Summary

• 3i is an investment company with two complementary businesses, Private Equity and Infrastructure, specialising in core investment markets in northern Europe and North America.
• Starting with £15m capital in 1945, today 3i is a leading international investment manager focusing on private equity and infrastructure.
• The company create capital value by investing in mid-market companies to create a diverse portfolio with strong growth potential.

Company Overview

3i (OTC:TGOPF, LSE:III) is an investment company with two complementary businesses, Private Equity and Infrastructure, specialising in core investment markets in northern Europe and North America.¹

Company History

Starting with £15m capital in 1945, today 3i is a leading international investment manager focusing on private equity and infrastructure.²

Business Overview

The company create capital value by investing in mid-market companies to create a diverse portfolio with strong growth potential. The company cover its operating costs with income from its portfolio and from fund management fees generated by its Infrastructure business, thereby minimising the dilution of its capital returns.³

Private Equity

The company invest in mid-market businesses headquartered in northern Europe and North America with potential for international growth. Once invested, the company work closely with its portfolio companies to achieve their full potential, realising its investments at the appropriate time to deliver strong cash-tocash returns for 3i shareholders and other investors.

The company's Private Equity portfolio delivered a GIR of £1,936 million or 30% on the opening portfolio value (2020: £352 million or 6%) in FY2021, after a £371 million foreign exchange translation loss. This result is underpinned by continued good earnings growth and cash flow despite the disruptions caused by the Covid-19 pandemic. In the 12 months to 31 March 2021, the Private Equity portfolio value increased to £8,814 million (31 March 2020: £6,552 million) driven by organic growth and value accretive acquisitions in its existing portfolio and new investments. As the company enter the next financial year, the portfolio has good momentum and is strategically well positioned to continue to benefit from an acceleration in consumer trends towards value-for-money retail, e-commerce and health, wellbeing and hygiene.

Portfolio

Infrastructure

The company manage a range of funds investing principally in mid-market economic infrastructure and operational projects in Europe. Infrastructure is a defensive asset class that has generally been financially resilient to the challenge of Covid-19 and provides a good source of income and fees for the Group, enhancing returns on its proprietary capital. The team is also active in the deployment of proprietary capital as part of its strategy to build its North American Infrastructure platform.

The Infrastructure portfolio performed well in the year, generating a GIR of £178 million, or 16% on the opening portfolio (2020: £39 million loss, (4)%), driven by the appreciation of its quoted stake in 3iN and strong dividend income. The company's US Infrastructure portfolio, which is currently all funded with proprietary capital, proved to be resilient in the year. The company also made good progress in realising its remaining value in its Indian Infrastructure Fund.

Portfolio

Financial Highlights

The company generated a GIR of £2,139 million in FY2021 (2020: £318 million) and operating profit before carried interest of £2,031 million (2020: £215 million).

The total return was £1,726 million, representing a profit on opening shareholders’ funds of 22% (2020: £253 million or 3%). The diluted NAV per share at 31 March 2021 increased by 18% to 947 pence (31 March 2020: 804 pence) after paying dividends totalling 35 pence per share during the year. This result was after a net foreign exchange translation loss of 41 pence and the 13 pence negative accounting re-measurement loss from a fundamental de-risking of the UK defined benefit pension plan.

Realised profits

The company generated total realised proceeds of £218 million (2020: £918 million) and realised profits of £35 million (2020: £90 million) in the year, including realised proceeds of £114 million and profit of £29 million from Private Equity (2020: £848 million, £90 million) and realised proceeds of £104 million and profit of £6 million from Infrastructure (2020: nil, nil).

Unrealised value movements

The company recognised an unrealised profit of £2,351 million (2020: £172 million unrealised loss). The company's portfolios performed strongly in FY2021 despite the uncertainty and disruption caused by Covid-19. Action continued to deliver robust performance contributing £1,202 million of unrealised profits and the company also saw strong performance from its Private Equity investments in Royal Sanders, Luqom, Cirtec Medical, Tato, SaniSure, Magnitude Software and AES. The share prices of its quoted investments, 3iN and Basic-Fit, recovered well in the year.

Portfolio income

Portfolio income decreased to £156 million during the year (2020: £195 million). Interest income from portfolio companies, the majority of which is non-cash, reduced to £65 million (2020: £118 million) as the company provided against interest income on the assets most impacted by the Covid-19 pandemic. Partially offsetting this was strong dividend income of £82 million (2020: £68 million), the majority of which was cash, following distributions from Royal Sanders, 3iN and Tato. Fee income remained stable in the year at £9 million (2020: £9 million).

Fees receivable from external funds

Fees received from external funds were £44 million (2020: £44 million). 3i receives a fund management fee from 3iN, which amounted to £25 million in FY2021 (2020: £28 million). 3i also received fee income of £6 million (2020: £6 million) from MIA through advisory and management fees and continued to generate fee income from other 3i managed accounts and other funds. In Private Equity, the company recognised a £4 million administration fee for its management of the 3i 2020 Co-investment vehicles related to Action.

Operating expenses

Operating expenses of £112 million (2020: £116 million), decreased in the year due to lower overhead spend and lower travel cost due to global restrictions on travel. 3i continues to focus on controlling its operating expenses to achieve an operating cash profit.

Operating cash profit

The company generated an operating cash profit of £23 million in the year (2020: £40 million). Cash income decreased to £131 million (2020: £160 million), principally due to lower cash interest following the receipt of non-recurring cash interest in FY2020, Scandlines’ decision not to pay a dividend in 2020, and the decision to defer the collection of some portfolio income as a result of prudent portfolio liquidity management during the pandemic. This was offset by good dividend income from the stronger performers in the portfolio. Cash operating expenses decreased to £108 million (2020: £120 million) driven principally by lower variable compensation costs and a reduction in travel.

Balance sheet and liquidity

At 31 March 2021, the Group had net debt of £750 million (31 March 2020: £270 million net cash) and gearing of 8%, after a £516 million carried interest payment, net cash investment of £160 million and dividend payments of £338 million in the year.

The Group had liquidity of £725 million as at 31 March 2021 (31 March 2020: £1,245 million) comprising cash and deposits of £225 million (31 March 2020: £845 million) and an undrawn RCF of £500 million. The RCF was increased from £400 million in the year and its maturity extended to 2026. In June 2020, the company took advantage of favourable debt market conditions to strengthen its liquidity further, issuing a 20-year £400 million bond at a coupon of 3.75%. At 31 March 2021, its gross debt was £975 million.

The investment portfolio value increased to £10,408 million at 31 March 2021 (31 March 2020: £8,098 million) with unrealised profits of £2,351 million and net cash investment offsetting a foreign exchange translation loss in the year.

Recent developments

11 Nov 2021; Results for the six months to 30 September 2021 ⁴

Total return of £2,199 million or 24% on opening shareholders’ funds (September 2020: £1,142 million, 15%) and NAV per share of 1,153 pence (31 March 2021: 947 pence) after paying 21 pence second dividend in July 2021.

The company's Private Equity portfolio continues to perform strongly, with a gross investment return of £2,373 million in the period, or 27% (September 2020: £1,245 million, 19%). The majority of top 20 Private Equity investments demonstrated considerable momentum in the period, and in particular those in its chosen areas of focus of value-for-money, e-commerce, consumer and healthcare. These continue to benefit from its active management and long-term structural growth trends, some of which were accelerated by the pandemic.

 Action continues to surpass expectations. Its growth has accelerated since the lifting of Covid-related restrictions, resulting in sales in the nine months to the end of period nine 2021 of €4.8 billion, 25% ahead of the same period last year. Like-for-like sales growth over the same period was also strong at 12.9%, compared to negative 2.5%

in the same period last year. Action delivered last twelve months EBITDA of €765 million to the end of period nine 2021 (September 2020: €579 million). Strong trading continued into October 2021, with sales increasing to

€5.4 billion and last twelve months EBITDA of €777 million. The international roll-out is proceeding well and the business is on track to open about 270 new stores in 2021.

 In competitive markets for new investment its Private Equity business has continued to deploy capital selectively, with new investments in MAIT and the newly created ten23 health platform, as well as bolt-on investments for Cirtec Medical, Luqom and Havea in the period. Investment activity has continued since the period end, with a new investment in Dutch Bakery, transformational bolt-on acquisitions for GartenHaus and ten23 health and a bolt-on acquisition for Evernex. The company signed the realisation of Magnitude Software in September 2021, which completed at the start of November 2021, returning £345 million of proceeds to 3i, representing a 109% uplift on

31 March 2021 value. The sale achieved a sterling money multiple of 2.5x and sterling IRR of 44% after a holding period of two and a half years. In November 2021, the company completed a £36 million co-investment in insightsoftware, the company that acquired its investment in Magnitude Software and announced the partial sale of its stake in Basic-Fit at €44.25 per share, generating proceeds of c.£146 million.

The company's Infrastructure business delivered a gross investment return of £60 million, or 5% (September 2020:

£134 million, 12%). This return was driven by the increase in 3i Infrastructure plc’s share price and dividend income. The company's other Infrastructure investment vehicles and its direct US investments performed in line with expectations in the period.

 First FY2022 dividend of 19.25 pence per share, in line with policy. This will be paid to shareholders in January 2022.

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

“The company saw good growth from its two investment portfolios in the first half of the year and this momentum has continued into November. 3i is beginning to see a significant compounding effect from the performance of today’s carefully selected Private Equity portfolio.

Despite the social and economic uncertainty that 3i has seen over the last 18 months, competition for private assets remains very strong. While the company will continue to deploy capital selectively in new and bolt-on investments, 3i is also in a good position to benefit from favourable market conditions through its realisation pipeline to deliver attractive returns for its shareholders.”

References

1. ^ https://www.3i.com/about-us/our-business-at-a-glance/
2. ^ https://www.3i.com/about-us/history/
3. ^ https://www.3i.com/media/5292/3i_group_ar2021.pdf
4. ^ https://www.3i.com/investor-relations/financial-news/2021/results-for-the-six-months-to-30-september-2021/