3i Group Regulatory News (III)

13 November 2014

3i Group plc announces Half-yearly resultsto 30 September 2014

Key highlights

§ Robust performance underpinned by good flow of realisations and strong balance sheet

§ Solid Private Equity portfolio performance; value weighted last twelve months earnings growth of 17% 

§ Continued strong realisation and refinancing proceeds of £324 million; further proceeds of £218 million received from realisations since the period end

§ Debt Management successfully raised two CLOs in the period and secured further commitments to the US Senior Loan Fund; first close of European Middle Market Loan Fund at €250 million post period end

§ Operating expenses of £63 million and interest costs of £26 million both 7% lower than the first half last year

§ Further improvement in Fund Management profitability to £13 million (30 September 2013: £8 million)

§ Total return of £234 million after accounting for a foreign exchange translation loss of £73 million

§ Good progression in NAV per share to 358 pence at 30 September 2014, after 13.3 pence final dividend paid in July 2014 (31 March 2014: 348 pence)

§ Interim dividend of 6.0 pence per share; of which 2.7 pence is base and 3.3 pence is additional

§ Expecting to pay a minimum dividend of 15 pence per share in respect of the full year; of which 8.1p is base dividend, in line with policy

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

"The Group performed well in the first half and again demonstrated strong progress against our strategic plan.

There is good earnings momentum in our larger investments and we have a number of realisation and refinancing projects in process. 

We continue to seek new investment opportunities, but we recognise the increasing political uncertainty and stagnating growth in Europe and are mindful of the risks of over-paying for new investments in this environment.

We will continue to manage our portfolio energetically, capitalise on realisation opportunities and be selective in making new investments."

Financial data

- ends -

For further information, please contact:

For further information regarding the announcement of 3i's Half-yearly results to 30 September 2014, including a live videocast of the results presentation at 10.00am (registration from 9.00am), please visit www.3i.com

A pdf of the 3i Group plc Half-yearly report 2014 will be available on our website.

Notes to editors

3i is a leading international investment manager focused on mid-market private equity, infrastructure and debt management across Europe, Asia and North America.

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.

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 return for the six months to 30 September 2014

Overview

Performance highlights

Our performance for the six months to 30 September 2014

Basis: The numbers and commentary in the Overview and Interim strategic report reflects the Investment basis rather than IFRS. Detail on the differences and a reconciliation are included in the "Reconciliation of Investment basis to IFRS".

Strategic goal and the 3i Value Build

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

§ mid-market Private Equity;

§ Infrastructure; and

§ Debt Management.

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 complementary platforms, together with our strong balance sheet and access to permanent capital, represents a differentiated and attractive value proposition.

Chairman's statement

"It was another period of good performance for 3i, benefiting from our restructuring against an unstable economic and political landscape."

Sir Adrian Montague

Chairman12 November 2014

I am pleased to report another period of good financial performance in the first six months of FY2015. Investors continue to benefit from the restructuring of the Group and our enhanced distribution policy. Unfortunately the macro-economic and geo-political landscape shows no sign of stabilising in the near term, and so we remain careful and patient in our approach to investment and growth.

Dividend

Our distribution policy is designed to give shareholders a direct share in the success of the Group's realisation activities by returning to shareholders a proportion of gross cash realisations. Given the outlook for new investment, we expect to remain net divestors in the medium term and therefore have declared an interim dividend at the top end of the range indicated by our policy.

The Board has declared a total interim dividend of 6.0 pence per share (2013: 6.7 pence per share), comprising2.7 pence, being a third of our annual base dividend, and 3.3 pence in relation to approximately 20% of gross realisation proceeds generated to date above the annual base dividend.

The pipeline for realisations is good and, subject to market factors, we currently expect to generate sufficient proceeds to support a total dividend for the year of at least 15 pence per share.

Board changes

Richard Meddings stepped down from the Board at the AGM in July 2014, having served as a non-executive Director since 2008 and as Audit and Compliance Committee Chairman and Senior Independent Director since 2010. His wise and invaluable counsel provided great support during a period of considerable change for 3i.

At the AGM I was delighted to announce the appointment of Caroline Banszky to the Board. Caroline is The Managing Director of The Law Debenture Corporation p.l.c. and brings a wealth of financial, banking, investment and operating experience. Caroline will succeed Richard as Audit and Compliance Committee Chair, after a period of familiarisation with the business.

Jonathan Asquith was appointed Senior Independent Director. He has also agreed to take on the chairmanship of the Audit and Compliance Committee on an interim basis pending Caroline Banszky's appointment to that role.

Outlook

The macro-economic and geo-political landscape has deteriorated in the last six months. The overall environment is uncertain and volatile, with the Eurozone moving back towards recession and deflation and escalating conflict across the world. This has led to increased volatility in currencies and other financial markets.

In this environment we are taking a cautious approach to costs, gearing and investment and retaining a strong focus on cash returns for shareholders and our fund investors, supported by a resilient investment portfolio.

Interim strategic report

Chief Executive's statement

"The Group performed well in the first half and again demonstrated strong progress against our strategic plan. There is good earnings momentum in our larger investments and we have a number of realisation and refinancing projects in process. We continue to seek new investment opportunities, but we recognise the increasing political uncertainty and stagnating growth in Europe and are mindful of the risks of over-paying for new investments in this environment. We will continue to manage our portfolio energetically, capitalise on realisation opportunities and be selective in making new investments."

Simon Borrows

Chief Executive12 November 2014

Introduction

The Group performed well in the first half of FY2015 and again demonstrated strong progress against our strategic plan.

We continued to see good earnings growth in our Private Equity portfolio and further improvements in the operating metrics of the Group. Market conditions were favourable for realisations in the period, but less so for making new investments. Our determined focus on consistency and discipline in our investment processes and asset management will continue to serve us well against an uncertain economic and political backdrop.

3i generated a total return of 7.1% in the first six months of the year. NAV increased from 348 pence per share at 31 March 2014 to 358 pence per share, after paying the 13.3 pence per share final dividend from last year in July 2014.

Taking account of realisations to date, we are confirming today that we will pay an interim dividend of 6.0 pence per share in January 2015, comprising a base dividend of 2.7 pence and an additional dividend of 3.3 pence. The pipeline for realisations for the remainder of the year is promising and, subject to market conditions outside of our control, it should support a total dividend for the year, including the 6 pence declared today, of at least 15 pence per share (including the 8.1 pence base dividend).

Business review

The positive momentum in the Private Equity business continues. Our portfolio companies continue to perform well with earnings growth of over 20% in the majority of our largest assets, and 17% on a value weighted average basis. We have taken advantage of positive markets for realisations, refinancings and IPOs, generating £316 million of proceeds in the first half, with a further £218 million received since the period end. The portfolio generated a gross investment return of £282 million, or 10% on the opening portfolio, after negative currency translation impacts.

A core element of the strategic review in June 2012 was the implementation of the asset management initiatives. Discipline in our investment and asset management processes is key to navigating an economic and political backdrop, which shows little sign of stabilising to support sustainable growth. Our larger investments such as Action, Mayborn and Element continue to trade well. The monthly portfolio dashboard monitoring put in place over two years ago gives the Private Equity team and Investment Committee early warning signs and therefore an ability to take effective action on a timely basis if performance in any investment falls behind plan. This portfolio monitoring has underpinned resilience in portfolio performance and valuations.

Detailed preparation and careful management of exit processes has enabled us to take opportunities in positive realisation and refinancing markets, generating £316 million of total proceeds from Private Equity for 3i in the period and a further £218 million since 30 September 2014. The realisations in the period generated profits of £34 million at an uplift over opening value of 12% and a money multiple of 1.8x on original cost. Including third-party funds, total proceeds were £427 million. The uplift over value of 12% may appear lower than in past periods but reflects the fact that some of the disposals completed early in the period, with the value substantially reflected in the NAV at 31 March 2014, and a proportionally higher level of refinancing activity. The largest category of companies sold were older and smaller investments or those in non-core geographies which were unlikely to achieve future returns in line with our thresholds. We have not sold any of our longer term hold assets. At 30 September 2014, we had 72 investments in our Private Equity portfolio, down from 81 at 31 March 2014, another important step to our target of a maximum of 40 Private Equity portfolio companies.

A consequence of the good performance is that, as noted in the last Annual report, we are accruing a higher level of carry payable. Encouragingly, the associated improvement in the performance of the Growth Capital Fund means that, on an accounting basis, we are now accruing for carry receivable on that fund for the first time. We recognised £6 million in the period and the fund multiple is now 1.5x. Eurofund V, our largest and most recent buyout focused fund, also continues to benefit from the strong portfolio performance and recovered to 1.3x at 30 September 2014 with the 2010-2012 vintage investments at 2.4x. However, we are not yet at the point where carry receivable would be recognised.

We have kept to our investment criteria, and avoided paying prices which could undermine our 2x return target.We made one significant new investment in the first half: $106 million invested in Dynatect, a US headquartered manufacturer of protective equipment, where we will support international expansion, particularly into Europe. Our experience of executing similar plans in previous investments such as Mold-Masters, Hilite and Norma was key in securing Dynatect. We also took the opportunity to acquire a small interest in Eurofund V from a third-party investor. The investment of €34 million increased our proportion in the fund from 56% to 57%. Since the period end we have announced two more investments in regions and sectors where we have an established track record: Q Holdings, a US based international manufacturer of specialist moulded rubber and silicone products; and Christ, a leading German jewellery and watch retailer.

In Infrastructure, the European portfolio continues to perform well. The attraction of infrastructure assets as investors hunt for yield has been reflected in recent transactions. As a result of both operational performance and market activity giving new value benchmarks, the 3i Infrastructure plc ("3iN") portfolio increased by 7% in value in the six months to 30 September 2014. Our investment in 3iN was valued at 140 pence per share at 30 September 2014 and we received a dividend of £10 million from 3iN during the period.

Notwithstanding competition for assets, we have a growing pipeline of new opportunities in both the core infrastructure and primary PPP sectors. The new leadership team has brought a renewed focus and energy to the division and we will look to further grow assets under management by building on our primary PPP capability in particular. In that context, we advised 3iN on the purchase of a number of new primary PPP opportunities, such as the A12 motorway project in The Netherlands and Ayrshire College in the UK.

The Debt Management team had another busy six months. We launched two new CLOs, one in the US and one in Europe, adding £764 million in AUM, and secured $39 million in third-party investment to the strongly performingUS Senior Loan Fund. Since the period end, we have priced further CLOs in each of Europe and the US, secured a further $50 million investment in the US Senior Loan Fund and announced a €250 million first close of a European Middle Market Loan fund.

We generated £18 million of fund management fee income in the period, up 13% on the same period last year. At 30 September 2014, the business managed £6.7 billion of assets through 32 funds, 20 in Europe and 12 in the US.

The investments held by 3i in the Debt Management funds generated good cash income of £11 million in the six months, an annualised yield of 15% on the opening book.

Market activity remained buoyant, as the cash yield generated by CLO and other debt funds remains attractive to investors. The US market is on track to achieve record CLO formation in 2014, exceeding the levels recorded in 2006. The European market has also seen strong growth since re-opening in 2013, with €12 billion of CLO issuance recorded so far in 2014 compared with €8 billion in the whole of 2013. Regulatory changes now in place in Europe, and being introduced to the US, relating to the need for managers of CLOs to invest their own capital in the structures, are resulting in market concentration. Larger managers with access to proprietary capital, such as 3i, are advantaged and are now raising the majority of new European CLOs. In the long term, these positive market conditions will be beneficial and support increased AUM and growth in fee income. However, in the shorter term, the high levels of CLO equity supply have depressed mark-to-market valuations. This, together with other factors including the effect of the income distributions from older funds, led to a reduction in the value of the CLO equity of £8 million.

At the Group level, operating cash profit of £16 million and further improvement in the profitability and margin of our Fund Management platform reflect the continued focus on tight cost discipline, and good income generation across our three businesses. Operating expenses reduced by 7% against the same period last year to £63 million, and are now 1.0% of AUM on an annualised basis. This includes the addition of the primary PPP team in Infrastructure in November 2013, and an increase in costs as a result of changes to the regulatory environment in which 3i operates. These changes are being handled carefully and we were authorised as a manager under the Alternative Investment Fund Manager Directive by the FCA in the period.

We have also taken the opportunity to simplify and strengthen the balance sheet further. Gross debt reduced marginally when we repaid our B shares in June. We also refinanced our revolving credit facilities, reducing the size from £500 million to £350 million while extending maturity to at least 2019, reducing ongoing financing costs as a result.

The strength of sterling relative to the euro in particular means we suffered a translation loss of £73 million during the period. Structural concerns about European growth mean that this translation volatility is likely to persist through the course of this financial year.

FY2014 Private Equity investment update

During FY2014, the Group invested £265 million of proprietary capital in three new Private Equity investments, GIF, JMJ and Basic-Fit, and one significant further investment to increase our stake in Scandlines.

All four investments are performing in line with, or ahead of, the investment case, with:

§ Average earnings growth of 23% compared to the prior year

§ Average entry multiple of 8x EBITDA

§ September valuation at 1.19x entry cost on a local currency basis

An update on the three new investments is provided below.

Strategic objectives and progress

In our Annual report for the year to 31 March 2014, we set out four priorities for the current year:

§ Focus on consistency and discipline of investment processes and asset management;

§ Selective new investment;

§ Maintain cost discipline; and

§ Continue to improve capital allocation, focusing on enhanced shareholder distributions.

The consistency and discipline of our asset management process during the six months is demonstrated by the strong value growth of £307 million and realisations of £324 million, underpinned by the last 12 month value weighted earnings growth of 17% in our Private Equity portfolio.

The benefit of our disciplined asset management and investment processes will also come through in the performance of our most recent Private Equity investments. The FY2014 investment update, included in this report, highlights the progress we have made so far.

Eliminating the leakage from costs that the Group has suffered in the past and reducing interest expense was essential for 3i to become a more robust business. We have completed the fundamental restructuring the Group needed and we remain focused on maintaining cost discipline. Despite adding the PPP investment team and capability to the Infrastructure business in November 2013 and further cost to service the increasing regulatory requirements that the Group is subject to, total operating costs were only 1.0% of AUM at 30 September, down from 1.6% at 31 March 2012.

Finally, we continue to demonstrate good discipline in capital allocation. Our distribution policy ensures that shareholders benefit directly from our realisation activity as we have committed to distribute 15-20% of gross cash realisations. Whilst we are investing at the lower end of our capacity, we expect to be distributing at the 20% end of the range. We have made good progress on realisations to date and have generated £542 million proceeds so far this year. This means that our base dividend of 8.1 pence is already well covered, and allows for an additional distribution of 3.3 pence at the interim. Together with the one-third interim distribution of 2.7 pence we are therefore announcing a total interim dividend of 6.0 pence, which will be paid in January 2015. The pipeline for realisations for the remainder of the year is promising, and, subject to market factors outside of our control, should support a total dividend for the year of at least 15 pence per share, including the 8.1 pence base dividend.

Outlook

The first half of FY2015 saw 3i continue to deliver against its strategic plan and against all of the elements of the "3i Value Build".

Our portfolio of investments is performing well, with some excellent growth in our larger and more recent Private Equity investments. We also see growth opportunities in both Infrastructure and Debt Management where, alongside our teams, 3i's Proprietary Capital can be a differentiator.

Critical to our success are our people. After two years of significant reductions, we are now carefully investing in our people. We are taking opportunities to develop our existing teams and have been adding talent in the Group with investment professional hires in Private Equity and Infrastructure and investor relations professionals in Debt Management. We have also launched a 3i Graduate Recruitment scheme and I am delighted by the early interest from some excellent candidates.

We recognise the increasing political uncertainty and stagnating growth in Europe and are mindful of the risks of over-paying for new investments in this environment. We will continue to manage our portfolio energetically, capitalise on realisation opportunities and be selective in making new investments.

We are operating in difficult markets, which will no doubt hinder growth in general, but 3i is continuing to make excellent progress in delivering against its Strategic Priorities.

Key Performance Indicators

Business review

Group overview

"The half-year results reflect the ongoing implementation of our strategic priorities and the improved stability and financial profile of the Group."

Julia Wilson

Finance Director12 November 2014

3i Group is an international investment manager with three complementary business lines. All our business lines invest using a combination of proprietary capital from the Group's own balance sheet and third-party funds. This Business review provides detail on our performance for the six months to 30 September 2014 ("the period") as well as our financial position as at that date.

The Group generated a total return of £234 million, or a profit on opening shareholders' funds of 7.1% (September 2013: £175 million or 6.0%). Our Proprietary Capital business provided strong value growth from our Private Equity portfolio, a continued good flow of realisations at strong money multiples and robust portfolio income. Our Fund Management business increased both its absolute profit and margin, particularly due to continued cost discipline but also as a result of assets under management growth in our Debt Management business. However, the relative strength of sterling has continued to impact the Group's results, with an unrealised translation loss from foreign exchange of £73 million.

The Group generated a gross investment return of £297 million (September 2013: £240 million) or 8.3% on opening portfolio value. Split by business line, Private Equity generated a gain of £282 million, Infrastructure a gain of £22 million and Debt Management generated a loss of £7 million, representing returns of 10%, 5% and (5)% respectively.

The Group's investment performance was subject to lower dilution from operating expenses and interest costs as a result of the significant reduction in these items since June 2012. Operating expenses of £63 million and interest costs of £26 million are both 7% lower than the first half last year.

As well as good total return, we continue to focus on creating sustainable operating cash profits. After securing the first annual operating cash profit for many years in the last financial year, the first six months saw a continued strong performance. In the first six months we recorded an operating cash profit of £16 million (September 2013: £6 million). Cash income was higher as a result of portfolio activity, which may not recur to the same extent in the second half.

In addition, the underlying profit we record in our Fund Management business has also grown in the period to £16 million with a margin of 26%. (September 2013: £15 million, 24%).

The focus on improving operational cash flows and profit from the Fund Management business means the Group is now operating from a more financially robust platform. During the period we refinanced the 2016 revolving credit facilities, reducing the total size of the facility from £500 million to £350 million, extending the maturity to 2019 and reducing interest costs by £1.5 million per annum.

Performance

Table 1: Summary financial data

The Group's Proprietary Capital portfolio performed well in the period with a gross investment return of £297 million, or 8% of opening portfolio, and an operating profit before carry of £262 million (September 2013: £240 million, 7%, £179 million). A good flow of realisations, delivering cash proceeds of £324 million and realised profits of £35 million (September 2013: £528 million and £129 million), and strong value growth of £307 million (September 2013: £137 million), were the largest contributors. The Private Equity portfolio performed strongly with value weighted last 12 month earnings growth of 17%. Portfolio income improved at £53 million (September 2013: £47 million) and benefited from an increased contribution from Debt Management and a number of income receipts on exit of Private Equity investments. This was offset by net interest payable of £25 million, (September 2013: £27 million). The Proprietary Capital business also incurred operating expenses of £13 million (September 2013: £13 million) and a synthetic fee for investment management, due to the Fund Management business, of £22 million (September 2013: £25 million).

The continued strength of sterling led to a net £73 million charge in the period (September 2013: £79 million charge). A charge of £98 million relates to the portfolio and is included in the gross investment return above, this is offset by £25 million relating to the translation of the Group's other net assets (September 2013: £75 million and £4 million loss).

Investment activity was higher than in the first half of last year with £199 million cash invested (September 2013:£92 million). This included £104 million invested in Private Equity, primarily funding a new investment into US headquartered A&A Manufacturing (since rebranded as Dynatect), and £95 million invested into new Debt Management funds and warehouses to support future fundraising. Since the period end we have announced investments into Q Holdings, a US manufacturer, and Christ, a German jewellery business, committing £196 million of proprietary capital in total and £72 million from Eurofund V in Christ. Although higher, investment levels remain below the Group's capacity as sourcing new investment opportunities at attractive prices remains challenging.

The Group's revolving credit facilities which were due to expire in 2016 were refinanced during the period. The facilities were reduced in size from £500 million to £350 million, the maturity extended to 2019 and interest costs reduced. As at 30 September 2014, gross debt was £831 million (March 2014: £857 million). Net divestment activity, offset by the payment of the final FY2014 dividend in the period, meant that net debt was stable at £161 million at30 September 2014 (March 2014: £160 million) and gearing was 5% (March 2014: 5%).

The Group's Fund Management income is driven by total assets under management ("AUM") which were£12.9 billion at 30 September 2014 (March 2014: £12.9 billion). In the period we closed two new CLOs. In Europe,we launched Harvest IX in July 2014, raising €525 million, and in the US, we raised $618 million with the launch of Jamestown IV in June 2014. Our Debt Management business had further success in securing $39 million in further third-party investment into the US focused Senior Loan Fund. This offset reductions in AUM as the older Debt Management CLOs mature and as a result of net divestment in Private Equity. The proportion of third-party assets under management remained stable compared to March 2014 at 74%. After the period end, the Debt Management business priced two further CLOs, secured a further $50 million commitment to the US Senior Loan Fund and announced the first close of a European Middle Market Loan fund at €250 million.

The Fund Management business earns fees on third-party capital, and recognises synthetic fee income on the proprietary capital that it manages. Fund Management income was stable in the period at £63 million (September 2013: £63 million), with additional fees generated by our PPP infrastructure team being offset by a reduction in fees from Private Equity. Within this, third-party fee income grew to £41 million (September 2013: £38 million).

For the Fund Management business to be profitable on a sustainable basis, tight cost control remains critical.Total Fund Management operating expenses fell by 9% in the period to £50 million (September 2013: £55 million). This includes £3 million of amortisation costs relating to previous acquisitions (September 2013: £3 million) but nonew restructuring costs (September 2013: £4 million).

Consequently, the Fund Management business improved both its absolute profit and profit margin in the period.Fund Management operating profit before carry at £13 million represented a margin of 21% (September 2013:£8 million and 13%). On an underlying basis, excluding restructuring and amortisation costs, the profit and margin were £16 million and 26% (September 2013: £15 million, 24%).

The carried interest payable charge of £45 million is a consequence of the growth in value of the portfolio and, for the first time, we have recognised £6 million of carry receivable from our Growth Capital fund. This is as a result of a good recovery in value in that fund, meaning that the hurdle has been met on an accruals basis in the period. The increase in value of the infrastructure portfolio within 3i Infrastructure plc has also led to the recognition in the period of £8 million of performance fees receivable.

The financial profile of the Group with regard to both consistency and strength of Proprietary Capital performance, operating cash profit, Fund Management profit and balance sheet is robust. Realisation proceeds totalled £324 million in the period with a further £218 million generated after the period end. Prices for attractive investments remain high, indicating investment activity is likely to remain at the lower end of the Group's capacity. The Board have therefore announced an interim dividend of 6.0 pence per share, including a base dividend of 2.7 pence and an additional dividend of 3.3 pence. Realisations achieved to date support a total dividend of 11.4 pence per share and, based on the immediate pipeline, we expect to pay a minimum of 15 pence per share, in total for FY2015, including the base dividend of 8.1 pence.

Assets under management

Total AUM was broadly flat at £12,923 million during the period (March 2014: £12,911 million). Within this, third-party AUM was £9,566 million, or 74% of the total AUM at 30 September 2014 (March 2014: £9,508 million, or 74% of total AUM).

Private Equity AUM is calculated on invested rather than committed capital as all third-party funds are beyond their investment periods. The reduction in total Private Equity AUM to £3,904 million (March 2014: £4,132 million) therefore mainly reflects the net divestment activity seen in the period.

Infrastructure AUM increased marginally to £2,344 million (March 2014: £2,294 million) mainly as a result of value growth and new investment in 3i Infrastructure plc ("3iN").

Debt Management successfully launched one European CLO and one US CLO in the period, adding £764 million to AUM. A further $39 million was invested by third-parties in the US focused senior loan fund, bringing the total AUM of that fund to $118 million. New warehouse facilities were also established in the period in preparation for new CLO launches in Europe and the US, totalling £462m of AUM at 30 September 2014. These new additions were partially offset by a reduction in AUM in older CLOs, as portfolios mature and distributions are made to investors, as well as a reduction from currency movements in euro and US dollar denominated funds. Total Debt Management AUM grew in the period to £6,675 million (March 2014: £6,485 million). Since the period end we have priced two new CLOs, secured a further $50 million into the US Senior Loan Fund and, on 11 November, we announced a first close for a European Middle Market Loan fund at €250 million which is an important step in diversifying the AUM base.

The table below summarises the key movements in the period.

Table 2: Reconciliation of movements in assets under management by business line

Table 3: Assets under management

Investment and realisations activity

Merger and acquisition ("M&A") volumes during the six months to 30 June 2014 increased marginally in Europe but fell in the smaller to mid-market segments (source: Capital IQ). This led to stable private equity deal flow and, with capital availability remaining high from both principal investors and debt providers (source: KPMG M&A Predictor, August 2014), highly competitive auctions and high prices were a significant feature of market conditions. Sincethe summer we have seen a reduction in M&A volumes across the market as confidence has reduced. In this environment, we continue to be more active sellers than buyers of investments, remaining cautious and focused only on new investments where we have a competitive advantage.

Private Equity invested in one new business in the period: A&A Manufacturing, now renamed Dynatect. Dynatect, headquartered in the US, is a leading manufacturer of speciality protective equipment and is well positioned to grow internationally with support from 3i. We also took an opportunity to purchase a small third-party interest in Eurofund V for €34 million, increasing our share in that fund by c.1%.

We invested in each of the new CLOs launched in the period and provided further support to grow our Debt Management business through ongoing warehouse facilities, used to establish portfolios ahead of future CLO launches.

Table 4 provides details of the investments made in the six month period.

Since the period end we have announced two Private Equity investments: €214 million, including third-party funds from Eurofund V, into Christ, a German jewellery retailer, and $160 million into Q Holdings, a US headquartered moulded rubber and silicone components manufacturer.

Table 4: Cash investment in the six months to 30 September 2014

Market conditions created opportunities for realisations, refinancing of portfolio companies and IPOs. Cash proceeds of £324 million (September 2013: £528 million) were received in the six months, at an uplift of 12% over opening portfolio value (September 2013: 32%). The uplift was lower than in previous periods due to a number of larger transactions occurring earlier in the half and, as such, being materially reflected in the 31 March 2014 valuations.

Private Equity generated the majority of the proceeds. Notable full exits in the six months included the sale of Vedici, which generated proceeds of £83 million and an uplift over opening value of 48%, and the sale of John Hardy, which generated proceeds of £25 million but no uplift over opening value as it was valued on an imminent sales basis at 31 March 2014. There were two large partial exits in the period where we sold c.70% of our equity stake in Phibro following an IPO in April 2014 and retained a residual loan to Foster + Partners, selling the equity in June 2014. Beijing Digital Telecom, the Chinese mobile phone retailer, listed on the Hong Kong stock exchange in July 2014 but our investment remains locked up until July 2015. Finally, refinancings at Element and Amor and a sale and leaseback of a new distribution centre at Action generated proceeds of £52 million in total.

As well as the larger exits noted above, we continued to sell smaller, legacy and non-core geography assets. Consequently, there were 72 investments in the Private Equity portfolio at 30 September 2014 down from 81 at 31 March 2014. Over time we expect to reduce the number of Private Equity investments to no more than 40.

The realisations from the Private Equity portfolio generated an aggregate money multiple of 1.8x (September 2013: 1.6x). Since the period end we have also completed the full exits of Hilite and LHi and sold a further share of our holding in Quintiles, generating a further £218 million of proceeds at a money multiple of 2.5x. The value of these exits was substantially reflected in the Group's NAV at 30 September 2014.

The Infrastructure business made its first realisation from the Indian Fund, with a partial sale of the holding in Adani Power, a quoted power generation business based in Gujarat, India. 3i received proceeds of £8 million, at an uplift of £1 million over opening value.

Table 5: Realisations in the six months to 30 September 2014

Portfolio

The value of the Proprietary Capital portfolio at 30 September 2014 was £3,672 million (31 March 2014: £3,565 million). Value growth in the period was offset in part by net divestment activity.

There was no material change to the portfolio composition by business line with Private Equity at 81% (March 2014: 82%), Infrastructure at 14% (March 2014: 14%) and Debt Management at 5% (March 2014: 4%) of the total portfolio.

Private Equity

In line with its strategy, the Group continues to reduce the number of assets held in the Private Equity portfolio to a more manageable level. There were 72 investments in the Private Equity portfolio at 30 September 2014 (31 March 2014: 81). The 10 largest investments accounted for 58% of the portfolio at the period end (31 March 2014: 54%) and the 25 largest for 84% (31 March 2014: 82%).

As shown in Table 6, earnings grew in the majority of the portfolio (78% by value) with good earnings growth in the portfolio's largest assets in particular. The Private Equity portfolio's value weighted last 12 months earnings, the most relevant measure of NAV impact, grew by 17% (March 2014: 19%) year on year.

Table 6: Portfolio earnings growth weighted by September 2014 carrying values (£m)1

The weighted average EBITDA multiple used at 30 September 2014 was 11.0x pre discount (March 2014: 10.6x) and 10.2x post discount (March 2014: 9.9x). 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 12.0x at 30 September 2014.

Leverage in the Private Equity portfolio remained stable at 3.1x net debt to EBITDA weighted by value (31 March 2014: 3.1x). We have taken the opportunity to refinance and restructure debt in a number of portfolio companies including Element, Amor and Mémora. The ratio reduced on average across the rest of the portfolio. Table 7 shows the ratio of net debt to EBITDA weighted by portfolio value.

Table 7: Ratio of net debt to EBITDA - Private Equity portfolio September 2014 carrying values (£m)1

The majority, or 88%, of the Private Equity portfolio by value, is now located in our focus areas of Northern Europe and the US (31 March 2014: 86%) as the exposure to Asia, Brazil 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 ("IIF").

3iN is a listed company and our investment is therefore exposed not only to the underlying portfolio but also to fluctuations in its share price. 3iN's underlying European portfolio continues to perform well and represents 94% of the underlying portfolio (31 March 2014: 93%). Portfolio valuations of 3iN's rail rolling stock assets increased significantly to reflect both operational improvements and market returns compression in recent bids to finance the procurement of new train fleets. 3iN's share price increased from 134.4 pence to 140.0 pence in the period. Our 34% holding was valued at £421 million at 30 September 2014, or 11% of 3i's total portfolio. Further detail can be found at: www.3i-infrastructure.com.

The Group's commitment to IIF was valued at £62 million at 30 September 2014 (31 March 2014: £75 million).

Debt Management

The Debt Management portfolio consists of 22 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. During the period the Group invested a total of £28 million into the equity tranches of Harvest IX and Jamestown IV, alongside a net £67 million investment in the warehouses. At 30 September 2014 the portfolio was valued at £197 million (March 2014: £143 million).

Financial review

Basis

Since the adoption of IFRS by the Group in the year ended 31 March 2006, there has been discussion about whether investment companies, such as 3i, should be exempt from consolidation for its portfolio investments. The introduction of the IFRS 10 accounting standard resolved this point by establishing an investment entity exception, which is an excellent outcome as consolidation of our portfolio investments would both be impractical and limit the usefulness of our statutory accounts.

However, the detailed application of the standard has reduced the transparency of the Group's underlying operating performance because we are now required to fair value a number of intermediate holding companies that were previously consolidated line by line. This fair value approach, applied at the intermediate holding company level, effectively obscures the performance of our proprietary capital investments and associated transactions occurring in the intermediate holding companies. As a result, in our 2014 Annual Report and Accounts we introduced separate "Investment basis" Statements of comprehensive income, financial position and cash flow to aid users of our report, and we continue to do so in this report. The numbers presented in the Overview and Interim Strategic Report refer to this Investment basis.

The commentary in this section refers to the Investment basis financial statements because we believe they provide a more understandable view of our performance. We provide more detail on the impact of IFRS10 and a reconciliation of our Investment basis financial statements to the audited IFRS statements which are presented at the end of this section. Total return and net assets are equal under each basis; the Investment basis is simply a "look through" of IFRS 10 to present the underlying performance.

Operating profit includes gross investment return, management fee income generated from managing external funds, the costs of running our business, net interest payable, movements in the fair value of derivatives, other losses and carried interest receivable or payable. Finally, total return comprises operating profit less any tax charge and movement in the actuarial valuation of the historic defined benefit pension scheme.

Each of these aspects of our returns are considered in greater detail in this Financial review, along with the remaining items that contribute to total return.

Returns

Table 8: Total return for the six months to 30 September 2014

Total operating expenses

Operating expenses incurred during the period were £63 million (September 2013: £68 million), and equated to 1.0% (September 2013: 1.1%) as a percentage of weighted average AUM. With the cost reduction initiatives outlined in the June 2012 strategic announcement largely complete, there were no restructuring costs provided for in this period (September 2013: £4 million). Excluding restructuring costs, the operating expenses were £1 million lower than the previous year, but include the additional costs associated with the new PPP Infrastructure team.

Table 9: Operating expenses for the six months to 30 September

Operating cash profit

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

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. We call this "operating cash profit".

FY2014 was the first in which the Group achieved an operating cash profit in more than a decade, a significant step in improving the robustness of the Group's operating model. This has continued and during the period the Group generated an operating cash profit of £16 million (September 2013: £6 million).

A focus on generating cash income from the portfolio has meant the Group was able to increase its cash income despite net divestment activity and a fall in third-party AUM in Private Equity. Cash income increased to £79 million (September 2013: £70 million), with a £11 million increase in portfolio income and a £2 million decrease in third-party fees.

The benefits of the cost reduction programme continue to be seen with actual costs (excluding restructuring costs but including acquisitions) stabilising at £63 million (September 2013: £64 million).

Proprietary Capital returns

Our Proprietary Capital business is assessed on operating profit before carry, which comprises gross investment return, operating expenses, a fee paid to the Fund Management business and balance sheet funding expenses such as interest payable. Overall operating profit before carry of £262 million (September 2013: £179 million) was £83 million higher than the prior year and this was underpinned by strong value growth within the portfolio.

By business line, the gross investment return on the opening portfolio was 10% from Private Equity (September 2013: 9%), 5% from Infrastructure (September 2013: (4)%) and (5)% from Debt Management (September 2013: 1%). Private Equity accounted for 81% of the Proprietary Capital portfolio at 30 September 2014 (March 2014: 82%) and remains the primary driver of performance for the Proprietary Capital segment.

Realised profits

Realised profits for the period of £35 million (September 2013: £129 million) were lower than the previous year, despite the Group continuing to achieve some strong exits and generating £324 million of realisation proceeds (30 September 2013: £528 million). The uplift was lower than in previous periods due to a number of larger transactions occurring earlier in the half year and, as such, being materially reflected in the 31 March 2014 valuations. We continue to pursue exits through careful planning, and in total fully divested 9 investments in the period.

The majority of the realisations were from the Private Equity portfolio, which contributed £316 million of the £324 million proceeds. Table 5 details the Realisations in the period and sets out the accounting uplift reflected in the total return and the longer-term cash-to-cash results. The Private Equity realisations completed in the period produced a money multiple of 1.8x over their investment life (September 2013: 1.6x).

Table 11: Proprietary Capital operating profit for the six months to 30 September

Unrealised value movements

Table 12: Unrealised profits/(losses) on revaluation of investments for the six months to 30 September

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 one company, Action, which is experiencing significant growth due to its store roll-out programme, a run-rate adjustment is made to its earnings to reflect the profitability of opened stores for valuation purposes.

Improvements in the performance of the portfolio valued on an earnings basis resulted in an increase in value of £209 million (September 2013: £32 million). Value weighted last 12 months earnings, the most relevant measure of NAV impact, increased by 17%, demonstrating that the portfolio's largest assets are delivering strong improvements in performance. Net debt in this portfolio remained flat at 3.1x EBITDA (March 2014: 3.1x). Excluding Action, value weighted last 12 months earnings grew 11%.

The number of investments valued using forecast earnings has increased to seven from four at 31 March 2014.These represent 12% of the 69% of the Private Equity portfolio valued on an earnings basis at the period end(March 2014: 3%, 79%).

Multiple movements

The weighted average EBITDA multiple of the Private Equity portfolio, valued on an earnings basis increased from 10.6x at 31 March 2014 to 11.0x at 30 September 2014 before marketability discount, and from 9.9x to 10.2x after marketability discount. Excluding Action, the largest asset by value and an asset with one of the highest multiples applied to earnings, the weighted average EBITDA multiple of the portfolio increased to 9.9x before marketability discount (March 2014: 9.8x) and 9.1x after marketability discount (March 2014: 9.0x). Stock market multiples generally fell in the period but, as noted in the Annual report, we consider other factors such as exit plans, relative performance and size when setting the multiples we use. We have felt for some time that market multiples were trading ahead of longer term averages and so had not followed markets up when valuing the portfolio. Consequently, we have not had to follow markets down in the period. Movements in multiples used for valuation led to a small increase in value of £13 million in the period to 30 September 2014 (September 2013: £78 million).

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. No new provisions or reversals were made during the period.

Imminent sale

Portfolio companies which are well advanced in a negotiated sales process are valued on an imminent sale basis. Two assets, Hilite and LHi, were valued on this basis at 30 September 2014, with a total value of £193 million. Proceeds of £189 million for the completion of both sales were received post the period end and the difference to September 2014 value related to cash income and amounts held in escrow.

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 2014, the largest portfolio company valued on this basis was Scandlines, valued at £218 million, with an unrealised profit in the period of £34 million. The majority of remaining assets valued using the DCF valuation basis were in the India Infrastructure Fund, which generated an unrealised loss of £8 million.

Other

Where a different valuation basis is more appropriate for a portfolio company, the "other" category is used to determine fair value, for example, the sum of the parts of the business or industry specific methods. The largest asset in this category is ACR, the Private Equity Asian reinsurance business, valued at £111 million at 30 September 2014 (March 2014: £101 million). Unrealised profits of £7 million were recognised in the period to 30 September 2014 (September 2013: nil).

Quoted portfolio

The quoted portfolio was valued at £641 million at 30 September 2014 and now represents 17% (March 2014: £554 million, 16%) of the Group's total portfolio. The Group's 34% investment in 3i Infrastructure plc is the largest asset in the quoted portfolio at £421 million. 3i Infrastructure plc's share price increased by 4% in the period, resulting in value growth of £17 million. Quintiles is the next largest quoted asset in the portfolio and was valued at £137 million at 30 September 2014. During the period to 30 September 2014 two portfolio companies completed IPO processes, Phibro and Beijing Digital Telecom, and together the Group's remaining holdings in these companies was valued at £68 million at 30 September 2014.

Debt Management

The Group has investments in a number of the CLOs which the Debt Management team manages, as well as in the Credit Opportunities Fund, Palace Street I and the US Senior Loan Fund. The Group also invests in warehouse facilities to support the creation of portfolios for future fund launches.

Where available, CLOs are valued on the basis of quotes from the arranging brokers, with reference to internal modelling of the future returns of the investment and third-party databases of prices. At 30 September 2014 the value of the equity stakes in CLOs was £83 million (March 2014: £67 million). Warehouses are valued using the mark-to-market prices of the underlying debt assets held in the facilities, and at 30 September 2014 these totalled £82 million (March 2014: £17 million).

Table 13: Proportion of total portfolio value by valuation basis

Portfolio income

Table 14: Portfolio income for the six months to 30 September

Income from the portfolio was £53 million in the period (September 2013: £47 million). Dividends of £21 million were received (September 2013: £18 million), including £10 million from 3i Infrastructure plc and £6 million from Debt Management investments. Interest income totalled £30 million (September 2013: £25 million) and included interest of £4 million from Foster + Partners, which was partially sold in the period.

A further £2 million in net transaction fees was received in the period (September 2013: £4 million), principally relating to fees received for completing new investments and monitoring fees paid by portfolio companies.

Portfolio income received as cash during the period was £42 million (September 2013: £31 million). This reflected higher income from our Debt Management investments and income received following exits or refinancing of Private Equity investments.

Net foreign exchange movements

The Group recorded a total net foreign exchange loss of £73 million (September 2013: £79 million) during the period, driven by the strengthening of sterling against the euro (6.2%), Swedish krona (7.9%) and Brazilian real (5.2%) resulting in losses of £79 million, £7 million and £2 million respectively. This was partially offset by the weakening of sterling against the US dollar (2.5%) resulting in a gain of £13 million. The net foreign exchange loss also reflects the translation of non-portfolio net assets, including non-sterling cash held at the balance sheet date.

As at 30 September 2014, a 1% movement in the euro, US dollar and the Indian rupee would give rise to a £16 million, £7 million and £1 million movement in total return respectively.

Proprietary Capital costs

A proportion of the Group's total operating expenses is allocated to Proprietary Capital, being those costs assessed as having been incurred in running a regulated and listed investment trust. These include 100% of costs in relation to the CEO and Group Finance Director and elements of finance, IT, property and compliance. Operating expenses of £13 million were flat compared to last year (September 2013: £13 million) as the substantial cost reductions in the Proprietary Capital business, made as part of the cost reduction programme, were implemented early in FY2013. A more detailed analysis of the Group's total operating expenses is provided earlier in this Financial review.

Synthetic fees are deducted from the operating profit of the Proprietary Capital business to reflect the fees that this business would have to pay if the assets were managed externally at market rates. The fall in synthetic fees to£22 million (September 2013: £25 million) reflects the lower level of Proprietary Capital being managed as a resultof net divestment during the period.

Net interest payable

Gross interest payable for the year was £26 million (September 2013: £28 million), and reflected the reduction in gross debt of the Group following a repayment of £164 million of drawings under a revolving credit facility in FY2014 and an acceleration of £1.5 million of amortised cost into the period following the early refinancing of the 2016 revolving credit facilities. The refinancing of the Group's revolving credit facilities in the period will reduce future interest costs by £1.5 million per annum. The current gross debt position is detailed further in this Financial review and in Note 6.

Interest receivable was flat at £1 million (September 2013: £1 million).

Derivative movements

The Group historically used foreign exchange and interest rate derivative contracts as part of its hedging programmes. The Group incurred a £1 million loss on the fair value movement of its remaining foreign exchange derivatives during the period (September 2013: £10 million gain). The prior period gain related to a long-term legacy interest rate swap, which was closed out in FY2014.

Consistent with the strategic focus on cash-to-cash returns, the residual foreign exchange derivatives will be allowed to expire and not be replaced. We will continue to consider foreign exchange risk at the point of investment and divestment and occasionally hedge these transactions with short-term derivatives.

Fund Management returns

Table 15: Fund Management operating profit for the six months to 30 September

Our Fund Management business comprises the investment teams of our Private Equity, Infrastructure and Debt Management businesses.

It is assessed on operating profit before carry, which comprises fee income from third parties as well as a synthetic fee on proprietary capital, less operating expenses. The Fund Management business generated an operating profit before carry of £13 million for the period (September 2013: £8 million). The increase in profitability was driven by a fall in costs, as total fee income remained stable. As a result operating profit margin increased to 21% from 13% for the same period last year.

On an underlying basis, excluding restructuring and amortisation costs, operating profit was £16 million (2013: £15 million) at a margin of 26% (September 2013: 24%).

The Group's Fund Management income is driven by total assets under management ("AUM"), which were £12.9 billion at 30 September 2014 (March 2014: £12.9 billion). The launch of two CLOs by Debt Management funds offset a fall in AUM from the net divestment activity in Private Equity. The proportion of third-party assets under management remained stable at 74% during the period and fees from third parties, including portfolio fee income, grew to £41 million from £38 million in the same period last year.

For the Fund Management business to be profitable, costs have to be managed closely to ensure they remain appropriate and consistent with third-party benchmarks, where available. Although growth in AUM is generally positive, we remain focused on profitable growth which incrementally adds to the profit of the Fund Management business.

Fees receivable from external funds

Fees earned from external funds of £41 million in the period were higher than the prior year (September 2013: £36 million).

Our Debt Management business continued to generate strong fund fee income of £18 million, increasing 13% over the prior year (September 2013: £16 million). Infrastructure fund fee income, which is generated from advisory and management services to 3i Infrastructure plc and the 3i India Infrastructure Fund, was supplemented by the acquisition of the PPP platform. Total infrastructure fund fee income was £14 million during the period (September 2013: £11 million).

Fee income from our managed Private Equity funds and third parties was flat at £9 million (September 2013: £9 million).

Fees receivable from Proprietary Capital

A synthetic fee is added to the operating revenue of the Fund Management business to reflect the fees that would be received on proprietary investments if managed on behalf of third parties at market rates. A fee of 1.5% is charged on Private Equity and Infrastructure Proprietary Capital and 0.5% on Debt Management. The fall in synthetic fees to £22 million (September 2013: £25 million) reflects the lower level of Proprietary Capital being managed as a result of net divestment in Private Equity during the period.

Fund Management costs

A proportion of the Group's total operating expenses is allocated to the Fund Management activity. This includes all costs in relation to investment management and advisory activity as well as an allocation in relation to direct and indirect support functions, such as finance, IT, human resources, compliance, and property costs. Fund Management operating expenses fell by 9% in the period to £50 million (September 2013: £55 million). A more detailed analysis of the Group's total operating expenses is provided earlier in this Financial review.

Total return

Table 16: Total return for the six months to 30 September