3i Group Regulatory News (III)

19 May 2016

3i Group plc announces full year results to 31 March 2016

Another year of strong performance

· Total return of £824m / 22% (FY2015: £659m / 20%) and NAV per share of 463 pence (FY2015: 396 pence)

· Private Equity gross investment return of £1,011m, or 32%, underpinned by a strong performance from a number of our key investments such as Action, Scandlines, Basic-Fit and ATESTEO (formerly GIF)

· Momentum in Private Equity realisations continues with proceeds of £743m and a further c.£224m announced in April 2016. Maintained a disciplined approach to investment and invested £365m in three new portfolio companies; Audley Travel, Weener Plastic and Euro-Diesel

· Good progress in Infrastructure with a 13% total shareholder return from 3i Infrastructure plc ("3iN") and a significant increase in origination activity. 3i will support 3iN's fundraising to maintain its 34% investment in 3iN

· Debt Management delivered a solid performance, raising £1.5bn of AUM from 4 CLOs and launching the Global Income Fund

· Robust balance sheet with net cash of £165m and nil gearing at 31 March 2016

· Proposed final dividend of 16.0 pence per share, bringing the total dividend for FY2016 to 22.0 pence per share, subject to shareholder approval

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

"These strong FY2016 results demonstrate 3i's continued momentum in the face of challenging macro-economic conditions. We enter FY2017 firmly focused on delivering our clear and consistent strategy and generating good returns and distributions for our shareholders."

Financial highlights 

ENDS

For further information, please contact:

For further information regarding the announcement of 3i's annual results to 31 March 2016, including a live videocast of the results presentation at 10.00am, please visit www.3i.com.

Notes to editors

3i is a leading international investment manager focused on mid-market Private Equity, Infrastructure and Debt Management. Our core investment markets are northern Europe and North America. For further information, please visit: www.3i.com.

Notes to the announcement of the results

Note 1

All of the financial data in this announcement is taken from the Investment basis financial statements. The statutory accounts are prepared under IFRS for the year to 31 March 2016 and have not yet been delivered to the Registrar of Companies. The statutory accounts for the year to 31 March 2015 have been delivered to the Registrar of Companies. The auditors' reports on the statutory accounts for these years are unqualified and do not contain any matters to which the auditor drew attention by way of emphasis or any statements under section 498(2) or (3) of the Companies Act 2006. This announcement does not constitute statutory accounts.

Note 2

Copies of the Report and accounts 2016 will be distributed to shareholders on or soon after 31 May 2016.

Note 3

This announcement may contain statements about the future including certain statements about the future outlook for 3i Group plc and its subsidiaries ("3i"). These are not guarantees of future performance and will not be updated. Although we believe our expectations are based on reasonable assumptions, any statements about the future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Note 4

Subject to shareholder approval, the proposed final dividend is expected to be paid on 22 July 2016 to holders of ordinary shares on the register on 17 June 2016.

Chairman's statement

"2016 has delivered another robust result which demonstrates the value of our clear, consistent strategy and disciplined approach to investment."

Overview

In my first year as Chairman, I am pleased to report that 3i delivered another robust result. The Group has a clear, consistent strategy and Simon Borrows and the team continue to make excellent progress in positioning 3i as a business capable of delivering attractive returns throughout the economic cycle.

Market environment

2015 was marked by considerable turbulence in global markets and growth indicators in the US and Europe remained under pressure. As a consequence, central bank monetary policy continued to be supportive across all the major developed economies with interest rates remaining at historic lows. 3i has limited direct exposure to companies in the most challenged sectors and our portfolio performed well, with our largest and strongest investments, including Action, Scandlines and 3i Infrastructure plc, delivering strong year-on-year improvements in performance.

Performance and dividend

In FY2016, total return increased by 25% to £824 million (2015: £659 million). Net asset value increased to 463 pence per share (31 March 2015: 396 pence) and return on opening shareholders' funds was 21.7% (2015: 19.9%). We remained net divestors during FY2016 and ended the year with a net cash position of £165 million and available liquidity of £1,352 million (31 March 2015: net cash of £49 million and liquidity of £1,214 million). In light of this strong performance, the Board has recommended a final dividend of 16 pence per share (2015: 14 pence per share), resulting in a full year dividend of 22 pence per share (2015: 20 pence per share), equivalent to 27% of cash realisation proceeds (2015: 23%). This reflects the Board's continuing confidence in both the Group's future prospects and its cash generation capability. Subject to shareholder approval, we will pay the final dividend of 16 pence (2015: 14 pence) in July 2016.

Our current dividend policy, set in May 2012, contemplates distributions of between 15-20% of cash realisation proceeds (subject to certain criteria on gross debt and gearing described below) with a minimum dividend of 8.1 pence per year. As a result of the Group's strong performance and conservative balance sheet strategy, actual dividends have exceeded 20% of realised proceeds in each of the years the policy has been in operation.

In light of the Group's continued progress in executing its strategy, the quality of its investment portfolio and forecast realisation pipeline, the Board has decided that with effect from FY2017, the base dividend will increase to 16 pence per annum, with an additional final dividend each year taking account of cash realisations, the investment pipeline and the balance sheet at year end. Consistent with our conservative approach, we will maintain our criteria of only paying an additional final dividend provided gross debt is less than £1 billion and gearing is less than 20%, but do not expect this to be a practical constraint. Further detail on the Group's approach to capital allocation is provided in the Chief Executive's review.

Outlook

The combination of continuing market volatility and the upcoming Brexit referendum is likely to weigh on investor sentiment, with reduced M&A volumes and delays in capital investment likely to persist while the uncertainty remains. However, I believe that 3i's proprietary capital, selective investment approach and balance sheet strength positions the Group well to deal with these uncertain economic and financial conditions. A clear, consistent strategy and disciplined approach to investment underpin our confidence in the future success of the Group.

Simon Thompson

Chairman

Strategic report

Chief Executive's review

"2016 was another strong year for 3i and built on the success of our recent restructuring. The Group's performance has been resilient in the face of challenging macro-economic conditions and volatile markets."

We have continued to execute our well established strategy, making good progress against our key performance indicators, with all three of our businesses building on the momentum seen in previous years. 3i generated an excellent total return on opening shareholders' funds of 21.7% (2015: 19.9%) and a NAV per share of 463 pence (31 March 2015: 396 pence). This year's financial and operational performance, against a backdrop of volatile market sentiment, demonstrates the depth of the Group's investment capabilities and potential to generate attractive returns for investors through the cycle.

Another year of resilient financial performance

Private Equity had an excellent year, generating a gross investment return of £1,011 million, or 32% of opening value (2015: £719 million, 24%). This reflects strong performance from our larger investments, particularly Action, Basic-Fit and Scandlines.

Action, the leading non-food discounter in continental Europe, had another outstanding year with a 36% increase in EBITDA and like-for-like sales growth of 7.6%. Action continued its successful store roll-out programme, opening 141 net new stores in the year, and at the end of 2015 had 655 stores in six countries (with a total of 410 opened since our investment in 2011). Action's international expansion has been a key driver of its success to date, with France and Germany now the main markets for growth. In addition, Action entered Austria and Luxembourg in 2015; early progress is encouraging and provides further evidence that Action's store concept travels well across borders. To enhance Action's international growth plans, a third distribution centre opened north of Paris in early 2016 and a fourth and fifth are planned for Toulouse and Mannheim respectively. 2016 promises to be another strong year for Action as it plans to open more stores than last year. We acquired Action in 2011 as a Benelux retailer but in 2015, Action opened more stores in France and Germany than in the Benelux and it has now become a truly pan-European retailer.

I joined the Board of Peer Holding BV, Action's parent company, last year in recognition of the importance of this investment to 3i and in order to foster closer links between the two groups.

Scandlines, a large ferry operator with two high frequency, large capacity routes between Germany and Denmark, continues to perform well due to strong volume growth and a shift in mix towards higher margin booking classes. The Danish Transport Ministry has confirmed that the opening date of a competing tunnel, the Fehmarn Belt Fixed Link, on Scandlines' key route between Rødby and Puttgarden will be delayed further, which is an important development for Scandlines.

Positive momentum continues at Basic-Fit, the leading discount fitness operator in continental Europe, with very good earnings growth and ongoing capital investment to upgrade its existing gym portfolio and open new units. Basic-Fit is now Europe's largest discount gym chain and had 351 gyms and 1.1 million members at 31 March 2016. It is another pan-European business, growing strongly in France and Spain, having established market leadership in the Netherlands and Belgium. On 17 May 2016, Basic-Fit announced its intention to launch an Initial Public Offering and Listing on Euronext Amsterdam.

The wider portfolio continues to perform well, notwithstanding the slowing macro-economic conditions, with encouraging performance from some of our newer investments. Our decision in 2012 to focus our Private Equity resources on core sectors and geographies has limited the negative impact from broader geo-political and economic concerns. Our monthly portfolio monitoring means that potential issues are highlighted early and any remedial actions put in place promptly. However, we cannot be immune to issues in the markets in which we operate. In particular, the impact of the lower oil price on the wider energy and industrial sectors has impacted our investments in JMJ and Dynatect. Reduced capital expenditure by oil and gas companies has continued to affect JMJ, which provides consultancy services to the sector. It has also had a negative effect on Dynatect, a specialist provider of protection equipment. Dynatect has a number of large customers which supply the capital goods sector, including oil and gas, in the US and suffered from reduced orders in 2015. Foreign exchange volatility has also hindered trading for a number of our companies and the decline in Russian consumer spending has had a negative impact on trading at our lingerie retailer, Agent Provocateur. However, the portfolio is performing well overall, with only a small minority of our investments seeing earnings decline in 2015. Value weighted earnings increased by 17% (2015: 19%) over the year.

The flow of realisations has continued and Private Equity realised total proceeds of £743 million (2015: £831 million). A supportive market for realisations in the first half of our financial year meant that we continued to make good progress in reshaping our portfolio. In total we disposed of 11 smaller or older assets in the year which freed up investment executive time to focus on origination and managing and ultimately maximising value in our stronger assets.

As we noted at the half-year, we have reached a point in the evolution of the portfolio where more of our realisations will come from our stronger assets. Despite a more challenging macro-economic environment for realisations in the second half of FY2016, we sold Element Materials Technology ("Element"), one of our largest and highest growth investments. Under 3i's ownership, Element completed and successfully integrated 10 acquisitions which also delivered an increase in EBITDA margin from 16% to 26%. As a result, revenue nearly trebled to c.US$290 million and EBITDA quadrupled to US$80 million. Total cash proceeds to 3i on the sale were £188 million with a money multiple of 3.9x (4.5x in euro). In total, cash returns were £217 million, including the refinancing completed in 2014. This was an excellent result and all credit to the management team at Element as well as our own Private Equity team.

Action completed a £1.2 billion senior debt refinancing, despite deteriorating conditions in the debt markets, in February 2016. Action's performance and strong cash generation meant it had been able to de-lever rapidly since its prior refinancing in 2015. Such is the strength of the Action proposition that we have already returned a 3.5x euro cash multiple on our original investment without reducing our equity ownership. This transaction contributed £168 million to the £185 million of realisations received from refinancings this year.

We closed the year with a strong realisation pipeline and post year end we announced the disposal of Amor, the market leader for medium price jewellery in Germany, for estimated proceeds of £89 million and 2.5x original euro cost (2.3x in sterling) as well as Mayborn, owner of the Tommee Tippee baby products brand, for £135 million (3.5x).

We have maintained the investment momentum seen in FY2015. In a competitive market, our pricing discipline is paramount but we were nevertheless able to secure three interesting new investment opportunities through careful and well managed processes. We invested £406 million (of which £365 million was 3i Group proprietary capital) in Weener Plastic Packaging Group ("Weener Plastic"), Euro-Diesel and Audley Travel as well as a further investment in ATESTEO (formerly known as GIF) through the buyout of the founding family's remaining interest.

The number of portfolio companies in Private Equity was 47 unquoted assets and five quoted stakes at 31 March 2016 (31 March 2015: 61 unquoted assets and four quoted stakes) and we remain on target to meet our medium-term objective of holding 30-40 Private Equity assets.

Finally, we reached an important milestone at 31 March 2016 with the accounting recognition of carry receivable for Eurofund V. This is an excellent achievement as the fund performance has recovered from a low point of 0.6x in 2009 to 1.7x at 31 March 2016.

The Infrastructure team built on FY2015's excellent performance and its core portfolio of European economic infrastructure assets continues to perform well and underpins good levels of income for the Group. The business generated cash income of £49 million (2015: £47 million) through its fund advisory and management activities and dividend income from 3i Infrastructure plc ("3iN"). The good portfolio performance also resulted in a NAV based performance fee for 3i of £20 million (2015: £45 million). In addition, 3i received a special dividend of £51 million (2015: nil) from 3iN following its sale of Eversholt Rail.

Against a backdrop of intense competition for infrastructure assets, and particularly for large core economic infrastructure assets, the team advised 3iN on a revised return target, announced in May 2015, and changed their investment focus towards mid-market economic infrastructure businesses and primary PPP and low-risk energy projects, which offer more attractive risk-adjusted returns. The new leadership team has made a number of senior hires, including a new origination partner, to support the strategic development and momentum of the business. The change in focus and high level recruitment has led to a material increase in origination activity. Infrastructure announced the completion of four new investments (two further terminals alongside Oiltanking, ESVAGT, the West of Duddon Sands Offshore Transmission Owner and a French PPP investment in Condorcet Campus) totalling £193 million in the year. 3iN also announced a £75 million investment in Wireless Infrastructure Group and a c.£154 million investment in TCR, Europe's largest independent asset owner of airport ground support equipment, in April 2016.

The success of the new investment strategy led to 3iN's announcement on 12 May 2016 of its intention to raise new equity of up to £350 million to fund new investments and its future pipeline. We have indicated our intention to support the transaction, and maintain our 34% interest in 3iN.

The Debt Management business had a successful year of fund raising in Europe and the US and AUM increased to £8.1 billion (31 March 2015: £7.2 billion). We closed four CLOs in the year, raising AUM of £1.3 billion (2015: £2.2 billion) of CLO AUM before negative investor sentiment around oil and gas, commodities and utilities effectively closed the US CLO market between January and March 2016. The European market, which generally has less exposure to these sectors, was impacted to a lesser degree, although it was effectively also closed for part of calendar Q1 2016. This market volatility has reduced the mark to market valuation of our CLO portfolio but, as long-term holders of CLO equity, our returns are ultimately driven by the cash flows, rather than short-term unrealised fair value movements.

The team continued to make important progress in diversifying the business and launched an open-ended senior debt fund, the Global Income Fund, with US$75 million of seed money from 3i. Both the Global Income Fund and the US Senior Loan Fund outperformed their benchmarks in the year. In total, Debt Management contributed £38 million of fee income (2015: £34 million) to the Group during the year.

One of the key components of our improved financial performance and resilience since 2012 has been a disciplined control over operating expenses. Although we have recruited selectively within our Private Equity and Infrastructure teams to support origination and business development activity, costs remain tightly controlled at 1% of AUM (2015: 1%). Cash income increased by 8% to £171 million (2015: £158 million) due to fee income and distributions from our three businesses. As a result, operating cash profit increased to £37 million (2015: £28 million).

Fragile market conditions create challenges and opportunities

Throughout FY2016, we operated through periods of significant economic, financial and geo-political volatility driven by concerns about Chinese growth and the significant falls in oil and commodity prices. Although the triggering events may change, we expect this volatility to continue to be a feature throughout FY2017 and beyond. This uncertainty is reducing M&A volumes and creates volatility in thin equity markets. Nevertheless, the private equity sector raised over $500 billion of new funds, increasing uninvested capital, or "dry powder", to a record level of $1.3 trillion in 2015 (source: Bain & Company Inc.).

In our Private Equity business, our systematic approach to planning for realisations allows us to be well prepared to maximise value in competitive processes and through the IPO market when conditions allow. The same factors drive our emphasis on the need to remain selective in making new investments. Our strategy of maintaining long-standing geographic teams with strong local relationships means we can often originate investments outside competitive processes and differentiate ourselves with management teams.

As we do not have the pressure of a future third-party fund mandate and timeline, we can step away from aggressive processes but act with flexibility and speed using our proprietary capital when suitable opportunities that meet our strict investment criteria arise. For example, in December 2015, we were able to move rapidly to secure the acquisition of Audley Travel by using the Group's strong balance sheet to underwrite the debt as well as provide the equity for this fast growing business. After securing the acquisition, we refinanced the debt facilities with a consortium of banks in January 2016.

Finally, our monthly portfolio monitoring process allows us to react promptly and decisively to indications that the wider market uncertainty is having a more direct effect on individual investment strategies, as it is bound to do given current weak growth in many sectors and geographies. This does not mean we can be completely immune to the markets in which we operate, but it substantially reduces the risk of material and realised losses that were a feature of 3i's past.

Our Infrastructure team has responded to the low yield environment by resetting its investment strategy away from the larger infrastructure assets and projects, which are attracting investors with lower return expectations. This has created a much more active pipeline of investment opportunities. Debt Management maintains an active trading approach to the underlying credit investments in its funds to minimise the risk of defaults. This, in turn, reinforces its successful credit management track record to support future fund raising.

Well positioned to deliver good returns to shareholders

We are navigating these challenging market conditions with a conservative and well-funded balance sheet. Our capital allocation approach is unchanged since we announced our strategy in 2012 and the progress.

The majority of our proprietary capital (83%) is invested in Private Equity. Our planned rate of new investment in Private Equity remains €500-€750 million in four to seven investments per annum. After allowing for this, we expect to remain a significant net divestor throughout the next five years, through a combination of re-shaping the portfolio and, more fundamentally, achieving our objective of generating at least a 2x money multiple on new investments.

We ended the year with a healthy cash position, out of which we will repay the 2017 €331 million bond (2016: £262 million) which matures on 17 March 2017. As we announced separately today, we intend to buy back the bond early to the extent there is investor appetite to do so. We also intend to support 3iN's equity fund raising.

In recognition of this year's strong performance, we have announced an increased total dividend for FY2016 of 22 pence per share (2015: 20 pence per share) and our strong balance sheet and capital allocation approach underpins the enhancement of our dividend policy going forward as set out in the Chairman's statement.

Outlook

Our restructuring and simplified strategy has re-established 3i as a more resilient business both commercially and financially. This clear and consistent approach with its emphasis on active asset management, cash generation and cost control has demonstrated its value over the last 12 months as macro-economic pressures and volatile debt and equity markets dampened market sentiment and challenged individual businesses. As an investment company, we also face the continual increase in financial and governance regulation which is often not appropriate for our specific circumstances and which inevitably leads to further cost and complexity for the Group.

We enter our new financial year with those challenging conditions still in place, but we remain confident that we can deliver another resilient performance. We must maintain our price and cost discipline and use the sector and geographic capabilities within our investment platforms to produce consistently strong returns for our shareholders and investment partners. This approach, along with our strong balance sheet and a proprietorial focus, gives us a fundamental competitive advantage in mid-market private equity and infrastructure investment and underpins our confidence in producing attractive financial returns. The mid-market is limited in the scale of opportunity within it but the breadth of our international platform and the long-term nature of our proprietary capital make 3i an attractive partner for management teams compared to many of our fund-financed competitors.

This was an excellent year for the Group and I would like to thank the 3i team for their good work and rigour. Our disciplined approach, capable investment and management teams and strong balance sheet underpin our objective of delivering mid to high-teens returns to shareholders, accompanied by attractive cash distributions.

Simon Borrows

Chief Executive

Our strategic objectives

To increase 3i's competitive advantage, we focus on opportunities where our sector and market expertise, combined with our strong capital position, can create material value for shareholders.

1 Last 12 months ("LTM") earnings in Private Equity companies valued on an EBITA/EBITDA basis (31 companies).

Key performance indicators

How we performed

For definitions, please see our glossary

Business review

Private Equity

"An excellent year with a gross investment return of 32%, good progress on realisations and three important new investments."

Alan Giddins and Menno Antal

Managing Partners and Co-heads of Private Equity

Business performance

Private Equity, the largest contributor to the Group's returns, delivered a strong performance in the year. The gross investment return of £1,011 million, or 32% on the opening portfolio (2015: £719 million, 24%), reflected the robust performance of our largest investments. The portfolio proved its resilience against a backdrop of volatile markets and difficult macro-economic conditions due to its strength and diversified nature. We continue to have no direct exposure to the energy and commodity sectors. The impact of the weak oil and commodity prices remains limited to a small number of assets with indirect exposure, such as JMJ and Dynatect. Weighted average earnings (including the benefit of portfolio acquisitions) increased by 17% in the last 12 months (2015: 19%) reflecting the continued strong growth trajectory in Action, as well as encouraging performance in a number of our newer investments.

Investment activity

The investment activity seen in FY2015 continued throughout FY2016. Although levels of M&A activity have moderated, particularly in the first quarter of the calendar year 2016, valuations remain high as there is still a substantial amount of capital searching for new investment opportunities. Importantly, we maintained our pricing discipline and invested £406 million, of which £365 million was proprietary capital.

We invested in three new businesses in the year; Weener Plastic, Euro-Diesel and Audley Travel. Alongside a co-investor who contributed €50 million, we invested €201 million in Weener Plastic, a manufacturer of plastic packaging systems headquartered in Germany. Euro-Diesel is a leading provider of stand-by diesel power supply systems, based in Belgium, in which we invested €71 million of proprietary capital. In December 2015, we invested £156 million in Audley Travel, a luxury provider of tailor-made travel experiences based in the UK. The initial investment included a £85 million bridging loan whilst Audley's existing facility was refinanced. The loan was repaid in full in January 2016; an excellent example of how our strong balance sheet can facilitate good investments in more volatile debt markets. In addition to these new investments, we also took the opportunity to purchase a minority stake in a 2013 investment, ATESTEO (formerly known as GIF) from the founding family.

Table 1: Private Equity cash investment in the year to 31 March 2016

Realisations activity

Market conditions were favourable for realisations in the first half of the 2015 calendar year, which enabled us to continue to divest 11 of our smaller or older assets. As we continue to reshape the portfolio, we expect more of our future realisations will be driven by our larger, stronger assets. In December 2015, we announced the disposal of Element at a euro money multiple of 4.5x (3.9x in sterling).

Realisations and refinancings generated aggregate proceeds of £743 million (2015: £831 million) in the year. Excluding refinancings of £185 million, which are usually recognised primarily as a repayment of shareholder loans or capital and therefore do not generate a material increase in value, this represented an uplift over opening value of £67 million, or 14% (2015: £144 million, 27%). The lower uplift reflects the fact that the majority of disposals were smaller or non-core assets, held on an imminent sales basis at 31 March 2015, or were from the quoted portfolio.

At 31 March 2016, there were 47 assets and five quoted stakes in the portfolio, down from 61 assets and four quoted stakes at 31 March 2015, and we remain on track to meet our longer-term objective of holding fewer than 40 Private Equity investments.

Table 2: Private Equity realisations in the year to 31 March 2016

Assets under management

Total AUM decreased to £3.5 billion in the year (31 March 2015: £3.8 billion), principally due to the continued net divestment activity. Encouragingly, the performance of Eurofund V ("EFV") and the Growth Capital Fund continued to improve, with gross money multiples at 31 March 2016 of 1.7x and 1.8x respectively (31 March 2015: 1.4x, 1.7x). The investments made in EFV's 2010-2012 investment period continue to show very strong performance, with a money multiple of 3.4x at 31 March 2016 (31 March 2015: 2.6x). The Growth Capital Fund benefited from the realisation of Labco and further disposals of Quintiles, a quoted holding. The value of 3i's Proprietary Capital increased to £3.7 billion in the year (31 March 2015: £3.1 billion) and, inclusive of third-party funds, increased to €6.8 billion (31 March 2015: €6.3 billion).

We concluded a review of our resources and investment opportunities during the year. As a result, we are planning for a reduction in our Nordic team while we seek to increase the size of the investment teams in some of our key geographies in Europe and the US.

Outlook

We remain focused on the investment pipeline for FY2017, sourcing attractive opportunities through our international team and network of advisers and business leaders, whilst maintaining price discipline. Conditions for M&A are expected to remain volatile and, whilst our portfolio companies cannot be immune to macro-economic pressures, our rigorous investment process and active portfolio management approach allows us to address such issues promptly.

Table 3: Private Equity assets under management at 31 March 2016

Infrastructure

"Infrastructure had a busy year in terms of business activity, demonstrating our ability to access attractive investment opportunities in a competitive market."

Ben Loomes and Phil White

Managing Partners and Co-heads of Infrastructure

The Infrastructure business performed well in the year, building on the strong result in FY2015 driven by the sale of 3iN's holding in Eversholt Rail. Infrastructure delivered a gross investment return of £47 million, or 8% on the opening portfolio (2015: £96 million, 20%). The business generated cash income of £49 million through its fund advisory and management activities and dividends received from 3iN (2015: £47 million). In addition, 3i received a £51 million special dividend from 3iN (2015: nil) following 3iN's sale of Eversholt Rail.

Investment Adviser to 3iN

To reflect the compression in market returns and the evolution of the composition of 3iN's underlying investment portfolio, 3iN's total return target was updated to between 8% and 10% to be delivered over the medium term (previously a 10% annual target) in May 2015. Given the competition for large core assets in the global infrastructure sector, the team has focused on sourcing mid-market economic infrastructure and greenfield projects across Europe. The team made good progress against these revised objectives and advised 3iN on four new investments in its target markets totalling £193 million (2015: £114 million) as well as the £75 million investment in Wireless Infrastructure Group, the c.£154 million investment in TCR and the c.£4 million investment in Hart van Zuid announced in April 2016. On 12 May 2016, 3iN announced its intention to raise new equity of up to £350 million to fund new investments and its future pipeline.

3iN has built an attractive portfolio of economic infrastructure assets across Europe which performed well and generated a strong total return of 14% in FY2016. In particular, the portfolio valuation benefited from positive regulatory developments for Elenia, an electricity distribution and district heating company based in Finland. This performance builds on the strong long-term performance of 3iN, which has delivered an annualised total shareholder return of 11.3% since its IPO in 2007.

Under the terms of the advisory agreement, 3i received an advisory fee of £16 million (2015: £16 million) and a NAV based performance fee of £20 million (2015: £45 million) from 3iN, of which £15 million (2015: £34 million) was accrued as payable to the team.

Business performance

3iN performance

In addition to being its investment adviser, 3i holds a 34% (31 March 2015: 34%) stake in 3iN. Reflecting its strong positioning, 3iN's share price continued to perform well in a year of equity market volatility and generated a total shareholder return of 13%.

3i's investment in 3iN contributed £33 million of unrealised value (2015: £77 million) and £21 million of dividend income (2015: £20 million). In July 2015, 3iN also paid a £150 million special dividend to shareholders, following its sale of Eversholt Rail. 3i's share of the special dividend, £51 million, was treated as realised proceeds.

Assets under management

The Infrastructure AUM decreased to £2.4 billion (31 March 2015: £2.5 billion) principally due to the payment of the special dividend from 3iN. In addition, the performance of the assets in the India Infrastructure Fund remained weak; the economic environment and ongoing depreciation of the rupee against the US dollar, in which the fund is denominated, resulted in a £11 million reduction in the value of 3i's direct share of the 3i India Infrastructure Fund to £53 million (31 March 2015: £64 million).

Outlook

The team's focus on origination and asset management capabilities together with a healthy pipeline of attractive investment opportunities across our target markets means that the business remains well placed to continue its current good performance and to grow its assets under management through selective investment.

Table 4: Infrastructure assets under management at 31 March 2016

Debt Management

"A solid year with four new CLOs and a new fund launch, despite volatility in the credit markets."

Jeremy Ghose

Managing Partner and CEO, 3i Debt Management

Business performance

The Debt Management team continued to make good progress in fund raising despite more volatile conditions for CLO issuance. AUM increased to £8.1 billion (31 March 2015: £7.2 billion) as good levels of fund raising activity and favourable foreign exchange rates more than offset the impact of the run off of older funds. An important source of operating cash income, the business generated £38 million of fee income in the year (2015: £34 million) and portfolio income of £35 million (2015: £21 million).

The pricing of debt instruments has been subject to significant volatility since the middle of 2015, particularly in the US, due to increased credit concerns about specific sectors such as oil and gas, metals and mining, energy and utilities. The European market, which generally has more limited exposure to oil and gas and metals and mining, experienced less volatility. As long-term holders of CLO equity positions, our returns are ultimately driven by the cash flows and the realised default and loss rates in the portfolio, rather than short-term unrealised fair value movements, but we remain subject to the impact of mark-to-market volatility.

Fund raising activity

Debt Management made good progress, particularly in the first half of our financial year, in generating new AUM.The team closed two CLOs in Europe, Harvest XII and Harvest XIV, and two in the US, Jamestown VII and Jamestown VIII, raising a total of £1.3 billion new CLO AUM. CLO issuance slowed significantly in the second half of our financial year. US CLO issuance in the three months to 31 March 2016 was 25% of the prior year CLO volumes. However, following an improvement in sentiment from March 2016, prices are recovering and our latest European CLO, Harvest XV, priced at the end of March and closed on 12 May 2016. We also had an open CLO warehouse vehicle in the US in anticipation of launching the first US CLO of FY2017.

Following on from the successful launch of the European Middle Market Loan Fund, we continued to diversify our product offering and launched a new Global Income Fund with US$75 million of seed capital from 3i. The fund is an open-ended senior debt fund that invests across the US and Europe and, as at 31 March 2016, had AUM of US$188 million. The US Senior Loan Fund also continued to perform strongly, outperforming its benchmarks, and AUM increased to US$178 million (31 March 2015: US$157 million).

Proprietary Capital investment

Including the US$75 million seed capital contributed to the Global Income Fund, we had £229 million (31 March 2015: £176 million) of proprietary capital invested in the Debt Management business at 31 March 2016. 3i is required to hold a minimum 5% stake in the European CLOs it manages. We also structure our US CLOs in anticipation of the implementation of similar risk retention rules in the US in December 2016. Our ability to comply with the risk retention rules is important as it is now a prerequisite for managers, even in the US, to demonstrate compliance with the regulatory rules.

In addition to the investments 3i makes in the CLOs for regulatory reasons, 3i is also the first loss investor in the majority of the warehouse facilities used to accumulate loans prior to the launch of a CLO. At 31 March 2016, the total invested by 3i in these facilities was £17 million (31 March 2015: £43 million).

Table 5 details cash investment in the year.

Table 5: Debt Management cash investment in the year to 31 March 2016

Outlook

The underlying credit performance of the portfolios underpinning our CLOs and other funds remains sound, with metrics outperforming market benchmarks despite the challenging year. Given our strong relationships with investors and ability to meet current and future fund risk retention requirements, we are in a good position to continue launching new CLOs and raising funds, if market conditions permit and returns are sufficiently attractive.

Risk management

Effective risk management underpins the successful delivery of our strategy. Integrity, rigour and accountability are central to our values and culture at 3i and are embedded in our approach to risk management.

Understanding our risk appetite and culture

As both an investor and asset manager, 3i is in the business of taking risk in order to seek to achieve its targeted returns for investors and shareholders. The Board approves the strategic objectives that determine the level and types of risk that 3i is prepared to accept. The Board reviews 3i's strategic objectives and risk appetite at least annually.

In order to support its institutional asset management capability, 3i's risk appetite policy is built on rigorous and comprehensive investment procedures and conservative capital management.

Culture

Integrity, rigour and accountability are central to our values and culture and are embedded in our approach to risk management. Our Investment Committee which has oversight of the investment pipeline development and approves new investments, significant portfolio changes and divestments, is integral to embedding our institutional approach across the business. It ensures consistency and compliance with 3i's financial and strategic requirements, cultural values and appropriate investment behaviours. Members of the Executive Committee have responsibility for their own business or functional areas and the Group expects individual behaviours to meet the Group's high standards of conduct. All employees share the responsibility for upholding 3i's strong control culture and supporting effective risk management. Senior managers, typically those who report to Executive Committee members, are required to confirm their individual and business area compliance. In addition, all staff are assessed on their compliance with the Group values as part of their annual appraisal.

The following sections explain how we control and manage the risks in our business. It outlines the key risks, our assessment of their potential impact on our business in the context of the current environment and how we seek to mitigate them.

Risk management

Approach to risk governance

The Board is responsible for risk assessment, the risk management process and for the protection of the Group's reputation and brand integrity. It considers the most significant risks facing the Group and uses quantitative analyses, such as the vintage control which considers the portfolio concentration by revenue, geography and sector, and liquidity reporting, where appropriate.

Non-executive oversight is also exercised through the Audit and Compliance Committee which focuses on upholding standards of integrity, financial reporting, risk management, going concern and internal control.

The Board has delegated the responsibility for risk oversight to the Chief Executive. He is assisted by the Group Risk Committee ("GRC") in managing this responsibility, guided by the Board's appetite for risk and any specific limits set. The GRC maintains the Group risk review, which summarises the Group's principal risks, associated mitigating actions and key risk indicators, and identifies any changes to the Group's risk profile. The risk review is updated quarterly and the Chief Executive provides quarterly updates to each Audit and Compliance Committee meeting where the Committee members contribute views and raise questions. The last risk review was completed in May 2016.

The risk framework is further augmented by a separate Risk Management Function which has specific responsibilities under the European Alternative Investment Fund Managers Directive ("AIFMD"). It meets ahead of the GRC meetings to consider the key risks impacting the Group, and any changes in the relevant period where appropriate. It also considers the separate risk reports for each AIF managed by the Group, including areas such as portfolio composition, portfolio valuation, operational updates and team changes, which are then considered by the GRC.

Assurance over the robustness and effectiveness of the Group's overarching risk management processes and compliance with relevant policies is provided to the Audit and Compliance Committee through the independent assessment by Internal Audit and the work of Group Compliance on regulatory risks.

Assurance over the robustness of the Group's valuation policy is provided by the Valuations Committee.

Risk management framework

The Group's risk management framework is designed to support the delivery of the Group's strategic objectives.

The key principles that underpin risk management in the Group are:

- The Board and the Executive Committee promote a culture in which risks are identified, assessed and reported in an open, transparent and objective manner; and

- The over-riding priority is to protect the Group's long-term viability and reputation and produce sustainable, medium to long-term cash-to-cash returns.

Managing the Group's Environmental, Social and Governance ("ESG") risks is central to how we do business and a key part of our risk management framework. It also forms part of our half-yearly portfolio company reviews as described in the Valuations Committee report in the Annual report 2016.

In practice, the Group operates a "three lines of defence" framework for managing and identifying risk. The first line of defence against outcomes outside our risk appetite is the business function and the respective Managing Partners across Private Equity, Infrastructure and Debt Management.

Line management is supported by oversight and control functions such as finance, human resources and legal which constitute the second line of defence. The Compliance function is also in the second line of defence; its duties include reviewing the effective operation of our processes in meeting regulatory requirements.

Internal Audit provides independent assurance over the operation of controls and is the third line of defence. The internal audit programme includes the review of risk management processes and recommendations to improve the internal control environment.

Risk review process

The Group risk review process includes the monitoring of key strategic and financial metrics considered to be indicators of potential changes in the Group's risk profile. The review includes, but is not limited to, the following reference data:

- Financial performance and strategic dashboards 

- Vintage control and asset allocation analysis 

- Macro-economic and M&A market overview 

- Liquidity management 

- Capital adequacy, including stress testing 

- Operating expenses 

- Portfolio performance reports for Private Equity, Infrastructure and Debt Management 

- Risk reports for managed AIFs 

- Quarterly Group risk log

In addition to the above, the GRC considers the impact of any changes and developments in its risk profile, strategic delivery and reputation quarterly.

The GRC uses the above to identify a number of key risks. It then evaluates the impact and likelihood of each key risk, with reference to associated measures and key performance indicators. The adequacy of the mitigation plans is then assessed and, if necessary, additional actions are agreed and then reviewed at the subsequent meeting.

A number of focus topics are also agreed in advance of each meeting. In FY2016, the GRC covered the update to the Group's IT strategy; 3i's approach to ESG especially with respect to its portfolio companies; business continuity and cyber security; an update on the implementation of Infrastructure's revised strategy, as well as the changes to the UK Corporate Governance Code and relevant risks for 3i associated with the UK EU referendum.

There were no significant changes to the Group's approach to risk governance or its operation in FY2016 but we have continued to refine our framework for risk management and reporting where appropriate.

Further details on 3i's approach as a responsible investor are available at www.3i.com

Review of principal risks

The disclosures on the following pages are not an exhaustive list of risks and uncertainties faced by the Group, but rather a summary of those principal risks which are under active review by the GRC and Board, and are believed to have the potential to affect materially the achievement of the Group's strategic objectives and impact its financial performance, reputation and brand integrity.

The Group's risk profile and appetite remain broadly stable. Although the economic outlook deteriorated and market volatility and uncertainty increased in the second half of our financial year, the Group's overall risk profile has not changed significantly. The Group believes that its consistent strategy of focusing on core sectors and geographies, its institutional process-led approach to investment and strong culture have helped it to maintain its stable risk profile.

External

The external environment remains difficult. There has been a significant amount of uncertainty in the Eurozone and the wider emerging markets' economies fuelled by a challenging global macro-economic context and ongoing geo-political tensions, including the UK referendum on EU membership. In addition, there is also some evidence of softening of US and Eurozone growth rates. The Group continues to monitor all of these events closely.

The Group is subject to a range of regulatory and tax reporting requirements which continue to evolve. These include the AIFMD, regulations under the European Market Infrastructure Regulation ("EMIR"), Capital Requirements Directive IV ("CRDIV"), the FCA's Client Asset rules ("CASS"), the Foreign Account Tax Compliance Act ("FATCA") and the OECD's Common Reporting Standard. These developments have resulted in increased reporting requirements, operational complexity and operational cost to the business. Managing these regulatory requirements is a key priority and they are the subject of regular updates to Executive Committee and the Board. To date, they have had limited practical impact on 3i's ability to deliver its strategy.

Looking forward, although the Base Erosion and Profit Shifting ("BEPS") proposals have now been published, it is not clear how individual countries will implement these proposals and the timing and extent of implementation as they do. The UK is already in the process of changing its domestic tax rules and implementing certain BEPS actions such as country-by-country reporting and limiting the tax deductibility for interest expense. The OECD has indicated that further detail on some of the proposals will be published in 2016. The Group continues to monitor developments carefully and intends to comply with new rules as and when they are implemented.

Investment

Being an investment company, there are a number of significant risks that impact our ability to achieve our strategic objectives. Firstly our ability to source attractive investment opportunities at the right price is critical. The investment case presented at the outset will include the expected benefit of operational improvements, growth initiatives and M&A activity that will be driven by our active management approach, together with the portfolio company's management team. It will also include a view on the likely exit strategy and timing. The execution of this investment case is monitored through our monthly portfolio monitoring and our semi-annual reviews which focus on longer term and strategic developments. Alongside this we need to recognise the need to plan and execute a successful exit at the optimum time for the portfolio company's development after taking account of market conditions. These risks are closely linked to the economic environment noted above. To mitigate these risks, we focus on sectors and geographies where our expertise and network can drive significant outperformance.

In addition, there are a number of risks specific to each business line as follows:

Private Equity

Regular and robust portfolio monitoring procedures remain critical given the volatile economic backdrop and as the investment portfolio becomes more concentrated. The Private Equity partners hold a detailed monthly portfolio monitoring meeting that is attended by the Group Chief Executive and the Group Finance Director. In addition, the Valuations Committee review the valuation assumptions of our more material assets quarterly. Individual portfolio company failures could have adverse reputational consequences for the Group, even though the value impact may not be material.

Infrastructure

3iN announced an amended total return target of 8% - 10% per annum over the medium term in May 2015 (previously a 10% annual target) as strong investor demand for yield was impacting the business' ability to maintain investment rates in quality assets. Infrastructure remains focused on investing selectively within its target sectors and developing both organic and inorganic growth opportunities. In addition, its engaged asset management approach supports many of the investments in the economic infrastructure and project portfolios.

Debt Management

The principal risks are the ability to grow AUM profitably in line with its business plan and to mitigate negative impact on returns. The business is exposed to volatility in the credit markets and the challenging market conditions in the US have negatively impacted valuations of our CLO equity in FY2016. Our teams manage the underlying credit portfolios very actively which, in some cases, might include taking early losses in volatile markets, if appropriate. Due to the introduction of risk retention rules in Europe (effective 2011) and the US (effective December 2016), we are required, as managers, to take minimum positions in the CLO funds we manage. In addition, during the warehouse phase of establishing CLOs, the Group is exposed to market volatilities and the potential for further capital calls.

Operational

One of the key areas of increased potential operational risk is cyber security. In response to this growing threat, management engaged KPMG to conduct an independent review on the adequacy of the Group's ability to prevent, detect and respond to cyber security threats. In addition, the Group rolled out a cyber security training course for all staff and refreshed information security policies and incident management processes. The Group also conducted a wider review of its business continuity and resilience capabilities. The findings and proposed enhancements from these various workstreams were discussed at GRC and are being implemented across the Group.

The Board also received regular updates on ESG risks and whether our investors' skill sets and business development capabilities could support the Group's strategic delivery. Detailed resource plans are in place at the business line level and the Board conducts an annual review of the Group's organisational capability and succession plans (which include contingencies against loss of key staff). The last review was conducted in September 2015.

Financial review

"Another year of robust results with each business continuing to perform well."

Julia Wilson

Group Finance Director

The table below summarises our key financial data under the Investment basis.

Table 6: Summary financial data

Basis

3i prepares its statutory financial statements in accordance with IFRS. The introduction of IFRS 10 in 2014 was important for investment companies such as 3i, as the investment entity exception it contained eliminated the risk of having to consolidate portfolio investments. However, consistent with previous years, we also report using a non-GAAP "Investment basis", as we believe it aids users of our report to assess the Group's underlying operating performance. Total return and net assets are the same under the Investment basis and IFRS and we provide more detail on IFRS 10, as well as a reconciliation of our Investment basis financial statements to the IFRS financial statements.

Total return

The Group generated a total return of £824 million, or a profit on opening shareholders' funds of 21.7% (2015: £659 million or 19.9%) in the year as the robust performance of its underlying portfolio more than offset the impact of volatile market conditions. The Proprietary Capital business delivered a gross investment return of £1,069 million (2015: £805 million) and an operating profit before carry of £920 million (2015: £721 million), underpinned by the strong performance of its portfolio companies as well as by the strengthening of the euro and US dollar against sterling. Fund Management operating profit before carry was £20 million (2015: £26 million). Further detail regarding the performance during the year is provided below.

Table 7: Total return for the year to 31 March

1 Includes restructuring costs of nil (2015: nil) and £5 million (2015: £1 million) for Proprietary Capital and Fund Management respectively.

Proprietary capital returns

Operating profit before carry on our Proprietary Capital was £920 million (2015: £721 million) and was underpinned by strong value growth in the portfolio and positive foreign exchange movements which partly reversed negative foreign exchange movements incurred in 2014 and 2015.

By business line, gross investment return on opening portfolio value was 32% for Private Equity (2015: 24%), 8% for Infrastructure (2015: 20%) and 6% for Debt Management (2015: loss of 7%). Private Equity accounted for 83% of the Proprietary Capital portfolio at 31 March 2016 (31 March 2015: 81%) and remains the primary driver of Proprietary Capital returns.

Realised profits

Exit momentum continued in the year to 31 March 2016 with realisation proceeds of £796 million (2015: £841 million) generating realised profits of £72 million (2015: £162 million). Realisations, excluding refinancings, were achieved at an uplift over opening value of 13%, (2015: 27%), due to a number of assets being valued on an imminent sales basis at the beginning of the year and the sale of quoted stakes.

The majority of the realisations were from the Private Equity portfolio, which contributed £743 million (2015: £831 million) of this, including £185 million of refinancing proceeds (2015: £155 million). Refinancing proceeds of £168 million were generated by Action, whose strong cash generation meant it had delevered rapidly since its refinancing in January 2015. Private Equity proceeds also included the sale of Element for £179 million and £111 million from sales of our quoted stakes. Table 2, in the Private Equity section, details the Private Equity realisations in the year and sets out the accounting uplift reflected in this year's total return and the longer-term cash-to-cash results. The Private Equity realisations, including refinancings and partial disposals completed in the year, have generated a money multiple of 2.6x over their investment life.

Proceeds of £51 million were received from 3iN, via a special dividend, following the completion of the sale of its holding in Eversholt Rail, and these were treated as realised proceeds.

Unrealised value movements

The unrealised value movement of £669 million (2015: £684 million) was driven by the continued strong performance of a number of our key assets, which more than offset market-driven weakness in a small number of portfolio companies. Table 8 summarises the revaluation movement by category and each category is discussed further below.

Table 8: Unrealised profits/(losses) on revaluation of investments for the year to 31 March

Private Equity unrealised value growth

The Private Equity portfolio performed strongly with value growth of £690 million in the year (2015: £641 million). This was underpinned by good value weighted earnings growth of 17% (2015: 19%) and a weighted multiple increase of 10% (2015: 6%), following the re-rating of a small number of our assets. Net debt declined to 2.9x EBITDA (31 March 2015: 3.1x) notwithstanding the fact that Action took advantage of its strong cash generation capability to take on additional debt at favourable terms. The majority of the portfolio (84% by value, 2015: 93%) grew its earnings in the year and our larger and more recent investments continue to perform very well.

Performance

Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £460 million (2015: £417 million). Value weighted earnings increased by 17% in the year (2015: 19%). Action, our largest asset with over 30% earnings growth in the 12 months to December 2015, is the biggest contributor to this measure. Excluding Action, the value weighted earnings growth was lower at 7% (2015: 16%) principally due to the sale of Element, one of our largest assets with high growth supported by its buy and build strategy and the impact of macro-economic challenges, such as the oil and commodity price pressure, seen in a small number of portfolio companies (JMJ, Dynatect, Agent Provocateur, AES and Etanco). In addition, acquisitions by our portfolio companies were fewer this year and therefore the contribution from acquisitions to earnings growth in 2016 was lower (2015: 2% of the 19% growth).

Table 9: Portfolio earnings growth weighted by March 2016 carrying values1

Table 10: Ratio of debt to EBITDA - Private Equity portfolio weighted by March 2016 carrying values1 (£m)

The value of a small number of investments was impacted by company and geography specific issues. In total, value reductions of £64 million, in relation to seven assets, offset the otherwise strong performance (2015: £44 million, seven assets). The largest single negative movement related to JMJ, a leading safety management consultancy with a particular focus on major capital projects for the oil and gas industry. We recognised a £19 million value reduction on this investment in the year.

Forecast earnings, used when the outlook is lower than the last 12 months' data, were used for only two investments at 31 March 2016, representing 7% of the portfolio by number and 3% by value (31 March 2015: two, 6% by number and 3% by value). Table 9 shows the earnings growth rates across the portfolio.

In the case of Action, EBITDA for valuation purposes is adjusted to reflect its run-rate performance. Action is growing strongly due, in part, to its successful store roll-out programme. We consider that this run-rate methodology reflects fairly the high growth characteristics of this business, and therefore its maintainable earnings. At £902 million (31 March 2015: £592 million), net of the £168 million refinancing in January 2016, Action is the largest Private Equity investment by value, representing 24% of the Private Equity portfolio (31 March 2015: 19%).

We took the opportunity to refinance the debt of Action and Geka, both increasing and extending the maturity of portfolio debt, with 82% of the overall portfolio debt now repayable in 2018 or later (31 March 2015: 81% in 2017 or later). Table 10 shows the ratio of net debt to EBITDA weighted by portfolio value.

Multiple movements

The weighted average EBITDA multiple of the Private Equity portfolio assets valued on an earnings basis increased from 11.2x at 31 March 2015 to 12.3x at 31 March 2016 before liquidity discount, and from 10.5x to 11.5x after liquidity discount, resulting in a positive movement in the year of £95 million (2015: £64 million). Due to another year of strong performance against its comparable set, we reviewed Action's EBITDA multiple and increased it by 0.5x to 14.7x pre-liquidity discount and 14.0x post discount (31 March 2015: 14.2x, 13.5x). Based on the run-rate earnings and capital structure at 31 March 2016, a 1.0x movement in the EBITDA multiple applied would increase or decrease Action's value by £86 million. Excluding Action, the weighted average EBITDA multiple increased to 10.8x before liquidity discount (31 March 2015: 10.1x) and was 10.1x after liquidity discount (31 March 2015: 9.3x). We also increased the multiple used to value Basic-Fit to reflect its strong performance, significant capital investment programme and a positive market environment for discount gym operators more generally.

We continued to adjust multiples lower in 17 out of the 29 companies (31 March 2015: 22 out of 33) valued on an earnings basis. As a matter of policy, we select an appropriate multiple for each investment based on a comparable set of quoted companies and adjust these comparable multiple sets with discounts and occasionally premiums to take account of relevant size, sector, growth and cycle considerations as appropriate. Against a volatile market backdrop, we continued to apply a relatively high level of adjustments to reflect our caution about longer-term and sector multiple trends rather than taking an average of the quoted comparable sets.

The pre-discount multiples used to value the portfolio ranged between 6.5x and 14.7x and post-discount multiples ranged from 5.5x to 14.0x.

Imminent sale

The exit processes for Amor and Mayborn were sufficiently progressed to value on an imminent sales basis at 31 March 2016. The uplift to imminent sale was £13 million (2015: £22 million). Both sales were announced post year end and are expected to complete by the end of June 2016.

Discounted cash flow

The largest investment valued using DCF in the Private Equity portfolio is Scandlines, the Danish/German ferry group, which increased in value by £122 million (2015: £94 million). Scandlines' largest ferry route, Rødby-Puttgarden, is expected to have direct competition from a new tunnel (the Fehmarn Belt project) at some point in the future. In light of recent public commentary and developments around expected potential delays to the opening of this new tunnel, we revised our assumption as to the tunnel opening date by three years since 31 March 2015 and two years since 30 September 2015. This change, combined with a reduction in the Weighted Average Cost of Capital ("WACC"), were the primary drivers of the increase in the value of our investment in Scandlines in the year.

Quoted portfolio

The Private Equity quoted portfolio, including IPOs completed in the year, generated an unrealised value reduction of £7 million (2015: £46 million gain) principally driven by our holding in Hong Kong listed Dphone. Table 11 details the movement in the year and closing quoted portfolio.

Infrastructure unrealised value movement

The Infrastructure portfolio consists primarily of our 34% holding in 3iN. 3iN continued to perform well during the year, as it has an attractive portfolio of core European assets. 3iN generated value growth of £33 million (2015: £77 million) for 3i Group in the year, driven by an 8% increase in the share price to 173 pence (2015: 160 pence, 19% increase) and a total shareholder return of 13%. This was offset by further modest falls in the value of the Indian Infrastructure portfolio of £12 million (2015: £9 million) as the investments continued to face a number of challenges.

Debt Management unrealised value movement

The Debt Management Proprietary Capital portfolio consists principally of CLO equity and at 31 March 2016, 3i had invested £151 million of proprietary capital in CLO equity (31 March 2015: £117 million). The remaining Debt Management portfolio is comprised of direct investments in CLO warehouses, the Global Income Fund and the Senior Loan fund.

The mark-to-market valuation of the CLO equity portfolio reduced by £43 million (2015: £25 million) and there were a number of other factors which contributed to this movement. We received £31 million (2015: £16 million) of cash distributions from CLO equity, which is included in portfolio income, resulting in an associated value reduction. Broker quotes, which are used to support CLO valuations, reflected general market concerns about liquidity and investor risk appetite. In the US in particular, negative investor sentiment around the oil and gas, commodities and utilities sectors impacted valuations significantly. The underlying cash flows of the CLOs remain sound, and our longer-term view of returns remains positive.

Table 11: Quoted portfolio movement for the year to 31 March 2016

Portfolio income

Portfolio income increased by 24% to £140 million (2015: £113 million) of which £93 million was received in cash (2015: £80 million). Dividends of £71 million were received (2015: £45 million), including £31 million from CLO investments (2015: £16 million), £21 million from 3iN (2015: £20 million) and £18 million from Private Equity (2015: £9 million). Interest income totalled £63 million (2015: £62 million), with £59 million (2015: £56 million) generated from Private Equity investments and £4 million (2015: £6 million) generated from investments held in Debt Management warehouses.

Net portfolio fees of £6 million were recognised during the year (2015: £6 million) from new Private Equity investments and monitoring fees.

Net foreign exchange movements

The net foreign exchange gain of £157 million in the year (2015: £114 million loss) reflects the translation of non-sterling denominated portfolio assets and non-portfolio net assets, including cash and gross debt held at the balance sheet date. This movement reflects the strengthening of the euro (9.1%) against sterling over the year.

The net assets of the Group by currency and the sensitivity for further currency movements are shown in Table 12 below.

Table 12: Net assets of the Group by currency and sensitivity at 31 March 2016

Proprietary Capital costs

A proportion of the Group's operating expenses that are assessed as having been incurred in running a regulated and listed investment trust are allocated to Proprietary Capital. These costs include 100% of costs in relation to the CEO and Group Finance Director and elements of finance, IT, property and compliance. Operating expenses were broadly stable at £31 million (2015: £32 million) as the Group continued to manage costs closely.

Synthetic fees, the internal fee payable to the Fund Management business for managing the Group's Proprietary Capital, of £44 million (2015: £45 million) reflect the lower level of Proprietary Capital being managed as a result of net divestment activity, predominantly in Private Equity.

Net interest payable

Gross interest payable declined to £47 million (2015: £49 million) due to the reduced costs associated with the revolving credit facility which was refinanced in September 2014.

The current gross debt position is detailed further in the Balance sheet section of this Financial review and in Note 7 of the financial statements.

Cash interest received increased marginally to £4 million (2015: £3 million).

Fund Management returns

This year the Board agreed to remove Fund Management profitability as a KPI. While Fund Management profitability is still monitored when managing the individual business lines to ensure cost discipline, our decision not to raise a new Private Equity fund means that it is no longer expected to be a material driver of the Group's performance.

The Group's Fund Management income is driven by total AUM, which was £14.0 billion at 31 March 2016 (31 March 2015: £13.5 billion). The closing of four CLOs and the launch of the Global Income Fund, and further commitments to the European Middle Market Fund and US Senior Loan Fund in the Debt Management business offset a fall in AUM arising from net divestment activity in Private Equity and the special dividend from 3iN. The proportion of third-party assets under management increased marginally to 76% (31 March 2015: 75%).

The Fund Management business generated an operating profit before carry of £20 million and an operating profit margin of 16% (2015: £26 million, 21%). Fee income declined marginally to £123 million (2015: £125 million) due to reduced third-party Private Equity AUM. Operating expenses increased marginally to £103 million (2015: £99 million), principally due to the redundancy costs noted in the Private Equity business line section.

Table 13: Fund Management profit for the year to 31 March

Table 14: Carried interest and performance fees by business line for the year to 31 March

Carried interest and performance fees payable

Our largest Private Equity fund, Eurofund V, which includes investments made in 2007-12, reached its performance hurdle on a valuation basis in FY2016. We have seen a strong recovery in the fund's multiple to 1.7x (31 March 2015: 1.4x) principally due to the performance of Action and Scandlines, as well as the realisations of Element and Amor. As a result, we are now accruing carried interest receivable from this fund for the first time and £63 million was recognised in the year (2015: nil). This is calculated assuming that the portfolio was realised at the 31 March 2016 valuation.

We pay carried interest to our investment teams on proprietary capital invested and share a proportion of carried interest receivable from third-party funds. In Private Equity, we typically accrue carried interest payable at between 10-15% of gross investment return. The improved performance over the last 12 months means that 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 31 March 2016 valuation. We accrued carried interest payable of £171 million (2015: £103 million) for Private Equity in the year, of which £48 million relates to the team's share of carry receivable from Eurofund V (2015: nil).

3iN pays a performance fee based on 3iN's NAV on an annual basis, subject to a hurdle rate of return and a high-water mark. The continued good performance of the European assets held by 3iN resulted in the recognition of £20 million of performance fees receivable in the year (2015: £45 million). Carry payable to the Infrastructure team of £15 million (2015: £35 million) has been accrued.

Carry is only paid once the hurdles are passed in cash terms and the cash proceeds are actually received following a realisation or refinancing event. During the year, £15 million was paid (2015: £7 million).

In total at 31 March 2016, balance sheet carried interest and performance fees payable increased to £404 million (31 March 2015: £227 million) and the receivable increased to £122 million (31 March 2015: £88 million).

Pension

The valuation of assets of the Group's defined benefit pension schemes was impacted by the volatility in financial markets during the year. The liability of the Group's defined benefit pension scheme declined in the year following an increase in the discount rate. On a net basis, these movements resulted in a re-measurement loss of £6 million (2015: £14 million loss) for the year. On an IAS19 basis the pension scheme remains in a significant surplus.

The 2013 triennial valuation of the UK defined benefit pension scheme was completed in March 2014. It resulted in a very small surplus and consequently no further contributions were made, or are planned, as a result of this valuation. The next triennial valuation will be based on the pension scheme's funding position at 30 June 2016.

We launched a programme to offer our members flexibility in how they take their pension benefits following the implementation of HM Treasury's "Freedom and Choice in Pensions" changes. This included providing financial advice and a range of options for deferred and pensioner members.

Tax

The Group's parent company is an approved investment trust company for UK tax purposes. Approved investment trust companies are used as investment fund vehicles. The tax exemption for capital profits from which they benefit ensures that investors do not suffer double taxation of their investment returns. The majority of our returns are capital returns for tax purposes (realised profits, fair value adjustments and impairment losses) and are substantially non-taxable. As a result, the Group's tax charge in the year was nil (2015: £4 million).

Operating cash profit

Table 15: Operating cash profit for the year to 31 March

1 Operating expenses are stated on an accrual basis.

2 Operating cash profit in FY16 has not been adjusted for restructuring costs.

Third-party fees received remained broadly flat during the year, as the launch of four Debt Management CLOs and the Global Income Fund largely offset the reduction in fees from our Private Equity funds. Increased investment into cash yielding Debt Management funds has generated good income and the Private Equity portfolio generated a higher level of dividend income. Consequently, the Group was able materially to improve its operating cash income to £171 million (2015: £158 million) despite the net divestment activity in Private Equity.

Total operating expenses increased by 2% to £134 million (2015: £131 million), while restructuring costs, which comprise redundancy, office closures and organisational changes, increased to £5 million (2015: £1 million). Excluding restructuring and redundancy costs, operating expenses were stable at £129 million (2015: £130 million) despite some strategic recruitment into our investment teams in the second half of the year. Operating expenses as a percentage of weighted average AUM remained stable at 1.0% (2015: 1.0%), as a result of the continuing cost focus. We expect costs to rise marginally as we continue to grow the business, increase activity and deal with increased regulation, but we expect costs to remain at c.1.0% of AUM.

In total, the operating cash profit position, including this year's restructuring costs, increased significantly to £37 million (2015: £28 million).

Cash flow

Investment and realisations

Proceeds from realisations were £796 million (2015: £841 million), of which £25 million was receivable at 31 March 2016. Cash proceeds of £771 million were offset partly by cash investment of £453 million (2015: £474 million) and resulted in net cash inflow of £318 million (2015: £367 million). A further £99 million of investment was non-cash due to capitalised interest (2015: £140 million) and total investment was £552 million (2015: £614 million).

Further detail on investment and realisations is included in the relevant business line sections.

Table 16: Investment activity - Proprietary Capital and Third-party Capital for the year to 31 March

Balance sheet

Table 17: Simplified balance sheet as at 31 March

The proprietary capital portfolio increased to £4,497 million at 31 March 2016 (31 March 2015: £3,877 million) as cash investment of £453 million, unrealised value growth of £669 million and foreign exchange movements of £188 million outweighed the good level of realisations.

Gross debt includes a euro denominated bond of £262 million (31 March 2015: £240 million) which matures on 17 March 2017. We expect to repay that bond out of cash resources.

Net divestment activity and an operating cash profit led to cash and deposits on the balance sheet increasing to £1,002 million (31 March 2015: £864 million). After allowing for an increase in the sterling equivalent of the 2017 euro denominated bond, the Group was in a net cash position of £165 million at 31 March 2016 (31 March 2015: £49 million net cash). Gearing remained at nil at 31 March 2016 (31 March 2015: nil).

Liquidity

Liquidity remained strong at £1,352 million (31 March 2015: £1,214 million) and comprised cash and deposits of £1,002 million (31 March 2015: £864 million) and undrawn facilities of £350 million (31 March 2015: £350 million).

Foreign exchange hedging

Although derivatives are not used to hedge currency movements on a portfolio basis, we do hedge individual investment acquisitions or divestments where appropriate. Foreign exchange risk is considered an integral part of the investment process.

Diluted NAV

The diluted NAV per share at 31 March 2016 was 463 pence (31 March 2015: 396 pence). This was driven by the total return in the year of £824 million (2015: £659 million) and partially offset by dividend payments in the year of £190 million, or 20.0 pence per share (2015: £183 million, 19.3 pence per share).

Dividend

The Board has declared a total dividend of 22 pence (2015: 20.0 pence) for 2016. This comprises an 8.1 pence base dividend and a 13.9 pence additional dividend. Due to our current net divestment activity and robust balance sheet, we have proposed an additional dividend above the top end of our 15%-20% distribution range, that will result in the total dividend for 2016 being 27% of gross cash realised proceeds. Following payment of an interim dividend of 6.0 pence per share in January 2016, and subject to shareholder approval, we will pay the final dividend of 16.0 pence (2015: 14.0 pence) on 22 July 2016 to shareholders on the register at 17 June 2016.

Investment basis

Consolidated statement of comprehensive income

Investment basis

Consolidated statement of financial position

Investment basis

Consolidated cash flow statement

Reconciliation of Investment basis to IFRS

Background to Investment basis financial statements

The Group makes investments in portfolio companies directly, held by 3i Group plc, and indirectly, held through intermediate holding company and partnership structures ("Investment entity subsidiaries"). It also has other operational subsidiaries which provide services and other activities such as employment, regulatory activities, management and advice ("Trading subsidiaries"). The application of IFRS 10 requires us to fair value a number of intermediate holding companies that were previously consolidated line by line. This fair value approach, applied at the intermediate holding company level, effectively obscures the performance of our proprietary capital investments and associated transactions occurring in the intermediate holding companies. The financial effect of the underlying portfolio companies and fee income, operating expenses and carried interest transactions occurring in Investment entity subsidiaries are aggregated into a single value. Other items which were previously eliminated on consolidation are now included separately.

As a result we introduced separate non-GAAP "Investment basis" Statements of comprehensive income, financial position and cash flow in our 2014 Annual report and accounts to aid understanding of our results. The Strategic report is also prepared using the Investment basis as we believe it provides a more understandable view of our performance. Total return and net assets are equal under the Investment basis and IFRS; the Investment basis is simply a "look through" of IFRS 10 to present the underlying performance.

Reconciliation between Investment basis and IFRS

A detailed reconciliation from the Investment basis to IFRS basis of the Statement of comprehensive income, Statement of financial position and Cash flow statement is shown below.

Reconciliation of consolidated statement of comprehensive income

Notes:

Reconciliation of consolidated statement of financial position