3i Group Regulatory News (III)

14 November 2013

3i Group plc announces Half-yearly resultsto 30 September 2013

Key highlights

§ Continuing to deliver against our strategic plan

§ Strong flow of Private Equity realisations with proceeds of £528 million, representing a 32% uplift to opening value

§ Solid Private Equity portfolio performance; continuing to see benefits of asset management improvement initiatives

§ Good contribution by Infrastructure and Debt Management to fee income generation

§ Expect to exceed operating cost savings target of £60 million by March 2014

§ Total return of £175 million after accounting for a foreign exchange translation loss of £79 million

§ Good progression in NAV per share to 322 pence at 30 September 2013 (31 March 2013: 311 pence)

§ Initiating additional shareholder distribution - proposing distribution of 20 pence per share for the year to March 2014, including annual base dividend of 8.1 pence; remainder to be distributed via special dividend

§ On this basis, confirming interim dividend of 2.7 pence and special interim dividend of 4.0 pence

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

"The Group has performed well during the first six months of the financial year which reflects the strong progress we have made against our strategic priorities. We are now generating some real momentum in the business.

"There has been a strong flow of realisations and a good progression in NAV per share to 322 pence at September 2013 compared to 311 pence at 31 March 2013.

"Given our strong run of realisations, combined with a net cash position and good levels of liquidity, we are initiating additional shareholder distributions. For the financial year 2014, we expect to propose a total dividend of 20 pence per share, including the annual base dividend of 8.1 pence per share."

Financial data

- ends -

For further information, please contact:

For further information regarding the announcement of 3i's Half-yearly results to 30 September 2013, including a live videocast of the results presentation at 10.00am (registration from 09.30am), please visit www.3i.com

Notes to editors

3i is a leading international investor focused on mid-market private equity, infrastructure and debt management across Europe, Asia and the Americas.  

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

This 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.

Total returnfor the six months to 30 September 2013

Overview

Performance highlights

Our performance for the six months to 30 September 2013

Chairman's statement

"I am pleased to report a good set of results during the first six months. We continue to make strong progress in executing our strategic plan."

I am pleased to report a good financial performance during the first half of the Group's financial year. This has been achieved against a backdrop of continued uncertainty and volatility in the wider economy. We continue to make strong progress in executing the strategic plan that we announced in June last year.

Dividend

In May 2012, the Board announced a strengthened distribution policy designed to give shareholders a direct share in the success of the Group's realisation activities by adopting a policy of returning to shareholders a proportion of gross cash realisations subject to certain conditions. These conditions have been satisfied and we are therefore initiating additional shareholder distributions above the base dividend.

The Board currently intends to propose a total dividend for the year of 20 pence per share, including the annual base dividend of 8.1 pence per share, subject to the financial results at 31 March 2014 and shareholder approval. Accordingly, the Board has decided to pay a total interim dividend of 6.7 pence per share (2012: 2.7 pence per share), representing one third of the expected total full year dividend. The total interim dividend of 6.7 pence per share will comprise a special dividend of 4.0 pence per share plus a base dividend of 2.7 pence per share.

Board changes

As I indicated in my statement for the year ended 31 March 2013, Willem Mesdag will be retiring from the Board with effect from 30 November. Willem has served as a non-executive Director on our Board since 2007, including as Chair of the Valuations Committee. He has provided invaluable advice during a period of considerable change for 3i and we wish him well in the future.

I am delighted that David Hutchison OBE has been appointed as a non-executive Director of 3i and joined the Board with effect from 11 November. Following Willem's departure from the Board, David will become Chair of the Valuations Committee. David brings a wealth of investment and banking experience across a range of asset classes. Until 2009, David was Head of UK Investment Banking at Dresdner Kleinwort Limited and a member of its Global Banking Operating Committee. Since 2009, he has been Chief Executive of Social Finance Limited, a not-for-profit organisation which injects market principles into funding that creates both social and financial results.

Outlook

Although there are some signs of recovery in parts of the global economy, the overall environment remains uncertain and volatile. We have seen only low levels of GDP growth in Eurozone countries and a marked slow down in emerging markets.

Despite the challenging macroeconomic environment and relatively subdued levels of M&A activity in our core markets, the second half of the year for 3i has started well. We have announced or completed three key Private Equity investments: GIF, JMJ Associates and Scandlines, representing total investment of £185 million. Within Infrastructure, the Group completed its acquisition of Barclays' European infrastructure funds management business, adding c.£780 million of assets under management and a team based in London and Paris.

We remain focused on delivering our strategic plan and we expect to continue to drive improved business performance and generate further shareholder value over the coming years.

Sir Adrian Montague

Chairman

13 November 2013

Chief Executive's statement

"The Group has performed well over the last six months, delivering a solid set of results as we build upon the considerable progress made during the last financial year - our year of "Restructuring".

We are making good progress in executing the next phase of our strategic plan - "Transition and delivery"."

Introduction

The Group has performed well during the first six months of the financial year. This reflects the strong progress we have made against our strategic priorities.

There has been a strong flow of realisations and a good progression in NAV per share to 322 pence at 30 September 2013 compared to 311 pence at 31 March 2013. Over the same period, 3i has generated a healthy total shareholder return of 17% compared to 4% for the FTSE All-Share index.

Given our strong run of realisations combined with a net cash position and good levels of liquidity, we are initiating additional shareholder distributions. For financial year 2014, we expect to propose a total dividend of 20 pence per share, including the annual base dividend of 8.1 pence per share.

Business review

In Private Equity, we are continuing to see the benefits of the asset management improvement initiatives which were implemented last year. Our Private Equity investment portfolio performance has been good during the first half of the year, despite economic conditions remaining generally weak across a number of markets. In particular, we have had a strong run of realisations within Private Equity, generating £528 million of total proceeds for 3i, more than twice the amount in the same period a year ago. Including third-party funds managed by 3i, total Private Equity realisation proceeds in the period were £887 million. Realisations were achieved at an overall uplift of 32% to opening value and generated good returns on both proprietary and third-party capital for the benefit of our shareholders and fund investors, respectively.

This strong performance has led to a notable improvement in the performance of Eurofund V and our Growth Capital Fund which have now recovered to 1.0x and 1.22x at 30 September 2013 respectively. This is a significant improvement given the funds stood at 0.76x and 0.94x at 31 March 2012 and underlines the benefits of the asset management improvement initiatives initiated during the early part of FY13. Since establishing the new Private Equity leadership team in 2010, the business has seen a strong improvement in performance with a key driver of growth coming from investments made from 2010 onwards such as Action and Element. We expect to continue to improve the performance over time.

In terms of new Private Equity investment opportunities, I am encouraged both by the recent pick up as well as by the quality of the assets that we are seeing in our pipeline. Since the period-end, we have announced or completed three significant investments: GIF (German-based specialist in transmission testing), JMJ (global management consultancy) and Scandlines (leading European ferry operator). In aggregate, these equate to total investment by 3i of £185 million (£261 million including third-party funds).

I am confident that we are putting together an interesting portfolio of new investments with significant potential for value growth. We have been focussing on sectors and assets where we have good experience and where our international platform is a differentiator. These are true mid-market assets which we have secured using our local platforms away from very competitive auction processes. We remain cautious about the macro outlook and our Investment Committee is very keen to see this reflected in the pricing of new investment at the current time. We also have a growing pipeline of potential new investments with similar potential for future value growth.

As a result of the excellent progress made by the business, Private Equity has continued to make a strong contribution to the Group's overall performance. In the first six months of the year, Private Equity generated a gross portfolio return of £322 million (11.9% on opening value), a 92% increase compared to £168 million (6.4% on opening value) in the same period a year ago.

In Infrastructure, the European portfolio has continued to perform well and generated a good level of cash income for the Group, through both portfolio income and advisory fees. However, much of this progress has been offset by a decline in the value of the 3i India Infrastructure Fund, driven by a combination of a material depreciation in the Indian rupee as well as the broader macroeconomic challenges in India. While this is disappointing, the core European portfolio is expected to be the key driver of future performance and accounted for 79% of 3i's underlying portfolio value at 30 September 2013 compared with 68% at 31 March 2013.

There continues to be a strong demand for infrastructure assets as investors seek yield, and while the market is competitive, we are seeing a number of interesting investment opportunities in our target northern European markets. For example, in June this year, 3i Infrastructure plc invested £62 million in Cross London Trains, which will own a key element of London's commuter rail infrastructure.

We are delighted to have completed in November the acquisition from Barclays of their European infrastructure fund management business ("BIFM") which brings c.£780 million of assets under management and experienced investment teams in both London and Paris. This business was a pioneer in the primary PPP market and currently manages two unlisted funds focused on UK and European PPP and low-risk energy projects. This strategic acquisition is a key milestone in the development of our Infrastructure business and I believe it will broaden and enhance our access to new investment opportunities. For example, since the period-end, we have already completed an investment in the National Military Museum PPP project in the Netherlands for 3i Infrastructure plc, which was sourced through the BIFM team.

In Debt Management, during the first half of the year, third-party fee income remained steady at £16 million (September 2012: £16 million), representing almost half of the Group's total third-party fee income in the period. At 30 September 2013, the business managed £6.3 billion of AUM through 25 funds, 16 in Europe and 9 in the US.

In terms of market activity in the first half, we saw a re-opening of the European CLO market as well as a strong level of new CLO issuance in the US. We capitalised on this with the launch of our first European CLO (Harvest VII) since the establishment of the Debt Management platform in 2011. Harvest VII closed in September, adding €310 million of AUM. And since the period-end, we have made good progress towards launching further CLOs.

We are focussed on the opportunity to launch further new CLO funds and we have warehousing vehicles in place in both Europe and the US to seed future launches.

Strategic priorities and progress

In my last review, I set out the priorities and targets for the Group in the next phase of our strategic plan during financial years 2014 and 2015 - "Transition and delivery". Our overall strategic objectives in this phase are:

Our progress against each of these objectives is described below.

Cover operating costs with annual cash income

A key objective is to cover the Group's operating costs with cash income from management fees and portfolio income. The major cost reduction programme that we announced in June 2012 is a key part of achieving this objective, in combination with growing our assets under management over time.

In May, we announced that we had significantly outperformed our original cost savings target of £40 million, achieving £51 million of annualised run-rate operating cost savings at 31 March 2013.

In this context, we announced a new target of £60 million of cumulative cost savings by 31 March 2014. These targeted savings represent almost a third of the Group's total opening run-rate cost base of £185 million at 31 March 2012, before we announced the restructuring. We have made very good progress in the first half and we again expect to exceed our cost savings target for this financial year. As an indication of the progress we have made, in the first six months of the year, actual operating costs were £68 million, 35% lower than a year ago (September 2012: £105 million). Furthermore, the Group's cash income increased to £70 million in the first half compared to £62 million a year ago. This increase was driven by growth in fees and portfolio income from Debt Management through new fund launches offsetting reduced fee income from Private Equity as a result of net divestment activity as well as Eurofund V and the Growth Capital Fund coming to the end of their respective investment periods.

To help you track our progress, in May we introduced a new key performance indicator called "Annual operating cash profit". This measures the difference between our annual cash income (cash fees from managing third-party funds and cash income from our investment portfolio) and our annual operating expenses, excluding restructuring costs. In the past, 3i has operated at a material deficit on this measure. Our aim is to eliminate this deficit on an annualised run-rate basis by 31 March 2014 even against the headwind of Eurofund V and the Growth Fund having finished their respective investment periods. We are on track to meet this target. We have already made good progress with the Group turning to a profit of £6 million in the six months to 30 September 2013 compared to a loss of £(18) million for the six months to 30 September 2012. Further details are provided in the Financial review under Annual operating cash profit.

Grow third-party income and generate a sustainable annual operating profit from our fund management activities

Our fund management platforms in Private Equity, Infrastructure and Debt Management source and manage investments on behalf of both 3i and third-party funds. These international platforms underpin our ability to make alpha-generating investments on behalf of our shareholders and co-investors. A key objective for 3i is ensuring that fees from these activities more than cover the costs of running the platforms. This includes the costs of our investment teams and the network of regional offices as well as the costs to the Group of providing support functions such as finance, information technology and human resources.

Therefore, our strategic focus is to generate more fees over time through growing our funds under management, while at the same time maintaining a right-sized cost base. We are making strong progress on these fronts. Since 31 March 2012, prior to the announcement of 3i's future strategy, total funds under management have grown from £10.5 billion to £11.8 billion at 30 September 2013. This was driven by growth in third-party capital of close to 37%, from £6.3 billion (60% of total AUM) to £8.6 billion (73% of total AUM). Over the same period, through the cost reduction programme, we have reduced our operating costs as a percentage of weighted average AUM from 1.5% at 31 March 2012 to 1.1% at 30 September 2013.

Over time, we believe that our fund management platform is capable of generating sustainable and growing annual profits, which in turn should create additional value for shareholders beyond the value of our proprietary investments. This is a key building block of the 3i Value Build which I talked about in my last review earlier this year.

Improve capital allocation, focusing on enhanced shareholder distributions and re-investment in our core investment businesses

As part of 3i's new strategy announced in June last year, we have fundamentally changed our capital allocation approach so that over time, we use less capital to pay operating costs, funding costs and debt repayments, and instead focus on shareholder distributions and re-investment in our core investment businesses.

§ Significant operating cost savings: we expect to exceed our target of £60 million of cumulative cost savings by 31 March 2014 and importantly we are on target to cover our costs with cash income on an annualised run-rate basis.

§ Substantial reduction in gross debt and funding costs: since 31 March 2012, prior to the announcement of 3i's new strategy, gross debt has reduced from £1,623 million to £873 million at 30 September 2013, representing a total reduction of over 46%. The effect of this has been to reduce gross interest costs to £28 million, less than half of the level a year ago (September 2012: £62 million). We are on track to reduce our gross interest costs to less than £60 million for the full year to 31 March 2014 compared to £101 million in the prior year.

§ Re-investing in our core investment businesses: we are seeing increasing new investment momentum, and since the period-end, we have made a number of key Private Equity investments and our investment pipeline is continuing to build.

The timing of realisations is driven by individual exit plans for each investment and we now have much better visibility on the timing of these initiatives. We are not planning for the same level of realisations in the second half of this financial year but over the coming years we do plan to deliver a good flow of realisations in Private Equity as we rationalise the number of investments in our portfolio and tighten our focus. We have had a strong run of realisations over the last 9 months, raising over £1.2 billion for 3i and its co-investors.

§ Initiating additional shareholder distributions: through our strong run of realisations and the resulting net cash position, we have satisfied the criteria for implementing our enhanced distribution policy. The Board intends to propose a total dividend for the year of 20 pence per share, including the annual base dividend of 8.1 pence per share.

Evolving business model

We believe that the combination of our asset management skills across three complementary platforms, together with our strong balance sheet and access to permanent capital, represents a differentiated and attractive value proposition.

Investing from our own balance sheet is part of 3i's heritage. Currently, proprietary investment AUM amounts to £3.2 billion, accounting for 27% of the Group's total AUM. 3i is the largest single investor in our Private Equity and Infrastructure funds. Putting our own capital to work alongside third-party investors is a fundamental part of our business model and strategy.

A recent example of this approach are the framework arrangements we have established earlier in the year with a number of leading investors to invest alongside 3i in European private equity buyout opportunities. It was under one of these arrangements that 3i recently invested alongside a co-investor in JMJ.

We view our role as both an active owner as well as manager of our funds - we see ourselves as an "engaged" LP. This reinforces the alignment between the interests of our shareholders and our fund investors. The Partners in the Private Equity business are responsible for finding and managing our investments while the Investment Committee, which I chair, and includes the two co-heads of thePrivate Equity business together with a majority of members from outside the Private Equity Division, acts as an engaged and challenging LP and has the final say on new investment as well as realisations and major people and financing decisions.

As we evolve our business model and value proposition further, we increasingly consider the profitability of our fund management activities in addition to the investment returns we generate on 3i's own capital. Both parts need to generate value for the Group.

And while each of our business lines has different proportions of third-party and proprietary capital and therefore different blends of income and capital returns, overall our focus is on growing profitably our fund management activities and maximising investment returns on 3i's own investments. In particular, we believe that our fund management platform is capable of generating sustainable and growing annual profits. This, combined with capital upside on our proprietary investments, should generate further value over time.

We are already managing the Group with this much clearer delineation between our fund management activities and proprietary capital investing and going forward you will be able to track our progress through a combination of KPIs measuring our performance as an investor of proprietary capital and separately as a fund manager, in addition to overall Group performance.

Our changes to the Group's compensation policies which we announced last year will drive a much greater level of share ownership by 3i staff over time and ensure continued focus on costs and delivering a growing level of annual profits.

Outlook

While we have made considerable progress to date in implementing our strategic plan and continue to work hard to drive improved performance across our business, we remain cautious on the economic outlook. We are seeing some positive indicators in certain parts of the economy, but any broader based recovery could be slow and uneven.

We are seeing growth in Debt Management and Infrastructure, and despite the macroeconomic uncertainty, we currently have a growing pipeline of potential new investments in Private Equity. Whilst uncertainty in the economic outlook can create divergent views on price expectations between buyers and sellers and impact the rate of conversion of prospects, it can also create good opportunities for us. We will need to continue to be patient and disciplined but we have the platform and experience to source mid-market investments with good value growth potential away from aggressive auction processes. This platform, together with our propriety capital, is a true source of competitive advantage for 3i.

Critical to our success are our people. Much of what we have achieved since the announcement of the new strategy in June 2012 is down to their hard work and commitment. A key focus is the continued training and development of our staff throughout their careers with 3i.

So far we have made good progress on all of our strategic priorities in this next phase of our plan and I look forward to updating you when we report our annual results for financial year 2014.

Strategic goal and the 3i Value Build

3i's strategic goal is to be a leading international manager of third-party and proprietary capital with three strong investment businesses delivering top quartile cash investment returns over the longer term:

Each of these businesses has different drivers and return characteristics. Together, they provide an attractive balance of income and capital returns. We believe that the combination of our asset management skills across these three complementary platforms, together with our strong balance sheet and permanent capital, represents a differentiated business model.

Our plan to achieve this strategic goal in financial year 2016 is set out in clear phases. During financial year 2013, we executed successfully the first phase of this strategic plan (the year of "Restructuring"), and we are already making strong progress towards delivering the full benefits of this in financial years 2014 and 2015 ("Transition and delivery").

The clear objective of this multi-year strategic plan is to improve business performance and maximise value for 3i, its shareholders and its fund investors - we call this the "3i Value Build" and it comprises:

Simon Borrows

Chief Executive13 November 2013

Business review

"The Group's results reflect further progress and achievement in the implementation of our strategic priorities."

Group overview

3i Group is an international investor with three complementary business lines. All three business lines invest using a combination of proprietary capital from the Group's own balance sheet and third-party capital. This Business review provides detail on our performance for the six months to 30 September 2013 ("the period") as well as our financial position as at that date, together with comment on our markets and principal risk factors.

The Group generated a total return of £175 million, or a profit on opening shareholders' funds of 6.0% (September 2012: £(5) million or (0.2)%). This reflects further progress and achievement in the implementation of our strategic priorities, with good realisations at strong uplifts to value, an improvement in our cost and income balance, and a further reduction in gross debt. Continuing volatility in macro conditions has had some impact on the results, particularly in respect of foreign exchange.

A key objective of the Group is to improve its operating cash flow so that fees and portfolio income cover costs over time. As a result of new third-party assets under management and the successful cost reduction programme there has been a marked improvement, with "annual operating cash profit" now at £6 million compared with an £(18) million loss in the same period last year. We expect to maintain a profitable position on this measure on a run-rate basis by March 2014.

Total assets under management ("AUM") were £11.8 billion at 30 September 2013. In the period, we closed the first new European CLO since the establishment of the Debt Management business in February 2011, an important milestone for the business. This added €310 million to AUM. Since the period end, we have also completed the acquisition of BIFM, adding a further c.£780 million of AUM.

As the business grows its third-party funds under management it becomes more relevant to considerthe balance of fee income and operating costs from that fund management activity separately from the value and performance of 3i's proprietary investment portfolio.

The Group's proprietary investment portfolio performed well in the period with strong realisations delivering cash proceeds of £528 million and an uplift on opening value of £130 million (September 2012: £268 million and £65 million). Portfolio income was stable at £48 million (September 2012: £49 million) and benefited from income being generated from our increased investment in Debt Management alongside third parties. This was offset by net interest payable of £27 million, which is materially lower than last year following a reduction in gross debt to £873 million (September 2012: £58 million1 and £1,249 million). However, £53 million (September 2012: £50 million1) of non-cash accounting charges relating to foreign exchange, movement in derivatives and pension accounting had a negative effect on total return in the period.

Fee income of £36 million was stable compared with last year (September 2012: £36 million). The underlying position reflects good growth in Debt Management which contributed £16 million, offset by falling fee income in Private Equity (totalling £9 million in the period) as a result of net divestment and the impact of a number of fund investment periods ending in the prior year. Infrastructure's fee income was stable at £11 million.

The Group continues to focus on sustaining a leaner organisation with an appropriate operating cost base relative to fee income. Actual costs incurred in the period were materially lower at £68 million (September 2012: £105 million), including additional costs relating to acquisitions and £4 million relating to one-off restructuring costs. The Group remains on track to exceed its targeted run-rate cost savings of £60 million by 31 March 2014.

The acquisition of BIFM, which completed in November, will further increase fee income in the second half of the year. Fees generated by the BIFM funds are expected to exceed the incremental costs.

We took further steps to reduce gross debt in the period, principally by the repayment of drawings under a revolving credit facility in April. As at 30 September 2013, gross debt was £873 million, a reduction of 19% since the start of the period and over 46% since 31 March 2012. Strong realisations and relatively low levels of investment mean that at 30 September 2013 we had net cash of £28 million, compared to net debt of £335 million at 31 March 2013.

Consequently, the Group has now clearly met the criteria for making additional distributions. Realisation proceeds, including the carry forward of proceeds from the sale of Mold-Masters in the prior period, totalled £750 million at 30 September 2013. As investment levels have been relatively low, and are expected to continue to be so in the near term, the Board has confirmed that it intends to pay a total dividend of 20 pence for the year, of which 8.1 pence is our base dividend. We have decided to pay one third of the total, or 6.7 pence, as an interim distribution, of which 2.7 pence represents the base dividend and 4.0 pence a special dividend.

Financial data and Key Performance Indicators

The table below summarises our financial results and our key performance indicators. The rest of this section of the report includes more detail on the performance in the year.

Assets under management

Total AUM fell by £1,119 million to £11,751 million in the period (March 2013: £12,870 million). Within this, third-party AUM decreased by £591 million to £8,585 million, or 73% of the total AUM at 30 September 2013 (March 2013: £9,176 million, or 71% of total AUM).

Private Equity AUM is calculated on invested rather than committed capital following the end of the investment periods for Eurofund V and the Growth Capital Fund. The reduction in total AUM therefore mainly reflects the net divestment activity.

During the period Debt Management launched its first European CLO since our establishment of the Debt Management business in February 2011 which, in addition to the establishment of warehouse vehicles in Europe and the US, helped to reduce the impact of distributions from CLOs that have passed their re-investment period and foreign exchange. Debt Management AUM decreased by £146 million in the period.

In Infrastructure, since the period end, we also completed the acquisition of the BIFM business which will add a further c.£780 million to the AUM.

The table below summarises the key movements in the period.

Table 1: Reconciliation of movements in assets under management by business line

Table 2: Assets under management

Investment and realisations

Table 3: Investment activity - proprietary capital and third-party capital six months to 30 September

Realisations in the period generated cash proceeds of £528 million (September 2012: £268 million), offset by cash investment of £81 million (September 2012: £118 million), resulting in net cash inflow of £447 million (2012: £150 million). Non-cash investment in the period totalled £46 million (September 2012: £20 million) and total investment was £127 million (September 2012: £138 million).

Investment

The macroeconomic environment in Europe remains challenged, with some economies struggling to return to growth while implementing austerity measures. There are some signs that the UK economy in particular is starting to improve with Purchasing Manager Indices reporting improved metrics. There are also signs of a more established recovery in the US economy. However, there remain a number of risks and, notwithstanding this improvement, global M&A activity in the six months to 30 June 2013 was flat overall in value terms, while the volume of deals reduced. Although there is significant capacity for investment (source: KPMG M&A Predictor July 2013), ongoing concerns about macroeconomic factors continue to subdue activity levels. M&A in the small and mid-market in particular has continued to reduce and European private equity activity, while flat year-on-year, fell 19% in the third quarter compared to the second quarter.

In contrast, the market for CLO fund raisings has been more positive. In the nine months to September 2013 $60 billion of new CLO deals have priced in the US across 124 deals, which is higher than the total level issued in 2012. Notwithstanding the strong momentum year to date, the primary CLO market has become more challenging in recent months, whilst the impact of US regulation, loans being issued on issuer friendly terms and wider liability funding. There were $28 billion of CLOs issued in the first quarter of 2013, with $18 billion and $14 billion issued in the second and third quarters. In the nine months to 30 September 2013, new European leveraged loan issuance was €54.6 billion, which is more than double the €20.5 billion seen in the first nine months of 2012. The recovery in the supply of new leveraged loan issuance in Europe is reflected in the re-opening of the European CLO market. Fourteen CLOs have priced in Europe so far this year for total volume of €4.8 billion.

The relatively reduced level of M&A activity and high level of competition is reflected in the Group's continued low level of investment activity, outside Debt Management, in the period.

Investment was £127 million (September 2012: £138 million). Cash investment was £81 million (September 2012: £118 million), including net negative investment of £11 million in Palace Street I, the European Credit Opportunities Fund. Investment into Debt Management accounted for the majority of cash investment in the period with £10 million also being invested by Private Equity to support the existing portfolio. All of the Group's new investments in the period were made by our Debt Management business and included £16 million in our new European CLO, Harvest VII, and also £66 million to warehouse investments in the US and Europe in preparation for the launch of further CLO funds. Table 4 details the new investments made in the period.

The investment pipeline for Private Equity did improve during the first half of the year. On 9 September 2013, 3i announced its £64 million investment in GIF, a leading international transmission testing business based in Germany, at a multiple of 7x EBITDA. On 21 October 2013 we also announced a £44 million investment in JMJ, a US-based global management consultancy. The investment in JMJ is the first to be made alongside our co-investors under the established framework agreements. The Group has also committed, alongside Eurofund V, to purchase an additional equity stake in Scandlines from our original investment partner for £77 million. The investments in GIF and JMJ have now completed and we expect Scandlines to complete in the quarter to 31 December 2013.

Table 4: New investment in the six months to 30 September 2013

Note : All new investments in the period related to the Debt Management business.

Realisations

As noted above, M&A activity remains subdued in Europe but there is capital available for investment generating a good environment for realisations. The Group generated strong realisations in the period but activity slowed in the quarter to 30 September 2013, in line with the market.

The Group received cash proceeds from realisations of £528 million in the six months to 30 September 2013 (September 2012: £268 million). These realisations were achieved at a strong average uplift over opening portfolio value of 32% (September 2012: 32%) and at a money multiple over original cost of 1.6x (September 2012: 2.1x). Excluding Enterprise, a large 2007 vintage investment, which was realised in the period for £7 million, representing a 0.1x money multiple, the money multiple over original cost was 1.9x.

All of the realisations in the period were generated from our Private Equity portfolio, predominantly through a combination of trade sales to strategic buyers and sales to private equity or other financial investors.

Notable exits included the sale of Xellia, which generated proceeds of £143 million and an uplift over opening portfolio value of 46%; the sale of Civica for £124 million and a 48% uplift on opening portfolio value; and the partial sale of shares in Quintiles, a global healthcare business, which completed a successful IPO in May 2013, from which we generated proceeds of £13 million, and retained residual value at 30 September 2013 of £146 million.

Table 5: Realisations by type in the six months to 30 September

Table 6: Realisations in the six months to 30 September 2013

Portfolio

The value of the portfolio at 30 September 2013 was £3,058 million (31 March 2013: £3,295 million). It reduced in the period as a result of net divestment, offset in part by unrealised value growth.

The weighting of Private Equity in the portfolio reduced marginally in the period to 79% (March 2013: 83%), following net divestment. The weighting of Debt Management increased to 5% (March 2013: 2%), as a consequence of new fundraising activity and Infrastructure remained stable at 16% of the total portfolio (March 2013: 15%).

In line with its strategy, the Group continues to reduce the number of assets held in the portfolio. There were 115 investments in the portfolio at 30 September 2013 (31 March 2013: 127) of which 87 were Private Equity, 10 Infrastructure and 18 Debt Management. As the number of realisations exceeded new investment, combined with the strong value growth in the Group's larger investments, there has been an increased concentration of the portfolio. The 10 largest investments accounted for 51% of the portfolio at the period end (31 March 2013: 46%) and the 25 largest for 76% (31 March 2013: 75%).

Private Equity

As shown in Table 7, the majority of the portfolio (65% by value) grew earnings and the portfolio's largest assets are delivering good earnings growth. The Private Equity portfolio's last 12 months value weighted earnings, the most relevant measure of NAV impact, grew by 15% (March 2013: 10%) year on year.

Table 7: Portfolio earnings growth1

The weighted average EBITDA multiple used at 30 September 2013 was 9.6x pre-marketability discount (March 2013: 8.8x) and 8.8x post-marketability discount (March 2013: 7.9x). These multiples remain below those seen in relevant sector and geographic public markets; for example the FTSE 250 was valued on an average multiple of 11.7x at 30 September 2013.

Leverage in the Private Equity portfolio increased marginally in the period to 3.3x net debt to EBITDA weighted by value (31 March 2013: 3.2x). The increase is primarily a result of the successful refinancing of Action in September 2013 which, as a result of the business' strong performance and the company's high cash flow conversion, had rapidly de-levered Table 8 shows the ratio of net debt to EBITDA weighted by portfolio value.

Table 8: Ratio of net debt to EBITDA- Private Equity portfolio weighted by September 2013 carrying values1

The majority, or 84%, of the Private Equity portfolio by value, is now located in our focus areas of Northern Europe, the US and Brazil (31 March 2013: 81%) as the exposure to Asia and Southern Europe has reduced through realisations and some decline in value.

Infrastructure

3i's investment exposure to infrastructure assets is primarily through its 34% shareholding in 3i Infrastructure plc ("3iN") and through its commitment to the 3i India Infrastructure Fund. 3iN is a listed company with an independent board and our investment is therefore exposed not only to the underlying portfolio but also to fluctuations in the share price of 3iN.

3iN is 3i Group's largest single investment. 3iN's share price increased from 132.6 pence to 133.2 pence in the period. Our 34% holding was valued at £400m at 30 September 2013, or 13% of 3i's total portfolio.

The underlying European portfolio continues to perform well and now represents 79% of the underlying portfolio (31 March 2013: 68%). The underlying India portfolio reduced in value in the period as a result of continuing challenging market conditions in India. Further detail can be found at:www.3i-infrastructure.com

Debt Management

The Debt Management portfolio consists of 18 investments, including the capital provided to CLOs managed by the Group, Palace Street I and the Senior Loan Fund and investments into warehouses in order to build portfolios prior to future fund launches. The Debt Management portfolio grew in the period following increased activity levels and the portfolio was valued at £155 million at 30 September 2013 (March 2013: £81 million). Excluding new investment, value remained flat in the period.

Financial review

Returns

Table 9: Total return for the six months to 30 September 2013

Total return

The total return for the Group was £175 million, which represented a 6.0% return on opening shareholders' funds and a marked improvement on the prior comparable six-month period (September 2012: £(5) million, (0.2)%). Gross portfolio return on 3i's investment portfolio of £315 million (September 2012: £180 million) demonstrated the robust performance of the portfolio, supported by strong cash realisations above opening valuations. The Group also benefited from the cost reduction programme initiated in June 2012, with actual operating costs of £68 million (September 2012: £105 million) being significantly lower than the prior comparable six-month period. The effect of the material reduction in gross debt since 31 March 2012 is now reflected in the net interest payable, which was £27 million in the period (September 2012: £58 million1). Finally, the total return included the negative impact of foreign exchange movements which, along with other non-cash accounting charges, reduced total return by £53 million (September 2012: £(50) million1).

Annual operating cash profit

In June 2012, the Group set an objective of generating cash income from third-party fees and portfolio income sufficient to cover the operating expenses incurred in the year, prior to restructuring costs. This is the "annual operating cash profit" and we measure it on an interim basis for a six month period.

The benefits of the cost reduction programme are now being seen. Actual costs incurred in the period of £68 million were significantly lower compared to the prior period (September 2012: £105 million). They include £4 million of implementation costs associated with the cost reduction programme, and £5 million of costs relating to the Fraser Sullivan and Invesco acquisitions completed since the programme commenced.

In addition to reducing costs, the Group has maintained its cash income. A reduction in fee income from Private Equity funds, that have had net divestment in the period, has been offset by underlying growth in Debt Management through new fund launches and increased investment into cash yielding Debt Management investments. The Private Equity portfolio income has also benefitted from £4 million of one-off cash receipts of accrued interest on realisation. The recent acquisition of BIFM will generate further fee income in future periods.

The annual operating cash profit position improved and importantly moved from a loss of £18 million in the six months to 30 September 2012 to a profit of £6 million in the six months to 30 September 2013, including the £4 million of one-off receipts stated above. We expect to remain profitable on this measure through to 31 March 2014.

Table 10: Annual operating cash profit for the six months to 30 September

Realised profits

Realised profits of £130 million in the period (September 2012: £65 million) demonstrated the benefits of careful exit planning. Realisations were achieved at an uplift over opening value of 32% (September 2012: 32%) and produced a money multiple of 1.6x (September 2012: 2.1x).

Table 6 details realisations in the period and sets out the accounting uplift reflected in the period's total return and the longer term cash-to-cash results.

Unrealised value movements

Table 11: Unrealised profits/(losses) on revaluation of investments six months to 30 September

The underlying performance of the portfolio overall was good. Some of our largest investments, notably Action and Element, continued to demonstrate strong progress in earnings growth. Investments in India and China continued to be challenged, principally as a result of macro economic factors. There have also been significant currency movements in the India portfolio in particular. The weakening of the rupee resulted in a loss of £15 million in the period, which is included in the foreign exchange movement within total return.

Table 12 details the proportion of portfolio value by valuation basis following the movements in the period.

Table 12: Proportion of portfolio value by valuation basis as at 30 September 2013

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 30 September 2013 valuations are the last 12 months' management accounts data to June 2013, 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. Consistent with the approach taken at 31 March 2013, a run-rate adjustment is made to the earnings of Action for valuation purposes to reflect the profitability of stores opened in the period.

Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £32 million (September 2012: £60 million). This was driven by strong earnings growth in our larger investments, with last 12 months' value weighted earnings, the most relevant measure of NAV impact, growing by 15% (March 2013: 10%). Leverage, measured as net debt to EBITDA, remained flat at 3.2x at 30 September 2013 since the beginning of the year for companies valued on an earnings basis (3.3x for the whole portfolio).

Multiple movements

Multiples used to value the portfolio showed improvement in the latter part of the period, following the continued recovery in stock markets. The value weighted average EBITDA multiple increased to 9.6x pre marketability discount (March 2013: 8.8x) and to 8.8x post discount (March 2013: 7.9x). This 9% increase in the period generated an increase in value of £78 million (September 2012: £4 million) for those assets valued on an earnings basis at the beginning and end of the period.

Provisions

A provision is recognised where we anticipate that there is a 50% or greater chance that the Group's investment in the portfolio company will fail within the next 12 months. There were no provisions made in the period (September 2012: £4 million).

Imminent sale

Portfolio companies which are currently in a negotiated sales process are valued on an imminent sale basis, provided there are no significant conditions to a successful completion. At 30 September 2013, two portfolio companies were in an advanced sales process, generating a value decrease of £13 million (September 2012: £(1) million). The majority of this decrease relates to an asset from the Asian portfolio.

Discounted Cash Flow

The Discounted Cash Flow ("DCF") valuation basis is used to value portfolio companies with predictable and stable cash flows, typically infrastructure investments. As at 30 September 2013, there were nine portfolio companies valued using the DCF valuations basis, the majority of which relate to the Group's Indian portfolio. The continued challenging environment in India has contributed to an unrealised loss for cases valued using DCF models of £31 million in the period (September 2012: £1 million).

Other

Where a different valuation basis is more appropriate for a portfolio company, other methods are used to determine fair value, for example, the sum of the parts of the business, or industry specific methods. We group these in the "other" category. The total movement in value was nil in the six months to 30 September 2013 (September 2012: £(9) million).

Quoted portfolio

The quoted portfolio was valued at £578 million at 30 September 2013 and now represents 19% (March 2013: 13%) of the Group's total portfolio, following the IPO of Quintiles in the period. The Group's 34% investment in 3i Infrastructure plc represents the majority of the quoted portfolio at £400 million. Table 13 below summarises the Group's quoted holdings.

Table 13: Quoted value movement in the six months to 30 September 2013

Broker quotes

The Group has investments in a number of the CLOs managed by the Debt Management team, as well as in the Credit Opportunities Fund, Palace Street I. These assets, valued using broker quotes, recorded no value movement in the period (September 2012: £1 million).

Portfolio income

Income from the portfolio was £48 million in the six months to 30 September 2013 (September 2012: £49 million).

Dividends of £16 million were received (September 2012: £14 million), including £11 million from 3i Infrastructure plc and £3 million from Debt Management investments. Interest income was lower than last year at £26 million (September 2012: £30 million) due to the net divestment position for Private Equity.

A further £6 million in net deal fees was received in the period (September 2012: £5 million), principally relating to fees received on completing investments and realisations and annual monitoring fees paid by portfolio companies.

Portfolio income received as cash in the six months was £31 million (September 2012: £27 million), reflecting the relatively high proportion of capitalised interest generated by the Private Equity portfolio.

Fees receivable from external funds

Fees earned from external funds of £36 million in the period were in line with the same period last year (September 2012: £36 million).

Our Private Equity business generated fund management fee income of £9 million (September 2012: £10 million), the decline reflecting the Growth Capital Fund coming to the end of its investment period in December 2012 and the net divestment position seen in the period.

Our Debt Management business continued to generate strong fund management fee income of £16 million (September 2012: £16 million). The recently closed European CLO, Harvest VII, will contribute to further growth in fee income in the second half. We recognised the subordinated fees on all but two of the CLO funds at 30 September 2013, demonstrating their continuing solid performance.

Advisory and management services to 3i Infrastructure plc and the 3i India Infrastructure Fund generated £11 million of advisory and management fee income in the year (September 2012: £10 million). The recently completed acquisition of BIFM will contribute to fee income growth in the second half.

Net carried interest and performance fees payable

Table 14: Net carried interest and performance fees payable six months to 30 September

Carried interest and performance fees are accrued on realised and unrealised profits, taking relevant performance hurdles on the underlying fund and carry vehicles into consideration and assuming that all assets are realised at their current carrying value. No cash payments will be made until the equivalent cash-to-cash returns are generated.

Net carried interest and performance fees payable in the six months to 30 September 2013 of £26 million (September 2012: £2 million) reflect the strong performance of assets, in particular those invested in since 2010. This is consistent with the improved performance of Eurofund V and the Growth Capital fund.

Operating expenses

Table 15: Operating expenses six months to 30 September

Operating expenses were materially lower at £68 million (September 2012: £105 million) and included implementation costs of £4 million in respect of redundancy, office closures and organisational changes (September 2012: £25 million). As a percentage of weighted average AUM in the period, annualised actual operating expenses in the period were 1.1% (September 2012: 1.5%).

The cost reduction programme, initiated in June 2012, has led to a material reduction in costs and headcount. Headcount at the end of 30 September 2013 was 271 (March 2013: 282). This is a significant reduction from 435 staff at 31 March 2012, prior to the cost reduction programme, and includes 15 additional staff who have joined the Group as a result of acquisitions since March 2012.

Net interest payable

Gross interest payable for the six months to 30 September 2013 was £28 million (September 2012: £62 million1) and in line with the expected reduction in interest cost following the reduction in gross debt to below £1 billion.

Interest receivable reduced to £1 million (September 2012: £4 million) in the period, as a result of the lower level of yield being received by the Group on lower average cash balances and deposits.

Derivative movements

The Group recognised a £10 million gain from the fair value movement of derivatives during the period (September 2012: £8 million loss), principally relating to a long-term legacy interest rate swap. The principal amount of the swap was reduced from £150 million to £60 million in the period, locking in an improvement in the long-dated sterling yield curve. The Group continues to reduce its use of derivative based hedging in relation to foreign exchange movements.

Net foreign exchange movements

The hedging ratio of the euro and US dollar denominated portfolio at 30 September 2013 reduced to 38% (September 2012: 89%) and 13% (September 2012: 65%) respectively, as a result of the reduction in euro and US dollar denominated debt and the reduction of currency hedging through derivatives in line with the updated hedging policy discussed in the 2013 Annual report. The net foreign exchange loss also reflects the translation of non-portfolio net assets including non-sterling cash held at the balance sheet date.

The net foreign exchange loss of £79 million (September 2012: £36 million loss) was driven by the strengthening of sterling against the unhedged element of the euro (1.0%), US dollar (6.1%), Indian rupee (18.6%) and Brazilian real (15.2%) resulting in losses of £8 million, £41 million, £15 million and £7 million respectively.

Pensions

The IAS 19 valuation of the Group's UK defined benefit pension scheme at 30 September was improved by an update to the membership data as part of the 30 June 2013 triennial funding valuation that is currently in progress. Due to the reduction in headcount as part of the Group's ongoing cost reduction programme, there are now fewer active members in the pension scheme which has resulted in a reduction of the value of the scheme's liabilities. This was, however, partially offset by the weaker than estimated performance of the scheme's assets. The total actuarial gain in the period was £16 million (September 2012: £(6) million1). The latest triennial funding valuation is in progress, with an effective date of 30 June 2013.

Balance sheet

Table 16: Portfolio value movement by business line

Strong realisations in the period were offset by investment of £127 million and unrealised value growth of £137 million, resulting in a decrease in the total portfolio value to £3,058 million at 30 September 2013 (March 2013: £3,295 million).

Table 17: Gearing and borrowings

Following the significant reduction in gross debt in the prior year, a further £164 million drawn under the 2016 revolving credit facility was repaid in April 2013. Gross debt includes mark to market derivative positions. In the period, £90 million notional of a £150 million long dated interest rate swap was closed out, further reducing gross debt by £22 million. Gross debt at 30 September 2013 was £873 million (31 March 2013: £1,081 million), a reduction of 19% in the period and of over 46% since 31 March 2012.

The Group moved into a net cash position of £28 million during the period (31 March 2013: £335 million net debt) following net divestment. Gearing consequently fell to zero at 30 September 2013 (31 March 2013: 11%) as a result of both the decrease in net debt and the increase in shareholders' funds to £3,062 million (31 March 2013: £2,934 million) following the total return of £175 million in the period.

Liquidity

Liquidity increased to £1,401 million in the six months (31 March 2013: £1,082 million). This comprised cash and deposits of £901 million (31 March 2013: £746 million) and undrawn facilities of £500 million (31 March 2013: £336 million). The cash balance increased primarily as a result of the strong cash inflows from divestment activity albeit offset by other operating cash flows and the repayment of gross debt.

Diluted NAV

The diluted NAV per share at 30 September 2013 was 322 pence (31 March 2013: 311 pence). This increase was driven by the total return in the period of £175 million (September 2012: £(5) million), and partially offset by the payment of the final dividend in relation to the prior financial year of £51 million (September 2012: £51 million).

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 2013.

The principal risks which the Group currently faces, and which the Board believes have the potential to impact materially the Group's financial performance and/or achievement of its strategic objectives, are set out in detail in the Annual report and are broadly unchanged in the period since publication.

The main areas of inherent risk affecting the Group are as follows:

External - Risks arising from external factors including political, legal, regulatory, economic and competitor changes which affect the Group's operations.

Strategic - Risks arising from the analysis, design and implementation of the Group's business model and key decisions on the investment levels and capital allocations.

Investment - Risks in respect of specific asset investment decisions, the subsequent performance ofan 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.

The Group Risk Committee continues to meet 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 to 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 have included the implementation of the European AIFM Directive; a new IT system implementation; the Barclays Infrastructure Fund Management ("BIFM") acquisition; and business developments in Asia.

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.

Financial statements

Consolidated statement of comprehensive income

for the six months to 30 September 2013

Consolidated statement of changes in equity

for the six months to 30 September 2013