3i Group Regulatory News (III)

11 May 2023

3i Group plc announces results for the yearto 31 March 2023

Very strong FY2023 performance in challenging markets

• Total return of £4,585 million or 36% on opening shareholders' funds (2022: £4,014 million, 44%) and NAV per share of 1,745 pence (31 March 2022: 1,321 pence). This includes a 65 pence per share gain on foreign exchange translation.

• Our Private Equity business delivered a gross investment return of £4,966 million or 40% (2022: £4,172 million, 47%). This result was driven primarily by Action's very strong performance in FY2023, with a good contribution from a number of our other portfolio companies operating in the value-for-money and private label, healthcare, industrial technology and business and technology services. We saw weaker trading in a small proportion of our portfolio, most notably our discretionary consumer segment.

• Action delivered annual revenue growth of 30% and EBITDA growth of 46% in 2022 and has started 2023 well. Action's LTM run-rate EBITDA to P3 2023, which ended on 2 April 2023, was €1,439 million (3 April 2022: €1,012 million), representing a 42% increase over the same period last year. This strong performance supported value growth of £3,708 million for Action in the year, in addition to cash dividend distributions to 3i of £325 million.

• The Private Equity team invested £381 million in the year, deploying capital in four new investments and three bolt-on acquisitions. In addition, our Private Equity portfolio companies completed a further eight bolt-on acquisitions funded through their own balance sheets. Realisations from the Private Equity portfolio totalled £857 million in the year and included the sales of Havea and Christ at uplifts of 50% and 45% respectively to their opening values, as well as the sales of Q Holding's QSR and Precision Components businesses, and of its Twinsburg site.

• Our Infrastructure business generated a gross investment return of £86 million, or 6% (2022: £241 million, 21%). This return was impacted by the decline in the share price of 3i Infrastructure plc ("3iN"), despite its strong NAV return in the year, offset in part by good contributions from our US Infrastructure assets, including notably Smarte Carte.

• The portfolio continues to trade resiliently in the current environment, with 83% exposure to the value-for-money and private label, infrastructure and healthcare sectors.

• Across the Group, we received over £1.3 billion of cash primarily via portfolio company realisations and income in the year. After repaying the £200 million fixed-rate bond due in March 2023, we ended the year with liquidity of £1.3 billion, net debt of £363 million and gearing of 2%.

• Total dividend of 53.0 pence per share for FY2023, with a second FY2023 dividend of 29.75 pence per share to be paid in July 2023 subject to shareholder approval.

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

"Our portfolio has been carefully assembled and its resilience and consistent financial performance in recent years reflects the benefits of thematic investing, disciplined pricing and active asset management. No portfolio company reflects this approach better than Action, which continues to be 3i's largest and most resilient portfolio investment. We are now focused on developing a select number of other companies to fulfil their potential to also become long-term compounders for the Group. Whilst we expect macroeconomic conditions to remain challenging in the near term, we have started FY2024 with good momentum and are confident that we have the right people, portfolio and processes to continue to compound value from our portfolio and deliver consistent returns through the cycle."

Financial highlights

1 Gearing is net debt as a percentage of net assets.

ENDS

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For further information regarding the announcement of 3i's annual results to 31 March 2023, including a live webcast 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 2023 and have not yet been delivered to the Registrar of Companies. The statutory accounts for the year to 31 March 2022 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 2023 will be posted to shareholders on or soon after Wednesday 24 May 2023

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 Friday 28 July 2023 to holders of ordinary shares on the register on Friday 23 June 2023. The ex-dividend date will be Thursday 22 June 2023.

Chairman's statement

"We delivered a very strong return in FY2023, as we continue to benefit from our clear strategy, consistent execution and investment discipline.

While we are not immune from the impacts of the current macroeconomic uncertainty, the Group's financial strength and quality portfolio put us in a good position to continue to deliver attractive returns through the economic cycle."

3i delivered a very strong result in FY2023, despite significant macroeconomic headwinds, as we continue to benefit from our clear strategy, consistent execution and investment discipline.

Performance

I am pleased to report that 3i delivered a very strong set of results in the financial year to 31 March 2023 ("FY2023"), with a total return of £4,585 million (2022: £4,014 million). Net asset value ("NAV") increased to 1,745 pence per share (31 March 2022: 1,321 pence) and our total return on opening shareholders' funds was 36% (2022: 44%). This result was driven predominantly by the strong performance of Action, our largest investment, as well as by good contributions from the majority of our remaining portfolio.

Market environment

FY2023 was dominated by the geopolitical and macroeconomic consequences of Russia's invasion of Ukraine and the gradual global recovery from the pandemic. Governments and central banks have had to deal with the consequences of high inflation and increasing energy prices, which resulted in significant increases in interest rates globally. The defensive characteristics of many of our portfolio companies have enabled them to continue to mitigate many of these macroeconomic headwinds, and in some cases make value accretive acquisitions. A small pocket of our portfolio exposed to discretionary consumer spending did, however, see significant underperformance in the year.

Investment activity across the buyout market slowed in 2022 and we continued to deploy capital selectively in businesses that operate in sectors that we know well and are supported by long-term growth trends. The Group invested £397 million in the year in new acquisitions and further investments in our existing businesses.

Dividend

Our dividend policy is to maintain or grow the dividend year-on-year, subject to the strength of our balance sheet and the outlook for investment and realisations. In FY2023, we generated significant cash inflow of over £1.3 billion from our portfolio companies, whilst remaining cautious and disciplined in our investment activity and supporting portfolio companies, where necessary. Following the repayment of the £200 million fixed-rate 2023 bond in March 2023, we reduced our fixed debt to £775 million, which contributed to a reduction in gearing to 2% at 31 March 2023 (31 March 2022: 6%). In line with the Group's policy and in recognition of the Group's financial performance, the Board recommends a second FY2023 dividend of 29.75 pence (2022: 27.25 pence), subject to shareholder approval, which will take the total dividend to 53.0 pence (2022: 46.5 pence).

Board and people

As announced in November 2021, Julia Wilson, formerly Group Finance Director, retired from the Board on 30 June 2022 after the 2022 AGM. James Hatchley joined the Board as Group Finance Director Designate on 12 May 2022 and became Group Finance Director upon Julia's retirement. Jasi Halai joined the Board as Chief Operating Officer on 12 May 2022. Both James and Jasi have settled very well into their respective roles.

After nine years' service as a non-executive Director, Caroline Banszky will not be standing for re-election at the 2023 AGM and accordingly will retire from the Board at the end of that Meeting. I would like to thank her for her outstanding contribution to the Board's deliberations.

Environmental, Social, and Governance ("ESG")

I am pleased with the progress we have made across all areas of our ESG agenda and I am encouraged by the level of engagement across our portfolio of investments. Led by the Chief Executive's ESG Committee, the focus has been principally on improving our ability to identify and manage climate risk across the portfolio and take advantage of any transition opportunities that may arise. We have embedded dedicated resource in our investment teams, to engage with the portfolio and explore opportunities to improve the sustainability of our investments. We also continue to prepare the Group to comply with ESG regulatory reporting requirements.

Outlook

We start FY2024 with a portfolio of assets that we have carefully constructed around sectors and themes supported by long-term growth trends, with a clear strategy of delivering sustainable returns through underlying organic growth and effective implementation of value accretive buy-and-build acquisitions. Whilst the Group and portfolio are not immune to a further sustained period of macroeconomic and geopolitical uncertainty, we are confident that our financial strength and quality portfolio will provide the Group with the flexibility to navigate these and continue to deliver attractive returns through all stages of the economic cycle.

David Hutchison

Chairman10 May 2023

Chief Executive's statement

"Our portfolio has been carefully assembled and its resilience and consistent financial performance in recent years reflect the benefits of thematic investing, disciplined pricing and active asset management. We have started FY2024 with good momentum and are confident that we have the right people, portfolio and processes to continue to compound value from our portfolio and deliver consistent returns through the cycle."

Despite adverse global economic conditions, 3i delivered a very strong result in FY2023, underpinned by another year of excellent growth from Action and resilient performance across the majority of the rest of our portfolio. In challenging markets, we maintained our investment and pricing discipline, deploying capital across new investments and value accretive bolt-on acquisitions. We also continued to generate significant cash proceeds via realisations at healthy premiums to opening value and strong portfolio income.

In FY2023, we continued to execute our well-established strategy, making good progress against our key performance indicators ("KPIs"), and generated a total return on shareholders' funds of £4,585 million, or 36% (2022: £4,014 million, or 44%), ending the year with a NAV per share of 1,745 pence (31 March 2022: 1,321 pence). The majority of our portfolio companies have been navigating effectively through the high inflation, elevated interest rates, supply chain disruption, rising commodity prices and overall weaker consumer sentiment that have characterised FY2023. Whilst Action's performance was the most significant contribution to the Group's FY2023 return, we also saw particularly good or resilient trading from other portfolio companies operating in the value-for-money and private label, healthcare, industrial technology, business technology and services and infrastructure sectors. We are not, however, immune to the prevailing macroeconomic headwinds, and we saw softer trading in a small number of our portfolio companies. We therefore recognised a meaningful unrealised value loss in two of our companies with discretionary consumer end-markets, to reflect weaker trading and the derating of valuation peers.

Private Equity transaction activity across the market slowed considerably in 2022 compared to 2021, as debt markets became less supportive and pricing expectations remained difficult to align. We were nevertheless able to complete four new investments in Private Equity and two in Infrastructure, in sectors and markets supported by long-term growth trends.

Bolt-on acquisitions across both of our portfolios remain an integral part of our long-term value creation strategy, enabling growth in the portfolio without taking on costly leverage. Accordingly, in FY2023, we completed a total of 11 bolt-on acquisitions for our Private Equity portfolio companies and three for our North American Infrastructure portfolio.

We also generated significant realised proceeds in FY2023, capitalising on demand for assets with a proven track record of through-the-cycle growth and the ability to execute and integrate bolt-on acquisitions. In total, across the Group, we generated over £1.3 billion of cash in the year from realisations and portfolio income.

Including the impact from foreign exchange hedging, 71% of the Group's net assets are denominated in euros or US dollars and we generated a £623 million gain (2022: £9 million gain) on foreign exchange translation as a result of sterling weakness. This includes a £122 million gain from our new medium-term foreign exchange hedging programme that we implemented for the Group in October and November 2022, and the existing hedging programme for Scandlines. For further details on the Group's foreign exchange hedging programme see the Financial review later in this document.  

Private Equity performance

In the year to 31 March 2023, our Private Equity portfolio, including Action, generated a Gross Investment Return ("GIR") of £4,966 million or 40% on opening value (2022: £4,172 million, or 47%). Action generated a GIR of £4,344 million, or 61%, on its opening value. The softer performance across some of our discretionary consumer portfolio companies detracted from the resilient performance of the remainder of the ex-Action portfolio, with 90% of our portfolio companies by value growing earnings in the last 12 months ("LTM") to the end of 31 December 2022. In addition, our Private Equity portfolio is prudently funded, with a long-dated maturity profile and the interest rate risk substantially hedged.

Action

Action, the fastest growing non-food discounter in Europe and our largest portfolio company, delivered another year of very impressive performance. For its financial year ending 1 January 2023, Action generated net sales of €8,859 million, 30% ahead of 2021 and like- for-like ("LFL") sales growth of 18.1% driven by higher footfall and a higher number of transactions. The removal of the remaining limited Covid-19 restrictions in the first quarter of 2022 also contributed to this performance. Sales grew across all of Action's 14 product categories, with particularly good sales of daily essential products.

In the 12 months to 1 January 2023, Action delivered operating EBITDA of €1,205 million, 46% ahead of 2021 and an all-time high EBITDA margin of 13.6%. Action's buying power, flexibility in its category assortment and ability to absorb some of the inflationary pressure enabled it to manage both cost and pricing effectively, whilst maintaining and, in many instances, increasing its pricing advantage compared to its competitors.

Action's simple, efficient and scalable operating model allows the business to expand seamlessly across existing and new geographies. The business added 280 new stores in 2022, setting another store opening record. Stores across all countries are performing well with some of the more recent markets, such as Poland and the Czech Republic, showing particularly strong growth. Action has also moved out of the pilot phase in Italy and Spain given these markets exceeded initial expectations and Action is now fully committed to a full scale expansion in these two sizable new countries. On 2 March 2023, Action opened its first store in Slovakia, its 11th country. At the end of Action's P3 2023 (which ended on 2 April 2023), Action had 2,297 stores across 11 countries, with considerable white space to roll out in both existing and new geographies.

Action largely mitigated external supply chain challenges in 2022. It did so by leveraging its heavy investment in network capacity and through improved planning capabilities and collaboration with logistics partners. This resulted in increased product availability in stores to meet high customer demand. In addition, Action continues to develop its mix of suppliers, with an increasing share of directly sourced products and further geographical diversification. In 2022, the business also continued to enhance its supply chain infrastructure, opening a new hub in Le Havre and ramped up capacity in the distribution centres ("DCs") in Verrières, Bieruń and Bratislava. Action plans to open two new DCs in 2023, which will increase its existing DC network capacity of c.2,700 stores by another c.400 stores.

Action's Sustainability Programme is a fundamental pillar of its strategy and growth trajectory, and the business has made significant progress in its delivery. In 2022, Action completed a circularity assessment of all 14 product categories looking at design and use, which has enabled the business to define circular improvements in the buying process going forward. The business also increased its use of sustainably sourced cotton to 90% and sustainably sourced timber to 92% and reduced its Scope 1 and 2 CO2 emissions by 40% from a 2021 baseline, which is an important step towards achieving its pledge to reduce the emissions from its own operations by 60% by 2030, from a baseline year of 2021.

Action continues to generate very strong cash flow, with cash conversion of 78% in 2022, as a result of its one-year cash payback for new stores and low capital intensity. The business paid an interim dividend to shareholders in December 2022, of which 3i received £159 million, and a second dividend in March 2023 of which 3i received £166 million. After paying the dividends, Action had a cash balance of €365 million as at 2 April 2023 and a net debt to run-rate earnings ratio of 1.8x.

In March 2023, we completed a transaction to provide liquidity for existing external investors in Action, who are invested via our 3i 2020 Co-investment Programme ("Programme"). As part of this transaction, we purchased a small additional stake in Action, investing £30 million through the Programme based on the December 2022 net asset value, increasing our equity stake from 52.7% to 52.9%. At the same time, we crystallised a portion of the carried interest liability relating to Action, which is expected to result in a payment by 3i of c.£200 million in carried interest to the participants in the relevant carry plans in May 2023.

The valuation of our 52.9% stake in Action at 31 March 2023 of £11,188 million (2022: £7,165 million) reflects the robust growth in Action's LTM run-rate EBITDA to €1,439 million (P3 2023), its low leverage and its current LTM run-rate EBITDA valuation multiple of 18.5x net of the liquidity discount. We take a long-term, through-the-cycle view on the multiple we use to value Action and take comfort from the fact that its continued excellent growth meant that its valuation at 31 March 2022 translated to only 13.0x the run-rate EBITDA achieved one year later. In addition, its most important operating KPIs compare very favourably with those of its peer group, which consists of North American and European value-for-money retailers.

In the first three periods to 2 April 2023, Action performed strongly, with LFL sales growth of 24.3% and 34 new stores added. Since 31 March 2023, we successfully allocated and signed an amendment and extension of Action's senior debt facilities on attractive terms. This included upsizing and extending the final maturities of a substantial portion of Action's senior term debt and revolving credit facility ("RCF"). Action's total senior debt facilities after the closing of the transaction will be €3,625 million including a €500m undrawn multi-currency RCF.

Healthcare portfolio companies

Our healthcare portfolio continues to demonstrate its resilient and secular growth characteristics, driving good performance in FY2023. SaniSure followed up a very strong 2021 with further outperformance in 2022, as a result of operational efficiencies and elevated demand for its products. Whilst industry demand has moderated since the start 2023, we remain very confident of SaniSure's fundamental growth prospects. The business and its growth potential will continue to be enhanced by its active buy-and-build strategy, including the recent acquisition of Q Holding's Twinsburg site, which has added to its capability and diversified its client portfolio.

Cirtec Medical delivered another year of top-line growth, offsetting short-term supply chain headwinds which have now largely been resolved. The business continued to add high value, differentiated capabilities and end-market diversification, with its strategic acquisition of Precision Components from Q Holding.

We continued to support the development of ten23 Health, our pharmaceutical products contract development and manufacturing organisation ("CDMO"), with a further investment of £36 million in the year.

Consumer portfolio companies (excluding Action)

Our value-for-money and private label businesses continued to perform well in FY2023, but a number of our discretionary consumer businesses have been disproportionately impacted by weaker consumer sentiment.

Despite significant raw material and energy price inflation in 2022, Royal Sanders sustained its strong growth through increased volumes with key customers and outperformance of the four bolt-on acquisitions completed since our initial investment in 2018. In April 2023, Royal Sanders completed the acquisition of Lenhart, its fifth since we first invested, further strengthening its position in the DACH region, and reinforcing its role as a key consolidator in a highly fragmented market. A combination of effective operational performance and positive contributions from recent bolt-on acquisitions has supported Dutch Bakery's good result in 2022.

nexeye delivered good top-line growth and margin performance in its financial year ending January 2023, driven by a comparatively attractive price point for its customers. It added 23 stores in the year and accelerated online appointments across its German business. Trading at the start of 2023 has recovered, following softer trading in Q3 2022 as consumer uncertainty impacted overall market demand.

Over the last 12 months, we have seen a significant recovery in bookings for Audley Travel and arrivia, two of our travel assets. Audley Travel's key destinations gradually reopened in 2022, leading to a strong recovery in bookings, driven by pent-up demand and supported by Audley's differentiated brand proposition. arrivia has seen good performance in its membership business, as well as a strong pick up in cruise and travel bookings.

Following a solid first quarter of 2022, both Luqom and YDEON experienced a significant drop in order intake across their online platforms for the remainder of the calendar year, as a result of weaker consumer confidence and inflationary concerns. Across this same period, e-commerce peers of both portfolio companies de-rated materially, reflecting the challenging external trading conditions. These were key considerations in support of the combined £357 million unrealised value decrease we recognised across these two portfolio companies in FY2023. We believe the longer-term growth fundamentals of each business remain and, through initiatives such as Luqom's further international expansion and YDEON's addition of lower cost products to its range, both businesses are positioning themselves for recovery.

BoConcept has to an extent mitigated lower footfall and order intake through its international diversification, franchise model and effective margin management.

Business and Technology Services portfolio companies

WilsonHCG delivered strong organic growth in 2022, and in January 2023 it completed the bolt-on acquisition of Personify, enabling it to accelerate its growth in the life sciences and healthcare end markets. The business is well positioned to navigate any prolonged slowdown in the North American hiring market, whilst new customer wins continue to diversify its customer base. MAIT traded resiliently in the year, as the IT services market continues to demonstrate a strong growth outlook. Following the bolt-on acquisition in June 2022 of Nittmann & Pekoll, an Austrian ERP specialist, the business has now completed five bolt-on acquisitions since we first invested in 2021, all of which are integrating well.

Evernex continued its buy-and-build activity, with the strategic acquisitions of XS International and Integra, enabling the business to expand its footprint in the US, Nordic, and Benelux markets. Short-term trading has been impacted by a post-pandemic increase in new IT equipment investment, affecting the renewal of maintenance contracts, although this was largely offset by a number of new contract wins in the year.

Industrial Technology portfolio companies

AES performed very well financially, strategically and operationally throughout 2022 and into the first quarter of 2023, driven by strong demand in its global pump and rotating equipment end market. The business has continued to invest and scale up, driving further reliability in its offering and helping to generate new customer wins.

Having traded strongly in the first half of 2022, Tato saw trading soften through the second half of 2022 with weaker end market demand and supply challenges for key input chemicals resulting in price inflation and margin pressure. Tato successfully leveraged its scale and global footprint to maintain good customer supply, and margin performance has improved since the turn of the year.

Following three years of significant operational and market disruption, Formel D has made encouraging steps in its earnings recovery. Whilst trading was soft through the first half of 2022 driven by prolonged Covid-19 shutdowns in China and intermittent supply chain issues as a result of Russia's invasion of Ukraine, the second half of 2022 and start of 2023 have been more encouraging with an easing of supply chain issues and margin improvement from contract renegotiations.

Private Equity investment

Unfavourable debt markets and economic uncertainty suppressed buyout market activity in 2022 compared to a more buoyant market in 2021. Our approach to new investment has remained consistent and we maintain our selective and disciplined approach, leveraging our offices and international network to identify attractive and sensibly priced new investments and value accretive bolt-on acquisitions for our portfolio companies.

In FY2023 we completed four new Private Equity investments totalling £221 million. Our digitalisation, automation and big data investment theme underpins three of these new investments: the £94 million investment in xSuite, an accounts payable invoice automation software provider; the £37 million investment in dé VakantieDiscounter ("VakantieDiscounter"), a technology-enabled online travel agency in the Benelux focused on affordable holidays; and the £30 million investment in Digital Barriers, a provider of unique video compression technology.

Our extensive consumer sector expertise will enable us to support the global expansion thesis for our £60 million investment in Konges Sløjd, which offers apparel and other products for babies and children.

Across the Private Equity portfolio, we completed 11 bolt-on acquisitions in the year. We supported Luqom's acquisition of Brumberg, a B2B lighting brand, arrivia's acquisition of RedWeek, an online timeshare rental marketplace, and WilsonHCG's acquisition of Personify, a provider of RPO to specialised end markets, with total further investment of £63 million. Our portfolio companies also completed eight self-funded bolt-on investments in the year, including the acquisitions by SaniSure and Cirtec Medical of two components of Q Holding's medical business, as well as bolt-on acquisitions by Dutch Bakery, MAIT, Evernex and AES.

Further details on our Private Equity investment activity can be found in the Private Equity section.

Private Equity realisations

Despite challenging market conditions, we generated total capital realisation proceeds of £857 million in the year, demonstrating the appeal of our portfolio companies, many of which have shown resilience at all stages of the economic cycle.

Our sale of Havea in October 2022 endorsed our long-standing buy-and-build approach. During our five-year holding period, the business delivered double-digit organic growth and completed and integrated five acquisitions which, combined with a significant strategic transformation, transitioned Havea from a family-owned business to a European leader in consumer healthcare and wellbeing. This disposal generated proceeds for 3i of £471 million, representing a 50% uplift on the value of the investment at 31 March 2022, a sterling money multiple of 3.1x and an IRR of 24%.

During the year, we received total proceeds of £332 million from three partial disposals by Q Holding. In Q1 FY2023 we completed the disposal of Q Holding's QSR division receiving total proceeds of £199 million and in Q4 FY2023 we received £133 million relating primarily to the disposal of Q Holding's Twinsburg site and Precision Components business. The valuation of Q Holding at 31 March 2023 of £117 million (31 March 2022: £398 million) includes our remaining value of Q Holding's device assembly business Catheter Technologies. This means that over the last two years, through a combination of realised proceeds and residual value, we have recognised an uplift for Q Holding of over 100% on the opening value at 31 March 2021, which takes our money multiple, including proceeds received to date and remaining residual value, to 2.8x.

In January 2023 we completed the sale of Christ, our last investment in Eurofund V ("EFV"), for gross proceeds to 3i of £47 million, representing a 45% uplift on the 31 March 2022 opening value. When added to the proceeds generated by the sale of Amor (another German player in the jewellery space which we considered as part of the same investment thesis and sold in 2016 crystallising a money multiple of 2.3x), the multiple generated by this sale is 1.0x. Following the disposal of Christ, EFV reached a final gross money multiple of 3.0x, a top quartile performance.

Further details on our Private Equity realisation activity can be found in the Private Equity section.

Infrastructure performance

In the year to 31 March 2023, our Infrastructure portfolio generated a GIR of £86 million or 6% on opening value (2022: £241 million, or 21%).

3i Infrastructure plc's ("3iN") carefully selected portfolio continues to benefit from its exposure to identified long-term growth trends. As a result, 3iN generated a total return on opening NAV of 14.7%, which was materially ahead of its 8-10% return objective, and delivered its dividend target of 11.15 pence, a 6.7% increase on last year. In February 2023, 3iN completed a £100 million placing of new shares at a price of 330 pence per share. The funds were used to part pay drawings on 3iN's RCF and partly used to fund its acquisition of Future Biogas. 3i did not participate in this placing and its holding in 3iN was therefore diluted from 30% to 29%. At 31 March 2023, our 29% stake (31 March 2022: 30%) in 3iN was valued at £841 million (31 March 2022: £934 million), as a result of a 10% year-on-year decline in its share price to 313 pence. However, this was partially offset by dividend income from 3iN of £29 million in the year. We see considerable unrealised value in 3iN's existing portfolio, with the platform investments generating substantial bolt-on investment opportunities, which can be funded from cash generated by those companies, together with portfolio company debt facilities. The additional equity raised by 3iN during the year gives further headroom to take advantage of this growth potential.

Demand for Infrastructure assets is strong and the team has continued to deploy capital while retaining its pricing discipline. As 3iN's investment manager, we oversaw 3iN's completion of its new investments in Global Cloud Xchange ("GCX") and Future Biogas in the year, as well as the purchase of an additional stake in TCR, a portion of which was subsequently syndicated to external investors. The team also completed the sale by 3iN of its European projects portfolio to the 3i European Operational Projects Fund ("3i EOPF") for £106 million.

Following robust US domestic travel demand and continued volume recovery from international travellers, our proprietary capital investment in Smarte Carte delivered strong performance across all lines of its business. Over the last 12 months, the business has continued to differentiate its offering with further ancillary services and also completed a refinancing at attractive terms.

Our North American Infrastructure platform delivered solid performance in FY2023. Regional Rail closed two bolt-on acquisitions, including three short-line railroads in the Midwest region of the US and several short-line railroads in Canada, whilst the existing freight rail platform delivered good volumes. EC Waste continued to benefit from strong landfill revenues.

As a result of our fund management activities and dividends from the portfolio we generated strong cash income of £107 million (2022: £91 million) from our Infrastructure business in the year.

Scandlines performance

Scandlines performed well in the year, generating a GIR of 10% (2022: 26%). The business delivered a second consecutive year of record growth in freight volumes in 2022, whilst leisure volumes saw good recovery driven by a strong summer peak season, offsetting the impact of Covid-19 at the start of 2022. Following continued good cash generation, we received total dividends of £38 million from Scandlines in FY2023.

Progress on our sustainability agenda

We made significant progress on our sustainability agenda in FY2023. We embedded dedicated ESG resource in our Private Equity and Infrastructure investment teams, as well as in our central Group function. This has accelerated the implementation of a range of sustainability initiatives at the Group level and across the portfolio, enhanced the quality of our engagement with portfolio companies on ESG themes, and improved our assessment of sustainability factors in our investment and value creation processes.

Our work on sustainability is driven by our ESG Committee, whose principal activities in FY2023 focused on portfolio data collection and management, climate training, and climate scenario analysis. Importantly, on 5 April 2023 we wrote to the Science Based Targets initiative ("SBTi") to indicate our commitment to set near-term science-based targets for 3i. We are now working to formulate our targets, with the intention to submit them to SBTi for validation in FY2024. Our science-based targets will cover our direct Scope 1 and 2 emissions, as well as our Scope 3 emissions associated with our portfolio and will be formulated in line with the guidance published by SBTi for the private equity sector.

Further details on our Task Force on Climate-related Financial Disclosures ("TCFD") and more information on how we assess and manage climate-related risks and opportunities can be found in the Sustainability section in our Annual report and accounts 2023.

During the year, we continued to support our nine charity partners which work across a variety of areas, including helping homeless people, enabling disabled students to go to university, helping elderly people regain some independence and battle loneliness, and providing veterans with mental health support and helping them back into work. We donated £1 million across these initiatives. In addition, we donated £500,000 to the Turkey Mozaik Foundation in support of victims of the earthquake in Turkey and Syria.

Conservative balance sheet and management of foreign exchange movements

Our conservative balance sheet strategy is fundamental to our proprietary capital model enabling us to invest with speed and flexibility without the need to accelerate any realisations. We also continue to place great weight on cost discipline and once again covered our cash operating costs with cash income. Our activity during the year is set out in the financial review including the details of the medium-term partial foreign exchange hedging programme we put in place at a time when we had the advantage of sterling weakness in October and November of 2022.

Active asset management

As investors in private equity and infrastructure companies, we pursue a highly involved form of asset management. This approach is only practical given the concentrated nature of the 3i portfolio. We start at the outset of our purchase with an investment case which we author in conjunction with company management with the simple goal of growing the business to at least double its profits over a five to six-year time-scale. As part of this plan, we define key milestones and KPIs which we track on a monthly basis in order to ensure the execution of the plan remains on track.

Management are closely aligned to the plan outcome and to 3i through their participation in equity and equity-linked plans as co-owners of the business. These long-term equity plans (five years or more) are much more meaningful than shorter-term annual variable pay, and in successful investments will deliver significant capital sums to the management teams. The nature of this incentive ensures real alignment with 3i's long-term approach to compounding capital.

The management team is supported in the execution of the investment case by a board primarily made up of experienced 3i executives or others hired by 3i who bring particular sector or specialist skills to the situation. The board and 3i investment team have regular monthly involvement with the company and are assisted by other members of the local investment team, being regularly involved at different levels throughout the organisation of the investee company. Active and involved governance is one of the key ingredients of our success.

3i also provides specialist legal, corporate finance, banking, ESG and digital resource to assist investee management teams in sharing best practice, particularly in relation to specific projects in funding and M&A as well as their overall ESG and digital agendas.

We believe this form of active management is key to the high returns we have achieved across both Private Equity and Infrastructure over the last 10 years. Management are allowed to drive a long-term rather than annual or quarterly agenda, and are encouraged to make the necessary investments to meet or exceed ambitious long-term growth plans. Action is a very good example of this approach.

The 3i Investment Committee and the senior partners in the Private Equity team review in detail progress against the investment case every March and September. It is in these reviews that the Investment Committee challenges the investment teams on the progress against the investment case and may agree to changes which could either prolong 3i's ownership by marking the asset as having potential for our "long-term portfolio" or even shorten the life of the plan to capitalise on current opportunities in the M&A market.

This highly-intensive approach to asset management was adopted at 3i in 2012, and has been refined over the last decade. It has been key to our strong investment performance since that time and together with our long-term, permanent capital approach gives us real competitive advantage against other forms of stewardship, be they more hands off-private or shorter-term focused public ownership models.

The benefits of compounding

3i's portfolio has been carefully assembled and its resilience over recent years is a reflection of the benefits of thematic investing, disciplined pricing and active asset management. Sustained returns over a number of years demonstrate the value of compounding, and no portfolio company better illustrates this than Action, which has become one of the fastest-growing retailers in the world, and 3i's largest and most resilient portfolio investment. Action has achieved 12 years of consistent, significant growth under 3i's ownership. The bedrock of this performance has been Action's very low prices and customer- centric approach. The company has performed well through all phases of the economic cycle and its low price leadership through this current period of very high shop price inflation has been particularly strong with high LFL sales across all 14 product categories and all countries.

Action has been welcomed in all 11 countries it now operates in and the company has recently been voted "favourite retail brand" in France by a large panel of consumers. France is now Action's largest market with some 730 stores, having opened its first store in that market in 2012. There are very few retailers that are close comparators to Action and very few of them can move seamlessly into new geographic markets as Action does.

Action has considerable growth potential across mainland Europe and elsewhere. It has opened over 2,000 stores across Europe under 3i's ownership and has the potential to open multiples of this number in the future. This organic expansion puts Action on track to join a very rare group of retailers where growth extends over decades, rather than years. Action is already a very large, well-spread and resilient business and will become even broader and larger as it grows its presence in new geographic markets. Action's business model produces high returns on equity and significant cash flows based on high store sales densities and one-year average historical paybacks on new store capital expenditure. So Action's store expansion is self-funding, allowing the group to increase its operating leverage through size and scale and deliver significant dividends to 3i and other shareholders as it grows.

3i invests permanent rather than time-limited fund capital. This allows us to capture the significant compounding benefits from Action's growth and consistent financial performance. We are now focused on developing a select number of other portfolio companies to fulfil their potential to also become long-term compounders for the Group. These other portfolio companies are likely to grow in prominence in our results over the coming years.

Outlook

Whilst we expect macroeconomic conditions to remain challenging in the near term, we have started FY2024 with good momentum and are confident that we have the right people, portfolio and processes to continue to deliver consistent returns for our shareholders through the cycle.

I would like to close by thanking the team at 3i and the teams in our portfolio companies for another very good performance in far from straightforward circumstances.

Simon Borrows

Chief Executive10 May 2023

Private Equity

1 LTM adjusted earnings to 31 December 2022. Includes 31 portfolio companies.

We invest in mid-market businesses headquartered in northern Europe and North America with potential for international growth. Once invested, we work closely with our portfolio companies to deliver ambitious growth plans, realising our investments to generate strong cash-to-cash returns for 3i shareholders and other investors.

In the year to 31 March 2023, our Private Equity portfolio delivered a GIR of £4,966 million, or 40%, on the opening portfolio value (2022: £4,172 million or 47%) and the portfolio value increased to £16,425 million (31 March 2022: £12,420 million). This result was driven predominantly by Action's very strong performance in FY2023, as well as by a good contribution from a number of our other assets operating in the value-for-money and private label, healthcare, industrial technology, and business and technology services sectors that have responded well to, and so far largely mitigated, high inflation, increased energy prices and interest rates and weaker consumer sentiment. We recognised a material unrealised value decline in two of our discretionary consumer portfolio companies, as a result of weaker trading and of the derating of external peers.

In FY2023, we made four new investments and continued to implement our buy-and-build strategy, completing 11 bolt-on acquisitions, three of which required additional funding from 3i. We ended the year as net divestors, with significant proceeds achieved from realisations and portfolio income. Average leverage across the portfolio remains low at 2.5x, or 4.0x excluding Action and our Private Equity portfolio is funded with all senior debt structures, with long-dated maturity profiles. The recent banking disruption has had no impact on our portfolio to date.

The contribution of Action to the Private Equity performance is detailed in Note 1 of the financial statements.

Table 1: Gross investment return for the year to 31 March

Investment activity

Across the US and European markets, private equity investment activity trended downwards in 2022, having reached near record levels in 2021. The significant deceleration from the second half of the year was driven by persistent macroeconomic headwinds and less supportive debt markets with pricing expectations that were difficult to align. Against this backdrop, we remained selective and disciplined in deploying our capital, investing £221 million in four new portfolio companies. All four of these investments were completed in the first half of FY2023.

We invested £94 million in xSuite, an accounts payable invoice automation software provider, and £30 million in Digital Barriers, a provider of unique video compression technology. These investments offer 3i exposure to their unique technology and high-growth end markets and both are transitioning to a subscription-based model. We also completed the £37 million investment in VakantieDiscounter, a highly scalable, technology-driven travel business with a value-for-money offering that is benefiting from the recovery of the travel market, as well as the £60 million investment in Konges Sløjd, a premium baby and child apparel and accessories business with an established international footprint that has significant scalability potential in a highly fragmented market.

Our buy-and-build strategy remains an integral part of our approach to value creation and, in FY2023, our portfolio companies completed 11 bolt-on acquisitions. We invested £63 million to support three bolt-on acquisitions for Luqom, arrivia and WilsonHCG, whilst the remaining eight bolt-on acquisitions completed in the year were funded by the portfolio companies' own balance sheets. Two of the bolt-on acquisitions involved carving out elements of Q Holding, an existing portfolio company, with SaniSure acquiring Q Holding's Twinsburg site and Cirtec Medical acquiring Q Holding's Precision Components. Further details of selected portfolio bolt-on acquisitions are in the Private Equity business review of our Annual report and accounts 2023.

In addition, we continued to develop ten23 health with a further investment of £36 million and used our capital to support two portfolio companies through challenging trading conditions, with a further investment of £14 million in YDEON and of £11 million in Formel D.

In March 2023, we completed a transaction to provide liquidity for existing external investors in Action who are invested via our 3i 2020 Co-investment Programme. As part of this transaction, we invested £30 million to purchase an additional small stake in Action from this Programme at the December 2022 net asset value, increasing our equity stake from 52.7% to 52.9%. At the same time, we crystallised a portion of the outstanding carried interest liability in relation to Action. For further details on carried interest see the Financial review later in this document.

In total, in the year to 31 March 2023, our Private Equity team invested £381 million across new, bolt-on and further investments.

Realisation activity

During the year we received total proceeds of £332 million from three partial disposals completed by Q Holding. These included the disposal of Q Holding's QSR business, completed in May 2022, and the disposals of its Twinsburg site and Precision Components business, which completed in December 2022 and January 2023 respectively. Q Holding's remaining business was valued at £117 million at 31 March 2023. Over the last two years, through a combination of realised proceeds and residual value, we have recognised an uplift of over 100% on the value of our investment in Q Holding at 31 March 2021, taking our money multiple, including realised proceeds to date and remaining value at 31 March 2023, to 2.8x.

In October 2022 we completed the sale of Havea after a five-year holding period, during which we partnered with the business to deliver a significant strategic transformation, completed five bolt-on acquisitions and generated double-digit organic growth. We received proceeds of £471 million from this divestment, representing a 50% uplift on the value of the investment at 31 March 2022, a sterling money multiple of 3.1x and an IRR of 24%.

In January 2023, we completed the disposal of Christ, our last investment in EFV, for realised proceeds of £47 million, at a 45% uplift on our 31 March 2022 opening value. When added to the proceeds generated by the sale of Amor (another German player in the jewellery space which we considered as part of the same investment thesis and sold in 2016 crystallising a money multiple of 2.3x), the multiple generated by this sale is 1.0x. Following the disposal of Christ our final fund multiple for EFV is 3.0x, a top quartile performance.

In total, we generated total Private Equity proceeds of £857 million (2022: £684 million) and realised profits of £169 million (2022: £228 million).

Table 2: Private Equity realisations in the year to 31 March 2023

1  For partial realisations, 31 March 2022 value represents value of stake sold.

2  Profit in the year over opening value.

3  Cash proceeds over cash invested. For partial realisations, valuations of any remaining investment are included in the multiple. Money multiples are quoted on a GBP basis.

Action performance and valuation

As detailed in the Chief Executive's statement, Action continues to deliver excellent growth driven by higher footfall, a higher number of transactions and further international store openings. In the 12 months to the end of Action's P3 2023 (which ended on 2 April 2023), Action generated run-rate EBITDA growth of 42% and strong cash inflow.

At 31 March 2023, Action was valued using its LTM run-rate EBITDA to the end of P3 2023 of €1,439 million. These included our normal adjustment to reflect stores opened in the year. Action has consistently outperformed the peers that we currently reference across its most important KPIs, supporting our valuation multiple, which remained unchanged at 18.5x net of the liquidity discount (31 March 2022: 18.5x).

Action ended P3 2023 with cash of €365 million and a net debt to run-rate earnings ratio of 1.8x after paying two dividend distributions in FY2023, of which 3i received £325 million.

At 31 March 2023, the valuation of our 52.9% stake in Action was £11,188 million (31 March 2022: 52.7%, £7,165 million) and we recognised unrealised profits from Action of £3,708 million (March 2022: £2,655 million) as shown in Table 3.

Performance (excluding Action)

Excluding Action, the private equity portfolio generated £520 million (March 2022: £584 million) of value growth from performance increases driven by good contributions from a number of assets operating in the value-for-money and private label, healthcare, industrial technology and business and technology services sectors, as well as good recovery from our travel assets. This good performance has more than offset performance decreases of £310 million (March 2022: £101 million), predominantly driven by some of our discretionary consumer businesses, principally Luqom and YDEON, which have been disproportionately impacted by weaker consumer sentiment.

Over the last two years SaniSure has delivered significant outperformance due to strong demand and customers stockpiling in mitigation of external supply chain concerns. Whilst recent demand has normalised as customers work down inventory levels, SaniSure remains well positioned to capitalise on expected continued annual double-digit growth across the bioprocessing market. Cirtec Medical maintained top-line growth from its key customers in 2022, largely offsetting short-term operational headwinds that impacted margin performance. The integration of Precision Components, its recent acquisition, is already progressing well and the business has a good 2023 outlook, with significant new contracts coming online.

Royal Sanders generated strong growth in 2022 despite increases across all key input costs. The business increased volumes with its key customers, including its value-for-money retailers that have seen robust growth. It also continues to consolidate a highly fragmented market, completing its fifth bolt-on since our initial acquisition, with an investment in Lenhart in April 2023, strengthening its position in the DACH region. Dutch Bakery generated a good result in 2022 as recent bolt-on acquisitions are integrating well, with the potential to deliver new customer wins. The underlying business has effectively managed its own operations during a period of rising input and energy costs.

nexeye maintained good top-line growth in 2022 despite softer trading in Q3 2022, which was caused by lower store footfall due to consumer uncertainty. Throughout the year, the business has sustained healthy margin performance whilst retaining a very attractive value-for-money price point for its customers compared to its competitors. The business added 23 new stores in the year and further accelerated its digitalisation agenda with its online appointment system in Germany. Trading at the start of 2023 has recovered from softer performance in Q3 2022.

Audley Travel and arrivia are recovering well from the pandemic. Pent-up demand for travel has driven a significant increase in bookings and departure revenue in 2022 for Audley Travel, supporting a return to the good cash generation characteristics that the business demonstrated pre-pandemic. At 31 March 2023, Audley Travel was valued on an earnings basis, having been valued on a DCF basis since June 2020 (31 March 2022: DCF basis), reflecting this recovery in performance. arrivia recorded a good recovery in membership bookings throughout 2022, and saw a strong improvement in the performance of its cruise product category. Both Audley Travel and arrivia have started 2023 with good bookings momentum.

Luqom and YDEON, which have a discretionary product offering, experienced a significant decline in order intake in 2022 as a result of declining consumer confidence across their markets. Luqom somewhat offset weaker performance in its core markets with growth in more recently launched regions in southern and eastern Europe. The business is also undertaking a significant programme of operational and cost efficiencies. YDEON has responded to weaker trading with a number of sales, cost and cash initiatives including the introduction of products at a much lower price point for which volumes are easily scalable. Across both assets we recognised a combined unrealised value loss of £357 million, part of which is attributable to the soft trading performance and part is based on a multiple reductions (see 'Multiple movements' later on in this section). BoConcept also saw pressure on store footfall due to the discretionary nature of its offering, but has to an extent mitigated lower footfall and order intake through its international diversification, franchise model and effective margin management.

WilsonHCG secured a significant number of new recruitment customers in 2022 and with new clients coming online in 2023 and the opportunity to accelerate its growth in the life sciences and healthcare end markets following its acquisition of Personify, the business is well positioned to navigate the recent slowdown in the North American hiring market.

Table 3: Unrealised profits on the revaluation of Private Equity investments 1 in the year to 31 March

1  Further information on our valuation methodology, including definitions and rationale, is included in the Portfolio valuation - an explanation section in our Annual report and accounts 2023.

Since our initial investment in MAIT in September 2021, we have completed five bolt-on acquisitions, including one in June 2022. These acquisitions have been value accretive and have driven good growth in addition to that achieved by the underlying business. Evernex also completed two further bolt-on acquisitions in the US and Europe in the year but saw softer trading in the short-term as a result of lower renewals of third-party maintenance contracts, driven by a pick-up in investment in new IT equipment post the pandemic.

AES saw a significant increase in demand across its key global end markets in 2022 and continued to maintain intelligent cost control, resulting in strong earnings growth. The business continues to benefit from long-term investment improving the reliability and range of its product offering and also continued to pursue bolt-on acquisitions, completing the acquisitions of DATUM RMS and Vibtech Analysis in the year. Having traded strongly in the first half of 2022 with sustained demand for its core biocides products, Tato saw trading soften through the second half of 2022 with weaker end demand for paints and coatings from the DIY and construction markets and supply challenges for key input chemicals resulting in price inflation and margin pressure. Tato successfully leveraged its scale and global footprint to maintain good customer supply and margin performance has improved since the turn of the year. Both Tato and AES were cash generative in the year and distributed dividends to 3i of £17 million in total.

Overall, 90% of the portfolio by value grew LTM adjusted earnings in the year (2022: 93%). Table 4 shows the earnings growth of our top 20 Private Equity investments.

Table 4: Portfolio earnings growth of the top 20 Private Equity1 investments

1  Includes top 20 Private Equity companies by value excluding ten23 health. This represents 96% of the Private Equity portfolio by value (31 March 2022: 96%). Last 12 months' adjusted earnings to 31 December 2022 and Action based on LTM run-rate earnings to the end of P3 2023.

Leverage

Our Private Equity portfolio is funded with all senior debt structures, with long-dated maturity profiles and c.40% repayable from 2026 and beyond. Across our Private Equity portfolio, term debt is well protected against interest rate rises, with over 70% of total term debt hedged at a weighted average tenor of more than three years with the interest rate element capped at a weighted average hedge rate below 2%. The average margin across the portfolio is under 4%, so the all-in debt cost across over 70% of the portfolio is capped below 6%. Average leverage across the portfolio was 2.5x (31 March 2022: 3.3x). Excluding Action, leverage across the portfolio was 4.0x (31 March 2022: 4.6x).

Following the successful amendment and extension of Action's senior debt facilities post 31 March 2023, as detailed in the Chief Executive's statement, the above long dated debt maturity profile for the Private Equity portfolio extends to 80% repayable from 2026 and beyond. The amend and extend transaction does not impact the interest rate hedging position at 31 March 2023.

Table 5 shows the ratio of net debt to adjusted earnings by portfolio value.

Table 5: Ratio of net debt to adjusted earnings1

1  This represents 92% of the Private Equity portfolio by value (31 March 2022: 92%). Quoted holdings, deferred consideration and companies with net cash are excluded from the calculation. Net debt and adjusted earnings at 31 December 2022 and Action based on LTM run-rate earnings to the end of P3 2023.

Multiple movements

We have continued our established approach of taking a long-term, through-the-cycle view on the multiples used to value our portfolio companies, consistent with how we drive value creation in our portfolio. When selecting multiples to value our portfolio companies we consider a number of factors including recent performance and outlook, comparable recent transactions and exit plans, and the performance of quoted comparable companies. FY2023 was characterised by significant volatility in the capital markets driven by Russia's invasion of Ukraine, global fiscal and monetary interventions to mitigate inflation and the more recent disruption in the banking sector. The consistency of our approach to valuation multiples has enabled us largely to mitigate the impact of such market volatility and, since the turn of the year, we have seen a gradual increase in the average multiples of our comparable sets, increasing the difference to our valuation multiples, which in the vast majority of cases are lower than the peer group average.

However, we did adjust eight multiples downwards where we experienced significant declines in selected peers groups and in some cases weaker trading performance. This included the reduction of multiples for Luqom and YDEON, accounting for £107 million of the total net £167 million (March 2022: increase of £241 million) multiple decrease in the year. Towards the end of our financial year, we saw stronger equity markets and we increased multiples for three of our portfolio companies which have consistently outperformed over many periods.

Our approach to valuing Action, our largest investment, is no different to the remainder of our portfolio in that we take a long-term, through-the-cycle view on the LTM run-rate EBITDA post-discount multiple of 18.5x used to value Action at 31 March 2023. We take comfort from the fact that Action's continued excellent growth meant that its valuation at 31 March 2022 translated to only 13.0x run-rate EBITDA achieved one year later. In addition, its most important operating KPIs compare very favourably to those of its peer group, consisting of North American and European value-for-money retailers. Based on the valuation at 31 March 2023, a 1.0x movement in Action's post discount multiple would increase or decrease the valuation of 3i's investment by £669 million. 

Quoted portfolio

Basic-Fit is the only quoted investment in our Private Equity portfolio. The business performed well in 2022, recovering strongly following the temporary Covid-19 related closures in 2021. Memberships increased by 51% in the year and the business expanded its club base by 185 clubs.

At 31 March 2023, our residual 5.7% shareholding in Basic-Fit was valued at £121 million reflecting a 10% year-on-year decrease in its share price to €36.32 (31 March 2022: 5.7% shareholding valued at £129 million based on a share price of €40.42).

Assets under management

The value of the Private Equity portfolio, including third-party capital, increased to £22.9 billion (31 March 2022: £16.7 billion), primarily due to unrealised value movements in the year.

Table 6: Private Equity assets by geography as at 31 March 2023

Table 7: Private Equity assets by sector as at 31 March 2023

Table 8: Private Equity 3i proprietary capital as at 31 March

1  Assets included in these vintages are disclosed in the Glossary.

2  Includes value of £8,220 million (31 March 2022: £ 4,703 million) held in Action through the 2020 Co-investment vehicles and 3i.

3  3i proprietary capital is the unrealised value for the remaining investments in each vintage.

4  Vintage money multiple (GBP) includes realised value and unrealised value as at the reporting date.

Infrastructure

We manage a range of funds investing principally in mid-market economic infrastructure and operational projects in Europe and North America. Infrastructure is a defensive asset class that provides a good source of income and fund management fees for the Group, enhancing returns on our proprietary capital. The team has been active in its deployment of capital across the portfolio and in new investments.

Our Infrastructure portfolio generated a GIR of £86 million or 6% on the opening portfolio value (2022: £241 million, 21%) primarily driven by portfolio income and good value growth contribution across our US assets, offset by a decrease in the share price of our quoted stake in 3iN, despite its strong NAV return in the year. We completed two new investments and three further investments in 3iN and three bolt-on acquisitions for our North American Infrastructure platform. We also completed the disposal of 3iN's operational projects portfolio to the 3i European Operational Projects Fund ("3i EOPF").

Table 9: Gross investment return for the year to 31 March

Fund management

3iN

3iN's total return on opening NAV of 14.7% for the year to 31 March 2023 was materially ahead of its total return target of 8% to 10% per annum. 3iN also delivered its dividend target of 11.15 pence per share, a 6.7% increase on last year.

Underpinning this strong return was the excellent performance of 3iN's investment portfolio, which was driven by exposure to long-term growth trends. We have seen particularly strong trading from assets operating in the utilities sector exposed to energy transition (such as Infinis and Attero), the communication sector (such as Tampnet) and the transport and logistics sector (such as TCR).

As investment manager to 3iN, in FY2023 we received a management and support services fee of £49 million (2022: £44 million) and a NAV-based performance fee of £35 million (2022: £26 million). This performance fee comprised a third of the potential performance fee for each of FY2023, FY2022 and FY2021 after the performance hurdle was met in each year.

The market for infrastructure investments remains competitive, with strong demand for quality infrastructure assets. Against this backdrop, 3iN was active in the year whilst remaining disciplined on price, completing a £318 million new investment in Global Cloud Xchange, a global data communications service provider and a £28 million new investment in Future Biogas, a producer of biomethane in the UK. 3iN also completed a £338 million further investment in TCR, acquiring an additional 48% stake from a co-investor, a £15 million further investment in DNS:NET to support its continued fibre roll-out programme and a £30 million further investment in Infinis to fund the development of its solar roll-out programme.

We continue to utilise our relationship with external co-investors to manage our underlying risk exposure across certain assets, demonstrated in the year with two syndications. We syndicated 28% of 3iN's stake in TCR for proceeds of £190 million and a 17% stake in ESVAGT for proceeds of £87 million.

In June 2022, 3iN completed the sale of its European projects portfolio to the 3i EOPF for £106 million.

North American Infrastructure platform

The investments in our North American Infrastructure platform generated good organic and acquisitive growth in FY2023. Regional Rail expanded its footprint through two bolt-on acquisitions and one new rail services contract, including three short-line railroads in the Midwest region of the US and several short-line railroads in Canada. Its existing freight lines delivered good volumes offsetting the impact of cost inflation. EC Waste completed the self-funded bolt-on acquisition of A&A Waste Management, a business that provides non-hazardous solid waste collections in Puerto Rico. This acquisition, combined with an increase in landfill volumes, contributed to the top-line growth of the business in the year.

Other funds

3i EOPF and 3i Managed Infrastructure Acquisitions Fund ("3i MIA") performed well in the year. 3i EOPF purchased the European projects portfolio from 3iN for £106 million. Following this acquisition, 3i EOPF has now deployed 86% of its total commitments.

3i's proprietary capital infrastructure portfolio

The Group's proprietary capital infrastructure portfolio consists of its 29% quoted stake in 3iN, its investment in Smarte Carte and direct stakes in other managed funds.

Quoted stake in 3iN

In February 2023, 3iN successfully completed a share placing of £100 million. The funds were used to part pay drawings on their RCF and partly used to fund the acquisition of Future Biogas. 3i did not participate in this placing and its holding in 3iN was therefore diluted from 30% to 29%. At 31 March 2023, our 29% stake in 3iN (31 March 2022: 30%) was valued at £841 million (31 March 2022: £934 million) as a result of a 10% year-on-year decline in its share price to 313 pence (31 March 2022: 347 pence), which was caused by broader market volatility. As a result we recognised an unrealised loss of £93 million (2022: unrealised gain of £137 million), partially offset by £29 million of dividend income (2022: £27 million).

North America Infrastructure proprietary capital

Smarte Carte traded strongly in 2022 driven by robust US travel and retail demand across each of its lines of business, coupled with a steady recovery in international volumes. The business continues to leverage its existing footprint to expand into financially attractive ancillary services such as porter services and bag storage at its airports and other locations and recently completed a refinancing at attractive terms. At 31 March 2023, Smarte Carte was valued at £300 million on a DCF basis (31 March 2022: £207 million).

Assets under management

Infrastructure AUM increased to £6.4 billion (2022: £5.7 billion), principally due to an increase in 3i managed accounts and good performance across 3i MIA and our US infrastructure portfolio, offset by a decline in the share price of 3iN.

Table 10: Assets under management as at 31 March 2023

1  AUM based on the share price at 31 March 2023.

2  First close completed in March 2022.

3  % invested is the capital deployed into investments against the total Fund commitment.

Table 11: Unrealised profits/(losses) on the revaluation of Infrastructure investments in the year to 31 March

Further information on our valuation methodology, including definitions and rationale, is included in the portfolio valuation - an explanation section in our Annual report and accounts 2023.

Table 12: Infrastructure portfolio movement for the year to 31 March 2023

1  Other movements include foreign exchange.

Scandlines

Scandlines is held for its ability to deliver long-term capital returns whilst generating cash dividends.

Performance

Scandlines performed well in the year, generating a GIR of £52 million, or 10% of opening portfolio value (2022: £112 million, 26%). The business delivered a second consecutive year of record growth in freight volumes in 2022, reaffirming Scandlines' position as a critical part of the Scandinavian trade infrastructure. Covid-19 impacted leisure volumes at the start of 2022, but a strong summer peak season resulted in overall 2022 leisure volumes marginally ahead of pre-pandemic levels. The business continues to benefit from the operational efficiencies implemented throughout the pandemic. As a result of good cash flow generation, the business returned total dividends to 3i of £38 million in FY2023 (2022: £13 million).

Scandlines continues to progress its zero-emission fleet ambition with the construction of its new electric freight ferry, which is expected to be operational in 2024. Further details can be found in the Sustainability section of our Annual report and accounts 2023.

We continue to value Scandlines on a DCF basis and at 31 March 2023 its value of £554 million (31 March 2022: £533 million) reflects the dividends received in the year and a degree of caution on the outlook.

Foreign exchange

We hedge the balance sheet value of our investment in Scandlines. In September 2022, we increased the size of this hedging programme from €500 million to €600 million to cover the higher underlying valuation of our investment.

We recognised a £21 million gain on foreign exchange translation (March 2022: loss of £4 million) offset by a £7 million fair value loss (March 2022: gain of £2 million) from derivatives in our hedging programme.

Table 13: Gross investment return for the year to 31 March

Financial review

Very strong financial performance

Table 14: Total return for the year to 31 March

Realised profits

We generated total realised proceeds of £857 million (2022: £788 million) and realised profits of £169 million in the year (2022: £238 million), all of which were generated from Private Equity.

Unrealised value movements

We recognised an unrealised profit of £3,769 million (2022: £3,824 million). Action's continued strong performance contributed £3,708 million (2022: £2,655 million). We also saw good contributions from a number of our other Private Equity investments including SaniSure, AES, WilsonHCG, Royal Sanders, Audley Travel, nexeye and Dutch Bakery offsetting negative contributions from Luqom, YDEON, BoConcept, Formel D and Mepal. Our US infrastructure portfolio also delivered good value growth in the year offsetting a 10% year-on-year share price reduction in our quoted holding in 3iN.

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

Table 15: Unrealised value movements on the revaluation of investments for the year to 31 March

Portfolio income

Portfolio income increased to £514 million during the year (2022: £463 million), primarily due to strong dividend income of £416 million (2022: £375 million), particularly from Action. Interest income from portfolio companies, the majority of which is non-cash, increased to £91 million (2022: £85 million), whilst fee income increased in the year to £7 million (2022: £3 million), reflecting the monitoring and negotiation fees receivable relating to new investments within our Private Equity portfolio.

Fees receivable from external funds

Fees received from external funds increased to £70 million (2022: £62 million). 3i receives a fund management fee from 3iN, which amounted to £49 million in FY2023 (2022: £44 million).

3i also received fee income of £4 million (2022: £6 million) from 3i MIA through management fees and continued to generate fee income from 3i managed accounts and other funds. In Private Equity, we recognised a £4 million (2022: £4 million) administration fee for our management of the 3i 2020 Co-investment Programme related to Action.

Operating expenses

Operating expenses increased to £138 million (2022: £128 million) reflecting the full-year impact of new hires in both Private Equity and Infrastructure, increased business activity and inflationary impacts on travel, marketing and professional fee costs.

Interest payable

The Group recognised interest payable of £54 million (2022: £53 million). Interest payable predominantly includes interest on the Group's loans and borrowings and amortisation of capitalised fees.

Operating cash profit

We generated an operating cash profit of £364 million in the year (2022: £340 million). Cash income increased to £497 million (2022: £450 million), principally due to an increase in dividend income. We received £325 million of cash dividends from Action (2022: £284 million). We also received cash dividends from Scandlines, 3iN, Tato and AES, as well as a good level of cash fees from our external funds in Infrastructure. Excluding the dividends received from Action, the operating cash profit was £39 million.

Cash operating expenses increased to £133 million (2022: £110 million), driven principally by higher fixed and variable compensation costs, as well as by inflationary impacts on travel and marketing costs, as well as professional fees.

Table 16: Operating cash profit for the year to 31 March

1  Cash operating expenses include operating expenses paid and lease payments.

Carried interest and performance fees

We receive carried interest and performance fees from third-party funds and 3iN. 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 (excluding Action), we typically accrue net carried interest payable of c.12% of GIR, based on the assumption that all investments are realised at their balance sheet value. Carried interest is paid to participants when cash proceeds have actually been received following a realisation, refinancing event or other cash distribution and performance hurdles are passed in cash terms. Due to the length of time between investment and realisation, the schemes are usually active for a number of years and their participants include both current and previous employees of 3i.

The continued excellent performance of Action in the Buyouts 2010-12 vintage and good performance in our other vintages led to a £392 million increase in carried interest payable in FY2023. During the year, £24 million (2022: £13 million) was paid to participants in Private Equity, of which £23 million was paid to participants in the Private Equity Buyouts 2010-12 carry plan.

In March 2023, we completed a transaction to provide liquidity for existing external investors in Action who are invested via our 3i 2020 Co-investment Programme and at the same time a portion of the outstanding carried interest liability in the Buyouts 2010-12 scheme relating to Action was crystallised, which is expected to result in a c.£200 million carried interest payment to participants in the Buyouts 2010-12 scheme in May 2023. This payment continues a series of carried interest payments to participants in the Buyouts 2010-12 scheme, the first of which occurred in May 2020, following the sale of EFV's interest in Action in FY2020. The economic result of this transaction is to increase 3i's investment in Action, net of carry, from 47.7% to 48.9%. 3i's gross investment in Action also increased to 52.9% (31 March 2022: 52.7%) following the purchase of a further small (£30 million) equity stake in Action.

3iN pays a performance fee based on its NAV on an annual basis, subject to a hurdle rate of return. The continued strong performance of the assets held by 3iN resulted in the recognition of £35 million (2022: £26 million) of performance fees receivable. £25 million (2022: £22 million) was recognised as an expense with the remaining fees payable deferred for an expense in future years. During the year, £27 million was paid to the Infrastructure team including payments for the 3i MIA performance plan. The cumulative total potential payable for performance fees including fees generated and deferred from prior periods amounts to £55 million.

Overall, the effect of the income statement charge, cash payments of £51 million (2022: £23 million), as well as currency translation meant that the balance sheet carried interest and performance fees payable was £1,351 million (31 March 2022: £963 million).

Table 17: Carried interest and performance fees for the year to 31 March

Table 18: Carried interest and performance fees at 31 March

Table 19: Carried interest and performance fees paid in the year to 31 March

Net foreign exchange movements

The Group recorded a total foreign exchange translation gain of £623 million including the impact of foreign exchange hedging in the year (March 2022: £9 million), as a result of sterling weakening by 4% against the euro and by 6% against the US dollar.

In October and November 2022, we took advantage of the weakness of sterling against the euro and US dollar by implementing a medium-term foreign exchange hedging programme to partially reduce the sensitivity of the Group's net asset value and impact of mismatched currency cash flows to changes in euro and US dollar exchange movements. The exposure of the Group's underlying investment portfolio to euro and US dollar has increased significantly in recent years through the organic growth of our existing European and US portfolio companies and due to the majority of our new investments being denominated in euro and US dollar.

We locked in favourable euro and US dollar rates compared to historical market averages, with forward foreign exchange contracts of a notional amount of €2 billion and $1.2 billion. In addition, during the year we also increased the size of our hedging programme for Scandlines, increasing the notional amount from €500 million to €600 million. Including the impact from foreign exchange hedging, 71% of the Group's net assets are denominated in euros or US dollars. Based on the Group's net assets, including the impact from foreign exchange hedging, a 1% movement in euro and US dollar foreign exchange rates would impact total return by £106 million and £12 million, as shown in Table 20 below.

Table 20: Net assets1 and sensitivity by currency at 31 March

1 The net assets position includes the impact from foreign exchange hedging.

2 The sensitivity impact calculated on the net assets position includes the impact from foreign exchange hedging.

Pension

The Group's UK defined benefit plan ("the Plan") is fully insured following previous buy-in policies with Legal & General in May 2020 and February 2019 and Pension Insurance Corporation in March 2017. These polices provide long-term security for the Plan members and 3i is no longer exposed to any material longevity, interest or inflation risk in the Plan or any ongoing requirement to fund the Plan. During the year the Group gave notice to terminate the Plan. The Trustees have taken steps to commence a buy-out and wind up of the Plan, the completion of which could take up to 18 months.

During the year the Group recognised an £8 million re-measurement gain (2022: £3 million) on the German defined benefit plan. The liability of this plan decreased in the year following an increase in the discount rate.

Tax

The Group's parent company continues 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's tax charge for the year was £2 million (2022: £5 million).

The Group's overall UK tax position for the financial year is dependent on the finalisation of tax returns of the various corporate and partnership entities in the UK group.

Balance sheet and liquidity

At 31 March 2023, the Group had net debt of £363 million (31 March 2022: £746 million) and gearing of 2% after the receipt of strong cash income of £497 million and net cash proceeds of £555 million, offsetting dividend payments of £485 million and repayment of our £200 million fixed-rate 2023 bond in the year.

The Group had liquidity of £1,312 million as at 31 March 2023 (31 March 2022: £729 million) comprising cash and deposits of £412 million (31 March 2022: £229 million) and an undrawn RCF of £900 million. During the year, we increased our available liquidity by introducing a two-year £400 million tranche to the existing base £500 million RCF. Since 31 March 2023, we extended the maturity of the £400 million additional tranche to July 2025.

The investment portfolio value increased to £18,388 million at 31 March 2023 (31 March 2022: £14,305 million) mainly driven by unrealised profits of £3,769 million in the year.

Further information on investments and realisations is included in the Private Equity, Infrastructure and Scandlines business reviews.

Table 21: Simplified consolidated balance sheet at 31 March

Going concern

The Annual report and accounts 2023 are prepared on a going concern basis. The Directors made an assessment of going concern, taking into account the Group's current performance and the outlook, and performed additional analysis to support the going concern assessment. Further details on going concern can be found in the Resilience statement in our Annual report and account 2023.

Dividend

The Board has recommended a second FY2023 dividend of 29.75 pence per share (2022: 27.25 pence), taking the total dividend for the year to 53.0 pence per share (2022: 46.5 pence). Subject to shareholder approval, the dividend will be paid to shareholders in July 2023.

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 statement

for 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 nancial 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, nancial position and cash ow 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 nancial position and Consolidated cash ow statement is shown on the following pages.

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 to the Reconciliation of consolidated statement of comprehensive income above:

Notes to Reconciliation of consolidated statement of financial position