3i Group Regulatory News (III)

14 May 2014

3i Group plc announces full year resultsto 31 March 2014

Key highlights

§ Strong total shareholder return of 30%

§ Good flow of Private Equity realisations with proceeds of £669m, representing a 43% uplift over opening value

§ Building investment momentum with three new Private Equity investments and one substantial further investment. Closed acquisition of Barclays' European infrastructure fund management business and seeing a good pipeline of primary PPP projects from this platform. Also closed 4 CLOs during the year; two each in the US and Europe

§ Substantially outperformed cost savings target; achieved £70 million of cumulative run-rate operating cost reductions, ahead of targeted savings of £60 million. Exceeded our target of covering operating costs with cash income, with an annual operating cash profit of £5m for the year

§ Solid and simplified balance sheet with gross debt reduced to £857m and gross interest costs reduced to £54m, ahead of target of £60m. Net debt reduced to £160m and gearing to 5%

§ Total return of £478 million after accounting for a foreign exchange translation loss of £116m

§ Good progression in NAV per share to 348 pence and a distribution yield of over 6%

§ Confirming final dividend of 13.3 pence per share, bringing the total dividend for FY2014 to 20.0 pence per share, subject to shareholder approval

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

"We have met or exceeded all of our strategic priorities and targets for the year.

"3i is now a more streamlined, decisive organisation focused on high performance and delivering attractive shareholder returns. We have started the new financial year with good momentum in our private equity portfolio and ambitious plans in our three businesses."

Financial data

ENDS

For further information, please contact:

Silvia Santoro, Investor Relations Director Tel: 020 7975 3258

Kathryn van der Kroft, Communications Director Tel: 020 7975 3021

For further information regarding the announcement of 3i's annual results to 31 March 2014, including a live videocast of the results presentation at 10.00am, please visit www.3i.com.

Notes to editors

3i is a leading international investment manager focused on mid-market Private Equity, Infrastructure and Debt Management across Europe, Asia and the Americas. For further information, please visit: www.3i.com.

Notes to the announcement of the results

Note 1

The statutory accounts for the year to 31 March 2014 have not yet been delivered to the Registrar of Companies. The statutory accounts for the year to 31 March 2013 have been delivered to the Registrar of Companies. The auditors' reports on the statutory accounts for these years are unqualified and do not contain any matters to which the auditor drew attention by way of emphasis or any statements under section 498(2) or (3) of the Companies Act 2006. This announcement does not constitute statutory accounts.

Note 2

Copies of the Report and accounts 2014 will be distributed to shareholders on or soon after 4 June 2014.

Note 3

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

Note 4

Subject to shareholder approval, the proposed final dividend is expected to be paid on 25 July 2014 to holders of ordinary shares on the register on 20 June 2014.

The financial data presented in the Overview and Strategic report relates to the Investment basis financial statements. The Investment basis is described in the Financial review and the differences from, and the reconciliation to, the IFRS Audited financial statements are included in the Strategic report.

Overview

Delivering strong results

Chairman's statement

"A strong performance as we continue implementing our strategic plan."

I am pleased to report a strong performance for the financial year to 31 March 2014. Simon Borrows and his executive team have made excellent headway in accomplishing many of the objectives in the three-year strategic plan we adopted in June 2012 and have achieved both strong levels of realisations and continued progress in matching the level of our operating costs with our annual cash income.

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 realisations by adopting a policy of returning to shareholders a proportion of gross cash proceeds subject to certain conditions.

These conditions have been satisfied, and in November 2013 we announced that we would be initiating additional shareholder distributions above the base dividend.

Given the strong level of realisations, the emphasis on selective investment in uncertain market conditions, and our healthy balance sheet position, we are proposing a total dividend for the financial year to 31 March 2014 of20.0 pence per share, a yield of 6% on the 316 pence per share price at 28 March 2013. We paid one third of this,6.7 pence per share, in January 2014 as an interim dividend. Subject to shareholder approval, we will pay the balance of 13.3 pence per share as a final dividend in July 2014.

Board changes

During the year, Willem Mesdag retired from the Board with effect from 30 November 2013. Willem had served as a non-executive Director on our Board since 2007, including as Chair of the Valuations Committee, and I would like to take this opportunity to thank him for his valuable advice and counsel over that period. David Hutchison OBE, who is Chief Executive of Social Finance Ltd, joined our Board as a non-executive Director with effect from 11 November 2013. David has succeeded Willem as Chair of the Valuations Committee.

Outlook

We remain cautious overall on the economic outlook. While there appear to be some positive indicators in certain parts of the European economy, not least strong equity markets, overall levels of GDP growth remain low and we believe that any broader based recovery could take time, and the unwinding of recent monetary policy will not be without risk.

Despite this uncertain macroeconomic environment and relatively subdued levels of M&A activity in our core markets, our Private Equity business completed three new mid-market investments and one significant further investment: Basic-Fit, GIF, JMJ Associates and Scandlines, contributing to total cash investment of £372 million, including third-party funds. Within Infrastructure, the Group completed its acquisition of Barclays' Infrastructure Funds Management business, adding over £700 million of assets under management and an experienced investment team based in London and Paris. We have also capitalised on buoyant credit markets in Debt Management, with the launch of four new CLO funds with aggregate third-party AUM of £1.2 billion.

The strength of the market for realisations and Simon Borrows' success in leading 3i through an intensive restructuring process have allowed us again to demonstrate the strength of 3i's franchise. We are confident that we will deliver the remaining objectives set out in the strategic plan, and we look forward to improving further the performance of the business and generating further shareholder value in years to come.

Sir Adrian Montague

Chairman

Strategic report

Delivering our strategic plan

Chief Executive's review

"We have met or exceeded all of our strategic priorities and targets for the year. 3i is now a more streamlined, decisive organisation focused on high performance and delivering attractive shareholder returns."

Introduction

FY2014 was another busy year for everyone at 3i. We met or exceeded all of our strategic priorities and targets for the year, and I am pleased to report a strong set of results. We are now almost two years into the three-year strategic plan that I set out in June 2012. This year's strong performance benefited from the considerable progress made during our restructuring phase in FY2013.

3i generated a total shareholder return of 30% compared to 9% for the FTSE All-Share index. Like many UK-based companies, we faced currency headwinds this year and the performance is all the more credible in view of that. During the year, we delivered a good flow of realisations and a total return of 16.3%. This included a good progression in NAV per share to 348 pence at 31 March 2014, from 311 pence at 31 March 2013.

As announced in November 2013, given the strong level of realisations, the emphasis on selective investment in these high-priced market conditions and our healthy balance sheet position, we have initiated additional shareholder distributions. The total proposed dividend for the financial year to 31 March 2014 is 20 pence per share, a yield of over 6% to the 316 pence share price at the close of 28 March 2013. We paid one-third of this, 6.7 pence per share, in January 2014 as an interim dividend. Subject to shareholder approval, we will pay the balance of 13.3 pence per share as a final dividend in July 2014.

Performance in the year

The Private Equity business made excellent progress this year, generating a gross investment return of £647 million (24% on opening value), reflecting the strong realisation activity and good earnings growth across the portfolio.

We continue to see significant benefits from the asset management improvement initiatives launched in FY2013. The majority of our investments generated earnings growth during the year, with larger investments such as Action continuing to perform very well. A consequence of this strong performance is an increase in the carry payable we are accruing on our Proprietary Capital, although we have some way to go before this becomes a cash payment. Overall, the Private Equity investment portfolio is in much better shape than it was two years ago and I believe it offers significant potential for further value creation.

During the year, we delivered a good flow of Private Equity realisations, generating £669 million of total proceeds for 3i and realised profits over opening valuation of £201 million, an overall uplift of 43%. Including third-party funds managed by 3i, total Private Equity realisation proceeds in the period were £1.1 billion. These were achieved at a total money multiple of 1.8x, generating good returns on both proprietary and third-party capital for the benefit of our shareholders and fund investors. We realised a mix of investments over the year, including a good number of our smaller, more challenged investments. We have not sold any of our longer-term hold investments which make up the largest part of our portfolio value. Their strong performance has led to material improvement in Eurofund V and the Growth Capital Fund, which have now recovered to 1.13x and 1.32x respectively of invested capital at 31 March 2014. This compares to 0.93x and 0.95x at 31 March 2013 respectively.

As at 31 March 2014, our Private Equity portfolio comprised 81 different investments, many of which have relatively low value. Over the next few years, as we continue to realise older and smaller value investments and pursue a focused investment strategy, we expect the number of investments held in our Private Equity portfolio to more than halve. This will create a much more manageable portfolio and generate further operating efficiencies.

For the Private Equity business, a key highlight of the year was the increased momentum in new investment activity with four key investments: Basic-Fit (leading European discount fitness operator), GIF (German-based specialist in transmission testing), JMJ (global management consultancy) and a substantial further investment in Scandlines (leading European ferry operator). In total, cash investment was £372 million including third-party funds, of which £276 million was 3i's proprietary capital. We made these investments at careful prices and expect this group of assets to deliver considerable upside value over the medium term.

While this pick-up in new investment activity is encouraging, we remain highly selective given the current high-price environment. We continue to focus on our core sectors and geographies where we have real experience and where our international platform and capabilities are a differentiator. We focus on mid-market investments which we are able to secure using our local expertise and presence, away from highly competitive auction processes. A key aspect of our differentiated business model is that we lead investments with our own balance sheet. We aim to fund a majority of each investment with proprietary capital as well as managing the balance of third-party funds for our co-investors. This enables us to retain a material share of the alpha-generating economics.

In Infrastructure, the European portfolio continued to perform well and generated a good level of cash income for the Group, through both dividends and advisory fees from 3i Infrastructure plc. However, the value of the 3i India Infrastructure Fund declined during the year, driven by the combination of a material depreciation in the Indian rupee and political and macroeconomic challenges in India. 3i Infrastructure plc's core European portfolio is expected to be the key driver of future performance and accounted for 78% of 3i's underlying Infrastructure portfolio value at 31 March 2014, compared with 68% at 31 March 2013.

In November 2013, 3i completed the acquisition from Barclays of their European infrastructure fund management business, adding over £700 million of assets under management and experienced investment teams in both London and Paris. This business was a pioneer in the 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, as well as providing a platform for future fundraising.

In February 2014, following the announcement of Cressida Hogg's departure, we appointed Ben Loomes and Phil White as Managing Partners and Co-heads of the Infrastructure business. This important leadership change brings fresh impetus and further underlines 3i's commitment to the next stage of development of its Infrastructure platform.

Furthermore, in May 2014, 3i Infrastructure plc announced that it had agreed, subject to shareholder approval, and approval from the Jersey Financial Services Commission, a number of amendments to the existing advisory agreement with 3i. These included extending the term of the advisory agreement for a minimum of a further five years.

There continues to be a strong demand for infrastructure assets as investors seek yield. While the market remains competitive, we are seeing a number of interesting investment opportunities in our target markets. For example, in June last year, 3i Infrastructure plc invested £62 million in Cross London Trains, which will own a key element of London's commuter rail infrastructure. In addition, it announced investments in the National Military Museum (Netherlands) and Mersey Gateway Bridge (UK) primary PPP projects, sourced through our new PPP platform, and see a strong pipeline for further PPP investments.

In Debt Management, third-party management fee income remained steady at £32 million (2013: £31 million), representing 44% of the Group's total third-party management fee income in the period. At 31 March 2014, the business managed £6.5 billion of assets through 28 funds, 17 in Europe and 11 in the US.

Market activity was buoyant during the year, following the re-opening of the European CLO market early in 2013.

Levels of new CLO issuance in the US were dampened in early 2014 by anticipated regulatory changes but have subsequently recovered. We capitalised on this with the launch of two new European CLOs (Harvest VII and Harvest VIII) and two new US CLOs (Jamestown III and COA Summit). Together, these new CLO funds added £1.2 billion of AUM including £40 million of proprietary capital.

During the year, Debt Management generated a gross investment return of £16 million, equating to 20% of its opening portfolio value.

Since the period end, we have made good progress towards launching further CLO funds and we have warehousing vehicles in place in both Europe and the US to seed these future launches.

Strategic objectives and progress

Last year, I set out a number of key strategic objectives:

§ Cover operating costs with annual cash income

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

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

Our progress against each of these objectives is described below.

Cover operating costs with annual cash income

Prior to the launch of 3i's restructuring in 2012, the Group's operating costs materially exceeded its annual cash income from management fees and portfolio income. An important target in FY2014 was to cover the Group's operating costs with annual cash income. The major cost reduction programme announced in June 2012 was a key part of achieving this objective.

In FY2013, we significantly outperformed our original target of £40 million of annualised run-rate operating cost savings, achieving £51 million of cost savings at 31 March 2013. In this context, we announced last year a new target of £60 million of cumulative run-rate cost savings to be achieved by 31 March 2014. I am pleased to report that we exceeded this target as well, delivering £70 million of run-rate cost savings at 31 March 2014. These savings represent over a third of the Group's total opening run-rate cost base of £185 million at 31 March 2012, before we announced the restructuring. As a result, actual operating costs in the year were £136 million, 20% lower than last year (2013: £170 million), including restructuring costs of £9 million (2013: £30 million). Restructuring costs were higher than the £7 million estimated, in order to secure the higher savings. We expect the full benefits of this cost reduction programme to be realised during FY2015.

In FY2014, the Group's cash income was consistent with the prior year at £132 million. This was driven by the acquisition of the European PPP platform in our Infrastructure business and the launch of new CLO funds and increased portfolio income from proprietary capital deployed in our Debt Management business. This offset the reduction in fee income from Private Equity as a result of net divestment activity, as well as the Growth Capital Fund coming to the end of its investment period in the previous year.

To help you track our progress, last year 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. As noted above, in the past, 3i has operated at a material deficit on this measure. In FY2014, we achieved an annual operating cash profit of £5 million.

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 platforms underpin our ability to make alpha-generating investments on behalf of our shareholders, co-investors and fund investors. A key objective for us is to ensure that fees from these fund management activities, taken together, more than cover the costs of operating our platforms and that over time we are able to generate a sustainable annual operating profit. The costs of running our investment platforms include paying for our investment teams and the network of international offices, as well as the costs to the Group of providing support functions such as finance, information technology, compliance and human resources.

Our objective is to ensure that we maintain a profitable Fund Management platform overall, growing our AUM profitably. We have made strong progress in this regard. Since 31 March 2012, total AUM has grown from £10.5 billion to £12.9 billion at 31 March 2014. Over the same period, through the cost reduction programme, we reduced our operating costs as a percentage of weighted average AUM from 1.5% at 31 March 2012 to 1.0% at 31 March 2014, excluding restructuring costs.

In order to assess properly the profitability of our fund management activities, we consider the fees that can be generated by our entire Fund Management platform, treating proprietary capital invested on the same basis as managed third-party funds. To do this, we calculate an internal fee payable to the Fund Management business for managing our proprietary capital and call this a "synthetic fee". The standalone profitability of our Fund Management platform is then based on measuring the total fund management income (third-party fees plus synthetic fees) against the operating costs allocated to the platform, excluding restructuring and amortisation costs. To help you track this profitability, we have introduced a new key performance indicator called "Underlying Fund Management profit and margin" (further details are available in the Financial review). In FY2014, our fund management platform generated an underlying profit and margin of £33 million and 26% respectively, compared to £17 million and 13% in FY2013.

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 growth in value of our proprietary investments. This is an important building block of the 3i Value Build which I talked about in my last review.

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

As part of the strategic review, we fundamentally changed our capital allocation approach so that, over time, we aim to use less of our capital to pay operating costs, funding costs and debt repayment, and instead focus our capital on additional shareholder distributions and investment in our core businesses.

The table below shows the average allocation of our capital over the three years between FY2010-12. On average, 68% of the total proceeds from realisations and cash income was used to pay operating and funding costs and debt repayment, leaving just 32% for shareholder distributions and investment in our core businesses. In FY2014, we improved this picture with 50% going to shareholder distributions and re-investment. We expect further improvement in FY2015.

Capital allocation

Business model

3i's business is a mix of proprietary capital investing and managing third-party capital. This "hybrid" asset manager business model enables us to combine capital returns from our proprietary balance sheet and recurring management fee income from our fund management activities. We believe that this represents a differentiated and attractive value proposition for our shareholders.

Investing from our own balance sheet is part of our heritage. Currently, proprietary AUM amounts to £3.4 billion, accounting for 26% of the Group's total AUM. 3i is the largest single investor in its own 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, and gives 3i a true competitive advantage. We view our role as both an active owner as well as manager of third-party funds. This further reinforces the alignment between the interests of our shareholders, our co-investors and our fund investors.

So, in addition to generating capital returns from proprietary capital investing (our Proprietary Capital activities), we also consider the profitability of our Fund Management platform. Both parts need to generate value for the Group. Our overall objectives are to maximise investment returns from our Proprietary Capital activities and grow our Fund Management activities profitably.

We are already managing the Group with this much clearer delineation between Proprietary Capital and Fund Management. Going forward, you will be able to track our progress through new disclosures and a combination of KPIs measuring our performance as an investor of Proprietary Capital and separately as a Fund Management business, in addition to overall Group performance. The performance of these activities is discussed in the Financial Review and further disclosure on the breakdown between Proprietary Capital and Fund Management is shown in Note 1.

Outlook

We have continued to be successful in implementing our strategic plan against a backdrop of ongoing challenges in the macroeconomic environment. Further regulation across the financial services industry is also presenting additional challenges for our business through further costs and increased complexity.

Despite this, we see the power of the 3i business model coming back well. Our network of local teams across our key geographies and our proprietary capital are two key competitive advantages. For example, in our mid-market Private Equity business, we have had teams on the ground across Europe for over 30 years and our franchise in those markets is very strong. This enables us to access attractive investment opportunities and using our own capital affords us flexibility in our approach and timescale that few of our competitors have.

The current environment is a tricky one for new investments. There is an excess of capital looking for investment opportunities and this has driven up sellers' price expectations. We have benefited from this in our realisation programme, however as we review new investment we will need to continue to be patient and disciplined. Our proposition can deliver healthy alpha-generating returns if we invest, manage and exit well. Careful investment in mid-market Private Equity using 3i's competitive advantages will generate significant value for the Group, its shareholders and third-party investors as well as take 3i back to sector-leading performance.

Everyone at 3i is committed and working hard to continue to deliver against our strategic plan. I would like to thank the entire 3i team for their efforts this year. They are key to our success. We are all looking forward to making further good progress in FY2015.

Simon Borrows

Chief Executive

Key Performance Indicators

Our strategic priorities in FY2015

Business review

"A year of significant progress with strong returns and momentum in all three businesses."

Julia Wilson

Group Finance Director

Group overview

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 12 months to 31 March 2014 ("the period") as well as our financial position as at that date.

Summary financial data

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 has resolved this point with the introduction of 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. We have therefore decided to adopt this standard early to benefit from the exception. 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, we have introduced separate "Investment basis" Statements of comprehensive income, financial position and cash flow to aid users of our report.

The numbers presented in the Overview and Strategic report refer to this Investment basis and Table 1 summarises our Investment basis financial results. A more detailed discussion of the impact of IFRS 10, the IFRS financial statements and a reconciliation to the Investment basis, are provided in the Financial review.

Segmental financial data

We manage the business using the Private Equity, Infrastructure and Debt Management business line activities to organise resources and measure performance.

However, as the business has focused on the development and efficient management of total assets under management, it becomes increasingly relevant to consider the balance of fee income and operating costs from that fund management activity separately from the value and performance of 3i's proprietary investment portfolio. Consequently, alongside the Investment basis statements, we have further analysed the performance of our balance sheet investments, our "Proprietary Capital" returns, and that of our fund management activities, our "Fund Management" returns. These are discussed in this section as well as being detailed in Note 1 to the Audited financial statements.

In order to assess the profitability of the Fund Management platform we have introduced the concept of a "synthetic fee", from the Proprietary Capital business to the Fund Management business for its services in managing investments funded from our balance sheet. This has been benchmarked against our third-party capital arrangements in each business line and will be reviewed annually to ensure it remains appropriate. A fee of 1.5% is applied to Proprietary Capital invested in Private Equity and Infrastructure and 0.5% in Debt Management.

Performance

The Group generated a total return of £478 million, or a profit on opening shareholders' funds of 16.3% (2013: £373 million or 14.2%). This reflects further progress and achievement in the implementation of our strategic priorities, with good realisations at strong uplifts to opening value, an improvement in our cost and income balance, and a further reduction in gross debt and associated interest costs. However, continuing pressure in macro conditions has had a negative impact on the results in the year, principally in respect of foreign exchange.

Table 1: Summary financial data

The Group generated a gross investment return of £665 million (2013: £598 million). Split by business line, Private Equity generated £647 million, Debt Management £16 million and Infrastructure £2 million. Further detail about the performance of our business lines is set out in the relevant Business line sections and Note 1 of the Audited financial statements.

As well as a good total return, the operating cash flow position has significantly improved and cash portfolio and fee income now cover the operating costs of the business. A modest increase in third-party assets under management and the successful cost reduction programme led to "annual operating cash profit" of £5 million in the period, exceeding our target to be breakeven by 31 March 2014. This compares with an £(8) million loss last year and an average loss of £(29) million p.a. in the period from FY2011 to FY2013.

This means we are operating a much more financially robust platform. Sustaining this position by growing cash income and maintaining a relentless focus on costs remains a key objective. More detail on the annual operating cash profit measure and on operating expenses is contained within the Financial review.

The primary driver of the improvement in annual operating cash profit was a reduced level of operating expenses. The Group significantly exceeded its updated run-rate cost savings target of £60 million by 31 March 2014 (against an original target of £45 million), delivering cumulative like-for-like savings of £70 million, a 38% reduction from the £185 million opening run-rate cost base at 31 March 2012.

A consequence of the strong investment performance was an increase in the amount we accrued in the year for carry payable. The charge in the year was £85 million (2013: £12 million). Further detail is provided in the Financial review.

The Group's Proprietary Capital portfolio performed well in the period with a gross investment return of £665 million, or 20.2% of opening portfolio, and an operating profit before carry of £539 million (2013: £598 million, 18.7%, £386 million). Strong realisations delivering cash proceeds of £677 million and realised profits of £202 million (2013: £606 million and £190 million) and good value growth of £475 million (2013: £253 million), were the largest contributors. The Private Equity portfolio performed strongly with average last 12 month earnings growth of 19%. Portfolio income was stable at £101 million (2013: £103 million) and benefited from an increased contribution from Debt Management. This was offset by net interest payable of £51 million, which is materially lower than last year (2013: £95 million). The Proprietary Capital business also incurred operating expenses of £28 million (2013: £30 million) and a synthetic fee for investment management payable to the Fund Management business of £51 million (2013: £56 million). This synthetic fee was benchmarked against third-party arrangements. Foreign exchange volatility, and particularly the strength of sterling, led to a £116 million non-cash accounting charge in the period (2013: £30 million gain).

Net interest payable benefited from the further steps taken to reduce gross debt in the period, principally by the repayment of drawings under a revolving credit facility in April 2013. Gross interest payable of £54 million was below the target of £60 million in FY2014. As at 31 March 2014, gross debt was £857 million, a reduction of 21% since the start of the period and over 47% since 31 March 2012. Strong realisations mean that at 31 March 2014 net debt had reduced to £160 million compared to £335 million at 31 March 2013, even after reflecting the good investment activity in the latter part of the year. Gearing was 5% at the end of the period (2013: 11%).

The Group's Fund Management income is driven by total assets under management ("AUM") which were £12.9 billion at 31 March 2014 (2013: £12.9 billion). In the period, we closed the first new European CLO (Harvest VII) since the establishment of the Debt Management business in February 2011, an important milestone for the business. This added €310 million to AUM and was followed by a further European CLO (Harvest VIII, €425 million) in March 2014. The US Debt Management business has continued to grow strongly, with two CLOs launched in the year, adding $900 million to AUM.

The proportion of third-party assets under management grew to 74% from 71% during the year. Infrastructure grew following the acquisition of BIFM, completed in November 2013, which added a further £780 million of AUM. Private Equity AUM reduced in the year as a result of net divestment activity.

Fees are earned on third-party capital and, as noted above, the Proprietary Capital business also generates a synthetic fee for the Fund Management business. Fund Management income in the year was flat at £127 million (2013: £127 million), notwithstanding the effect of net divestment in Private Equity.

For the Fund Management business to be profitable on a sustainable basis, tight cost control is critical. The positive impact of the cost reduction programme initiated in June 2012 is now clearly shown in the results. Total Fund Management operating expenses fell by 23% in the period to £108 million (2013: £140 million), including £8 million of restructuring costs (2013: £24 million) and the addition of £6 million of costs relating to acquisitions in the period.

Consequently, the Fund Management business improved both its absolute profit and profit margin in the period. Fund Management operating profit before carry at £19 million represented a margin of 15% (2013: £(13) million loss and (10)%). On an underlying basis, excluding restructuring and amortisation costs, the profit and margin were £33 million and 26% (2013: £17 million, 13%).

The acquisition of the Barclays Infrastructure Funds Management business ("BIFM"), which completed in November 2013, will further increase third-party fee income and positions the Infrastructure business for growth. Fees generated from the team's managed funds marginally exceeded the operating costs of the acquired business in the period to 31 March 2014.

The financial profile of the Group with regard to Proprietary Capital performance, annual operating cash profit, Fund Management profit and balance sheet strength has materially improved, and the Group has now met the criteria for making additional distributions set out in May 2012. Realisation proceeds, including the carry forward of £222 million of proceeds from the sale of Mold-Masters in the prior period, totalled £899 million at 31 March 2014. Investment levels have improved as momentum builds but we are at the lower end of capacity as prices remain high. Taking all these factors into account, the Board has therefore confirmed, as indicated in November 2013, that it proposes a total dividend of 20 pence per share for the year, of which 8.1 pence per share is our base dividend. Following the payment of an interim 6.7 pence per share dividend in January 2014, the final dividend proposed is 13.3 pence per share, subject to shareholder approval.

Assets under management

The Group's total AUM increased by £41 million to £12,911 million during the year. Assets managed on behalf of third parties increased as a proportion of the total to 74% from 71% at the beginning of the year.

The acquisition of the Barclays Infrastructure Funds Management business, which invests in PPP projects

and completed in November 2013, added £780 million of AUM to the Infrastructure business line. Debt Management successfully raised two CLOs in Europe and two CLOs in the US, which more than offset the reduction in the value of assets managed in the CLO and other Debt Management fund vehicles that have reached the end of their re-investment period. Net divestment activity in Private Equity led to a fall in AUM of £662 million. Movements in foreign exchange rates also had a negative impact of £374 million on total AUM.

The table below summarises the key movements in the period. Fund by fund details are shown in the relevant business line sections of this business review.

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

1 Includes 3i investment into new funds where applicable.

Business lines

Private Equity performance

"Strong performance driven through a combination of earnings growth and successful realisations, together with growing momentum in new investment."

Introduction

3i's Private Equity business employs 59 investment professionals focused on making and managing mid-market investments in northern Europe and North America.

The Private Equity business also manages the existing portfolio in southern Europe, Asia and Brazil. During the

year we announced that we would not be making any new investments, or pursuing a fund raise, in Brazil and have reduced the cost and resources applied to it.

As at 31 March 2014, the Private Equity portfolio consisted of 81 companies with operations in over 80 countries. Assets under management at 31 March 2014 were £4.1 billion (2013: £4.9 billion) and the reduction reflects the net divestment activity seen in the period. However, the value of 3i's proprietary capital invested in the Private Equity portfolio at 31 March 2014 was £2.9 billion (2013: £2.7 billion), due to good value growth across the portfolio more than offsetting net divestment activity.

The business performed well in the year and the gross investment return was £647 million, or 24% of the opening portfolio value (2013: £562 million, or 21%) reflecting strong realisation activity and good earnings growth in the portfolio.

Within this, the European and North American portfolio performed particularly well, delivering a gross investment return of £698 million (30%), while the portfolio in Asia and Brazil delivered a loss of £51 million (13% loss).

Investment activity picked up in the second half of the year. We completed three new investments in JMJ, GIF and Basic-Fit, and there was a significant further investment as we completed the buyout of our co-shareholder in Scandlines.

Private Equity business model

3i's Private Equity business is focused on making mid-market private equity investments.

Investment and realisations activity

Merger and acquisition ("M&A") volumes during the year to 31 December 2013 declined in Europe and in the smaller to mid-market segments (source: Capital IQ). This led to lower private equity deal flow and, with capital availability remaining high from both principal investors and debt providers, highly competitive auctions and high prices were a significant feature of market conditions (source: KPMG M&A Predictor, January 2014).

In this environment, we have remained selective and focused on sourcing deal flow outside of highly competitive processes. Private Equity invested a total of £372 million cash (2013: £182 million) in the year, of which 74% was Proprietary Capital and 26% third-party capital. Eurofund V invested £61 million in the Scandlines further investment in the year and £28 million was invested from co-investment arrangements in three of the new investments made in the year, in return for management fees and other income as well as carried interest.

Proprietary Capital of £188 million was invested in three new investments and £77 million in the further investment into Scandlines. In addition, £8 million was invested to support restructurings or covenant issues (2013: £13 million) and £3 million for other investments (2013: £2 million). Other non-cash investment includes capitalised interest of £167 million recognised in the loan portfolio (2013: £113 million). This included £28 million (2013: £7 million) of interest which was recognised in the prior year and now capitalised and £106 million (2013: £75 million) of interest provided against as a result of the principal loan value being below par.

Table 3 provides details of the investments made in the year.

Table 3: Private Equity investment in the year to 31 March 2014

In light of the market dynamics noted above, there has been a positive environment for exits and we have continued to make progress, in particular, in exiting our smaller or older investments. We were able to achieve a number of very successful realisations with carefully structured and executed exit plans generating competition among buyers and premium exit prices. We were also able to take advantage of strong equity markets, most notably in our IPO and partial exit from Quintiles.

Private Equity generated Proprietary Capital proceeds from realisations of £669 million (2013: £575 million) at a 43% uplift over opening portfolio value (2013: 49%). 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 which generated proceeds of £51 million and an uplift of 70% over opening portfolio value. The realisations from the Private Equity portfolio generated an aggregate money multiple of 1.8x (2013: 2.1x). The multiple incorporates the sale of Enterprise, a 2007 investment, which was written down by £201 million in FY2011 and sold for £7 million in April 2013.

Total proceeds of £1,091 million were generated in the period (2013: £733 million) on behalf of shareholders and third-party investors.

Table 4: Private Equity realisations in the year to 31 March 2014

Table 5: Private Equity realisations by type for the year to 31 March

Gross investment return

Table 6: Gross investment return for the year to 31 March

The portfolio generated a gross investment return of £647 million or 24% of the opening portfolio (2013: £562 million, or 21%). Strong realisations at good uplifts over opening value contributed £201 million of realised profit (2013: £190 million).

The remaining portfolio also performed well with value growth of £478 million in the year (2013: £250 million). This was underpinned by good value weighted earnings growth of 19%, a multiple increase of 20%, following rises in stock markets during the year and the re-rating of a small number of assets, and stable net debt in the portfolio of 3.1x EBITDA (2013: 10%, 7% and 3.2x). The majority of the portfolio (87% by value) grew earnings in the year and the larger investments continue to perform strongly. Table 7 shows earnings growth rates across the portfolio.

Table 7: Portfolio earnings growth weighted by March 2014 carrying values1

In the case of Action, the Benelux headquartered discount retailer, EBITDA for valuation purposes is adjusted to reflect a run-rate basis. Action is growing strongly due, in large part, to its successful store roll-out programme. We believe this run-rate methodology fairly reflects the high growth characteristics of this business, and therefore its maintainable earnings. We continue to monitor closely the high level of transaction and IPO activity in the discount retail sector in order to appropriately benchmark value and have applied a 13.2x pre-discount and 12.5x post-discount EBITDA multiple at 31 March 2014. Action is the largest Private Equity investment by value, valued at £501 million at 31 March 2014 (2013: £280 million), after a recapitalisation which returned £59 million of proceeds in the year. At 31 March 2014, Action represented 17% of the Private Equity portfolio (2013: 10%), and, based on the run-rate earnings and capital structure at 31 March 2014, a 1x movement in the EBITDA multiple applied would increase or decrease value by c.£50 million.

We also saw strong value growth from successful IPOs with Quintiles listing in May 2013, leading to unrealised value growth of £62 million in addition to realised profits of £21 million in the year. Since the period end, Phibro also listed in the US and its value at 31 March 2014 reflected the IPO price. Phibro recorded value growth of £42 million in the year.

Although performance overall was good, there were inevitably a small number of investments where company and geography specific issues impacted value. In total, we saw reductions in value of £134 million offsetting the general improvement. The largest negative movement related to Hobbs, which was reduced in value by £26 million earlier in the year; it was valued at £21 million at 31 March 2014, which was in line with the valuation at 31 December 2013.

Forecast earnings, used when the forecast EBITDA outlook is lower than the last 12 months' data and a lead indicator of negative portfolio outlook, were used for only four investments at 31 March 2014, representing 9% of the portfolio by number and 3% by value (2013: 11, 22% by number and 11% by value).

The net debt position of the portfolio reduced marginally in the period and the average ratio of net debt to EBITDA, for those assets valued on an earnings basis, was 3.1x at 31 March 2014 (2013: 3.2x). Successful refinancings within the portfolio extended the maturity of portfolio debt, with 79% of the debt repayable in 2016 or later (2013: 65%). Table 8 shows the ratio of net debt to EBITDA weighted by portfolio value.

The combination of earnings growth and net debt reduction ("performance") led to a value increase of £182 million

(2013: £141 million).

Equity markets were strong throughout the year and the average EBITDA multiple in the FTSE 250 increased by 20% to 13.3x in the period. As a matter of policy, we select an appropriate multiple for each investment based on a comparable set of quoted companies and we may also apply caps and discounts to these comparable multiple sets to take account of relevant size, sector and cycle considerations as appropriate.

Against a strong market backdrop, we have applied these to a greater proportion of the portfolio during the year. The average EBITDA multiple used to value the Private Equity portfolio increased by 20% to 10.6x before marketability discount (2013: 8.8x) and 9.9x after marketability discount (2013: 7.9x). This translated into a positive movement in the period of £216 million (2013: £36 million). Excluding Action, the average EBITDA multiple increased by 13% to 9.8x pre discount (2013: 8.7x) which represented 9.0x (2013: 7.8x) post discount.

Portfolio income of £68 million (2013: £78 million) decreased as a result of net divestment activity. Income from loans and receivables reduced as a result of net divestment to £46 million (2013: £52 million), dividends received reduced to £13 million (2013: £22 million) but other portfolio income improved to £9 million (2013: £4 million) as we secured good fees on increased investment activity.

81% of the Private Equity portfolio value at 31 March 2014 was invested outside the UK, with 59% in investments denominated in euros and 16% denominated in US dollars. The reduction in currency portfolio hedging during the year, and sterling's appreciation against the euro and dollar, reduced the portfolio valuation at the balance sheet date by £100 million in the period (2013: £44 million gain).

The long-term performance of the Private Equity business is monitored through tracking the money multiple and IRR of investments. Information detailing the performance of the portfolio on a vintage by vintage basis, together with further portfolio analysis, is available on 3i's website www.3i.com.

Table 8: Ratio of debt to EBITDA - Private Equity portfolio weighted by March 2014 carrying values1

Fund Management activity

Table 9: Assets under management

1 Gross money multiple is the cash returned to the fund plus value as at 31 March 2014, as a multiple of cash invested.

AUM reduced to £4,132 million at 31 March 2014 (2013: £4,851 million) as a result of the net divestment activity in the year and the strengthening of sterling against the euro.

We continued to build relationships with leading investors who can invest alongside 3i in future transactions in return for management fees, other income and carried interest. Two of the three new investments made in the period, JMJ and Basic-Fit, were partially funded through this route.

The performance of Eurofund V and the Growth Capital Fund improved markedly in the year. At 31 March 2014, Eurofund V had a gross money multiple of 1.13x invested capital (2013: 0.91x) with strong performance from Action, EMT, Hilite and Scandlines contributing to its improved value. The Growth Capital Fund also grew returns strongly, particularly supported by the performance of Quintiles and full realisation of Hyperion.

Table 9 above details the current Private Equity AUM.

Fee income from third parties reduced in the period, as funds that are past their investment periods continued to realise investments from their portfolios. We continue to focus on securing other fees as we increase investment to mitigate this effect, but the net divestment position overall led to a reduction in the third-party fee income to £17 million (2013: £19 million).

Priorities for the year ahead

We seek to use our local teams to find opportunities and selectively invest in our core markets of northern Europe and North America, focused on international growth businesses.

We will work with co-investment partners on new investments to strengthen relationships and further expand the group of investors we will work with in the future.

We will continue to manage intensively the existing portfolio by implementing clear value-building strategies and realising investments well through carefully planned and executed exit strategies. This will benefit both 3i and our third-party investors.

Business lines

Infrastructure performance

"The European portfolio continues to perform well, while the acquisition of BIFM has increased the breadth of capability in the team."

Introduction

3i's Infrastructure business employs 31 investment professionals focused on originating and managing both core and Public Private Partnership ("PPP") infrastructure investments.

During the year we completed the acquisition of Barclays Infrastructure Fund Management business ("BIFM"), adding specialist investment skills in the PPP sector.

The leadership of the Infrastructure business changed in the year. Cressida Hogg left 3i at the end of March and Ben Loomes and Phil White were appointed Managing Partners and Co-heads of the business.

At 31 March 2014, the underlying Infrastructure portfolio consisted of 17 investments, held through 3i Infrastructure plc ("3iN") and the 3i India Infrastructure Fund ("India Fund"). The business also managed an additional 111 investments, held by the two funds managed by BIFM. 3i has no proprietary capital invested in these two funds. Assets under management at 31 March 2014 were £2.3 billion (2013: £1.6 billion) and the increase primarily reflects the addition of two BIFM funds. The value of 3i's Proprietary Capital invested in the Infrastructure portfolio at 31 March 2014 was £487 million (2013: £507 million).

Gross investment return in the period of £2 million, or 0% of the opening portfolio (2013: £22 million or 4%), was impacted by both operational and macroeconomic challenges in the India Fund portfolio as well as the marked weakening of the Indian rupee against sterling. The core European portfolio continued to perform well.

Infrastructure business model

3i's Infrastructure business is focused on making and managing infrastructure investments, and in managing for value the investments in the India Fund ahead of an exit. The strategy is built around the following components:

Investment and realisations activity

The level of competition for infrastructure assets in Europe remained high in the year as they continue to be in demand from an increasing range of investors for their defensive and cash yielding characteristics. This was intensified by high levels of debt availability for infrastructure investments. Consequently, the team maintained a prudent approach to new investment and the level of investment on behalf of its advised and managed vehicles remained relatively low.

A total of £84 million was invested by the vehicles managed or advised by 3i. The largest single investment in the year was Cross London Trains, a company established to procure and lease the rolling stock for use on the Thameslink passenger rail franchise, made by 3iN. 3iN also completed the investments in the National Military Museum PPP project in The Netherlands for £5 million and an investment in the Mersey Gateway Bridge PPP project in the UK of £13 million. These deals were both sourced by the new PPP team. Table 10 provides details of the investments made in the year.

We sold one investment in the period, a stake in a small manager of PPP funds, generating proceeds of £2 million and a small profit on opening book value. Following the acquisition of BIFM, there was no longer a strategic reason for retaining a stake in that business.

Table 10: Infrastructure investment in the year to 31 March 2014

Gross investment return

Table 11: Gross investment return for the year to 31 March

The portfolio generated a gross investment return of £2 million, or 0% of the opening portfolio (2013: £22 million or 4%).

The value of the Group's 34% holding in 3iN increased by 1% in the year to 31 March 2014, generating an unrealised value gain for the Group of £5 million for the year. The Group also received dividend income of £21 million from 3iN in the year (2013: £18 million). This return was underpinned by the performance of 3iN's European portfolio, which continued to generate good levels of income and value growth. In particular, 3iN's holdings in Elenia and Eversholt saw strong value gains, underpinned by the re-financing of their acquisition debt facilities at attractive terms, as well as by their continued strong operational performance. Its 10% holding in AWG ended the year broadly flat in valuation terms. The ongoing regulatory review of the UK water sector is expected to conclude in December 2014. 3iN's PPP portfolio also delivered robust value gains and good levels of income.

The valuation of the India Fund investments continued to be affected by a number of macroeconomic and market factors, resulting in an unrealised value loss of £18 million, which more than offset the gain generated by 3iN. The India Fund power investments, in particular, have experienced issues around fuel supply and costs and their ability to pass increased fuel costs to their customers. The road investments faced challenges in project execution due to delays relating to land acquisitions and working capital constraints in the construction sector.

At 31 March 2014, 22% of 3i's Proprietary Capital underlying portfolio was denominated in Indian rupees (2013: 32%). The weakness in the Indian rupee and US dollar against sterling impacted the portfolio valuation at the balance sheet date. A translation charge of £7 million (2013: £6 million gain) further offset the good underlying performance in Europe in the period.

Further portfolio analysis can be found on 3i's website, www.3i.com.

Fund Management activity

Table 12: Assets under management

AUM increased to £2,294 million at 31 March 2014 (2013: £1,579 million) as a result of the acquisition of BIFM and growth in the NAV of 3iN, offset by a reduction due to foreign exchange translation in the AUM of the India Fund which is denominated in US dollars.

We continue to explore potential fund raising options, with a focus on primary PPP investing as a result of the expansion in capability in that area.

Table 12 details the current Infrastructure AUM.

Fee income from third parties increased in the year to £24 million (2013: £21 million) which reflects stable 3iN fee income, four months of fee income from acquired funds and lower fee income from the India Fund. BIFM is expected to generate, prior to any additional fund raising, c.£7 million in fee income next year.

Priorities for the year ahead

In Europe, we will maintain our rigorous investment approach, focusing our activity in the core infrastructure and PPP project markets in Europe, building on our market-leading track record of returns.

We will continue to work with the management teams of the portfolio to improve operational performance and deliver value over the long term.

We aim to increase AUM through future capital raisings for 3iN, as appropriate, and through targeted private fund raisings, principally focused on PPP investments.

In India, we will focus on managing the existing portfolio to maximise value in the realisation phase.

Business lines

Debt Management performance

"Successful CLO fund launches, as well as continued strong track records in both Europe and the US, position the business for further growth."

Jeremy Ghose

Managing Partner and CEO, 3i Debt Management

Introduction

3i's Debt Management business employs 29 investment professionals focused on managing funds that invest in corporate debt in both Europe and North America.

As at 31 March 2014, the Debt Management business managed 28 funds principally being Collateralised Loan Obligations ("CLOs"). Assets under management at 31 March 2014 were £6.5 billion (2013: £6.4 billion) and the increase primarily reflects the raising of four CLOs during the year, including our first in Europe since the establishment of the business in 2011. This AUM growth was offset by reductions in older funds as they passed their re-investment period and capital was distributed to investors. The value of 3i's Proprietary Capital invested in the Debt Management portfolio at 31 March 2014 was £143 million (2013: £81 million).

Gross investment return in the period of £16 million or 20% of the opening portfolio (2013: £14 million or 33%) was good and reflected the strong performance of the funds and a consequent increase in both the valuation of our holdings and cash income in the year.

The level of investment activity increased as 3i invested in three of the four CLOs raised and also provided capital to establish warehouse facilities in order to build up portfolios of assets ahead of future fund raises. £61 million was invested in the year (2013: £23 million).

Debt Management business model

3i's Debt Management business is focused on raising and managing corporate debt funds in Europe and North America.

Investment and realisations activity

In 2013, the European CLO market re-opened, supported by increased economic confidence and increased private equity deal flow at the larger end of the market. During 2013, 20 European CLOs were raised with a value of €7.4 billion, while no CLOs were raised in 2012. The US CLO market continued to build on its momentum from 2012 during the first half of 2013, with record quarterly levels of CLO issuance seen in the second quarter. Increasing concerns about future US regulation (particularly the Volcker Rule) dampened activity in the second half, however issuance in early 2014 was at strong levels, following the announcement by the Federal Reserve that banks will be given until July 2017 to comply with the Volcker Rule.

The Debt Management business closed two European CLOs in the period and 3i invested £34 million into these launches alongside third-party investors. There were two CLO launches in the US, into which 3i invested £6 million. In addition, 3i has committed £80 million to create warehouse facilities in both the US and Europe to support the creation of portfolios ahead of future fund launches. During the year, £21 million was invested into these facilities.

Table 13 provides details of the investments made in the year.

Following a successful close and a period of good trading, the decision was taken to sell our equity holding in Jamestown I. This generated proceeds of £5.5 million, and crystallised a small realised profit.

Table 13: Debt Management investment in the year to 31 March 2014

Gross investment return

The portfolio generated a gross investment return of £16 million, or 20% of the opening portfolio (2013: £14 million or 33%).

A small realised gain was recognised on the sale of our equity holding in Jamestown I.

Unrealised gains of £10 million reflect uplifts in the mark-to-market valuations of the equity stakes in our CLOs, as well as the valuation movement of our holding in the Credit Opportunities Fund (Palace Street I) and the warehouse vehicles used to launch CLOs.

Yield is generated from the Debt Management portfolio both from distributions on our equity held in the CLOs and Palace Street I (£10 million) and interest received on our warehouse vehicles (£4 million).

Foreign exchange movements reflect the strengthening of sterling in the year, as most of our portfolio is denominated either in US dollars or euros.

Further portfolio analysis can be found on 3i's website, www.3i.com.

Table 14: Gross investment return for the year to 31 March

Fund Management activity

AUM increased to £6,485 million at 31 March 2014 (2013: £6,440 million) as a result of the launch of two CLOs in Europe and two in North America. This was largely offset by the reduction in AUM in several of the CLOs that are now past their re-investment period and making distributions to investors and foreign exchange.

Table 15 details the current Debt Management AUM.

Fee income from third parties increased to £32 million in the year (2013: £31 million) as AUM grew and we had the benefit of a full year of fees from acquisitions made in FY2013. Of this, 78% was generated in Europe and 22% in the US.

In the year ended 31 March 2013 catch-up fees relating to earlier periods of £6 million were received in relation to improved fund performance as accrued subordinated fees became payable once funds had met their performance hurdles. In the year ended 31 March 2014, no such fees were received. Therefore, excluding catch-up fees, fee income has increased by £7 million in the year.

CLO fees remain the core of the business and accounted for 81% of the total fees received in the year (2013: 79%). The active CLO markets in both Europe and the US, as discussed above, are therefore important.

Priorities for the year ahead

We continue to manage the existing funds to maintain our strong track record of returns, ensuring we remain a preferred manager of corporate debt funds.

We will prioritise further CLO launches in both Europe and the US in order to replace maturing AUM and increase our investment potential.

We will maintain a focus on costs to ensure fees exceed operating expenses.

We will consider further inorganic growth opportunities, or diversification, where fee income from acquired management contracts or platforms would be incrementally profitable.

Table 15: Assets under management

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 accounting standard, IFRS 10, has resolved this point with the introduction of 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. We have therefore decided to adopt this standard early to benefit from the exception. 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, we have introduced separate "Investment basis" Statements of comprehensive income, financial position and cash flow for the first time to aid users of our report. The numbers presented in the Overview and Strategic report refer to this Investment basis. A more detailed discussion of the impact of IFRS 10 is included at the end of this section.

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 have presented 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 investment performance.

We have also taken the opportunity to align our Investment basis total return statement more closely to how the business is managed on a day-to-day basis. Specifically, following the reduction in foreign exchange hedging and, instead, the consideration of foreign currency risks as part of the investment process, we have included net foreign exchange movements relating to the portfolio in a new subtotal, gross investment return, as the key measure of investment performance. The previous measure, gross portfolio return, excluded net foreign exchange movements. We have also separately analysed the impact of acquisition accounting as "Acquisition related earn-out charges", which was previously included in carry payable.

Table 16: Total return for the year to 31 March

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 is considered in greater detail in this review.

The Group generated a total return of £478 million, or a profit on opening shareholders' funds of 16.3% (2013: £373 million or 14.2%). This reflects further progress and achievement in the implementation of our strategic priorities, with good realisations at strong uplifts to opening value, an improvement in our cost and income balance, and a further reduction in gross debt. However, continuing strength in sterling had a negative impact on the results for the year in respect of foreign exchange translation.

The operating profits of the Proprietary Capital and Fund Management business and the remaining items that contribute to total return are analysed in this Financial review.

Total operating expenses

Operating expenses of the Group were £136 million in the year (2013: £170 million) and included restructuring costs of £9 million (2013: £30 million) in respect of redundancy, office closures and organisational changes. Operating expenses as a percentage of weighted average AUM decreased to 1.0% (2013: 1.3%) as a result of the further reduction in like-for-like costs combined with the BIFM acquisition and new CLO fund launches in the year which increased the cost efficiency of the Group (excluding restructuring costs).

We achieved annualised like-for-like run-rate operating cost savings of £70 million at 31 March 2014 against our run-rate of £185 million at 31 March 2012. This represents a reduction of 38% and exceeds our revised target to achieve cost savings of £60 million by 31 March 2014. Of this total, £19 million of run-rate savings were achieved during the year ended 31 March 2014.

The main savings in operating costs since 31 March 2012 have come from headcount reductions, with average headcount of 277 in 2014 compared to 358 in the prior year. The majority of the staff changes were implemented in the year ended 31 March 2013. As at 31 March 2014, headcount was 266, compared to 282 at 31 March 2013 and 435 at 31 March 2012. The addition of 21 staff as a result of the BIFM acquisition was offset by a net reduction of 37 staff across the remainder of the Group during the year. The next most significant saving related to property costs, as a direct consequence of headcount changes.

Restructuring costs of £9 million were incurred during the year in order to effect further changes to staff, offices and other cost savings. This total was higher than the £7 million originally estimated, reflecting the costs of reducing the level of resource applied to Brazil and, in particular, the severance costs of the team, which were not anticipated in the original target. However, the ratio of run-rate cost savings to restructuring costs is better than originally targeted, with £70 million of run-rate cost savings achieved at a cost of £39 million, representing a 1.8x ratio, compared with the original target of £45 million savings and £30 million restructuring costs (1.5x).

The cost reduction initiatives outlined in the strategic announcement in June 2012 are largely complete and we will no longer report operating expenses on a run-rate basis as we expect it to converge and to be in line with the actuals in all material respects.

Table 17: Operating expenses for the year to 31 March

Annual operating cash profit

Table 18: Annual operating cash profit for the year to 31 March

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 "annual operating cash profit".

The annual operating cash profit position improved from a loss of £(8) million in the year to 31 March 2013 to a profit of £5 million in the year to 31 March 2014. This is the first year the Group achieved an operating cash profit in more than a decade. This is a significant step in improving the profitability of the Group's operating model.

Third-party AUM increased during the year following the acquisition of BIFM and the launch of four Debt Management funds. The growth in third-party AUM, and a focus on generating cash income from the portfolio, has meant the Group has been able to maintain its cash income despite net divestment activity in Private Equity. Cash income was stable at £132 million (2013: £132 million), with a £5 million increase in third-party fees and a £5 million decrease in portfolio income.

The benefits of the cost reduction programme are now being seen with actual costs (excluding restructuring costs) incurred during the year of £127 million (2013: £140 million) including £6 million of additional costs relating to acquisitions. The cost reduction programme has delivered £70 million of run-rate operating cost savings from the initial £185 million cost base, a reduction of 38%, before adding costs relating to acquired businesses.

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 £539 million (2013: £386 million) was £153 million higher than the prior year and this was underpinned by strong gross investment return and a reduction in costs.

By business line, the gross investment return on the opening portfolio was 24% from Private Equity (2013: 21%), 0% from Infrastructure (2013: 4%) and 20% from Debt Management (2013: 33%). Private Equity accounts for 82% of the Proprietary Capital portfolio at 31 March 2014 (2013: 83%) and remains the primary driver of performance for the Proprietary Capital segment. Business line performance is discussed in more detail in the relevant Business line sections.

Realised profits

Realised profits at £202 million in the year to 31 March 2014 (2013: £190 million) demonstrated a second consecutive year of strong exits and were achieved at an uplift over opening value of 43% (2013: 46%). We continue to pursue exits through careful exit planning, particularly for our older, smaller and non-core geography assets.

The majority of the realisations were from the Private Equity portfolio, which contributed £669 million of the £677 million proceeds. Table 4 details the Private Equity realisations in the period and sets out the accounting uplift reflected in the annual total return and the longer-term cash-to-cash results. The Private Equity realisations completed in the year produced a money multiple of 1.8x over their investment life.

Table 19: Proprietary Capital operating profit for the year to 31 March

Unrealised value movements

Table 20: Unrealised profits/(losses) on revaluation of investments for the year to 31 March

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 March valuations are the last 12 months' management accounts data to December, unless the current year forecast indicates a lower maintainable earnings level. Where appropriate, adjustments are made to earnings on apro 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 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 £182 million (2013: £141 million). Value weighted earnings, the most relevant measure of NAV impact, increased by 19% in the year, demonstrating that the portfolio's largest assets are delivering strong improvements in performance, while net debt in the portfolio reduced marginally to 3.1x (2013: 3.2x).

Multiple movements

Increases in quoted prices for comparable businesses over the year, together with a re-rating of a small number of assets (most notably Action), have led to an increase in the weighted average EBITDA multiple of the portfolio to 10.6x before marketability discount (2013: 8.8x) and 9.9x after marketability discount (2013: 7.9x). Excluding Action, the largest asset by value and the asset with the highest multiple applied to earnings, the weighted average EBITDA multiple of the portfolio has increased to 9.8x before marketability discount (2013: 8.7x) and 9.0x after marketability discount (2013: 7.8x). The increase in the year has generated an increase in value of £216 million (2013: £36 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 year.

Imminent sale

Portfolio companies which are well advanced in a negotiated sales process are valued on an imminent sale basis. At 31 March 2014, while there are a number of ongoing sales processes, only two were sufficiently progressed to value

on this basis and the uplift to imminent sale was £9 million (2013: £24 million).

Discounted Cash Flow

The Discounted Cash Flow (DCF) valuation basis is used to value portfolio companies with predictable and stable cash flows. This is typically used for investments in our Infrastructure business, however one significant Private Equity investment, Scandlines is now valued on a DCF basis as it has a number of similar characteristics to an infrastructure investment. As at 31 March 2014, there were eight portfolio companies valued using the DCF valuation basis, the majority of which relate to the Group's Indian Infrastructure portfolio. Value growth in Scandlines was offset by unrealised losses as a result of the continued challenging environment in India, leading to a net loss on cases valued using DCF models of £(8) million in the year (2013: £(41) 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. Unrealised losses of £10 million were incurred in the year to 31 March 2014 (2013: gains of £73 million).

Quoted portfolio

The quoted portfolio was valued at £554 million at 31 March 2014 and now represents 16% (2013: £431 million, 13%) of the Group's total portfolio. The Group's 34% investment in 3i Infrastructure plc represents the majority of the quoted portfolio at £404 million. 3i Infrastructure plc's share price increased by 1% in the year, resulting in value growth of £5 million. The IPO of Quintiles was completed in May 2013 and following sales of the Group's holding in the business, the value of Quintiles at 31 March 2014 was £122 million. The total investment return from Quintiles in the period, including realised profits, unrealised profits and income was £87 million. The IPO of Phibro was completed after the end of the period. At 31 March 2014 this continued to be valued on an earnings basis so is not included in the quoted portfolio.

Table 21: Proportion of portfolio value by valuation basis for the year to 31 March

Debt Management

The Debt Management business line has investments in a number of the CLOs which the Group manages, as well as in the Credit Opportunities Fund, Palace Street I and the 3i Senior Loan Fund. The Group also invests in Warehouse facilities to support the creation of portfolios for future fund launches.

The CLOs are valued on the basis, where possible, of quotes from the arranging brokers, substantiated by internal modelling of the future returns of the investment and third-party databases of prices. At 31 March 2014 the value of the equity stakes in CLOs was £67 million (2013: £26 million). Warehouse facilities are valued directly on the mark-to-market of the underlying debt held, and at 31 March 2014 these totalled £17 million (2013: £nil). The NAV of Palace Street I at 31 March 2014 was £53 million (2013: £48 million) and the value of the equity held in the US Senior Loan Fund was £6 million (2013: £7 million).

Portfolio income

Table 22: Portfolio income for the year to 31 March