3i Group Regulatory News (III)

12 November 2020

3i Group plc announces results for the six months to

30 September 2020

Strong results driven by resilient performance

· Total return of £1,142 million or 15% on opening shareholders' funds (September 2019: £767 million, 10%) and NAV per share of 905 pence (March 2020: 804 pence) after paying a dividend of 17.5 pence per share in the period and a 12 pence per share negative accounting impact from the further de-risking of the UK defined benefit pension plan.

· Our Private Equity business delivered a gross investment return of £1,245 million or 19% (September 2019: £666 million, 11%), supported by continued good earnings growth and cash generation in portfolio companies operating in the consumer, e-commerce, healthcare and business services sectors and a sustained recovery in our retail investments following the lifting of Covid-related trading restrictions through the summer. Our investments in the travel and automotive sectors continue to experience challenging conditions.

· Action's performance through the Covid-19 pandemic has exceeded our expectations, with strong like-for-like sales, EBITDA and cash flow growth. This supported an increase in value of our stake in Action of £644 million in the period. At 30 September 2020, we valued our 52.6% stake in Action at £4,269 million, based on a multiple of 18x Action's September 2020 run-rate earnings.

· In challenging markets, the Private Equity business maintained its selective approach to capital deployment, making one new investment in GartenHaus whilst focusing on growing the existing portfolio. We funded the transformational acquisitions of Technogroup by Evernex and of SaniTech West by our bioprocessing platform, which we have now rebranded as SaniSure. Private Equity realisations totalled £82 million in the period.

· Our Infrastructure business delivered a gross investment return of £134 million, or 12% (September 2019: £88 million, 9%), driven by resilient performance across all portfolios. Our 30% stake in 3i Infrastructure plc ("3iN) contributed particularly strongly to this return through a 17% share price increase since 31 March 2020. The Infrastructure business continues to contribute materially to our operating cash profit, with fee income across the business of £19 million and dividend income from 3iN of £12 million in the period.

· First dividend for FY2021 set at 17.5 pence, in line with our dividend policy.

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

"In the six months to 30 September 2020, our Private Equity portfolio delivered a gross investment return ("GIR") of 19%, demonstrating its resilience in a difficult macroeconomic environment. Our thorough portfolio management processes enabled us to respond quickly and effectively to the challenges that arose as a result of the pandemic, including, more recently, decisive measures to address increases in infection rates across much of Europe. Encouragingly, most of our portfolio companies outperformed our rebased Covid-19 full-year outlook during the period. In this environment, we will remain disciplined in our investment approach and focused on enhancing the value of our portfolio through organic growth and value-accretive add-ons."

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 also report a non-GAAP "Investment basis" which we believe 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 in the Alternative Performance Measures section later in this document. 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 later in this document. Numbers are prepared on an Investment basis from the beginning of this document up to the Alternative Performance Measures section.

3i Group Half-year report 2020

Chief Executive's review

3i delivered a strong set of results for the first half of the year, generating a total return of £1,142 million, or 15% on opening shareholders' funds (September 2019: £767 million, or 10%). The NAV per share at 30 September 2020 was 905 pence (March 2020: 804 pence), after the payment of the 17.5 pence second FY2020 dividend in July 2020 and the 12 pence one-off negative accounting impact from the further de-risking of the UK defined benefit pension plan.

These results were underpinned by resilient performance across our portfolio up to the end of September. We completed our first new Private Equity investment for this year in September 2020 and focused on growing our existing portfolio with the completion of two transformational bolt-on acquisitions in our Private Equity portfolio and two bolt-on acquisitions in the 3i Infrastructure plc ("3iN") portfolio.

Private Equity

In the six months to 30 September 2020, our Private Equity portfolio delivered a gross investment return ("GIR") of 19%, demonstrating its resilience in a difficult macroeconomic environment. Our thorough portfolio management processes enabled us to respond quickly and effectively to the challenges that arose as a result of the pandemic, including, more recently, decisive measures to address increases in infection rates across much of Europe. Encouragingly, most of our portfolio companies outperformed our rebased Covid-19 full-year outlook during the period.

Action

Action's performance through the pandemic has exceeded our expectations. Trading in the first two and a half months of 2020 was strong with sales, like-for-like ("LFL") growth, EBITDA and cash flows ahead of budget. As the outbreak of Covid-19 intensified across Europe in late March, Action was impacted by government-enforced temporary closures of its stores in France, Belgium and Austria and partial closures in Germany and Poland. Stores in the Netherlands remained open. After the reopening of all stores in May 2020, Action experienced robust trading with strong LFL performance across all markets. Action delivered LTM EBITDA of €579 million in September 2020 (September 2019: €506 million). October 2020 was another strong month for Action with LTM EBITDA increasing to €608 million (October 2019: €519 million). At the end of October, national lockdowns were re-imposed in France, Germany and Belgium, three of Action's largest markets. Action's stores in Germany have remained open, selling the entire range but with enhanced social distancing measures. In France and Belgium all stores are open, selling a reduced range of essentials, representing about 60% of items in France and about 50% of items in Belgium.

Store openings in April and May were limited and the roll-out programme resumed at pace only after the lifting of lockdowns. In the 10 months to October 2020, Action had opened 115 stores, including its first five stores in the Czech Republic. The opening of pilot stores in Italy, initially planned for Autumn 2020, has been deferred to H1 2021.

Other portfolio performance and activity

We continue to see strong momentum in earnings growth and cash generation for portfolio companies operating in the consumer, e-commerce, healthcare and business services sectors. The increased demand for hygiene products continues to benefit Royal Sanders. The strong performance and cash flow generation since our investment in 2018 allowed the company to make a dividend distribution to 3i of £38 million in July 2020. Lampenwelt, now rebranded Luqom, has been supported by the structural shift of consumer demand towards e-commerce and the increased importance of the home and living category as consumers spend more time at home. Cirtec Medical delivered significant year-on-year growth in the first half, driven by sales to high growth customers and the successful implementation of several margin optimisation initiatives. Tato has benefited from increased demand for products used in disinfectants and hygiene products and returned a £5 million dividend to 3i in July 2020.

We have also seen an encouraging recovery across our retail investments. In April 2020, we completed a £20 million equity injection into Hans Anders, to support the business through government-enforced temporary store closures across the countries in which it operates. Since reopening its stores in May 2020, Hans Anders has experienced a strong recovery in order intake across all markets, with higher conversion rates in the stores. The business has shifted its emphasis from walk-ins to online bookings, leveraging the substantial investments in its omni-channel proposition since our investment in 2017. Similarly, BoConcept has recovered well since the easing of lockdowns, with trading levels above those of the prior year.

Our portfolio companies exposed to the travel and automotive sectors continue to operate in more challenging conditions. As expected, Audley Travel's revenues have been under significant pressure, with departures severely restricted since April 2020. In early November 2020 we invested a further c.£50 million of capital to support the business through this difficult trading period. We believe Audley Travel will be well positioned to benefit when international leisure travel recovers due to its client proposition, destination diversity and asset-light model. The performance of ICE, now rebranded Arrivia, has been relatively resilient, with the recurring revenue nature of its membership business and material reductions to expenses and capex offsetting an extended period of no cruise sailings and a low level of resort vacations. Since passing the peak of the temporary plant shutdowns in April 2020 in response to Covid-19, Formel D has remained cash generative. Whilst its output recovery has been steady, it has been slower than expected, against a backdrop of a very challenging automotive sector. Q Holding continued to experience softer trading in its Quality Synthetic Rubber ("QSR") business, which has exposure to the automotive sector. Performance has since begun to stabilise, and the business is positioned well to recover as the automotive cycle improves. Its healthcare business continues to perform well.

We continue our focus on buy-and-build opportunities for our platform assets. In July 2020, we supported Evernex's transformational acquisition of Technogroup, the leading third-party data centre maintenance provider in Germany, Austria and Switzerland, contributing £41 million of funding. Having established a bioprocessing platform through the merger of Cellon, Silicone Altimex and TBL Performance Plastics in January 2020, we achieved a significant milestone in the growth and internationalisation of this platform through the acquisition of Sani-Tech West, Inc in July 2020. The total 3i investment in this platform, now rebranded as SaniSure, is £135 million. In August 2020, SaniSure completed the acquisition of Biofluidfocus.

In September 2020, we completed the £64 million investment in GartenHaus, an online leader in the retail of garden buildings, sheds, saunas, and related products in Germany, Austria, Switzerland and the Netherlands. In June 2020, we invested £17 million in Basic-Fit to provide expansion capital and, in September 2020, we repurchased an equity stake in Havea for £23 million. At the start of November 2020, we signed a c.£125 million investment in MPM, an international leader in branded premium natural pet food.

In the period, we completed the disposal of Kinolt and received total proceeds of £81 million. As a proprietary capital investor, and with the benefit of a strong balance sheet, we are not under pressure to exit investments when market conditions are unfavourable or when we believe a longer-term hold may yield greater returns for shareholders. Over 61% of our portfolio by value, excluding Action, was acquired within the last four years, and is still being managed actively as we build value organically and, in a number of cases, through bolt-on acquisitions. In light of the Covid-19 related market uncertainty, we are not currently planning to realise further material assets for the remainder of the year.

Infrastructure

Our Infrastructure business performed well in the first half of the year, achieving a GIR of 12%. The 3iN portfolio continues to demonstrate its resilience, generating a total return on opening NAV of 4% in the six months to 30 September 2020 (September 2019: 6%). 3iN is on track to deliver its dividend target, which is up 6.5% on last year. The team completed two bolt-on acquisitions in the period. 3iN's share price reflected the portfolio's good operational performance, increasing by 17% and closing at 289 pence on 30 September 2020 (31 March 2020: 247 pence).

Both of our US infrastructure assets are deemed to be providers of essential services and have continued to operate throughout the pandemic. The seven freight rail lines of our investment in Regional Rail have performed ahead of our investment case despite some softness in freight volumes in Northeast America. Smarte Carte has benefited from the diversity of its product offering and the locations in which it operates, as well as a moderate recovery in US air traffic levels. However, we remain cautious in light of the short and medium-term prospects for the travel industry.

In the period, we established a new 3i-managed vehicle which will co-invest alongside 3iN in certain transactions, with a commitment of €400 million from Industriens Pension of Denmark.

Scandlines

Scandlines delivered a solid performance in the period with freight volumes remaining close to 2019 levels. The lifting of travel restrictions in the summer months allowed car volumes to also show good momentum. Scandlines continues to be well positioned to manage the further uncertainty developing in Northern Europe due to the pandemic.

Balance sheet and dividend

In June 2020, we took advantage of favourable corporate debt market conditions to strengthen our balance sheet further, issuing a 20-year £400 million bond at a coupon of 3.75%. At 30 September 2020, our balance sheet remained well funded with £687 million of cash. Net debt was £288 million, resulting in gearing of 3%.

In line with our dividend policy, we have decided to pay a first FY2021 dividend of 17.5 pence, which is half of our FY2020 total dividend. This first FY2021 dividend will be paid to shareholders on 13 January 2021.

Covid-19 update

Throughout this pandemic, our focus has been first and foremost on protecting the wellbeing of our own employees, as well as those of our portfolio companies and the communities in which we collectively operate. We continue to follow local government guidance closely.

At the start of May 2020, we used employee carry and performance fee reserves to establish a £5 million Covid-19 Charitable Fund, with the aim of supporting charities and communities affected by the pandemic in the countries in which we operate. This money will be allocated to both immediate relief and longer-term rebuilding activities. By the end of October, we had made donations totalling c.£1.6 million to over 20 charities focused on immediate relief work across our markets. The overarching theme of the fund is the alleviation of poverty and its consequences. The fund has focused its donations on areas such as food provision, education, domestic violence, the advancement of minorities and disadvantaged groups, community development, homelessness, elderly people and mental health.

Brexit

As we approach the end of the transition period on 1 January 2021, we do not expect a significant disruption to our business from Brexit. Our Brexit planning has been based on worst-case scenario assumptions and we implemented an alternative regulatory structure in Luxembourg, which enables us to continue activities in Europe, regardless of the form of Brexit. The direct impact of Brexit on our investment portfolio is not expected to be material.

Outlook

The environment remains challenging as a result of the economic and social disruption resulting from the Covid-19 pandemic. Investor confidence continues to be undermined by the limited visibility on the longer-term impact of the pandemic and the political response to it across the world. In this environment, we will remain disciplined in our investment approach and focused on enhancing the value of our portfolio through organic growth and value-accretive add-ons. To date, our portfolio has been resilient to the shocks caused by the pandemic and while we continue to monitor developments closely, we have entered the second half of the year with good momentum across the Group. We will continue to navigate the challenges from the pandemic from a strong position with our resilient investment portfolio and a clear and proven strategy supported by rigorous asset management policies.

Simon Borrows

Chief Executive

Business and Financial review

Private Equity

Our Private Equity business performed strongly in the first half, generating a gross investment return of £1,245 million (September 2019: £666 million), or 19% of the opening portfolio value (September 2019: 11%), including a gain on foreign exchange on investments of £97 million (September 2019: £176 million).

Table 1: Gross investment return for the six months to 30 September

Investment

Table 2: Private Equity cash investment in the six months to 30 September 2020

During the first half of the year, our Private Equity business made net investment of £231 million (September 2019: £221 million), comprising £116 million of new and further investment and return of funding and £115 million of bolt-on investments.

A description of the new and bolt-on investments is provided in the Chief Executive's review. We have also used our capital to support the existing portfolio through the Covid-19 pandemic. In April 2020, we completed the £20 million equity injection in Hans Anders to provide liquidity support and in June 2020, we invested £17 million in Basic-Fit to provide expansion capital. In September 2020, we repurchased an equity stake in Havea for £23 million, following a reorganisation of shareholding. In July 2020, Luqom returned £8 million of overfunding that we had provided for the bolt-on acquisition of QLF in FY2020.

At the start of November 2020, we signed a c.£125 million investment in MPM, an international leader in branded premium natural pet food.

Realisations

In the period, we realised proceeds of £82 million (September 2019: £1 million). We completed the sale of Kinolt, generating proceeds of £81 million, of which £76 million was recognised as capital and the remainder as income. We also received further proceeds from the disposal of ACR, a legacy investment.

Table 3: Private Equity realisations in the six months to 30 September 2020

Portfolio performance

The Covid-19 pandemic continues to drive uncertainty for the 2020 outlook. Since the valuation point at 31 March 2020 (see pages 22 and 23 of the FY2020 Annual report and accounts detailing our valuation approach at that date), our Private Equity portfolio has shown resilience and most of our portfolio companies outperformed our rebased Covid-19 full-year outlook during the period. Therefore, for most of our portfolio, we reverted to our usual valuation process for 30 September 2020. For the more challenged investments, particularly those in the travel and automotive sectors, we sought to gather a broader range of inputs, considered different methodologies and applied further judgement.

Table 4: Unrealised profits/(losses) on the revaluation of Private Equity investments1 in the six months to 30 September

Action valuation and performance

Following the reopening of all stores in May 2020, Action has experienced robust trading with an increase in the average basket size more than outweighing a decrease in footfall resulting from the implementation of social distancing measures. Strong earnings recovery and cash generation resulted in £644 million (September 2019: £381 million) of value growth, as shown in Table 4.

At 30 September 2020, Action was valued using its run-rate earnings to 30 September and a multiple of 18.0x net of the liquidity discount (31 March 2020: Fair value). This approach was consistent with the approach used at 30 June 2020. This resulted in a valuation of our 52.6% stake in Action of £4,269 million (31 March 2020: £3,536 million).

Performance (excluding Action)

We continue to see strong performance from our portfolio companies operating in the consumer, e-commerce, healthcare and business services sectors. 

Royal Sanders has been able to capture a share of the surge in demand for handwash and hand gels, with all its factories remaining operational throughout the year. Additionally, the acquisition of the McBride sites in 2018 has created significant value. As a result, the business has generated strong earnings growth and cash since our investment in 2018, allowing the company to return £38 million of dividends to 3i.

Luqom has been supported by the structural shift of consumer demand towards e-commerce, coupled with an increasing demand and relevance of the home and living category, resulting in significant sales growth in the first half. E-commerce demand for lighting products has remained high even as economies have reopened.

Cirtec Medical delivered strong year-on-year growth in the first half. The neuromodulation and structural heart end markets recovered quickly from the deferral of procedures in late March and early April. Additionally, Cirtec Medical has benefited from platform-specific tailwinds, with a number of customers ramping up their purchases. The business also realised several margin optimisation initiatives, all of which have driven earnings growth.

Tato has seen increased demand for chemicals used in disinfectants and hygiene products and returned a £5 million dividend to 3i in July 2020.

Evernex's third-party IT equipment maintenance ("TPM") model has performed resiliently so far, with monthly subscriptions accounting for around two-thirds of total sales and with the benefit of variable operating costs. In addition, the acquisition of Technogroup in July 2020 secured its European leadership in the TPM sector.

Our retail businesses have recovered well from government-enforced temporary store closures across Europe at the beginning of FY2021. Since reopening its stores in May 2020, Hans Anders has experienced a strong recovery in order intake across all markets, with higher conversion rates in the stores. The business has shifted its emphasis from walk-ins to online bookings, leveraging the substantial investments in its omni-channel proposition since 3i's investment in 2017. Similarly, BoConcept has shown good performance with trading levels above those of the prior year and very limited store closures.

Our portfolio companies exposed to the travel sector continue to operate in more challenging conditions. Arrivia experienced an extended period of no cruise sailings and low level of resort vacations. Despite this, Arrivia's business model has proven resilient, due to the strength of its membership business that forms a significant part of its revenue. Audley Travel's trading has been acutely impacted by Covid-19, with minimal departure revenue since April 2020. Further details can be found under 'Discounted Cash Flow ("DCF")' below.

With the on-set of the Covid-19 pandemic, the automotive market, which had already been under pressure, has been further negatively affected on both the supply and demand side, resulting in a reduction in volumes across Europe and the US in the period. Since passing the peak of the enforced temporary plant shutdowns in April 2020, Formel D's output recovery has been steady but slower than expected. Covid-19 has had a commercial impact on the automotive side of Q Holding's business whilst creating some operational disruption to its medical sites. However, these impacts are partially offset by an increase in demand for non-discretionary medical products.

Overall, 85% of the top 20 assets by value in our Private Equity portfolio grew their earnings in the 12 months to 30 June 2020 (September 2019: 91%). Nine companies experienced negative earnings growth in the 12 months to 30 June 2020. These include companies exposed to the challenging travel and automotive sectors and companies which experienced temporary interruptions in activity during April and May.

Table 5: Portfolio earnings growth of the top 20 Private Equity investments1

Across the portfolio leverage was 4.0x at 30 September 2020 (31 March 2020: 4.1x). Excluding Action, leverage across the portfolio at 30 September 2020 was 4.3x (31 March 2020: 3.7x). Table 6 shows the ratio of net debt to earnings by portfolio value at 30 September 2020.

Table 6: Ratio of net debt to earnings1

Multiple movements

In setting or changing a multiple, we consider a number of factors such as relative performance, investment size, comparable recent transactions and exit plans, and monitor external equity markets. Where appropriate, we adjust the multiples for the impact of the applicable lease accounting standards.

In valuing the portfolio at 30 September 2020, we adjusted a small number of multiples to reflect the strong performance in the medical sector and took account of the recent transformational acquisitions in the multiples of Evernex and SaniSure. We have also taken some recovery in multiples for businesses that we believe are experiencing a short-term impact on earnings driven by the pandemic, but in general, we have not assumed that exceptional performance as a result of changed behavior in the pandemic should also be reflected in a rerating of the business.

The multiple of run-rate earnings used to value Action at 30 September 2020 was 18.0x net of the liquidity discount. As at 30 September 2020, a 1.0x movement in Action's post-discount multiple would have increased or decreased the valuation of 3i's investment by £299 million.

DCF

In the period, we moved Audley Travel's valuation basis from earnings to DCF and reflected the deterioration in travel market sentiment and broader market outlook in the short to medium term in the valuation. In early November 2020, we invested a further c.£50 million of capital to support the business through this difficult trading period.

Imminent sale

At 30 September 2020, we moved Navayuga, an Asian legacy asset, to an imminent sale valuation basis following the completion of a commercial settlement. We received proceeds of £17 million from this sale in October 2020.

Quoted portfolio

Basic-Fit is the only quoted asset in the Private Equity portfolio. In June 2020, we invested £17 million in the business to provide expansion capital. We recognised an unrealised value gain of £28 million from Basic-Fit in the period (September 2019: £12 million loss) as its share price increased to €20.30 at 30 September 2020 (31 March 2020: €15.20). At 30 September 2020, our residual 12.8% shareholding was valued at £141 million (31 March 2020: 12.7% shareholding valued at £93 million).

Private Equity proprietary capital

At 30 September 2020, the portfolio consisted of 32 assets (31 March 2020: 32 assets). The value of 3i's Private Equity proprietary capital increased to £7.9 billion (31 March 2020: £6.6 billion) due to value growth, net investment

and gains from foreign exchange translation on investment in the period.

Table 7: Private Equity proprietary capital 

The value of the Private Equity portfolio including third-party capital increased to €11.6 billion (31 March 2020: €9.9 billion) due to the increase in the valuation of Action, strong performance from our more recent vintages, net investment and favourable foreign exchange gains.

Table 8: Private Equity proprietary capital by 3i office location

Infrastructure

Our Infrastructure business performed well and generated a gross investment return of £134 million, or 12% on the opening portfolio value in the period (September 2019: £88 million, 9%). This was driven by the recovery of 3iN's share price and by dividend income.

Table 9: Gross investment return for the six months to 30 September

3iN performance

The 3iN portfolio continues to demonstrate its resilience to the effects of the Covid-19 pandemic, generating a total return on opening NAV of 4% in the six months to 30 September 2020 (September 2019: 6%). 3iN is on track to deliver its dividend target which is up 6.5% on last year. In the first half, Infinis completed the acquisition of the development rights for a 6MW solar PV project at the Ling Hall landfill and Tampnet agreed to purchase a 1,200km offshore fibre cable system in the Gulf of Mexico. Furthermore, 3iN committed additional capital to ESVAGT to fund further growth in its offshore wind servicing segment.

As 3iN's investment manager, we received a management fee of £12 million for the six-month period to 30 September 2020 (September 2019: £15 million).

Performance of 3i's proprietary capital Infrastructure portfolio

Table 10: Unrealised profits on the revaluation of Infrastructure investments1 in the six months to 30 September

Quoted stake in 3iN

3iN's share price increased by 17% in the first half of the year and closed at 289 pence on 30 September 2020 (31 March 2020: 247 pence). We recognised £113 million of unrealised value growth on our 3iN investment and £12 million of dividend income (September 2019: £53 million of unrealised value growth and £12 million of dividend income). At 30 September 2020, our investment in 3iN was valued at £778 million (31 March 2020: £665 million).

US Infrastructure

Our US infrastructure portfolio has been relatively resilient throughout the pandemic, as both assets have been deemed to provide essential services. Regional Rail has continued to perform well. The business benefited from opportunistic growth in offerings like car storage and better than expected operational efficiency at its newly acquired Carolina Coastal Railway line. It also added new customers on its Florida lines, offsetting some freight softness in Northeast America. Smarte Carte's operations have been relatively resilient despite the reduction in air travel across the US, benefiting from a diverse offering and broad penetration across the country. However, the business continues to operate in very challenging market conditions. Whilst US air traffic has marginally recovered, the Company benefits from leisure travel that is recovering faster than business travel.

Imminent sale

At 30 September 2020, we valued Krishnapatnam Port, the largest asset remaining in our 3i India Infrastructure Fund, on an imminent sale valuation basis following completion of a commercial settlement. We received proceeds of £30 million from this sale in October 2020.

Fund management

The 3i European Operational Projects Fund completed the acquisition of a portfolio of eight operational projects in France. The Fund has now deployed c.60% of its total commitments and has a good pipeline of potential investments. The Fund is outperforming its yield objective.

We established a new 3i-managed vehicle in the period that will co-invest alongside 3iN in certain transactions, with a commitment of €400 million from Industriens Pension of Denmark.

Infrastructure AUM increased to £4.9 billion (31 March 2020: £4.4 billion) and we generated fee income of £19 million from our fund management activities in the period (September 2019: £22 million).

Table 11: Assets under management as at 30 September 2020

Scandlines

Scandlines generated a gross investment return of £15 million (September 2019: £44 million) or 3% of opening portfolio value (September 2019: 8%).

Table 12: Gross investment return for the six months to 30 September

Performance

Scandlines delivered a solid performance. Its strategic importance to supply chains between Denmark, Germany and Scandinavia remains evident, with freight volumes at over 90% in the nine months to September compared to the prior comparable period. Car volumes continue to be impacted on a month-by-month basis by regional and national travel and quarantine restrictions, although they demonstrated good momentum following the removal of travel restrictions in the summer. The company continues to be well positioned to manage the further uncertainty developing in Northern Europe due to the pandemic. As indicated previously, we do not expect to receive any dividends from Scandlines in FY2021. At 30 September 2020, Scandlines was valued at £452 million (31 March 2020: £429 million) on a DCF basis.

Foreign exchange

We hedge our investment in Scandlines for foreign exchange translation risk. We recognised a £3 million net gain on foreign exchange translation (September 2019: £7 million) including an £8 million fair value loss (September 2019: £9 million) from derivatives in our hedging programme.

Overview of financial performance

3i generated a total return of £1,142 million, or a profit on opening shareholders' funds of 15%, in the six months to 30 September 2020 (September 2019: £767 million, or 10%). The diluted NAV per share at 30 September 2020 increased to 905 pence (31 March 2020: 804 pence) after the payment of the second FY2020 dividend of £169 million, or 17.5 pence per share (September 2019: £194 million, 20 pence per share) and the 12 pence one-off negative accounting impact of the pension buy-in transaction.

Table 13: Gross investment return for the six months to 30 September

Gross investment return was £1,394 million in the period (September 2019: £798 million) driven by the strong performance of Action and several other portfolio companies, as well as good dividend income from the portfolio. The GIR also includes a £88 million net foreign currency gain on translation of our investments (September 2019: £195 million gain). Further information on the Private Equity, Infrastructure and Scandlines valuations is included in their respective sections of this Business and Financial review.

Operating cash profit

Table 14: Operating cash profit/(loss) for the six months to 30 September

3i generated an operating cash profit of £14 million in the period (September 2019: £2 million loss). Cash income increased to £83 million (September 2019: £77 million) principally due to good dividend income. Cash operating expenses incurred during the period decreased to £69 million (September 2019: £79 million) driven principally by lower variable compensation costs and a reduction in travel as a result of the Covid-19 travel restrictions.

Foreign exchange

At 30 September 2020, 83% of the Group's assets were denominated in euros or US dollars (31 March 2020: 78%). Following the weakening of sterling against the euro and strengthening of sterling against the US dollar, the Group recorded a total foreign exchange gain of £80 million net of derivatives during the period (September 2019: £196 million).

Table 15: Net assets and sensitivity by currency at 30 September 2020

Carried interest and performance fees payable and receivable

We pay carried interest to participants in plans relating to our proprietary capital invested. We also receive performance fees from third-party funds and pay a portion of that carry received to participants in our carry plans. Carried interest at 30 September 2020 was calculated assuming that remaining assets in the portfolio were realised at their fair value at that date.

Table 16: Carried interest and performance fees for the six months to 30 September

Table 17: Carried interest and performance fees 

Carried interest and performance fees receivable

Following the disposal of its stake in Action by Eurofund V ("EFV") in FY2020, the only material carried interest and performance fees receivable will be generated from our management of 3iN's portfolio.

Carried interest and performance fees payable

In Private Equity, we typically accrue net carried interest payable at between 10% and 13% of gross investment return. We accrued carried interest payable of £61 million (September 2019: £63 million) for Private Equity in the period. At 30 September 2020, we were not accruing carried interest payable on the 2016-19 or 2019-22 vintage.

Carried interest is paid to participants when the performance hurdles are passed in cash terms following cash proceeds received from a realisation, refinancing event or other cash distribution. Due to the time between investment and realisation, the schemes are usually active for a number of years and their participants are both current and previous employees of 3i. In FY2020, we crystallised carried interest due on the EFV share of Action, along with the carried interest due on 3i's share of the refinancing proceeds from Action in the Buyouts 2010-12 scheme. As a result, £502 million was paid to participants in the Buyouts 2010-12 scheme, of which £109 million was previously held in escrow.

Overall, the effect of the income statement charge, cash payments, as well as the currency translation meant that the balance sheet carried interest and performance fees payable decreased to £588 million (31 March 2020: £1,038 million). During the period, we crystallised further carried interest in the Buyouts 2010-12 scheme relating to Action, which is expected to result in a c.£112 million carried interest payment to participants in the Buyouts 2010-12 scheme in November 2020.

Balance sheet and NAV

Table 18: Simplified consolidated balance sheet

The investment portfolio value increased to £9,578 million at 30 September 2020 (31 March 2020: £8,098 million) driven by unrealised value growth of £1,210 million, net investment and gains on foreign exchange translation.

At 30 September 2020 the Group had net debt of £288 million (31 March 2020: £270 million net cash) after a £400 million carried interest payment, net cash investment of £15 million and the payment of the second FY2020 dividend of £169 million.

Going concern and liquidity

The Half-year consolidated financial statements are prepared on a going concern basis. The Directors made an assessment of going concern, taking into account the Group's current performance and the outlook, and performed additional analysis to support the going concern assessment considering the ongoing impact of the Covid-19 pandemic on the portfolio.

Liquidity reduced to £1,087 million at 30 September 2020 (31 March 2020: £1,245 million) and comprised cash and deposits of £687 million (31 March 2020: £845 million) and undrawn facility of £400 million (31 March 2020: £400 million). In June we successfully issued a 20-year £400 million bond at a coupon of 3.75%, providing further liquidity to the Group.

Pension

During the period, the 3i Group Pension Plan Trustees completed a £650 million buy-in transaction with Legal & General. This transaction was completed without additional contributions from 3i. The 3i Group Pension Plan benefits are now fully insured through buy-in policies which are held as assets of the Plan. This means that 3i is no longer exposed to any material longevity, interest or inflation risk in the plan and therefore any financing requirements. As a result of the transaction we have reduced the IAS 19 plan surplus to reflect this commercial outcome. Consequently, at 30 September 2020, the IAS 19 Plan surplus was £57 million (31 March 2020: £173 million) which included a total re-measurement loss recognised in other comprehensive income of £118 million (September 2019: £6 million gain) and interest income recognised in the Consolidated statement of comprehensive income of £2 million (September 2019: £2 million).

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 in the Reconciliation of the Investment basis to IFRS section below. The table below defines our additional APMs and should be read in conjunction with the Annual report and accounts 2020.

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 2020, 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 55 to 59 of the Annual report and accounts 2020. There have been no material changes to the impact and likelihood of the Group's principal risks in the period, which are outlined below.

Covid-19

The restrictions to combat the Covid-19 pandemic have resulted in a significant contraction of economic activity across the G20 countries and downgrading of global economic growth forecasts. The outlook remains very uncertain. These economic headwinds have the potential to affect trading, liquidity and valuations in varying degrees across the portfolio. As outlined below, 3i has a well-funded balance sheet and the impact on the investment portfolio, which is now clearer, has been concentrated on a small number of assets in the most exposed sectors.

Principal risks

External - Risks arising from external factors including political, legal, regulatory, economic and competitor changes, which affect the Group's investment portfolio and operations. There is significant continuing uncertainty in the outlook for the global economy and the potential for periods of increased market volatility, both of which will be influenced by the extent of Covid-19 related restrictions, their economic impact and government economic policies. 3i is not immune to these wider market conditions; however, our balance sheet is well funded with low holding company debt and we have a diverse portfolio of international companies.

Whilst the outcome of UK / EU trade negotiations remains unclear, we have in place the necessary regulatory and investment structures to ensure continuity of our EU based activities based on a range of reasonably foreseeable scenarios. The exposure of the portfolio to possible disruption to UK / EU trade flows is very limited.

Investment - Risks in respect of specific asset investment decisions, the subsequent performance of an investment or exposure concentrations across business line portfolios. Although the extension of Covid-19 restrictions continues to affect a limited number of portfolio assets in the most exposed sectors e.g. travel, the majority of the portfolio continues to show a resilient performance.

Operational - Risks arising from inadequate or failed processes, people and systems or from external factors affecting these. The Group's day-to-day operations have been largely unaffected by the impact of Covid-19 related restrictions and remote working arrangements. This includes the resilience and security of the Group's IT systems; maintaining robust processes and internal controls; and providing appropriate levels of support for our staff.

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 2020.

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 the Group 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.

To aid understanding of our results, we include a separate non-GAAP "Investment basis" consolidated statement of comprehensive income, financial position and cash flow. The Investment basis is an APM and the Chief Executive's review and the Business and financial review are 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 2020 on page 43.

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 below.

Reconciliation of consolidated statement of comprehensive income

Notes: 

Reconciliation of consolidated statement of financial position

Notes:

Reconciliation of consolidated cash flow statement

Notes: 

IFRS Financial statements

Condensed consolidated statement of comprehensive income

The Notes to the accounts section forms an integral part of these financial statements.

Condensed consolidated statement of financial position 

The Notes to the accounts section forms an integral part of these financial statements.

Condensed consolidated statement of changes in equity

The Notes to the accounts section forms an integral part of these financial statements.

Condensed consolidated cash flow statement

The Notes to the accounts section forms an integral part of these financial statements.

Notes to the condensed consolidated 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 2020. The accounting policies applied by 3i Group plc for the Half-year condensed consolidated financial statements are consistent with those described on pages 126 to 164 of the Annual report and accounts 2020. There was no change in the current period to the critical accounting estimates and judgements applied in 2020, which are stated on page 128 of the Annual report and accounts 2020.

The financial information for the year ended 31 March 2020 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 2020, 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. At the 2020 AGM held on 25 June 2020 shareholders appointed KPMG LLP as the Company's new external auditor for the year ending 31 March 2021, in succession to Ernst & Young LLP.

In this Half year report, we have changed the presentation of the Condensed consolidated cash flow statement

to present net cash flows from investment entity subsidiaries on a gross basis in two line items; Drawdowns paid to investment entity subsidiaries and Distributions received from investment entity subsidiaries. Presentation of the six months to September 2019 have been changed to reflect this split.

Going concern

The Half-year condensed consolidated financial statements are prepared on a going concern basis and presented to the nearest million sterling (£m), the functional currency of the Group.

The Directors have made an assessment of going concern, taking into account the Group's current performance, and outlook, and performed additional analysis to support the going concern assessment considering the ongoing impact of the Covid-19 pandemic on the Group portfolio. The Group has maintained a conservative balance sheet structure for the past eight years, positioning the Group well to navigate the current uncertain business environment. As part of this assessment the Directors considered:

· an analysis of the Group's liquidity, solvency and regulatory capital position. The Group manages and monitors liquidity regularly, ensuring it is adequate and sufficient and is underpinned by its monitoring of investments, realisations, operating expenses and receipt of portfolio cash income. The Group successfully issued a bond of £400 million in June 2020. At 30 September 2020, liquidity remained strong at £1,087 million (31 March 2020: £1,245 million). Liquidity comprised of cash and deposits of £687 million (31 March 2020: £845 million) and undrawn facility of £400 million (31 March 2020: £400 million);

· the business review reflects that to date, our portfolio has been resilient to the effects of the pandemic, but we continue to monitor developments closely particularly in the travel and automotive sectors. The approach to valuations was consistent with the normal valuation process and where needed we continue to apply judgement. At 30 September 2020 our portfolio companies exposed to the travel and automotive industries have been most negatively impacted by the Covid-19 pandemic and where required, we have assessed their ability to generate earnings and cash flows, and also the longer-term view of their ability to recover; and

· the operational resilience of the Group's critical functions includes the wellbeing of 3i's staff and the resilience of IT systems. Covid-19 has emphasised the importance of 3i and its portfolio companies' focus on keeping employees safe, motivated and able to continue to fulfil their roles effectively.

Having performed an assessment on going concern, the Directors consider it appropriate for the going concern basis to be adopted in preparing the Half-year report and condensed consolidated financial statements.

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 above. Further detail on the Group's segmental analysis can be found on pages 130 to 132 of the Annual report and accounts 2020. The remaining Notes are prepared on an IFRS basis.