3i Group Regulatory News (III)

16 May 2019

3i Group plc announces results for the yearto 31 March 2019

Strong performance across our business

· Total return of £1,252 million or 18% on opening shareholders' funds (March 2018: £1,425 million, 24%) and NAV per share of 815 pence (31 March 2018: 724 pence) after paying 37 pence of dividends in the year

· Our Private Equity business continues to perform well, with underlying earnings growth underpinning a gross investment return of £1,148 million or 20%. This was driven by assets including Action, Cirtec Medical, Audley Travel, Aspen Pumps and Formel D

· In competitive markets the Private Equity team maintained its cautious approach to pricing, deploying proprietary capital of £332 million, including two new investments. We intensified our focus on M&A activity by our portfolio companies and completed eight bolt-on acquisitions in total during the year, most of which were self-funded. We also re-invested £529 million into Scandlines for a 35% stake

· Our Infrastructure business had another outstanding year. 3i Infrastructure plc ("3iN") generated a total shareholder return of 33% as a result of good underlying portfolio performance and the realisation of XLT. Proceeds from XLT and cash in the business were redeployed by the team in three new investments

· Realisations remained strong, with proceeds of £1,242 million, or £713 million after the £529 million reinvestment in Scandlines

· Total dividend of 35 pence per share for FY2019, with a dividend of 20 pence per share to be paid in July 2019 subject to shareholder approval

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

"3i continued to perform well in FY2019, delivering a total return of 18%, supported by good earnings growth across our Private Equity portfolio and by excellent returns from our Infrastructure team. In very competitive markets, we remained disciplined investors and focused on our buy-and-build platforms.

FY2020 appears to be starting in a similar way to FY2019, with significant political and market uncertainty and a growing tide of funds looking to invest in our markets. We remain cautious in this environment, which will lead us to be careful about the pricing of new investments and to deploy further capital in companies we already know well.

The Group's portfolio of investments is positioned well and has good momentum for further growth. We have a clear strategic focus and will use our active management processes to deliver another good year of progress for our shareholders. "

Financial highlights 

ENDS

For further information, please contact:

For further information regarding the announcement of 3i's annual results to 31 March 2019, 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 and Infrastructure. Our core investment markets are northern Europe and North America. For further information, please visit: www.3i.com.

Notes to the announcement of the results

Note 1

All of the financial data in this announcement is taken from the Investment basis financial statements. The statutory accounts are prepared under IFRS for the year to 31 March 2019 and have not yet been delivered to the Registrar of Companies. The statutory accounts for the year to 31 March 2018 have been delivered to the Registrar of Companies. The auditor's 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 Annual report and accounts 2019 will be distributed to shareholders on or soon after 28 May 2019.

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 second dividend is expected to be paid on 19 July 2019 to holders of ordinary shares on the register on 14 June 2019. The ex-dividend date will be 13 June 2019.

Chairman's statement

"A Clear strategy and consistent execution has delivered strong returns."

Against a volatile political and economic backdrop, 3i delivered another strong performance in FY2019. Private Equity performed well, driven by good portfolio earnings growth, the effective implementation of our buy-and-build strategy, and a favourable market for realisations. 3iN delivered strong returns, with a solid performance from its core European portfolio and another excellent realisation.

Market environment

FY2019 was characterised by continuing political and economic uncertainty, fuelled by the protracted trade war between the US and China, the ongoing lack of clarity on the UK's future relationship with the European Union, and slowing growth in the Eurozone. While we were not immune to the influence of these uncertainties, our diversified portfolio and long-term, rigorous approach to new investments and asset management limited the impact on the Group's performance.

Despite the economic uncertainties, debt markets remained available throughout the year and high demand for private equity and infrastructure investments enabled us to sell a number of assets at attractive exit valuations, delivering strong returns for our shareholders and other investors. At the same time, our deal teams maintained a cautious approach to new business, completing a number of new investments and bolt-on acquisitions at disciplined entry prices.

Performance and dividend

The Group's total return1 for the year was £1,252 million (2018: £1,425 million). Net asset value ("NAV") increased to 815 pence per share (31 March 2018: 724 pence) and our return on opening shareholders' funds was 18% (2018: 24%). We remained net divestors in FY2019, ending the year with net cash of £495 million and liquidity of £1,420 million (31 March 2018: net cash of £479 million and liquidity of £1,404 million).

Last year we announced a revised dividend policy, with the aim of maintaining or growing our dividend year on year, subject to balance sheet strength and investment and realisation levels. In line with the revised policy, and in recognition of the Group's financial performance and robust balance sheet, the Board has recommended a second FY2019 dividend of 20.0 pence (2018: 22.0 pence). Together with the first FY2019 dividend of 15 pence per share paid in January 2019, this takes the total dividend to 35.0 pence (2018: 30.0 pence). The recommendation reflects the Board's confidence in the future prospects of the Group as we continue to execute our clear and consistent strategy.

Board and management

I am pleased to welcome Coline McConville, who joined the Board on 1 November 2018, as a non-executive Director. Coline brings extensive commercial experience in a variety of relevant sectors and considerable board experience. She has joined the Remuneration, Audit and Compliance and Nominations Committees.

Outlook

We enter FY2020 with a strong balance sheet and a diversified portfolio of assets that position the Group well in the current uncertain environment, with significant growth potential combined with good defensive characteristics. The Board is confident that the Group's clear strategy, experienced investment teams, and disciplined but opportunistic approach to business will continue to deliver superior returns for shareholders.

Simon Thompson

Chairman

1 Total return is defined as Total comprehensive income for the year, under both the Investment basis and the IFRS basis. See the Investment basis Total return statement.

Chief Executive's statement

"Our results for the year, against a backdrop of geo-political uncertainty and market volatility, highlight the resilience of the Group and its capabilities to generate attractive, sustainable returns for investors through the cycle."

Simon Borrows

Chief Executive

We generated a total return on shareholders' funds of £1,252 million, or 18% (2018: £1,425 million, or 24%), ending the year with NAV per share of 815 pence (31 March 2018: 724 pence). Realised proceeds, were strong at £1,242 million (31 March 2018: £1,323 million) or £713 million after the £529 million reinvestment into Scandlines. In the current competitive environment for new investment we remained selective and cautious on price, investing £245 million in two new Private Equity investments and we focused heavily on bolt-on acquisitions for our portfolio companies where we could achieve synergies. We were successful in completing a total of eight such bolt-on acquisitions for our Private Equity portfolio as well as three for the 3iN portfolio.

A high quality, diverse portfolio in Private Equity

Our Private Equity portfolio is performing well. Our top 20 Private Equity assets account for 98% of the Private Equity portfolio value. Overall, 93% of our Private Equity assets by value delivered earnings growth in the year. We have remained selective and price disciplined in both making new investments and completing bolt-on acquisitions for our existing portfolio companies, in a market where competition for private assets remains very strong. We did, however, capitalise on record levels of dry powder by exiting some of our long-standing 2008 and 2011 assets at good recovery values. The result is a leaner, stronger and well diversified portfolio, which continues to generate attractive returns for shareholders in an uncertain environment.

Action

Action, our largest Private Equity investment, had another strong year. In 2018, revenue grew by 23% to €4.2 billion, like-for-like ("LFL") sales by 3.2% and EBITDA by 16% to €450 million (2018: €3.4 billion, 5.3% and €387 million). These results were achieved despite a challenging year for the broader European retail industry and operational supply chain issues in France.

Action is an exceptional business and, to achieve its full potential of international growth, it is investing significantly in its commercial, stock planning, distribution and supply chain capabilities. During 2018, Action recruited a new planning team and added further resource to its buying and supply chain teams. It is accelerating the roll-out of its distribution centre ("DC") network. It opened two new DCs earlier this year and a further three are due to open over the next 18 months, increasing the network to 10 DCs across Europe. This investment will facilitate further store roll-out in France, Germany, Poland, Austria and new countries. It will also mitigate the effect of the DC performance and product availability issues that Action has experienced over the last 12 months, particularly in France. The DC expansion is being accompanied by the roll-out of new IT systems to support stock planning and DC organisation, in order to manage better the increasing complexity inherent in the end-to-end supply chain planning, given the rapid roll-out of Action stores and DCs across Europe.

The supply chain improvements resulted in strong performance in France and elsewhere in the final months of 2018. LFL sales growth increased in the final quarter of 2018 to a healthy 4.4% overall, above the rate seen in the previous three quarters, with higher and more stable stock availability seen across the French network of stores. Strong LFL sales growth has continued during the first four months of 2019.

The pace of store roll-outs remains impressive with 230 net new stores in calendar year 2018, even after Action decided to defer 20 new store openings in France to 2019 to help manage the supply chain issues. Action had 1,361 stores across seven countries as at 31 March 2019. In Poland, the success of Action's six store pilot, which started in 2017, led to the opening of an additional 19 stores in 2018. In 2019, Action will continue with its store roll-out programme in France and Germany and will accelerate its store growth rate in Poland. Action also accelerated its store renewal programme in the Netherlands and Belgium: 48 stores were refurbished, enlarged or relocated in 2018, compared to 27 the year before, improving the customer experience and EBITDA contribution of those stores.

Exceptional weather conditions in 2018 adversely affected customer footfall across European retail and also contributed to the delayed opening of two of Action's most recent DCs; Belleville near Lyon and Peine in Germany. Both of these DCs became operational in Q1 2019.

3i owns 44.3% of Action and also manages Eurofund V ("EFV"), which owns 33.2% of the company. Action is one of two remaining companies in EFV. The final extension of EFV is scheduled to end in November this year. As a result, 3i is working closely with the team at Action to facilitate a transaction that will allow those investors who wish to realise their interest in Action by November 2019 to do so. 3i intends to maintain its current level of exposure in Action and we expect that a number of other investors are likely to retain a substantial part of their holdings.

Private Equity portfolio performance

Since the strategic review in 2012, 3i's Private Equity portfolio has changed significantly. The portfolio has been reduced from 124 companies to 32 companies and, excluding Action, 86% of the remaining Private Equity portfolio value is from our 2013-16 and 2016-19 vintages. We are conscious of the challenging external environment and concerns that some form of market correction is coming. Our strategy of taking a long-term view on the multiples used to value our portfolio companies means we are able to reduce the impact of volatility on our return, which increases 3i's resilience to market corrections.

Our 2013-16 vintage is performing strongly, generating significant cash returns. In September 2018, we sold 24% of our shareholding in Basic-Fit at €30.50 per share, generating proceeds of £89 million. We retain an 18% stake in the business, valued at £254 million. We completed the refinancing of Aspen Pumps, returning cash of £49 million to the Group. Aspen Pumps' underlying business is performing strongly through a combination of organic growth, with strong performance in its core pumps division, together with bolt-on acquisitions helping to consolidate its position as a global leader in the condensate pump manufacturing market. Audley Travel had another good year and we received a cash distribution of £25 million. Investment in its US operation is now generating strong earnings growth. We invested £1.1 billion in the 2013-16 vintage and that portfolio is already standing at over a 2x vintage multiple with significant potential growth ahead of it.

At 31 March 2019, the 2016-19 vintage reached the end of its investment period, with the Group's total proprietary capital committed totalling c.£1.4 billion. In FY2019, we invested and committed to invest c.£450 million in a combination of new investments and bolt-on acquisitions. In the first quarter we completed proprietary capital investments in Royal Sanders of £135 million and ICE of £110 million. We also completed further bolt-on acquisitions for both assets; in November 2018 we completed the acquisition of McBride's European personal care liquids business for Royal Sanders and, in February 2019, we invested a further £19 million of proprietary capital in ICE's merger with SOR Technology ("SOR").

We focused on originating acquisition opportunities for our portfolio companies in FY2019, as prices for new investments remained high. Over the last 12 months we completed a £50 million proprietary capital further investment in 'eyes + more' for Hans Anders, as well as bolt-on acquisitions for Cirtec Medical and Ponroy Santé, both of which required no additional equity contribution from 3i. These bolt-on acquisitions offer good potential for commercial and operational synergies, which we are already beginning to see in both companies.

At the end of March 2019, we announced the final investment in the 2016-19 vintage, Magnitude Software Inc, a leading provider of unified application data management solutions, operating in the US, the Netherlands, the UK, Canada and India. This investment, of c.£139 million, completed at the start of May 2019.

Formel D, the leading international provider of quality services for the automotive industry, was another notable performer of the 2016-19 vintage, generating strong profitability following implementation of a range of initiatives focusing on improving margins and working capital.

Schlemmer, a German manufacturer of cable management solutions for the global automotive industry, had a challenging 12 months and we reduced the value of this 2016-19 asset by £70 million. The company experienced some market volatility predominantly in Europe, ongoing operational difficulties in the US and Mexico and raw material price increases especially in China, affecting profitability and cash flow. As a result, 3i implemented a change in management with a new CEO and CFO and provided additional funding of £4 million in March 2019, to ease the liquidity issue. We are now confident the new management team has a clear plan to recover performance.

Another outstanding year for Infrastructure

In the 12 months to 31 March 2019, 3iN's share price appreciated by 29% to 275 pence, generating value growth of £167 million for the Group's 33% stake. This excellent share price increase reflects the successful management by our Infrastructure team, their impressive recent track record of realisations and the strong performance from the portfolio of European infrastructure assets.

Over the last few years, we have repositioned the 3iN portfolio away from assets with higher regulatory risk and generated significant investment gains for shareholders in the process. During the year 3iN disposed of its 33% stake in Cross London Trains ("XLT") for proceeds of £333 million, representing a 5.9x return and a 40% IRR. The value uplift from the sale contributed materially to a performance fee of £31 million for the Group. We increased our fee generating Infrastructure AUM by £300 million, as we manage new investments in Tampnet and Attero for 3iN and other investors. In addition to these investments, 3iN completed the acquisition by Infinis of Alkane Energy in the year, and in March 2019, 3iN announced a commitment to invest in Joulz, a leading owner and provider of essential energy infrastructure equipment and services in the Netherlands. The £190 million investment in Joulz completed in April 2019.

Demand for Infrastructure assets is strong and the team remains disciplined on price and, much like Private Equity, we look for bolt-on opportunities for the existing portfolio where appropriate. In the year, two such acquisitions for Wireless Infrastructure Group ("WIG") and one for TCR were completed, without further equity contribution from 3iN.

Our North American Infrastructure team announced its second investment at the beginning of April 2019, in Regional Rail LLC, a leading owner and operator of short-line freight railroads and rail-related businesses throughout the Mid-Atlantic US.

Apart from the gain in 3iN's share price, our Infrastructure platform remains an important source of cash income for the Group, generating £82 million (2018: £78 million) of cash income through its fund management activities and dividend income from Infrastructure.

Corporate Assets

In June 2018, we completed the sale and our subsequent 35% reinvestment into Scandlines, generating net proceeds to 3i of £306 million. Our decision to reinvest into Scandlines is consistent with our strategic objectives and we are already seeing the benefit of this through the considerable cash flows that the business is continuing to produce. Since the Group's reinvestment, we have received £28 million of dividend income, an important contribution to the Group's operating cash position.

Strong balance sheet, well positioned to deliver good returns to shareholders

We ended FY2019 with net cash of £495 million after returning £358 million of cash dividends to shareholders in the year. Our strong balance sheet means we can be competitive and move fast when we find the right proprietary capital investments without having to accelerate realisations ahead of their full potential.

Our people and values

We expect everyone at 3i to act with integrity, to be accountable for their behaviour, and to approach their roles with ambition, rigour and energy. This means demonstrating our culture and values while working hard towards achieving attractive returns for our shareholders and other investors.

Our long-standing Responsible Investment Policy informs our investment decisions and our behaviour as stewards of our assets. We are committed to the continuous improvement of our approach.

We have seen some changes in key personnel this year. The Co-Heads of our Private Equity division transitioned during the year, with Menno Antal and Alan Giddins handing over leadership to Pieter de Jong from our Dutch team and Peter Wirtz from our German team, who have become the new Co-Heads of Private Equity and I look forward to working with them in their new capacity. I would like to thank Menno and Alan for their strong contribution in leading the Private Equity team since 2010.

Outlook

For 3i, FY2020 appears to be starting in a similar way to FY2019 with geo-political uncertainty, volatile capital and currency markets, concerns about economic growth and a growing tide of funds looking to invest in private assets in particular.

We remain cautious in this environment, which will lead us to be careful about the pricing of new investments, while looking to put more capital behind those portfolio companies we already know well. So our focus will remain on bilateral or complex processes and our buy-and-build platforms.

The Group's portfolio of investments is positioned well and has good momentum for further growth. We have a clear strategic focus and are committed to using our active management processes to deliver another good year of progress for our shareholders.

I would like to thank the 3i team again for all their good work this year.

Simon Borrows

Chief Executive

Private Equity

Business review

Our Private Equity business performed well in FY2019 with a gross investment return of £1,148 million or 20% on the opening portfolio (2018: £1,438 million or 30%) and realisations of £1,235 million (2018: £1,002 million), including £835 million from the disposal of Scandlines. Despite the political and economic backdrop, strong performance from Action and a number of assets from our 2013-16 and 2016-19 vintages generated unrealised value growth of £916 million (2018: £1,080 million). In a highly competitive market, the team remained selective and disciplined on price, making two new investments and adding eight bolt-on acquisitions for existing portfolio companies.

Investment activity

Over the last twelve months, record levels of capital availability continued to drive competition for private assets. We have remained selective and disciplined on price when originating new investment opportunities and have also focused on further bolt-on acquisitions for our existing portfolio companies, an important part of building the strategic value of these assets.

In April 2018, we invested £135 million of proprietary capital in Royal Sanders, a private label and contract manufacturing producer of personal care products and in June 2018, we invested £110 million in ICE, a global travel and loyalty company that connects leading brands, travel suppliers and end consumers. Over the last two years we have focused on investing in more fragmented markets which offer buy-and-build growth opportunities. In addition to these initial proprietary investments, Royal Sanders completed its acquisition of McBride's European personal care liquids business in November 2018 and, in February 2019, 3i supported ICE's merger with SOR, a web-based travel technology platform, by contributing a further investment of £19 million. In January 2019, we also invested £50 million to support Hans Anders with the bolt-on acquisition of eyes + more, a fast growing value-for-money optical retailer headquartered in Germany.

A number of other portfolio companies also completed bolt-on acquisitions in the year, primarily funded from their own resources. In May 2018, WP completed its acquisition of Proenfar, a Colombia based manufacturer of pharmaceutical and cosmetics plastic packaging solutions for the Latin American market. In July 2018, Ponroy Santé continued its buy-and-build strategy with the acquisition of Densmore, a natural food supplement laboratory specialising in ophthalmic solutions. Ponroy Santé also announced its acquisition of Pasquali Healthcare, a leading pharmaceutical company in Italy at the end of FY2019. In October and December 2018, Cirtec Medical completed the acquisitions of Cactus Semiconductor and Metrigraphics LLC, expanding the company's product portfolio of cutting edge and technically advanced medical device components. In November 2018, Aspen Pumps acquired Advanced Engineering, the market leader in the manufacture and supply of coil cleaners and service equipment to the air conditioning and refrigeration industry.

In September 2018, we acquired £12 million of Action shares from other shareholders and in February 2019, we purchased a small additional LP stake in EFV, which further increased our holding in Action to 44.3%.

In addition to the £332 million of investment completed in the year, in March 2019, we announced a new investment in Magnitude Software Inc, a leading provider of unified application data management solutions, operating in the US, the Netherlands, the UK, Canada and India. This investment, of c.£139 million, completed at the start of May 2019.

Realisations activity

Market conditions remained favourable for exit in FY2019 and we generated £1,081 million of Private Equity proceeds (2018: £603 million) from the sale of five companies in the year, at an average money multiple of 3.0x.

On 21 June 2018, together with EFV, we sold Scandlines, generating proceeds of £835 million for our proprietary capital stake. The Scandlines disposal generated a money multiple of 7.7x on our investment and contributed £31 million to realised profit in the year, in addition to the uplift on sale we recognised in FY2018. This is an outstanding result having originally invested in Scandlines in 2007 and then, in a strategically significant step, increased our investment in 2013. Subsequently, the Group reinvested £529 million into Scandlines to acquire a 35% stake alongside First State Investments and Hermes Investment Management. This investment is now managed outside of the Private Equity business and is reported as a Corporate Asset.

We disposed of two 2011 assets at good recovery values. In September 2018, we sold Etanco for proceeds of £91 million and a realised profit of £24 million and, in March 2019, we completed the sale of OneMed returning proceeds of £96 million and generating a realised profit of £52 million. In addition, we sold our minority stake in SLR, a 2008 investment, for proceeds of £30 million and received our final payment of £29 million for Prisa Radio.

We took advantage of supportive equity market conditions to reduce our quoted holding in Basic-Fit, disposing of 24% of our equity holding and returning proceeds of £89 million. We retain an 18% stake in Basic-Fit, valued at £254 million at 31 March 2019.

We continue to refinance our most cash generative assets where appropriate for the business and where the market allows. In December 2018, Aspen Pumps completed a refinancing which resulted in a £49 million distribution to 3i, of which £48 million was recognised as capital proceeds and the remainder as income. Finally, in December 2018 Audley Travel completed a shareholder distribution of £25 million to 3i, of which £8 million was recognised as capital proceeds and the remainder as income.

In aggregate, we generated total Private Equity proceeds of £1,235 million (2018: £1,002 million) and realised profits of £131 million in the year (2018: £199 million).

Portfolio valuation

As at 31 March 2019, the portfolio comprised 31 assets and one quoted stake (31 March 2018: 35 assets and one quoted stake). The portfolio generated unrealised value growth of £916 million in the year (2018: £1,080 million) and was valued at £6,023 million at 31 March 2019 (31 March 2018: £5,825 million).

Performance

The continued strong performance of the investments valued on an earnings basis resulted in an increase in value of £654 million (2018: £541 million), with the most significant contribution coming from Action. At 31 March 2019, Action was valued using run-rate earnings to 31 March 2019 and a post discount run-rate multiple of 18.0x (31 March 2018: 16.5x), resulting in a value of £2,731 million (31 March 2018: £2,064 million). As the largest Private Equity investment by value, it represented 45% of the Private Equity portfolio (31 March 2018: 35%).

Our 2013-16 vintage is performing strongly. Audley Travel is a provider of luxury tailor-made holidays to over 80 destinations worldwide, serving clients principally in the UK and the US, and has had another strong year. Since our investment in 2015, we have further grown the UK business and are building a strong US business, investing in country specialists and expanding the roll-out of European destination offerings for US customers. As a result, our £156 million initial investment was valued at £270 million at 31 March 2019, after the receipt of the £25 million capital and interest distribution in the year.

A combination of organic growth and bolt-on acquisitions has consolidated Aspen Pumps as a global manufacturing leader of pumps and accessories for the air conditioning, heating and refrigeration industry. At 31 March 2019, our investment in Aspen Pumps was valued at £103 million (2018: £108 million), after the receipt of £49 million capital and interest proceeds from its refinancing in the year.

We completed a number of bolt-on acquisitions for assets within our 2016-19 vintage that add scale to these businesses and, in most cases, also generate operational synergies. The two new acquisitions for Cirtec Medical further expand the company's product portfolio, and the acquisition of Densmore continues Ponroy Santé's buy-and-build strategy. A combination of these acquisitions and growth in the core businesses are reflected in good earnings growth for Cirtec Medical and Ponroy Santé. The bolt-on acquisitions in Hans Anders, ICE and Royal Sanders are also adding value.

We continue to see a small number of asset specific challenges in the portfolio. Schlemmer experienced some market volatility predominantly in Europe, ongoing operational difficulties in the US and Mexico and higher raw material prices, against a more challenging automotive market backdrop. As a result, Schlemmer generated our largest decline in value in the year (£70 million), mainly attributable to performance. After a relatively slow start to the year, Euro-Diesel generated a record order intake in calendar year 2018, of which most will be manufactured and delivered in 2019. Finally, WP's performance recovered towards the end of its financial year, following pressure on profitability due to increasing resin prices, negative foreign exchange effects and temporarily weaker South American markets.

Overall, 93% of the portfolio by value, including Basic-Fit, grew their earnings in the year (2018: 91%). One investment was valued using forecast earnings at 31 March 2019 (31 March 2018: one), representing 1% of the portfolio by value (31 March 2018: 1%). Table 4 shows the earnings growth of our top 20 assets.

Net debt across the portfolio decreased slightly to 3.9x earnings (31 March 2018: 4.0x), principally due to a decrease in the leverage ratio for Action. Excluding Action, the ratio increased to 3.7x (31 March 2018: 3.3x) due to the mix of new investments and realisations in the year, a number of bolt-on acquisitions funded by leverage of the portfolio companies and the refinancing of Aspen Pumps. Table 5 shows the ratio of net debt to earnings by portfolio value at 31 March 2019.

Multiple movements

The increase in value due to multiple movements was £219 million (2018: £144 million increase). The run-rate multiple used to value Action increased to 18.0x post liquidity discount at 31 March 2019 (31 March 2018: 16.5x) to reflect its continued strong performance and our confidence in its future growth prospects. Based on the valuation at 31 March 2019, a 1x movement in Action's post-discount multiple would increase or decrease the valuation of 3i's investment by £197 million (31 March 2018: £176 million).

A common feature throughout FY2019 was volatility in equity markets, which was particularly acute in December 2018. Such unpredictable movements reinforce our strategy of taking a long-term view on the multiples used to value our portfolio companies. In setting and before changing a multiple, we consider a number of factors such as relative performance, investment size, comparable recent transactions and exit plans, as well as monitoring external equity markets. As a result, as at 31 March 2019, we selected multiples that were lower than the comparable set in 12 out of the 21 companies valued on an earnings basis (31 March 2018: 14 out of 21).

Excluding Action, the weighted average EBITDA multiple increased slightly to 11.8x before liquidity discount (31 March 2018: 11.7x) and was 11.1x after liquidity discount (31 March 2018: 11.0x).

The pre-discount multiples used to value the portfolio ranged between 7.5x and 18.9x (31 March 2018: 8.5x to 17.4x) and the post-discount multiples ranged between 7.1x and 18.0x (31 March 2018: 6.3x to 16.5x).

Quoted portfolio

Basic-Fit, the only quoted asset in the Private Equity portfolio, had another very strong year, which was reflected in its share price increase of 28% to €30.00 per share at 31 March 2019 (31 March 2018: €23.35). In its 2018 financial year, revenue and profit increased by 23% and 24% respectively and the business ended the year with 629 clubs and 1.8 million members.

We generated an unrealised value gain of £55 million from Basic-Fit in the year, in addition to realised profits of £20 million on the disposal of 24% of our shareholding in September 2018 at €30.50 per share. At 31 March 2019, our residual 18% shareholding was valued at £254 million.

Assets under management

The value of 3i's proprietary capital invested in Private Equity increased to £6.0 billion in the year (31 March 2018: £5.8 billion).

The value of the Private Equity portfolio, including third-party capital, increased to €9.6 billion (31 March 2018: €9.5 billion).

Infrastructure

Business review

Infrastructure contributed a gross investment return of £210million, or 25% on the opening portfolio (2018: £113 million, 16%). This was primarily driven by 3iN's outstanding share price appreciation of 29% and good levels of dividend income. 3iN generated £333 million of proceeds from the sale of XLT, which were recycled into the investment in Tampnet and a new commitment to invest in Joulz. We increased our fee generating AUM with the management of third-party stakes in Attero and Tampnet and continued to build our US Infrastructure platform with the announcement of our second proprietary capital investment in Regional Rail, LLC.

Investment manager to 3iN

Our role changed from Investment Adviser to Investment Manager of 3iN in October 2018, when 3iN moved its management and tax domicile from Jersey to the UK. The move was accompanied by 3iN successfully applying to HM Revenue & Customs for UK approved investment trust status. Under the terms of the new management agreement, 3i will receive a management fee of between 1.2% and 1.4% on a tiered basis and a performance fee of 20% of returns above a hurdle of 8% of the growth in NAV per share, with a deferral and clawback mechanism in the event of subsequent performance below the hurdle. The fees payable by 3iN to 3i for FY2019 are calculated on the same basis as the previous advisory agreement.

Under the terms of the advisory and management agreements, 3iN paid a management fee of £31 million to 3i (2018: £34 million) and a NAV based performance fee of £31 million (2018: £90 million).

3iN and 3i managed accounts investment

In June 2018, 3iN completed its investment in Attero by completing the £176 million acquisition for a 50% stake. In August 2018, 3iN syndicated 50% of the original investment amount to other investors whose stakes continue to be managed by 3i. In March 2019, 3iN, in consortium with Danish pension fund ATP, invested £375 million in Tampnet, a fibre-based communications infrastructure asset. Of this investment, £187 million is 3iN's proprietary capital and the remaining ATP stake is managed by 3i.

In addition to these investments, 3iN completed its FY2018 commitment with the acquisition by Infinis of Alkane Energy and, in March 2019, it announced a commitment to invest in Joulz, a leading owner and provider of essential energy infrastructure equipment and services in the Netherlands. The £190 million investment in Joulz completed in April 2019.

Finally, the platform investments in the 3iN portfolio made three bolt-on acquisitions in the year, including two acquisitions by WIG and a further by TCR, all of which were funded from the companies' own resources.

Realisations

In March 2019, 3iN sold its 33% stake in XLT for proceeds of £333 million, representing a 5.9x money multiple and a 40% IRR. This realisation generates an excellent return for shareholders and continues to reposition 3iN away from assets with higher regulatory risk.

3iN also refinanced Infinis, WIG, TCR and Attero during the year, all on attractive terms.

Performance

Overall, the 3iN portfolio continues to perform well and the company generated a total return on opening NAV of 15% in the year (2018: 29%), ahead of its target total return of between 8% and 10% per annum to be achieved over the medium term.

Performance of 3i's proprietary capital Infrastructure portfolio

Quoted stake in 3iN

The Group's proprietary capital infrastructure portfolio consists primarily of its 33% stake in 3iN.

3iN's share price performed very strongly in the year, increasing by 29% and closing at 275 pence on 31 March 2019 (31 March 2018: 214 pence). We recognised £167 million of unrealised value growth on our 3iN investment and £22 million of dividend income.

US Infrastructure

In April 2019, we announced an agreement to invest c.$112 million in Regional Rail, LLC, a leading owner and operator of short-line freight railroads and rail-related businesses throughout the Mid-Atlantic US. This is our second investment in US infrastructure, in addition to Smarte Carte.

As at 31 March 2019, Smarte Carte was valued on a DCF basis and we recognised an unrealised value gain of £3 million in the year, net of £12 million of capital and income proceeds received.

Fund Management

In April 2018, the 3i European Operational Projects Fund had its final close, with commitments of €456 million. At 31 March 2019, the fund had invested €102 million out of this total commitment. 3i has a commitment of €40 million to this fund, €9 million of which has been drawn to invest in the fund.

Our 5% holding in 3i Managed Infrastructure Acquisitions LP generated unrealised value growth of £2 million, net of the £1 million dividend distribution received in the year. The underlying portfolio performed well overall in the year.

Infrastructure AUM increased to £4.2 billion (2018: £3.4 billion), principally due to the increase in 3iN's share price and 3i managed accounts.

Corporate Assets

Business review

Investment activity

On 21 June 2018, the Group reinvested into Scandlines, alongside First State Investments and Hermes Investment Management. The Group reinvested £529 million to acquire a 35% stake in Scandlines. Scandlines is now being managed separately from the Private Equity and Infrastructure business lines and is hence reported as a Corporate Asset. At 31 March 2019, Scandlines was the only asset reported as a Corporate Asset.

Portfolio performance

Scandlines contributed a gross investment return of £49 million, or 9% of its reinvestment value. It is valued on a DCF basis and recognised an unrealised value gain of £9 million net of the £28 million of dividend distributions received in the year.

Foreign exchange

In January 2019, we implemented a hedging programme to help mitigate the foreign exchange translation risk on our reinvestment in Scandlines. This is because, unlike most private equity investments, it is an asset that we intend to hold for the longer term, with expected regular cash flows. The total notional size of the hedging programme is €500 million, which represents c.81% of the Scandlines value at 31 March 2019. As at 31 March 2019, we recognised a £12 million net gain on foreign exchange translation, which includes the £21 million movement from the hedging programme.

1 Scandlines was moved to Corporate Assets in June 2018.

Financial review

Another year of strong financial performance

FY2019 was another year of strong financial performance in line with our strategic objective of generating mid to high teen returns through the cycle. We generated a gross investment return of £1,407 million (2018: £1,552 million) and operating profit before carried interest of £1,295 million (2018: £1,428 million).

We generated total return of £1,252 million, or a profit on opening shareholder funds of 18% (2018: £1,425 million or 24%). As a result of the good performance in the year, the diluted NAV per share at 31 March 2019 increased by 13% to 815 pence (31 March 2018: 724 pence) after paying dividends totalling 37 pence per share during the year.

The performance was mainly driven by strong unrealised value growth from Action, 3iN and the 2013-16 and 2016-19 Private Equity vintages.

Investment basis and alternative performance measures ("APMs")

In our Strategic report we report our financial performance using our Investment basis. We do not consolidate our portfolio companies; as private equity and infrastructure investments they are not operating subsidiaries. IFRS 10 provides an exemption from consolidation but also requires us to fair value other companies in the Group (primarily intermediate holding companies and partnerships), which results in a loss of transparency. As explained in the Investment basis and Reconciliation of investment basis and IFRS sections below, the total financial position is the same under our audited IFRS financial statements and our Investment basis. The Investment basis is simply a "look through" of IFRS 10 to present the underlying performance and we believe it is more transparent to readers of our Annual report and accounts.

In October 2015, the European Securities and Markets Authority ("ESMA") published guidelines about the use of APMs. These are financial measures such as KPIs that are not defined under IFRS. Our Investment basis is itself an APM, and we use a number of other measures which, on account of being derived from the Investment basis, are also APMs.

Further information about our use of APMs, including the applicable reconciliations to the IFRS equivalent where appropriate, is provided at the end of the Financial review and should be read alongside the Investment basis to IFRS reconciliation. Our APMs are gross investment return as a percentage of the opening investment portfolio value, cash realisations, cash investment, operating cash profit, net cash/(debt) and gearing. 

Realised profits

We generated gross proceeds of £1,242 million before the Scandlines reinvestment of £529 million (2018: £1,323 million) and realised profits of £132 million (2018: £207 million) in the year. Almost all of the realisation proceeds and uplift over the opening value were from the Private Equity portfolio, which contributed £1,235 million of proceeds and £131 million of realised profits (2018: £1,002 million, £199 million). This includes the sale of Scandlines (£31 million realised profit) and OneMed (£52 million realised profit), together with the partial disposal of our quoted holding in Basic-Fit, which generated a realised profit of £20 million.

Unrealised value movements

We recognised an unrealised value movement of £1,087 million (2018: £1,163 million). Action's continued strong performance contributed £701 million (2018: £610 million) to value growth. Our quoted portfolio generated an unrealised value gain of £222 million following share price appreciation of 29% for 3iN and 28% for Basic-Fit. The majority of the 2013-16 and 2016-19 portfolio continued to perform well, notably Cirtec Medical, Audley Travel, Aspen Pumps and Formel D, offsetting asset specific issues in Schlemmer and Euro-Diesel.

Further information on the Private Equity, Infrastructure and Scandlines valuations is included in the Business reviews.

Portfolio income

Portfolio income increased to £185 million during the year (2018: £171 million) principally due to the receipt of £28 million of dividend income from Scandlines. Loan interest income receivable from portfolio companies remained relatively stable at £113 million (2018: £116 million). The majority of this interest income is non-cash. Fee income reduced to £9 million (2018: £14 million) as a result of fewer Private Equity investments in the year.

Fees receivable from external funds

Fees received from external funds decreased to £53 million (2018: £57 million). 3i, as manager of EFV, received a fee based on the investment cost of the remaining assets in the fund. In January 2018, we agreed with the external investors in EFV to extend the life of the fund by a further year with effect from November 2018 and, as part of that agreement, 3i stopped receiving a management fee from that date.

3i, as Investment Manager to 3iN, receives a fee for sourcing and completing new investments and for the management of the portfolio. In FY2019, we received fee income of £31 million (2018: £34 million) from 3iN. In addition, we started to generate fee income from 3i managed accounts.

Operating expenses

Operating expenses increased to £126 million (2018: £121 million), principally due to a planned increase in staff cost for new roles and replacements across both the Private Equity and Infrastructure business lines to support our asset management capability and business initiatives.

Operating cash profit

We generated an operating cash profit of £46 million in the year (2018: £11 million). Cash income increased to £155 million (2018: £126 million), principally due to £28 million of dividend income received from Scandlines (2018: nil) and non-recurring cash interest of £18 million received from Audley Travel and Aspen Pumps.

Cash operating expenses were £109 million (2018: £115 million), which is lower than the £126 million (2018: £121 million) of operating expenses recognised in the Consolidated statement of comprehensive income as a result of share based payments and other non-cash expenses such as depreciation and amortisation.

Carried interest and performance fees

We receive carried interest and performance fees from third-party funds. We also pay carried interest and performance fees to participants in plans relating to returns from investments. These are received and/or paid subject to meeting certain performance conditions. In Private Equity, we typically accrue net carried interest payable at between 10% and 12% of gross investment return.

The continued good performance of Action, the largest investment in our Private Equity fund, EFV, led to a £130 million increase in carried interest receivable from EFV (2018: £136 million). This was calculated assuming that the portfolio was realised at the 31 March 2019 valuation. The fund's gross multiple was 2.8x at 31 March 2019 (31 March 2018: 2.5x).

The majority of assets by value are now held in schemes that would have met their performance hurdles, assuming that the portfolio was realised at the 31 March 2019 valuation. The 2016-19 vintage is not yet through its performance hurdle, but is expected to meet it in FY2020, at which point we will accrue a catch up in carried interest payable on the returns to date. We accrued carried interest payable of £206 million (2018: £196 million) for Private Equity, of which £88 million relates to the Private Equity team's share of carried interest receivable from EFV (2018: £77 million).

Carried interest is paid to participants when the performance hurdles are passed in cash terms and then only when the cash proceeds have actually been received following a realisation, refinancing event or other cash distribution. Due to the length of time between investment and realisation, the schemes are usually active for a number of years and their participants are both current and previous employees of 3i. During the period, £77 million was paid to participants in the Private Equity plans (2018: £43 million).

3iN pays a performance fee based on 3iN's NAV on an annual basis, subject to a hurdle rate of return and a high watermark. The continued strong performance of the assets held by 3iN, including the significant uplift achieved on the sale of XLT, resulted in the recognition of £31 million (2018: £90 million) of performance fees receivable. The Infrastructure team receives a share of the performance fee received from 3iN, with the majority of payments deferred and expensed over a number of years. £14 million (2018: £9 million) was recognised as an expense during the year, relating to performance fees from both the current and previous years. The total potential payable relating to the FY2019 performance fee is £23 million, which together with the FY2018 performance fee, gave a remaining cumulative total potential payable for performance fees of £68 million.

Overall, the effect of the income statement charge, the cash movement, as well as the currency translation meant that the balance sheet carried interest and performance fees payable increased to £970 million (31 March 2018: £870 million) and the receivable increased to £640 million (31 March 2018: £596 million).

Impact of IFRS 15 on the recognition of carried interest receivable

The IFRS 15 revenue recognition standard became applicable to 3i from 1 April 2018. Carried interest receivable is the only material balance within the scope of the standard. Our calculation of carried interest, being the amount expected if all of the underlying investments were realised at their fair value at the balance sheet date, remains unchanged. IFRS 15 introduces the concept that variable revenue can only be recognised to the extent that it is highly probable that a significant reversal will not occur. IFRS 15 requires us to consider if there are any specific constraints to our income recognition. The factors that 3i considers when making its judgement include the remaining duration of the fund, the current position in relation to the cash hurdle, the remaining assets in the fund and the potential for clawback.

The substantial majority of 3i's carried interest receivable is due from EFV, which has been extended to November 2019, when we expect the fund to come to an end and to have a significant liquidity event. At 31 March 2019, there were only two remaining investments in the fund: Action and Christ (31 March 2018: four). At 31 March 2019, EFV investments had generated proceeds of €3.7 billion and the fund was over 85% of the way towards meeting its cash hurdle. Given the relative size of Christ, the actual payment of carried interest receivable is dependent on the performance of Action. At 31 March 2019, EFV's investment in Action was valued at €2,439 million (31 March 2018: €1,815 million). Given the strong performance of Action and its expected growth profile, and consistent with our investment strategy for and valuation of the asset, we have concluded that IFRS 15 does not have an impact on our recognition of carried interest receivable at 31 March 2019.

As at 31 March 2019, the carried interest receivable accrued on 3i's balance sheet from EFV was £602 million (31 March 2018: £484 million), with a corresponding £413 million (31 March 2018: £334 million) accrued as payable to the carry plan participants. The overall net impact from EFV carried interest is £189 million (31 March 2018: £150 million) or 19 pence per share (2018: 15 pence per share).

As the Group has no plans to raise a third-party fund in Private Equity in the medium term, the Group is not expected to receive material amounts of carried interest receivable from Private Equity after the closure of EFV.

Net foreign exchange movements

At 31 March 2019, 77% of the Group's net assets were denominated in euros or US dollars (31 March 2018: 77%). Following the strengthening of sterling against the euro, partially offset by the weakening of sterling against the US dollar, the Group recorded a total net foreign exchange loss, before the movement in the fair value of hedging derivatives, of £21 million (2018: £16 million loss) in the year.

The Group's general policy remains not to hedge its foreign currency denominated portfolio. Where possible, flows from currency realisations are matched with currency investments. Short-term derivative contracts are used occasionally to manage transaction cash flows. However, in January 2019, we completed a hedging programme to help mitigate the foreign exchange translation risk on our reinvestment in Scandlines. The reinvestment in Scandlines is a longer term hold with relatively predictable cash flows. As at 31 March 2019 the notional amount of the forward foreign exchange contracts relating to Scandlines held by the Group was €500 million and the movement in fair value of the derivatives was a £21 million gain.

The net foreign exchange loss also reflects the translation of non-portfolio net assets, including non-sterling cash held at the balance sheet date.

Pension

During the year, the Trustees of the 3i Group Pension Plan ("the Plan") completed a buy-in transaction, which is a bulk annuity purchase that will partially reduce member longevity risk. This is the second buy-in completed by the Plan, following the first transaction in FY2017. It is expected to improve the actuarial funding position of the Plan, which in turn influences the requirement for future cash contributions by 3i. The next triennial funding valuation will be based on the Plan's position at 30 June 2019. On an IAS 19 basis, there was an £8 million re-measurement gain on the Group's UK pension scheme during the year (2018: £1 million), which is net of a £14 million accounting charge from the most recent buy-in transaction.

Tax

The affairs of the Group's parent company continue to be directed to allow it to operate in the UK as an approved investment trust company. An approved investment trust is a UK investment company which is required to meet certain conditions set out in the UK tax rules to obtain and maintain its tax status. This approval allows certain investment profits of the Company, broadly its capital profits, to be exempt from tax in the UK.

The Group recognised a corporate tax credit of £13 million for the year (2018: £26 million charge). The credit recognised this year arose from a partial reversal of the UK corporate tax charge included in last year's accounts due to the final tax for 2018 being less than estimated. The Group's overall UK tax position for the financial year is dependent on the finalisation of the tax returns of the various corporate and partnership entities in the UK group.

Balance sheet

Net cash increased to £495 million (31 March 2018: £479 million) as the Group remained a net divestor in FY2019. The investment portfolio value increased to £7,553 million at 31 March 2019 (31 March 2018: £6,657 million) with unrealised value growth of £1,087 million and cash investment offsetting the value of realisations in the year.

Further information on investments and realisations is included in the Private Equity, Infrastructure and Corporate Assets Business reviews.

Liquidity

Liquidity remained strong at £1,420million (31 March 2018: £1,404 million). Liquidity comprised cash and deposits of £1,070 million (31 March 2018: £1,054 million) and undrawn facilities of £350 million (31 March 2018: £350 million).

Dividend

The Board has recommended a second FY2019 dividend of 20.0 pence (2018: 22.0 pence). Subject to shareholder approval, the dividend will be paid to shareholders in July 2019 and takes the total dividend for the year to 35.0 pence (2018: 30.0 pence).

With net cash of £495 million and liquidity of over £1 billion at 31 March 2019, the Group is well positioned to fund the second FY2019 dividend of 20.0 pence.

Brexit outlook

The primary, direct risk of the UK's anticipated exit from the EU ("Brexit") relates to the Group's UK regulatory "passports" to conduct certain investment activities within the EU. In certain scenarios, including that of a "hard Brexit", it is likely that the Group would no longer have the benefit of these regulatory passports. Therefore we have implemented an alternative regulatory structure, which includes an AIFM in Luxembourg, which has taken over the operations of 3i's existing branches in France, Germany and the Netherlands from 1 April 2019. This new structure will enable 3i to continue its activities in Europe regardless of the form and timing of Brexit.

The direct impact of Brexit on 3i's investment portfolio is not expected to be material, due to the limited number of our portfolio companies that operate between the UK and the EU.

Key accounting judgements and estimates

A key judgement is the assessment required to determine the degree of control or influence the Group exercises and the form of any control to ensure that the financial treatment of investment entities is accurate. The introduction of IFRS 10 resulted in a number of intermediate holding companies being presented at fair value, which has led to reduced transparency of the underlying investment performance. As a result, the Group continues to present a non-GAAP Investment basis set of financial statements to ensure that the commentary in the Strategic report remains fair, balanced and understandable. The reconciliation of the Investment basis to IFRS is shown further on in this document.

In preparing these accounts, the key accounting estimates are the carrying value of our investment assets, which are stated at fair value, and the calculation of carried interest receivable and payable.

Given the importance of the valuation of investments, the Board has a separate Valuations Committee to review the valuation policy, process and application to individual investments. However, asset valuations for unquoted investments are inherently subjective, as they are made on the basis of assumptions which may not prove to be accurate. At 31 March 2019, 87% by value of the investment assets were unquoted (31 March 2018: 87%).

The valuation of the proprietary capital portfolio is a primary input into the carried interest payable and receivable balances, which are determined by reference to the valuation at 31 March 2019 and the underlying investment management agreements. A further key judgement is the extent to which the calculated carry receivable can be recognised, on the basis that it is highly probable that there will not be a significant reversal.

Investment basis

Consolidated statement of comprehensive income

for the year to 31 March

Consolidated statement of financial position

as at 31 March

Consolidated cash flow statementfor the year to 31 March

Background to Investment basis financial statements

The Group makes investments in portfolio companies directly, held by 3i Group plc, and indirectly, held through intermediate holding company and partnership structures ("Investment entity subsidiaries"). It also has other operational subsidiaries which provide services and other activities such as employment, regulatory activities, management and advice ("Trading subsidiaries"). The application of IFRS 10 requires us to fair value a number of 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.

The financial effect of the underlying portfolio companies and fee income, operating expenses and carried interest transactions occurring in Investment entity subsidiaries are aggregated into a single value. Other items which were previously eliminated on consolidation are now included separately.

To maintain transparency in our report and aid understanding we introduced separate non-GAAP "Investment basis" Statements of comprehensive income, financial position and cash flow in our 2014 Annual report and accounts. The Investment basis is an APM and the Strategic report is prepared using the Investment basis as we believe it provides a more understandable view of our performance. Total return and net assets are equal under the Investment basis and IFRS; the Investment basis is simply a "look through" of IFRS 10 to present the underlying performance.

Reconciliation of Investment basis and IFRS

A detailed reconciliation from the Investment basis to IFRS basis of the Consolidated statement of comprehensive income, Consolidated statement of financial position and Consolidated cash flow statement is shown below.

Reconciliation of Investment basis and IFRS

Reconciliation of consolidated statement of comprehensive income

for the year to 31 March

The IFRS basis is audited and the Investment basis is unaudited.

Notes:

Reconciliation of consolidated statement of financial position

as at 31 March

The IFRS basis is audited and the Investment basis is unaudited.

Notes:

Reconciliation of consolidated cash flow statement

for the year to 31 March