composition of the Board,
including succession planning, and the needs of the
Company in terms of the desirable experience and
qualifications of future appointees as non-executive
Directors;
Recommended Mr Asquith for appointment as Senior
Independent Director;
Considered candidates for appointment as Chairman of
the Board in succession to Sir Adrian Montague;
Considered candidates for appointment as non-
executive Director and recommended to the Board the
appointment of Mrs Banszky; and
Considered 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, the Board strongly
supports the principle of boardroom diversity, of which
gender is one important aspect. The Board’s aim is to have
a diverse Board in terms of gender, industry experience,
skills and educational background, and nationality. The
Board makes appointments on merit and against objective
criteria. External search consultancies engaged by the
Company are instructed to put forward for all Board
positions a diversity of candidates including women
candidates. External search consultancies engaged by the
Committee during the year were Egon Zehnder, Russell
Reynolds Associates and The Zygos Partnership. Egon
Zehnder and Russell Reynolds Associates also provided
other recruitment services to the Group during the year.
THE COMPANY SECRETARY
Directors have access to the advice and services of
the General Counsel and Company Secretary, who advises
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.
60
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 MAJOR INTERESTS IN ORDINARY SHARES
Notifications of the following major voting interests in the Company’s ordinary share capital (notifiable in accordance with
Chapter 5 of the FCA’s Disclosure and Transparency Rules or section 793 Companies Act 2006) had been received by the
Company as at 31 March 2015 and 1 May 2015.
BlackRock, Inc
Artemis Investment Management LLP
UBS Global Asset Management
Threadneedle Asset Management Limited
State Street Global Advisors
J O Hambro Capital Management Group Limited
Legal & General Investment Management Limited
RELATIONS WITH SHAREHOLDERS
AND POTENTIAL INVESTORS
Approach to Investor Relations
The Board recognises the importance of maintaining a
purposeful relationship with shareholders. The Group has
a comprehensive Investor Relations programme to help
existing and potential investors to understand its activities,
strategy and financial performance. The Chief Executive
and the Group Finance Director meet with the Company’s
principal 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.
Board oversight
The Executive Directors brief the Board on a regular
basis on the implementation of the Investor Relations
programme and on feedback received from analysts and
investors. Any significant concern raised by shareholders
in relation to the Group is also communicated to the Board.
In addition, research reports published by investment
banks on 3i are circulated to the Board on a regular basis.
The Board also receives periodic feedback from existing
shareholders and potential investors through 3i’s
corporate brokers, Bank of America Merrill Lynch
and Barclays.
Institutional investor programme
Meetings with principal shareholders
The Executive Directors meet with the Group’s principal
shareholders on a twice yearly basis, following the
publication of annual and half yearly results and as
required during the year. The Chairman and Senior
Independent Director are also available to meet with
shareholders as required. The Investor Relations
department also manages a programme of engagement
with smaller shareholders, implemented through regular
presentations and meetings.
As at
31 March 2015
% of issued
share capital
As at
1 May 2015
% of issued
share capital
102,041,789
67,795,142
38,478,516
38,039,519
31,585,088
31,393,678
30,443,239
10.49
6.97
3.96
3.91
3.25
3.22
3.13
100,494,125
64,286,507
38,608,638
38,039,519
31,843,893
29,837,786
30,429,315
10.33
6.61
3.97
3.91
3.27
3.07
3.13
Meetings with potential investors
During the year, the Executive Directors and the Investor
Relations team held regular meetings with potential
investors internationally to communicate the strategy
and performance of 3i.
Annual and half yearly results presentations
The Executive Directors present the annual and half yearly
results to a broad group of institutional investors and
analysts. These presentations are webcast live on 3i’s
website, and the on-demand webcast remains available
on the website for a period of 12 months.
Capital markets day
The 2014 capital markets day, held in June, consisted of a
presentation to significant shareholders and analysts by
senior 3i executives and the management team of Action,
3i’s largest investment, followed by a tour of Action’s
distribution centre in the northern Netherlands. The
presentation focused on Action’s business model and
strategy and on its recent financial performance. The
presentation materials used on the day were made
available on 3i’s website to enable those investors and
analysts that could not attend to access the information
provided at the meeting.
Industry conferences
Throughout the year, the Executive Directors also
participated in a number of industry conferences
organised by investment banks for their institutional
investor base. These included conferences organised by
Morgan Stanley, Société Générale, KBW, Bank of America
Merrill Lynch and Citi.
Individual investors
Individual investors are encouraged to engage with the
Group and provide feedback through the Investor Relations
team and the Company Secretary, whose contact details
are available on the website.
61
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Corporate governance statement continued
Website
3i’s website provides a brief description of 3i’s history,
current operations and strategy, as well as an archive of
over 10 years of news and historical financial information
on the Group and details of forthcoming events for
shareholders and analysts. Annual and half-year results
presentations are also webcast live and on-demand on
3i’s website.
Annual General Meeting
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. Business to be discussed at the
meeting is notified to shareholders in advance through the
Notice of Meeting and covers matters such as the annual
election of Directors, the appointment of the Auditors and
the dividend declaration. During the meeting, shareholders
are also asked to approve the financial statement and
report of the Directors and Auditors. In addition,
shareholders are asked to approve the Directors’
remuneration report.
The 2014 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 2015 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 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 any
shares with preferred rights as may then be in issue.
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).
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. Where shares are held on behalf
of former or current employees under employee share
schemes, those participants can give instructions to the
holder of such shares as to how votes attached to such
shares should be exercised.
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.
62
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 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 and through active engagement
with the Boards of those companies. In relation to quoted
investments, the Group’s policy is to exercise voting rights
on all 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 2015 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 internal control process established for the Group
includes:
Policies
Core values and global policies together comprising the
Group’s high-level principles and controls, with which
all staff are expected to comply;
Detailed policies and procedures, with processes for
reporting weaknesses and for monitoring corrective
action; and
A Compliance manual, with procedures for reporting
compliance therewith.
Processes
Appointment of experienced and professional staff,
both by recruitment and promotion, of the necessary
calibre to fulfil their allotted responsibilities;
A planning framework which incorporates a Board
approved strategic plan, with objectives for each
business unit;
Formal business risk reviews performed by
management which evaluate the potential financial
impact and likelihood of identified risks and possible
new risk areas;
The setting of control, mitigation and monitoring
procedures and the review of actual occurrences,
identifying lessons to be learnt;
A comprehensive system of financial reporting to the
Board, based on an annual budget with monthly
reporting of actual results, analysis of variances,
scrutiny of key performance indicators and regular
re-forecasting;
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;
A Group Compliance function whose role is to integrate
regulatory compliance procedures and best practices
into the Group’s systems; and
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.
63
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 DIRECTORS’ REPORT
For the purposes of the UK Companies Act 2006, the
Directors’ report of 3i Group plc comprises the Corporate
Governance section on pages 46 to 81 other than the
Directors’ remuneration report on pages 72 to 81.
The Strategic report, Directors’ report and Directors’
remuneration report have been drawn up and presented
in accordance with and in reliance upon English company
law and the liabilities of the Directors in connection with
those reports shall be subject to the limitations and
restrictions provided by that law.
By order of the Board
K J Dunn
Company Secretary
13 May 2015
Registered Office:
16 Palace Street,
London SW1E 5JD
Corporate governance statement continued
Verification
An Internal Audit function which undertakes periodic
examination of business units and processes and
recommends improvements in controls to
management;
The external Auditors who are engaged to express an
opinion on the annual financial statements; and
An Audit and Compliance Committee which considers
significant control matters and receives reports from
Internal Audit, the external Auditors and Group
Compliance on a regular basis.
The internal control system is monitored and supported
by Internal Audit 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. 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:
Comprehensive system of key control and oversight
processes, including regular reconciliations, line
manager reviews and systems’ access controls;
Updates for consideration by the Audit and Compliance
Committee of accounting developments, including draft
and new accounting standards and legislation;
A separate Valuations Committee which considers the
Group’s investment valuation policies, application
and outcome;
Approval of the Group’s budget by the Board and
regular updates on actual and forecast financial
performance against budget;
Reports from Internal Audit on matters relevant to
the financial reporting process, including periodic
assessments of internal controls, processes and
fraud risk;
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
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.
64
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Audit and Compliance Committee report
INTRODUCTION
“ The Audit and Compliance
Committee’s priorities
remain the effectiveness of
internal control and ensuring
the integrity of the Group’s
financial reporting.”
Other attendees were invited from time to time depending
on the nature of agenda items.
The Chairman of the Committee also had meetings with
a number of these individuals separately, providing an
additional forum to discuss specific issues. During the
year, the Committee held private discussions with the
Group Finance Director, the Director, Internal Audit, the
Director, Group Compliance and with the external Auditors
in the absence of management.
For the first time, this Annual Report includes a separate
report from the Valuations Committee. The role of the
Committee to review and recommend the valuation of the
investment portfolio remains unchanged. However the
detail on the key valuation considerations and the review
and challenge undertaken in the year is now included in
the Valuation Committee Report on page 69.
Caroline Banszky
Chairman, Audit and Compliance Committee
INTRODUCTION
With the retirement in July 2014 of Richard
Meddings, who had been Chairman of the
Audit and Compliance Committee (“the
Committee”) since October 2010, Caroline
Banszky was appointed as Chairman with
effect from January 2015 after a period of
familiarisation with the business. In the
interim, Jonathan Asquith chaired the
Committee as Acting Chairman.
MEMBERSHIP AND ATTENDEES
The Board is satisfied that Mrs Banszky and Mr Asquith
both have recent and relevant financial experience as
outlined in the UK Corporate Governance Code. Further
detail on each Director’s experience can be found in the
Directors’ biographies on page 48.
Throughout the year, the Committee received regular
reports on a number of matters including the valuation
of the investment portfolio, internal audit findings and
follow-up work, accounting issues and judgements, and
legal and regulatory matters. The Committee received
presentations from members of senior management
including the Chief Executive, Group Finance Director,
General Counsel, Group Financial Controller, the Director,
Internal Audit and the Director, Group Compliance, as well
as from the external Auditors Ernst & Young LLP.
MEMBERSHIP DURING THE YEAR
Name
Membership status
Caroline Banszky (Chairman) Non-executive Director
Jonathan Asquith
Non-executive Director
Alistair Cox
Richard Meddings
Non-executive Director
Non-executive Director
Member since 17 July 2014
Chairman since 1 January 2015
Member since March 2011
Acting Chairman between 17 July 2014 and 1 January 2015
Member since October 2009
Retired as Chairman and member on 17 July 2014
65
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Audit and Compliance Committee report continued
WHAT THE AUDIT AND COMPLIANCE COMMITTEE REVIEWED IN THE YEAR
The Committee met six times during the year and the attendance of members at meetings is shown in the table on
page 58. During the year the Committee’s activities included considering the following:
Annual and half-year reports
Quarterly trading updates
Developments in financial reporting
External reporting being fair, balanced and
understandable
Going concern
Key areas of accounting judgements
and estimates
Financial
reporting
Internal control
and risk management
3i’s system of internal control
and risk management
External and internal audit reports
Regulatory changes and compliance
Annual effectiveness reviews of internal audit
and internal control framework
Confirmation of external Auditor independence
Policy and approval for non-audit fees
Audit plan and process, fees and engagement
Auditor performance and effectiveness
Regulatory position with regard to audit tendering
External
audit
Risk
reviews
Valuation reports and recommending the
investment asset valuation to the Board
Cyber security and business continuity
Regular reviews of regulatory changes,
projects to implement and compliance
Annual report on tax risk
Litigation
Liquidity and going concern
In addition to the areas of significant accounting judgement
(set out opposite) and monitoring the effectiveness of 3i’s
risk management, discussed further below, the Committee
particularly focused on the changing regulatory
environment, the finalisation of implementing a new
Private Equity accounting system and the increasing
materiality of carried interest payable accrual.
The regulatory and tax environment has been going
through a period of unprecedented change. There has
been a significant increase in reporting to regulators and
tax authorities as well as changes to our operating model
in accordance with the new requirements of AIFMD, EMIR,
CRD IV, CASS rules and FATCA. This has placed additional
burdens on the compliance and finance functions in
particular. The Committee has received quarterly updates
on the key regulatory and tax developments and
outstanding projects from both Finance and Group
Compliance. Where necessary external professional
service firms have been engaged to review both our
interpretation of the requirements and the ongoing
compliance as well as the processes implemented to
gather new data. The Committee also requested that
Internal Audit undertake a series of reviews to further test
implementation of our new regulatory reporting processes
and systems and ongoing compliance with the new
requirements which were found to be satisfactory.
The Committee assessed how the risks associated with a
new system implementation and related process changes
had been mitigated. The Committee requested that
Internal Audit undertake periodic reviews of the project,
including the change management process and a post
implementation review. It also requested a report on the
effectiveness of the system from the Group Financial
Controller. In addition the external Auditors considered the
effective working of the system and application controls as
part of the external audit. The Committee was satisfied
that the risks were being appropriately managed.
The improved investment performance and good flow
of realisations led the Committee to review the carried
interest payable accrual and payment processes. Internal
Audit undertook a review of the processes and accounting
policies. Following the completion of this review and
discussion with the external Auditors, the Committee was
satisfied that carried interest was being appropriately
managed and accounted for.
66
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Area of significant accounting judgement
What the Committee reviewed and concluded
Valuation of the Proprietary Capital portfolio
The most material area of judgement in the financial statements,
and noted as a key risk by the external Auditor, relates to the
valuation of the unquoted Proprietary Capital portfolio, which at
31 March 2015 was £3,114 million, or 80% of net assets, under
the Investment basis.
In recognition of the importance of this area the Board has
established a separate Valuations Committee to review the
valuations policy, process and application to individual
investments. This Committee provides quarterly
recommendations to the Committee and the Board.
Fair, balanced and understandable
Under the UK Corporate Governance Code the Board should
establish arrangements to ensure the Annual Report presents a
fair, balanced and understandable assessment of the Company’s
position and prospects.
On behalf of the Board, the Audit and Compliance Committee
considered the procedures required to ensure that this statement
could be made.
On behalf of the Board, the Committee considered quarterly
reports from the Chairman of the Valuations Committee and the
Group Finance Director, with particular focus on the assumptions
supporting the unquoted asset investments, any valuation
uncertainties and the proposed disclosure in the financial
statements.
For further information see the report of the Valuation
Committee on pages 69 to 71.
The Committee reviewed the Interim and Annual financial
statements as well as the quarterly trading updates with
management, focusing on the integrity and clarity of disclosure
and to enable the Board ultimately to provide the fair, balanced
and understandable confirmation to shareholders in the
Annual report. The Committee considers that the Annual report
is consistent with its understanding of the business.
The 2015 Annual report has been enhanced, in parallel with the
FRC’s Clear and Concise reporting programme, to ensure that it
is less cluttered and duplication is removed.
A report highlighting the relevant considerations was reviewed
by the Committee in advance of the year end and a summary
of the procedures undertaken was prepared alongside the
Annual report.
Ongoing development of IFRS 10 and the presentation of 3i’s results
The Group adopted IFRS 10 in its 2014 accounts and introduced the
non-GAAP Investment basis financial statements to ensure that its
results remained understandable.
The Committee monitored feedback received from external
users of the financial statements on the presentation of the
non-GAAP Investment basis and was satisfied that maintenance
of the Investment basis financial statements was appropriate.
The Committee continued to receive regular updates on
developments in IFRS 10, including the amendment in 2014, and
to endorse the engagement of management with the FRC, IASB
and relevant industry bodies.
The external Auditors also confirmed that the inclusion of the
Investment basis remained consistent with the prior year.
RISK AND INTERNAL CONTROL REVIEWS
The Committee has responsibility on behalf of the Board
for overseeing the effectiveness of the Group’s risk
management and internal control systems. It monitors the
activities of the Group Risk Committee (“GRC”), the risk
management processes in place and the activities of the
Internal Audit function, including its reporting on the
effectiveness of controls, the use of the Group’s
whistleblowing facility and any changes in approach or
issues relating to the UK Bribery Act.
A report summarising each quarterly GRC meeting, along
with the risk report considered, is circulated to the Audit
and Compliance Committee for review and discussion.
The risk report details the principal risks, which are
derived from the Group Risk process, along with
commentary on how the exposure to these risks has
moved in the quarter. The Committee also receives reports
from Internal Audit quarterly, covering change
management and other areas of identified higher risk.
67
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Audit and Compliance Committee report continued
The General Counsel and Group Finance Director prepare
an annual report on the internal controls framework for
presentation to the Committee. The review documents
the components of the internal control framework and
highlights the key developments in the year. A separate
commentary on the operation and effectiveness of the
internal control framework over the year is independently
prepared by Internal Audit. The Group maintains a
framework of controls related to key financial processes
and management of the associated risks. The
effectiveness of such controls is reviewed by Internal
Audit, either through dedicated reviews or in the course
of other reviews over the course of the year. Group
Compliance carries out desk based monitoring, business
unit and thematic reviews in relation to compliance
policies and other regulatory matters.
The Committee reviewed the scope, activity and
effectiveness of the Internal Audit function and met
privately with the Director, Internal Audit.
EXTERNAL AUDIT
Ernst & Young LLP has been the Group’s statutory external
Auditor since before the Company was listed on the
London Stock Exchange in 1994. The Committee assesses
the independence and objectivity, qualifications and
effectiveness of Ernst & Young LLP on an annual basis.
The Committee also concludes on whether to recommend
the reappointment of Ernst & Young LLP as Auditors to
the Board.
Auditor appointment and independence
The Committee recognises the importance of ensuring the
independence and objectivity of the Company’s Auditors. It
reviews the nature and extent of the services provided by
them, the level of their fees and the element comprising
non-audit fees.
The Committee reviewed the Auditors’ fee structure,
resourcing and terms of engagement in the year. The total
audit fee for the year was £2.0 million (2014: £2.0 million).
The Committee is satisfied that this fee is appropriate in
respect of the audit services provided and that an effective
audit can be provided. The Committee oversees the
Group’s policy on the provision of non-audit services by the
external Auditor. The Committee continues to see benefits
for the Group in engaging Ernst & Young LLP where:
The Committee Chairman approves all assignments
allocated to Ernst & Young LLP over a defined limit, other
than those related to due diligence within the Group’s
investment process. The key principle of our policy is that
permission to engage the external Auditor will be refused
when a threat to independence and/or objectivity is
perceived. Appointments in relation to the investment
process are independent of the audit team and are
approved separately by the Investment Committee
but are reported to the Committee Chairman.
Details of the non-audit fees paid to the Auditors are
disclosed in Note 6 to the financial statements. The
Committee concluded that all of these fees fell within its
criteria for engaging Ernst & Young LLP and that the
activities did not undermine the Auditor’s independence
or objectivity.
Assessing external audit effectiveness
The Committee reviews the effectiveness of Ernst & Young
LLP through the use of questionnaires completed by
management, by considering the extent of their
contribution at its meetings throughout the course
of the year and in one-to-one meetings.
The 2015 evaluation also reviewed the quality of the audit
process, the use of Ernst & Young LLP’s valuation practice
to support the audit of the portfolio valuations, the
technical knowledge of the team and staff turnover within
the Ernst & Young LLP audit team and the Committee
concluded that the audit was effective.
Audit tender
During the year the Committee reviewed the effect of the
UK Corporate Governance Code, the EU Audit Regulation
2014 and the Statutory Service Order 2014 issued by
the UK Competitions and Market Authority (“CMA”) with
respect to audit relationships. Due to the extent of the
changes to the business following the Strategic Review in
2012, the adoption of IFRS 10 and the extent of existing
relationships with alternative audit firms across the Group,
the Committee concluded that it would take advantage of
the transitional arrangements in relation to auditor
rotation as outlined by the Financial Reporting Council and
the CMA. The Committee currently plans that Ernst &
Young LLP will be retained at least until the conclusion of
the term of its current lead partner in 2018. A full tender
will therefore be conducted no later than 2018.
Work is closely related to the audit;
By order of the Board
A detailed understanding of the Group is required; and
Ernst & Young LLP is able to provide at least an
equivalent quality and/or value service than other
potential providers.
C J Banszky
Chairman, Audit and Compliance Committee
13 May 2015
68
READ MORE
Further information on the Audit and
Compliance Committee’s terms of
reference can be found on our website
www.3i.com
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Valuations Committee report
INTRODUCTION
“The Valuations Committee
plays an important role in
providing the Board with
assurance that the valuation
process is sound and
independently challenged.”
David Hutchison
Chairman, Valuations Committee
INTRODUCTION
The Committee has been in operation since
before the Company’s flotation in 1994 but
is reporting directly to shareholders for the
first time this year. The Valuations
Committee reports to the Audit and
Compliance Committee and the Board on
the valuation of the Group’s investment
assets. It meets quarterly, to coincide with
the Group’s external financial reporting
requirements. It reviews and challenges
the assumptions behind management’s
proposed investment asset valuation.
The Committee’s activity is principally focused on the
Private Equity investments as a high level of judgement is
required to value the unquoted portfolio. The Committee
has increased its review of the Group’s Debt Management
investments during the year as the capital allocation to
that business has grown. Limited time is devoted to
Infrastructure due to the fact that its principal investment
in 3i Infrastructure plc is quoted.
The Committee is responsible for keeping the Group’s
valuation policy under review and recommending any
changes to the policy to Audit and Compliance Committee
and the Board. The policy is reviewed at least annually.
The Group’s valuation policy is based on the International
Private Equity and Valuation (“IPEV”) guidelines which set
out recommended practice for fair valuing unquoted
investments within the IFRS framework.
MEMBERSHIP DURING THE YEAR
Name
David Hutchison (Chairman)
Sir Adrian Montague
Martine Verluyten
Simon Borrows
Julia Wilson
Non-executive Director
Non-executive Director
Non-executive Director
Chief Executive
Group Finance Director
OVERVIEW OF THE VALUATION PROCESS
The Committee receives a detailed report from the Group
Finance Director recommending a proposed valuation of
the investment portfolio. This report highlights the key
themes by business line and the main drivers of value
movement analysed between performance, multiple
movements and other factors. The Committee also
reviews selected material assets in further detail;
examples of such assets covered during the year included
Action, Basic-Fit, Scandlines and new investments made
during FY2015.
In advance of the full year and half year reporting,
management hold detailed individual portfolio company
reviews with the respective investment teams. All
non-executive Directors are free to attend these meetings.
Non-executive Directors, including members of the
Valuations Committee, attended a significant proportion of
all the meetings held in September 2014 and March 2015
and were represented at all of the top five Private Equity
portfolio company review meetings.
As part of its external audit, Ernst & Young LLP undertakes
a separate review of the proposed investment portfolio
valuation to determine that the valuation policy is being
complied with and that there is consistent application and
support for the underlying assumptions. Ahead of the
year-end audit, Ernst & Young LLP’s specialist valuations
team independently reviews a selection of assets to
provide further assurance on their overall audit conclusion
on the appropriateness of 3i’s portfolio valuation.
Membership status
Chairman and Member since December 2013
Member since July 2010
Member since 2012
Member since 2012
Member since 2009
Meetings are also attended by other members of the Executive Committee as required, the Group Financial Controller
and the external Auditors.
69
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Valuations Committee report continued
FY2015 UPDATE
The Committee focused on the following significant issues in the year:
Areas of judgement
What the Committee did
Private Equity
Earnings and multiple assumptions
The majority of the portfolio is valued using a multiple of EBITDA
earnings. This requires judgement as the earnings of the portfolio
company may be adjusted so that they are considered
“maintainable”.
There is also a significant degree of judgement in selecting the
appropriate set of comparable quoted companies to determine the
appropriate multiple to generate an enterprise value. Multiples are
selected by reference to quoted comparable companies, M&A
transactions and input in certain cases from corporate finance
advisors. We also take into account growth profile, diversification
and leverage/refinancing risk.
The multiple implied by the quoted comparable may be reduced if
the longer-term view (cycle or exit plan) supports the use of more
conservative multiples.
Imminent sale assets
At any point in time it is likely that a number of potential exit
processes from the portfolio are underway. Judgement is applied
by management as to the likely eventual exit proceeds and
certainty of completion. This means that in some cases an asset
may not be moved to an imminent sales basis until very shortly
before completion; in other cases the switch may occur on signing.
However as a general rule an asset moves to an imminent sale
basis only when a process is materially complete and the
remaining risks are estimated to be minimal, given the normal
completion risk around unquoted equity transactions.
Assets valued using a DCF basis
Earnings data is received monthly from Private Equity portfolio
companies and monitored closely by management. Actual
earnings may be adjusted in management’s proposed valuations,
for example, to reflect a full year’s trading of an acquired
business, removing profit from discontinued activities or
excluding exceptional transaction costs. Material adjustments
are highlighted to the Committee in the quarterly report for
review and approval.
Given the strong performance of many quoted markets in the
year, management proposed reducing a significant proportion of
multiples used to below the multiple implied by the quoted
comparable levels. Any such adjustments are reviewed by the
Committee. Ernst & Young LLP also specifically review and
consider the appropriateness of any such adjustments and
reports to the Committee.
Assets that are within active sales processes are reviewed by
the Committee including details such as the timeline to potential
completion, the number and make-up of bidders for investments,
execution and due diligence risks and regulatory or competition
clearance issues. Management propose a treatment for each
asset which the Committee reviews.
For assets valued using DCF techniques the key valuation
judgements relate to longer-term assumptions that drive the
underlying business plan and appropriate discount rates.
Material assumptions and changes to these assumptions are
reviewed by the Committee. This may include third-party
support if available. Sensitivity to assumptions is also noted.
Debt Management
Valuation process
The level of capital deployed into Debt Management investments
at 31 March 2015 was £176 million (March 2014: £143 million).
70% of this relates to investment in CLO equity where there is
limited trading and therefore limited third-party evidence of value.
Consequently, judgement is required on the choice of basis to use,
including use of internal DCF models.
Discount rates are selected by management with reference to
market transactions, weighted average cost of capital
calculations and other public data. Any material changes are
reviewed by the Committee.
As the level of capital invested in Debt Management investments
has continued to increase, the Committee has also continued to
review the valuations policy and refine the process. The use by
management of independent data supporting the proposed
valuations has been increased, and the quarterly valuation report
includes a range indicated from all available data points,
including internal DCF models, against the proposed valuation.
The range and actual values are reviewed by the Committee.
70
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 As part of its challenge and review process, the
Committee:
Considered the management information provided to
support the Committee’s review of the matter, including
the strength and operation of the internal controls and
management’s responses to any challenges raised by
the Committee members or Ernst & Young LLP;
Sought assurance from the external Auditors as to
whether and how they had considered each of
these areas;
Reviewed the consistency of the views of management
and the external Auditors.
The Committee was satisfied that the application of the
policy and process was appropriate during the period, and
recommended the portfolio valuation to the Audit and
Compliance Committee and the Board at each quarter end
for approval by the Board.
PORTFOLIO TRENDS
The Committee Chairman and management conducted a
review of the valuation outcomes in the portfolio since
2012. The Committee Chairman and Group Finance
Director reported to the Board in May 2015 on the key
observations.
It is intended to conduct similar reviews at least
annually as an additional review of the overall
portfolio development, alongside the specific
quarterly valuation process.
By order of the Board
D A M Hutchison
Chairman, Valuations Committee
13 May 2015
READ MORE
Further information on the Valuation
Committee’s terms of reference can
be found on our website www.3i.com
71
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Directors’ remuneration report
“We remain committed to
maintaining a remuneration
framework which rewards
progress in meeting the
Group’s strategic objectives.”
Jonathan Asquith
Chairman, Remuneration Committee
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 2014 to 31 March 2015
(“the year” or “FY2015”) 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” or “FY2016” relate to the
financial year 1 April 2015
to 31 March 2016.
At our 2014 Annual General Meeting, our remuneration
policy was approved. No changes are being made to that
policy. The policy is also reproduced for reference from
page 138 of this Annual Report.
Last year’s Directors’ remuneration report was our first
such report published under the Large and Medium-sized
Companies (Accounts and Reports) (Amendment)
Regulations 2013, and we received some helpful feedback
from a number of shareholders and their representatives
on aspects of that report. That feedback, particularly in
relation to disclosures linking performance to annual
bonus outcomes, has assisted us in preparing the
Directors’ remuneration report for the year.
PERFORMANCE IN THE YEAR
As we approach the end of the third year of the multi-year
strategic plan announced in June 2012, I am pleased to
report, as you will have read earlier in this Annual Report,
that this has been another successful year for the
Company. The business has continued to deliver a good
flow of realisations and strong unrealised value growth
driven by quality earnings growth. This, combined with the
Company’s continued cost discipline, has generated a total
return of 20% on opening shareholders’ funds. This return
was achieved despite significant currency headwinds. In
addition, all the objectives set out at the start of the
strategic plan have been met or exceeded.
72
The strong performance by the Company has been
reflected in the share price which has increased by 21%
in the year and a 177% total shareholder return since the
June 2012 strategic announcement.
The Committee’s decisions concerning the Executive
Directors’ remuneration were made in light of these
achievements against the strategic priorities which were
established for the year. Further information on this
assessment is provided on pages 74 to 76. Highlights of
these achievements include:
Portfolio return
A combination of strong Private Equity portfolio
performance, continued delivery of Private Equity
realisations at material uplifts to opening value and a very
good return on the Infrastructure portfolio, generated a
gross investment return of £805 million or 23% of opening
portfolio value. A significant portion of this return was
driven by earnings growth in the Private Equity portfolio.
Investment
The improved levels of new investment activity in FY2014
carried through to FY2015 with four key investments
completed in Private Equity: Q Holding (precision
engineered elastomeric components manufacturer),
Dynatech (manufacturer of engineered, mission critical
protective equipment), Aspen Pumps (manufacturer of
pumps and accessories for the air conditioning, heating
and refrigeration industry) and Christ (distributor and
retailer of affordable jewellery). The Infrastructure
business also completed a €107 million investment in two
oil storage facilities and committed a total of £37 million to
new PPP deals, while Debt Management successfully
completed £2.2 billion of new CLO issuance in the year.
However, in light of the high-priced market conditions for
Private Equity and Infrastructure assets, it was important
that the Company maintained an emphasis on disciplined
investing. Numerous potential investments were declined
for pricing reasons and only a select number of investment
opportunities were pursued and completed.
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Operating profit
For many years prior to FY2014, the Company had
operated at a material annual operating cash loss, which
diluted capital returns to our shareholders. Annual
operating cash profits have further improved from
£5 million in FY2014 to £28 million for FY2015. This
significantly exceeded the FY2015 target due to the 12%
growth in Debt Management AUM, improved portfolio
income cash generation in Private Equity and dividend
proceeds from 3iN.
Strategy, investor relations and culture
We are now at the end of the three year strategic plan
that was set out by our Chief Executive, Simon Borrows,
in June 2012. Each phase of the plan from the first year’s
Restructuring, the subsequent Transition and delivery
phase and now the achievement of the strategic goal
has been well communicated to, and supported by, our
shareholders. As a result of these strategic changes,
the Company today is now a more robust, efficient and
energised operation than three years ago.
The effects of this turnaround are reflected in the long-
term remuneration of the Executive Directors in two ways.
We have operated LTIP schemes for key management for
many years. This year is the first since 2008 in which any
long-term incentive award has actually vested at 3i. The
amounts received by the Executive Directors, which are
entirely in line with policy, reflect the Company’s excellent
performance under their guidance over the last three
years and the appreciation in the share price from £1.97
per share at the time of grant.
COMMITTEE PRIORITIES AND POTENTIAL
CHANGES IN THE CURRENT YEAR
The Committee remains committed to maintaining a
remuneration framework which rewards progress in
meeting the Group’s strategic objectives.
We regularly monitor relevant guidelines and regulatory
changes, and our current arrangements are fully in line
with these. During the current year, the Committee will
continue to follow developments, and in particular will
assess the potential impact of the draft EBA guidelines on
remuneration in relation to CRD IV, which may necessitate
changes to our remuneration policy in FY2016. The
Committee will also review its malus/clawback policies
in FY2016.
The Remuneration Committee values all feedback from
shareholders and hopes to receive your support at the
forthcoming Annual General Meeting.
Jonathan Asquith
Chairman, Remuneration Committee
13 May 2015
73
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Directors’ remuneration report continued
POLICY REPORT
The policy as set out in the 2014 Directors’ remuneration report was formally approved by shareholders at the Annual
General Meeting on 17 July 2014. No amendments to the policy are required for this year and so shareholders will not be
asked to vote on the policy at this year’s Annual General Meeting.
The full policy is reproduced for reference from page 138.
Following the publication of the 2014 Directors’ remuneration report, the Company issued a statement on its website
providing further context on how the Committee would address the issue of an Executive Director participating in a
carried interest scheme. For the avoidance of doubt, neither of the current Executive Directors participates in a carried
interest scheme and any future Chief Executive or Group Finance Director will not be permitted to participate. Further
details can be found on our website here: http://www.3i.com/system/files/reports/3i_DirectorsRemunerationPolicy_
AdditionalInformation.pdf.
THE ANNUAL REPORT OF REMUNERATION (IMPLEMENTATION REPORT)
Director remuneration for the year
Single total figure of remuneration for each Director
£’000
fees Benefits Pension
Salary/
FY2015
LTIP
(no
performance
condition)
LTIP
(performance
condition)
Annual
Bonus
Salary/
Total
fees Benefits Pension
FY2014
LTIP
(no
performance
condition)
LTIP
(performance
condition)
Annual
Bonus
Total
S A Borrows
J S Wilson
Sir Adrian Montague
J P Asquith
C J Banszky
A R Cox
D A M Hutchison
R H Meddings
W Mesdag
M G Verluyten
562
409
295
111
61
80
92
27
–
72
15
17
–
–
–
–
–
–
–
–
15
45
–
–
–
–
–
–
–
–
2,096
850
–
–
–
–
–
–
–
–
696
–
–
–
–
–
–
–
–
–
4,894 8,278
2,225 3,546
295
111
61
80
92
27
–
72
–
–
–
–
–
–
–
–
550
400
295
84
–
68
31
90
56
64
17
19
–
–
–
–
–
–
–
–
15
53
–
–
–
–
–
–
–
–
2,035
750
–
–
–
–
–
–
–
–
605
–
–
–
–
–
–
–
–
–
0 3,222
0 1,222
295
–
84
–
–
–
68
–
31
–
90
–
56
–
64
–
Benefits include a car allowance, provision of health insurance and, for Mrs Wilson, the value of the Share Incentive Plan matching
share awards.
Mr Borrows and Mrs Wilson received salary supplements in lieu of pension contributions of £15k and £45k respectively.
Annual bonus awards made in respect of the year are delivered as 50% cash immediately, and 50% payable in shares deferred for
four years, subject to the malus/clawback policy. These shares are released in four equal annual instalments over the four years
commencing June 2016 and carry the right to receive dividends and other distributions.
In the case of Mrs C J Banszky the sum shown (which includes VAT) was paid to her principal employer, the Law Debenture
Corporation p.l.c., which released her to serve as a non-executive Director.
In addition to the table above, dividends or dividend equivalents on unvested deferred share awards were paid during the year
(Mr Borrows £131k, Mrs Wilson £36k).
The value shown in the LTIP (no performance condition) for Mr Borrows represents the award made in 2011 on joining the Company
in recognition of awards forfeited on leaving his previous employment. The award value represents 171,087 shares vesting at a
market price of 407.3 pence.
The values shown in the LTIP (performance condition) represent the performance shares vesting from the 2012 LTIP. The shares have
been valued using the 31 March 2015 closing share price (482.4 pence). Further detail is provided on page 76.
The fees shown for the non-executive Directors include fees used to purchase shares in the Company.
In addition to the fees shown above, Mr Borrows retained directors’ fees of £67k from The British Land Company PLC and £76k from
Inchcape plc, and Mrs Wilson retained directors’ fees of £105k from Legal and General Group plc.
FY2015 ANNUAL BONUS
The annual bonuses for Executive Directors for the year were awarded against a balanced scorecard of both financial
and strategic measures agreed by the Committee in May 2014. The Committee uses the scorecard as a prompt and
guide to judgment and considers the performance outcomes in the wider context of personal performance (including
values and behaviours), risk, market and other factors.
74
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 The scorecard review was completed in the context of a very strong performance by the business, resulting in a 20%
total return for the year. Highlights of this performance included:
A strong level of realisations (£831m) from the Private Equity portfolio, delivered at a significant premium (27%) to
opening value;
Unrealised value growth of £684m in the Private Equity portfolio, underpinned by growth in earnings in portfolio
companies of 19%;
Improved origination activity resulting in increased levels of investment in Private Equity, Infrastructure and Debt
Management, whilst retaining a disciplined and selective approach to investment opportunities; and
Value uplifts and realisations from the European Infrastructure portfolio leading to a material increase in the
value of 3iN.
Virtually all of the Group and business line KPIs, including those set out in the scorecard assessment shown below, have
outperformed versus plan from the beginning of the year. Overall, performance for FY2015 not only exceeded plan but in
all material respects improved further on the excellent performance in FY2014.
The specific metrics considered by the Committee to assess the performance of the Executive Directors in each area
of strategic focus are set out below, together, where appropriate, with their associated targets.
For some metrics, particularly in the area of new investments and realisations, the Board sets expectations rather than
targets. This is because the timing of acquisitions and disposals is highly sensitive to market conditions, and a more
prescriptive approach would run the risk of creating perverse incentives for executives. For example, to achieve a target
level of realisations may result in the earlier sale of assets than would otherwise be appropriate, or to achieve a target
level of investments may result in investing at inflated prices. In practice, the Board’s expectations in these areas were
met or exceeded in each case.
Area of
strategic
focus
Weighting
(%)
Metrics considered
Target/Expectation Performance Comments
Gross investment return
(% of opening portfolio value)
T
£526m (15%) £805m (23%) Gross investment return exceeded expectations
Portfolio
return
40%
Private Equity cash income T
£32m
£55m
3iN investment return
New capital invested in
Private Equity
New CLO issuance in Europe
and US
New 3iN capital committed
in Core/PPP
Operating cash profit
Operating costs as a
percentage of AUM
Group underlying FM profits
(margin %)
T
E
E
E
T
T
T
10%
n/a*
n/a*
n/a*
£1m
1.0%
24%
£369m
£2.2bn
€107m/£37m
£28m
1.0%
£30m (24%) £33m (26%)
Investment 30%
Operating
profit
20%
Strategy,
investor
relations
and culture
10%
Achievement of strategy, investor relations and culture targets
is measured against a balanced scorecard of objectives set by
the Remuneration Committee.
T = Target E = Expectation
* Expectations are not disclosed as they are commercially sensitive
and surpassed that of the previous financial
year.
Realisations, interest and dividends across the
Private Equity portfolio were strong.
Other measures of portfolio return showed
excellent progression.
Investment performance was good overall with
CLO issuance expectations met and new capital
invested in Private Equity increasing on FY2014.
Maintained a disciplined and selective approach
to new investments in Private Equity,
Infrastructure and Debt Management.
Operating cash profit for the year was above
targets and showed strong performance and
growth compared with FY2014.
Underlying FM profits and operating costs
remained steady.
Successful execution of the three-year
strategic plan set out in June 2012. 3i is now
a more resilient business, both commercially
and financially.
Positive feedback from shareholders who
have been very supportive of the progress
in the implementation of the strategy.
Completion of transition to a new operating
system, consolidating reporting, improving
efficiency and eliminating 19 legacy systems.
3i’s Graduate Programme successfully launched
with the first graduates starting this autumn.
75
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Directors’ remuneration report continued
In the light of the achievements detailed above, and the exceptional performance of the Group in the year, the Committee
awarded Mr Borrows a bonus in respect of FY2015 of £2,096k (being 92.5% of his maximum bonus opportunity) and
awarded Mrs Wilson a bonus in respect of FY2015 of £850k (being 82.5% of her maximum bonus opportunity). In each
case, 50% of the award will be paid in cash immediately, with the remaining 50% being deferred into shares vesting in
equal instalments over four years.
SHARE AWARDS VESTING IN 2015 SUBJECT TO PERFORMANCE CONDITIONS
2012 Long-term incentive award
The long-term incentive awards granted in July 2012 to Mr Borrows and Mrs Wilson were subject to a performance
condition based on annualised Total return on equity over the three financial years to 31 March 2015. The table below
shows the achievement against this condition and the resulting proportion of the awards that will vest in July 2015.
Measure
Performance
% vesting
Performance
% vesting
Performance
% vesting
Annualised three-year total return
on equity
10% pa
20%
18% pa
100%
16.8%
90.85%
Threshold
Maximum
Actual
The table below shows the grants made to each executive Director on 10 July 2012 at a share price of 197p and the
resulting number of shares that will vest due to the achievement against the Total return on equity performance
condition. The value of the shares vesting has been included in the single figure table using the 31 March 2015 closing
share price of 482.4 pence.
S A Borrows
J S Wilson
Basis of award at grant
Face value award of 4 times
base salary of £550k
Face value award of 2.5 times
base salary of £400k
Number
of shares
awarded
at 197p
per share
Face Value
at grant
% vesting
Number
of shares
vesting
Value
of share
vesting
at 482.4p
per share
£2,200k
1,116,751
90.85%
1,014,568
£4,894k
£1,000k
507,614
90.85%
461,167
£2,225k
The proportion of the award vesting will be released 50% in July 2015, 25% in July 2016 and 25% in July 2017 together
with the value of dividends that would have been received during the release period.
CHANGE IN THE REMUNERATION OF THE CHIEF EXECUTIVE COMPARED TO OTHER EMPLOYEES
The table below shows the percentage change in remuneration awarded to the Chief Executive and employees as a
whole, between the year to 31 March 2014 and the year to 31 March 2015.
Chief Executive
All other employees
Salary
Benefits
3%
5%
0%
0%
Bonus
3%
17%
76
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015
DETAILS OF SHARE AWARDS GRANTED IN THE YEAR
LTIP
Performance share awards were granted to the two Executive Directors during the year as shown in the table below.
Description of award
Face value
A performance share based award, which releases shares, subject to satisfying the performance
conditions, 50% on the third anniversary of grant and 25% on the fourth and fifth anniversaries.
Chief Executive – 400% of salary, being 567,449 shares.
Group Finance Director – 250% of salary, being 257,931 shares.
The share price used to make the award was the average mid-market closing price over the five working
days starting with the day of the announcement of the 2014 annual results (387.7p).
1 April 2014 to 31 March 2017.
50% of the award is based on absolute TSR measured over the performance period, and vests:
0% vesting below 10% pa TSR;
20% vesting at 10% pa TSR;
Straight-line vesting between 10% and 18% pa TSR; and
100% vesting at 18% pa TSR.
50% of the award is based on relative TSR measured against the FTSE 250 Index over the performance
period, and vests:
0% vesting for below median performance against the index;
25% vesting for median performance against the index;
100% vesting for upper quartile performance against the index; and
Straight-line vesting between median and upper quartile performance.
The Committee can reduce any award which would otherwise vest if gross debt or gearing targets are
missed.
Performance period
Performance targets
Remuneration Committee
discretion
DEFERRED BONUSES AWARDED IN FY2015
Under the Deferred Bonus Plan, share awards were granted to the Executive Directors on 11 June 2014 in respect of
FY2014 performance with a face value of £813,600 (209,956 shares) for the Chief Executive and £300,000 (77,379 shares)
for the Group Finance Director. These face values were reported in the 2014 single total figure of remuneration for each
Director. The share price used to calculate face value was the average of the mid-market closing prices over the five
working days starting with the date of the announcement of the Company’s results for the year ended 31 March 2014
(14 May 2014 to 20 May 2014), which was 387.7 pence. These awards are not subject to further performance conditions
and vest in four equal instalments annually from 1 June 2015.
SHARE INCENTIVE PLAN
During the year Mrs Wilson participated in the HMRC approved Share Incentive Plan which during the year allowed
employees to invest up to £150 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 within three years of grant. Dividends are reinvested in further ordinary shares (“dividend shares”).
During the year Mrs Wilson purchased 409 partnership shares, and received 818 matching shares and 549 dividend
shares at prices ranging between £3.8173 and £4.923 per share, with an average price of £4.244.
PENSION ARRANGEMENTS
Mr Borrows and Mrs Wilson received salary supplements in lieu of pension of £15k and £45k respectively.
PAYMENTS TO PAST DIRECTORS
No payments were made to past Directors in the year.
PAYMENTS FOR LOSS OF OFFICE
No payments to Directors for loss of office have been made in the year.
77
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 Directors’ remuneration report continued
STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS
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 gross salary in the case of the Chief
Executive and 1.5 times gross salary for the Group Finance Director. In addition, shareholding targets have been
introduced for other members of Executive Committee at 1.5 times their gross salary levels and for partners in the
Group’s businesses at 1.0 times their gross salaries.
Details of Directors’ interests (including interests of their connected persons) in the Company’s shares as at 31 March
2015 are shown below. The share price on 31 March 2015 was £4.824.
S A Borrows3
J S Wilson3
Sir Adrian Montague3
J P Asquith3
C Banszky3
A R Cox3
D Hutchison3
M G Verluyten3
Shares
Owned
outright1
9,580,419
67,590
Deferred
shares
Subject to
performance2
Unexercised
share options
Shareholding
requirement
Current
shareholding
(% salary)
608,617
196,586
2,297,525
1,044,329
–
21,495
300%
150%
8,158%
79%
Shares owned
outright
90,905
10,602
6,000
22,900
53,966
18,000
1 The share interests shown for Mrs Wilson include shares held in the 3i Group Share Incentive Plan. The owned outright column includes
partnership and dividend shares under the SIP. The deferred shares column includes matching shares under the SIP.
2 The number of shares shown under the heading “Subject to performance” includes 100% of the 2012 Performance Share award. It is
expected that the performance target will be met with 90.85% of the shares being released as described on page 76.
3 Directors are restricted from hedging their exposure to the 3i share price.
From 1 April 2015 to 1 May 2015, Mrs Wilson became interested in a further 29 shares overall outright (SIP Partnership Shares) and a
further 58 deferred shares (SIP Matching Shares). There were no other changes to Directors’ share interests in that period.
PERFORMANCE GRAPH AND TABLE
TSR Graph
This graph compares the Company’s total shareholder return for the six financial years to 31 March 2015 with the total
shareholder return of the FTSE 250 Index.
3i total shareholder return vs FTSE 250 total return over the six years to 31 March 2015
450
400
350
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
3i Group
FTSE 250
Rebased at 100 at 31 March 2009
78
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015
Table of historic Chief Executive data
Year
FY2015
FY2014
FY20131
FY2012
FY2011
FY2010
Single figure
of total
remuneration
£’000
Percentage
of maximum
bonus paid
Percentage
of maximum
LTIP vesting
8,278
3,222
2,932
429
641
1,305
1,989
92.5%
92.5%
90%
0%
0%
54%
75%
90.85%
0%
n/a
0%
0%
0%
0%
Chief Executive
S A Borrows
S A Borrows
S A Borrows
M J Queen
M J Queen
M J Queen
M J Queen
1 M J Queen ceased to be a Director on 16 May 2012. Mr Borrows was appointed Chief Executive on 17 May 2012 having previously been
Chief Investment Officer.
RELATIVE IMPORTANCE OF SPEND ON PAY
Remuneration of all employees
Dividends paid to shareholders
2014/15
£85m
£183m
2013/14
£77m
£114m
Change
%
10.4%
60.5%
STATEMENT OF IMPLEMENTATION OF THE REMUNERATION POLICY IN THE COMING YEAR
The table below sets out how the Committee intends to operate the remuneration policy in FY2016.
Policy element
Base salary
Pension
Benefits
Annual bonus
Implementation of policy during FY2016
A Group-wide 3% increase to salaries will take place in FY2016, which will also be applied to Executive
Director salaries. Effective from 1 July 2015, salaries for the Executive Directors will therefore be as
follows:
Chief Executive: £583,495 (+3%)
Group Finance Director: £424,360 (+3%)
No changes to the current arrangements are proposed for FY2016. The Executive Directors will continue
to receive a pension contribution or salary supplement as follows:
Chief Executive: £15k
Group Finance Director: 12% of salary
No changes to the current arrangements are proposed for FY2016.
Benefits will continue to include a car allowance, provision of health insurance and any Share Incentive
Plan matching share awards.
The maximum annual bonus opportunities for FY2016 will remain unchanged, in line with the
remuneration policy, as follows:
Chief Executive: 400% of salary
Group Finance Director: 250% of salary
Awards over 75% of this maximum will be made only in exceptional circumstances.
Any bonus will be awarded based on a balanced scorecard of both financial and strategic measures
agreed by the Committee, alongside a consideration of the wider context of personal performance
(including values and behaviours) risk, market and other factors.
Measures for the FY2016 scorecard are based 85% on financial measures (50% portfolio returns, 25%
investment management and 10% operating performance) and 15% on strategic and people objectives.
They are calibrated to current business strategy and will evolve year on year as the Group’s situation and
priorities develop.
The Committee considers that the specific targets and expectations contained in the FY2016 scorecard
are commercially sensitive and therefore will not be disclosed in advance. We will report to shareholders
next year on performance and the resulting bonus outturns.
At least 50% of any bonus award will be deferred into shares vesting in equal instalments over four years.
Under the Company’s malus and clawback policy, any deferred bonus may be forfeited or reduced prior
to vesting in exceptional circumstances on such basis as the Committee considers fair, reasonable and
proportionate. This would include material misstatement of Group financial statements, 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.
79
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015
Directors’ remuneration report continued
Policy element
Implementation of policy during FY2016
Long-term incentive plan
Awards under the long-term incentive plan in FY2016 will be made as follows:
Chief Executive: 400% of salary
Group Finance Director: 250% of salary
Performance will be measured over a three year period and will be determined by the Remuneration
Committee. Performance measures remained unchanged from the previous year and will be as follows:
50% of the award is based on absolute TSR measured over the performance period, and vests:
0% vesting below 10% pa TSR;
20% vesting at 10% pa TSR;
Straight-line vesting between 10% and 18% pa TSR; and
100% vesting at 18% pa TSR.
50% of the award is based on relative TSR measured against the FTSE 350 Index* over the performance
period, and vests:
0% for below median performance against the index;
25% for median performance against the index;
100% for upper quartile performance against the index; and
Straight-line vesting between median and upper quartile performance.
*Awards under the FY2015 plan were measured against the FTSE 250 Index. After a review, the
Committee has decided that the FTSE 350 Index is a more appropriate index to measure the Company’s
relative TSR, as this Index reflects both the variety of the Company’s portfolio of international
investments as well as the diverse currencies in which those investments are denominated.
Under the Company’s malus and clawback policy, any long-term incentive award may be forfeited or
reduced prior to vesting in exceptional circumstances on such basis as the Committee considers fair,
reasonable and proportionate. This would include material misstatement of Group financial statements,
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.
No changes to the current arrangements are proposed for FY2016. Shareholding requirements will
therefore remain as follows:
Chief Executive: 300% of salary
Group Finance Director: 150% of salary
No changes to the current arrangements are proposed for FY2016. Fees for the non-executive Directors
will therefore remain as follows:
Chairman fee:
£265,000 plus £30,000 in 3i shares
Non-executive Directors:
Board membership fee:
Deputy Chairman (including SID fee)
Senior Independent Director fee:
Committee Chairman:
Committee member:
£50,000 plus 3,000 3i shares.
£40,000
£10,000
£20,000
£8,000
Committee fees are payable in respect of the Audit and Compliance Committee, Remuneration
Committee and Valuations Committee.
Shareholding requirements
Non-executive Director fees
80
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 CONSIDERATION BY THE DIRECTORS OF MATTERS RELATING TO DIRECTORS’ REMUNERATION
The following Directors were members of the Remuneration Committee during the year:
MEMBERSHIP DURING THE YEAR
Name
Jonathan Asquith (Chairman)
Non-executive Director
Alistair Cox
David Hutchison
Non-executive Director
Non-executive Director
Membership status
Member since March 2011
Chairman since May 2011
Member since July 2011
Member since December 2013
The Committee’s terms of reference are available on the Company’s website.
The Committee appointed Deloitte LLP as advisers in 2013 and during the year they provided the Committee with
external, independent advice.
Deloitte are members of the Remuneration Consultants Group and as such, voluntarily operate under the code of conduct
in relation to executive remuneration consulting in the UK. During the year, Deloitte LLP also provided 3i with certain tax
advisory services. The Committee has reviewed the advice provided during the year and is satisfied that it has been
objective and independent. The total fees for advice during the year were £44,200 (excluding VAT).
The Chief Executive, the Remuneration Director and the General Counsel, Company Secretary & Head of HR attend
Committee meetings by invitation, other than when their personal remuneration is being discussed.
RESULT OF VOTING AT THE 2014 AGM
At the 2014 AGM, held on 17 July 2014, votes cast in respect of the Directors’ remuneration report were:
Resolution
Approval of the remuneration report (other than the part containing the
Directors’ remuneration policy)
Approval of the Directors’ remuneration policy
Votes
for
Votes
against
Total votes
cast
Votes
withheld
690,675,950
(98.53%)
701,059,781
(98.10%)
10,279,207
(1.47%)
13,563,200
(1.90%)
700,955,157
15,466,533
714,622,981
1,798,709
AUDIT
The tables in this report (including the Notes thereto) on pages 74 to 79 have been audited by Ernst & Young LLP.
By order of the Board
Jonathan Asquith
Chairman, Remuneration Committee
13 May 2015
81
CORPORATE GOVERNANCE3i Group Annual report and accounts 2015 83
84
Consolidated statement of
comprehensive income
Consolidated statement
of financial position
85 Consolidated statement
of changes in equity
86 Consolidated cash flow statement
87
Company statement
of financial position
Company statement
of changes in equity
88
89 Company cash flow statement
Significant accounting policies
90
93 Notes to the accounts
129 Independent Auditor’s report
Audited
financial
statements
82
3i Group Annual report and accounts 2015
Consolidated statement of comprehensive income
FOR THE YEAR TO 31 MARCH
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Fair value movements on investment entity subsidiaries
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest received
Interest paid
Movement in the fair value of derivatives
Exchange movements
Income from fair value subsidiaries
Carried interest
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit before tax
Income taxes
Profit for the year
Other comprehensive expense that may be reclassified to the income statement
Exchange differences on translation of foreign operations
Other comprehensive income that will not be reclassified to the income statement
Re-measurements of defined benefit plans
Other comprehensive income for the year
Total comprehensive income for the year (“Total return”)
Earnings per share
Basic (pence)
Diluted (pence)
Dividend per share
Interim dividend per share paid (pence)
Final dividend per share (pence)
1 Restated. See Note 31.
Notes
2
3
11
4
13
13
7
26
8
8
9
9
2015
£m
54
236
530
820
36
38
6
(49)
851
80
(122)
3
(49)
(1)
(61)
1
80
(72)
(8)
702
(2)
700
(27)
(14)
(41)
659
73.9
72.9
6.0
14.0
2014
(restated)1
£m
146
81
433
660
25
29
7
(45)
676
75
(136)
3
(54)
10
(42)
8
3
(17)
(6)
520
(3)
517
(50)
11
(39)
478
54.8
54.5
6.7
13.3
83
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Consolidated statement of financial position
AS AT 31 MARCH
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investments in investment entities
Investment portfolio
Carried interest and performance fees receivable
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and performance fees receivable
Other current assets
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
B shares
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Derivative financial instruments
Current income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Translation reserve
Capital reserve
Revenue reserve
Own shares
Total equity
1 Restated. See Note 31.
Sir Adrian Montague
Chairman
13 May 2015
84
Notes
2015
£m
2014
(restated)1
£m
10
10
11
13
14
26
7
13
15
13
16
26
7
17
18
13
7
17
19
20
399
1,272
2,079
3,750
43
19
136
4
3
3,955
45
54
–
861
960
4,915
(72)
(10)
(815)
–
(19)
(1)
(5)
(922)
(152)
(13)
(17)
–
(2)
(3)
(187)
(1,109)
3,806
719
784
43
31
216
1,519
573
(79)
3,806
258
1,324
1,909
3,491
17
25
137
5
3
3,678
–
76
2
674
752
4,430
(30)
(18)
(849)
(6)
(14)
(2)
(5)
(924)
(166)
(6)
(10)
(4)
(4)
(8)
(198)
(1,122)
3,308
718
782
43
19
243
1,050
542
(89)
3,308
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
Consolidated statement of changes in equity
FOR THE YEAR TO 31 MARCH
2015
Total equity at the start of the year1
Income for the year
Exchange differences on translation of
foreign operations
Re-measurements of defined benefit plans
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards
Ordinary dividends
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
2014 (restated)1
Total equity at the start of the year
Income for the year
Exchange differences on translation of
foreign operations
Re-measurements of defined benefit plans
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards
Ordinary dividends
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
1 Restated. See Note 31.
Share
capital
£m
718
Share
premium
£m
782
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
43
19
243
–
–
–
(27)
(27)
–
19
(7)
Capital
reserve
£m
1,050
599
Revenue
reserve
£m
542
101
Own
shares
£m
(89)
(14)
585
(10)
(106)
101
7
(77)
–
10
43
31
216
1,519
573
(79)
1
719
2
784
Share
capital
£m
718
Share
premium
£m
780
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
Capital
reserve
£m
Revenue
reserve
£m
43
17
293
–
–
–
(50)
(50)
–
8
(6)
Own
shares
£m
(104)
–
15
700
392
11
403
(15)
(38)
487
125
125
6
(76)
718
2
782
43
19
243
1,050
542
(89)
Total
equity
£m
3,308
700
(27)
(14)
659
19
–
–
(77)
(106)
3
3,806
Total
equity
£m
2,934
517
(50)
11
478
8
–
–
(76)
(38)
2
3,308
85
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 2015
£m
(116)
270
272
14
35
10
77
6
(14)
(10)
(116)
3
(54)
(5)
372
3
(6)
(183)
–
9
(177)
–
–
195
674
(8)
861
2014
(restated)1
£m
(148)
454
62
6
25
6
75
5
(15)
–
(131)
3
(57)
(7)
278
–
–
(114)
(164)
(32)
(310)
90
90
58
633
(17)
674
Consolidated cash flow statement
FOR THE YEAR TO 31 MARCH
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash inflow from fair value subsidiaries
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest and performance fees received
Carried interest and performance fees paid
Acquisition related earn-out fees paid
Operating expenses
Interest received
Interest paid
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Issue of shares
Repurchase of B shares
Dividend paid
Repayment of short-term borrowings
Net cash flow from derivatives
Net cash flow from financing activities
Cash flow from investing activities
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
1 Restated. See Note 31.
86
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Company statement of financial position
AS AT 31 MARCH
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investment portfolio
Carried interest and performance fees receivable
Interests in Group and fair value entities
Total non-current assets
Current assets
Other current assets
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
B shares
Total non-current liabilities
Current liabilities
Trade and other payables
Acquisition related earn-out charges payable
Derivative financial instruments
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Capital reserve
Revenue reserve
Total equity
Sir Adrian Montague
Chairman
13 May 2015
Notes
2015
£m
2014
£m
10
10
22
15
16
18
19
399
1,163
1,562
33
1,561
3,156
341
–
735
1,076
4,232
(2)
(10)
(815)
–
(827)
(327)
(11)
–
(338)
(1,165)
3,067
719
784
43
31
1,400
90
3,067
258
1,283
1,541
8
1,735
3,284
303
2
605
910
4,194
(2)
(16)
(849)
(6)
(873)
(292)
(10)
(4)
(306)
(1,179)
3,015
718
782
43
19
1,368
85
3,015
87
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Company statement of changes in equity
Share
premium
£m
Capital
redemption
reserve
£m
Share
premium
£m
Capital
redemption
reserve
£m
782
–
2
784
780
–
2
782
43
31
1,400
90
43
–
43
–
Share-
based
payment
reserve
£m
19
–
19
(7)
Capital
reserve
£m
1,368
138
138
(106)
Revenue
reserve
£m
85
75
75
7
(77)
Share-
based
payment
reserve
£m
17
–
8
(6)
Capital
reserve
£m
1,336
70
70
(38)
Revenue
reserve
£m
144
11
11
6
(76)
43
19
1,368
85
Total
equity
£m
3,015
213
213
19
–
(77)
(106)
3
3,067
Total
equity
£m
3,038
81
81
8
–
(76)
(38)
2
3,015
2015
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
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
2014
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
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
Share
capital
£m
718
–
1
719
Share
capital
£m
718
–
718
88
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Company cash flow statement
FOR THE YEAR TO 31 MARCH
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Net distributions/(drawdowns) from subsidiaries
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Carried interest and performance fees 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
Dividend paid
Issue of shares
Repurchase of B shares
Net cash flow from derivatives
Net cash flow from financing activities
Cash flow from investing activities
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
2015
£m
(28)
270
143
11
29
(1)
1
(11)
(44)
3
(54)
–
319
(183)
3
(6)
9
(177)
–
–
142
605
(12)
735
2014
£m
(108)
454
(217)
6
25
(2)
–
–
–
3
(57)
–
104
(114)
–
–
(32)
(146)
90
90
48
573
(16)
605
89
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Significant accounting policies
REPORTING ENTITY
3i Group plc (the “Company”) is a public limited company incorporated and domiciled in England and Wales. The Consolidated financial statements
(“the Group accounts”) for the year to 31 March 2015 comprise the financial statements of the Company and its consolidated subsidiaries
(collectively, “the Group”).
The Group accounts have been prepared and approved by the Directors in accordance with Section 395 of the Companies Act 2006 and the Large
and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. The Company has taken advantage of the exemption in
Section 408 of the Companies Act 2006 not to present its Company Statement of comprehensive income and related Notes.
A number of key accounting policies are disclosed below, but where possible, accounting policies have been shown as part of the Note that they
specifically relate to in order to assist the reader’s understanding.
A COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
The Group accounts have been prepared and approved by the Directors in accordance with all relevant IFRSs as issued by the International
Accounting Standards Board (“IASB”), and interpretations issued by the IFRS Interpretations Committee, endorsed by the European Union (“EU”).
In the year the Group adopted the following amendment:
IFRS 10 (Revised) – Consolidated Financial Statements
The IASB issued a narrow scope amendment to IFRS 10 in December 2014, and subsequently the Group has revisited and is now consolidating
two Debt Management entities and a small number of subsidiaries rather than fair valuing them in the IFRS financial statements. This is due to
additional guidance in the narrow scope amendment clarifying the treatment of entities which invest for capital appreciation but also provide
investment related services. The Group has chosen to adopt the changes provided in the narrow scope amendment early, and has applied the
change retrospectively. The change has no effect on total return or net asset value as reported in the Group’s prior year IFRS financial statements.
Comparative information has been restated and the effect is shown in Note 31.
The following standards, amendments and interpretations have been issued with implementation dates, subject to EU endorsement in some
cases, which do not impact on these financial statements:
IFRS
IFRS
IFRS 15
IFRS 9
Annual improvements 2010 to 2012 and 2011 to 2013
Annual improvements 2012 to 2014
Revenue from contracts with customers
Financial instruments
Effective for annual periods beginning on or after
1 July 2014
1 July 2016
1 January 2017
1 January 2018
The impact of future standards and amendments on the financial statements is being assessed by the Group and the Company.
B BASIS OF PREPARATION
The financial statements are prepared on a going concern basis as disclosed in the Directors’ Report.
C BASIS OF CONSOLIDATION
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control, as defined by IFRS 10, is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully
consolidated from the date on which the Group effectively obtains control. They are de-consolidated from the date that control ceases.
3i Group plc is an investment entity and, as such, does not consolidate the investment entities it controls. Most of the Group’s interests in
subsidiaries are recognised at fair value through profit or loss. Those subsidiaries which provide investment related services, such as advisory,
management or employment services are not classified at fair value through profit and loss and continue to be consolidated unless they are
deemed investment entities, in which case they are fair valued.
The acquisition method of accounting is used to account for the acquisition of subsidiaries. Under the acquisition method of accounting, with
some limited exceptions, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition.
Any non-controlling interest is measured either at fair value or at the non-controlling interest’s proportion of the net assets acquired. Acquisition
related costs are accounted for as expenses when incurred, unless directly related to the issue of debt or equity securities. Any excess of the cost
of acquisition over net assets is capitalised as goodwill. All intra-group balances, transactions, income and expenses are eliminated.
(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.
(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.
90
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 (iv) Composition of the Group
The Group is made up of several different types of subsidiaries. The Group re-assesses the function performed by each type of subsidiary to
determine its treatment under the IFRS 10 exception from consolidation. The types of subsidiaries and their treatment under IFRS 10 are
as follows:
General Partners (GPs) – Consolidated
General Partners provide investment management services and do not hold any direct investments in portfolio assets. These entities are not
investment entities.
Investment managers/advisers – Consolidated
These entities provide investment related services through the provision of investment management or advice. They do not hold any direct
investments in portfolio assets. These entities are not investment entities.
Investment managers/advisers which also hold investments – Consolidated
These entities provide investment related services through the provision of investment management or advice and also hold investments in
managed assets, typically due to regulatory reasons or investor expectations. The primary purpose of these entities is to provide investment
related services and therefore they are not classified as investment entities.
Holding companies of investment managers/advisers – Consolidated
These entities provide investment related services through their subsidiaries. They do not hold any direct investment in portfolio assets and
these entities are not investment entities.
Limited Partnerships and other intermediate investment holding structures – Fair valued
The Group makes investments in portfolio assets through its ultimate parent company as well as through other limited partnership and
corporate subsidiaries which the Group has created to align the interests of the investment teams with the performance of the assets through
the use of various carried interest schemes. The purpose of these limited partnerships and corporate holding vehicles, many of which also
provide investment related services, is to invest for investment income and capital appreciation. These partnerships meet the definition of an
investment entity and are classified at fair value through the profit and loss.
Portfolio investments – Fair valued
Following the introduction of IFRS 10, the test for accounting subsidiaries has been altered to take wider factors of control as well as actual
equity ownership into account. This has resulted in 30 investments being classified as accounting subsidiaries. In accordance with the
investment entity exception, these entities have been held at fair value with movements in fair value going through the Statement of
comprehensive income. With one exception (Palace Street I) none of these subsidiaries is a UK Companies Act subsidiary.
Structured entities – Fair valued
The Group has interests in a number of unconsolidated structured entities, their current carrying value and a description of their activities is
included in Note 29.
D CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial
statements. UK company law and IFRS require the Directors, in preparing the Group’s financial statements, to select suitable accounting policies,
apply them consistently and make judgements and estimates that are reasonable and prudent. The Group’s estimates and assumptions are
based on historical experience and expectation of future events and are reviewed periodically. The actual outcome may be materially different
from that anticipated.
The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the most important to the
portrayal of its financial condition are the fair valuation of the investment portfolio and the fair valuation of each investment entity subsidiary. The
investment portfolio is held at fair value and further detail on the valuation methodology is disclosed in Note 10. Given the importance of this area,
the Board has a separate Valuations Committee to review the valuations policies, process and application to individual investments. A report on
the activities of the Valuations Committee is included in the Governance section of the Annual report.
Further detail on the assessment as an investment entity is as follows:
(a) Assessment as an investment entity
Entities that meet the definition of an investment entity within IFRS 10 are required to account for most investments in controlled entities, as well
as investments in associates and joint ventures, at fair value through profit and loss.
The Board has concluded that the Company continues to meet the definition of an investment entity as its strategic objective of investing in
portfolio investments and providing investment management services to investors for the purpose of generating returns in the form of
investment income and capital appreciation remains unchanged.
The Group is required to determine the degree of control or influence the Group exercises and the form of any control to ensure that the financial
treatment is accurate. Following the IASB’s narrow scope amendment to IFRS 10, issued in December 2014, the Company revisited its assessment of
all of its subsidiaries and has consolidated two Debt Management entities and reclassified a small number of subsidiaries. Comparative information
has been restated to reflect the adoption of the amendment to IFRS 10 and the impact is shown in Note 31. Further detail on our detailed review of our
application of IFRS 10, including the amendment, can be found at the end of the Financial Review section on pages 33 to 37.
91
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Significant accounting policies continued
(b) Valuation of the defined benefit scheme
The Group also considers the valuation of the IAS 19 defined benefit scheme to be a significant estimate. The Group reviews its assumptions
annually with its independent actuaries. Further detail on the scheme and the assumptions applied can be found in Note 26 of the financial
statements.
E OTHER ACCOUNTING POLICIES
A) Revenue Recognition
Gross investment 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 and includes foreign exchange movements in respect of the investment portfolio. Investment income is
analysed into the following components:
i. 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 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.
ii. 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.
iii. Fair value movements on investment entity subsidiaries are the movement in the carrying value of Group subsidiaries which are classified as
investment entities under IFRS 10. The Group makes investments in portfolio assets through these entities which are usually limited
partnerships or corporate subsidiaries.
iv. 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:
Dividends from equity investments are recognised in the Statement of comprehensive income when the shareholders’ rights to receive
payment have been established. Income received on the investment in the most junior ranked level of CLO capital is recognised as a
dividend. £16 million was received in the year (2014: £10 million).
Income from loans and receivables is recognised as it accrues by reference to the principal outstanding and the effective interest rate
applicable, which is the rate that exactly discounts the estimated future cash flows through the expected life of the financial asset to the
asset’s carrying value. 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. Income received on the instruments in the most junior level of CLO capital is recognised as a dividend. £16 million was received in
the year (2014: £10 million).
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.
v. Foreign exchange on investments arises on investments made in currencies that are different from the functional currency of the Group
entity. Investments are translated at the exchange rate ruling at the date of the transaction. At each subsequent reporting date investments
are translated to sterling at the exchange rate ruling at that date.
B) Foreign currency translation
For the Company and those subsidiaries whose balance sheets are denominated in sterling which is the Company’s functional and presentation
currency, monetary assets and liabilities denominated in foreign currencies are translated into sterling at the closing rates of exchange at the
balance sheet date. Foreign currency transactions are translated into sterling at the average rates of exchange over the year and exchange
differences arising are taken to the income statement.
The balance sheets of subsidiaries and associates denominated in foreign currencies are translated into sterling at the closing rates.
The Statements of comprehensive income for these subsidiaries and associates are translated at the average rates and exchange differences
arising are taken to other comprehensive income. Such exchange differences are reclassified to the income statement in the period in which
the subsidiary or associate is disposed of.
C) Treasury assets and liabilities
Short-term treasury assets and short and long-term treasury liabilities are used in order to manage cash flows and minimise the overall costs
of borrowing.
Cash and cash equivalents comprise cash at bank and short-term deposits. 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.
92
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts
1 SEGMENTAL ANALYSIS
Operating segments are the 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 assess its performance.
The Chief Executive, who is considered to be the chief operating decision maker, manages the Group on two bases. Firstly, as business divisions
determined with reference to market focus, geographic focus, investment funding model and the Group’s management hierarchy. Secondly, in line
with the strategy of the Group, he considers separate Proprietary Capital and Fund Management businesses focused on investment returns and
Fund Management profits respectively. A description of the activities, including products and services offered by these divisions and the allocation
of resources, is given in the Strategic report.
The segmental information that follows is presented on the Investment basis which is the basis used by the Chief Executive to monitor the
performance of the Group. The remaining Notes are prepared on the IFRS basis.
Year to 31 March 2015
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)
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses 1
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Operating profit before carry
Carried interest
Carried interest and performance
fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Other comprehensive income
Re-measurements of defined benefit plans
Total return
Net divestment/(investment)
Realisations
Cash investment
Balance sheet
Opening portfolio value at 1 April 2014
Investment 2
Value disposed
Unrealised value movement
Other movement 3
Closing portfolio value at 31 March 2015
Private
Equity
£m
Infrastructure
£m
Debt
Management
£m
161
641
9
56
8
(156)
719
16
–
(66)
28
(103)
–
831
(369)
462
2,935
509
(670)
641
(267)
3,148
1
68
20
–
(1)
8
96
30
–
(31)
45
(35)
–
10
–
10
487
–
(9)
68
7
553
–
(25)
16
6
(1)
(6)
(10)
34
–
(34)
7
(4)
(8)
–
(105)
(105)
143
105
–
(25)
(47)
176
Total
£m
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
841
(474)
367
3,565
614
(679)
684
(307)
3,877
Proprietary
Capital
£m
Fund
Management
£m
Total
£m
162
684
45
62
6
(154)
805
–
(45)
(32)
3
(49)
(1)
40
721
841
(474)
367
3,565
614
(679)
684
(307)
3,877
–
–
–
–
–
–
–
80
45
(99)
–
–
–
–
26
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
841
(474)
367
3,565
614
(679)
684
(307)
3,877
1 Includes restructuring costs of nil, nil and £1 million for Private Equity, Infrastructure and Debt Management, respectively, and nil and £1 million for Proprietary Capital
and Fund Management, respectively.
2 Includes capitalised interest and other non-cash investment.
3 Other relates to foreign exchange and the provisioning of capitalised interest. In Debt Management, £41 million relates to capital withdrawn from the Palace Street I
portfolio.
93
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
1 SEGMENTAL ANALYSIS CONTINUED
Year to 31 March 2014
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)
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses 1
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Operating profit before carry
Carried interest
Carried interest and performance fees
receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Other comprehensive income
Re-measurements of defined benefit plans
Total return
Net divestment/(investment)
Realisations
Cash investment
Balance sheet
Opening portfolio value at 1 April 2013
Investment 2
Value disposed
Unrealised value movement
Other movement 3
Closing portfolio value at 31 March 2014
Private
Equity
£m
Infrastructure
£m
Debt
Management
£m
201
478
13
46
9
(100)
647
17
–
(79)
(1)
(82)
–
669
(276)
393
2,707
443
(468)
478
(225)
2,935
1
(13)
21
–
–
(7)
2
24
–
(23)
–
–
–
2
–
2
507
–
(1)
(13)
(6)
487
–
10
10
4
(2)
(6)
16
32
–
(34)
4
(3)
(6)
6
(61)
(55)
81
61
(6)
10
(3)
143
Total
£m
202
475
44
50
7
(113)
665
73
–
(136)
3
(54)
10
(3)
558
3
(85)
(6)
470
(3)
11
478
677
(337)
340
3,295
504
(475)
475
(234)
3,565
Proprietary
Capital
£m
Fund
Management
£m
–
–
–
–
3
–
3
73
51
(108)
–
–
–
–
19
202
475
44
50
4
(113)
662
–
(51)
(28)
3
(54)
10
(3)
539
677
(337)
340
3,295
504
(475)
475
(234)
3,565
Total
£m
202
475
44
50
7
(113)
665
73
–
(136)
3
(54)
10
(3)
558
3
(85)
(6)
470
(3)
11
478
677
(337)
340
3,295
504
(475)
475
(234)
3,565
1 Includes restructuring costs of £7 million, £1 million and £1 million for Private Equity, Infrastructure and Debt Management, respectively, and £1 million and £8 million
for Proprietary Capital and Fund Management, respectively.
2 Includes capitalised interest and other non-cash investment.
3 Other relates to foreign exchange and the provisioning of capitalised interest.
94
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 1 SEGMENTAL ANALYSIS CONTINUED
Year to 31 March 2015
Gross investment return
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Foreign exchange on investments
Net divestment/(investment)
Realisations
Cash Investment
UK
£m
2
106
56
(2)
162
70
(109)
(39)
Continental
Europe
£m
The
Americas
£m
Balance sheet
Value of investment portfolio at the end of the year
1,148
1,947
Year to 31 March 2014
Gross investment return
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Foreign exchange on investments
Net divestment/(investment)
Realisations
Cash Investment
UK
£m
77
33
47
(1)
156
218
(41)
177
Balance sheet
Value of investment portfolio at the end of the year
1,058
1,817
Continental
Europe
£m
The
Americas
£m
121
531
42
(218)
476
532
(186)
346
89
357
36
(38)
444
343
(238)
105
29
36
13
40
118
161
(179)
(18)
483
28
124
16
(36)
132
70
(58)
12
361
Asia
£m
10
12
2
25
49
77
–
77
297
Asia
£m
7
(39)
2
(38)
(68)
43
–
43
325
Rest of
World
£m
–
(1)
–
1
–
1
–
1
2
Rest of
World
£m
1
–
–
–
1
3
–
3
4
Total
£m
162
684
113
(154)
805
841
(474)
367
3,877
Total
£m
202
475
101
(113)
665
677
(337)
340
3,565
95
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
2 REALISED PROFITS OVER VALUE ON THE DISPOSAL OF INVESTMENTS
Realisations
Valuation of disposed investments
Of which:
– profit recognised on realisations
– losses recognised on realisations
Realisations
Valuation of disposed investments
Of which:
– profit recognised on realisations
– losses recognised on realisations
2015
Unquoted
investments
£m
2015
Quoted
investments
£m
155
(136)
19
21
(2)
19
115
(80)
35
35
–
35
2015
Total
£m
270
(216)
54
56
(2)
54
2014
Unquoted
investments
(restated)
£m
2014
Quoted
investments
(restated)
£m
2014
Total
(restated)
£m
442
(298)
144
148
(4)
144
12
(10)
2
2
–
2
3 UNREALISED PROFITS/(LOSSES) ON THE REVALUATION OF INVESTMENTS
2015
Unquoted
investments
£m
2015
Quoted
investments
£m
117
193
(76)
117
119
119
–
119
2014
Unquoted
investments
(restated)
£m
2014
Quoted
Investments
(restated)
£m
67
126
(59)
67
14
14
–
14
Movement in the fair value of investments
Of which:
– unrealised gains
– unrealised losses
Movement in the fair value of investments
Of which:
– unrealised gains
– unrealised losses
96
454
(308)
146
150
(4)
146
2015
Total
£m
236
312
(76)
236
2014
Total
(restated)
£m
81
140
(59)
81
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 4 OPERATING EXPENSES
Operating expenses of £122 million (2014: £136 million) recognised in the IFRS Statement of comprehensive income include the
following amounts:
Depreciation of property, plant and equipment
Amortisation of fund management contracts
Audit fees
Staff costs (Note 5)
Restructuring and redundancy costs
2015
£m
2
6
2
85
1
2014
(restated)
£m
2
6
2
77
9
Expenses incurred in the entities accounted for as investment entity subsidiaries were £9 million (2014: nil). Total operating expenses were
£131 million (2014: £136 million) under the Investment basis.
5 STAFF COSTS
The table below is prepared in accordance with Companies Act requirements, which is consistent with both the IFRS and the Investment basis.
Wages and salaries
Social security costs 1
Share-based payment costs (Note 27)
Pension costs
2015
£m
56
11
15
3
85
2014
(restated)
£m
57
10
6
4
77
1 Excludes nil social security cost included in restructuring and redundancy costs (2014: £1 million).
Under both IFRS and the Investment basis, the average number of employees during the year was 271 (2014 restated: 277).
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
2015
£m
39
46
85
2014
(restated)
£m
46
31
77
97
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
Notes to the accounts continued
6 INFORMATION REGARDING THE GROUP’S AUDITORS
During the year the Group obtained the following services from its Auditors, Ernst & Young LLP. The table below is prepared in accordance with
Companies Act requirements, which is consistent with both the IFRS and the Investment basis.
Audit services
Statutory audit
– Company
– UK subsidiaries
– Overseas subsidiaries
Non-audit services
Other assurance services
Investment due diligence
Tax services (compliance and advisory services)
NON-AUDIT SERVICES
2015
£m
2014
£m
1.2
0.6
0.2
2.0
0.5
0.2
0.3
3.0
1.3
0.5
0.2
2.0
0.2
0.2
0.1
2.5
In addition to the above, Ernst & Young LLP has received fees from investee companies. It is estimated that Ernst & Young LLP received less than
20% (2014: less than 20%) of the total investment-related fees paid to the four largest accounting firms.
7 INCOME TAXES
ACCOUNTING POLICY:
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.
To enable the tax charge to be based on the profit for the year, deferred tax is provided in full on temporary timing differences, at the rates of tax
expected to apply when these differences crystallise. Deferred tax assets are recognised only to the extent that it is probable that sufficient
taxable profits will be available against which temporary differences can be set off. All deferred tax liabilities are offset against deferred tax
assets in accordance with the provisions of IAS 12 “Income taxes”.
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.
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income taxes in the Statement of comprehensive income
2015
£m
(3)
1
(2)
2014
(restated)
£m
(6)
3
(3)
98
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
7 INCOME TAXES CONTINUED
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 21% (2014: 23%), and the differences are
explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax in the UK of 21% (2014: 23%)
Effects of:
Utilisation of previously unrecognised deferred tax
Non-taxable dividend income
Permanent differences
Foreign tax
Capital profits
Excess tax losses arising in the period
Total income taxes in the Statement of comprehensive income
2015
£m
702
(147)
3
6
(6)
(2)
145
(1)
(2)
2014
(restated)
£m
520
(120)
7
6
–
(4)
137
(29)
(3)
The Group’s realised profits, fair value adjustments and impairment losses are primarily included in the Company, the affairs of which are
directed so as to allow it to be approved as an investment trust. An investment trust is exempt from tax on capital gains, therefore the Group’s
capital return is substantially non-taxable.
Including £2 million of tax charges incurred in fair valued entities, the total tax charge for the Group was £4 million under the Investment basis
presentation.
DEFERRED INCOME TAXES
Opening deferred income tax asset
Tax losses
Income in accounts taxable in the future
Other
Recognised through Statement of comprehensive income
Tax losses utilised
Income in accounts taxable in the future
Other
Recognised on acquisition
Income in accounts taxable in the future
Closing deferred income tax asset
Tax losses
Income in accounts taxable in the future
Other
2015
£m
12
(12)
1
1
(5)
5
1
1
–
–
7
(7)
2
2
2014
(restated)
£m
9
(11)
1
(1)
3
–
–
3
(1)
(1)
12
(12)
1
1
At 31 March 2015, the Group had carried forward tax losses of £1,409 million (2014: £1,360 million), capital losses of £98 million (2014: £78 million)
and other temporary differences of £12 million (2014: £12 million). It is uncertain 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 20% (2014: 20%).
99
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
8 PER SHARE INFORMATION
The calculation of basic net assets per share is based on the profit attributable to shareholders and the number of basic average shares. When
calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the effect of all dilutive share options
and awards.
As at 31 March
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit 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
2015
73.9
72.9
700
2015
2014
54.8
54.5
517
2014
972,141,887
(24,825,193)
947,316,694
971,574,471
(28,285,335)
943,289,136
12,293,543
959,610,237
5,627,447
948,916,583
2015
4.01
3.96
2014
3.50
3.48
3,806
3,308
Basic NAV per share is calculated on 948,610,924 shares in issue at 31 March 2015 (31 March 2014: 945,028,804). Diluted NAV per share is
calculated on diluted shares of 961,432,940 at 31 March 2015 (31 March 2014: 951,531,950).
9 DIVIDENDS
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Proposed final dividend
2015
pence
per share
13.3
6.0
19.3
14.0
2015
£m
126
57
183
133
2014
pence
per share
5.4
6.7
12.1
13.3
2014
£m
51
63
114
126
100
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 10 INVESTMENT PORTFOLIO
ACCOUNTING POLICY:
Investments are recognised and de-recognised on the date where the purchase or sale of an investment is under a contract whose terms
require the delivery or settlement of the investment and the risks and rewards attached to it. 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 investments, including both equity and loans 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 available in “Portfolio valuation – an explanation” on pages 136 and 137.
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, in accordance with 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 fair value reduction 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.
As a result of IFRS 10, and the exception from consolidation, the proportion of the investment portfolio held by the Group’s unconsolidated
subsidiaries is now presented as part of the fair value of investment entity subsidiaries, along with the fair value of their other assets and
liabilities. A reconciliation of the fair value of Investments in investment entities is included in Note 11.
Opening book value
Additions
– of which loan notes with nil value
Disposals, repayments and write-offs
Fair value movement
Other movements and net cash returned
Closing book value
Quoted investments
Unquoted investments
Closing book value
Group
2015
£m
1,582
203
(48)
(216)
236
(86)
1,671
399
1,272
1,671
Group
2014
(restated)
£m
Company
2015
£m
Company
2014
(restated)
£m
1,687
225
(60)
(308)
81
(43)
1,582
258
1,324
1,582
1,541
109
(48)
(217)
249
(72)
1,562
399
1,163
1,562
1,686
191
(60)
(306)
83
(53)
1,541
258
1,283
1,541
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 include £69 million (2014: £98 million) in interest received by way of loan notes, of which £48 million (2014: £60 million) has been valued
to nil. Included within the Statement of comprehensive income is £38 million (2014: £29 million) of interest income, which reflects the net additions
after write downs noted above, £14 million (2014: £6 million) of cash income and the capitalisation of prior year accrued income and non-
capitalised accrued income is £3 million (2014: £(15) million).
Other movements include foreign exchange and conversions from one instrument into another, including £18 million which relates to net cash
returned (2014: £21 million net cash invested) from Debt Management warehouses.
101
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
11 INVESTMENTS IN INVESTMENT ENTITIES
ACCOUNTING POLICY:
Investments in investment entity subsidiaries are accounted for as financial instruments at fair value through profit or loss.
These entities are typically Limited Partnerships and other intermediate investment holding structures which hold the Group’s interests in
investments in portfolio companies (Investment Entity Holding Companies) and were consolidated prior to the adoption of IFRS 10. The fair value
can increase or reduce from either cash flows to/from the investment entities or valuation movements in line with the Group’s valuation policy.
The fair value of these entities is their net asset values subject to any adjustments where necessary.
Non-current
Opening book value
Net cash flow from investment entity
Fair value movement on investment entity subsidiary
Transfer of assets from investment entity subsidiaries to the Company
Closing book value
Group
2015
£m
1,909
(272)
530
(88)
2,079
Group
2014
(restated)
£m
1,594
(62)
433
(56)
1,909
All investment entities are classified as Level 3 in the fair value hierarchy, see Note 12 for details.
A 5% movement in the closing book value of investments in investment entities would have an impact of £104 million (2014: £95 million).
RESTRICTIONS
3i Group plc, the ultimate parent company, receives dividend income from its subsidiaries. There are no significant restrictions on the ability to
transfer funds from these subsidiaries to the Group.
SUPPORT
3i Group plc provides ongoing support to its investment entity subsidiaries for the purchase of portfolio investments. During the year, the Group
provided support to its unconsolidated subsidiaries, with a net cash flow as noted in the table above. The Group’s current commitments to its
subsidiaries are disclosed in Note 24.
102
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 12 FAIR VALUES OF ASSETS AND LIABILITIES
ACCOUNTING POLICY:
Financial instruments, other than those held at amortised cost, are held at fair value and are designated irrevocably at inception. In particular, 3i
designates groups of financial instruments as being at fair value when they are managed, and their performance evaluated, on a fair value basis
in accordance with a documented risk management or investment strategy, and where information about the groups of financial instruments is
reported to management on that basis.
(A) CLASSIFICATION
The following tables analyse the Group’s assets and liabilities in accordance with the categories of financial instruments in IAS 39:
At 31 March 2015
Assets
Quoted investments
Unquoted investments
Investments in investment entities
Other financial assets
Total
Liabilities
Loans and borrowings
Other financial liabilities
Total
At 31 March 2014
Assets
Quoted investments
Unquoted investments
Investments in investment entities
Derivative financial instruments
Other financial assets
Total
Liabilities
Loans and borrowings
Derivative financial instruments
Other financial liabilities
Total
Group
Designated
at fair value
through
profit and
loss
£m
Group
Other
financial
instruments
at amortised
cost
£m
399
1,272
2,079
88
3,838
–
85
85
–
–
–
54
54
815
179
994
Group
Designated
at fair value
through
profit and
loss
£m
Group
Other
financial
instruments
at amortised
cost
£m
258
1,324
1,909
2
17
3,510
–
4
36
40
–
–
–
–
76
76
849
–
200
1,049
Company
Designated
at fair value
through
profit and
loss
£m
Company
Other
financial
instruments
at amortised
cost
£m
399
1,163
–
33
1,595
–
2
2
–
–
–
341
341
815
348
1,163
Company
Designated
at fair value
through
profit and
loss
£m
Company
Other
financial
instruments
at amortised
cost
£m
258
1,283
–
2
8
1,551
–
4
2
6
–
–
–
–
303
303
849
–
324
1,173
Group
Total
£m
399
1,272
2,079
142
3,892
815
264
1,079
Group
Total
£m
258
1,324
1,909
2
93
3,586
849
4
236
1,089
Company
Total
£m
399
1,163
–
374
1,936
815
350
1,165
Company
Total
£m
258
1,283
–
2
311
1,854
849
4
326
1,179
103
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
12 FAIR VALUES OF ASSETS AND LIABILITIES CONTINUED
3i enters into warehouse arrangements to support the creation of debt portfolios ahead of future CLO launches and has designated these financial
instruments at fair value. At 31 March 2015, 3i has invested £43 million (2014: £17 million) to these warehouses and the balance is included within
the Group’s unquoted investments. Of this balance, £15 million has been invested to secured debt portfolios and £28 million is held by the
warehouse provider either awaiting settlement or held as cash pending a return to 3i. For the Company, £28 million is included within the
unquoted investments.
Details of the commitments and contingent liabilities in relation to these warehouses can be found in Notes 24 and 25.
(B) VALUATION
The fair values of the Group’s financial assets and liabilities are not materially different from their carrying values with the exception of loans and
borrowings. The fair value of the loans and borrowings is £997 million (2014: £942 million), determined with reference to their published market
prices. The carrying value of the loans and borrowings is £815 million (2014: £849 million).
Valuation 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
Unquoted equity instruments and debt instruments 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 and debt instruments can be found in the section “Portfolio valuation – an explanation” on page 136.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy at 31 March 2015:
Group
2015
Level 1
£m
Group
2015
Level 2
£m
Assets
Quoted investments
Unquoted investments
Derivative financial instruments
Total
Liabilities
Derivative financial instruments
Total
399
–
–
399
–
–
–
–
–
–
–
–
Group
2015
Level 3
£m
–
1,272
–
1,272
–
–
Group
2015
Total
£m
399
1,272
–
1,671
–
–
Group
2014
Level 1
(restated)
£m
Group
2014
Level 2
(restated)
£m
Group
2014
Level 3
(restated)
£m
Group
2014
Total
(restated)
£m
258
–
–
258
–
–
–
–
2
2
4
4
–
1,324
–
1,324
–
–
258
1,324
2
1,584
4
4
At the Company level, the disclosures remain the same, with the exception of unquoted investments. Unquoted investments in the Company
of £1,163 million (2014: £1,283 million) are valued at Level 3 in the fair value hierarchy.
This disclosure only refers to the directly held investment portfolio. The fair value hierarchy also applies to Investments in investment entities,
see Note 11 for details.
Investments in investment entities are fair valued at the entity’s net asset value with the significant part being attributable to the underlying
portfolio. The underlying portfolio is valued under the same methodology as directly held investments with any other assets or liabilities within
investment entities fair valued in accordance with the Group’s accounting policies.
104
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 12 FAIR VALUES OF ASSETS AND LIABILITIES CONTINUED
Movements in the directly held investment portfolio categorised as Level 3 during the year:
Opening book value
Additions
– of which loan notes with nil value
Disposals, repayments and write-offs
Fair value movement
Transfer of investment Level 3 to Level 1
Other movements
Closing book value
Group
2015
£m
1,324
201
(48)
(136)
117
(112)
(74)
1,272
Group
2014
(restated)
£m
Company
2015
£m
Company
2014
(restated)
£m
1,444
225
(60)
(298)
67
(12)
(42)
1,324
1,283
107
(48)
(136)
130
(112)
(61)
1,163
1,443
191
(60)
(297)
69
(12)
(51)
1,283
Unquoted 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 £19 million (2014: £144 million), dividend income of £23 million (2014: £12 million) and foreign exchange losses
of £52 million (2014: £48 million losses). The transfer of investment from Level 3 to Level 1 reflects the IPOs of Eltel and Refresco in the year.
Level 3 inputs are sensitive to assumptions made when ascertaining fair value as described in the Portfolio valuation – an explanation section.
On an IFRS basis, of assets held at 31 March 2015, classified as Level 3, 44% (2014: 43%) were valued using a multiple of earnings and the
remaining 56% (2014: 57%) were valued using alternative valuation methodologies.
Valuation multiple – The valuation multiple is the main assumption applied to a multiple of earnings based valuation. The multiple is derived from
comparable listed companies or relevant market transaction multiples. Companies in the same industry and geography and, where possible, with
a similar business model and profile are selected and then adjusted for factors including liquidity risk, growth potential and relative performance.
The value weighted average multiple used when valuing the portfolio was 9.68x (2014: 9.08x).
If the multiple used to value each unquoted investment valued on an earnings multiple basis as at 31 March 2015 decreased by 5%, the investment
portfolio would decrease by £35 million (2014: £57 million) or 2% (2014: 4%). If the same sensitivity was applied to the underlying portfolio held by
investment entities, this would have a negative impact of £121 million (2014: £101 million) or 5% (2014: 5%).
If the multiple increased by 5% then the investment portfolio would increase by £33 million (2014: £57 million) or 2% (2014: 4%). If the same
sensitivity was applied to the underlying portfolio held by investment entities, this would have a positive impact of £122 million (2014: £103 million)
or 6% (2014: 5%).
Alternative valuation methodologies – There are a number of alternative investment valuation methodologies used by the Group, for reasons
specific to individual assets. The details of such valuation methodologies, and the inputs that are used, are given in the Portfolio valuation – an
explanation section. Each methodology is used for a proportion of assets, by value and at year end the following techniques were used: 21% DCF,
7% Imminent sale, 10% Industry metric, 13% broker quotes and 5% other. If the value of all of the investments under this methodology moved by
5%, this would have an impact on the investment portfolio of £35 million (2014: £29 million) or 2% (2014: 2%). If the same sensitivity was applied to
the underlying portfolio held by investment entities, this would have an impact of £6 million (2014: £7 million) or 0.3% (2014: 0.4%).
105
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
13 CARRIED INTEREST AND PERFORMANCE FEES
ACCOUNTING POLICY:
Carried interest and performance fees receivable
The Group earns a share of profits (“carried interest and performance fees receivable”) from funds which it manages on behalf of third parties.
These profits are earned when the funds meet certain performance conditions.
Carried interest and performance fees receivable include amounts receivable from Private Equity, Infrastructure and Debt Management funds.
Each scheme is separately reviewed at the balance sheet date, and an accrual for carried interest receivable is made once the performance
conditions would be achieved if the remaining assets in that 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.
The performance fee receivable from 3iN is based on 3iN’s most recently published NAV subject to a performance hurdle and a high
water mark.
Carried interest and performance fees payable
The Group offers investment executives the opportunity to participate in the returns from successful investments. “Carried interest and
performance fees 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 schemes. Carried
interest payable is accrued if its performance conditions, measured at the balance sheet date, would be achieved if the remaining assets in that
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, discounted to reflect the likely actual cash payment date, which may be materially later than the time of
the accrual.
The Infrastructure performance fee is accrued when we become contractually liable to make payments to the team.
Under IFRS 10, where carry payable reduces the fair value of an investment entity subsidiary, that movement is recorded through “Fair value
movements on investment entity subsidiaries”. At 31 March 2015, an additional £142 million of carry payable was recognised in the Statement
of financial position of these investment entity subsidiaries (2014: £81 million).
Opening carried interest and performance fees receivable
Carried interest and performance fees receivable recognised in the Statement of comprehensive income during the year
Cash received in the year
Other movements
Closing carried interest and performance fees receivable
Of which: receivable in greater than 1 year
Opening carried interest and performance fees payable
Carried interest and performance fees payable recognised in the Statement of comprehensive income during the year1
Cash paid in the year
Other movements
Closing carried interest and performance fees payable
Of which: payable in greater than 1 year
Group
2015
£m
17
80
(6)
(3)
88
43
Group
2015
£m
36
68
(14)
(5)
85
72
Group
2014
(restated)
£m
20
3
(5)
(1)
17
17
Group
2014
(restated)
£m
39
11
(15)
1
36
30
1 The carry payable charge in the table above does not include £4 million (2014: £6 million) associated with the share-based payment charge arising from related
carry schemes. The total carried interest and performance fee payable recognised in the statement of comprehensive income is £72 million (2014: £17 million).
See Note 27 Share based payments for further details.
106
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 14 INTANGIBLE ASSETS
ACCOUNTING POLICY:
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 any impairment losses.
Amortisation is charged to the Statement of comprehensive income, included in operating expenses, on a straight-line basis over the estimated
useful life of the fund management contract, typically five to 10 years.
Goodwill is recognised on the acquisition of subsidiaries when the cost of acquisition exceeds the net assets acquired. Goodwill is carried at cost
less any accumulated impairment, and is assessed annually for impairment.
Fund management contracts
Opening cost
Closing cost
Opening accumulated amortisation
Charge for the year
Closing accumulated amortisation
Net book amount
Goodwill
Opening value
Closing value
Total
15 OTHER CURRENT ASSETS
ACCOUNTING POLICY:
Group
2015
£m
Group
2014
(restated)
£m
33
33
17
6
23
10
Group
2015
£m
9
9
19
33
33
11
6
17
16
Group
2014
(restated)
£m
9
9
25
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.
Prepayments
Other debtors
Amounts due from subsidiaries
Group
2015
£m
4
50
–
54
Group
2014
(restated)
£m
5
71
–
76
Company
2015
£m
Company
2014
£m
–
43
298
341
–
11
292
303
107
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
16 LOANS AND BORROWINGS
ACCOUNTING POLICY:
All loans and borrowings are initially recognised at the fair value of the consideration received. 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. Financial liabilities are derecognised when they are extinguished.
Loans and borrowings are repayable as follows:
Within one year
In the second year
In the third year
In the fourth year
In the fifth year
After five years
Principal borrowings include:
Group
2015
£m
Group
2014
£m
Company
2015
£m
Company
2014
£m
–
240
–
–
–
575
815
–
–
274
–
–
575
849
–
240
–
–
–
575
815
–
–
274
–
–
575
849
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)
Committed multi-currency facilities
£350 million
£50 million
£450 million
Total loans and borrowings
Rate
Maturity
Group
2015
£m
Group
2014
£m
Company
2015
£m
Company
2014
£m
6.875%
5.750%
5.625%
LIBOR+0.60%
LIBOR+1.50%
LIBOR+1.00%
2023
2032
2017
2019
2016
2016
200
375
240
815
–
–
–
–
815
200
375
274
849
–
–
–
–
849
200
375
240
815
–
–
–
–
815
200
375
274
849
–
–
–
–
849
During the period, the £450 million syndicated multi-currency facility was replaced with a £350 million syndicated multi-currency facility with
a maturity date of September 2019. The Company has the option to request one year extensions at the first and second year anniversary of the
facility, which may be granted at the discretion of each lender individually. The new £350 million facility has no financial covenants.
The £50 million multi-currency facility was cancelled during the period.
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 £997 million (2014: £942 million), determined with reference to their published market prices.
The loans and borrowings are included in Level 1 of the fair value hierarchy as detailed in Note 12.
Under AIFMD, the Group is required to calculate leverage in accordance with a set formula and disclose this to investors. In line with AIFMD,
leverage is 117% (2014: 127%) under the gross method and 120% (2014: 133%) under the commitment method. More detail on the Group’s capital
structure is included in Note 21.
108
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 17 PROVISIONS
ACCOUNTING POLICY:
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.
Opening balance
Charge for the year
Utilised in the year
Closing balance
Opening balance
Charge for the year
Utilised in the year
Closing balance
Group
2015
Property
£m
Group
2015
Redundancy
£m
Group
2015
Restructuring
£m
6
–
(2)
4
4
–
(3)
1
3
1
(1)
3
Group
2015
Total
£m
13
1
(6)
8
Group
2014
Property
(restated)
£m
Group
2014
Redundancy
(restated)
£m
Group
2014
Restructuring
(restated)
£m
Group
2014
Total
(restated)
£m
7
1
(2)
6
4
7
(7)
4
2
1
–
3
13
9
(9)
13
The provision for redundancy relates to staff reductions announced prior to 31 March 2015. 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 10 years.
18 TRADE AND OTHER PAYABLES
ACCOUNTING POLICY:
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.
Amounts due to subsidiaries
Trade and other payables
Group
2015
£m
–
152
152
Group
2014
(restated)
£m
–
166
166
Company
2015
£m
Company
2014
£m
307
20
327
276
16
292
109
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
19 ISSUED CAPITAL
ACCOUNTING POLICY:
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.
Issued and fully paid
Ordinary shares of 73 19⁄22p
Opening balance
Issued on exercise of share options and under employee share plans
Closing balance
2015
Number
2015
£m
2014
Number
971,803,122
650,697
972,453,819
718
1
719
971,405,127
397,995
971,803,122
2014
£m
718
–
718
During the year to 31 March 2015 the Company issued 487,574 ordinary shares for total cash consideration of £1,888,531.63 on the exercise of
executive share options at various prices from 352.5 pence to 431.5 pence per share (being the market prices at the dates of grant in 2004 and
2005 of the options, adjusted to reflect returns of capital and additional dividends). The Company issued 163,123 ordinary shares to the Trustee of
the 3i Group Share Incentive Plan for a total cash consideration of £676,963.57 at various prices from 381.7 pence to 492.3 pence per share (being
the market prices on the issue dates which were the last trading day of each month in the year). These shares were ordinary shares with no
additional rights attached to them and had a total nominal value of £480,628.47.
20 OWN SHARES
ACCOUNTING POLICY:
Own shares are recorded by the Group when ordinary shares are acquired by the Company or by The 3i Group Employee Benefit Trust. Own
shares are deducted from shareholders’ equity. A transfer is made to retained earnings at their weighted average cost in line with the vesting of
own shares held for the purposes of share-based payments. The number of own shares held by the Trust and the schemes are described in
Note 27 Share based payments.
Opening cost
Awards vested
Closing cost
21 CAPITAL STRUCTURE
2015
£m
89
(10)
79
2014
£m
104
(15)
89
The capital structure of the Group consists of net debt, including cash held on deposit, long-term borrowings and shareholders’ equity. The type
and maturity of the Group’s borrowings are analysed further in Note 16. 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 the future development of
the business.
Cash, deposits and derivative financial assets1
Borrowings and derivative financial liabilities2
Net cash/(debt)3
Total equity
Gearing (net debt/total equity)
Group
2015
£m
861
(815)
46
3,806
nil
Group
2014
(restated)
£m
676
(859)
(183)
3,308
6%
Company
2015
£m
Company
2014
£m
735
(815)
(80)
3,067
3%
607
(859)
(252)
3,015
8%
1 Group and Company include derivative financial assets of nil (2014: £2 million) which net off borrowings in order to calculate gross debt.
2 Group and Company include derivative financial liabilities of nil (2014: £4 million) and B shares of nil (2014: £6 million).
3 The above numbers have been prepared under IFRS and differ from the Investment basis as detailed in the Strategic report.
110
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 21 CAPITAL STRUCTURE CONTINUED
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 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
FCA. The last submission to the FCA demonstrated a significant consolidated capital surplus in excess of the FCA’s prudential rules. The Group’s
capital requirement is updated regularly 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 FCA and operates with a significant
regulatory capital surplus. The Group’s Pillar 3 disclosure document can be found on www.3i.com.
22 INTERESTS IN GROUP AND FAIR VALUE ENTITIES
ACCOUNTING POLICY:
The Company has controlling equity interests in, and makes loans to, both consolidated and fair valued Group entities. In the Company’s books
these subsidiaries are all held at amortised cost less impairment.
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 30.
Opening book value
Additions
Share of profits
Disposals and repayments
Impairment
Exchange movements
Closing book value
Company
2015
Equity
investments
£m
Company
2015
Loans and
receivables
£m
334
30
–
(52)
(51)
–
261
1,401
361
254
(585)
(32)
(99)
1,300
Company
2014
Equity
investments
£m
Company
2014
Loans and
receivables
£m
278
60
–
(25)
21
–
334
1,403
285
55
(253)
2
(91)
1,401
Company
2015
Total
£m
1,735
391
254
(637)
(83)
(99)
1,561
Company
2014
Total
£m
1,681
345
55
(278)
23
(91)
1,735
111
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
23 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
2015
£m
7
20
17
44
Group
2014
£m
Company
2015
£m
Company
2014
£m
7
22
21
50
–
–
–
–
–
–
–
–
The Group leases a number of its offices under operating leases. None of the leases include contingent rentals.
During the year to 31 March 2015, £5 million (2014: £5 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 (2014: £nil) as the
amounts are netted against the provision in Note 17. The total future sublease payments expected to be received under non-cancellable subleases
are £4 million (2014: £5 million).
24 COMMITMENTS
ACCOUNTING POLICY:
Commitments represent amounts the Group has contractually committed to pay third parties but do not yet represent a charge or asset. This
gives an indication of committed future cash flows. Commitments at the year end do not impact on the Group’s financial results for the year.
Group
2015
due within
1 year
£m
68
Company
2015
due within
1 year
£m
24
Group
2015
due
between
2 and 5
years
£m
–
Company
2015
due
between
2 and 5
years
£m
–
Group
2015
due over
5 years
£m
–
Company
2015
due over
5 years
£m
–
Group
2015
Total
£m
68
Company
2015
Total
£m
24
Group
2014
due within
1 year
£m
66
Company
2014
due within
1 year
£m
42
Group
2014
due
between
2 and 5
years
£m
5
Company
2014
due
between
2 and 5
years
£m
5
Group
2014
due over
5 years
£m
–
Company
2014
due over
5 years
£m
–
Group
2014
Total
£m
71
Company
2014
Total
£m
47
Equity and loan investments
Equity and loan investments
The amounts shown above include commitments made by the Group and Company of £33 million (2014: £63 million) and £15 million
(2014: £39 million) respectively, to create warehouse facilities in Europe to support the creation of senior secured debt portfolios ahead of future
CLO fund launches. These commitments are due within one year.
Further details on these warehouses are detailed in Notes 12 and 25.
For commitments to Private Equity funds managed and advised by the Group refer to page 17.
112
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 25 CONTINGENT LIABILITIES
ACCOUNTING POLICY:
Contingent liabilities are potential liabilities where there is even greater uncertainty, which could include a dependency on events not within
the Group’s control, but where there is a possible obligation. Contingent liabilities are only disclosed and not included within the Statement
of financial position.
Contingent liabilities relating to guarantees available to third parties in respect of investee companies
Group
2015
£m
14
Group
2014
£m
5
Company
2015
£m
14
Company
2014
£m
5
The contingent liability at 31 March 2015 related to an investee company that has been sold post year end. The contingent liability was eliminated
on the date of disposal.
OTHER CONTINGENT LIABILITIES
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 2015 was £193 million (2014:
£162 million).
3i has entered into warehouse arrangements in Europe to support the creation of senior secured debt portfolios ahead of future CLO fund
launches. Whilst in the warehouse phase, 3i is subject to optional margin calls in the event of market falls. The current capital at risk is restricted
to £15 million at 31 March 2015 (2014: £17 million) and further detail can be found in Note 29.
At 31 March 2015, there was no material litigation outstanding against the Company or any of its subsidiary undertakings.
26 RETIREMENT BENEFITS
ACCOUNTING POLICY:
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. Interest on the net defined benefit liability/asset, calculated using the discount rate used to measure the
defined benefit obligation, is recognised in the income statement. Re-measurement 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.
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 £3 million (2014: £3 million), which represents the contributions
payable to these plans. There were no outstanding payments due to these plans at the balance sheet date.
113
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
26 RETIREMENT BENEFITS CONTINUED
(ii) Defined benefit plans
The Group operates a final salary defined benefit plan for qualifying employees of its subsidiaries in the UK (“the Plan”). The Plan is approved by
HMRC for tax purposes and is operated separately from the Group and managed by an independent set of Trustees, whose appointment is
determined by the Plan’s documentation. The Plan is subject to UK funding regulations, which require the Group and the Trustees to agree a
funding strategy and contribution schedule where necessary.
Membership of 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. The Trustees are responsible for managing and investing the
Plan’s assets and for monitoring the Plan’s funding position. As the Plan is now closed to future accrual, measures have been taken to de-risk the
Plan through changes to its investment policy.
The valuation of the Plan has been updated on an IAS 19 basis by an independent qualified actuary as at 31 March 2015.
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 £1 million
(2014: £1 million) and the future liability calculated by German and Spanish actuaries is £20 million (2014: £15 million). The amounts recognised
in the income statement for the year and other comprehensive income for these schemes are a £1 million expense (2014: £1 million expense)
and a £7 million expense (2014: £1 million gain) respectively.
The amount recognised in the Statement of financial position in respect of the Group’s defined benefit plans 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
2015
£m
846
(1,055)
73
(136)
19
2014
£m
687
(898)
74
(137)
14
The asset restriction relates to tax that would be deducted at source in respect of a refund of the Plan surplus. Amounts recognised in the
Statement of comprehensive income in respect of the Plan are as follows:
Included in interest payable
Interest income on net defined benefit asset
Included in other comprehensive income
Re-measurement loss/(gain)
Asset restriction
Total re-measurement loss/(gain) and asset restriction
Total
2015
£m
2014
£m
(5)
11
(4)
7
2
(4)
(17)
7
(10)
(14)
The re-measurement loss recognised in the financial statements is £14 million (2014: £11 million gain). The remaining balance relates to losses on
our overseas schemes, as noted above.
Changes in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Interest on Plan liabilities
Re-measurement (gain)/loss:
– (gain)/loss from change in demographic assumptions
– loss/(gain) from change in financial assumptions
– experience gains
Benefits paid
Closing defined benefit obligation
114
2015
£m
687
30
(2)
157
(3)
(23)
846
2014
£m
720
31
11
(7)
(41)
(27)
687
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
26 RETIREMENT BENEFITS CONTINUED
Changes in the fair value of the Plan assets were as follows:
Opening fair value of the Plan assets
Interest on Plan assets
Actual return on Plan assets less interest on Plan assets
Employer 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
The Plan’s assets are all invested with Legal and General Investment Management in quoted and liquid funds.
The Plan’s assets do not include any of the Group’s own equity instruments nor any property in use by the Group.
Changes in the asset restriction were as follows:
Opening asset restriction
Interest on asset restriction
Re-measurements
Closing asset restriction
2015
£m
898
38
141
1
(23)
1,055
2015
£m
222
213
610
10
1,055
2015
£m
74
3
(4)
73
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
2015
3.3%
5.6%
3.2%
3.1%
2.1%
2014
£m
904
38
(20)
3
(27)
898
2014
£m
198
207
482
11
898
2014
£m
64
3
7
74
2014
4.5%
5.9%
3.5%
3.4%
2.4%
In addition, it is assumed that members exchange 25% of pension for lump sum at retirement on the conversion terms in place at 31 March 2015
with an allowance for the terms to increase in future. The duration of the Plan’s defined benefit obligation at the accounting date was around
21 years.
115
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
26 RETIREMENT BENEFITS CONTINUED
The post-retirement mortality assumption used to value the benefit obligation at 31 March 2015 is 80% of the S1NA Light tables allowing for
improvements from 2003 in line with the CMI 2012 core projections with a long-term annual rate of improvement of 1.5% (unchanged from
31 March 2014). The life expectancy of a male member reaching age 60 in 2035 (2014: 2034) is projected to be 33.4 (2014: 33.3) years compared
to 31.1 (2014: 31.0) years for someone reaching 60 in 2015.
The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is:
Discount rate
Retail Price Index (RPI) inflation
Life expectancy
Change in assumption
Impact on defined benefit obligation
2015
2014
Decrease by 0.1%
Increase by 0.1%
Increase by 1 year
Increase by £12 million
Increase by £11 million
Increase by £16 million
Increase by £9 million
Increase by £8 million
Increase by £11 million
The above sensitivity analysis is based on changing one assumption whilst all others remain constant. In practice this is unlikely to occur and
changes in some of the assumptions may be correlated.
Through its defined benefit plan the Group is exposed to a number of risks, the most significant of which are detailed below:
Asset volatility
A fall in the value of the Plan’s assets may reduce the value of the defined benefit surplus and could affect the future funding requirements.
To reduce the volatility of the Plan’s assets, the Trustees have implemented an investment strategy that reduces the Plan’s equity holdings
by switching them to bonds over time. The Plan’s assets are also diversified across different asset classes.
Inflation risk
Changes in bond yields A decrease in corporate bond yields will increase the Plan’s IAS 19 defined benefit obligation. However, the Plan holds a proportion of its
assets in corporate bonds and so any increase in the defined benefit obligation would be partially offset by an increase in the value of the
Plan’s assets.
The Plan’s defined benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities. The majority of the Plan’s
assets are either unaffected by or only loosely correlated with inflation, meaning that an increase in inflation could reduce or eliminate the
defined benefit surplus.
The Plan’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the Plan’s
defined benefit obligation.
Life expectancy
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 2013 was completed in March 2014. The results of that valuation showed that the plan had
an actuarial surplus of £1 million at 30 June 2013 and as a result the Group was not required to make contributions to the Plan in respect of that
valuation. The contingent asset arrangement entered into during FY2013, details of which are provided in Note 25, remains in place. It is expected
that the next triennial actuarial funding valuation exercise will be based on the financial position of the Plan as at 30 June 2016.
116
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 27 SHARE-BASED PAYMENTS
ACCOUNTING POLICY:
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 over the period that employees
provide services, generally the period between the start of performance period and the vesting date of the shares. The number of shares
expected to vest takes into account the likelihood that performance and services conditions included in the terms of the award will be met.
Fair value is measured by use of an appropriate model which takes into account the exercise price of the option, the current share price, the
risk-free interest rate, the expected volatility of the share price over the life of the option and any other relevant factors. 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 are adjusted for the
forfeitures of the participants’ rights that no longer meet the plan requirements as well as for early vesting.
Share-based payments are in certain circumstances made in lieu of annual cash bonuses or carried interest payments. The cost of the share-
based payments is allocated either to operating expenses (bonuses) or carried interest depending on the original driver of the award. Executive
Director Long Term Incentives are allocated to operating expenses.
The total cost recognised in the Statement of comprehensive income is shown below:
Share awards included as operating expenses1
Share awards included as Carried interest1
Cash-settled share awards
1 Credited to equity.
2015
£m
15
4
3
22
2014
£m
6
2
2
10
117
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
27 SHARE-BASED PAYMENTS CONTINUED
The features of the Group’s share schemes for Executive Directors are described in the Report of the Board on Directors’ remuneration on pages
72 to 81. To ensure that employees’ interests are aligned with shareholders, a significant amount of variable compensation paid to higher earning
employees is deferred into shares that vest over a number of years. 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 2015 is £5 million
(2014: £4 million).
For the share-based awards granted during the year, the weighted average fair value of those options at 31 March 2015 was 323 pence
(2014: 345 pence).
The main assumptions for the valuation of certain share-based awards with market conditions attached comprised:
Valuation methodology
Binomial and Monte Carlo models
Black Scholes
Share price
at issue
Exercise
price
Expected
volatility
433.6p
401.9p
–
–
34%
30%
Expected
option life
in years
3
3
Dividend
Yield
–
4.6%
Risk free
interest
rate
1.2%
1.4%
Expected volatility was determined from the historical three year volatility at the date of grant, commensurate with the performance period.
MOVEMENTS IN SHARE AWARDS
Share-based awards have no exercise prices outstanding and the number of awards are as follows:
Outstanding at the start of the year
Granted
Exercised
Lapsed
Outstanding at the end of year
Weighted average remaining contractual life of awards outstanding in years
Exercisable at the end of the year
2015
Number
17,454,763
2,483,913
(3,141,620)
(780,433)
16,016,623
4.45
186,481
2014
Number
13,773,834
6,058,327
(1,503,366)
(874,032)
17,454,763
4.74
50,354
The weighted average market price at the date of exercise was 426 pence (2014: 369 pence)
HOLDINGS OF 3I GROUP PLC SHARES
The Group has established an employee benefit trust and the total number of 3i Group plc shares held in this trust at 31 March 2015 was
24 million (2014: 27 million). Dividend rights have been waived on these shares. The total market value of the shares held in trust based on the
year end share price of £4.82 (2014: £3.98) was £115 million (2014: £107 million).
118
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 28 FINANCIAL RISK MANAGEMENT
INTRODUCTION
A review of the Group’s objectives, policies and processes for managing and monitoring risk is set out in the Risk section. 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 an individual 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. The risk management
processes of the Company are aligned with those of the Group and both the Group and the Company share the same financial risks.
FINANCIAL RISKS
Concentration risk
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. Although 3i does not set maximum limits for asset allocation, it does have a maximum exposure limit.
This is detailed in the Investment policy on page 53 of the Directors’ Report. Quantitative data regarding the concentration risk of the portfolio
across geographies can be found in the Segmental analysis in Note 1 and in the 25 large investments table on pages 93 and 134.
Credit risk
The Group is subject to credit risk on its unquoted investments, derivatives, cash and deposits. The Group’s cash and deposits are held with
a variety of counterparties with 61% of the Group’s surplus cash held on demand in AAA rated banks and 23% held in short-term reverse
repurchase agreements with banks rated A or higher using Gilts as collateral. The balance is held on short-term deposit with banks with a credit
rating of A or higher. The credit quality of unquoted investments, which are held at fair value and include debt and equity elements, is based on
the financial performance of the individual portfolio companies. The credit risk relating to these assets is based on their enterprise value and
is reflected through fair value movements. The credit quality of the assets is based on the financial performance of the individual portfolio
companies. 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. Further detail can be found in the Price risk – market fluctuations disclosure in this Note and the sensitivity disclosure to
changes in the valuation assumptions is provided in the valuation section of Note 12.
Liquidity risk
Liquidity outlook is monitored weekly by management and regularly by the Board in the context of periodic strategic reviews of the balance sheet.
The new investment pipeline and forecast realisations are closely monitored and assessed against our vintage control policy. These are noted in
the risk mitigation section on page 43 of the Risk section. The table below analyses the maturity of the Group’s gross contractual liabilities.
Financial liabilities (excluding foreign exchange contracts)
As at 31 March 2015
Gross commitments:
Fixed loan notes
Committed multi-currency facility
Carried interest and performance fees payable within one year
Acquisition related earn-out charges payable
Trade and other payables
Total
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more than
5 years
£m
49
1
13
17
152
232
289
1
–
10
–
300
106
2
–
–
–
108
896
–
–
–
–
896
Total
£m
1,340
4
13
27
152
1,536
Gross commitments include principal amounts and interest and fees where relevant. Carried interest and performance fees payable greater than
one year of £72 million (2014: £30 million) have no stated maturity as they result from investment related transactions and it is not possible to
identify with certainty the timing of when the investments will be sold.
119
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
28 FINANCIAL RISK MANAGEMENT CONTINUED
Forward foreign exchange contracts
As at 31 March 2015
Gross amount receivable for forward foreign exchange contracts
Gross amount payable for forward foreign exchange contracts
Total
Financial liabilities (excluding forward foreign exchange contracts)
As at 31 March 2014 (restated)
Gross commitments:
Fixed loan notes
Committed multi-currency facility
Carried interest and performance fees payable within one year
Acquisition related earn-out charges payable
Trade and other payables
Total
Forward foreign exchange contracts
As at 31 March 2014
Gross amount receivable for forward foreign exchange contracts
Gross amount payable for forward foreign exchange contracts
Total amount payable
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more than
5 years
£m
58
(58)
–
–
–
–
–
–
–
–
–
–
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more than
5 years
£m
51
2
6
10
166
235
51
2
–
10
–
63
396
–
–
8
–
404
931
–
–
–
–
931
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more than
5 years
£m
108
(112)
(4)
–
–
–
–
–
–
–
–
–
Total
£m
58
(58)
–
Total
£m
1,429
4
6
28
166
1,633
Total
£m
108
(112)
(4)
The Company disclosures are the same as those for the Group with the following exceptions; carried interest and performance fees payable
within one year is nil (2014: nil), acquisition related earn-out charges payable within one year is £11 million (2014: £10 million), acquisition related
earn-out charges payable within one and two years is £10 million (2014: £8 million), acquisition related earn-out charges payable between 2 and
5 years is nil (2014: £8 million) and trade and other payables within one year is £327 million (2014: £292 million).
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
Interest rate risk has primarily been managed through a reduction in gross debt. The direct impact of a movement in interest rates is relatively
small as the Group’s outstanding debt is fixed rate. The sensitivities below arise principally from changes in interest receivable on cash
and deposit.
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 £9 million (2014: £8 million increase) for the Group and £8 million income (2014: £6 million) for the Company.
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.
120
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 28 FINANCIAL RISK MANAGEMENT CONTINUED
(ii) Currency risk
The Group’s net assets in euro, US dollar, Swedish krona, Indian rupee, Chinese renminbi, Brazilian real and all other currencies combined is
shown in the table below. This sensitivity analysis is performed based on the sensitivity of the Group’s net assets to movements in foreign
currency exchange rates assuming a 10% movement in exchange rates against sterling. The sensitivity of the Company to foreign exchange
risk is not materially different from the Group.
The Group considers currency risk on specific investment and realisation transactions and has reduced hedging on a consolidated basis over
time. Further information on how currency risk is managed is provided on page 26 in the Financial review section.
As at 31 March 2015
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 2014 (restated)
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
Sterling
£m
1,271
Euro
£m
1,367
US dollar
£m
Swedish
krona
£m
990
20
Indian
rupee
£m
71
Chinese
renminbi
£m
Brazilian
real
£m
35
26
Other
£m
26
Total
£m
3,806
n/a
n/a
n/a
124
12
136
75
(7)
68
10
1
11
3
3
6
3
–
3
2
–
2
Sterling
£m
948
Euro
£m
1,317
US dollar
£m
898
Swedish
krona
£m
(6)
Indian
rupee
£m
62
Chinese
renminbi
£m
Brazilian
real
£m
26
33
2
1
3
Other
£m
30
n/a
n/a
n/a
108
15
123
65
(6)
59
7
1
8
3
3
6
2
–
2
3
–
3
2
–
2
219
10
229
Total
£m
3,308
190
13
203
(iii) Price risk – market fluctuations
The Group’s management of price risk, which arises primarily from quoted and unquoted equity instruments, is through the careful consideration
of the investment, asset management and divestment decisions at the Investment Committee. The Investment Committee’s role in risk
management is discussed further 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
At 31 March 2015
At 31 March 2014 (restated)
Company
At 31 March 2015
At 31 March 2014
Quoted
investment
£m
Unquoted
investment
£m
60
39
191
199
Quoted
investment
£m
Unquoted
investment
£m
60
39
174
192
Total
£m
251
238
Total
£m
234
231
121
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
29 RELATED PARTIES AND INTERESTS IN OTHER ENTITIES
The Group has various related parties stemming from relationships with limited partnerships managed by the Group, its investment portfolio
(including unconsolidated subsidiaries), its advisory arrangements and its key management personnel. In addition, the Company has related
parties in respect of its subsidiaries. Some of these subsidiaries are held at fair value (unconsolidated subsidiaries) due to the treatment
prescribed in IFRS 10.
RELATED PARTIES
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/(payable)
Fees receivable from external funds
Statement of financial position
Carried interest receivable
Group
2015
£m
28
34
Group
2015
£m
33
Group
2014
£m
(1)
33
Group
2014
£m
8
Company
2015
£m
Company
2014
£m
28
–
(1)
–
Company
2015
£m
33
Company
2014
£m
8
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 IFRS 10) but are related parties. The total amounts included for these
investments are as follows:
Statement of comprehensive income
Realised profit over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Statement of financial position
Unquoted investments
Group
2015
£m
13
3
26
Group
2015
£m
560
Group
2014
(restated)
£m
12
62
12
Group
2014
(restated)
£m
587
Company
2015
£m
Company
2014
£m
13
15
17
12
59
11
Company
2015
£m
450
Company
2014
£m
542
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
Performance fees
Dividends
Statement of financial position
Quoted equity investments
Performance fees
122
Group
2015
£m
46
12
45
12
Group
2015
£m
288
45
Group
2014
£m
Company
2015
£m
Company
2014
£m
3
10
–
12
Group
2014
£m
242
–
46
–
–
12
3
–
–
12
Company
2015
£m
288
–
Company
2014
£m
242
–
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 29 RELATED PARTIES AND INTERESTS IN OTHER ENTITIES CONTINUED
Subsidiaries
Transactions between the Company and its fully consolidated 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 £13 million (2014: £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 £145 million (2014: £98 million) for this service.
Other subsidiaries
The Company borrows funds from, and lends funds to certain subsidiaries and pays and receives interest on the outstanding balances.
The interest income that is included in the Company’s Statement of comprehensive income is £1 million (2014: £2 million) and the interest
expense included is nil (2014: £1 million).
Key management personnel
The Group’s key management personnel comprise the members of the Executive Committee and the Board’s non-executive Directors.
The following amounts have been included in respect of these individuals:
Statement of comprehensive income
Salaries, fees, supplements and benefits in kind
Cash bonuses1
Carried interest and performance fees payable
Share-based payments
1 2014 charge restated to reflect cash bonus only. For further detail, see Directors’ remuneration report.
No termination benefits were paid to Executive Directors during the year or the prior year.
Statement of financial position
Bonuses and share-based payments
Carried interest and performance fees payable within one year
Carried interest and performance fees payable after one year
Group
2015
£m
5
4
17
5
Group
2015
£m
14
5
21
Group
2014
(restated)
£m
5
5
10
3
Group
2014
£m
7
1
6
Carried interest paid in the year to key management personnel was £3 million (2014: £3 million).
UNCONSOLIDATED STRUCTURED ENTITIES
The application of IFRS 12 requires additional disclosure on the Group’s exposure to unconsolidated structured entities.
The Group has exposure to a number of unconsolidated structured entities as a result of its investment activities across its Private Equity,
Infrastructure and Debt Management business lines. These structured entities fall into four categories, namely CLO’s, debt management
warehouses, closed end limited partnerships (Private Equity and Infrastructure funds) and investments in certain portfolio investments.
The nature, purpose and activities of these entities are detailed below along with the nature of risks associated with these entities and the
maximum exposure to loss.
123
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
29 RELATED PARTIES AND INTERESTS IN OTHER ENTITIES CONTINUED
CLO structured entities
The Group manages CLO vehicles as part of its Debt Management business. These funds predominantly invest in senior secured loans and are
financed by investors seeking credit rated, structured, investment returns.
The Group manages these funds, in return for a management fee. The Group also typically invests into the equity tranche of these funds.
The Group’s attributable stakes in these entities are held at fair value, fees receivable are recognised on an accruals basis and performance
fees are accrued when relevant performance hurdles are met.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Fee income receivable
Total
Carrying amount
Assets
£m
Liabilities
£m
119
7
126
–
–
–
Maximum loss
exposure
£m
119
7
126
Net
£m
119
7
126
At 31 March 2015, the total CLO assets under management were £6.5 billion (2014: £5.8 billion). The Group earned dividend income of £16 million
(2014: £8 million) and fee income of £30 million (2014: £7 million) during the year from CLO structured entities.
Warehouse structured entities
Ahead of future CLO fund launches, warehouse facilities are usually established to support the creation of senior secured debt portfolios.
These entities are financed by the Group along with the bank appointed to operate the warehouse facility. The Group makes a commitment
to the warehouse, typically taking the first loss position and is at risk for margin calls if the portfolio underperforms. The Group’s attributable
stakes in these warehouses are held at fair value.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Total
Carrying amount
Assets
£m
Liabilities
£m
43
43
–
–
Maximum loss
exposure
£m
43
43
Net
£m
43
43
At 31 March 2015, the total net asset value of the warehouse entities was £43 million (2014: £17 million). The Group earned interest income
of £6 million (2014: £2 million) during the year from warehouse structured entities.
Closed end limited partnerships
The Group manages a number of closed end limited partnerships, which are primarily Private Equity or Infrastructure focused, in return for
a management fee. The purpose of these partnerships is to invest in Private Equity or Infrastructure investments for capital appreciation.
Limited Partners, which in some cases may include the Group, finance these entities by committing capital to them and cash is drawn down
or distributed for financing investment activity.
The Group’s attributable stakes in these entities are held at fair value, fees receivable are recognised on an accruals basis and carried interest is
accrued when relevant performance hurdles are met.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Carried interest receivable
Total
Carrying amount
Assets
£m
Liabilities
£m
33
33
–
–
Maximum loss
exposure
£m
33
33
Net
£m
33
33
At 31 March 2015, the total assets under management relating to these entities was £2.2 billion (2014: £2.5 billion). The Group earned fee income
of £31 million (2014: £33 million) and carried interest of £28 million (2014: £(1) million) in the year.
124
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 29 RELATED PARTIES AND INTERESTS IN OTHER ENTITIES CONTINUED
Investments that are structured entities
The Group makes investments on behalf of itself and third party funds that it manages, for capital appreciation purposes. In a small number of
cases, these investments fall under the classification of a structured entity as they are funds managed by the General Partner under a limited
partnership agreement.
The Group’s attributable stakes in these entities are held at fair value.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Total
Carrying amount
Assets
£m
Liabilities
£m
2
2
–
–
Maximum loss
exposure
£m
2
2
Net
£m
2
2
At 31 March 2015, the total fair value of these investments, including stakes held by third parties was £33 million (2014: £53 million). The Group
recognised an unrealised loss of £1 million from investments that are structured entities (2014: £1 million realised profit).
REGULATORY INFORMATION RELATING TO FEES:
Under AIFMD, 3i Investments plc acts as an Alternative Investment Fund Manager (“AIFM”) to 3i Group plc. In performing the activities and
functions of the AIFM, the AIFM or another 3i company may pay or receive fees, commissions or non-monetary benefits to or from third parties
of the following nature:
Transaction fees: 3i companies receive monitoring and directors’ fees from portfolio companies. The amount is agreed with the portfolio
company at the time of the investment but may be re-negotiated. Where applicable, 3i may also receive fees on the completion of
transactions such as acquisitions, re-financing or syndication either from the portfolio company or a co-investor. Transaction fees paid to 3i
are included in portfolio income.
Payments for third party services: 3i companies may retain the services of third party consultants; for example for an independent director
or other investment management specialist expertise. The amount paid varies in accordance with the nature of the service and the length of
the service period and is usually, but not always, paid/reimbursed by the portfolio companies. The payment may involve a flat fee, retainer or
success fee. Such payments, where borne by 3i companies, are usually included in portfolio income.
Payments for services from 3i companies: One 3i company may provide investment advisory services to another 3i company and receive
payment for such service.
125
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Notes to the accounts continued
30 PRINCIPAL SUBSIDIARIES
The table below comprises the principal subsidiary undertakings as at 31 March 2015 all of which were wholly-owned, with the exception of
3i Debt Management Limited, which is 75.4% 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 24.6% of the equity of 3i Debt
Management Limited and 20% of 3i Debt Management US LLC, currently owned by management, over the next two years. They are incorporated
in Great Britain and registered in England and Wales unless otherwise stated.
The introduction of IFRS 10 has resulted in a reassessment of the accounting subsidiaries of the Group. IFRS 10 has reduced the requirements for
an entity to be classified as an accounting subsidiary and deems wider control issues, as opposed to equity ownership, as the key determinant
when identifying accounting subsidiaries. Under IFRS 10, if the Group is exposed, or has rights to variable returns from its involvement with the
investee and has the ability to affect these returns through its power over the investee then it has control, and hence the investee is deemed an
accounting subsidiary. This is inconsistent with the UK Companies Act where voting rights are the key determinant when identifying accounting
subsidiaries, with a larger than 50% holding of voting rights resulting in an entity being classified as a subsidiary. The accounting treatment of
each subsidiary is noted in the table below.
As at 31 March 2015, the entire issued share capital of 3i Holdings plc and 75.4% 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 listed in the table below and 80% of 3i Debt
Management US LLC was held by subsidiary undertakings of the Company.
In addition, under the application of IFRS 10, 30 of the portfolio investments are considered to be accounting subsidiaries. As per the investment
entity exception under IFRS 10, these are all held at fair value with movements shown in the Statement of comprehensive income. The largest 25
portfolio companies by fair value are detailed on pages 134 and 135. The combination of the table below and that on pages 134 and 135 are
deemed by the Directors to fulfil the IFRS 12 disclosure of material subsidiaries.
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 Group’s (Accounts and Reports) Regulations 2008 is such that compliance would
result in information of excessive length being given. The full disclosure will be annexed to the Company’s next annual return.
Name
3i Holdings plc
Country of
incorporation
England and Wales
3i International Holdings
England and Wales
3i plc
England and Wales
3i Debt Management Limited
England and Wales
3i Debt Management
Investments Limited
3i Investments plc
England and Wales
England and Wales
3i BIFM Investments Limited
England and Wales
3i Europe plc
3i Nordic plc
Gardens Pension
Trustees Limited
3i Corporation
England and Wales
England and Wales
England and Wales
USA
3i Debt Management US LLC
USA
3i Deutschland
Gesellschaft für
Industriebeteiligungen
GmbH
Germany
Issued and fully paid
share capital
Principal
activity
1,000,000
ordinary shares of £1
2,715,973
ordinary shares of £10
110,000,000
ordinary shares of £1
1,000,000
ordinary shares of £1
12,000,000
ordinary shares of £1
10,000,000
ordinary shares of £1
2,570,000
ordinary shares of £1
500,000
ordinary shares of £1
500,000
ordinary shares of £1
100
ordinary shares of £1
15,000 shares of common
stock (no par value)
Holding company
Holding company
Services
Holding company
Investment manager
Investment manager
Investment manager
Investment adviser
Investment adviser
Pension fund trustee
Investment manager
100 shares of common stock
(no par value)
€25,564,594
Investment manager
Investment manager
Consolidation
treatment
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Registered
office
16 Palace Street
London SW1E 5JD
1 Grand Central Place,
60 East 42nd Street,
Suite 4100,
New York NY 10165 USA
Bockenheimer
Landstrasse 2-4
60306 Frankfurt am
Main Germany
126
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
31 RESTATEMENT OF PRIOR PERIOD INFORMATION
As explained in the Significant accounting policies, the Group has restated comparative information where relevant, following the early adoption of
changes provided in the narrow scope amendment to IFRS 10.
The impact of this restatement on a line by line basis is presented below.
IMPACT ON CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2014
Unrealised profit on the revaluation of investments
Fair value movements on investment entity subsidiaries
Fees receivable from external funds
Operating expenses
Interest receivable
(Expense)/income from fair value subsidiaries
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Income taxes
Other income statement items
Total comprehensive income for the year
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
77
454
50
(118)
2
(5)
(1)
(16)
–
(2)
37
478
4
(21)
25
(18)
1
13
4
(1)
(6)
(1)
–
–
81
433
75
(136)
3
8
3
(17)
(6)
(3)
37
478
IMPACT ON CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2014
Assets
Unquoted investments
Investments in investment entities
Carried interest and performance fees receivable
Intangible assets
Deferred income taxes
Other current assets
Cash and cash equivalents
Other assets
Total assets
Liabilities
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Deferred income taxes – non current
Provisions
Trade and other payables
Acquisition related earn-out charges payable
Current income tax
Deferred income taxes – current
Other liabilities
Total liabilities
Equity
Translation reserve
Capital reserve
Other reserves
Total equity
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
1,279
1,973
8
10
1
72
643
402
4,388
(26)
(2)
–
(4)
(158)
–
(2)
(1)
(887)
(1,080)
242
1,051
2,015
3,308
45
(64)
9
15
2
4
31
–
42
(4)
(16)
(2)
(1)
(8)
(10)
(2)
1
–
(42)
1
(1)
–
–
1,324
1,909
17
25
3
76
674
402
4,430
(30)
(18)
(2)
(5)
(166)
(10)
(4)
–
(887)
(1,122)
243
1,050
2,015
3,308
127
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
Notes to the accounts continued
31 RESTATEMENT OF PRIOR PERIOD INFORMATION CONTINUED
IMPACT ON CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2014
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash inflow from fair value subsidiaries
Portfolio fees received
Fees received from external funds
Carried interest and performance fees received
Carried interest and performance fees paid
Operating expenses
Income taxes paid
Other cash flows
Change in cash and cash equivalents
Opening cash and cash equivalents
Effect of exchange rate fluctuations
Closing cash and cash equivalents
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
(114)
452
46
4
52
1
(20)
(125)
(3)
(243)
50
610
(17)
643
(34)
2
16
2
23
4
5
(6)
(4)
–
8
23
–
31
(148)
454
62
6
75
5
(15)
(131)
(7)
(243)
58
633
(17)
674
128
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015
Independent Auditor’s report
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF 3i GROUP PLC
Opinion on Financial statements
In our opinion:
the Financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2015 and of the
Group’s profit for the year then ended;
the Group Financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the
European Union (IFRSs);
the parent Company Financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006; and
the Financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
Financial statements, Article 4 of the IAS Regulation.
What we have audited
We have audited the Financial statements of 3i Group plc for the year ended 31 March 2015 which comprise the Consolidated Statement of
comprehensive income, the Consolidated and Parent Company Statements of changes in equity, the Consolidated and parent Company
Statements of financial position, the Consolidated and Parent Company cash flow statements and the related notes 1 to 31. The financial reporting
framework that has been applied in their preparation is applicable law and IFRS 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 pages 55 and 56, 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 the parent Company’s circumstances and have been consistently applied and adequately
disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the Financial statements.
In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the
audited Financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies
we consider the implications for our report.
129
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Independent Auditor’s report continued
Our assessment of risk of material misstatement and our response to these risks
The risks included in the table below represent those material risks of misstatement that have had the greatest impact on our audit strategy and
approach for the year ended 31 March 2015 (including the allocation of resources and the directing of efforts of the engagement team). The table
also includes our audit response to each of these risks:
Risk identified
Our response
Group and parent Company
Valuation of unquoted proprietary investments and
resulting impact on the Consolidated statement of
comprehensive income
Please refer to page 67, Audit and Compliance
Committee report and notes 10 and 11 to the
audited Financial statements.
The proprietary investment portfolio comprises a
large number of unquoted securities. The valuation
policy followed by the Group is based on the
International Private Equity and Venture Capital
Valuation (IPEV) guidelines. Owing to the illiquid
nature of these investments the assessment of fair
valuation necessitates significant and complex
judgements by management.
Inappropriate judgements made in the assessment
of fair value, in particular, in respect of earnings
multiples, liquidity discounts, discount rates and
valuation multiple selection could have a significant
impact on the value of the unquoted investment
portfolio, and therefore on the return generated for
the shareholders.
We obtained an understanding of management’s processes and controls around the fair valuation of
unquoted proprietary investments by performing walkthrough procedures, testing relevant controls and by
reviewing the valuation governance structure and protocols around management’s oversight of the valuation
of unquoted investments.
We assessed that management’s valuation policies were in compliance with IFRS and the IPEV guidelines and
that the valuation approach adopted by management was appropriate.
With the assistance of our valuation experts, we formed an independent assessment of the valuation of a
sample of unquoted investments to provide further assurance on the appropriateness of the portfolio
valuation. Our valuation experts conducted this independent assessment by reference to relevant industry
and market valuation considerations.
In respect of the valuation model inputs, on a sample basis, we agreed the earnings and earnings multiples
to investment company and comparable company results, transaction multiples, management accounts,
and other information available from relevant external market sources.
We re-performed the calculation of the valuation models on a sample basis.
We identified and discussed with management the rationale for any differences between the exit prices of
investments realised during the year against the prior year fair value, to further assess the reasonableness of
the current year valuation models and methodology adopted by management.
We confirmed the impact on the Consolidated Statement of comprehensive income of valuation
movements – realised and unrealised.
Risk identified
Our response
We obtained an understanding of management’s processes and controls around the carried interest
calculations by reviewing the terms and conditions set out in the underlying agreements, performing
walkthrough procedures, testing relevant controls and reviewing the governance structure and protocols
around management’s oversight of the carried interest arrangements.
We performed analytical procedures in respect of carried interest based on our knowledge of investment
realisations, and the performance of the reference investment portfolio.
On a sample basis we re-performed management’s calculation of carried interest; obtained corroborative
audit evidence for the inputs used in the calculation and checked conformity with the provisions of the
respective agreements.
Group
Calculation of carried interest and resulting impact on
the Consolidated statement of comprehensive income
Please refer to page 66, Audit and Compliance
Committee report and note 13 to the audited
financial statements.
The carried interest agreements are complex in
nature. Carried interest reflects amounts payable to
investment executives and amounts receivable in
respect of the 3i managed funds. The valuation of
carried interest is based on the underlying valuation
of the investment portfolio. The process of
calculating carry payable and receivable requires
the use of manual calculations.
The complexities inherent in the arrangements and
the manual nature of the recognition process could
have a significant impact on the value of carry
payable and receivable and therefore on the return
generated for the shareholders.
In the prior year, the Auditor’s report included the first time adoption of IFRS10 as a risk. As the Group has followed the same approach to IFRS 10
this year and as there have been limited changes to the standard, IFRS10 has not been included in the risks identified above, in respect of the
current year.
130
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Our application of materiality
We applied the concept of materiality both in planning and performing our audit, and in evaluating the effect of identified misstatements on our
audit and on the Financial statements. For the purposes of determining whether the Financial statements are free from material misstatement
we define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable
person, relying on the Financial statements, would be changed or influenced.
When establishing our overall audit strategy, we determined a magnitude of uncorrected and undetected misstatements that we judged would be
material for the Financial statements as a whole. We determined materiality for the Group to be £38 million (2014: £33 million), which is 1% of net
asset value. Our evaluation of materiality requires professional judgement and necessarily takes into account qualitative as well as quantitative
considerations implicit in the definition. We have derived our materiality calculation based on Net assets as we consider this, on balance, to be the
most important financial metric used by shareholders.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgment was that overall
performance materiality (that is our tolerance for misstatement in an individual account or balance) for the Group should be 50% of materiality,
namely £19 million (2014: £16.7 million). Our objective in adopting this approach is to ensure that total uncorrected and undetected audit
differences in the Financial statements as a whole do not exceed our materiality of £38 million.
We agreed with the Audit and Compliance Committee that we would report to the Committee all audit differences in excess of £1.9 million, (2014:
£1.6 million), as well as differences below that threshold that, in our view warranted reporting on qualitative grounds.
We evaluated any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations.
An overview of the scope of our audit
We used a risk-based approach for determining our audit strategy, ensuring that our audit teams performed consistent procedures and focused
on addressing the risks that are relevant to the business. This approach focused our audit effort towards higher risk areas, such as significant
management judgments.
The investments balance is the most significant part of the balance sheet. Control over the valuation of investments, wherever they are based,
is exercised directly by 3i’s management in London, and as such is audited by the UK based audit team. In all locations where the Group has
operations, the UK based audit team audited all items material to the Group Financial statements.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
the part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Strategic report and the Directors’ report for the financial year for which the Financial statements are prepared
is consistent with the Financial statements.
131
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Independent Auditor’s report continued
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:
materially inconsistent with the information in the audited Financial statements; or
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our
audit; or
is otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and
the Directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the annual report appropriately
discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
Branches not visited by us; or
the parent Company Financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the
accounting records and returns; or
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
the Statement of Directors’ Responsibilities, set out on pages 55 and 56, in relation to going concern; and
the part of the Corporate governance statement relating to the Company’s compliance with the ten provisions of the UK Corporate Governance
Code specified for our review.
David Canning-Jones (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
Date: 13 May 2015
The maintenance and integrity of the 3i Group plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration
of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Financial statements since they were initially
presented on the web site.
Legislation in the United Kingdom governing the preparation and dissemination of Financial statements may differ from legislation in other jurisdictions.
132
FINANCIAL STATEMENTS3i Group Annual report and accounts 2015 Portfolio
and other
information
134 25 large investments
136 Portfolio valuation – an explanation
138 Directors’ remuneration policy
145 Information for shareholders
147 Glossary
133
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Portfolio and other information
25 LARGE INVESTMENTS
The 25 investments listed below account for 81% of the portfolio at 31 March 2015 (2014: 75%).
For each of our investments we have assessed whether they classify as accounting subsidiaries under IFRS and/or subsidiaries under
the UK Companies Act. This assessment forms the basis of our disclosure of accounting subsidiaries in the financial statements.
The UK Companies Act defines a subsidiary based on voting rights, with a greater than 50% majority of voting rights resulting in an entity being
classified as a subsidiary. IFRS 10 applies a wider test and, if a Group is exposed, or has rights to variable returns from its involvement with the
investee and has the ability to affect these returns through its power over the investee then it has control, and hence the investee is deemed
an accounting subsidiary. Accounting subsidiaries under IFRS 10 within the 25 large investments below are noted. None of these investments
are UK Companies Act subsidiaries.
In accordance with Section 29 of the Alternative Investment Fund Manager Directive (“AIFMD”), 3i Investments plc, as AIFM, encourages
all controlled portfolio companies to make available to employees and investors an Annual report which meets the disclosure requirements
of the Directive. These are available either on the portfolio company’s website or through filing with the relevant local authorities.
Investment
Action l
3i Infrastructure plc l
Scandlines l
Amor/Christ l
Description of business
Non-food discount retailer
Quoted investment company, investing in infrastructure
Ferry operator between Denmark and Germany
Distributor and retailer of affordable jewellery
Business line
Private Equity
Infrastructure
Private Equity
Private Equity
Geography
Benelux
UK
Denmark/Germany
Germany
Element Materials Technology l
Materials testing and inspection
Private Equity
Benelux
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Clinical research outsourcing solutions
Manufacturer and distributor of baby products
Pan-Asian non life reinsurance
Precision engineered elastomeric components manufacturer
Manufacturer of mechanical seals and support systems
Discount gyms operator
Manufacture and sale of speciality chemicals
International transmission testing specialist
Manufacturer of engineered, mission critical protective equipment
Manufacturer of pumps and accessories for the air conditioning, heating and
refrigeration industry
Private Equity
Pan-European speciality chemical distributor
Private Equity
Funeral service provider
Global management consultancy
Private Equity
Manufacturer of brushes, applicators and packaging systems for the cosmetics industry Private Equity
Private Equity
Women’s lingerie and associated products
Private Equity
European bottler of soft drinks and fruit juices for retailers and branded customers
Private Equity
Distributor of consumable medical products, devices and technology
Private Equity
Infrastructure services for electricity and telecoms networks
Private Equity
Building materials supplier
Private Equity
Designer, manufacturer and distributor of fasteners and fixing systems
US
UK
Singapore
US
UK
Benelux
UK
Germany
US
UK
Luxembourg
Spain
US
Germany
UK
Benelux
Sweden
Sweden
UK
France
Quintiles
Mayborn l
ACR
Q Holding l
AES Engineering
Basic-Fit l
Tato
GIF l
Dynatect l
Aspen Pumps l
Azelis l
Mémora l
JMJ l
Geka l
Agent Provocateur l
Refresco Gerber
OneMed Group l
Eltel Networks l
MKM
Etanco l
l IFRS accounting subsidiary
134
First invested in Valuation basis
Residual cost
March 2014
Residual cost
March 2015
Valuation
March 2014
Valuation
March 2015
£m Relevant transactions in the year
592 Refinancing returned £113m of proceeds.
£20m dividends paid to 3i Group.
2010/2014
Earnings
Follow on investment in Christ of £99m to acquire Christ,
a leading retailer for jewellery and watches in Germany.
2011
2007
2007
2010
2008
2006
2006
2014
1996
2013
1989
2013
2014
2015
2007
2008
2013
2012
2007
2010
2011
2007
2006
2011
Industry metric
Earnings
Quoted
DCF
Earnings
Quoted
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Quoted
Earnings
Quoted
Earnings
Earnings
£m
57
302
108
50
78
52
113
105
–
30
84
2
64
–
–
72
141
44
56
49
46
89
20
80
108
£m
2
302
114
129
62
41
129
105
100
30
91
2
68
65
65
76
159
42
69
53
30
117
13
22
87
£m
501
404
193
70
124
122
116
101
–
96
82
85
65
–
–
26
67
43
55
35
42
44
70
27
44
109 New investment.
71 New investment.
64 New investment.
481
262
165
145
144
133
120
102
102
80
78
62
61
53
53
53
47
47
47
43
40
1,750
1,973
2,412
3,154
Imminent sale
Exit completed in May 2015.
IPO in March 2015 generating £25m of proceeds.
IPO in February 2015 generating £87m of proceeds.
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 The 25 investments listed below account for 81% of the portfolio at 31 March 2015 (2014: 75%).
For each of our investments we have assessed whether they classify as accounting subsidiaries under IFRS and/or subsidiaries under
the UK Companies Act. This assessment forms the basis of our disclosure of accounting subsidiaries in the financial statements.
The UK Companies Act defines a subsidiary based on voting rights, with a greater than 50% majority of voting rights resulting in an entity being
classified as a subsidiary. IFRS 10 applies a wider test and, if a Group is exposed, or has rights to variable returns from its involvement with the
investee and has the ability to affect these returns through its power over the investee then it has control, and hence the investee is deemed
an accounting subsidiary. Accounting subsidiaries under IFRS 10 within the 25 large investments below are noted. None of these investments
are UK Companies Act subsidiaries.
In accordance with Section 29 of the Alternative Investment Fund Manager Directive (“AIFMD”), 3i Investments plc, as AIFM, encourages
all controlled portfolio companies to make available to employees and investors an Annual report which meets the disclosure requirements
of the Directive. These are available either on the portfolio company’s website or through filing with the relevant local authorities.
3i Infrastructure plc l
Quoted investment company, investing in infrastructure
Description of business
Non-food discount retailer
Ferry operator between Denmark and Germany
Distributor and retailer of affordable jewellery
Element Materials Technology l
Materials testing and inspection
Private Equity
Benelux
Clinical research outsourcing solutions
Manufacturer and distributor of baby products
Pan-Asian non life reinsurance
Precision engineered elastomeric components manufacturer
Manufacturer of mechanical seals and support systems
Discount gyms operator
Manufacture and sale of speciality chemicals
International transmission testing specialist
Manufacturer of engineered, mission critical protective equipment
Manufacturer of pumps and accessories for the air conditioning, heating and
refrigeration industry
Pan-European speciality chemical distributor
Funeral service provider
Global management consultancy
European bottler of soft drinks and fruit juices for retailers and branded customers
Distributor of consumable medical products, devices and technology
Infrastructure services for electricity and telecoms networks
Building materials supplier
Designer, manufacturer and distributor of fasteners and fixing systems
Business line
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
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Geography
Benelux
UK
Denmark/Germany
Germany
Singapore
Benelux
Germany
US
UK
US
UK
UK
US
UK
Luxembourg
Spain
US
UK
Benelux
Sweden
Sweden
UK
France
Investment
Action l
Scandlines l
Amor/Christ l
Quintiles
Mayborn l
ACR
Q Holding l
AES Engineering
Basic-Fit l
Tato
GIF l
Dynatect l
Aspen Pumps l
Azelis l
Mémora l
JMJ l
Geka l
Refresco Gerber
OneMed Group l
Eltel Networks l
MKM
Etanco l
l IFRS accounting subsidiary
Agent Provocateur l
Women’s lingerie and associated products
Manufacturer of brushes, applicators and packaging systems for the cosmetics industry Private Equity
Germany
First invested in Valuation basis
Residual cost
March 2014
£m
Residual cost
March 2015
£m
Valuation
March 2014
£m
2011
2007
2007
2010/2014
2010
2008
2006
2006
2014
1996
2013
1989
2013
2014
2015
2007
2008
2013
2012
2007
2010
2011
2007
2006
2011
Earnings
Quoted
DCF
Earnings
Earnings
Quoted
Earnings
Industry metric
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Earnings
Imminent sale
Earnings
Earnings
Earnings
Earnings
Quoted
Earnings
Quoted
Earnings
Earnings
57
302
108
50
78
52
113
105
–
30
84
2
64
–
–
72
141
44
56
49
46
108
89
20
80
1,750
2
302
114
129
62
41
129
105
100
30
91
2
68
65
65
76
159
42
69
53
30
117
13
22
87
1,973
501
404
193
70
124
122
116
101
–
96
82
85
65
–
–
26
67
43
55
35
42
44
70
27
44
2,412
Valuation
March 2015
£m Relevant transactions in the year
592 Refinancing returned £113m of proceeds.
£20m dividends paid to 3i Group.
481
262
165
Follow on investment in Christ of £99m to acquire Christ,
a leading retailer for jewellery and watches in Germany.
145
144
133
120
109 New investment.
102
102
80
78
71 New investment.
64 New investment.
Exit completed in May 2015.
IPO in March 2015 generating £25m of proceeds.
IPO in February 2015 generating £87m of proceeds.
62
61
53
53
53
47
47
47
43
40
3,154
135
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Portfolio valuation – an explanation
POLICY
The valuation policy is the responsibility of the Board, with additional
oversight and annual review from the Valuations 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. Valuations
of the investment portfolio of the Group and its subsidiaries are
performed at each quarter end.
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.
The quoted assets in our portfolio are valued at their closing bid price
at the balance sheet date. The majority of the portfolio, however, is
represented by unquoted investments.
PRIVATE EQUITY UNQUOTED VALUATION
To arrive at the fair value of the Group’s unquoted Private Equity
investments, we first estimate the entire value of the company we have
invested in – the enterprise value. We then apportion that enterprise
value between 3i, other shareholders and lenders.
Determining 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, and trading updates from our
portfolio.
As unquoted investments are not traded on an active market, the
Group adjusts the estimated enterprise value by a liquidity discount.
The 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 page 137 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.
Other factors
In applying this framework, there are additional considerations that are
factored into the valuation of some assets.
Impacts from structuring
Structural rights are instruments convertible into equity or cash at
specific points in time or linked to specific events. For example, where
a majority shareholder chooses to sell, and we have a minority interest,
we may have the right to a minimum return on our investment.
Debt instruments, in particular, may have structural rights. In the
valuation, it is assumed third parties, such as lenders or holders of
convertible instruments, fully exercise any structural 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 structural rights are valued on the basis they are exercisable on
the reporting date.
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 UNQUOTED 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 a range of data including
broker quotes if available, 3i internal forecasts and discounted cash
flow models, trading data where available, and data from third-party
valuation providers. Broker quotes and trading data for more liquid
holdings are preferred.
136
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Methodology
Description
Inputs
Earnings
(Private Equity)
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)
Discounted
cash flow
(Private Equity/
Infrastructure)
Broker quotes (Debt
Management)
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
Appropriate for businesses with
long-term stable cash flows,
typically in infrastructure
Used to value traded debt
instruments
Other
(Private Equity)
Used where elements of
a business are valued on
different bases
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 relative performance in the set of
comparables, exit expectations and other company
specific factors
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, benchmarked to a
range of other data such as DCF, trade data and other
quotes
Values of separate elements prepared on one of the
methodologies listed above
% of portfolio
valued on this
basis
59%
Adjustments
A 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
Discounts applied to separate
elements as above
20%
3%
0%
3%
9%
5%
1%
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.
137
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 EXTRACT FROM 2014 ANNUAL REPORT
Directors’ remuneration policy
This is an extract from the 2014 Annual report and sets out the Directors’ remuneration policy
(“the Policy”) approved at the 2014 Annual General Meeting held on 17 July 2014 and is effective
from that date for all payments made to directors.
The Policy is reproduced here for ease of reference only.
POLICY REPORT
Remuneration policy table
The table below summarises the policy in respect of each element of the Company’s remuneration for Executive and non-executive Directors
effective from the date of the 2014 Annual General Meeting. This policy was approved by shareholders at the 2014 Annual General Meeting in
accordance with section 439A of the Companies Act 2006.
This policy remains unchanged. While the Committee will consider the appropriateness of the Remuneration policy annually to ensure it continues
to align with the business strategy, there is no current intention to revise the policy more often than every three years, unless required to through
changes to regulations or legislation.
Executive Directors
Purpose and link
to strategic objectives
Base salary
To provide a fixed
element of pay at
a level that aids the
recruitment, retention
and motivation of high
performing people.
To reflect their role,
experience and
importance to
the business.
Pension
To provide contributions
to Executive Directors
to enable them to
make long-term
savings to provide
post-retirement income.
Pension contributions
are provided to both
support retention and
recruit people of the
necessary calibre.
Operation
Opportunity
Performance
metrics
Salaries are normally reviewed
Whilst there is no maximum salary
None, although the
annually by the Committee, with any
changes usually becoming effective
from 1 July.
These are reviewed by taking into
account a number of factors,
including:
– performance of the Company and
individual;
– wider market and economic
conditions;
– any changes in responsibilities; and
– the level of increases made across
the Company.
level, increases are generally
considered in the context of those
awarded to other employees and the
wider market.
Higher increases may be awarded in
exceptional circumstances. For
example, this may include a change
in size, scope or responsibility of role,
or development within the role or a
specific retention issue.
The annual base salary for each
Executive Director is set out in the
Annual report on Remuneration
for the year.
Committee considers
when setting salary
levels the breadth and
responsibilities of
the role as well as
the competence
and experience
of the individual.
Participation in the defined
contribution pension scheme
(3i Retirement Plan) or cash equivalent.
Executive Directors receive a pension
contribution or cash allowance of
12% of pensionable salary.
N/A
Prior to 2011 Executive Directors were
eligible for membership of the
3i Group Pension Plan, a defined
benefit contributory scheme. 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.
For the period from 5 April 2011
until 5 April 2015, defined benefit
members receive additional
contributions into their defined
contribution pension scheme as
transitional relief for members
whose pension accrual ceased
on 5 April 2011.
In addition if an Executive Director is
a member of the 3i Group Pension
Plan they are eligible to receive a
maximum additional contribution of
5% of the first £50,000 of pensionable
salary in the year to April 2015 only.
For those Executive Directors who
were members of the 3i Group
Pension Plan, their deferred pension
will change to reflect the deferred
pension available on leaving, payable
from age 60.
Details for the current Executive
Directors are set out in the Annual
report of remuneration for the year.
138
3i Group Annual report and accounts 2015 Performance
metrics
N/A
Purpose and link
to strategic objectives
Benefits
Operation
Opportunity
To provide market
Executive Directors are entitled to
competitive benefits
at the level needed to
attract and retain high
performing people.
To provide health
benefits to support
the well being
of employees.
Annual bonus
a combination of benefits, including
a non-pensionable car allowance,
private medical insurance, an
annual health assessment and
life assurance.
The Remuneration Committee may
remove benefits that Executive
Directors receive or introduce other
benefits if it is appropriate to do so.
Executive Directors are also eligible
to participate in any tax-approved
all employee share plans operated
by the Company on the same basis
as other eligible employees.
Whilst there is no maximum level of
benefits, they are generally set at an
appropriate market competitive level,
taking into account a number of
factors including market practice for
comparable roles within appropriate
pay comparators.
The Remuneration Committee may
review the benefits for an existing or
new Executive Director at any point.
To incentivise the
Bonus awards are considered
Maximum bonus of 400% of salary
Performance is
for the Chief Executive.
Maximum bonus of 250% of salary
for the Group Finance Director.
A bonus of above 75% of
the maximum opportunity
is only awarded for
exceptional performance.
achievement of the
Group’s strategic
objectives on an
annual basis.
Deferral into shares
reinforces retention
and enhances
alignment with
shareholders
by encouraging
longer- term focus
and risk alignment.
annually based on performance
in the relevant financial year.
All performance targets are
reviewed and set by the Committee
early in the year.
Awards are determined by the
Committee after the year based
upon the actual performance
against these targets.
No more than 50% of any bonus
award is paid as cash.
At least 50% of any bonus award will
be deferred into shares vesting in
equal instalments over four years.
Deferred bonus awards may be
granted in the form of conditional
share awards, options or forfeitable
shares. Awards may also be
settled in cash.
Participants receive the value of
dividends in cash on the shares
which are subject to the award.
Deferred share awards are subject
to the malus/clawback policy.
assessed against a
balanced scorecard
which aligns with the
strategic objectives
of the Group.
The targets can be
a range of financial,
business line specific,
personal, risk and other
key Group targets.
The Committee uses
the scorecard as a
prompt and guide to
judgment and considers
the performance
outcomes in the wider
context of personal
performance (including
values and behaviours),
risk, market and
other factors.
Details of the annual
performance targets
(and performance
against targets) are
shown within the
Annual report
of remuneration.
139
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 EXTRACT FROM 2014 ANNUAL REPORT
Directors’ remuneration policy continued
Purpose and link
to strategic objectives
Long-term Incentive Plan
Alignment of reward
with long-term,
sustainable Company
performance and
the creation of
shareholder value
over the longer-term.
The combination of
strategic performance
measures and total
shareholder return
targets balance
internal and external
perspectives of
performance, and
align participants with
shareholders’ interests.
Shareholding requirements
To create alignment
with shareholders by
encouraging longer-
term focus.
140
The Committee may make an award
in the form of forfeitable shares,
conditional share awards, stock
appreciation rights, or options under the
plan. Awards may be settled in cash.
Award levels are determined by
reference to individual performance
prior to grant.
Awards vest subject to the Group’s
achievements against the
performance targets over a
fixed three year period.
To the extent that shares vest, they are
released 50% on or around (but not
earlier than) the third anniversary of
grant, and 25% on or around (but not
earlier than) the fourth and fifth
anniversaries of grant.
The Committee may determine that
participants may receive the value
of dividends in cash or shares which
would have been paid on the shares
that vest under awards.
Performance share awards are
subject to the malus/clawback policy
(as set out in the notes opposite).
Executive Directors are required to
build up over a reasonable period
of time, and thereafter maintain,
a shareholding in the Company’s
shares. Vested shares (net of
income tax and National Insurance
contributions) under the Deferred
Bonus Plan and Long-term Incentive
Plan should be retained until the
shareholding requirement is met.
In addition, shareholding targets
exist for other members of the
Executive Committee and for staff
designated as “partners” in the
Group’s businesses.
The Committee retains the
ability to introduce additional retention
conditions.
Operation
Opportunity
All performance targets, along with
relative weightings, are reviewed
and set by the Committee prior
to awards being made.
Awards granted in respect of a
financial year will have a face value
of up to 400% of salary for the
Chief Executive.
Awards granted in respect of
a financial year will have a face
value of up to 250% of salary for
the Group Finance Director.
Normally, no payment will be made
for below threshold performance.
Between 20% and 25% of the
award vests at threshold
performance, depending upon
the performance condition.
Performance
metrics
The scorecard used
to measure the
performance links at
least half of the award
to total shareholder
returns and the
balance, if any, to
strategic objectives set
by the Board.
The achievement
against these targets
is measured over
a three-year period
and is determined
by the Committee.
The Committee can
reduce any award
which would otherwise
vest if gross debt or
gearing targets
are missed.
Details of the current
performance conditions
are shown within
the Annual report
of remuneration.
The shareholding targets for the
N/A
Executive Directors are:
– Chief Executive – 3.0 times salary
– Group Finance Director – 1.5
times salary
Executive Committee members have
a target of 1.5 times salary and
selected “partners” 1.0 times salary.
3i Group Annual report and accounts 2015
Notes to the Remuneration policy table
Performance conditions
The Committee selected the performance conditions used for
determining the annual bonus and LTIP awards as they align directly
with the short and long-term strategy of the business. These conditions
are set annually by the Committee at levels that take into account the
Board’s business plan.
Changes to the policy operated in FY2014
There have been no changes to the remuneration policy from that
which was applied during the year, other than an increase in the
proportion of the annual bonus that is deferred over four years from
40% to 50%. This has been increased to align the Executive Directors’
interests more closely with those of shareholders.
Consistency with policy for all employees
All employees are eligible to receive salary, pension contributions
and benefits and to be considered for a discretionary annual bonus,
with the maximum opportunities reflecting the role and seniority of
each employee. Other members of the Executive Committee are
subject to the same bonus deferral arrangements as the Executive
Directors. Higher-earning members of staff below Executive
Committee have a portion of their bonus deferred into shares vesting
in equal instalments over a three-year period.
Within each of the Group’s businesses, senior members of staff have
a significant part of their compensation linked to the long-term
performance of the Group’s and its clients’ investments through
carried interest schemes or similar arrangements.
Co-investment and carried interest plans
Executive Directors, other than the Chief Executive and Group Finance
Director, are permitted to participate in carried interest plans and
similar arrangements. This was approved by shareholders on 4 July
2001 and 6 July 2011 when approving the Group’s Long-term Incentive
Plan. No current Executive Director benefits from these arrangements.
Malus/Clawback policy
The Committee has agreed a policy, which applies to long-term
incentive awards and deferred bonus share awards made during the
year to Executive Directors (and certain other Senior Executives), under
which awards may be forfeited or reduced prior to vesting in
exceptional circumstances on such basis as the Committee considers
fair, reasonable and proportionate. This would include material
misstatement of Group financial statements, 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.
The Committee may make minor changes to this policy, which do
not have a material advantage to Directors, to aid in its operation
or implementation without seeking shareholder approval for
a revised version of this Policy report.
Non-executive Directors
Purpose and link to strategy
Operation
Opportunity
Non-executive Directors – Fees
To attract and retain high
performing non-executive
Directors of the calibre
required.
Non-executive Directors receive a basic annual fee.
The fee is delivered in a mix of cash and shares.
The Chairman’s fee is reviewed annually by
the Committee.
Fees are benchmarked against other companies
of comparable size and against listed financial
services companies.
The Board is responsible for determining all other
non-executive Director fees, which are reviewed
annually to ensure they remain appropriate.
Fees are set at a level which is considered
appropriate to attract and retain the calibre
of individual required by the Company but the
Company avoids paying more than necessary
for this purpose.
Additional fees are paid for the following
roles/duties:
– Senior Independent Director
– Committee Chairman
– Committee membership
Committee fees are payable in respect of the
Audit and Compliance Committee, Remuneration
Committee and Valuations Committee.
141
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 EXTRACT FROM 2014 ANNUAL REPORT
Directors’ remuneration policy continued
RECRUITMENT POLICY
In determining remuneration arrangements for new executive
appointments to the Board (including internal promotions), the
Committee will take into consideration all relevant factors, including the
calibre of the individual, the nature of the role, local market practice,
the individual’s current remuneration package, 3i remuneration policy,
internal relativities and existing arrangements for other Executive
Directors. For external appointments, some variation may be
necessary in order to attract the successful candidate and to reflect
particular skills or experience specifically required.
The maximum level of variable pay (as expressed as a multiple of base
salary) which may be awarded to new Executive Directors in respect
of their appointment shall be no more generous than the combined
maximum limits expressed in the Remuneration policy table above in
respect of the Chief Executive, with an appropriate mix between annual
bonus and LTIP opportunity, excluding any awards made to
compensate the Executive Director for awards forfeited by their
previous employer.
It may be necessary to compensate the new Executive Director
for variable pay being forfeited from their current employer.
The Committee’s intention is that any such award would be no
more generous than the awards being forfeited and would be
determined on a comparable basis at the time of grant, including
the pay out schedule and performance conditions, where appropriate.
In determining whether it is appropriate to use such judgment, the
Committee will ensure that any awards made are in the best interests
of both the Company and its shareholders. The Committee is at all
times conscious of the need to pay no more than is necessary,
particularly when determining buy-out arrangements.
For an internal appointment of a new Executive Director, any existing
awards made prior to becoming a Director would be allowed to vest
and pay out in accordance with the existing plan rules.
In the event of the appointment of a new non-executive Director,
remuneration arrangements will normally be in line with those detailed
in the relevant table above.
SERVICE CONTRACTS
The main terms of the service contracts of the Executive Directors who served in the year were as follows:
Provision
Notice period
Policy
12 months’ notice if given by the Company
6 months’ notice if given by the Executive Director
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.
Dates of contracts
Mr S A Borrows – 17 May 2012
Mrs J S Wilson – 1 October 2008
Termination payments
Mr Borrows’ contract entitles 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.
All Directors’ contracts entitle the Company to give pay in lieu of notice.
Remuneration and benefits
The operation of all incentive plans, including being eligible to be considered for an annual bonus and
Long-term Incentive Plan awards, is non-contractual.
On termination of employment outstanding awards will be treated in accordance with the relevant plan rules.
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. Service contracts are available for inspection at the Company’s
headquarters in business hours.
142
3i Group Annual report and accounts 2015 PAYMENT FOR LOSS OF OFFICE
As outlined above, the Committee must satisfy any contractual
obligations agreed with the Executive Directors. Details of the Directors’
notice periods are shown alongside the service contract information.
An Executive Director may be eligible to receive a time pro-rated
annual bonus in respect of the year up until he or she ceased
employment. In determining whether to award any bonus, the
Committee will assess performance during the financial year up to the
date of cessation of active involvement in their management role.
The treatment of outstanding share awards is governed by the relevant
share plan rules. The following table and the note below it summarise
the leaver categories and the impact on the share awards which
employees (including Executive Directors) may hold.
For the avoidance of doubt, the Committee reserves the right to
make any remuneration payments and payments for loss of office
notwithstanding that they are not in line with the policy set out above,
where the terms of that payment were agreed (i) before the policy
came into effect or (ii) at a time when the relevant individual was not a
Director of the Company and, in the opinion of the Committee, the
payment was not in consideration for the individual becoming a
Director of the Company. For these purposes “payments” includes the
Committee satisfying awards of variable remuneration and, in relation
to an award or option over shares, the terms of the payment are
“agreed” at the time the award is granted.
Plan
Good leaver categories
Good leaver treatment 1
Bad leaver treatment 1
Deferred share awards
Death
Retirement
Ill-health, injury, disability
Redundancy
Employing company/business ceasing
to be part of 3i Group
“Scheduled Departure” (ie a participant
leaving on such a basis and/or within
a specified timeframe as agreed by
the Committee)
Long-term
Incentive Plan
Death
Retirement
Ill-health, injury, disability
Redundancy
Employing company/business ceasing
to be part of 3i Group
“Scheduled Departure” (ie a participant
leaving on such a basis and/or within
a specified timeframe as agreed by
the Committee)
Awards vest in full on the normal
vesting date
On death, awards vest in full
immediately
Unvested awards lapse in full
Vested awards structured as
options may be exercised for three
months following the participant’s
cessation of employment
Awards normally vest on the
normal vesting date subject to
performance. Scaling back for
time will normally apply
If a participant dies, the Committee
will determine the extent to which
awards should vest as soon as
practicable following the
participant’s death
Awards lapse in full
If the Committee decides the
awards should vest after the
participant’s cessation of
employment, awards will vest
subject to performance and
it may scale back awards or
impose additional conditions
1 The treatments set out in the table above apply to all employees and are expected to operate in the vast majority of cases. The Plan rules retain discretion for
the Committee to reduce awards in exceptional circumstances to Good Leavers or permit vesting (in whole or in part) of awards which would otherwise lapse to
Bad Leavers. The Committee will report on the use of this discretion if it is exercised in relation to any Executive Director.
143
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 EXTRACT FROM 2014 ANNUAL REPORT
Directors’ remuneration policy continued
CHANGE OF CONTROL
The assumptions made in preparing these graphs are that:
If there is a takeover or winding up of the Company, awards will vest
to the extent determined by the Committee.
Minimum – this includes only the fixed elements of pay, being base
salary, benefits and pension;
SCENARIOS
Chief Executive (£000s)
Maximum
12%
44%
44%
4,982
Actual
FY2014
22%
78%
2,617
Minimum
100%
582
0
1,000
2,000
3,000
4,000
5,000
Fixed remuneration
Annual bonus (including deferred element)
Long-term incentive
Finance Director (£000s)
Maximum
19%
40.5%
40.5%
2,472
Actual
FY2014
39%
61%
1,222
Minimum
100%
471
0
500
1,000
1,500
2,000
2,500
Fixed remuneration
Annual bonus (including deferred element)
Long-term incentive
Actual – this represents the remuneration received by each
Executive Director for their performance in the year;
Maximum – this is calculated as the fixed elements and the
maximum Annual Bonus and Long-term Incentive Plan awards; and
Remuneration arising as a result of share price movements or
rights to dividends and other distributions have been excluded.
CONSIDERATION OF WIDER EMPLOYEE PAY
As part of the annual Committee agenda, the Committee reviews the
overall pay and bonus decisions in aggregate for the Group. This
ensures that the pay and conditions in the wider Group are taken into
account when determining directors’ pay. In particular:
Salary increases awarded over time to other employees are taken
into account when considering salary increases for the Executive
Directors; and
The bonus awards made to Directors are considered and made in
the context of discretionary bonus awards made within the
business. These are based upon Company performance, and are
closely correlated to the Executive Director bonus awards.
The Company does not consult with employees when preparing the
Executive Director remuneration policy. However, a number of our
employees are shareholders and so are able to express their views
in the same way as other shareholders.
CONSIDERATION OF SHAREHOLDER VIEWS
As part of the shareholder consultation process during 2012/13, the
Company proposed moving the payment date for awards under the
Long-term Incentive Plan to three years and six months following the
date of award. The Committee received and considered feedback from
shareholders on this point, and decided to retain the existing
framework under which the awards have a performance period of
three years and then are released in tranches on the third, fourth and
fifth anniversary of the date of grant.
The Committee will continue to be mindful of shareholder views when
evaluating and setting ongoing remuneration strategy, and commits
to consulting with shareholders prior to any significant changes to
remuneration policy.
144
3i Group Annual report and accounts 2015
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
Thursday 18 June 2015
Friday 19 June 2015
Thursday 25 June 2015
Friday 24 July 2015
November 2015
January 2016
* The 2015 Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 25 June 2015 at
11.00am. For further details please see the Notice of Annual General Meeting 2015.
INFORMATION ON ORDINARY SHARES
Shareholder profile: Location of investors at 31 March 2015
UK
North America
Continental Europe
Other international
SHARE PRICE
Share price at 31 March 2015
High during the year (23 March 2015)
Low during the year (15 October 2014)
DIVIDENDS PAID IN THE YEAR TO 31 MARCH 2015
FY2014 Final dividend, paid 25 July 2014
FY2015 Interim dividend, paid 7 January 2015
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
72.0%
16.0%
8.0%
4.0%
482.4p
505.0p
352.1p
13.3p
6.0p
%
0.67
1.62
1.97
11.63
30.83
53.29
100.00
Number of
holdings
individuals
Number of
holdings
Corporate
Bodies
13,758
5,721
168
17
0
0
19,664
541
990
393
300
111
22
2,357
Balance as at
31 March 2015
6,478,401
15,715,721
19,114,835
113,068,619
299,829,264
518,246,979
972,453,819
The table above provides details of the number of shareholdings within each of the bands stated in the register of members at 31 March 2015.
145
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Information for shareholders continued
BOILER ROOM AND OTHER SCAMS
ANNUAL REPORTS AND HALF YEARLY REPORTS ONLINE
In the past, some of our shareholders have received unsolicited
telephone calls or correspondence concerning investment matters
from organisations or persons claiming or implying that they have
some connection with the Company. These are typically from overseas
based “brokers” who target UK shareholders offering to sell them what
often turn out to be worthless or high risk shares in UK or overseas
investments. Shareholders are advised to be very wary of any
unsolicited advice, offers to buy shares at a discount or offers of free
reports into the Company. These approaches are operated out of what
is more commonly known as a “boiler room”. You may also be
approached by brokers offering to purchase your shares for an upfront
payment in the form of a broker fee, tax payment or de-restriction fee.
This is a common secondary scam operated by the boiler rooms.
If you receive any unsolicited investment advice:
Always ensure the firm is on the Financial 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;
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;
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; and
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.
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 2015 half yearly report will be available online only. Please
register to ensure you are notified when it becomes available at
www.3i.com/investor-relations/financial-news.
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 cost 8p per minute, plus network extras. Lines are
open from 8.30am to 5.30pm, Monday to Friday (international callers
+44 121 415 7183).
146
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Glossary
Alternative Investment Funds (“AIFs”) At 31 March 2015, 3i
Investments plc as AIFM, managed four AIFs. These were 3i Group plc,
3i Growth Capital Fund, 3i Eurofund V and the European Middle Market
Loan Fund.
Alternative Investment Fund Managers Directive (“AIFMD”) became
effective from July 2013. As a result, at 31 March 2015, 3i Investments
plc is registered as an Alternative Investment Fund Manager (“AIFM”),
which in turn manages four AIFs.
Alternative Investment Fund Manager (“AIFM”) is the regulated
manager of AIFs. Within 3i, this is 3i Investments plc.
Assets under management (“AUM”) A measure of the total assets that
3i has to invest or manages on behalf of shareholders and third-party
investors for which it receives a fee.
Barclays Infrastructure Fund Management business (“BIFM”)
Acquired by 3i in November 2013 when it managed two active unlisted
funds that invest in UK and European PPP and energy projects, with
assets under management of over £700 million.
Board The Board of Directors of the Company.
Capital redemption reserve is established in respect of the
redemption of the Company’s ordinary shares.
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.
Carried interest is accrued on the realised and unrealised profits
generated taking relevant performance hurdles into consideration,
assuming all investments were realised at the prevailing book value.
Carry is only actually paid or received when the relevant performance
hurdles are met, and the accrual is discounted to reflect expected
payment periods.
Carry receivable is generated on third-party capital over the life of the
relevant fund when relevant performance criteria are met.
We pay carry to our investment teams on proprietary capital invested
and share a proportion of carry receivable from third-party funds.
This total carry payable is provided through schemes which have
been structured historically over two year vintages to maximise
flexibility in resource planning.
Collateralised Loan Obligation (“CLO”) A form of securitisation where
payments from multiple loans are pooled together and passed on to
different classes of owners in various tranches.
Company 3i Group plc.
Discounting The reduction in present value at a given date of a future
cash transaction at an assumed rate, using a discount factor reflecting
the time value of money.
Dividend income from equity investments and CLO capital is
recognised in the Statement of comprehensive income when the
shareholders’ rights to receive payment have been established.
Earnings before interest, tax, depreciation and amortisation
(“EBITDA”) EBITDA is defined as earnings before interest, taxation,
depreciation and amortisation and is used as the typical measure of
portfolio company performance.
EBITDA multiple Calculated as the enterprise value over EBITDA, it is
used to determine the value of a company.
Executive Committee The Executive Committee is responsible for the
day-to-day running of the Group and comprises: the Chief Executive,
Group Finance Director, the Managing Partners of the Private Equity,
Infrastructure and Debt Management businesses and the Group’s
General Counsel.
Fair value movements on investment entity subsidiaries The
movement in the carrying value of Group subsidiaries, classified as
investment entities under IFRS 10, between the start and end of the
accounting period converted into sterling using the exchange rates at
the date of the movement.
Fair value through profit or loss (“FVTPL”) FVTPL is an IFRS
measurement basis permitted for assets and liabilities which meet
certain criteria. Gains and losses on assets and liabilities measured
as FVTPL are recognised directly in the income statement.
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.
Fees receivable from external funds are fees received by the Group,
from third parties, for the management of private equity, infrastructure
and debt management funds.
Foreign exchange on investments arises on investments made in
currencies that are different from the functional currency of the Group
entity. Investments are translated at the exchange rate ruling at the date
of the transaction. At each subsequent reporting date investments are
translated to sterling at the exchange rate ruling at that date.
Fund Management A segment of the business focused on generating
profits from the management of private equity, infrastructure and debt
management funds.
Fund Management Operating profit comprises fee income from third
parties as well as a synthetic fee received from the Proprietary Capital
business, less operating expenses incurred by the Fund Management
business.
Gross investment return (“GIR”) GIR includes profit and loss on
realisations, increases and decreases in the value of the investments
we hold at the end of a period, any income received from the
investments such as interest, dividends and fee income and foreign
exchange movements. GIR is measured as a percentage of the opening
portfolio value and is the principal tool for assessing our Proprietary
Capital business.
Income from loans and receivables is recognised as it accrues. 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.
147
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Glossary continued
International Financial Reporting Standards (“IFRS”) IFRS are
accounting standards issued by the International Accounting Standards
Board (“IASB”). The Group’s consolidated financial statements are
required to be prepared in accordance with IFRS.
Investment basis Accounts prepared assuming that IFRS 10 had not
been introduced. Under this basis, we fair value portfolio companies
at the level we believe provides the most comprehensive financial
information.
The commentary in the Strategic Report refers to this basis as we
believe it provides a more understandable view of our performance.
Key Performance Indicators (“KPI”) This is a measure by reference to
which the development, performance or position of the Group can be
measured effectively.
Money multiple Calculated as the cumulative distributions plus any
residual value divided by paid-in capital.
Net asset value (“NAV”) NAV is a measure of the fair value of our
proprietary investments and the net costs of operating the business.
Operating cash profit Defined as the difference between our cash
income (cash fees from managing third-party funds and cash income
from our proprietary capital portfolio) and our operating expenses,
excluding restructuring costs.
Operating profit Includes gross investment return, management fee
income generated from managing external funds, the costs of running
our business, net interest payable, movements in the fair value of
derivatives, other losses and carried interest.
Portfolio income is that which 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. It is comprised of dividend income, income from loans and
receivables and fee income.
Proprietary Capital A segment of the business focused on generating
profits from shareholders capital which is available to invest.
Proprietary Capital operating profit The profit comprises gross
investment return, operating expenses, a fee paid to the Fund
Management business and balance sheet funding expenses such
as interest payable.
Public Private Partnership (“PPP”) A PPP is a government service
or private business venture which is funded and operated through a
partnership of government and one or more private sector companies.
Realised profits or losses over value on the disposal of investments
The difference between the fair value of the consideration received
less any directly attributable costs, on the sale of equity and the
repayment of loans and receivables, and its carrying value at the start
of the accounting period, converted into sterling using the exchange
rates at the date of disposal.
Revenue reserve recognises all profits that are revenue in nature or
have been allocated to revenue.
Segmental reporting Operating segments are reported in a manner
consistent with the internal reporting provided to the Chief Executive
who is considered to be the Group’s chief operating decision maker. All
transactions between business segments are conducted on an arm’s
length basis, with intra-segment revenue and costs being eliminated
on consolidation. Income and expenses directly associated with each
segment are included in determining business segment performance.
Share-based payment reserve is a reserve to recognise those
amounts in retained earnings in respect of share-based payments.
Synthetic fee Internal fee payable to the Fund Management business
for managing our proprietary capital.
Total return Comprises operating profit less tax charge less movement
in actuarial valuation of the historic defined benefit pension scheme.
Total shareholder return (“TSR”) This is the measure of the overall
return to shareholders and includes the movement in the share price
and any dividends paid, assuming that all dividends are reinvested on
their ex-dividend date.
Translation reserve comprises all exchange differences arising from
the translation of the financial statements of international operations.
Underlying fund management profit Calculated as fee income minus
operating expenses related to Fund Management activities, excluding
restructuring and amortisation costs.
Unrealised profits or losses on the revaluation of investments The
movement in the carrying value of investments between the start and
end of the accounting period converted into sterling using the exchange
rates at the date of the movement.
Value weighted earnings growth The growth in last 12 month
earnings, when comparing to the preceding 12 months. This measure
is the key driver of our private equity portfolio performance.
148
PORTFOLIO AND OTHER INFORMATION3i Group Annual report and accounts 2015 Designed and produced by Radley Yeldar www.ry.com
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our Annual Report and accounts 2014
have been measured and reduced
to net zero through verified carbon offset
projects (100% renewable energy projects).
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
3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7975 3131
THR27379
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