Final Results
3i Group PLC
15 May 2003
3i Group plc
Preliminary statement of annual results for the year to 31 March 2003
For further information regarding the announcement of 3i's full year results to
31 March 2003 please see www.3iGroup.com
15 May 2003
Results
• Diluted net asset value per share of 480p
• Recommended final dividend of 8.6p per share, making a total dividend
for the year of 13.5p (2002: 13.0p), an increase of 3.8%
• Total return of a negative 23.7% on opening shareholders' funds,
compared with a negative total return of 29.8% for the FTSE All-Share
index
• £931 million invested (including co-investment funds)
Baroness Hogg, chairman of 3i Group plc, said:
'Despite difficult markets, 3i has generated strong realisations at good profits
and the Board is recommending an increased dividend. Although 3i's net asset
value has fallen, it has done so by less than our benchmark indices. The
changes we have made to the business have sharpened our competitive position and
provide a good base for growth.'
Financial Overview
• A negative return of 23.7% represents an outperformance of the
FTSE100, FTSE All-Share, FTSE SmallCap and MSCI Europe indices.
• Revenue profit after tax of £140 million.
• Realisation proceeds on the sale of assets of £976 million generated
realised capital profits of £184 million. Equity realisations were
made at an uplift of 34% over opening values.
• Investment in the year was £931 million. There has been a 37% increase
in investment in the second half reflecting the better opportunities
to invest.
• Net cash inflow of £170 million.
• The fall in value of 3i's investment assets was £1,165 million, mainly
resulting from falling stock markets and value reductions in respect
of companies in technology sectors.
Commenting on the outlook, 3i's chief executive, Brian Larcombe, said:
'Although we are cautious about the short-term market environment, we are
confident about the prospects for the business.'
- ends -
For further information, please contact:
Brian Larcombe, Chief Executive Tel: 020 7975 3386
3i Group plc
Michael Queen, Finance Director Tel: 020 7975 3400
3i Group plc
Patrick Dunne, Group Communications Director Tel: 020 7975 3283
3i Group plc
Issued by:
Philip Gawith Tel: 020 7379 5151
The Maitland Consultancy
Notes to Editors
3i brings capital, knowledge and connections to the creation and development of
businesses around the world. It invests in a wide range of opportunities from
start-ups to buy-outs and buy-ins, focusing on businesses with high growth
potential and strong management.
3i invests in businesses across three continents through local investment teams
in Europe, Asia Pacific and the US. To date, 3i has invested over £14.5 billion
(including co-investment funds).
Chairman's statement
This has been a year of challenge and change for 3i. Our mid-market buy-out
business achieved a strong performance, despite the faltering economic recovery.
But market conditions were particularly difficult for our technology portfolio.
3i has responded to the challenge by restructuring its organisation along
product lines, giving clear leadership to all parts of the business, while using
its international network to help the portfolio companies in which it invests to
realise their potential for growth.
The rigour with which we have reviewed the value of our technology portfolio has
had an impact on our net asset value, contributing to a negative return on
shareholders' funds of 23.7% over the year to 31 March 2003. It may be small
comfort to shareholders that this is still less than the drop in our benchmark,
the FTSE All-Share, which fell 29.8%, or the FTSE SmallCap, which was down
33.4%. We have also maintained our record of long term outperformance. But our
share price, which proved volatile during the year, was 47% down in the year to
31 March.
Despite the virtual closure of the market for new issues, we achieved a strong
flow of realisations: a total of nearly £1 billion, at a healthy profit over the
value at which these investments were held at the beginning of the year. Income,
too, has held up well in a difficult environment, and costs have been reduced.
The Board is recommending a final dividend of 8.6p, making a total dividend of
13.5p, an increase of 3.8% from 13.0p last year.
A particular strength of 3i's business in times like these is the balance of our
three key product groups - buy-outs, growth capital and early stage technology.
Our Chief Executive, Brian Larcombe, has carried out an extensive reorganisation
of management and investment processes to provide each with international
leadership and focus.
The buy-out business, led by Jonathan Russell, achieved some strong realisations
during the year such as Go, the low cost airline. The benefits of local
origination of investment opportunities, sector focus and product expertise are
also coming through with new investments by the buy-out team, such as De
Telefoongids.
Our growth capital investment business, for which there is a considerable market
opportunity, has received fresh impetus under the leadership of Chris Rowlands,
who has rejoined 3i as a member of the Executive Committee.
Under the leadership of Rod Perry, our early stage technology business is now
more narrowly targeted on the sectors which we believe will offer the best
investment opportunities. It is also focused on achieving good realisations from
our existing portfolio.
As I indicated at the half-year, there have been a number of changes to the
Board. Two executive Directors, Richard Summers and Peter Williams, retired from
the Board at the end of 2002. I would like to thank them for the major part they
played in the development of 3i right through the 1980s and 1990s. Christine
Morin-Postel, who joined the Board in September as a non-executive Director,
brings a wealth of international experience in financial services and industry
and is already making an important contribution.
I would also like to pay tribute to our staff who have shown a high degree of
energy and realism throughout the year, and are constantly alert to good
opportunities to invest.
The strength of 3i's balance sheet and its leading positions in the key venture
capital and private equity markets mean that the business has the robustness
needed during the downturn in markets and economic conditions. This combination
also means that 3i is well positioned to take advantage of an upturn.
The substantial changes we have made to the business in the past year to sharpen
our competitive position, improve our investment processes and increase
efficiency provide 3i with a much stronger base for growth.
Baroness Hogg
Chairman
14 May 2003
Chief Executive's statement
Overview
For the second consecutive year, we are reporting a substantial fall in the
value of the portfolio and shareholders' funds.
The market has undoubtedly been difficult and, particularly for early stage
technology companies, the operating environment has been the toughest for a very
long time.
Our Operating review considers the performance of our product businesses -
buy-outs, growth capital and early stage technology in more detail. In summary,
our mid-market buy-out business performed well and achieved a positive return.
Our smaller buy-out business and our growth capital business both performed
satisfactorily but produced negative returns, partly because of reduced
valuations arising from falling stock markets. Our early stage technology
business saw a substantial fall in the value of its portfolio and was the
principal factor contributing to the Group's negative total return.
The return from our mid-market buy-out business of 5% and the negative return of
12% in our growth capital business compare strongly with the movements for the
All-Share Index of minus 29.8% and the SmallCap Index of minus 33.4%. Our early
stage technology business saw a decline of 51%, which is very similar to the
fall in the techMARK Index of 50.0%.
At the Group level, we generated about £1 billion of realisation proceeds, at
good prices, and this has enabled us to retain our balance sheet strength.
We have maintained our long term strategy but have taken significant actions to
improve the quality of our processes.
Market conditions
The weakness in stock markets in the year clearly recognises the slowing down of
world economies and the continuing pressure on corporate profits. This has had a
major impact on the private equity industry which has seen falling returns and a
difficult fundraising climate.
For calendar year 2002, total investment in private equity and venture capital
in the US and Europe is estimated to have increased by approximately 10% to $91
billion. However, within this total, buy-out investment was up 69% to $61
billion, whereas early stage investment was down 53% to $4.1 billion in the US
and by 66% to $2.5 billion in Europe.
We have continued to invest in line with our strategy of building a balanced
portfolio.
In our main European markets, we invested in about 10% of completed
transactions, thereby maintaining our market leading position.
Liquidity for the private equity and venture market has generally been difficult
with significantly lower levels of mergers and acquisitions activity and
virtually no IPOs. In this environment, it is very encouraging that we saw such
a strong interest in many of our portfolio companies.
Strategy and competitive advantage
Our strategy is to:
• develop the business internationally;
• build a balanced investment business;
• use the network as our key competitive advantage; and
• invest primarily in growth companies.
Our network enables us to use our local presence and established relationships
to identify opportunities in which to invest. This, combined with our scale,
gives us the ability to use specialist resources for winning deals, carrying out
extensive referencing and adding value to our portfolio companies.
A key element of our strategy is maintaining a balanced business with about 40%
of our assets in buy-outs, 40% in growth capital and 20% of our portfolio in
early stage technology based companies. The proportion of our portfolio in
technology companies increased during the bubble in 2000 and 2001, which has
damaged our short term performance, but we have now broadly restored the shape
of the portfolio in line with our long term strategy.
We seek to invest in companies with good growth potential rather than relying on
financial engineering as the driver of value growth. Additionally, we look for
growth markets, a strong and well-balanced management team and a business
strategy that will deliver value to all shareholders.
Strategy and management action
We have adjusted our resources and organisation to meet the market challenges.
The process of reorganising the business on to a product as well as geographical
basis is now largely complete. We have also reduced staff numbers to align
resources with market conditions.
Our business is led on a product and sector basis. Jonathan Russell heads up our
buy-out business and Rod Perry our technology business. Following the
retirements of Peter Williams and Richard Summers, who had respectively run our
UK and continental European networks, we were particularly pleased to recruit
Chris Rowlands back to 3i. Chris is, in addition to responsibilities for the UK
regional network and the northern European countries, driving forward our growth
capital business across Europe.
The drivers of change in our product approach have been specialist teams,
focused marketing and using our resources on a pan European basis. This model,
which we adopted in our buy-out business two years ago, is working well and
delivering strong investment opportunities.
Key elements of this approach include a refined investment process and a new
performance management system for our staff.
We closed our office in Tokyo and subsequently our office in Dublin, but made no
other changes to our country network. In Japan, we had hoped to develop a
mid-market buy-out business, but after three years it became clear that this
market was not developing at a rate to support a local presence. Our decision to
close our Dublin office reflected the slower than expected development of the
Irish private equity market.
In Germany, market conditions have been very tough, particularly for early stage
companies, and we have carried through a major restructuring resulting in the
closure of our offices in Hamburg and Berlin.
Outlook
In the short term, the outlook for corporate profits growth remains weak.
Against this background, we are actively managing the portfolio and focusing
investment on those companies that can thrive in this more difficult
environment.
Market weaknesses and imperfections also create great opportunities and we are
mindful that the recession years of 1992-93 were excellent vintages in terms of
investment returns.
Although cautious about the short term outlook, I have every confidence in 3i's
business.
Brian Larcombe
Chief Executive
14 May 2003
Operating review
Overview
This review comments on the operations of our buy-out, growth capital and early
stage technology businesses and covers the market conditions and our operating
performance in Europe, the US and Asia Pacific. The review also comments on our
third party fund management activities.
Buy-outs
3i continues to lead the pan European mid-market for buy-outs and this part of
the business, led by Jonathan Russell, has performed strongly through the year.
3i's focus within this market is on transactions with a value from €25 million
to €500 million. The vendors of these companies are typically large corporates
disposing of non-core subsidiaries or private groups with succession issues.
Market statistics for calendar year 2002 show that there were 153 transactions
in this segment of which 3i invested in 18.
3i is also active in the smaller buy-out market (below €25 million). This is a
more fragmented segment and one in which 3i's local network provides ideal
access to the private vendors, management teams and local advisers involved.
During the year to 31 March 2003, 3i made 63 buy-out investments, with 3i and
funds managed by 3i investing £482 million, of which 3i led 14 new mid-market
deals investing £338 million including co-investment funds. Realisations from
the buy-out portfolio were strong with total proceeds of £613 million, including
£144 million from the sale of Go. These realisations were achieved at an
aggregate equity uplift of 69%.
Our buy-out performance is driven by a clear product strategy, which is
rigorously applied. This strategy is to build competitive advantage from our
scale and local knowledge so that we see the market, select the most attractive
investment opportunities and drive value from our portfolio.
We see the market through the local access that the 3i network provides, through
our sector teams, through the relationships that we have built with large
corporates and through the people programmes we run for chairmen, chief
executives and independent directors.
We aim to select the most attractive opportunities through harnessing our
international network and experience and by assembling the best team for the job
from our regional, sector and buy-out specialists. A transaction like De
Telefoongids involved our local office in Amsterdam, two of our sector teams,
Media and Communications, as well as members of our pan European buy-out team.
A panel of our most experienced buy-out investors ensures rigorous application
of our investment process and provides additional guidance to try to ensure that
we win the buy-outs that we want to do at an attractive price.
Once we have made an investment, it is critical that we add value. We do this
through the investee company board, through our knowledge and experience and
through our network.
3i's investment in Go was a good demonstration of our approach to this market.
Access to the original investment was gained through strong corporate
relationships with British Airways and its advisers. Past experience, track
record and relationships in the sector enabled 3i to take an informed view and
win the transaction at the right price, £110 million. Through the efforts of the
management team and staff, led by CEO Barbara Cassani, both market share and
profitability levels increased. They were supported with the introduction of
Keith Hamill as Chairman and non-executive directors, including Paul Sternbetz,
who was formerly Operations Director for Southwest Airlines in the US. easyJet,
a natural strategic buyer for Go, made a successful bid in July 2002 of £374
million for the business.
Our view is that the medium term outlook for buy-outs is improving. Economic
conditions and depressed public markets are encouraging corporate restructuring
and the selling off of non-core activities. Reduced levels of corporate mergers
and acquisitions activity mean there is less competition from trade buyers. We
believe that there is a significant amount of pent up demand, both in terms of
corporates with subsidiaries to sell and of good management teams keen to gain
their independence.
Growth capital
Growth capital has always been a core part of 3i's business. It involves the
provision of capital to accelerate the growth of established businesses and
generally involves investing in a minority equity position. It is a product
suited to a diverse range of growth opportunities, including acquisitions,
increasing production capacity, market or product development, turnaround
opportunities, shareholder succession and change of ownership situations.
In the second half, we observed signs of increasing demand for growth capital,
resulting from two main factors. Firstly, companies were unable to raise capital
by achieving an IPO on European stock markets and, secondly, debt providers
adopted a more cautious view on the level of finance they would advance. Both
these factors are increasing demand for growth capital. Furthermore, as and when
the economic outlook improves, we would expect deferred expansion and
acquisition plans to be reactivated, giving rise to an increasing demand for
growth capital. We believe that we are well placed to take advantage of these
conditions.
Our strategy for this product targets investments from 3i of between £2 million
and £30 million, across a range of sectors. This product is primarily focused on
3i's European and Asia Pacific markets and has historically had a less
competitive environment than buy-outs.
Success in this market is determined by the ability to build long term
relationships with local businesses and local intermediaries, as well as
demonstrating the capability of helping these businesses to grow. This fits well
with our strategy of local presence, sector specialisation, sharing knowledge
and offering local businesses access to our international network of
relationships.
Chris Rowlands was appointed to lead growth capital investment in September 2002
and he has brought a more focused approach to deal origination and the key
processes for this product. A Product Leadership Team, with representatives of
each of the targeted regions in Europe, coordinates individual country
activities, develops and implements strategy and operates as a forum for sharing
ideas on a range of best practices.
Certain sectors are ideally suited to the growth capital product. A good example
is the oil and gas sector. The North Sea exploration and production sector is
undergoing significant change and a number of new independent businesses are
emerging as the next generation of North Sea oil companies. In the oil and gas
services sector, the ability to provide services on an international basis is an
important competitive advantage, and capital is required to enable the
development and international distribution of products and services. 3i's sector
knowledge, local presence and international network combine to position us as a
strong financial partner to such businesses. Major transactions by our Oil and
Gas team in Aberdeen during the year included the investments in Petrofac
Limited and Faroe Petroleum Limited, and the partial realisation, through an IPO
on the London Stock Exchange, of our investment in John Wood Group plc. In
addition, the sale of Orwell Group plc crystallised a total return for 3i of
£35.0 million on our total investment of £2.9 million.
During the year, we invested £273 million (2002: £258 million) in growth capital
transactions, 46% (2002: 32%) of which was in companies new to our portfolio.
However, despite difficult conditions for sales and IPOs, a good level of
realisations was achieved, with proceeds of £270 million during the year and an
equity uplift of 30%.
Early stage technology
The continuing depressed state of the technology and capital markets meant that
3i's early stage technology business, which at 31 March 2003 represented 15% of
our assets, had a difficult year. A negative return of £(671) million, arising
principally from a reduction in the value of the portfolio to reflect these
market weaknesses, severely impacted the performance of the Group as a whole.
However, following a restructuring under the leadership of Rod Perry, we now
have a tightly focused business which is targeted at four key sub-sectors.
We have also focused this activity on a smaller number of our locations and have
refined the investment process. As a result, we now believe 3i is well
positioned to take advantage of current market conditions and to seize the
opportunity presented by an improved environment in the medium term.
We continue to develop and nurture our relationships with key larger corporates
in each sub-sector, since these corporates are potentially customers, partners
or ultimate buyers of our individual portfolio companies, and to share these
relationships with our portfolio companies. The events we hold for portfolio
CEOs and key larger corporates are one way in which we do this. For example, the
3i eSecurity CEO Conference at the IESE business school in Barcelona in November
2002 was attended by over 20 3i-backed companies and 25 corporates, including
IBM, Sun Microsystems and Microsoft.
The year to 31 March 2003 saw total investment of £176 million, and realisation
proceeds of £93 million, at an equity loss of 26% on the carrying value at 31
March 2002.
The two biggest early stage technology markets, Europe and the US, both
experienced significant falls in aggregate investment during 2002. According to
market statistics, the total amount invested in Europe fell 54% to €3.72
billion. Most of this investment was in support of existing venture capital
backed businesses rather than in completely new opportunities. 3i also saw this
pattern, with 78% of early stage technology investment during the financial year
being in our existing portfolio.
The US market has shown a similar fall. According to market statistics,
aggregate investment fell by 40% in 2002. Our US business is also now making a
contribution to the rest of the Group, through the relationships we have been
building with larger corporates such as IBM.
The key factor in the weak investment performance of early stage technology
companies has been the depressed state of the markets for their products and
services. The most important cause of this has been the significantly reduced
levels of expenditure by corporates on information technology and related
applications. A number of 3i's investments have underperformed as their business
models have been undermined by significantly lower levels of demand than
expected.
A number of technology companies have also experienced difficulty in translating
a strong product into a commercial success. An example is Weston Medical, a 3i
investment that achieved an IPO in 2001. Weston's needle-free injection product
was technically respected but the company was unable to translate that into
commercial success, and recently went into receivership.
In the context of the reported performance of 3i's early stage technology
investments made in the period 1999 through 2001, the 'J-Curve' phenomenon (so
named because the reported performance of a portfolio or vintage of technology
investments tends to dip in the early years before rising again, as poor and
failing investments become apparent before the successful ones) is interesting.
While the continuing depressed markets and the difficulty of commercialising
newly developed products have adversely affected the reported performance of
that portfolio, the J-Curve phenomenon would hold that the performance of the
remaining portfolio should improve as more of the underlying businesses achieve
success and the investments are realised.
The financial performance of the early stage technology portfolio was also
adversely affected by falls in value. Valuation of technology companies usually
involves reference to valuation ratios of listed companies or the price at which
similar companies have been acquired. However, the absence of an active market
for IPOs and a low level of mergers and acquisitions activity have diminished
the usefulness of these traditional benchmarks. Another benchmark involves
reference to the value at which private companies in the early stage technology
sector are currently raising capital. During the year, capital has generally
been raised through funding rounds at lower capitalisations than previous
rounds, even when a company is meeting its milestones, and they have therefore
become known as 'down rounds'. Our valuations reflect the impact of actual down
rounds undertaken by our portfolio companies, and also at 31 March 2003 the
application of this benchmark to companies with no imminent plans to seek
funding. The combined down round effect during the year was a £361 million
reduction in value of which £269 million was in respect of early stage
technology investments.
In conclusion, the early stage technology business has seen a significant loss
of value this year but the portfolio has been valued using prudent assumptions
regarding the outlook for market conditions, and the business has been reshaped
for the market we now face.
Europe
Economic conditions across Europe weakened during the year. In general,
manufacturing sectors experienced difficult conditions but the downturn has
spread to all sectors, including retail and services, largely driven by
weakening consumer demand.
The prevailing economic uncertainty continues adversely to affect the levels of
private equity investment, as institutional investors, banks and equity
providers have become more cautious and vendors of businesses have become
increasingly unwilling to sell in the face of falling prices. Additionally,
expansion and acquisition plans have been deferred and spending on information
technology by corporates has reduced. Offsetting these negative factors,
economic conditions have encouraged corporate restructuring and the selling off
of non-core assets, which has created opportunities for buy-outs.
Against this background, market statistics show that the total amount of private
equity monies invested in Europe in 2002 increased to €27.2 billion from €24.3
billion in 2001, but was still below the €35.0 billion invested in 2000.
Across Europe, £835 million (2002: £889 million) was invested by 3i (including
co-investment funds) in 357 companies during the year. In the UK, investment
amounted to £399 million, compared with £443 million the previous year.
Despite difficult conditions, we achieved a strong level of realisations at good
prices, comfortably in excess of the valuations we placed on those businesses at
March 2002.
In total, realisation proceeds across Europe during the year amounted to £965
million, compared with £927 million the previous year.
There has been a significant reduction in the valuation of our portfolio, caused
by increased provisions and value reductions as a result of down rounds and
weaker business performance. At 31 March 2003, our portfolio in Europe amounted
to £3,669 million, of which £2,494 million was in the UK.
During the year, we announced the closure of three of our offices in Europe
(Hamburg, Berlin and Dublin) and we reduced the number of staff in our European
business. These changes were made to align resources with the market and to
reflect changes in our investment processes. 3i now has 27 offices across
Europe.
US
The US venture market has continued to be depressed throughout the year. 3i
continues to develop its business in the US and to focus on managing the
existing portfolio with a view to achieving realisations in the next few years.
During the year, £74 million (down from £119 million in 2002) was invested in 33
companies, of which £56 million was in new investments.
Asia Pacific
The Japanese market has not developed as rapidly as we had expected, and the
flow of quality deals has not been sufficient to justify the resourcing of our
Tokyo office, which was closed in February 2003. The Japanese market will
continue to be serviced out of the Hong Kong and Singapore offices, as will
other markets in the region.
The Asia Pacific business invested £22 million during the year, including the
first investment by the Hong Kong office, which was in a Korean multiplex cinema
operator.
Conditions for realisations in the region were depressed during the year.
Despite this, £9 million of realisation proceeds were generated.
Private equity fund management
3i manages third party co-investment funds primarily in our mid-market buy-out
business, where capital raised is co-invested alongside our capital, enabling us
to invest in companies without 3i itself holding a majority interest in the
underlying business.
Since 1994, 3i has raised funds with total third party commitments of £2.3
billion. Funds are usually raised from institutional investors, typically
pension funds and insurance companies seeking exposure to private equity and who
are attracted by 3i's market leading position, business model and track record.
The funds raised are typically invested on a 50:50 basis alongside 3i's capital.
During the year, we earned fee income of £34 million (2002: £35 million) from
the management of funds and, in addition, received £7.3 million (2002: £1.6
million) in respect of carried interest on realisations. At 31 March 2003, the
invested portfolio managed on behalf of third party investors was valued at
£1,158 million (2002: £1,264 million), excluding undrawn commitments.
Since the balance sheet date 3i has announced the successful first closing of
its pan European mid-market buy-out fund, Eurofund IV. Third party investors
have committed €0.4 billion and intend to invest a further €0.2 billion over the
life of the fund and 3i intends to invest up to €1.5 billion. It is expected
that further closings will take place over the coming months and the final
closing of Eurofund IV will take place by the end of the year.
Quoted fund management
3i's Asset Management team manages the Group's portfolio of quoted investments
(comprising principally our holdings in investments that have achieved an IPO)
as well as the portfolios of the 3i Group Pension Plan and of three quoted
specialist investment companies - 3i Smaller Quoted Companies Trust plc, which
invests in smaller UK companies, 3i Bioscience Investment Trust plc, which
invests internationally in life science and healthcare companies, and 3i
European Technology Trust plc, which invests in quoted companies across Europe
whose focus is on technology.
At the balance sheet date, total third party funds under management by 3i Asset
Management were £452 million. Fees earned from quoted fund management amounted
to £4 million for the year, a reduction from £7 million last year, mainly due to
the fall in capital markets.
Summary
Despite a tough year, we have focused the business on the three product areas of
buy-outs, growth capital and early stage technology. We believe we have the
right structures and processes in place to gain access to and select the most
profitable opportunities and then to enhance value and generate profit from the
investments that we make. In an environment of low growth and low inflation,
this strategy will enable 3i to provide superior returns for our shareholders.
Financial review
Total return
Total return for the year was a negative 23.7% on opening shareholders' funds, a
return of £(935) million. High levels of investment in early stage technology
companies in the three years to 31 March 2002, combined with the current
exceptionally difficult conditions, have resulted in a total return of £(671)
million for our early stage technology business. The downturn in other sectors
and the fall in stock markets have resulted in negative returns for our small
buy-outs and growth capital businesses, although our mid-market buy-out business
produced a positive return. Overall, the effect of falling stock markets on
total return was £(453) million.
3i's return of (23.7)% represents an outperformance against our benchmark
indices, FTSE All-Share (29.8)%, the FTSE 100 (29.1)% and the FTSE SmallCap
(33.4)%. Over the medium and longer term, 3i has maintained its record of
outperformance against stock market indices, except that over a cumulative three
year period to 31 March 2003, the FTSE All-Share and FTSE 100 had marginally
smaller negative returns by 0.4% and 0.2% respectively. For all longer
cumulative periods up to 10 years, 3i has continued to outperform, and overall
has maintained its margin of outperformance.
There was a strong performance on realisations, with realised capital profits of
£184 million. The negative total return arose from the unrealised valuation
movement on the portfolio of £1,165 million, due mainly to reductions in the
valuation of the technology portfolio.
Given the difficult economic conditions, the mid-market buy-out business
performed well, delivering a positive total return of £61 million, through a
strong level of profitable realisations and a good income yield.
The small buy-outs and growth capital portfolios have produced negative total
returns of £(188) million and £(137) million respectively. This is largely as a
result of unrealised losses on the revaluation of the portfolio, caused mainly
by a fall in price-earnings ratios used to value a large proportion of the
portfolio and provisions for companies that may fail. Realisations were,
however, strong, producing a satisfactory level of realised profits and there
were also continued good levels of dividend and interest income.
In the early stage technology business, provisions continued at the high levels
experienced in the previous year and the impact of the worsening conditions
necessitated additional valuation reductions.
Geographically, the return from our UK investments was £(400) million and the
return on our continental Europe investments was £(379) million. UK investments
have earned a good income yield, mainly in the form of dividends and interest,
and also strong realised profits, which partially offset reductions in the
valuation of the portfolio. In continental Europe, the portfolio is weighted
more towards early stage technology but the valuation reductions were partly
offset by a currency gain of £95 million.
Our Asia Pacific business produced a return of £(16) million, and our US
business, mainly in early stage technology, a return of £(140) million, which
includes a currency loss of £26 million arising from the weakening of the US
dollar against sterling.
Statement of Recommended Practice: Financial Statements of Investment Trust
Companies (SORP)
The recommendations of the revised SORP issued by the Association of Investment
Trust Companies in February 2003 have been adopted in these accounts. Fee income
earned and costs incurred on the acquisition or intended acquisition or disposal
of investments are included in the capital return. The revenue account includes
a tax charge of £30 million and the capital account a corresponding tax credit
in respect of expenses charged to the capital return which are being utilised in
reducing taxable revenue profits. Adoption of these recommendations has had no
effect on total return and, as a result, as required by the SORP, comparatives
for the previous year have not been restated.
In addition to implementing the revised SORP recommendations, the methodology
used to identify management expenses and interest costs available for allocation
between the revenue and capital accounts has been revised, resulting in a higher
level of costs being available for allocation. All finance costs, less interest
income on short term funds, are now available for allocation, as borrowings are
now considered to finance investment packages, comprising equity shares and
loans, rather than primarily loans as previously. The proportion of available
management expenses and interest charged to the capital reserve has been reduced
from 80% to 70% to reflect the expected future balance of returns from capital
and revenue. This proportion had been increased from 70% to 80% in the year to
31 March 2001.
The effect of adopting the revised SORP recommendations and changes in the
allocation methodology for management expenses and interest payable has been to
increase revenue profits after tax this year by £50 million and to reduce the
capital return by a corresponding amount, compared with the previous
methodology.
Income, costs and revenue profit
Total operating income was £308 million, a reduction from the previous year,
£355 million. Interest receivable on loan investments of £96 million (2002: £113
million) has fallen due to lower interest rates (and the prior year benefited
from some exceptional high yields on certain investments). Dividend income of
£123 million (2002: £130 million) includes £46 million of dividends received on
the sale and restructuring of investments (2002: £44 million). Fee income,
comprising mainly unquoted fund management fees and investment negotiation fees,
amounted to £56 million, the same as last year. Interest receivable on treasury
assets has fallen to £34 million from £46 million, mainly due to a fall in
interest rates.
Management expenses were £18 million or 11% lower than in the previous year, as
the number of staff employed reduced from 943 to 858 at 31 March 2003. The cost
of organisational changes in the year was £10 million (March 2002: £18 million).
Costs less fee income amount to £97 million compared with £115 million last
year.
Interest payable on borrowings, which are mainly fixed rate, has reduced by £10
million but this is offset by the fall of £12 million in interest receivable on
treasury assets, included in total operating income.
Revenue profit after tax was £140 million, which is higher than last year (£106
million), because of changes in accounting treatment arising from the SORP and
in the allocation of costs.
Realised profits on disposal of investments
Realised profits on disposal of investments were £184 million which compares to
a loss of £39 million in the previous year.
Proceeds amounted to £976 million, of which £110 million were realised from the
quoted portfolio. Despite corporate mergers and acquisitions markets remaining
weak throughout the year, realisations from the unquoted portfolio were strong,
generating proceeds of £829 million, significantly higher than £514 million in
the previous year. Realisations included the sale of Go, the low cost airline,
which generated £144 million of proceeds and contributed £86 million to realised
profits.
Unquoted equity investments were realised, after taking account of write-offs,
at a good uplift of 40% over their March 2002 valuations. Sales of holdings in
our quoted portfolio generated an uplift of 6% despite falling stock markets.
The uplift achieved on the total equity realisations was 34%.
Overall, 14% of the total equity portfolio at 31 March 2002 was realised and,
including loan and fixed income share repayments, 16% of 3i's total portfolio
was realised.
Realised profits also include £50 million in respect of the write-off of
subordinated borrowings, which are no longer repayable in full. These
borrowings, where some of the risk was assumed by the finance provider, funded
the acquisition of German technology investments, which have failed or been
provided for this year and in previous years.
Realised profits are stated net of write-offs, which amounted to £79 million
(2002: £151 million).
Unrealised value movement on revaluation of investments
There has been a net unrealised value movement of £(1,165) million. The main
drivers have been provisions for companies which may fail of £379 million, down
rounds and reductions to fair value of £361 million and the effect of falling
stock markets which amounted to £453 million. Reductions in the valuation of the
early stage technology portfolio make up 62% of provisions and 75% of down round
and fair value adjustments.
Our approach to the valuation of early stage technology investments has changed
over the last year. At 31 March 2002, the valuations of early stage investments
were reduced where a down round or further financing had taken place at a lower
value. At 30 September 2002, valuations were reduced for down rounds that had
already taken place and also for those that were anticipated to take place
within the next six months. At the balance sheet date, 31 March 2003, valuations
of early stage investments were reduced for down rounds that have occurred or
are anticipated, and were also reduced to an estimated down round value or to a
fair value, even where no further financing is anticipated, based on the most
appropriate valuation criteria available.
The continued fall in stock markets has led to a decrease in the value of the
quoted portfolio of £209 million and has also reduced the weighted average
price-earnings ratio used to value the unquoted equity portfolio valued on an
earnings basis from 10.0 at March 2002 to 8.1. This has resulted in a further
value reduction of £244 million.
There has been an increase in investee companies' earnings, where these are used
as a valuation basis at the start and end of the year, which has generated a
valuation movement of £48 million; earnings of these portfolio companies have
increased by 2%.
Unrealised value movement includes a net currency gain of £60 million (2002: £
(1) million), mainly arising from the weakening of sterling resulting in an
increase in the valuation of European investments partially offset by losses on
related borrowings.
Investment
During the year, we invested a total of £931 million (£716 million invested by
3i and £215 million of co-investment funds). This is lower than last year (March
2002: £1,039 million) but there was a 37% increase in the second half of the
year reflecting improved investment opportunities in the market. Investment has
been balanced and aligned more closely with our portfolio objectives with
investment in buy-outs representing 52% of total investment in the year, growth
capital 29% and early stage technology 19%. The majority of the technology
investment, 78%, has been made in supporting our existing portfolio where those
companies continue to look likely to deliver good returns over the medium term.
Investment across Europe was balanced with 43% of total investment being made in
the UK and 47% in continental Europe. The US invested £74 million, 8% of total
investment, reflecting the reduction in technology investment across the Group.
Asia Pacific invested £22 million.
Cash flow and balance sheet
Strong net realisation proceeds of £975 million and relatively low cash
investment of £673 million were the main factors contributing to a cash inflow
of £219 million, before a refinancing investment of £49 million in a joint
venture, resulting in a net cash inflow of £170 million, reducing net borrowings
to £1,013 million. This compares with a net cash outflow last year, after
acquisitions, of £102 million.
The value of the portfolio (excluding co-investment funds) has fallen during the
year from £5,109 million to £3,939 million largely because of unrealised losses
on the revaluation of investments. Early stage technology investments amount to
£589 million,15% of the total portfolio. Buy-out and growth capital investments
amount to 51% and 34% of the portfolio respectively.
At the balance sheet date, 63% of the portfolio by value was located in the UK,
30% in continental Europe, 5% in the US and 2% in Asia Pacific. By sector, the
portfolio continues to be well diversified. Of the total portfolio, 5% is
represented by quoted investments, 40% by loans and fixed income shares and 55%
by unquoted equity investments, of which 28% have been valued at cost and 44% on
an earnings basis.
The capital and funding structure of the Group is strong. At the balance sheet
date, shareholders' funds amounted to £2.9 billion, net debt to £1.0 billion and
private equity co-investment funds under management were £1.6 billion. The net
effect of the reduction during the year in both shareholders' funds and net
borrowings has increased gearing to 35% (March 2002: 30%).
The Group's net borrowing comprises long term borrowing, short term borrowing
and liquid treasury assets and cash. Original long term borrowing of £1.6
billion, which is unsecured and primarily raised from the public issue of debt
under the notes issuance programme, has been swapped to give a predominantly
fixed rate position. Of the original long term borrowing, £197 million is
repayable in 2003, with £754 million in 2006 and 2007 and £600 million in 2023
or later. Short term borrowing of £196 million is outweighed by cash and liquid
treasury assets of £811 million.
At the balance sheet date, the Group had committed and undrawn borrowing
facilities amounting to £634 million.
The Group continues to meet very comfortably the capital adequacy ratios set by
the Financial Services Authority, in its role as supervisor of 3i Group plc's
status as a deposit taker.
Pension
Pension costs have been accounted for on the basis of SSAP 24. The charge for
the year to 31 March 2003 to Group profits in respect of the main defined
benefit scheme, the 3i Group Pension Plan ('the Plan') was £12 million (March
2002: £13 million), based on the triennial actuarial valuation at 30 June 2001.
If the SSAP 24 charge continues to be based on the 30 June 2001 valuation, the
charge for the year to 31 March 2004 would be £12 million.
The progressive implementation of FRS17 'Accounting for Retirement Benefits' has
been accompanied by considerable debate about its suitability as a measure of
present and future pension liabilities. Mandatory implementation of FRS17 in
full has been deferred by the Accounting Standards Board. FRS17 has not been
fully implemented in these accounts.
Due to substantial falls in stock markets and declines in interest rates used to
calculate the present value of liabilities, the FRS17 figures show a significant
deterioration during the year to a deficit on the Plan of £90 million (2002:
deficit of £14 million). Recognising that in the short term at least, some of
the deficit is unlikely to be made up simply by the recovery in asset values,
the Group has contributed lump sums over the last two years of £13 million
during the year to 31 March 2003 and £22 million during the year to 31 March
2002. It has also recommenced making monthly contributions with effect from 1
April 2002 which have amounted to £12 million in the current year. Total
contributions in the year to 31 March 2003 were £25 million (2002: £22 million).
Changes have been made to the Plan which require existing members to contribute
1% of salary from 1 January 2003, increasing by 1% each year to 5% by 1 January
2007.
New employees joining 3i and the Plan after 1 September 2002 are required to
contribute 5% of salary. At 31 March 2003, 578 employees were members of the
Plan.
Our policy on pensions continues to be under active review in the light of
changes in tax legislation and accounting and because funding deficits have
arisen from the fall in capital markets.
Regulation of the Group
3i Group plc and relevant subsidiaries continue to be regulated by the Financial
Services Authority.
Risk management
3i has a comprehensive framework to manage the risks that are inherent in its
business. This framework includes a risk committee whose purpose is to monitor
the identification, assessment and management of key risks across the business.
The main risks comprise economic risk, treasury and funding risk, investment
risk and operational risk.
Economic risk
3i invests mainly in European companies and continues to develop its operations
in the US and Asia Pacific. However, the majority of the portfolio is still in
UK companies and there is an element of exposure to the UK economic cycle. To
mitigate this, 3i has invested in different sectors of the UK economy with
different economic cycles. In addition, an increasing proportion of assets is
invested in continental Europe, in the US and Asia Pacific, which may have
different economic cycles.
Treasury and funding risk
The overall funding objective continues to be that each category of investment
asset is broadly matched with liabilities and shareholders' funds, with
corresponding characteristics in terms of risk and maturity, and that funding
needs are met ahead of planned investment. This objective continued to be met
during the year to 31 March 2003.
All assets and liabilities are held for non-trading purposes and, as a result,
the Group does not have a trading book. The Group does not trade in derivatives
and does not enter into transactions of either a speculative nature or unrelated
to the Group's investment activities. Derivatives are used to manage the risks
arising from the Group's investment activities.
The main funding risks faced by the Group are interest rate risk and exchange
rate risk. The level of these risks is mitigated by the overall funding
objective and the Board regularly reviews and approves policies on the approach
to each of these risks.
3i's policy for exchange rate risk management is not generally to hedge its
overall portfolio in continental Europe or the US. In line with its funding
policy, part of those assets are funded by borrowings in local currency and, as
a result, a partial hedge exists. 3i's largest exposure is £0.7 billion in
respect of net assets denominated in euro in continental Europe. The level of
exposure to exchange rate risk is reviewed on a periodic basis.
Day to day management of treasury activities is delegated to executive Directors
and the Group Treasurer. Regular reports on the Group's funding position have
been considered during the year by the Board. There has been no change during
the year or since the year end to the major funding risks faced by the Group, or
to the Group's approach to such risks.
Investment risk
This includes investing in companies that may not perform as expected, being
over exposed to one sector of the economy and the portfolio valuation being
partly based on stock market valuations.
Investment levels are set, allocated and monitored by product area and
geography. Within this framework, 3i invests in all sectors of the economy,
except those, such as property, where the opportunity to invest in venture
capital backed businesses meeting 3i's investment criteria is limited.
Management periodically reviews the portfolio, which is well diversified by
industry sector, to ensure that there is no undue exposure to any one sector.
3i's investment criteria focus on management ability and market potential.
Investment appraisal and due diligence is undertaken in a rigorous manner by
drawing on our international network and experts in individual industry sectors.
In general, proposed investments over £5 million are presented to the Group's
Investment Committee or Technology Investment Committee, which are committees of
senior management including executive Directors.
The valuation of a large proportion of 3i's equity portfolio is based on stock
market valuations for the relevant industry sector. Quoted investments are
valued using the mid-market price at the balance sheet date. About 44% of the
unquoted equity portfolio is valued using stock market price-earnings ratios for
the relevant industry sector discounted for non marketability. Accordingly,
stock market valuations for individual sectors are an important factor in
determining the valuation of 3i's portfolio and the total return.
There are regular reviews of holdings in quoted companies and exposure to
individual sectors in order to monitor the level of risk and mitigate exposure
where appropriate. In particular, the level of future funding of technology
companies is kept under review. However, it is not possible to protect against
the risks of a downturn in stock markets generally or in any specific sector.
Accordingly, the valuation of 3i's portfolio and opportunities for realisation
depend on stock market conditions and the buoyancy of the wider mergers and
acquisitions market.
Operational risk
This includes operational events such as human resources risks, legal and
regulatory risks, IT systems problems, business disruption and shortcomings in
internal controls.
Line management at all levels is responsible for identifying, assessing,
controlling and reporting operational risks. This is supported by a framework of
core values, Group standards and controls, a code of business conduct and
delegated authorities.
The ability to recruit, develop and retain capable people is of fundamental
importance to achieving our strategic objectives. We operate in a competitive
industry and aim to remunerate our staff in line with market practice and to
provide superior development opportunities.
A group-wide business continuity strategy is in place. This strategy has been
assessed against a detailed business impact analysis and independently
benchmarked against best practice.
Summary
Net asset value per share has fallen, mainly due to the fall in stock markets
and the reduction in the valuation of the early stage technology portfolio which
at the balance sheet date represented 15% of the total portfolio. 3i did,
however, experience a smaller fall in net asset value than its stock market
benchmarks.
3i continues to have the financial capacity to increase investment should
economic and market opportunities improve.
Michael Queen
Finance Director
14 May 2003
Total return (£m)
2003 2002
Total operating income before interest payable 308 355
Interest payable (110) (120)
Management expenses (153) (171)
Realised profits/(losses) on disposal of investments 184 (39)
Unrealised value movement on revaluation of investments (1,165) (890)
Other (changes to organisational structure, goodwill, tax
and currency) 1 (95)
- Revenue return 146 102
- Capital return (1,081) (1,062)
Total return (935) (960)
Total return by product (£m)
Mid-market buy-outs 61) (48)
Small buy-outs (188) (38)
Growth capital (137) 14)
Early stage technology (671) (815)
Goodwill amortisation - (73)
Total return (935) (960)
Total return by geography (£m)
UK (400) (298)
Continental Europe (379) (481)
US (140) (74)
Asia Pacific (16) (34)
Goodwill amortisation - (73)
Total return (935) (960)
Consolidated statement of total return
for the year to 31 March 2003
Revenue Capital Total Revenue Capital Total
2003 2003 2003 2002 2002 2002
£m £m £m £m £m £m
Capital profits
Realised profits/(losses) on 184 184 (39) (39)
disposal of investments
Unrealised (losses) on (1,165) (1,165) (890) (890)
revaluation of investments
(981) (981) (929) (929)
Total operating income before 298 10 308 355 - 355
interest payable
Interest payable (57) (53) (110) (114) (6) (120)
241 (1,024) (783) 241 (935) (694)
Administrative expenses (64) (89) (153) (121) (50) (171)
Amortisation of goodwill - - - (2) (71) (73)
Cost of changes to (5) (5) (10) (9) (9) (18)
organisational structure
Return before tax and currency 172 (1,118) (946) 109 (1,065) (956)
translation adjustment
Tax (32) 35 3 (3) 4 1
Return for the year before 140 (1,083) (943) 106 (1,061) (955)
currency translation adjustment
Currency translation adjustment 6 2 8 (4) (1) (5)
Total return 146 (1,081) (935) 102 (1,062) (960)
Total return per share
Basic (pence) 23.9p (177.1)p (153.2)p 16.8p (174.5)p (157.7)p
Diluted (pence) 23.9p (176.9)p (153.0)p 16.7p (173.3)p (156.6)p
Reconciliation of movement in shareholders' funds
2003 2002
£m £m
Opening balance 3,945 4,973
Revenue return 146 102
Capital return (1,081) (1,062)
Total return (935) (960)
Dividends (81) (78)
Proceeds of issues of shares 7 10
Movement in the year (1,009) (1,028)
Closing balance 2,936 3,945
Consolidated revenue statement
for the year to 31 March 2003
2003 2002
£m £m
Interest receivable
Interest receivable and similar income arising from debt securities and other
fixed income securities held as financial fixed asset investments
Interest receivable on loan investments 96 113
Fixed rate dividends 17 19
113 132
Other interest receivable and similar income 34 46
147 178
Interest payable (57) (114)
Net interest income 90 64
Dividend income from equity shares 106 111
Share of net (losses)/profits of joint ventures (1) 9
Fees receivable 46 56
Other operating income - 1
Total operating income 241 241
Administrative expenses and depreciation (64) (121)
Amortisation of goodwill - (2)
Cost of changes to organisational structure (5) (9)
Profit on ordinary activities before tax 172 109
Tax on profit on ordinary activities (32) (3)
Profit for the year 140 106
Dividends
Interim (4.9p per share paid, 2002: 4.9p per share paid) (29) (29)
Final (8.6p per share proposed, 2002: 8.1p per share paid) (52) (49)
Profit retained for the year 59 28
Earnings per share
Basic (pence) 22.9p 17.4p
Diluted (pence) 22.9p 17.3p
There is no material difference between the reported revenue and the revenue on
an unmodified historical cost basis.
Consolidated balance sheet
as at 31 March 2003
Assets 2003 2003 2002 2002
£m £m £m £m
Treasury bills and other eligible bills 1 1
Loans and advances to banks 527 563
Debt securities held for treasury purposes 283 191
Debt securities and other fixed income securities held as
financial fixed asset investments
Loan investments 1,336 1,408
Fixed income shares 228 324
1,564 1,732
Equity shares
Listed 187 413
Unlisted 2,188 2,964
2,375 3,377
3,939 5,109
Interests in joint ventures
Share of gross assets 104 133
Share of gross liabilities (81) (98)
23 35
Intangible fixed assets
Goodwill - -
Tangible fixed assets 45 50
Own shares 44 54
Other assets 64 61
Prepayments and accrued income 73 69
Total assets 4,999 6,133
Liabilities
Deposits by banks 423 519
Debt securities in issue 1,350 1,339
Other liabilities 56 53
Accruals and deferred income 173 181
Provisions for liabilities and charges 10 12
Subordinated liabilities 51 84
2,063 2,188
Called up share capital 305 305
Share premium account 349 342
Capital redemption reserve 1 1
Capital reserve 1,940 3,021
Revenue reserve 341 276
Equity shareholders' funds 2,936 3,945
Total liabilities 4,999 6,133
Memorandum items
Contingent liabilities
Guarantees and assets pledged as collateral security 19 27
Commitments 270 411
Approved by the Board
Baroness Hogg
Brian Larcombe
Directors
14 May 2003
Consolidated cash flow statement
for the year to 31 March 2003
2003 2002
£m £m
Operating activities
Interest received and similar income arising from debt securities and other fixed 75 102
income securities held as financial fixed asset investments
Other interest received and similar income 31 51
Interest paid on borrowings (58) (113)
Dividends received from equity shares 102 109
Fees and other net cash receipts 46 62
Operating and administrative costs paid (68) (148)
Net cash inflow from operating activities 128 63
Taxation received/(paid) 4 (2)
Capital expenditure and financial investment
Investment in equity shares, fixed income shares and loans (673) (804)
Investment in equity shares and loans acquired from joint ventures (17) (233)
Sale, repayment or redemption of equity shares, fixed income shares and loan 975 1,123
investments
Fees intrinsic to acquisition or disposal of investment 10 -
Investment interest paid (53) (6)
Investment administrative expenses (94) (59)
Investment in joint ventures (54) (347)
Divestment or repayment of interests in joint ventures 19 281
Disposal of investment properties - 7
Purchase of tangible fixed assets (5) (7)
Sale of tangible fixed assets 1 1
Net cash flow from capital expenditure and financial investment 109 (44)
Acquisitions
Acquisition of subsidiary undertakings - (51)
Equity dividends paid (78) (78)
Management of liquid resources 15 293
Net cash flow before financing 178 181
Financing
Debt due within one year (104) (394)
Debt due after more than one year (32) 165
Issues of shares 7 10
Net cash flow from financing (129) (219)
Increase/(decrease) in cash 49 (38)
Notes to the financial statements
for the year to 31 March 2003
1 Reconciliation of revenue profit before tax to net cash flow from operating
activities
2003 2002
£m £m
Revenue profit before tax 172 109
Depreciation of equipment and vehicles 7 8
Amortisation of goodwill - 2
Tax on investment income included within income from overseas companies (1) (2)
Interest received by way of loan notes (41) (30)
Movement in other assets associated with operating activities (9) (5)
Movement in prepayments and accrued income associated with operating activities 12 13
Movement in accruals and deferred income associated with operating activities (15) (31)
Movement in provisions for liabilities and charges 2 8
Reversal of losses/(profits) of joint ventures less distribution received 1 (9)
Net cash inflow from operating activities 128 63
2 Reconciliation of net cash flows to movement in net debt
2003 2002
£m £m
Increase/(decrease) in cash in the year 49 (38)
Cash flow from management of liquid resources (15) (293)
Cash flow from debt financing 143 252
Cash flow from subordinated liabilities (7) (24)
Cash flow from finance leases - 1
Change in net debt from cash flows 170 (102)
Foreign exchange movements (46) 5
Non-cash changes 50 9
Movement in net debt in the year 174 (88)
Net debt at start of year (1,189) (1,101)
Net debt at end of year (1,015) (1,189)
3 Analysis of net debt
1 April Cash flow Exchange Other 31 March
2002 £m movement non-cash 2003
£m £m changes £m
£m
Cash and deposits repayable on demand 48 49 2 - 99
Treasury bills, other loans, advances and 707 (15) 20 - 712
treasury debt securities
Deposits and debt securities repayable (310) 104 (11) (184) (401)
within one year
Deposits and debt securities repayable (1,548) 39 (47) 184 (1,372)
after one year
Subordinated liabilities repayable after (84) (7) (10) 50 (51)
one year
Finance leases (2) - - - (2)
(1,189) 170 (46) 50 (1,015)
Notes to the preliminary announcement
Note 1
The statutory accounts for the year to 31 March 2003 have not yet been delivered
to the Registrar of Companies. The statutory accounts for the year to 31 March
2002 were filed on 3 September 2002. The auditors' reports on these statutory
accounts are unqualified and do not contain any statements under Section 237(2)
or (3) of the Companies Act 1985. This announcement does not constitute
statutory accounts.
Note 2
The final dividend will be payable on 18 July 2003 to holders of shares on the
register on 20 June 2003.
Note 3
Copies of the Report and accounts 2003 will be distributed to shareholders on or
soon after 30 May 2003.
Note 4
Investment statistics referred to in this preliminary announcement relate to
investments made by 3i Group and third party co-investment funds unless
otherwise stated.
New investment analysis
Analysis of the equity, fixed income and loan investments made by 3i Group.
This analysis excludes investments in joint ventures.
2003 2002 2001 2000 1999
Investment by geography
(3i only - excluding co-investment funds) (£m)
UK 318 377 786 705 693
Continental Europe 304 312 560 306 137
US 74 119 134 28 1
Asia Pacific 20 26 49 31 6
Total 716 834 1,529 1,070 837
Investment by geography (including co-investment funds) (£m)
UK 399 443 1,006 894 899
Continental Europe 436 446 770 422 241
US 74 119 134 28 1
Asia Pacific 22 31 62 32 6
Total 931 1,039 1,972 1,376 1,147
Continental European investment (£m)
Benelux 67 64 63 39 3
France 36 84 117 84 63
Germany/Austria/Switzerland 149 146 346 130 83
Ireland 2 2 17 - -
Italy 32 13 64 48 21
Nordic 69 90 16 - -
Spain 75 45 131 95 68
Other European1 6 2 16 26 3
Total 436 446 770 422 241
1 Other European includes investments in countries where 3i did not have an office at the year end.
Investment by product (£m)
Buy-outs 482 361 687 579 609
Growth capital 273 258 362 340 327
Early stage technology 176 420 923 457 211
Total 931 1,039 1,972 1,376 1,147
Investment by FTSE industrial classification (£m)
Resources 12 15 67 17 69
Industrials 328 110 256 201 376
Consumer goods 194 206 371 167 237
Services and utilities 197 352 482 546 330
Financials 54 26 55 48 41
Information technology 146 330 741 397 94
Total 931 1,039 1,972 1,376 1,147
Portfolio analysis
The Group's equity, fixed income and loan investments total £3,939 million at 31
March 2003.
2003 2002 2001 2000 1999
Portfolio value by geography (including co-investment funds) (£m)
UK 3,041 4,018 4,792 5,240 4,565
Continental Europe 1,773 1,984 2,039 1,514 882
US 182 270 246 192 14
Asia Pacific 101 101 98 64 12
Total 5,097 6,373 7,175 7,010 5,473
Portfolio value by geography (3i only - excluding co-investment funds) (£m)
UK 2,494 3,386 4,121 4,668 4,036
Continental Europe 1,175 1,373 1,363 1,049 495
US 180 264 235 190 14
Asia Pacific 90 86 86 63 12
Total 3,939 5,109 5,805 5,970 4,557
Continental European portfolio value (£m)
Benelux 101 78 92 59 2
France 186 253 254 203 173
Germany/Austria/Switzerland 319 385 556 533 196
Ireland 8 18 45 28 -
Italy 69 103 142 71 44
Nordic 273 304 26 6 -
Spain 211 222 234 135 80
Other European1 8 10 14 14 -
Total 1,175 1,373 1,363 1,049 495
1 Other European includes investments in countries where 3i did not have an
office at the year end.
Portfolio value by product (£m)
Buy-outs 2,001 2,253 2,338 2,622 2,372
Growth capital 1,349 1,814 2,099 2,357 1,735
Early stage technology 589 1,042 1,368 991 450
Total 3,939 5,109 5,805 5,970 4,557
Portfolio value by FTSE industrial classification (£m)
Resources 186 268 232 185 176
Industrials 944 1,117 1,081 1,247 1,258
Consumer goods 873 1,080 1,237 1,138 952
Services and utilities 1,018 1,318 1,538 1,648 1,559
Financials 274 273 256 251 196
Information technology 644 1,053 1,461 1,501 416
Total 3,939 5,109 5,805 5,970 4,557
Portfolio value by valuation method (£m)
Imminent sale or IPO 37 51 106 241 88
Listed 187 413 818 1,103 742
Secondary market 30 89 266 483 75
Earnings 938 1,210 1,033 1,226 1,192
Cost 607 1,077 1,078 626 404
Further advance 155 186 244 143 38
Net assets 139 132 147 144 113
Other 282 219 157 119 82
Loan investments and fixed income shares 1,564 1,732 1,956 1,885 1,823
Total 3,939 5,109 5,805 5,970 4,557
2003 2002 2001 2000 1999
Buy-out portfolio value by valuation method (£m)
Imminent sale or IPO 12 14 30 33 47
Listed 67 144 279 573 382
Secondary market 7 15 23 21 14
Earnings 536 635 551 649 608
Cost 149 132 130 100 81
Net assets 40 36 32 45 36
Other 115 90 43 19 16
Loan investments and fixed income shares 1,075 1,187 1,250 1,182 1,188
Total 2,001 2,253 2,338 2,622 2,372
Growth capital portfolio value by valuation method (£m)
Imminent sale or IPO 14 28 32 44 23
Listed 120 269 539 530 360
Secondary market 23 74 243 462 61
Earnings 377 544 442 511 526
Cost 187 234 134 102 109
Further advance 42 26 22 - -
Net assets 98 88 114 98 75
Other 69 96 43 72 60
Loan investments and fixed income shares 419 455 530 538 521
Total 1,349 1,814 2,099 2,357 1,735
Early stage technology portfolio value by valuation method (£m)
Imminent sale or IPO 11 9 44 164 18
Earnings 25 31 40 66 58
Cost 271 711 814 424 214
Further advance 113 160 222 143 38
Net assets 1 8 1 1 2
Other 98 33 71 28 6
Loan investments and fixed income shares 70 90 176 165 114
Total 589 1,042 1,368 991 450
Technology portfolio value by stage (£m)
Early stage 589 1,042 1,368 991 450
Late stage
Quoted 103 290 723 1,074 329
Buy-outs 294 214 231 312 193
Growth capital 250 170 7 2 2
647 674 961 1,388 524
Total 1,236 1,716 2,329 2,379 974
The early stage portfolio comprises investments in immature businesses which typically require further
funding. The late stage portfolio comprises investments in more mature, typically self funding
businesses, including investments made by way of buy-outs and growth capital.
Early stage technology portfolio value by sector (£m)
Healthcare 195 288 237 181 116
Communications 112 185 264 223 89
Electronics, semiconductors and advanced technologies 72 139 140 166 86
Software 210 430 727 421 159
Total 589 1,042 1,368 991 450
Realisations analysis
Analysis of the Group's realisation proceeds (excluding third party
co-investment funds). The analysis below excludes divestment of non-venture
capital investments in FTSE 350 companies, 31 March 2003: £nil (2002: £156
million, 2001: £49 million).
2003 2002 2001 2000 1999
Realisations proceeds by geography (£m)
UK 727 794 1,366 986 754
Continental Europe 238 133 181 145 98
US 2 10 - - -
Asia Pacific 9 2 4 1 -
Total 976 939 1,551 1,132 852
Realisations proceeds (£m)
IPO 37 55 253 48 75
Sale of quoted investments 110 370 536 351 165
Trade and other sales 493 303 470 423 292
Loan and fixed income share repayments 336 211 292 310 320
Total 976 939 1,551 1,132 852
Realisations proceeds by FTSE industrial classification (£m)
Resources 60 52 34 6 14
Industrials 294 193 211 197 262
Consumer goods 192 255 278 176 180
Services and utilities 330 288 338 497 378
Financials 42 18 33 20 18
Information technology 58 133 657 236 n/a
Total 976 939 1,551 1,132 852
n/a The current FTSE industrial classifications came into effect on 1 April
1999. Changes made included the introduction of information technology. With
the exception of 1999, the classification shown analyses investment and the
portfolio by FTSE classification in use at each balance sheet date.
Funds under management
(£m) 2003 2002 2001 2000 1999
Third party unquoted co-investment funds 1,587 1,995 2,131 2,261 1,470
Quoted investment companies(1) 452 761 870 818 474
Total 2,039 2,756 3,001 3,079 1,944
(1) Also includes the 3i Group Pension Plan.
Ten largest investments
At 31 March 2003, the Directors' valuation of the ten largest investments was a
total of £409 million. These investments cost £371 million.
Investment First Cost(1) Proportion Directors' Income Net Earnings(3)
invested £m of equity valuation(1) in the assets(3) £m
in shares held £m year(2) £m
£m
Travelex Holdings Ltd(4) 1998
Foreign currency services
Equity shares - 19.6% 60 1
- 60 1 45 15
Nordisk Renting AB(5) 2001
Renting real estate
Equity shares 67 35.0% 47 3
67 47 3 140 26
Malmberg Investments BV 2001
Educational publisher
Equity shares 7 41.8% 26 -
Loans 19 19 2
26 45 2 16 3
Mettis Group Ltd 1999
Orthopaedic and aerospace component
service provider
Equity shares 1 40.0% - -
Loans 50 43 3
51 43 3 (19) (11)
SR Technics Holding AG(6) 2002
Repair and maintenance of aeroplane
engines and frames
Equity shares 7 32.2% 7 -
Loans 33 33 1
40 40 1
Beltpacker plc 2000
Manufacture/marketing of healthcare
/beauty products, footwear and
accessories
Equity shares 12 38.9% - -
Loans 43 38 -
55 38 - 15 (13)
Westminster Health Care Holdings 2002
Ltd
Care homes operator
Equity shares 1 49.6% 1 -
Loans 37 37 3
38 38 3 3 1
ERM Holdings Ltd(7) 2001
Environmental consultancy
Equity shares - 39.0% 1 -
Loans 35 35 4
35 36 4 (3) (3)
Pets at Home Ltd 1995
Retailer in pets and pet supplies
Equity shares 2 26.0% 5 -
Loans 27 27 2
29 32 2 - 2
Aspen Insurance Holdings Ltd(6) 2002
Property/casualty insurance
underwriters
Equity shares 30 6.7% 30 -
30 30 -
Notes
(1) The investment information is in respect of 3i's holding and excludes any co-investment by
3i managed funds.
(2) Income in the year represents dividends received (inclusive of any overseas withholding tax)
and gross interest receivable in the year to 31 March 2003.
(3) Net assets and earnings figures are taken from the most recent audited accounts of the
investee business. The figures shown are the total earnings and net assets of each
business. Because of the varying rights attaching to the classes of shares held by 3i, it
could be misleading to attribute a certain proportion of earnings and net assets to the
proportion of equity capital held. Negative earnings and net assets are shown in brackets.
(4) The cost of the equity held in Travelex Holdings Ltd is £121,000.
(5) This investment has been sold since the year end.
(6) These companies were incorporated in 2002 and no audited accounts are available,
consequently no net assets or earnings are disclosed.
(7) The cost of the equity held in ERM Holdings Ltd is £463,000.
This information is provided by RNS
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