3i Group (LSE:III)

Simon Borrows
CEO
Market Cap (AUD): 9.61B
Sector: Financials
Last Trade (AUD): 987.537 +0 (+%)
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1. About

3i Group plc is a United Kingdom-based investment manager focused on mid-market private equity, infrastructure and debt management. 3i’s investment capability across three complementary businesses underpins its business model and strategy, creating an efficient investment platform and capital model generating material shareholder distributions and proceeds for reinvestment.[1]

2. Business model

The Company operates the following divisions:

 

Division

Revenue (£M)

% of Revenue

% of Profit (before Tax)

Sales and distribution model

Profit drivers

Private Equity

£719

89.32%

N/A

Retailers, IPOs, refinancings, through brokers

The portfolio’s performance was strong in the year; driven by growth of 19% in earnings and good realisations,through sales and IPOs as well as refinancings.[2]

An important part of building the strategic value of the portfolio companies, including achieving international expansion, is an active acquisition programme. The Company’s  portfolio companies made over 20 acquisitions in the year, with a combined EV of over €400 million, primarily funded from the 3i's own cash and banking facilities

Infrastructure

£96

11.93%

N/A

Infrastructure performed strongly in the year with a gross investment return of £96 million, or 20% on the opening portfolio (2014: £2 million, 0%). The business generated £30 million (2014: £24 million) of advisory and management fees across its funds and £10 million of net performance fees (2014: nil)

Debt Management

(£10)

(1.24%)

N/A

[3]

Fund Management business which primarily generates returns through managing third-party capital through CLOs and other senior debt focused funds, the Company generates Proprietary Capital returns from 3i’s investment in funds managed by Debt Management

The performance of all of the CLOs launched in the last two years is very good, with early performance ahead of plan. There were no defaults and distributions are providing an annualised yield of between 8% and 20%

The Debt Management team had a good year of fundraising, closing six new CLOs and a new €250 million European Middle Market Loan Fund. AUM grew to £7.2 billion at the end of the year (31 March 2014: £6.5 billion)

[4]

3. Strategy

Key strategies include:

 

  – To focus on mid-market Private Equity, Infrastructure and Debt Management

  – Generate attractive shareholder returns through the cycle

  – Realising lower value and underperforming assets

  – Enhancing the value of the Company's existing investment portfolio as well as pursuing investment

     opportunities if the strategic and financial case is strong

  – Driving operational excellence within the Group portfolio companies and an institutional approach

     to the process of investment management

  – To focus on core economic infrastructure, Public Private Partnerships (“PPP”) and low risk energy

  – To focus on sectors and geographies where company expertise and network can drive significant

     outperformance

  – Create more investor interest in the product[5]

4. Markets

Industry (UK)

Industry Revenue (2015)

Growth rate (annual 11-16)

Private Equity

£2 billion

4.1%

Fund Management Activities

£19 billion

7.8%

Factoring

£3 billion

4.9%

[6]

5. Competition

Major competitors include:

 

  • Investcorp Bank B.S.C
  • CVC Capital Partners Ltd
  • Candover Investments Plc[7]

6. History

1945 – 3i founded with £15m of capital  

 

1983 – Opened Paris office

 

1984 – Opened Frankfurt office

 

1990 – Opened Madrid office

 

1994 – 3i Group plc floats on London Stock Exchange

 

1997 Opened Singapore office

 

1998 – Opened Amsterdam office

 

2001 – Opened Stockholm office

 

2005 – Opened Mumbai office

 

2006 – Raised €5bn mid-market buyout fund, Eurofund V

 

2007 – Opened New York office

          – 3i Infrastructure plc floats on London Stock Exchange

 

2008 – Raised US$1.2bn India Infrastructure Fund

 

2010 – Sir Adrian Montague appointed Chairman

          – Raised €1.2bn Growth Capital Fund

          – Establishment of Debt Management business

 

2011 – Launched €50m Credit Opportunity Fund

 

2012 – Simon Borrows appointed Chief Executive Officer

          – Raised first US CLO fund, US$450m

          – Established US debt platform

 

2013 – 3i closes US$515.9 million CLO, Jamestown III

          – Raised second US CLO fund, US$500m

          – Raised first European CLO fund, €310m

          – Acquisition of Barclays Infrastructure Funds Management Limited

 

2014 – 3i closes its fifth CLO of 2014, Harvest X

          – 3i closes $411m, Jamestown V

          – 3i holds €250m first close on EMMF

          – 3i closes second European CLO, Harvest VIII

          – 3i closes US $416 million CLO, COA Summit

 

2015 – 3i closes Jamestown VI

          – 3i closes Harvest IX, a €415m CLO[8]

7. Team

Board of Directors

 

Simon Thompson – Chairman             
Simon Borrows – Chief Executive
Julia Wilson – Chief Financial Director
Jonathan Asquith – Deputy Chairman
Caroline Banszky – Non Executive Director
Alistair Cox – Non Executive Director
David Hutchison OBE – Non Executive Director
Martine Verluyten – Non Executive Director

 

Management Team

 

Simon Borrows – Chief Executive
Julia Wilson – Chief Financial Director
Menno Antal – Managing Partner, Private Equity
Kevin Dunn – General Counsel, Company Secretary & Head of HR
Jeremy Ghose – Managing Partner and 3i Debt Management CEO 
Alan Giddins – Managing Partner, Private Equity
Ben Loomes – Managing Partner, Infrastructure and Group Strategy Director
Phil White – Managing Partner, Infrastructure[9]


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8. Financials

Financial Year 2014/2015 (ended 31st March)
 

Division

Revenue (£M)

% Change

Profit (before Tax) (£M)

% Change

Private Equity

£719

11.13%

N/A

N/A

Infrastructure

£96

4700.00%

N/A

N/A

Debt Management

(£10)

(162.50%)

N/A

N/A

Total

£805

21.05%

£747

33.87%

[10]

9. Risk

Major risks include:

 

External Risk

The external environment remains challenging. The key economies in which the Group operates are showing signs of recovery against a background of low interest rates and the effects of quantitative easing in the Eurozone.

 

Investment Risk

The most significant risks are their ability to source attractive investment opportunities, maximise the value available from their portfolio and manage the timings of exits and cash returns. These risks are closely linked to the economic environment noted above.

 

Private Equity

As the investment portfolio becomes more concentrated, additional steps have been taken to increase the frequency and scope of monitoring of the more material assets. Individual portfolio company failures could have adverse reputational consequences for the Group, even if the value impact is not material.

 

Infrastructure Risk

Strong investor demand for yield is challenging the business’ ability to maintain investment rates in quality assets. The business is adapting its strategy but remains focused on pursuing new investments while considering fundraising options and inorganic opportunities.

 

Debt Management Risk

The principal risk is the ability to grow AUM profitably, in line with its business plan. The business is also exposed to potential volatility in the fixed income markets and the effects of regulatory changes, including the Risk Retention and Volcker rules which will impact the structure of the US CLO funds.

 

Operational Risk

The key areas of potential operational risk include the loss of key people and whether the investor skill sets and business development capabilities can support the Group’s strategic delivery.

 

Concentration Risk

3i seeks to diversify risk through significant dispersion of investments by geography, economic sector, asset class and size as well as through the maturity profile of its investment portfolio. Although 3i does not set maximum limits for asset allocation, it does have a maximum exposure limit.

 

Credit Risk

The Group is subject to credit risk on its unquoted investments, derivatives, cash and deposits. The Group’s cash and deposits are held with a variety of counterparties with 61% of the Group’s surplus cash held on demand in AAA rated banks and 23% held in short-term reverse repurchase agreements with banks rated A or higher using Gilts as collateral.

 

Liquidity Risk

Liquidity outlook is monitored weekly by management and regularly by the Board in the context of periodic strategic reviews of the balance sheet. The new investment pipeline and forecast realisations are closely monitored and assessed against our vintage control policy.

 

Interest Rate Risk

Interest rate risk has primarily been managed through a reduction in gross debt. The direct impact of a movement in interest rates is relatively small as the Group’s outstanding debt is fixed rate. The sensitivities below arise principally from changes in interest receivable on cash and deposit.

 

Currency Risk

The Group’s net assets in euro, US dollar, Swedish krona, Indian rupee, Chinese renminbi, Brazilian real and all other currencies combined. This sensitivity analysis is performed based on the sensitivity of the Group’s net assets to movements in foreign currency exchange rates assuming a 10% movement in exchange rates against sterling. The sensitivity of the Company to foreign exchange risk is not materially different from the Group.

 

Price Risk

The Group’s management of price risk, which arises primarily from quoted and unquoted equity instruments, is through the careful consideration of the investment, asset management and divestment decisions at the Investment Committee.[11]