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3i Group PLC  -  III   

3i Group Half-year results to 30 September 2017

Released 07:00 16-Nov-2017

RNS Number : 6442W
3i Group PLC
16 November 2017
 



 

16 November 2017

 

3i Group plc announces half-year results
to 30 September 2017

 

 

Another good first half performance

 

·     Continued progression in NAV per share to 652 pence (31 March 2017: 604 pence), after payment of the 18.5 pence FY2017 final dividend, and a total return of £655 million or 11% of opening shareholders' funds

 

·     Private Equity performed well, with strong performances from Action, Scandlines, ATESTEO, Audley Travel, Basic-Fit, Q Holding and Aspen Pumps contributing to its gross investment return of £715 million

 

·     Completed four new Private Equity investments totalling £514 million in Hans Anders, Formel D, Lampenwelt and Cirtec Medical

 

·     Significant growth of the third-party Infrastructure fund management business, including the addition of £830 million of assets under management in two new European infrastructure funds

 

·     Announced our first North American infrastructure investment, Smarte Carte

 

·     Strong balance sheet supported the increase in investment activity, resulting in net debt of £48 million at 30 September 2017. Good pipeline of investments and realisations in progress, which are expected to complete in the second half

 

·     Interim dividend of 8.0 pence in line with our dividend policy

 

 

Simon Borrows, 3i's Chief Executive, commented:

 

"This was another good half for 3i. We used our strong balance sheet to invest in some attractive and well-priced businesses in Private Equity and added £830 million of assets under management in Infrastructure. Our Private Equity portfolio has been transformed over recent years and is on track to deliver another year of strong growth."

 

 

Summary financial highlights under the Investment basis

 

3i prepares its statutory financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). However, we continue to report using a non-GAAP "Investment basis" as we believe it aids users of our report to assess the Group's underlying operating performance. The investment basis (which is unaudited) is an alternative performance measure ("APM") and is described at the end of the Financial review. Total return and net assets are the same under the Investment basis and IFRS and we provide a reconciliation of our Investment basis financial statements to the IFRS statements in the "Reconciliation of the Investment basis to IFRS" section.

 

 


Six months to/as

Six months to/as

12 months to/as


at 30 September

at 30 September

at 31 March

Investment basis

2017

20161

2017

Total return2

£655m

£1,006m

£1,592m

% return on opening shareholders' funds2

11%

23%

36%

Dividend per ordinary share

8.0p

8.0p

26.5p

Proprietary capital return

Realisation proceeds

£374m

£666m

£1,005m


Uplift over opening book value3

£53m/20%

£51m/9%

£38m/5%


Money multiple4

2.7x

2.3x

3.6x

Gross investment return

£746m

£1,109m

£1,755m


As a percentage of opening 3i portfolio value

13%

25%

40%

Proprietary capital balance sheet

Cash investment

£572m

£430m

£638m

3i portfolio value

£6,584m

£5,207m

£5,675m

Gross debt

£575m

£844m

£575m

Net (debt)/cash

£(48)m

£187m

£419m

Liquidity

£877m

£1,360m

£1,323m

Diluted net asset value per ordinary share

652p

551p

604p

 

1

The sale of our Debt Management business completed on 3 March 2017. The FY2017 total return attributed to the business sold to Investcorp was classified as discontinued operations and the results for the six months to/as at 30 September 2016 have been re-presented. Unless stated, all balances are on continuing operations.

2

Total return and % return on opening shareholders' funds include discontinued operations.

3

Uplift over opening book value excludes refinancings. 

4

Cash proceeds over cash invested. For partial realisations, the valuation of any remaining investment is included in the multiple.

 

 

Disclaimer

These half-year results have been prepared solely to provide information to shareholders. They should not be relied on by any other party or for any other purpose. These half-year results may contain statements about the future, including certain statements about the future outlook for 3i Group plc and its subsidiaries ("3i" or "Group"). 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.

 

Enquiries:

Silvia Santoro, Investor Relations Director


020 7975 3258


Kathryn Van Der Kroft, Communications Director

020 7975 3021



A PDF copy of this release can be downloaded from www.3i.com/investor-relations


For further information, including a live videocast of the results presentation at 10.00am on 16 November 2017, please visit www.3i.com

 

 

 

Half-year report

 

Chief Executive's review

 

Introduction

 

This was another good half for 3i. Both our divisions have made progress with Private Equity investing in a number of attractive businesses and Infrastructure raising two third-party funds.

 

The total return in the first half was £655 million (September 2016: £1,006 million), or 11% on opening shareholders' funds, and NAV per share increased to 652 pence (31 March 2017: 604 pence), after the payment of the FY2017 final dividend of 18.5 pence. Our Private Equity portfolio delivered good earnings growth and a gross investment return of £715 million (September 2016: £989 million). 3i Infrastructure plc's ("3iN") share price increased to 194 pence (31 March 2017: 189 pence), which, together with dividend and advisory fee income, underpinned a good contribution from our Infrastructure business. We saw a material uplift in investment activity in Private Equity, completing four new investments, added £830 million of assets under management to our two new European infrastructure funds and announced our first North American infrastructure investment.

 

Continued strong progress in Private Equity

 

3i's Private Equity portfolio has been transformed in recent years and its international investments, particularly in northern Europe and North America, now account for c.90% of the total by value.

 

Action has been a stand out contributor to 3i's results for the last few years and it is an exceptional investment. After six years under 3i's management, Action's revenue continues to grow at sector leading levels. The opportunity for further significant growth is considerable and the Action team has embarked on a strategic initiative to put in place an organisation capable of handling over 2,700 stores and €10 billion of turnover per annum. This initiative encompasses continued rapid expansion of both its store and distribution network while further strengthening country management and essential backbone structures across all key functions. In the current year alone, Action has opened two new distribution centres in France and Germany as well as making further investment in the Moissy distribution centre in south east Paris that opened last year. This major initiative will weigh on margin development at Action in the near term but should facilitate material scale benefits in due course.

 

The compounding benefit of Action's strong growth means that we are now valuing our holding at over £2.0 billion (31 March 2017: £1.7 billion) despite not changing the earnings multiple that we use in our valuation. The valuation for this half includes 111 new stores. Action opened its 1,000th store in October and plans to have opened in excess of 230 stores by the end of this calendar year. Action's 2017 operating performance, together with this further material step up in its store opening programme, is on track to deliver another significant value increase for 3i this financial year.

 

But the 3i story is not only about Action. Since 2012, we have invested c.£2 billion in an attractive portfolio of Private Equity investments, four of which we presented at our Private Equity capital markets seminar in September 2017. This portfolio is well positioned to benefit from secular global trends in automation and electrification (automotive), outsourcing (medical devices and B2B service providers) and value for money retail. We are continuing to see the benefits of our sector and geographic focus as it provides demonstrable competitive advantage in the origination of new and further investment.

 

In the first six months of the year, we invested £514 million in four companies: Hans Anders, Lampenwelt, Formel D and Cirtec Medical. Where possible, our aim is to avoid highly competitive auction processes. Instead, we actively seek out companies within our target markets and sectors and build relationships with management long before any auction process starts. This was very effective, for example, in sourcing our investments in Ponroy Santé ("Ponroy") and Lampenwelt. These recent investments are in highly rated sectors, reflecting their significant growth potential, and they complement the portfolio that we have built since 2012.

 

International growth and bolt-on and strategic M&A are essential features of our investment strategy and key to delivering at least our 2x cash return objective. Recent acquisitions in our portfolio ranged from smaller strategic add-ons, such as ATESTEO's acquisition of Straesser, to transformative acquisitions, such as Q Holding's purchase of Degania. In many cases, the portfolio company is able to fund these acquisitions without the need for further 3i capital. Over the last six months, for example, Aspen Pumps completed two strategically important acquisitions using its own cash flow.

 

Ponroy has the opportunity to participate in the strong growth and consolidation of the highly fragmented consumer healthcare sector. In September 2017, we announced Ponroy's first acquisition, ERSA Group ("Aragan"), a designer and distributor of premium pharmaceutical food supplements. This acquisition will strengthen Ponroy's presence in the pharmacy channel, which represents more than half of the food supplement market in France. In addition, Ponroy's existing international subsidiaries and distributors should provide an additional growth channel for Aragan.

 

Technology advances and globalisation are having a greater and greater impact on every commercial sector and we remain very focused on buying companies that can thrive in this fast-changing environment.

 

Enhancing our infrastructure platform

 

We have two broad priorities in Infrastructure. First, we are focused on our advisory relationship with 3iN and the active management of its portfolio. Second, we have also launched complementary fund management initiatives in Europe and North America in order to build fund management profit for the Group.  

 

After last year's exceptional level of investment activity in 3iN, our main priority this year is to ensure first class asset management for those recent investments. Although the pipeline for further investment is good, our experience in Europe over the last few months is one of extremely competitive processes completed by both new and existing infrastructure investors in very short time frames. In such an environment, maintaining a selective and disciplined approach is critical.

 

Outside of 3iN, the Infrastructure team had a busy first half of fund launches. We closed two new European infrastructure funds and established a number of good relationships with important investors. In March 2017, we launched our North American infrastructure investment platform to complement and extend 3i's European presence. In October 2017, we announced our first US infrastructure investment in Smarte Carte, a leading concessionaire of essential infrastructure equipment, which we have funded from our own balance sheet. Although our US team has only been with us for a short while, it has already identified an interesting pipeline of potential new opportunities. These infrastructure initiatives will provide an important contribution to operating cash profit in due course.

 

Balance sheet and dividend

 

A consequence of this half's step up in investment is that we closed the half year with net debt of £48 million (31 March 2017: net cash of £419 million). In addition to the investment in Smarte Carte (which is expected to complete before our financial year end), we have a number of acquisitions for our Private Equity portfolio in the pipeline. However, we expect the second half to be different from the six months to September, with higher realisation and refinancing proceeds and lower levels of investment across the Group.

 

In line with our dividend policy, we have decided to pay an interim dividend of 8.0 pence, which is half of our 16.0 pence base dividend. This interim dividend will be paid to investors on 10 January 2018.

 

Outlook

 

This was another good half for 3i and these results are a further demonstration that 3i's strategy is capable of delivering consistently good returns. We used our strong balance sheet to invest in some attractive and well-priced businesses in Private Equity and added £830 million of assets under management in Infrastructure. Our Private Equity portfolio has been transformed over recent years and is on track to deliver another year of strong growth.

 

 

Simon Borrows

Chief Executive

 

 

Business review

 

Private Equity

 

Private Equity continued to perform strongly, with good performance from Action, Scandlines, Q Holding, ATESTEO, Audley Travel and Aspen Pumps contributing to unrealised value growth of £517 million (September 2016: £643 million). In addition, we completed a number of realisations, such as Mémora and MKM, and made four new investments. The ongoing weakness in sterling against the euro in particular contributed to £84 million of foreign exchange gains (September 2016: £268 million) and, in total, we generated a gross investment return of £715 million, or 15% on the opening portfolio (September 2016: £989 million or 26%) in the first half.

 

Investment activity

 

We had a very busy start to FY2018 and invested £514 million in four companies: two disruptive European retailers; a B2B German service business focused on the automotive sector; and a US manufacturer of medical devices. In May 2017 we closed a £104 million investment in Lampenwelt, the largest European online specialist retailer in the lighting space, as well as a £172 million investment in Hans Anders, a value for money optical retailer based in the Benelux. In July 2017 we invested £135 million in Formel D, a global service provider to the automotive and component supply industry based in Germany and brought in CITIC Capital as a co-investor to facilitate Formel D's expansion in China. Finally, in August 2017 we closed a £103 million investment in Cirtec Medical, a leading provider of outsourced medical device design, engineering and manufacturing, headquartered in North America.

 



 

Table 1: Private Equity cash investment in the six months to 30 September 2017

 






Proprietary





Total

capital





investment

investment

Investment

Type

Business description

Date

£m

£m

Lampenwelt

New

Online lighting specialist retailer

May 2017

105

104

Hans Anders

New

Value for money optical retailer

May 2017

173

172

Formel D

New

Quality assurance service provider for the automotive industry

July 2017

153

135

Cirtec Medical

New

Outsourced medical device manufacturing

August 2017

103

103

OneMed

Further (M&A)

Distributor of consumable medical products, devices and technology

May 2017

6

3

BoConcept

Over-funding

Urban living brand

July 2017

(11)

(11)

Total Private Equity investment


529

506

 

 

Realisations activity

 

As market conditions remained favourable, we completed the sale of some of our older investments, such as Mémora, MKM and Óticas Carol, our last remaining investment in Brazil. The sale of Mémora, the Iberian funeral services provider, generated proceeds of £119 million and a 1.4x money multiple, which was a good result from this 2008 investment. We also took advantage of supportive equity markets to sell our quoted holding in Dphone and a portion of our stake in Refresco Gerber.

 

Where appropriate, we will refinance our strongest assets when market conditions and trading performance allow. In July 2017, Scandlines completed a 1 billion refinancing, which resulted in £50 million of proceeds for 3i.

 

In total, we generated proceeds of £350 million (September 2016: £654 million). Realised profits of £53 million represented an uplift over opening value, excluding refinancings, of 21% (September 2016: £52 million and 9%). At 30 September 2017, the portfolio included 37 assets and two quoted stakes (31 March 2017: 37 assets and three quoted stakes).

 

Table 2: Private Equity realisations in the six months to 30 September 2017

 




31 March

3i

Profit/(loss)

Uplift on


Money




Calendar

2017

realised

in the

opening

Residual

multiple



Country/

year

value1

proceeds

period2

value2

Value

over


Investment

region

invested

£m

£m

£m


£m

cost3

IRR


Full realisations

Mémora

Spain

2008

86

119

32

37%

1.4x

4%

MKM

UK

2006

68

70

2

3%

5.9x

19%

Óticas Carol

Brazil

2013

19

27

9

50%

1.9x

15%

Dphone

Hong Kong

2006

21

26

6

30%

2.2x

7%

Foster and Partners

UK

2007

34

33

(1)

(3)%

1.8x

9%

Partial realisations1,3

Refresco Gerber

Benelux

2010

14

16

2

14%

23

2.0x

12%

Other

n/a

n/a

3

5

n/a

34

n/a

n/a

Refinancings










Scandlines4

Denmark/ Germany

2007/
2013

50

50

n/a

n/a

n/a

Deferred consideration

Other

n/a

n/a

4

3

n/a

n/a

n/a

Total Private Equity realisations


295

350

53

18%

57

2.7x

n/a

 

1

For partial realisations, 31 March 2017 value represents the opening value of the stake disposed.

2

Cash proceeds in the period over opening value realised.

3

Cash proceeds over cash invested. For partial realisations, the valuation of any remaining investment is included in the multiple.

4

Scandlines' residual value, money multiple and IRR have been excluded for commercial reasons.

 

 

Portfolio performance

 

The portfolio performed strongly in the first half and generated unrealised value growth of £517 million (September 2016: £643 million).

 

Table 3: Unrealised profits on the revaluation of Private Equity investments1
in the six months to 30 September

 


2017

2016


£m

£m

Earnings based valuations




Performance

283

282


Multiple movements

59

300

Other bases


Other movements in unquoted investments

145

5


Quoted portfolio

30

56

Total

517

643

 

1

More information on our valuation methodology, including definitions and rationale, is included in our Annual report and accounts 2017 on pages 158 to 159.

 

 

Performance

The strong performance of investments valued on an earnings basis resulted in an increase in value of £283 million (September 2016: £282 million). The largest contributor to the increase was Action. At 30 September 2017, Action was valued using run-rate earnings to 10 September 2017, the closest period end to 3i's. As at 30 September 2017, Action's post discount run-rate multiple was unchanged at 16.0x and the resulting valuation was £2,009 million (31 March 2017: £1,708 million) representing 35% of the Private Equity portfolio value at 30 September 2017 (31 March 2017: 35%).

 

We continue to see good earnings growth in investments made post the 2012 review. Over the last five years, we have built a portfolio of attractive, mid-market companies in our target sectors with good potential for organic and inorganic growth. Q Holding is a manufacturer of highly engineered critical components and finished devices for the automotive and medical device sectors. Following its transformational acquisition of Degania in December 2016, Q Holding has increased its scale and global footprint materially to create a combined business with a greater focus on healthcare. In addition, the underlying automotive business is performing well and, as a result, Q Holding's revenue has doubled under our ownership to date.

 

ATESTEO continued to perform well over the period as it delivered a number of growth initiatives and improvements to its systems and processes, leading to operational and financial out-performance. It is now a world leader in global testing and inspection with a clear competitive advantage in lab-based testing. In addition, in September 2017 ATESTEO completed its acquisition of Straesser, a leading player in road testing and vehicle test-driving services.

 

A number of our older investments are benefiting from improved macro-economic trends in their markets. AES Engineering is a leading UK-based manufacturer of mechanical seals. AES exports its niche and highly specialised products globally and is experiencing strong demand for its seals and support systems, as well as from customers extending the life of their plants rather than building new ones.  

 

Overall, 91% of the top 20 assets by value in our portfolio grew their earnings in the period (September 2016: 87%). We continue to see some portfolio company specific weakness. Schlemmer experienced operational challenges in its US business which affected project delivery and hence earnings growth in the first six months of the year. Earnings remain subdued for those assets exposed to the oil and gas after-market (JMJ and Dynatect) and to weaker consumer sentiment (Christ). In total, three investments were valued using forecast earnings at 30 September 2017 (31 March 2017: one), representing 3% of the Private Equity portfolio by value (31 March 2017: 2%).

 

Table 4: Portfolio earnings growth of the top 20 Private Equity assets1

 



3i carrying value



at 30 September 2017

Last 12 months' (LTM) earnings growth

Number of companies

£m

<0%

4

455

0 - 9%

7

1,483

10 - 19%

3

485

20 - 29%

3

2,336

>30%

3

529

 

1

This represents 93% of the Private Equity portfolio by value (31 March 2017: 91%). This excludes ACR because earnings are not its relevant measure.

 

 

Net debt across the portfolio increased to 3.5x EBITDA (31 March 2017: 3.3x) principally due to the refinancing of Scandlines in July 2017. Table 5 shows the ratio of net debt to EBITDA by portfolio value at 30 September 2017.

 

Table 5: Ratio of net debt to EBITDA1

 



3i carrying value



at 30 September 2017

Ratio of net debt to EBITDA

Number of companies

£m

<1x

2

94

1 - 2x

4

391

2 - 3x

4

573

3 - 4x

6

2,680

4 - 5x

7

1,266

 

1

This represents 88% of the Private Equity portfolio by value (31 March 2017: 87%). Quoted holdings and companies with net cash are now excluded from the calculation.

 

 

Multiple movements

The increase in value of £59 million due to multiples (September 2016: £300 million increase) reflected a modest re-rating of a small number of our investments where their recent performance justified a review. The prior period increase included the effect of a re-rating of Action in June 2016. We consider a number of factors such as relative performance, investment size, comparable recent transactions and exit plans when setting valuation multiples. Consistent with this, we selected multiples that were lower than the comparable set in 15 out of the 24 companies (31 March 2017: 14 out of 22) valued on an earnings basis, taking into account the current strength of equity markets.

 

The run-rate multiple used to value Action remained unchanged at 16.0x post liquidity discount at 30 September 2017 (31 March 2017: 16.0x). Excluding Action, the weighted average EBITDA multiple increased to 11.5x before liquidity discount (31 March 2017: 10.6x) and was 10.8x after liquidity discount (31 March 2017: 9.9x). The increase in the weighted average multiple reflects the recent investment in companies in higher rated sectors, such as Cirtec and Lampenwelt, and the sale of assets held at lower multiples.

 

The pre-discount multiples used to value the portfolio ranged between 3.5x and 16.8x (31 March 2017: 5.0x to 16.8x) and the post discount multiples ranged between 3.4x and 16.0x (31 March 2017: 4.8x to 16.0x).

 

Other movements in unquoted investments

Other includes the valuation increase on assets valued on a discounted cash flow basis and those valued on industry metrics such as price to book.

 

Quoted portfolio

The Private Equity quoted portfolio generated an unrealised value gain of £30 million (September 2016: £56 million gain). The gain was principally due to Basic-Fit, whose share price increased to 18.70 at 30 September 2017 (31 March 2017: €16.27) following the announcement of strong interim results, which highlighted its continued growth in clubs and revenue and a confident outlook for the remainder of its financial year.

 

Table 6: Quoted portfolio movements for the six months to 30 September 2017



Opening




Closing



value

Disposals

Unrealised


value at



at 1 April

at opening

value

Other

30 September



2017

book value

movement

movements1

2017

Investment

IPO date

£m

£m

£m

£m

£m

Dphone

July 2014

21

(21)

Refresco Gerber

March 2015

32

(14)

2

3

23

Basic-Fit

June 2016

184

28

6

218


237

(35)

30

9

241

 

1

Other movements include foreign exchange.

 

 

Table 7: Private Equity assets by geography

 



3i carrying value



at 30 September 2017

3i office location

Number of companies

£m

Benelux

6

2,683

France

2

190

Germany

7

1,539

UK

6

588

US

4

422

Other

14

270

Total

39

5,692

 

 

Assets under management

 

Consistent with the increase in our proprietary capital valuations, the value of Eurofund V ("EFV") increased in the period and the Fund had a gross fund money multiple at 30 September 2017 of 2.3x (31 March 2017: 2.2x).

 

Investments made since the 2012 strategic review, including the further investment in Scandlines, are making good progress. The investments made between 2013 and 2016 had a sterling multiple of 1.9x at 30 September 2017 (31 March 2017: 1.7x).

 

The value of 3i's Proprietary Capital increased to £5.7 billion in the period (31 March 2017: £4.8 billion). The value of the portfolio including third-party capital increased to 9.1 billion (31 March 2017: €8.1 billion).

 

 

Infrastructure

 

Infrastructure generated a gross investment return of £32 million or 5% on the opening portfolio (September 2016: £90 million, 17%) principally from the Group's 34% holding in 3iN. The 3iN share price increased by 3% in the period to close at 194 pence on 30 September 2017 (31 March 2017: 189 pence). Overall, we recognised £19 million of unrealised value growth on our 3iN investment and £13 million of dividend income (September 2016: £80 million of unrealised value growth and £10 million of dividend income).

 

Investment adviser to 3iN

 

The 3iN portfolio continued to perform well and 3iN generated a total return on opening NAV of 7% in the period (September 2016: 5%), ahead of its stated target total return of between 8 and 10% to be delivered over the medium term.

 

In the first half, the team focused on managing the 3iN portfolio actively and embedding the six investments made in FY2017. Although the team is reviewing a good number of new investment opportunities, there is very strong demand for infrastructure assets from both existing competitors and new entrants into the sector. As a result, the team remains disciplined on price and focused on maintaining a balanced and carefully selected portfolio for 3iN.

 

Under the terms of the investment advisory agreement, 3iN paid an advisory fee of £13 million to 3i (September 2016: £11 million) with the increase attributable to new investment activity in FY2017.

 

Table 8: Unrealised profits/(losses) on the revaluation of Infrastructure investments1
in the six months to 30 September

 


2017

2016


£m

£m

Quoted

19

80

Other (includes DCF)

3

(4)

Total

22

76

 

1

More information on our valuation methodology, including definitions and rationale, is included in our Annual report and accounts 2017 on pages 158 to 159.

 

 

Fund management

 

We launched several initiatives in the first half to complement our 3iN mandate and generate increased cash income for 3i in the medium term. In June 2017, we closed the c.£700 million 3i Managed Infrastructure Acquisitions LP and invested £30 million into the fund alongside two pension funds, ATP and APG. The fund holds investments in East Surrey Pipelines, Belfast City Airport, HerAmbiente and a number of discrete PPP projects. In April 2017, we announced the first close of the 3i European Operational Projects Fund and raised 155 million, including a €40 million commitment from 3i. 3i invested £13 million in this fund in July 2017 to enable it to purchase the majority of the PPP assets held by 3i's existing BEIF II fund. In October 2017, we announced the first acquisition by our US infrastructure team in Smarte Carte, the leading provider of self-service luggage carts, electronic lockers, commercial strollers and massage chairs at more than 2,500 locations worldwide.

 

Assets under management and advisory agreement

 

Infrastructure AUM increased to £3.6 billion (31 March 2017: £2.9 billion) principally due to the new fund management initiatives launched in the period, as well as to 3iN's share price increase.

 

Table 9: Assets under management and advisory agreement

 

Fund

Close date

Fund size

3i

Remaining 3i

% invested at

AUM

Fee income




commitment

commitment

September


earned in




/share




the period






2017

£m

£m

3iN1

Mar 07

n/a

£670m

n/a

n/a

1,995

13

3i Managed Infrastructure Acquisitions Fund

Jun 17

£698m

£35m

£5m

64%

662

2

3i European Operational Projects Fund2

Apr 17

€155m

€40m

n/a

38%

52

BIIF

May 08

£680m

n/a

n/a

90%

542

2

BEIF II

Jul 06

£280m

n/a

n/a

97%

13

India Infrastructure Fund

Mar 08

US$1,195m

$250m

$35m

73%

145

2

Other

various

various

various

n/a

n/a

206

2

Total






3,615

21

 

1

Value based on the share price at 30 September 2017.

2

Numbers based on the first close of the fund.

 

 

Financial review

 

Financial performance

 

3i delivered a gross investment return of £746 million (September 2016: £1,109 million) driven by strong unrealised value growth, especially from Action and Scandlines, and the uplifts from the realisations of Mémora and Óticas Carol.

 

3i generated a total return of £655 million, or a profit on opening shareholders' funds of 11%, in the first half (September 2016: £1,006 million including discontinued operations, or 23%). As a result, the diluted NAV per share at 30 September 2017 increased to 652 pence (31 March 2017: 604 pence) after the payment of the final FY2017 dividend of £178 million, or 18.5 pence per share (September 2016: £154 million, 16.0 pence per share).

 

Table 10: Total return 

 


Six months to

Six months to

12 months to


30 September

30 September

31 March


2017

20161

2017

Investment basis

£m

£m

£m

Realised profits over value on the disposal of investments

53

51

38

Unrealised profits on the revaluation of investments

539

731

1,342

Portfolio income





Dividends

22

24

50


Interest income from investment portfolio

49

19

50


Fees receivable

10

1

6

Foreign exchange on investments

73

283

269

Gross investment return

746

1,109

1,755

Fees receivable from external funds

24

23

46

Operating expenses

(58)

(54)

(117)

Interest income

1

1

2

Interest paid

(18)

(25)

(49)

Foreign exchange movements

(21)

9

28

Other income

1

8

10

Operating profit before carried interest

675

1,071

1,675

Carried interest





Carried interest and performance fees receivable

64

203

279


Carried interest and performance fees payable

(81)

(302)

(434)

Operating profit from continuing operations

658

972

1,520

Income taxes

-

(2)

3

Re-measurements of defined benefit plans

(3)

(19)

(22)

Total comprehensive income: continuing operations
("Total return from continued operations")


655


951


1,501

Total comprehensive income from discontinued operations, net of tax
("Total return from discontinued operations")



55


91

Total comprehensive income ("Total return")

655

1,006

1,592

Total return on opening shareholders' funds

11%

23%

36%

 

1

Comparatives have been re-presented throughout the Financial review to reflect the classification of the Group's Debt Management business sold to Investcorp as discontinued operations and the residual Debt Management investments as continuing operations at 30 September 2016.

 

 

Realised profits

 

We sold a number of assets from our older vintages and realised profits on disposal of £53 million (September 2016: £51 million) and proceeds totalling £374 million (September 2016: £666 million). Private Equity generated £350 million of the proceeds and all of the profits on disposal. Group realisations, excluding refinancings, were achieved at an uplift over opening value of 20%, and reflect the sales of Mémora, Dphone and Óticas Carol. MKM was valued at imminent sale at 31 March 2017 and therefore substantially all of its uplift to sale was recognised in FY2017.

 

Unrealised value movements

 

The unrealised value movement of £539 million (September 2016: £731 million) was principally due to strong earnings growth in a number of our Private Equity assets including Action, ATESTEO and Q Holding. The unrealised value growth is lower than in the prior period as those results included a re-rating of Action's valuation in June 2016.

 

Table 11: Unrealised profits on revaluation of investments
for the six months to 30 September

 


2017

2016


£m

£m

Private Equity

517

643

Infrastructure

22

76

Other

12

Total

539

731

 

 

Further information on the Private Equity and Infrastructure valuations is included in the business line sections.

 

Portfolio income

 

Portfolio income increased to £81 million in the period (September 2016: £44 million) principally as a result of an increase in loan interest income receivable from five of the new Private Equity investments completed in the last 12 months (12 months to September 2016: three new investments). The majority of this interest income is non-cash. We recognised £10 million of fee income (September 2016: £1 million) due to transaction fees generated from our increased investment activity in the last six months together with a reduction in abort costs incurred on prospective transactions relative to the comparable period last year. Dividend income was £22 million (September 2016: £24 million).

 

Operating expenses

 

Operating expenses increased by 7% to £58 million in the first six months (September 2016: £54 million) principally due to a planned increase in staff costs as we invest to support our origination and asset management capability. Consistent with guidance given at the full year results in May 2017, we continue to expect that operating expenses for the year will be approximately double the FY2017 second half costs of £63 million.

 

Operating cash loss

 

Table 12: Operating cash loss for the six months to 30 September

 


2017

2016


£m

£m

Third-party capital fees

24

23

Cash portfolio fees

8

2

Cash portfolio dividends and interest

23

33

Cash income

55

58

Cash operating expenses

(71)

(65)

Operating cash loss

(16)

(7)

 

 

3i's cash expenses exceeded its cash income by £16 million in the period (September 2016: £7 million). Cash income was £55 million (September 2016: £58 million) with the increase in transaction fees offset by the reduction in cash interest received. Cash operating expenses incurred during the period increased to £71 million (September 2016: £65 million) principally due to higher variable compensation costs.

 

Net interest payable

 

Gross interest payable decreased to £18 million (September 2016: £25 million), following repayment of the €331 million bond in March 2017. Interest receivable was £1 million (September 2016: £1 million).

 

Carried interest and performance fees

 

We receive carried interest from third-party funds and pay a portion to participants in our carry plans. We also pay carried interest to participants in plans relating to our proprietary capital invested.

 

Table 13: Carried interest and performance fees for the six months to 30 September

 

Consolidated statement of comprehensive income

2017

2016


£m

£m

Carried interest and performance fees receivable



Private Equity

64

203

Total

64

203




Carried interest and performance fees payable



Private Equity

(81)

(302)

Total

(81)

(302)




Net carried interest payable

(17)

(99)

 

 

The continued good performance of Action and Scandlines, the largest investments in our Private Equity fund EFV, led to a corresponding increase in carried interest receivable from EFV and £63 million was recognised in the first six months (September 2016: £199 million). This is calculated assuming that the portfolio was realised at the 30 September 2017 valuation. The fund's gross multiple was 2.3x at 30 September 2017 (31 March 2017: 2.2x).

 

In Private Equity, we typically accrue carried interest payable at between 10% and 15% of gross investment return. The majority of assets by value are now held in schemes that would have met their performance hurdles, assuming that the portfolio was realised at the 30 September 2017 valuation. We accrued carried interest payable of £81 million (September 2016: £302 million) for Private Equity in the period, of which £29 million relates to the team's share of carried interest receivable from EFV (September 2016: £153 million).

 

Carried interest is paid to participants when the performance hurdles are passed in cash terms and then only when the cash proceeds are actually received following a realisation, refinancing event or other cash distribution. During the period, £21 million was paid to participants in the Private Equity plans (September 2016: £61 million).

 

Overall, the effect of the income statement charge, the cash payment as well as the currency translation meant that the balance sheet carried interest and performance fees payable increased to £766 million (31 March 2017: £685 million) and the receivable increased to £436 million (31 March 2017: £366 million).

 

Table 14: Carried interest and performance fees

Consolidated statement of financial position

30 September

31 March


2017

2017


£m

£m

Carried interest and performance fees receivable



Private Equity

434

359

Infrastructure

4

Other

2

3

Total

436

366




Carried interest and performance fees payable



Private Equity

(736)

(650)

Infrastructure

(30)

(35)

Total

(766)

(685)

 

Net foreign exchange movements

 

At 30 September 2017, 75% of the Group's assets were denominated in euros or US dollars (31 March 2017: 71%). The Group recorded a total net foreign exchange gain of £52 million during the period (September 2016: £292 million gain) as sterling continued to weaken against the euro due to the political and economic uncertainty created by the UK's upcoming exit from the European Union.

 

The Group is a long-term investor and does not hedge its foreign currency denominated portfolio. Flows from currency realisations are matched with currency investments where possible. We may use short-term contracts, typically to hedge investments and realisations between signing and completion.

 

The net foreign exchange gain also reflects the translation of non-portfolio net assets, including non-sterling cash held at the balance sheet date.

 

Table 15: Net assets and sensitivity by currency at 30 September 2017

 



Net


1%

Net gain



assets


sensitivity

/(loss)


FX rate

£m

%

£m

£m

Sterling

n/a

1,326

21%

n/a

Euro

1.1344

3,968

63%

39

105

US dollar

1.3398

778

12%

8

(51)

Danish krone

8.4411

145

2%

1

4

Other

n/a

103

2%

n/a

(6)

Total


6,320



52

 

 

Pension

 

The latest triennial valuation for the Group's UK defined benefit scheme was completed on 25 September 2017, based on the scheme's position at 30 June 2016. The outcome was an actuarial deficit of £50 million but it was agreed that it was not necessary for the Group to make any immediate contributions to the plan, taking into account the volatile market conditions at the valuation date (immediately after the UK EU referendum), and improvements in market conditions and liability management actions implemented since then. As part of this valuation, the Group has agreed to pay up to £50 million to the scheme if its gearing increases above 20%, gross debt above £1 billion, or net assets fall below £2 billion. The scheme also benefits from a contingent asset arrangement, details of which are provided in Note 9 of this Half-year report and on page 131 of our Annual report and accounts 2017. If the gearing, gross debt or net asset limits noted are reached, the Group may be required to increase the potential cover provided by the contingent arrangement until the gearing, gross debt or net assets improve.

 

On an IAS 19 basis, there was a £3 million re-measurement loss on the Group's pension scheme during the period (September 2016: £19 million loss) and the pension scheme remains in a surplus of £120 million (31 March 2017: £121 million).

 

Tax

 

The Group's parent company is an approved investment trust company for UK tax purposes, which provides it with a tax exemption for capital profits. This ensures that shareholders do not suffer double taxation of their investment returns. The majority of the Group's returns are capital returns for tax purposes (realised profits and fair value movements) and are therefore substantially non-taxable. As a result, the Group's tax charge in the period was nil (September 2016: £2 million tax charge).

 

Other assets

 

The balance of the Debt Management investments not sold to Investcorp in March 2017 are detailed below. The value reduced in the period principally due to sterling strengthening against the US dollar. We invested £23 million into the Global Income Fund to replace a loan facility, arranged by 3i prior to the disposal of the business, which expired in the period. Separately, we redeemed £23 million of our holding in the period and the majority of the remaining investment since the period end.

 

Table 16: Debt Management investments

 

Consolidated statement of financial position

Currency

31 March
2017

Investment

Divestment

Unrealised
value

Other
movements
1

30 September
2017



£m

£m

£m

£m

£m

£m

CLO equity retained

/US$

50

(4)

46

Global Income Fund

US$

79

23

(23)

(6)

73

Senior Loan Fund

US$

8

8

Other

1

(1)

Total


138

23

(24)

(10)

127

 

1

Other movements include foreign exchange.

 

 

Balance sheet

 

Table 17: Simplified consolidated balance sheet

 


30 September 2017

31 March 2017


£m

£m

Investment portfolio value

6,584

5,675

Gross Debt

(575)

(575)

Cash

527

994

Net (debt)/cash

(48)

419

Carried interest and performance fees receivable

436

366

Carried interest and performance fees payable

(766)

(685)

Other net assets

114

61

Net assets

6,320

5,836

Gearing1

1%

nil

 

1

Gearing is net debt as a percentage of net assets.

 

 

Due to the increased level of investment activity in the first half (£572 million) and to the payment of the FY2017 dividend of £178 million, the Group had net debt of £48 million at 30 September 2017 (31 March 2017: net cash £419 million). The investment portfolio value increased to £6,584 million at 30 September 2017 (31 March 2017: £5,675 million) as unrealised value growth of £539 million and cash investment offset the book value of realisations in the period. Further information on investments and realisations is included in the Private Equity and Infrastructure business reviews.

 

Liquidity

Liquidity reduced to £877 million at 30 September 2017 (31 March 2017: £1,323 million) and comprised cash and deposits of £527 million (31 March 2017: £994 million) and undrawn facilities of £350 million (31 March 2017: £329 million). Gearing increased to 1% at 30 September 2017 (31 March 2017: nil).

 

 

Alternative Performance Measures ("APMs")

 

We assess our performance using a variety of measures that are not specifically defined under IFRS and are therefore termed APMs. The APMs that we use may not be directly comparable with those used by other companies. Our Investment basis is itself an APM.

 

The explanation of and rationale for the Investment basis and its reconciliation to IFRS is provided at the beginning of the "Reconciliation of the Investment basis to IFRS" section. The table below defines our additional APMs and should be read in conjunction with the Annual report and accounts 2017.

 

APM

Purpose

Calculation

Reconciliation to IFRS

Gross investment return as a percentage of opening portfolio value

A measure of the performance of our proprietary investment portfolio. For further information see the Group KPIs in our Annual report and accounts 2017.

It is calculated as the gross investment return, as shown in the Investment basis Consolidated statement of comprehensive income, as a % of the opening portfolio value.

The equivalent balances under IFRS and the reconciliation to the Investment basis are shown in the Reconciliation of the consolidated statement of comprehensive income and the Reconciliation of the consolidated statement of financial position respectively.

Cash realisations

Cash proceeds from our investments support our returns to shareholders, as well as our ability to make new investments. For further information see the Group KPIs in our Annual report and accounts 2017.

The cash received from the disposal of investments in the period as shown in the Investment basis Consolidated cash flow statement.

The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated cash flow statement.

Cash investment

Making new investments with our proprietary capital is the primary driver of the Group's ability to deliver attractive returns. For further information see the Group KPIs in our Annual report and accounts 2017.

The cash paid to acquire investments in the period as shown on the Investment basis Consolidated cash flow statement.

The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated cash flow statement.

Operating cash
profit/(loss)

By covering, as far as possible, the cash cost of running the business with cash income, we reduce the potential dilution of capital returns. For further information see the Group KPIs in our Annual report and accounts 2017.

The cash income from the portfolio (interest, dividends and fees) together with fees received from external funds less cash operating expenses as shown on the Investment basis Consolidated cash flow statement. The calculation is shown in Table 12 of the Financial review.

The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated cash flow statement.

Net cash/(net debt)

A measure of the financial risk in the Group's balance sheet.

Cash and cash equivalents plus deposits less loans and borrowings as shown on the Investment basis Consolidated statement of financial position.

The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated statement of financial position.

Gearing

A measure of the financial risk in the Group's balance sheet.

Net debt (as defined above) as a % of the Group's net assets under the Investment basis. It cannot be less than zero.

The equivalent balance under IFRS and the reconciliation to the Investment basis is shown in the Reconciliation of the consolidated statement of financial position.

 

 

Principal risks and uncertainties

 

3i's risk appetite statement, approach to risk management and governance structure are set out in the Risk section of the Annual report and accounts 2017, which can be accessed on the Group's website at www.3i.com.

 

The principal risks to the achievement of the Group's strategic objectives for the remaining six months of its financial year are unchanged from those reported on pages 50 to 53 of the Annual report and accounts 2017 and summarised below. This is not a comprehensive list of all potential risks and uncertainties faced by the Group, but rather a summary of the risks which it currently believes may have a significant impact on its performance and future prospects.

 

External - Risks arising from external factors including political, legal, regulatory, economic and competitor changes which affect the Group's operations. There has been a significant amount of uncertainty in the global economy over the last year and, more recently, due to the negotiations on the UK's upcoming exit from the EU. Although we cannot be immune to wider market conditions and political instability, our well-funded balance sheet and portfolio of international companies position us well as the wider implications of the negotiations unfold. As a result, we do not consider Brexit on its own to be a principal risk to the Group.

 

Investment - Risks in respect of specific asset investment decisions, the subsequent performance of an investment or exposure concentrations across business line portfolios.

 

Operational - Risks arising from inadequate or failed processes, people and systems or from external factors affecting these. We continue to review and improve our governance and controls to protect our information and operational infrastructure.

 

The Half-year report provides an update on 3i's strategy and business performance, as well as on market conditions, which is relevant to the Group's overall risk profile and should be viewed in the context of the Group's risk management framework and principal risks as disclosed in the Annual report and accounts 2017.

 

 

Reconciliation of the Investment basis to IFRS

 

Background to Investment basis numbers used in the Half-year report

 

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 investment entity subsidiaries. This fair value approach, applied at the investment entity subsidiary level, effectively obscures the performance of our proprietary capital investments and associated transactions occurring in the investment entity subsidiaries. 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.

 

As a result we include a separate non-GAAP "Investment basis" consolidated statement of comprehensive income, financial position and cash flow to aid understanding of our results. The Investment basis is an APM and the Chief Executive's review, Business review and Financial review are 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.

 

A more detailed explanation of the effect of IFRS 10 is provided in the Annual report and accounts 2017 on page 38.

 

Reconciliation between Investment basis and IFRS

 

A detailed reconciliation from the Investment basis to IFRS basis of the consolidated statement of comprehensive income, consolidated statement of financial position and consolidated cash flow statement is shown in the "Reconciliation of the Investment basis to IFRS" section.

 

 

Reconciliation of consolidated statement of comprehensive income

 



Six months to 30 September 2017

Six months to 30 September 2016



Investment

IFRS

IFRS

Investment

IFRS

IFRS



basis

adjustments

basis

basis5

adjustments5

basis5





(unaudited)



(unaudited)


Notes

£m

£m

£m

£m

£m

£m

Realised profits over value
on the disposal of investments


1,2


53


(40)


13


51


(44)


7

Unrealised profits
on the revaluation of investments


1,2


539


(363)


176


731


(639)


92

Fair value movements
on investment entity subsidiaries


1


-


396


396


-


671


671

Portfolio income








Dividends

1,2

22

(6)

16

24

(6)

18


Interest income from investment portfolio


1,2


49


(39)


10


19


(17)


2


Fees receivable

1,2

10

1

11

1

3

4

Foreign exchange on investments

1,4

73

(66)

7

283

(222)

61

Gross investment return


746

(117)

629

1,109

(254)

855

Fees receivable from external funds

1,3

24

-

24

23

-

23

Operating expenses

1,3

(58)

-

(58)

(54)

1

(53)

Interest income


1

-

1

1

-

1

Interest paid


(18)

-

(18)

(25)

-

(25)

Exchange movements

1,4

(21)

37

16

9

26

35

Income from investment entity subsidiaries


1


-


11


11


-


-


-

Other income


1

-

1

8

-

8

Operating profit before carried interest



675


(69)


606


1,071


(227)


844

Carried interest









Carried interest and performance
fees receivable


1,3


64


-


64


203


2


205


Carried interest and performance
fees payable


1,3


(81)


67


(14)


(302)


228


(74)

Operating profit from continuing operations



658


(2)


656


972


3


975

Income taxes

1,3

-

1

1

(2)

-

(2)

Profit for the period from continuing operations



658


(1)


657


970


3


973

Profit for the period from discontinued operations




-


-


-


55


(5)


50

Profit for the period


658

(1)

657

1,025

(2)

1,023

Other comprehensive income/(expense) that may be reclassified to the income statement:








Exchange differences
on translation of foreign operations


1,4


-


1


1


-


(3)


(3)

Other comprehensive expense that will not be reclassified to the income statement:









Re-measurement of defined
benefit plans




(3)


-


(3)


(19)


-


(19)

Other comprehensive expense for the period from continuing operations





(3)



1



(2)



(19)



(3)



(22)

Other comprehensive income for the period from discontinued operations




-


-


-


-


5


5

Total comprehensive income for the period ("Total return")




655


-


655


1,006


-


1,006



Notes:

1

Applying IFRS 10 to the consolidated statement of comprehensive income consolidates the line items of a number of previously consolidated subsidiaries into a single line item called 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 periods. The adjustments simply reclassify the consolidated 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 that are 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

Other items 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.

 

4

On the Investment basis, the impact of the translation of foreign subsidiaries is included within the line items foreign exchange on investments and exchange movements rather than as a separate line item as required under IFRS. On an IFRS basis, the revaluation of assets and liabilities held by investment entity subsidiaries is reflected in the fair value movements on investment entity subsidiaries rather than being reflected as exchange movements.

 

5

Comparatives for the six months ended 30 September 2016 have been re-presented to show the results of the retained Debt Management assets, previously shown as discontinued operations, as continuing operations. See Note 11.

 

 

Reconciliation of consolidated statement of financial position

 

 



As at 30 September 2017

As at 31 March 2017



Investment

IFRS

IFRS

Investment

IFRS

IFRS



basis

adjustments

basis

basis

adjustments

basis





(unaudited)



(audited)


Notes

£m

£m

£m

£m

£m

£m

Assets







Non-current assets







Investments








Quoted investments

1

911

(514)

397

893

(503)

390


Unquoted investments

1

5,673

(4,068)

1,605

4,782

(3,466)

1,316

Investments in investment entity subsidiaries

1,3

-

4,156

4,156

-

3,483

3,483

Investment portfolio


6,584

(426)

6,158

5,675

(486)

5,189

Carried interest and performance
fees receivable


1


433


(5)


428


359


(5)


354

Other non-current assets


109

(58)

51

106

(56)

50

Intangible assets


13

-

13

-

-

-

Retirement benefit surplus


120

-

120

121

-

121

Property, plant and equipment


5

-

5

5

-

5

Total non-current assets


7,264

(489)

6,775

6,266

(547)

5,719

Current assets







Carried interest and performance
fees receivable


1


3


-


3


7


2


9

Other current assets

1

15

3

18

10

2

12

Current income tax receivable


4

-

4

2

-

2

Derivative financial instruments


3

-

3

-

-

-

Deposits


41

-

41

40

-

40

Cash and cash equivalents

1,2

486

(144)

342

954

(23)

931

Total current assets


552

(141)

411

1,013

(19)

994

Total assets


7,816

(630)

7,186

7,279

(566)

6,713

Liabilities







Non-current liabilities







Trade and other payables

1

(25)

-

(25)

(29)

5

(24)

Carried interest and performance
fees payable

1


(717)


573


(144)


(644)


520


(124)

Loans and borrowings


(575)

-

(575)

(575)

-

(575)

Retirement benefit deficit


(22)

-

(22)

(22)

-

(22)

Deferred income taxes

1

-

-

-

(1)

1

-

Provisions


(1)

-

(1)

(2)

-

(2)

Total non-current liabilities


(1,340)

573

(767)

(1,273)

526

(747)

Current liabilities








Trade and other payables

1

(103)

15

(88)

(125)

22

(103)

Carried interest and performance
fees payable


1


(49)


41


(8)


(41)


18


(23)

Current income taxes


(1)

1

-

-

-

-

Provisions


(3)

-

(3)

(4)

-

(4)

Total current liabilities


(156)

57

(99)

(170)

40

(130)

Total liabilities


(1,496)

630

(866)

(1,443)

566

(877)

Net assets


6,320

-

6,320

5,836

-

5,836

Equity







Issued capital


719

-

719

719

-

719

Share premium


786

-

786

785

-

785

Other reserves

4

4,841

-

4,841

4,370

-

4,370

Own shares


(26)

-

(26)

(38)

-

(38)

Total equity


6,320

-

6,320

5,836

-

5,836

 

Notes:

 

1

Applying IFRS 10 to the consolidated statement of financial position consolidates the line items of a number of previously consolidated subsidiaries into a single line item called investments in investment entity subsidiaries. In the Investment basis, we have disaggregated these line items to analyse our net assets as if these investment entity subsidiaries were fully consolidated, consistent with prior periods. The adjustment reclassifies items in the consolidated 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 entity subsidiaries line. We have disaggregated this fair value and disclosed the underlying portfolio holding in the relevant line item, ie quoted investments or unquoted investments.


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 entity subsidiaries 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 consolidated statement of financial position of 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.

 

 

Reconciliation of consolidated cash flow statement

 



Six months to 30 September 2017

Six months to 30 September 2016



Investment

IFRS

IFRS

Investment

IFRS

IFRS



basis

adjustments

basis

basis

adjustments

basis





(unaudited)



(unaudited)


Notes

£m

£m

£m

£m

£m

£m

Cash flow from operating activities







Purchase of investments

1

(572)

305

(267)

(515)

229

(286)

Proceeds from investments

1

360

(185)

175

693

(485)

208

Net cash flow (to)/from investment entity subsidiaries


1


-


(240)


(240)


-


151


151

Net cash flow from derivatives


(13)

-

(13)

-

-

-

Portfolio interest received

1

1

(1)

-

12

(8)

4

Portfolio dividends received

1

22

(6)

16

40

(6)

34

Portfolio fees received


8

-

8

2

-

2

Fees received from external funds


24

-

24

46

-

46

Carried interest and performance
fees received




5


-


5


29


-


29

Carried interest and performance
fees paid


1


(24)


7


(17)


(64)


52


(12)

Acquisition related earn-out charges


-

-

-

(1)

-

(1)

Operating expenses paid

1

(71)

-

(71)

(70)

-

(70)

Co-investment loans


1

-

1

-

-

-

Income taxes paid

1

(2)

1

(1)

(1)

-

(1)

Net cash flow from operating activities



(261)


(119)


(380)


171


(67)


104

Cash flow from financing activities








Issue of shares


1

-

1

1

-

1

Repurchase of short-term borrowings


-

-

-

(15)

-

(15)

Dividend paid


(178)

-

(178)

(154)

-

(154)

Interest received


1

-

1

1

-

1

Interest paid


(11)

-

(11)

(11)

-

(11)

Net cash flow from financing activities



(187)


-


(187)


(178)


-


(178)

Cash flow from investing activities








Purchases of property, plant and equipment



(1)


-


(1)


-


-


-

Purchases of intangible assets


(13)

-

(13)

-

-

-

Net cash flow from investing activities



(14)


-


(14)

 

-

 

-

 

-

Change in cash and cash equivalents

2

(462)

(119)

(581)

(7)

(67)

(74)

Cash and cash equivalents at the start of the period


1


954


(23)


931


962


(5)


957

Effect of exchange rate fluctuations

1

(6)

(2)

(8)

50

1

51

Cash held within assets held for sale


-

-

-

(14)

-

(14)

Cash and cash equivalents at the end of the period


2


486


(144)


342


991


(71)


920

 

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 consolidated 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 subsidiaries. Cash held within investment entity subsidiaries will not be shown in the IFRS statements but will be seen in the Investment basis statements.

 

 

IFRS Financial statements

 

Condensed consolidated statement of comprehensive income

 



Six months to

Six months to



30 September

30 September



2017

20161



(unaudited)

(unaudited)


Notes

£m

£m

Realised profits over value on the disposal of investments

2

13

7

Unrealised profits on the revaluation of investments

3

176

92

Fair value movements on investment entity subsidiaries

7

396

671



585

770

Portfolio income




Dividends


16

18


Interest income from investment portfolio


10

2


Fees receivable


11

4

Foreign exchange on investments


7

61

Gross investment return


629

855

Fees receivable from external funds


24

23

Operating expenses


(58)

(53)

Interest income


1

1

Interest paid


(18)

(25)

Exchange movements


16

35

Income from investment entity subsidiaries


11

-

Other income


1

8

Carried interest




Carried interest and performance fees receivable


64

205


Carried interest and performance fees payable


(14)

(74)

Operating profit before tax from continuing operations


656

975

Income taxes


1

(2)

Profit for the period from continuing operations


657

973

Profit for the period from discontinued operations

11

-

50

Profit for the period

657

1,023

Other comprehensive income/(expense) that may be reclassified to the income statement:




Exchange differences on translation of foreign operations


1

(3)

Other comprehensive expense that will not be reclassified to the income statement:




Re-measurement of defined benefit plans


(3)

(19)

Other comprehensive expense for the period from continuing operations


(2)

(22)

Other comprehensive income for the period from discontinued operations

11

-

5

Total comprehensive income for the period ("Total return")


655

1,006




Earnings per share from continuing operations




Basic (pence)

4

68.2

101.5


Diluted (pence)

4

67.9

101.0

Earnings per share




Basic (pence)

4

68.2

106.7


Diluted (pence)

4

67.9

106.2

 

1

Comparatives for the six months ended 30 September 2016 have been re-presented to show the results of the retained Debt Management assets, previously shown as discontinued operations, as continuing operations. See Note 11.

 

 

Condensed consolidated statement of financial position


30 September

31 March


2017

2017


(unaudited)

(audited)

Notes

£m

£m

Assets



Non-current assets



Investments




Quoted investments

6

397

390


Unquoted investments

6

1,605

1,316

Investments in investment entity subsidiaries

7

4,156

3,483

Investment portfolio


6,158

5,189

Carried interest and performance fees receivable

428

354

Other non-current assets


51

50

Intangible assets


13

-

Retirement benefit surplus


120

121

Property, plant and equipment


5

5

Total non-current assets

6,775

5,719


Current assets




Carried interest and performance fees receivable


3

9

Other current assets


18

12

Current income tax receivable


4

2

Derivative financial instruments


3

-

Deposits

41

40

Cash and cash equivalents

342

931

Total current assets

411

994

Total assets

7,186

6,713


Liabilities



Non-current liabilities



Trade and other payables

(25)

(24)

Carried interest and performance fees payable

(144)

(124)

Loans and borrowings


(575)

(575)

Retirement benefit deficit


(22)

(22)

Provisions


(1)

(2)

Total non-current liabilities

(767)

(747)


Current liabilities




Trade and other payables


(88)

(103)

Carried interest and performance fees payable

(8)

(23)

Provisions


(3)

(4)

Total current liabilities

(99)

(130)

Total liabilities

(866)

(877)

Net assets

6,320

5,836


Equity




Issued capital


719

719

Share premium


786

785

Capital redemption reserve


43

43

Share-based payment reserve


25

30

Translation reserve


219

218

Capital reserve


3,826

3,390

Revenue reserve


728

689

Own shares


(26)

(38)

Total equity

6,320

5,836

 

 

Condensed consolidated statement of changes in equity

 

For the six months to
30 September 2017
(unaudited)




Share-








Capital

based






Share

Share

redemption

payment

Translation

Capital

Revenue

Own

Total

capital

premium

reserve

reserve

Reserve

reserve

reserve

shares

Equity

£m

£m

£m

£m

£m

£m

£m

£m

£m

Total equity at the start of
the period


719


785


43


30


218


3,390


689


(38)


5,836

Profit for the period

-

-

-

-

-

576

81

-

657

Exchange differences on translation of foreign operations


-


-


-


-


1


-


-


-


1

Re-measurements of defined benefit plans


-


-


-


-


-


(3)


-


-


(3)

Total comprehensive income for the period


-


-


-


-


1


573


81


-


655

Share-based payments

-

-

-

6

-

-

-

-

6

Release on exercise/forfeiture of share awards


-


-


-


(11)


-


-


11


-


-

Loss on sale of own shares

-

-

-

-

-

(12)

-

12

-

Ordinary dividends

-

-

-

-

-

(24)

(53)

-

(77)

Additional dividends

-

-

-

-

-

(101)

-

-

(101)

Issue of ordinary shares

-

1

-

-

-

-

-

-

1

Total equity at the end of
the period


719


786


43


25


219


3,826


728


(26)


6,320

 

 

For the six months to
30 September 2016
(unaudited)




Share-








Capital

based






Share

Share

redemption

payment

Translation

Capital

Revenue

Own

Total

capital

premium

reserve

reserve

Reserve1

reserve

reserve

shares

Equity

£m

£m

£m

£m

£m

£m

£m

£m

£m

Total equity at the start of
the period


719


784


43


32


229


2,080


622


(54)


4,455

Profit for the period

-

-

-

-

-

937

86

-

1,023

Exchange differences on translation of foreign operations from continuing operations



-



-



-



-



(3)



-



-



-



(3)

Re-measurements of defined benefit plans from continuing operations



-



-



-



-



-



(19)



-



-



(19)

Other comprehensive income from discontinued operations


-


-


-


-


5


-


-


-


5

Total comprehensive income for the period


-


-


-


-


2


918


86


-


1,006

Share-based payments

-

-

-

12

-

-

-

-

12

Release on exercise/forfeiture of share awards


-


-


-


(18)


-


-


18


-


-

Loss on sale of own shares

-

-

-

-

-

(15)

-

15

-

Ordinary dividends

-

-

-

-

-

-

(52)

-

(52)

Additional dividends

-

-

-

-

-

(102)

-

-

(102)

Issue of ordinary shares

-

1

-

-

-

-

-

-

1

Total equity at the end of
the period


719


785


43


26


231


2,881


674


(39)


5,320

 

1

Translation reserve balance at 30 September 2016 included £12 million in relation to discontinued operations (31 March 2016: £7 million).

 

 

Condensed consolidated cash flow statement

 


Six months to

Six months to


30 September

30 September


2017

2016


(unaudited)

(unaudited)


£m

£m

Cash flow from operating activities



Purchase of investments

(267)

(286)

Proceeds from investments

175

208

Net cash flow (to)/from investment entity subsidiaries

(240)

151

Net cash outflow from derivatives

(13)

-

Portfolio interest received

-

4

Portfolio dividends received

16

34

Portfolio fees received

8

2

Fees received from external funds

24

46

Carried interest and performance fees received

5

29

Carried interest and performance fees paid

(17)

(12)

Acquisition related earn-out charges

-

(1)

Operating expenses paid

(71)

(70)

Co-investment loans received

1

-

Income taxes paid

(1)

(1)

Net cash flow from operating activities

(380)

104




Cash flow from financing activities



Issue of shares

1

1

Repurchase of short-term borrowings

-

(15)

Dividend paid

(178)

(154)

Interest received

1

1

Interest paid

(11)

(11)

Net cash flow from financing activities

(187)

(178)




Cash flow from investing activities



Purchase of property, plant and equipment

(1)

-

Purchase of intangibles

(13)

-

Net cash flow from investing activities

(14)

-




Change in cash and cash equivalents

(581)

(74)

Cash and cash equivalents at the start of the period

931

957

Effect of exchange rate fluctuations

(8)

51

Cash held within assets held for sale

-

(14)

Cash and cash equivalents at the end of the period

342

920

 

 

Notes to the financial statements

 

Basis of preparation and accounting policies

 

Compliance with International Financial Reporting Standards ("IFRS")

 

The Half-year condensed consolidated financial statements of 3i Group plc have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and as endorsed by the European Union. The Half-year condensed consolidated financial statements should be read in conjunction with the Annual report and accounts 2017. The accounting policies applied by 3i Group plc for the Half-year condensed consolidated financial statements are consistent with those described on pages 108 to 148 of the Annual report and accounts 2017, as are the methods of computation. There was no change in the current period to the critical accounting estimates and judgements applied in 2017, which are stated on pages 109 to 110 of the Annual report and accounts 2017.

 

The impact of future standards and amendments on the financial statements is being assessed by the Group and the Company. The Group does not anticipate that IFRS 9 (Financial instruments) and IFRS 16 (Leases) will have a material impact on its results. The detailed assessment of the extent to which IFRS 15 (Revenue from contracts with customers) may affect the carried interest receivable recognition in the Group's financial statements is ongoing.

 

The financial information for the year ended 31 March 2017 contained within this Half-year report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory accounts for the year to 31 March 2017, prepared under IFRS as endorsed by the EU, have been reported on by Ernst & Young LLP and delivered to the Registrar of Companies. The report of the Auditor on these statutory accounts was unqualified and did not contain a statement under section 498(2) or section 498(3) of the Companies Act 2006.

 

3i announced the sale of its Debt Management business to Investcorp on 25 October 2016 and the transaction completed on 3 March 2017. At 30 September 2016, the Debt Management business was classified as discontinued operations and all of its associated assets and liabilities as held for sale. As disclosed in the Annual report and accounts 2017, we retained the Debt Management investments not sold to Investcorp and classified them as 'Other' in our segmental analysis. Therefore, the comparatives for the six months ended 30 September 2016 have been re-presented to include the results from these retained Debt Management assets as continuing operations.

 

The Half-year condensed consolidated financial statements are prepared on a going concern basis.

 

 

1 Segmental analysis

 

 

The tables below are presented on the Investment basis which is the basis used by the chief operating decision maker, the Chief Executive, to monitor the performance of the Group. A description of the Investment basis and a reconciliation of the Investment basis to the IFRS financial statements is provided in the "Reconciliation of the Investment basis to IFRS" section. Further detail on the Group's segmental analysis can be found on pages 112 to 114 of the Annual report and accounts 2017. The remaining Notes are prepared on an IFRS basis.

 

Investment basis






Private





Equity

Infrastructure

Other

Total

Six months to 30 September 2017

£m

£m

£m

£m

Realised profits over value on the disposal
of investments


53


-


-


53

Unrealised profits on the revaluation of investments

517

22

-

539

Portfolio income






Dividends

2

13

7

22


Interest income from investment portfolio

49

-

-

49


Fees receivable

10

-

-

10

Foreign exchange on investments

84

(3)

(8)

73

Gross investment return

715

32

(1)

746

Fees receivable from external funds

3

21

-

24

Operating expenses

(38)

(20)

-

(58)

Interest received




1

Interest paid




(18)

Exchange movements




(21)

Other income




1

Operating profit before carried interest




675

Carried interest






Carried interest and performance fees receivable

64

-

-

64


Carried interest and performance fees payable

(81)

-

-

(81)

Operating profit




658

Income taxes




-

Other comprehensive income






Re-measurements of defined benefit plans




(3)

Total return




655

Net (investment)/divestment





Realisations1

350

-

24

374

Cash investment

(506)

(43)

(23)

(572)


(156)

(43)

1

(198)

Balance sheet





Opening portfolio value at 1 April 2017

4,831

706

138

5,675

Investment2

555

43

23

621

Value disposed

(297)

-

(24)

(321)

Unrealised value movement

517

22

-

539

Other movement (including foreign exchange)

86

(6)

(10)

70

Closing portfolio value at 30 September 2017

5,692

765

127

6,584

 

1

Investment basis Cash flow statement differs due to timing realisation cash flows in Private Equity.

2

Includes capitalised interest and other non-cash investment.

 

 

Investment basis




Total




Private



Continuing

Discontinued


 


Equity

Infrastructure

Other1

Operations

Operations1,2

Total

 

Six months to 30 September 20161

£m

£m

£m

£m

£m

£m

 

Realised profits/(losses) over value on the disposal of investments


52


(1)


-


51


2


53

 

Unrealised profits on the revaluation of investments


643


76


12


731


1


732

 

Portfolio income







 


Dividends

6

10

8

24

16

40

 


Interest income from investment portfolio

19

-

-

19

3

22

 


Fees receivable

1

-

-

1

-

1

 

Foreign exchange on investments

268

5

10

283

17

300

 

Gross investment return

989

90

30

1,109

39

1,148

 

Fees receivable from external funds

5

18

-

23

24

47

 

Operating expenses

(35)

(19)

-

(54)

(12)

(66)

 

Interest received




1

-

1

 

Interest paid




(25)

-

(25)

 

Exchange movements




9

4

13

 

Other income/(expense)




8

(1)

7

 

Operating profit before carried interest




1,071

54

1,125

 

Carried interest and performance fees







 


Receivable

203

-

-

203

1

204

 


Payable

(302)

-

-

(302)

-

(302)

 

Operating profit




972

55

1,027

 

Income taxes




(2)

-

(2)

 

Other comprehensive income







 


Re-measurements of defined
benefit plans





(19)


-


(19)

 

Total return




951

55

1,006

 

Net divestment/(investment)







 

Realisations3

654

12

-

666

3

669

 

Cash investment3

(291)

(131)

(8)

(430)

(42)

(472)

 


363

(119)

(8)

236

(39)

197

 

Year to 31 March 2017







 

Balance sheet







 

Opening portfolio value at 1 April 2016

3,741

527

92

4,360

137

4,497

 

Investment4

548

131

29

708

51

759

 

Value disposed

(944)

(13)

(10)

(967)

(191)

(1,158)

 

Unrealised value movement

1,274

59

9

1,342

3

1,345

 

Other movement
(including foreign exchange)


212


2


18


232


-


232

 

Closing portfolio value at 31 March 2017

4,831

706

138

5,675

-

5,675

 

 

1

Comparatives for the six months ended 30 September 2016 have been re-presented to show the results of the retained Debt Management assets, previously shown as discontinued operations, within Other.

2

Discontinued operations relate to the Debt Management business sold to Investcorp.

3

Investment basis Cash flow statement differs due to timing of investment and realisation cash flows in Private Equity and Debt Management.

4

Includes capitalised interest and other non-cash investment.

 

 

2 Realised profits/(losses) over value on the disposal of investments

 

Six months to 30 September 2017

Unquoted

Quoted



investments

investments

Total


£m

£m

£m

Realisations

175

-

175

Valuation of disposed investments

(162)

-

(162)


13

-

13

Of which:




-      

- profit recognised on realisations

14

-

14


- losses recognised on realisations

(1)

-

(1)



13

-

13

 

Six months to 30 September 2016

Unquoted

Quoted



investments

investments

Total


£m

£m

£m

Realisations

186

20

206

Valuation of disposed investments

(180)

(19)

(199)


6

1

7

Of which:




-      

- profit recognised on realisations

7

1

8


- losses recognised on realisations

(1)

-

(1)



6

1

7

 

 

3 Unrealised profits/(losses) on the revaluation of investments

 

Six months to 30 September 2017

Unquoted

Quoted



investments

investments

Total


£m

£m

£m

Movement in the fair value of investments

165

11

176

Of which:





- unrealised gains

177

11

188


- unrealised losses

(12)

-

(12)



165

11

176

 

Six months to 30 September 20161

Unquoted

Quoted



investments

investments

Total


£m

£m

£m

Movement in the fair value of investments

44

48

92

Of which:





- unrealised gains

93

48

141


- unrealised losses

(49)

-

(49)



44

48

92

 

1

Comparatives for the six months ended 30 September 2016 have been re-presented to show the unrealised profits/(losses) on the retained Debt Management assets, previously shown as discontinued operations, as continuing operations. See Note 11.

 

 

4 Per share information

 

The calculation of basic earnings per share is based on the profit attributable to shareholders and the average number of basic 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.

 


6 months

6 months


to 30 September

to 30 September


2017

20161

Earnings per share (pence)



Basic earnings per share

68.2

106.7


- of which from continuing operations

68.2

101.5


- of which from discontinued operations

-

5.2




Diluted earnings per share

67.9

106.2


- of which from continuing operations

67.9

101.0


- of which from discontinued operations

-

5.2




Earnings (£m)



Profit for the period attributable to equity holders of the Company

657

1,023


- of which from continuing operations

657

973


- of which from discontinued operations

-

50

 

1

Comparatives for the six months ended 30 September 2016 have been re-presented to show the results from the retained Debt Management assets, previously shown as discontinued operations, as continuing operations. See Note 11.

 

 


6 months

6 months


to 30 September

to 30 September


2017

2016


Number

Number

Weighted average number of shares in issue



Ordinary shares

972,828,742

972,696,599

Own shares

(9,611,495)

(13,810,391)

Basic shares

963,217,247

958,886,208

Effect of dilutive potential ordinary shares



Share options and awards

4,520,532

4,403,571

Diluted shares

967,737,779

963,289,779

 

 


30 September

31 March


2017

2017

Net assets per share (pence)



Basic

655

607

Diluted

652

604

Net assets (£m)



Net assets attributable to equity holders of the Company

6,320

5,836

 

Basic NAV per share is calculated on 964,884,704 shares in issue at 30 September 2017 (31 March 2017: 961,458,801). Diluted NAV per share is calculated on diluted shares of 969,721,096 at 30 September 2017 (31 March 2017: 966,553,549).

 

 

5 Dividends

 


6 months to

6 months to

6 months to

6 months to


30 September

30 September

30 September

30 September


2017

2017

2016

2016


pence


pence



per share

£m

per share

£m

Declared and paid during the period





 

Final dividend

18.5

178

16.0

154

 


18.5

178

16.0

154

 

Proposed interim dividend

8.0

77

8.0

77

 

 

 

6 Investment portfolio

 

This section should be read in conjunction with Note 10 on pages 120 to 121 of the Annual report and accounts 2017, which provides more detail about initial recognition and subsequent measurement of investments at fair value. 

 


6 months to

Year to


30 September 2017

31 March 2017

Non-current

£m

£m

Opening fair value

1,706

1,540

Additions from continuing operations

277

291


- of which loan notes with nil value

(1)

(10)

Additions from discontinued operations

-

70

Disposals and repayments from continuing operations

(162)

(311)

Disposals and repayments from discontinued operations

-

(191)

Fair value movement from continuing operations

176

262

Fair value movement from discontinued operations

-

3

Other movements and net cash movements from continuing operations

6

71

Other movements and net cash movements from discontinued operations

-

(19)

Closing fair value

2,002

1,706

Quoted investments

397

390

Unquoted investments

1,605

1,316

Closing fair value

2,002

1,706

 

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 £10 million (31 March 2017: £11 million) in capitalised interest received by way of loan notes, of which £1 million (31 March 2017: £10 million) was written down in the period to nil. Included within the Consolidated statement of comprehensive income is £10 million (31 March 2017: £10 million) of interest income, which reflects the net additions after write downs noted above, cash income is nil (31 March 2017: £4 million). The capitalisation of prior year accrued income and non-capitalised accrued income is £1 million (31 March 2017: £5 million). The prior year to 31 March 2017 included £3 million of interest income from discontinued operations.

 

Other movements and net cash movements include the impact of changes in foreign exchange rates. The prior year to 31 March 2017 included cash returned of £19 million from warehouses used by our Debt Management business.

 

Quoted investments are classified as Level 1 in the fair value hierarchy and unquoted investments are classified as Level 3 in the fair value hierarchy; see Note 8 for details.

 

 

7 Investments in investment entity subsidiaries

 

Investments in investment entity subsidiaries are accounted for as financial instruments at fair value through profit and loss. We determine that in the ordinary course of business, the net asset values of an investment entity subsidiary are considered to be the most appropriate to determine fair value. At each reporting period, we consider whether any additional fair value adjustments need to be made to the net asset values of the investment entity subsidiaries. These adjustments may be required to reflect market participants' considerations about fair value that may include, but are not limited to, liquidity and the portfolio effect of holding multiple investments within the investment entity subsidiary. There was no particular circumstance to indicate that any fair value adjustment was required and after due consideration we concluded that the net asset values were the most appropriate reflection of fair value at 30 September 2017.

 

Level 3 fair value reconciliation - investments in investment entity subsidiaries

 


6 months to

Year to


30 September 2017

31 March 2017

Non-current

£m

£m

Opening fair value

3,483

2,680

Net cash flow to/(from) investment entities

240

(246)

Fair value movement on investment entity subsidiaries

396

1,041

Transfer of assets to investment entity subsidiaries

37

8

Closing fair value

4,156

3,483

 

All investment entity subsidiaries are classified as Level 3 in the fair value hierarchy, see Note 8 for details.

 

A 5% movement in the closing fair value of investments in investment entity subsidiaries would have an impact of £208 million (31 March 2017: £174 million).

 

Restrictions

3i Group plc, the ultimate parent company, receives dividend income from its subsidiaries. There are no restrictions on the ability to transfer funds from these subsidiaries to the Group except for cash balances of £58 million (31 March 2017: £56 million) held in escrow in investment entity subsidiaries for carried interest payable.

 

Support

3i Group plc provides, where necessary, ongoing support to its investment entity subsidiaries for the purchase of portfolio investments. During the period, there were net cash flows from the Group as noted in the table above.

 

 

8 Fair values of assets and liabilities

 

This section should be read in conjunction with Note 12 on pages 122 to 124 of the Annual report and accounts 2017 which provides more detail about accounting policies adopted, the definitions of the three levels of fair value hierarchy, valuation methods used in calculating fair value, and the valuation framework which governs oversight of valuations. There have been no changes in the accounting policies adopted or the valuation methodologies used.

 

Valuation

 

The Group classifies financial instruments measured at fair value in the investment portfolio according to the following hierarchy:

 

Level

Fair value input description

Financial instruments

Level 1

Quoted prices (unadjusted) from active markets

Quoted equity instruments

Level 2

Inputs other than quoted prices included in Level 1 that are observable either directly (ie as prices) or indirectly (ie derived from prices)

Derivative financial instruments

Level 3

Inputs that are not based on observable market data

Unquoted equity instruments and loan instruments

 

The table below shows the classification of financial instruments held at fair value into the valuation hierarchy at 30 September 2017:

 


As at 30 September 2017

As at 31 March 2017


Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total


£m

£m

£m

£m

£m

£m

£m

£m

Quoted investments

397

-

-

397

390

-

-

390

Unquoted investments

-

-

1,605

1,605

-

-

1,316

1,316

Investments in investment entity
subsidiaries


-


-


4,156


4,156

 

-

 

-


3,483


3,483

Derivative financial instruments

-

3

-

3

-

-

-

-

Total

397

3

5,761

6,161

390

-

4,799

5,189

 

We determine that in the ordinary course of business, the net asset values of an investment entity subsidiary are considered to be the most appropriate to determine fair value. The underlying portfolio is valued under the same methodology as directly held investments, with any other assets or liabilities within investment entity subsidiaries valued in accordance with the Group's accounting policies. Note 7 details the Directors' considerations about the fair value of the underlying investment entity subsidiaries.

 

The fair values of the Group's other financial assets and liabilities are not materially different from their carrying values with the exception of loans and borrowings. The fair value of loans and borrowings is £722 million (31 March 2017: £741 million), determined with reference to their published market prices. The carrying value of the loans and borrowings is £575 million (31 March 2017: £575 million).

 

Level 3 fair value reconciliation - unquoted investments

 


Six months to

Year to


30 September

31 March


2017

2017


£m

£m

Opening fair value

1,316

1,243

Additions from continuing operations

277

213


- of which loan notes with nil value

(1)

(10)

Additions from discontinued operations

-

70

Disposals and repayments from continuing operations

(162)

(292)

Disposals and repayments from discontinued operations

-

(191)

Fair value movement from continuing operations

165

224

Fair value movement from discontinued operations

-

3

Other movements and net cash movements from continuing operations

75

Other movements and net cash movements from discontinued operations

-

(19)

Closing fair value

1,605

1,316

 

Unquoted investments valued using Level 3 inputs also had the following impact on the Consolidated statement of comprehensive income: realised profits over value on disposal of investment of £13 million (September 2016: £6 million), dividend income of £8 million (September 2016: £4 million) and foreign exchange gains of £7 million (September 2016: £55 million).

 

Level 3 inputs are sensitive to assumptions made when ascertaining fair value as described in the Portfolio valuation - an explanation section on pages 158 to 159 in the Annual report and accounts 2017. On an IFRS basis, of the unquoted assets held at 30 September 2017 classified as Level 3, 41% (31 March 2017: 33%) were valued using a multiple of earnings and the remaining 59% (31 March 2017: 67%) were valued using alternative valuation methodologies.

 

Assets move between Level 1 and Level 3 primarily when an unquoted equity investment lists on a quoted market exchange. There were no transfers in or out of Level 3 in the period.

 

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 and relevant market transaction multiples. Companies in the same industry and geography and, where possible, with a similar business model and profile are selected and their valuation multiple is then adjusted for factors including liquidity risk, growth potential and relative performance. Multiples are also adjusted to reflect our longer term view of performance through the cycle or our exit assumptions.

 

The value weighted average multiple used when valuing the portfolio at 30 September 2017 was 11.28x (31 March 2017: 10.23x).

 

If the multiple used to value each unquoted investment valued on an earnings multiple basis as at 30 September 2017 decreased by 5%, the investment portfolio value would decrease by £38 million (31 March 2017: £18 million) or 2% (31 March 2017: 1%). If the same sensitivity was applied to the underlying portfolio held by investment entity subsidiaries, this would have a negative impact of £257 million (31 March 2017: £224 million) or 6% (31 March 2017: 6%). If the multiple increased by 5% then the investment portfolio value would increase by £38 million (31 March 2017: £16 million) or 2% (31 March 2017: 1%). If the same sensitivity was applied to the underlying portfolio held by investment entity subsidiaries, this would have a positive impact of £261 million (31 March 2017: £215 million) or 6% (31 March 2017: 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 on pages 158 to 159 in the Annual report and accounts 2017. Each methodology is used for a proportion of assets by value, and at 30 September 2017 the following techniques were used under an IFRS basis: 51% other (which includes DCF) and 8% industry metric. If the value of all of the investments under these methodologies moved by 5%, this would have an impact on the investment portfolio of £47 million (31 March 2017: £44 million) or 3% (31 March 2017: 3%). If the same sensitivity was applied to the underlying portfolio held by investment entity subsidiaries, this would have an impact of £5 million (31 March 2017: £7 million) or 0.1% (31 March 2017: 0.2%).

 

 

9 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 an agreement with 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 held by this subsidiary at 30 September 2017 was £273 million (31 March 2017: £265 million). As part of the latest triennial valuation of the pension scheme, the Company has agreed to pay up to £50 million to the scheme if the Group's gearing increases above 20%, gross debt above £1 billion or net assets fall below £2 billion. If gearing, gross debt or net asset limits noted are reached, the Group may be required to increase the potential cover provided by the contingent asset arrangement until the gearing, gross debt or net assets improve.

 

 

At 30 September 2017, there was no material litigation outstanding against the Company or any of its subsidiary undertakings.

 

 

10 Related parties

 

All related party transactions that took place in the half year to 30 September 2017 are consistent in nature with the disclosures in Note 29 on pages 140 to 143 of the Annual report and accounts 2017. Related party transactions which took place in the period and materially affected performance or the financial position of the Group, together with any material changes in related party transactions as described in the Annual report and accounts 2017 that could materially affect the performance or the financial position of the Group are detailed below.

 

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 recognised in respect of these limited partnerships:

 

Consolidated statement of comprehensive income

Six months to

Six months to


30 September

30 September


2017

2016


£m

£m

Carried interest and performance fees receivable

64

205

Fees receivable from external funds

13

14

 

Consolidated statement of financial position

30 September

31 March


2017

2017


£m

£m

Carried interest and performance fees receivable

430

356

 

 

Investments

The Group makes investments in the equity of unquoted and quoted investments where it does not have control but may be able to participate in the financial and operating policies of that company. IFRS presumes that it is possible to exert significant influence when the equity holding is greater than 20%. The Group has taken the investment entity exception as permitted by IFRS 10 and has not equity accounted for these investments, in accordance with IAS 28, but they are related parties. The total amounts included for investments where the Group has significant influence but not control are as follows:

 

Consolidated statement of comprehensive income

Six months to

Six months to


30 September

30 September


2017

20161


£m

£m

Realised profit over value on the disposal of investments

9

-

Unrealised profits on the revaluation of investments

25

29

Portfolio income

5

7

Profits for the period from discontinued operations

-

30

 

Consolidated statement of financial position

30 September

31 March


2017

2017


£m

£m

Unquoted investments

423

429

 

1

Comparatives for the six months ended 30 September 2016 have been re-presented to show the results from the retained Debt Management assets, previously shown as discontinued operations, as continuing operations. See Note 11.

 

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 recognised in respect of this advisory relationship:

 

Consolidated statement of comprehensive income

Six months to

Six months to

 


30 September

30 September

 


2017

2016

 


£m

£m

 

Unrealised profits on the revaluation of investments

11

48

Dividends

8

6

Fees receivable from external funds

11

9

 

Consolidated statement of financial position

30 September

31 March


2017

2017


£m

£m

Quoted equity investments

397

390

Performance fees receivable

-

4

 

 

11 Discontinued operations

 

On 3 March 2017, the Group completed the disposal of its Debt Management business to Investcorp and received cash proceeds of £270 million. All assets associated with the Debt Management business were classified as held for sale in the Half-year report 2016. Following the completion of the transaction on 3 March 2017, the Group determined that the investments not sold to Investcorp would be retained beyond the 12 month period prescribed by IFRS 5. Accordingly, they were no longer classified as held for sale and were included as continuing operations in the Annual report and accounts 2017.

 

Comparatives for the six months to 30 September 2016 have been re-presented to reflect the reclassification of the residual Debt Management assets as continuing operations. The impact of this re-presentation on a line by line basis is presented below. There was no profit or cash flow from discontinued operations in the six months to 30 September 2017.

 

Condensed consolidated statement of comprehensive income - Impact of re-presentation

 

Six months to 30 September 2016

As previously

Effect of

As


reported

re-presentation

re-presented


£m

£m

£m

Realised profits over value on the disposal of investments

7

-

7

Unrealised profits on the revaluation of investments

80

12

92

Fair value movements on investment entity subsidiaries

670

1

671


757

13

770

Portfolio income





Dividends

10

8

18


Interest income from investment portfolio

2

-

2


Fees receivable

4

-

4

Foreign exchange on investments

53

8

61

Gross investment return from continuing operations

826

29

855

Fees receivable from external funds

23

-

23

Operating expenses

(53)

-

(53)

Interest received

1

-

1

Interest paid

(25)

-

(25)

Exchange movements

35

-

35

Other income

8

-

8

Carried interest





Carried interest and performance fees receivable

205

-

205


Carried interest and performance fees payable

(74)

-

(74)

Operating profit before tax from continuing operations

946

29

975

Income taxes

(2)

-

(2)

Profit for the period from continuing operations

944

29

973

Profit for the period from discontinued operations

79

(29)

50

Profit for the period

1,023

-

1,023

Other comprehensive expense that may be reclassified to the income statement:





Exchange differences on translation of foreign operations

(3)

-

(3)

Other comprehensive expense that will not be reclassified to the income statement:





Re-measurement of defined benefit plans

(19)

-

(19)

Other comprehensive income for the period from continuing operations

(22)

-

(22)

Other comprehensive income for the period from discontinued operations

5

-

5

Total comprehensive income for the period ("Total return")

1,006

-

1,006

 

 

Cash flows - Impact of re-presentation

Six months to 30 September 2016

As previously

Effect of

As


reported

re-presentation

re-presented


£m

£m

£m

Net cash flows from operating activities

43

(1)

42

Total net cash flows from discontinued operations

43

(1)

42

 

 

Independent review report to 3i Group plc

 

Introduction

 

We have been engaged by 3i Group plc (the 'Company' or the 'Group') to review the condensed consolidated financial statements in the Half-year report for the six months ended 30 September 2017 which comprises the Condensed consolidated statement of comprehensive income, the Condensed consolidated statement of financial position, the Condensed consolidated statement of changes in equity, the Condensed consolidated cash flow statement, Basis of preparation and accounting policies and the related notes 1 to 11 (together the 'condensed consolidated financial statements'). We have read the other information contained in the Half-year report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

 

Directors' Responsibilities

 

The Half-year report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half-year report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in the Basis of preparation and accounting policies, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed consolidated financial statements included in this Half-year report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the Half-year report based on our review.

 

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the Half-year report for the six months ended 30 September 2017 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

 

 

 

Ernst & Young LLP

London, United Kingdom

15 November 2017

 

 

Statement of Directors' responsibilities

 

The Directors, who are required to prepare the financial statements on a going concern basis unless it is not appropriate, are satisfied that the Group has the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered information relating to present and future conditions, including future projections of profitability and cash flows.

 

The Directors confirm that to the best of their knowledge:

 

a)  the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU;

b)  the Half year report includes a fair review of the information required by:

 

i)

DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year ending 31 March 2018 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

ii)

DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being (i) related party transactions that have taken place in the first six months of the financial year ending 31 March 2018 which have materially affected the financial position or performance of 3i Group during that period; and (ii) any changes in the related party transactions described in the Annual report and accounts 2017 that could materially affect the financial position or performance of 3i Group during the first six months of the financial year ending 31 March 2018.

 

 

The Directors of 3i Group plc and their functions are listed below.

 

The report is authorised for issue by order of the Board.

 

 

 

K J Dunn, Secretary

15 November 2017

 

 

List of Directors and their functions

 

The Directors of the Company and their functions are listed below:

 

Simon Thompson, Chairman and Chairman of the Nominations Committee

Simon Borrows, Chief Executive and Executive Director

Julia Wilson, Group Finance Director and Executive Director

Jonathan Asquith, non-executive Director, Deputy Chairman and Chairman of the Remuneration Committee

Caroline Banszky, non-executive Director and Chairman of the Audit and Compliance Committee

Stephen Daintith, non-executive Director

Peter Grosch, non-executive Director

David Hutchison, non-executive Director and Chairman of the Valuations Committee

 

 

Portfolio and other information

 

20 large investments

 

The 20 investments listed below account for 82% of the portfolio at 30 September 2017 (31 March 2017: 77%). This table excludes one investment for commercial reasons.

 



Residual

Residual





Business line

cost1

cost1

Valuation

Valuation



Geography

March

September

March

September


Investment

First invested in

2017

2017

2017

2017

Relevant transactions

Description of business

Valuation basis

£m

£m

£m

£m

in the period

Action*

Private Equity

1

1

1,708

2,009


Non-food discount retailer

Benelux







2011







Earnings






3i Infrastructure plc*

Infrastructure

399

396

655

670

Dividend of

Quoted investment

UK





£13 million received

company, investing

2007






in infrastructure

Quoted






Q Holding*

Private Equity

162

162

222

243


Manufacturer of engineered

US






precision elastomeric

2014






components

Earnings






Weener Plastic*

Private Equity

161

168

200

218


Supplier of plastic packaging

Germany






solutions

2015







Earnings






Basic-Fit

Private Equity

11

11

184

218


Discount gym operator

Benelux







2013







Quoted






Audley Travel*

Private Equity

177

185

185

208


Provider of experiential

UK






tailor made travel

2015

Earnings






Hans Anders*

Private Equity

-

178

-

195

New investment in

Value for money

Benelux





the period

optical retailer

2017







Earnings






ATESTEO*

Private Equity

39

40

160

182


International transmission

Germany






testing specialist

2013







Earnings






Schlemmer*

Private Equity

162

168

154

152


Provider of cable

Germany






management solutions for

2016






the automotive industry

Earnings






BoConcept*

Private Equity

140

136

146

145

DKK 100 million

Urban living brand

Denmark





over-funding repaid


2016





in the period


Earnings






Formel D*

Private Equity

-

137

-

135

New investment in

Quality assurance provider

Germany





the period

for the automotive industry

2017







Earnings






AES Engineering

Private Equity

30

30

113

134


Manufacturer of mechanical

UK






seals and support systems

1996







Earnings






Ponroy Santé*

Private Equity

123

126

122

133


Manufacturer of natural

France






healthcare and cosmetics

2017






products

Earnings






ACR

Private Equity

105

105

135

130


Pan-Asian non-life

Singapore






reinsurance

2006







Industry metric






 

Tato

Private Equity

2

2

112

112


Manufacturer and seller of

UK






speciality chemicals

1989







Earnings






Lampenwelt*

Private Equity

-

105

-

109

New investment in

Online lighting

Germany





the period

specialist retailer

2017







Earnings






Aspen Pumps*

Private Equity

78

82

88

104


Manufacturer of pumps and

UK






accessories for the air

2015






conditioning, heating and

Earnings






refrigeration industry







Christ*

Private Equity

101

102

98

100


Distributor and retailer of

Germany






jewellery

2014







Earnings






Cirtec Medical*

Private Equity

-

103

-

99

New investment in

Outsourced medical device

USA





the period

manufacturing

2017







Earnings






Euro-Diesel*

Private Equity

57

60

95

91


Manufacturer of

Benelux






uninterruptible

2015






power supply systems

Earnings






 

* Controlled in accordance with IFRS.

1 Residual cost includes capitalised interest.

 

 

Glossary

Approved Investment Trust Company This is a particular UK tax status maintained by 3i Group plc, the parent company of 3i Group. An approved investment trust company is a UK company which meets certain conditions set out in the UK tax rules which include a requirement for the company to undertake portfolio investment activity that aims to spread investment risk and for the company's shares to be listed on an approved exchange. The "approved" status for an investment trust must be agreed by the UK tax authorities and its benefit is that certain profits of the company, principally its capital profits, are not taxable in the UK.

 

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. AUM is measured at fair value.

 

Capital reserve recognises all profits that are capital in nature or have been allocated to capital. Following changes to the Companies Act 2006, the Company amended its Articles of Association at its 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. Carried interest is only actually paid or received when the relevant performance hurdles are met on a cash basis and the accrual is discounted to reflect expected payment periods. Carried interest receivable is generated on third-party capital over the life of the relevant fund when relevant performance criteria are met.

 

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.

 

EBITDA is defined as earnings before interest, taxation, depreciation and amortisation and is used as the typical measure of the performance of our portfolio companies.

 

EBITDA multiple Calculated as the enterprise value over EBITDA and is used to determine the value of a company.

 

Fees receivable from external funds are fees received by the Group, from third parties, for the management of Private Equity and Infrastructure funds.

 

Investment basis accounts are 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 Interim report refers to this basis as we believe it provides a more understandable view of our performance.

 

Money multiple is calculated as the cumulative distributions plus any residual value divided by paid-in capital.

 

Operating cash profit/(loss) is the difference between our cash income (consisting of portfolio interest received, portfolio dividends received, portfolio fees received and fees received from external funds as per the Investment basis Cash flow statement) and our cash operating expenses (as per the Investment basis Cash flow statement).

 

Proprietary Capital Shareholders' capital which is available to invest.

 

Revenue reserve recognises all profits that are revenue in nature or have been allocated to revenue.

 

Total shareholder return ("TSR") 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.

 

 

Information for shareholders

 

Note

 

The interim dividend is expected to be paid on 10 January 2018 to holders of ordinary shares on the register on 15 December 2017. The ex-dividend date will be 14 December 2017.

 

 

 

 

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.

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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3i Group Half-year results to 30 September 2017 - RNS