3i Group Regulatory News (III)

3i Group plc announces half yearly resultsto 30 September 2015

Another solid half year with each business making important progress

§ Good progression in NAV per share to 401 pence, after the payment of the 14 pence final FY2015 dividend

§ Strong performance in the Private Equity portfolio underpinned by continued earnings momentum in our key assets

§ Productive first half for Private Equity with selective investment of £208 million and realised proceedsof £307 million

§ Infrastructure had a good first half, advising 3i Infrastructure plc on three new investments and contributing a special dividend of £51 million and cash income of £25 million to 3i

§ Debt Management assets under management now £7.5 billion as the team raised £0.8 billion of new assets from one new CLO in Europe and one new CLO in the US and launched the Global Income Fund

§ Efficient operating platform supported operating cash profit of £17 million

§ Well funded balance sheet with net debt of only £12 million

§ Interim dividend of 6.0 pence per share and expect to pay a full year dividend of at least 15 penceper share

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

"We have completed another solid half year with each business making important progress. The macro and market environment has clearly deteriorated over the course of this year and the steps we have taken since 2012 to create a more resilient business are proving their value.

We are enjoying good momentum across 3i and anticipate that the current environment will, over time, create attractive opportunities and we have the people, financial resources and agility to take advantage of them."

Financial highlights

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For further information, please contact:

For further information regarding the announcement of 3i's Half-yearly results to 30 September 2015, including a live videocast of the results presentation at 10.00am (registration from 9.00am), 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 Half-yearly results

Note 1

All of the financial data in this announcement is taken from the Investment basis financial statements. This Half-yearly report has been prepared solely to provide information to shareholders. It should not be relied on by any other party or for any other purpose.

The financial information for the year ended 31 March 2015 contained within this announcement does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The statutory accounts for the year to 31 March 2015, prepared under IFRS, have been reported on by Ernst and 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.  

Note 2

A pdf of the 3i Group plc Half-yearly report 2015 will be available on our website www.3i.com and is also attached below.

http://www.rns-pdf.londonstockexchange.com/rns/4327F_1-2015-11-11.pdf 

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

The interim dividend is expected to be paid on 6 January 2016 to holders of ordinary shares on the register on 11 December 2015.

Disclaimer

The Half-yearly report has been prepared solely to provide information to shareholders. It should not be relied on by any other party or for any other purpose.

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

Basis

The numbers and commentary in the Overview and Interim management report reflects the Investment basis rather than IFRS. Detail on the differences and a reconciliation is included in the Reconciliation of the Investment basis to IFRS. The key measures of total return on equity and NAV are the same under both bases.

For definitions of our financial terms, used throughout this report, please see our glossary.

We have enhanced the Half-yearly report to concentrate on those events and transactions that are significant to an understanding of 3i's financial performance in the period since the Annual report and accounts 2015. As a result the commentary has been streamlined to remove duplication and a number of Notes on the Financial Statements have been refined or deleted to focus on information that is material to this Half-yearly report.

Total return for the six months to 30 September 2015

OVERVIEW

Performance highlights

for the six months to 30 September 2015

Chairman's statement

"3i remains well positioned and reported a resilient performance in the first half despite the volatile economic environment"

Simon Thompson, Chairman11 November 2015

Introduction

This is my first report to you since succeeding Sir Adrian Montague as Chairman at the Annual General Meeting in June 2015. Over the past few months, I have acquainted myself with both the 3i team and its shareholders. My first impressions are that 3i is well positioned in its chosen geographies and sectors with a distinct and well established strategy to deliver shareholder value. In this highly competitive and volatile market, I believe that 3i has both the financial and commercial strength to maximise the opportunities available to it.

Performance

Our performance in the first half of our financial year was resilient. The market environment has been characterised by reduced investor confidence as a result of uncertainties in the Eurozone, the impact of depressed commodity prices and concerns about the growth outlook for China and other emerging markets. While we are not immune to these developments, we are seeing the benefit of the strategic decision to reduce our presence in Asia and South America and to focus on our core sectors in northern Europe and North America.

Dividend

Our distribution policy is designed to give shareholders a direct share in the success of the Group's divestment activity. We made good progress on realisations in the first half and generated proceeds of £359 million. We also increased our investment activity but have announced a total interim dividend of 6.0 pence per share (September 2014: 6.0 pence per share) in recognition of the robust financial performance and the Board's confidence in the Group's longer term prospects. The dividend comprises of a base dividend of 2.7 pence (one third of our annual base dividend) and 3.3 pence of additional dividend.

BOARD CHANGES

As announced in October 2015, Alistair Cox retired as a Director of 3i on 10 November 2015, having served on the Board for six years. We thank him for his valued contribution to the Group.

Peter Grosch was appointed as a non-executive Director on 1 November 2015. He brings directly relevant geographic and sector experience as a director or supervisory board member of a number of private and public companies as well as being chairman of Euro-Diesel, a 3i investee company.

Outlook

The macro-economic and geo-political landscape continues to be challenging and investor confidence is fragile. The outlook for growth is uncertain in many parts of the world, including the Eurozone and China, and this is resulting in volatility across financial markets. Given this context, we will remain cautious and disciplined in our investment approach, and focused on enhancing the value of our portfolio of investments, while supporting the continued development of our fund management activity.

Chief Executive's statement

"Another solid half year for 3i with each business making important progress"

Simon Borrows, Chief Executive11 November 2015

Introduction

We have completed another solid half year with each business making important progress, underpinned by the sound fundamentals created from our restructuring in 2012.

The macro and market environment has clearly deteriorated over the course of this year but 3i is now well-placed to operate with resilience and capitalise on the opportunities this part of the cycle will create. Today, the Group benefits from a strong balance sheet, a portfolio of Private Equity investments with good earnings growth and capable investment teams working within disciplined investment processes.

Robust first half performance

3i generated a total return on shareholders' funds of 4.4% (September 2014: 7.1%) and a NAV per share of 401 pence (31 March 2015: 396 pence) after accounting for the payment of the 14 pence final dividend in July 2015. This performance was underpinned by continued strong earnings growth in the Private Equity portfolio and supported by good levels of dividend and fee income from Infrastructure and Debt Management. We continued to reduce the number of companies in our portfolio by realising smaller non-core assets early in the period. Realisation proceeds also benefited from a special dividend from 3iN following the sale of Eversholt Rail. In line with our policy, and in recognition of our confidence in our longer term prospects, we are announcing a 6.0 pence dividend which is comprised of one third of our base dividend (2.7 pence) and an additional dividend of 3.3 pence.

Business review

In Private Equity, the team delivered another good performance and generated a gross investment return of £246 million, or 8% on opening value (September 2014: £282 million, 10%). This was due to strong performances from a number of our larger assets, as evidenced by weighted average earnings growth, including the benefit of portfolio acquisitions, of 19% (31 March 2015: 19%) and 14% excluding Action (31 March 2015: 16%). Action delivered robust like for like earnings growth and made good progress with its international expansion plans, opening over 80 new stores in the calendar year to date. It announced the appointment of a new CEO and CFO to lead the business in the next stage of its strategic journey and is well set for a strong finish to its current financial year. Elsewhere in the portfolio, Element Materials Technology's performance benefited from a number of strategic acquisitions and Scandlines' valuation increased due to both strong trading and the expectation of further delays in the proposed competing fixed tunnel link.

In addition to the resilient performance of our existing investments, the flow of realisations has continued. A generally constructive market in the first quarter allowed us to dispose of some of our older, more challenged assets; this included the completion of some significant turnarounds. At their valuation low points, Azelis and Labco were held at £14 million and £24 million respectively; we received proceeds of £63 million and £42 million for each and freed up valuable investment team time to focus on origination and our newer investments. We achieved 9 complete exits and, in total, received proceeds of £307 million (September 2014: £316 million) from a combination of asset sales and an IPO. We recorded profits of £26 million, at an uplift of 9%. This uplift reflects the weight of realisations early in the first half. £71 million of the proceeds came from the quoted portfolio, where we have taken advantage of opportunities to sell down tranches of Quintiles.

We are making good progress with new investments. We completed two new transactions, Weener Plastic Packaging Group ("Weener Plastic") and Euro-Diesel, in our core industrials sector at sensible prices, as well as a further investment in GIF through the buyout of the founding family. At 30 September 2015, we had reduced the portfolio to 53 companies and 5 quoted holdings and the team continues to work on a busy pipeline of promising investment opportunities.

Our sector and geographic focus since the 2012 restructuring has limited the negative impact from the current broader geo-political and economic conditions. The impact of the lower oil price on the wider energy sector has had the most notable impact on JMJ, a leading safety management consultancy with a particular focus on major capital projects for the oil and gas industry. It has been very proactive in reducing its cost base to counter the impact of the falling oil price. Currency volatility created pressures in a small number of our portfolio companies, but the impact is limited to date.

Notwithstanding the volatility in the global equity markets in the first half, and in our second quarter in particular, the weighted average post discount EBITDA multiple increased to 10.7x (31 March 2015: 10.5x) reflecting the increased weighting of our higher rated assets. There was no change to the multiple used to value Action (post discount 13.5x) and, excluding Action, the average increased marginally to 9.4x (31 March 2015: 9.3x). Notably, we increased the multiple used to value Basic-Fit from 9.5x to 10.5x post discount to recognise the growth potential of this asset, as it upgrades its existing gyms and opens new ones. More generally, our policy of adjusting multiples as equity markets increased throughout the prior year, to reflect both our longer term view of cross-cycle sector values and our exit plans, meant our portfolio valuation was less impacted by the recent volatility than it might otherwise have been. The net effect of all the multiple changes was a value reduction of £24 million (September 2014: £13 million gain) and this was more than compensated for by the £171 million improvement in performance (September 2014: £209 million). Overall, our Private Equity portfolio companies remain well positioned in their chosen markets. This reflects our methodical and disciplined investment approach and the increased weight of our portfolio towards its stronger assets.

The Infrastructure team has been proactive in the origination of new investment opportunities. Against a backdrop of intense competition for infrastructure assets, and particularly for large core economic infrastructure businesses, the team has also shaped its investment focus towards mid-market economic infrastructure businesses and primary PPP and low-risk energy projects, which offer more attractive risk-adjusted returns in line with 3iN's target. The team is focused on sourcing opportunities in these areas and the early signs are encouraging.

Infrastructure had a good first half and contributed a gross investment return of £23 million, or 4% (September 2014: £22 million, 5%). The European portfolio continues to perform well and underpins the good levels of cash income for 3i.

3iN performed well in the period and reported a 7% total shareholder return for the six months to 30 September 2015 following a well received annual results announcement which included updated return targets. In line with its focus on mid-market infrastructure, PPP and low-risk energy sectors, the team announced the completion of three new investments (two further terminals alongside Oiltanking, ESVAGT and the West of Duddon Sands Offshore Transmission Owner) totalling £187 million. In its recent interim announcement, 3iN also recorded a good unrealised value uplift from its attractive portfolio of economic European assets with a notable increase in the valuation of its investment in Elenia, a Finnish energy distribution company.

3iN's positive performance was partially offset by the weaker performance of the India Infrastructure Fund, in which 3i also has a direct interest, which was valued at £54 million at 30 September 2015 (31 March 2015: £64 million). The valuation of this portfolio remains subject to rupee weakness as well as specific macro-economic issues impacting assets with exposure to the road and power sectors in India.

We continue to see good levels of fundraising activity in our Debt Management business although recent market volatility, particularly in the US, has resulted in a general reduction in investor appetite for CLOs. However, as a result of our strong investor relationships we had an active six months and grew AUM in our core CLO offering, closing one €413 million CLO in Europe and a US$511 million CLO in the US. Our investment in CLOs generated strong cash distributions (£14 million, September 2014: £6 million). The effect of these distributions, together with some market volatility, particularly in the US, reduced the mark to market valuation of our existing CLOs (£18 million reduction in the first half, September 2014: £10 million).

The team also made 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. The US Senior Loan Fund outperformed its benchmarks in the period, helping to attract investors. In total, Debt Management generated £17 million of fee income, a slight decrease on the prior period's income of £18 million due to the timing of the new AUM raising, and increased assets under management to £7.5 billion (31 March 2015: £7.2 billion).

We remain focused on fund management profitability and operating cash profit as measures to ensure cost discipline and operating expenses remained stable at £63 million in the first half (September 2014: £63 million). Due to improved distributions from CLO equity and a dividend from Scandlines, cash income increased by 1% to £80 million (September 2014: £79 million) and, as a result, operating cash profit increased in the period to £17 million (September 2014: £16 million). This focus is all the more important as Private Equity management fee income will continue to decline as we realise investments made in Eurofund V ("EFV") and fund new Private Equity investments with proprietary capital, rather than initiating a new Private Equity fundraising, in the short to medium term.

As well as selective recruitment of experienced investment professionals across the business, we launched a graduate recruitment programme in 2014 to start developing our own investment professionals and business leaders. A number of exceptional candidates applied and our first cohort joined the Group in September 2015.

Continuing to deliver value for investors

Our three-year transformation programme, which completed in March 2015, created a more resilient business both commercially and financially. The cornerstones of that programme, namely our emphasis on disciplined asset management, cash generation, cost control and fund management margins remain as relevant now as they were in June 2012. We remain committed to executing this strategy through our three diverse, yet complementary, business lines, as we believe this represents a differentiated and attractive value proposition that generates capital return and fund management income.

In Private Equity, we have an investment team with a proven ability to develop businesses internationally and drive operational efficiencies. Monetary policy over the last few years has contributed to large amounts of both equity and debt capital chasing a limited supply of investment opportunities and, in this environment, our principal constraint is our ability to source assets at appropriate prices. We intend to commit €500 million - €750 million of proprietary capital in four to seven investments per year subject to available opportunity and attractive pricing. However, as we start to observe a change in the cycle, we are finding more investment opportunities to consider and in the first half we announced and completed two investments totalling €272 million.

As we reduce the number of more challenged assets in our portfolio, the contribution to realisations from our stronger, core assets will increase in significance. High quality assets are less dependent on general market sentiment to generate good realisation proceeds but are necessarily less frequent and individually more material. The structured approach to exit plans implemented in 2012 allows us to anticipate this and plan accordingly.

Our Fund Management profitability objectives are driven by Infrastructure and Debt Management. In line with our strategy to grow Infrastructure's contribution to our Fund Management profits, we continue to leverage 3i's partnerships and broader investor network to originate new investments. Since the sale of Eversholt Rail, the team has made new investments of £187 million. In addition, the team's engaged asset management approach is driving increased value in 3iN's existing European portfolio.

Debt Management is well placed to manage regulatory changes in Europe and the US, as our proprietary capital allows us to support the establishment of our CLO vehicles and the team continues to have success in its fundraising activities. The changing regulatory landscape is having an impact on business models and the structure of vehicles that support CLOs, and 3i continues to monitor and adapt to these changes where appropriate. We are also continuing to diversify our product offering to address investor appetite for alternative debt products.

Our clear and consistent strategy is designed to deliver a robust performance across all three of our business lines. This is underpinned by our core investment capabilities across our chosen geographic and business sectors which allow us to evaluate and take risk-based decisions. Our strong balance sheet and efficient investment platform ensure this value creation is not diluted and returns can be distributed to shareholders or reinvested into new assets.

Outlook

The second quarter of our first half was noted as one of the most volatile in markets since the financial crisis. Against that backdrop, the steps that 3i has taken since 2012 to create a significantly more resilient business are proving their value.

We currently enjoy good momentum across 3i and anticipate that the current environment will, over time, create attractive opportunities for the Group and we now have the people, financial resources and agility to take advantage of them.

Key Performance Indicators

INTERIM MANAGEMENT REPORT

Business review

PRIVATE EQUITY

Private Equity delivered a good performance in the first half. Although market volatility was a feature of the period, its direct impact was limited to a small number of assets and the underlying strength and performance of our larger assets is demonstrated by the 19% increase in weighted average earnings (including the benefit of portfolio acquisitions) in the last twelve months. The gross investment return for the period was £246 million, or 8% on the opening portfolio (September 2014: £282 million, 10%).

Investment activity

The momentum seen in FY2015 continued, as the disposal of a number of our more challenging assets over the last three years allowed the investment teams to focus more of their activity on origination.

The Private Equity team invested in two new businesses in our core industrial sector in the period: Weener Plastic and Euro-Diesel. Headquartered in Germany, Weener Plastic designs, develops and manufactures added value caps, closures, roll-on balls, jars and bottles for a number of markets. We initially invested €251 million of proprietary capital and then set up a co-investment arrangement with a third-party investor to fund €50 million of our commitment. Euro-Diesel is a leading provider of diesel rotary uninterruptable power supply systems, based in Belgium, in which we invested €71 million of proprietary capital.

In both cases we had been working with the management teams and our Business Leaders Network for a significant amount of time before the respective sales processes started. Having stepped back from both processes, we were able to re-join after they failed to complete and secured the investments at good prices. 3i will use its network to support both businesses in the acceleration of their international expansion plans and maximise their operational efficiency. In addition to these new investments, we also took the opportunity to purchase a minority stake in GIF (2013 investment) from the founding family.

Table 1: Cash investment in the six months to 30 September 2015

Realisations activity

Market conditions were favourable in the first half of the 2015 calendar year, enabling us to continue to dispose of a number of smaller non-core assets through both sales and an IPO.

We took advantage of opportunities to sell down one of our quoted investments. We disposed of two tranches of our holding in Quintiles, realising proceeds of £53 million. We also completed a successful IPO of UFO Moviez, realising £17 million. In total we received cash proceeds of £307 million (September 2014: £316 million) at an uplift of 9% over opening portfolio value (September 2014: 15%). The relatively small uplift reflects the fact that a number of assets were held on an imminent sales basis at 31 March 2015, or were from the quoted portfolio.

At 30 September 2015, there were 53 assets in the portfolio and 5 stakes in listed companies, down from 61 assets and 4 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: Realisations in the six months to 30 September 2015

Assets under management

Total AUM decreased to £3.6 billion during the period (31 March 2015: £3.8 billion). The performance of EFV and the Growth Capital Fund continued to improve, with money multiples at 30 September 2015 of 1.5x and 1.8x respectively (31 March 2015: 1.4x, 1.7x). The Growth Capital Fund in particular benefited from the realisation of Labco and further quoted disposals of Quintiles. The investments made in EFV's 2010-2012 investment period, continue to show a particularly strong performance, with a money multiple of 2.8x at 30 September 2015 (31 March 2015: 2.6x), driven by the strong performance of Action, Element and Amor/Christ in particular.

Table 3: Assets under management at 30 September 2015 

outlook

The team made good progress in sourcing and completing new investment opportunities in the first half but will remain disciplined and selective in their approach. On the divestment side, it is likely that more realisations will come from our stronger investments, given the significant progress we have made to date in reshaping and streamlining the portfolio.

INFRASTRUCTURE

Infrastructure continued to make good progress and contributed a gross investment return of £23 million, or 4% on the opening portfolio (September 2014: £22 million, 5%). The performance of the underlying assets underpinned a good level of cash income to 3i, from both dividends and fee income from 3iN and other infrastructure funds managed by the team.

Investment adviser

In its capacity as investment adviser to 3iN, the team advised on three new investments totalling £187 million in the mid-market economic infrastructure and low-risk energy sectors. There is a good pipeline of investment opportunities but, given the competition in the sector, the team remains focused on sourcing assets that can generate returns for 3iN in line with its return targets.

3iN's underlying European portfolio continues to perform well and it has an attractive collection of economic infrastructure assets. In particular, the portfolio valuation has benefited from an improved regulatory environment and performance in Elenia, an electricity distribution and heating company based in Finland.

Under the terms of the advisory agreements, we received an advisory fee of £8 million (September 2014: £7 million).

3iN performance

In addition to its role as investment adviser, 3i holds a 34% (31 March 2015: 34%) stake in 3iN. 3iN continued to perform well in the period and the share price increased by a respectable 4% to 167 pence at 30 September 2015 (31 March 2015: 160 pence). The underlying uplift in 3iN's performance was driven by value growth across its core economic infrastructure portfolio, supported by the continued returns compression and the competitive market environment for large economic infrastructure.

3i's investment in 3iN contributed £19 million of value growth (September 2014: £17 million) and £11 million of dividend income (September 2014: £10 million). In July 2015, 3iN also paid a £150 million special dividend to shareholders, generated from 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 remains subject to economic pressures, with the power and road assets particularly affected. This, together with the ongoing depreciation in the value of the rupee resulted in a £9 million reduction in the value of 3i's share of the Indian portfolio to £54 million (31 March 2015: £64 million).

Table 4: Assets under management at 30 September 2015 

outlook

The team remains busy as it focuses on new investment opportunities in mid-market infrastructure, greenfield PPP and low-risk energy projects. We have made a number of senior hires, including a new origination partner, to support the strategic development and momentum of the business.

DEBT MANAGEMENT

We had another good period of fund-raising, closing two new CLOs and launching a new US$150 million Global Income Fund. AUM increased to £7.5 billion at 30 September 2015 (31 March 2015: £7.2 billion) as the £773 million of new AUM raised and favourable foreign exchange movements more than offset the run-off of older funds.

Fundraising activity

Debt Management has made good progress in generating AUM in the first half as the cash yield generated by CLO funds remained attractive. The team closed one CLO in Europe, Harvest XII, and one in the US, Jamestown VII, raising a total of £625 million new CLO AUM in the first half. In addition, we continue to operate CLO warehouse vehicles in both Europe and the US ahead of establishing new CLOs. There was significant volatility in August and September 2015 and, overall, the CLO market activity is below the peak seen in 2014 in the US in particular and transactions are taking longer to close in Europe.

In addition to our CLO offerings and 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 30 September 2015, had US$171 million under management. The US Senior Loan Fund also continued to perform strongly, outperforming its benchmarks, and AUM increased to US$199 million (31 March 2015: US$157 million).

Table 6 details Debt Management AUM.

Proprietary Capital investment

For regulatory reasons, 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 European risk retention rules, and future US rules, is important as managers who can provide most or all of the equity to a new CLO, and demonstrate the ability to comply with the regulatory rules, are increasingly at a competitive advantage.

As long-term holders of CLO equity positions, our returns are driven by the cash flows to maturity. CLO equity distributions contributed £14 million (September 2014: £6 million) to operating cash profit and the IRRs are attractive. However, in the interim, our valuations were subject to the market volatility and we recognised a mark to market loss of £18 million (September 2014: £10 million) in the first half. This was due, in part, to the distributions but also a number of other factors, such as concerns about interest rate rises and the oil and gas sector.

In addition to the investments 3i makes in the CLOs for regulatory reasons, 3i is also the first loss investor in the warehouse facilities used to accumulate loans prior to the launch of a CLO. At 30 September 2015 the total invested by 3i in these facilities was £51 million.

Table 5: Cash investment in the six months to 30 September 2015 

Including the US$75 million seed capital contributed to the Global Income Fund, we had £249 million (31 March 2015: £176 million) of proprietary capital invested in the Debt Management business at 30 September 2015.

outlook

In general, current market volatility is impacting investor appetite for new CLOs. However, our strong relationships mean we expect to close at least one US CLO and one European CLO before the end of the financial year.

Table 6: Assets under management at 30 September 2015 

Financial review

Against a volatile market backdrop, the Group delivered a solid result in the first half.

Table 7: Summary financial data under the Investment basis

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 eliminated the risk of having to consolidate portfolio investments. However, as described in our Annual report and accounts 2015, 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 statements.

Total return

3i generated a total return of £168 million, or a profit on opening shareholders' funds of 4.4% (September 2014: £234 million or 7.1%) in the first half, despite challenging market conditions, demonstrating the financial and commercial resilience of the business after the completion of its three-year transformation programme. The Proprietary Capital business delivered a gross investment return of £272 million (September 2014: £297 million) and an operating profit before carry of £204 million (September 2014: £262 million) due to a robust performance in the underlying portfolio companies. Underlying Fund Management operating profit before carry was £13 million (September 2014: £16 million).

Table 8: Total return for the six months to 30 September 2015

Proprietary capital returns

The Proprietary Capital business delivered an operating profit before carry of £204 million (September 2014: £262 million) principally due to strong weighted average earnings growth, including portfolio acquisitions, of 19% (31 March 2015: 19%) in the Private Equity portfolio and positive contributions from the Infrastructure and Debt Management businesses.

By business line, the gross investment return on the opening portfolio was 8% from Private Equity (September 2014: 10%), 4% from Infrastructure (September 2014: 5%) and 2% from Debt Management (September 2014: loss of 5%). Private Equity accounted for 81% of the proprietary capital portfolio at 30 September 2015 (31 March 2015: 81%) and remains the primary driver of Proprietary Capital returns.

Realised profits

Continued exit momentum in the first half resulted in 3i realising profits on disposal of £29 million (September 2014: £35 million) and proceeds totalling £359 million (September 2014: £324 million). Realisations were achieved at an uplift over opening value of 9%, which was lower than prior periods due to a number of assets being valued on an imminent sales basis at the beginning of the year.

As in previous periods, the majority of the realisations were from the Private Equity portfolio, which contributed proceeds of £307 million (September 2014: £316 million), including £71 million from the sale of quoted assets (September 2014: £68 million). The Private Equity realisations completed in the period generated an average money multiple of 1.6x over their investment life. Further detail is provided in Table 2 of the Private Equity section.

3iN returned £51 million via a special dividend during the period, following the completion of its sale of Eversholt Rail, and this was treated as realised proceeds. This generated a realised profit of £3 million due to the increase in the 3iN share price up until the date the dividend was paid.

Unrealised value movements

The unrealised value movement of £167 million (September 2014: £307 million) was due predominantly to strong earnings growth in a number of our key Private Equity assets.

Table 9: Unrealised profits/(losses) on revaluation of investments for the six months to 30 September

Private Equity unrealised value growth

Performance

The performance category measures the impact of earnings and net debt movements for the portfolio companies valued on an earnings basis. In general, when valuing a portfolio investment on an earnings basis, the earnings used in the September valuations are the last 12 months' management accounts data to June, unless the current year forecast indicates a lower maintainable earnings level. Where appropriate, adjustments are made to earnings on a pro forma basis for acquisitions, disposals and non-recurring items. In the case of Action, which is continuing to experience significant growth due to its store roll-out programme, a run-rate adjustment is made to its earnings for valuation purposes to reflect the profitability of recently opened stores.

Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £171 million (September 2014: £209 million). Value weighted last 12 months earnings, including portfolio acquisitions, increased by 19% (31 March 2015: 19%), demonstrating that the portfolio's largest assets are delivering strong improvements in performance. Excluding Action, value weighted last 12 months earnings grew by 14% (31 March 2015: 16%).

The number of investments valued using forecast earnings increased to five at 30 September 2015 from two at 31 March 2015, representing 10% of the portfolio by value (31 March 2015: 3%).

Table 10: Portfolio earnings growth weighted by September 2015 carrying values1

Net debt in the portfolio decreased to 2.8x EBITDA (31 March 2015: 3.1x).

Table 11: Ratio of debt to EBITDA weighted by September 2015 carrying values1

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 11.4x at 30 September 2015 before marketability discount, and from 10.5x to 10.7x after marketability discount. The multiple used to value Action, the largest asset by value, remained unchanged at 13.5x post discount. Excluding Action, the weighted average EBITDA multiple remained flat at 10.1x before marketability discount (31 March 2015: 10.1x) and was 9.4x after marketability discount (31 March 2015: 9.3x).

We increased the multiple used to value Basic-Fit from 9.5x at 31 March 2015 to 10.5x post discount to recognise the growth potential of this asset as it both upgrades its existing gyms and opens new ones.

Stock market multiples declined sharply in our second quarter but, as noted in the Annual report and accounts 2015, we consider other factors such as exit plans, relative performance and investment size when setting the multiples we use. As a result, we adjusted multiples down, when compared to the market, throughout 2014 as equity markets increased. In the first half we continued to adjust multiples in 19 out of the 30 companies (31 March 2015: 22 out of 33) valued on an earnings basis. However the valuation multiples declined for 10 companies and the net effect was a decrease in value of £24 million in the period (September 2014: £13 million increase).

Imminent sale

Portfolio companies which are well advanced in a negotiated sales process are valued on an imminent sale basis. No companies were valued on this basis at 30 September 2015.

Discounted Cash Flow

The Discounted Cash Flow (DCF) valuation basis is used to value portfolio companies with predictable and stable cash flows. As at 30 September 2015, the largest portfolio company valued on this basis was Scandlines, valued at £257 million. Its value increased by £30 million largely due to strong trading and the expectation of further delays in the opening of the proposed competing fixed link.

Quoted portfolio

The Private Equity quoted portfolio, including the UFO Moviez IPO that completed in the period, generated an unrealised value loss of £2 million (September 2014: £12 million gain) which is detailed in Table 12.

Table 12: Quoted portfolio movement for the six months to 30 September 2015 

Infrastructure unrealised value movement

The direct Infrastructure portfolio primarily consists of our 34% holding in 3iN. The 4% increase in 3iN's share price to 167 pence (31 March 2015: 160 pence) led to a value uplift of £19 million in the period (September 2014: £17 million). This positive performance was partially offset by a further decline in value of the India Infrastructure Fund which recorded an unrealised value reduction of £9 million (September 2014: £8 million reduction). The fund's investments continued to face a number of challenges together with the ongoing depreciation of the rupee.

Debt Management unrealised value movement

The Debt Management unrealised value reduction of £18 million in the first half (September 2014: £10 million) relates principally to the mark to market valuation of the CLO equity portfolio, and there are a number of factors that contribute to this movement. We received £14 million of cash distributions (September 2014: £6 million), included in portfolio income, that result in a corresponding value reduction. Broker quotes, which are used to support CLO valuations, also reflected general market concerns about liquidity and investor risk appetite. In the US in particular, potential interest rate rises and oil and gas sector concerns impacted this sentiment. The underlying cash flows of the CLOs remain sound, and our longer term view of returns remains positive.

Portfolio income

The portfolio generated income of £69 million in the period (September 2014: £53 million). The increase compared to the prior period was driven by dividends, with notable receipts including £14 million from Debt Management CLO distributions, £8 million from Scandlines and the £11 million ordinary distribution from 3iN. Income from loans and receivables was broadly stable at £28 million (September 2014: £30 million) and predominantly related to Private Equity assets.

A further £5 million in net fees from the new investments in Weener Plastic and Euro-Diesel, as well as portfolio monitoring fees, were also recognised in the period (September 2014: £2 million).

Net foreign exchange movements

The Group recorded a total net foreign exchange loss of £3 million (September 2014: £73 million) during the period with the strengthening of sterling against the US dollar (2.4%) being partially offset by the weakening of sterling against the euro (1.6%). The net foreign exchange loss also reflects the translation of non-portfolio net assets, including non-sterling cash held at the balance sheet date.

Based on the portfolio as at 30 September 2015, a 1% movement in the euro and US dollar would give rise to a £20 million and £7 million movement in total return respectively.

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 include 100% of costs in relation to the CEO and Group Finance Director and elements of finance, IT, property and compliance. Proprietary Capital operating expenses continued to be well managed and were £15 million (September 2014: £13 million).

Synthetic fees, which are calculated on cost rather than value of assets, were marginally lower at £21 million (September 2014: £22 million) and reflect the lower level of proprietary capital being managed as a result of net divestment during the period.

Net interest payable

Gross interest payable declined to £24 million (September 2014: £26 million) due to the reduced costs associated with the 2016 revolving credit facility which was refinanced in September 2014. This facility was extended by one year to September 2020 at no extra cost, following an agreement with the participating banks in September 2015. The current gross debt position is detailed further in this Financial review and in Note 9 of the accounts.

Interest receivable increased marginally to £2 million (September 2014: £1 million) and reflected the higher cash balances held throughout the period.

FUND MANAGEMENT RETURNS

Table 13: Fund Management operating profit for the six months to 30 September

The Group's Fund Management income is driven by total AUM. At 30 September 2015, AUM was stable at £13.5 billion (31 March 2015: £13.5 billion) as the launch of two CLOs and the Global Income Fund within Debt Management were offset by a fall in AUM from the net divestment activity in Private Equity.

The Fund Management business generated an operating profit before carry of £10 million for the period (September 2014: £13 million). The reduction in profitability was driven principally by lower third-party fee income, which declined by 10% to £37 million (September 2014: £41 million) as a result of the ongoing divestment of older Private Equity assets that were partially funded with external capital. This was partially offset by continued cost discipline but the operating profit margin decreased to 17% (September 2014: 21%). On an underlying basis, excluding amortisation costs, operating profit was £13 million (September 2014: £16 million) at a margin of 22% (September 2014: 26%).

Total return


Table 14: Summarised total return for the 6 months to 30 September

Net carried interest and performance fees payable

We pay carried interest to our investment teams on proprietary capital invested and receive carried interest from third-party funds.

In Private Equity, we typically accrue carried interest 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 30 September 2015 valuation. We accrued carried interest payable of £36 million (September 2014: £36 million) in the period.

We also accrued £3 million of carried interest payable to the Debt Management team (September 2014: £2 million) and nil to the Infrastructure team (September 2014: £7 million) as 3iN did not go through its performance hurdle in the first half. In total, we accrued for £39 million of carry payable in September 2015 (September 2014: £45 million).

The £(3) million carried interest receivable includes an £8 million one-off adjustment to the balance due from the Growth Capital Fund, which offsets the £5 million from Debt Management (September 2014: £4 million). Notwithstanding the recovery in fund performance, we are yet to accrue carried interest receivable from EFV, our largest third-party Private Equity fund.

Pension

There was a re-measurement loss on the Group's pension scheme of £1 million (30 September 2014: £7 million loss) during the period. The liability of the Group's UK defined benefit pension scheme declined in the period following an increase in the discount rate. However, this was offset by a fall in asset valuations, which were impacted by volatile financial markets.

We have launched a programme to offer our members flexibility in how they take their pension benefits following the Government's "Freedom and choice in pensions" changes announced in April 2014. This includes the provision of independent financial advice and a range of options for deferred and pensioner members.

Operating cash profit

Table 15: Operating cash profit for the six months to 30 September

3i made an operating cash profit of £17 million in the period (September 2014: £16 million). Cash income increased modestly to £80 million (September 2014: £79 million) principally due to increased dividends. Our Debt Management business generated good fund fee cash income of £18 million (September 2014: £17 million) which almost offset the reduced Private Equity fund management income. Cash fee income from our managed Private Equity funds and third parties decreased to £5 million (September 2014: £9 million).

Operating expenses incurred during the period were stable at £63 million (September 2014: £63 million), and decreased to 0.9% (September 2014: 1.0%) of AUM. We have recruited to support our investment teams, as detailed in the Chief Executive's statement, but remain focused on costs being 1% of AUM as an appropriate benchmark.

INVESTMENT CASH FLOWS

Investment and realisations

Table 16: Investment activity - Proprietary Capital and Third-party Capital for the six months to 30 September

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

BALANCE SHEET

Table 17: Simplified balance sheet and gearing

The Proprietary Capital portfolio increased to £4,037 million at 30 September 2015 (31 March 2015: £3,877 million) as cash investment of £294 million and unrealised value growth of £167 million offset the realisations in the period.

The mix of the portfolio was broadly stable. Private Equity remained at 81% of the total portfolio (31 March 2015: 81%) while an increase in the Debt Management portfolio to 6% (31 March 2015: 5%) was offset by a fall in the Infrastructure portfolio to 13% (31 March 2015: 14%).The final FY2015 dividend payment, partially offset by operating cash inflows and net divestment, led to cash and deposits on the balance sheet decreasing to £807 million (31 March 2015: £864 million). We recognised a small increase in the sterling equivalent of the 2017 euro denominated bond and, as a result, the Group was in a net debt position of £12 million at 30 September 2015 (31 March 2015: £49 million net cash) and had gearing of 0.3% (31 March 2015: nil).

Liquidity

Liquidity remained strong at £1,157 million (31 March 2015: £1,214 million) and comprised cash and deposits of £807 million (31 March 2015: £864 million) and undrawn facilities of £350 million (31 March 2015: £350 million).

Foreign exchange

At 30 September 2015, 30% of the Group's net assets were denominated in sterling, 43% in euro, 25% in US dollar and 2% in other currencies. Although we do not implement structured hedging of the NAV, we may implement specific short-term hedging on entry or exit cash flows of an investment if appropriate.

Diluted NAV

The diluted NAV per share at 30 September 2015 was 401 pence (31 March 2015: 396 pence). The increase was driven by the total return in the period of £168 million (September 2014: £234 million), partially offset by the payment of the final FY2015 dividend of £133 million, or 14.0 pence per share (September 2014: £126 million, 13.3 pence per share).

Dividend

The Board has announced an interim dividend of 6.0p (September 2014: 6.0p). This comprises of a 2.7p base dividend and a 3.3p additional dividend and reflects our robust balance sheet and confidence in our longer term prospects. The interim dividend is expected to be paid on 6 January 2016 to those shareholders on the register at 11 December 2015.

Principal risks and uncertainties

The main elements of 3i's approach to risk management, its risk management process and governance structure are set out in the Risk section of the 3i Group Annual report and accounts 2015 which can be accessed via the link on the Investor Relations home page of the Group's website at www.3i.com.

In delivering the Group's strategy we face a number of risks. These are monitored continuously and managed by:

§ adhering to our clearly defined and established business model;

§ following an integrated risk management approach; and

§ maintaining our clearly defined risk appetites and key risk indicators.

During the six months to 30 September 2015, there was no significant change to our business model, risk management approach or risk appetite.

The principal risks and uncertainties for the remaining six months of the financial year are unchanged and summarised below. This is not a comprehensive list of all potential risks and uncertainties faced by the Group, but rather a summary of the risks which it currently believes may have a significant impact on its performance and future prospects.

External - Risks arising from external factors including political, legal, regulatory, economic and competitor changes which affect the Group's operations. There has been a significant amount of uncertainty in the Eurozone and the wider emerging markets' economies in 2015 and the Group continues to monitor these events closely. On 5 October 2015, the OECD published the final reports arising from its work on the Base Erosion and Profit Shifting ("BEPS") project. It is not clear which countries will implement these proposals and the timing and extent of implementation by those that do. The OECD has indicated that further detail on some of the proposals will be published during 2016. 3i will continue to monitor the impact of these proposals on its business and operations.

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

Treasury and funding - Risks in relation to changes in market prices and rates, access to capital markets and third-party funds, and the Group's capital structure.

Operational - Risks arising from inadequate or failed processes, people and systems or from external factors affecting these. In the Group's ongoing assessment of operational risks in FY2016, which is informed by an analysis of its risk factors, the Group has paid particular attention to the increasingly sophisticated threat of cyber crime. We continue to review and improve our governance and controls to protect our information and infrastructure.

The Group Risk Committee meets quarterly. The risk review process includes the monitoring of dashboards which track the Group's financial performance and progress against its strategic objectives at a Group level and for each of the Group's business lines. This assists the Committee in its assessment of the key risks affecting the achievement of the Group's objectives and the effectiveness of current risk mitigation plans.

The Committee also has a number of focus areas, which are agreed in advance of each meeting. Topics discussed in the period included a review of cyber crime and a review of the changes to the UK Corporate Governance code.

This Half-yearly report provides an update on 3i's strategy and business performance, as well as market conditions, which are relevant to the Group's overall risk profile and should be viewed in the context of the Group's risk management framework and principal inherent risk factors as disclosed in the Annual report and accounts 2015.

Reconciliation of the Investment basis to IFRS

Background to investment basis NUMBERS USED IN THE INTERIM MANAGEMENT REPORT

The Group makes investments in portfolio companies directly, held by 3i Group plc, and indirectly, held through intermediate holding company and partnership structures ("Investment entity subsidiaries"). It also has other operational subsidiaries which provide services and other activities such as employment, regulatory activities, management and advice ("Trading subsidiaries"). The application of IFRS 10 requires us to fair value a number of Investment entity subsidiaries that were previously consolidated line by line. 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. 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 Annual report and accounts 2014 to aid understanding of our results. The Interim management 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 the same 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 after Principal risks and uncertainties.

Reconciliation of Statement of comprehensive income