3i Group Plc · LSE:III
3i — FY2013 Earnings Presentation
76 slides from 3i's earnings presentation, May 16, 2013
Slide 1: Annual results to 31 March 2013
Annual results to 31 March 2013 Private Equity Infrastructure Debt Management 16 May 2013
Slide 2: Agenda
Agenda Strategic objectives and progress Simon Borrows, Chief Executive Financial performance Julia Wilson, Group Finance Director Conclusion and Q&A Simon Borrows, Chief Executive 2
Slide 3: Strategic objectives and progress
Strategic objectives and progress Simon Borrows Chief Executive 3
Slide 4: A clear vision and strategy
A clear vision and strategy Our strategic goal: A leading international manager of third-party and proprietary capital with three strong investment businesses delivering top quartile cash investment returns over the longer term: Focused mid-market Private Equity Class-leading Infrastructure Gr
Slide 5: Our strategic goal: a leading international manager of third-party and proprietary capital
Our strategic goal: a leading international manager of third-party and proprietary capital Private Equity Infrastructure Debt Management Illustrative capital allocation Third-party capital Third-party capital Third-party capital Proprietary capital Proprietary capital Proprietary capital Key return
Slide 6: The 3i Value Build
The 3i Value Build An attractive, multi-year value proposition Grow Private Equity investment Grow NAV portfolio earnings Realise investments at good uplifts to Optimise value of existing book value and strong cash-on-cash portfolio and enhance P/NAV multiples rating Generate a sustainable annua
Slide 7: The 3i Value Build (cont.)
The 3i Value Build (cont.) Examples of key actions taken Key value drivers: Key actions: Grow Private Equity investment Implementation of asset management portfolio earnings improvement initiatives Realise investments at good uplifts Re-focused Private Equity business to book value and strong ca
Slide 8: Key phases of organisational change and strategic delivery
Key phases of organisational change and strategic delivery FY2013 FY2014 - 15 FY2016+ Transition and Restructuring Strategic goal delivery We have delivered all of our FY2013 strategic priorities We are already making strong progress towards the next phase of our strategic plan: “Transition and de
Slide 9: Our strategic priorities in FY2013
Our strategic priorities in FY2013 FY2013 FY2014-2015 FY2016+ We have delivered against all of the immediate priorities and targets for FY2013: 1 Reduce operating costs - fitter and more efficient 2 Reduce gross debt and funding costs materially 3 Achieve greater central control and business foc
Slide 10: Significantly reduced operating costs
1 Significantly reduced operating costs Met or exceeded FY2013 targets announced on 29 June 2012 Key targets announced on 29 June 2012 Progress in FY2013 Reduce staff Headcount reduction of over Net headcount reduction of 168 160 staff by 31 March 2013 staff at 31 March 2013, before Debt Management
Slide 11: Significantly reduced operating costs (cont.)
1 Significantly reduced operating costs (cont.) Met or exceeded FY2013 targets announced on 29 June 2012 Key targets announced on 29 June 2012 Progress in FY2013 Operating Targeted annualised run-rate Achieved annualised run-rate cost savings operating cost savings of £40m to operating cost savings
Slide 12: Breakdown of headcount reduction in FY2013
1 Breakdown of headcount reduction in FY2013 Investment professionals and Group Total other front functions and headcount office staff (1) support staff (2) 31 March 2012 39% 168 267 435 61% base-line (49) (119) (168) 71% Net reduction (29)% (45)% (39)% 29% 45% 31 March 2013 119 148 267 55% Note: Th
Slide 13: Breakdown of headcount reduction in FY2013 (cont.)
1 Breakdown of headcount reduction in FY2013 (cont.) Investment professionals and other Group functions and support staff(2) front office headcount(1) 120 100 100 (19%) Net reduction Net reduction of 49 staff (29%) 80 of 119 staff (45%) (37%) 80 60 60 (36%) 40 40 (60%) (69%) (35%) (42%) (65%) 20 (40
Slide 14: Outperformed March 2013 cost reduction target
1 Outperformed March 2013 cost reduction target Examples of outperformance Outperformance of 28% achieved through combination of: Reduction of travel, entertainment and personal expenses – Driven by tighter focus on cost-control and new expenses Over-achievement policies, e.g. introduced effective
Slide 15: Significantly increasing March 2014 cost reduction target
1 Significantly increasing March 2014 cost reduction target New target of £60m of cumulative run-rate operating Annualised run-rate cost reduction by 31 March 2014 operating cost – Increase of 33% from original target of £45m announced in reduction by 31 June 2012 March 2014 Represents ‘like-for
Slide 16: Significantly increasing March 2014 cost reduction target
1 Significantly increasing March 2014 cost reduction target Actions being taken Continued re-focusing of investment staff around our Re-focusing of core geographies investment staff in Private Equity Optimising resources with a tighter international network and greater centralisation IT system
Slide 17: Substantially reduced gross debt ahead of schedule
2 Substantially reduced gross debt ahead of schedule Gross debt progression (£bn) Exceeded original target to reduce 2.5 gross debt to below £1bn by June 2013 Target of gross 2.0 £1.6bn debt below £1bn achieved early 1.5 -44% £1.1bn £1.0bn By 30 April 2013, 1.0 £0.9bn gross debt reduced by 44%
Slide 18: Achieved greater central control and business focus
3 Achieved greater central control and business focus Rationalised existing committee structures; ‘de-layering’ Removal of of organisation organisational One Private Equity business complexity and bureaucracy Formed new Executive Committee as principal day-to-day business and operational decis
Slide 19: Improved consistency and discipline
4 Improved consistency and discipline Private Equity investment and asset management In June 2012, we announced six asset management initiatives: 1. Investment review process 2. People: governance and resourcing 3. Operational capabilities, knowledge management and networks 4. Monitoring and perform
Slide 20: Investment review process – greater oversight
4 Investment review process – greater oversight Private Equity Key elements of 3i’s investment review process throughout investment lifecycle: Investment Pre- Early Stage assessment Partner Investment investment Review Committee Reviews and due process decision process diligence Investment Committee
Slide 21: Investment review process – examples of improvements
4 Investment review process – examples of improvements Private Equity Previously separate Investment Committee and Portfolio Committee structures, each considered investments at Streamlined different points in lifecycle process In July 2012, moved to a new single Investment Committee which consi
Slide 22: Management assessment – proactive approach
4 Management assessment – proactive approach Private Equity Systematic As part of original investment case assessment Ongoing regular assessment post-investment Consistent Standardised assessment requirements standards and All management candidates interviewed by two of: requirements Simon B
Slide 23: Monitoring and performance tracking – working well
4 Monitoring and performance tracking – working well The dashboard Company X dashboard: October-12 Eurofund ABC Data: Sep-12 P&L Rolling LTM trends against budget (€m) €m Month YTD LTM FY end Net senior debt (Right axis) PY Actual Budget PY Actual Budget Actual Budget Forecast Valuation EBITDA (Left
Slide 24: Exit strategy and planning – greater focus
4 Exit strategy and planning – greater focus Private Equity Since March 2012, we have increased the emphasis on developing detailed exit strategies for each asset – Individual asset plans combined with portfolio approach in terms of capital and resource allocation Exit plans reviewed and updated
Slide 25: Exit strategy and planning – key realisations
4 Exit strategy and planning – key realisations as part of well constructed exit plans Total Private Equity realisations of £575m in FY2013 – Realised profit over opening value of £190m in FY2013 vs £22m in FY2012 – Uplift over opening value of 49% and money multiple of 2.1x Notable Private Equity
Slide 26: Re-focus and re-shape Private Equity
5 Re-focus and re-shape Private Equity New investment principally focused in Northern Europe, North America and Brazil Suspended new investment in Asia and Spain; focusing on portfolio management Tighter focus on Overall investment activity in FY2013 has been low new investment – Low M&A volum
Slide 27: Private Equity portfolio by geography
5 Private Equity portfolio by geography Direct portfolio value of £2.7bn as at 31 March 2013 % of Private Equity portfolio Portfolio Versus 3i region value Selected comments status May 2012 Exit of EUSA Pharma (June 2012), Monitise (September UK 24% 2012) and partial exit of Mayborn (December 2012)
Slide 28: Portfolio segmentation
5 Portfolio segmentation Key categories: Selected examples: Action, Element, Longer-term hold and value creation Mayborn Strong performers; position for sale over the next few Civica, Mold-Masters years Azelis, OneMed, Manage intensively; potential value upside Xellia Low or nil-valued assets Enterp
Slide 29: New approach to compensation – key principles
6 New approach to compensation – key principles Fair and Ensure fair and transparent split of returns between 3i’s transparent split key stakeholders of returns - Including between shareholders, employees, fund investors and re-investment into the business Cover Group’s operating costs with annu
Slide 30: Next phase of our strategic plan: Transition and delivery
Next phase of our strategic plan “Transition and delivery” FY2013 FY2014-2015 FY2016+ 1 Cover operating costs with annual cash income On track Grow third-party income and generate a sustainable 2 annual operating profit from our fund management On track activities Improve capital allocation strategy
Slide 31: Cover operating costs with annual cash income
1 Cover operating costs with annual cash income £m 200 + Reduction in operating costs 150 + Growing third-party 100 income, particularly in Debt Management and 50 Infrastructure - ─ Private Equity AUM and (50) third-party fee income (100) reducing over time (150) ─ Current challenging Private Equity
Slide 32: More balanced contribution of our three businesses to income over time
2 More balanced contribution of our three businesses to income over time Strong and growing contribution Third-party fee income(1) (% of total) from Debt Management 100% Steady contribution from 80% Infrastructure through portfolio 60% income and annual advisory and management fees 40% Reflect
Slide 33: Grow third-party AUM and fee income
2 Grow third-party AUM and fee income Private Equity Selective and measured investment through proprietary capital and third-party co-investment In March 2013, completed second Brazilian investment – Leading Brazilian eyewear retailer, Óticas Carol – 3i-led consortium, including institutional inve
Slide 34: Grow third-party AUM and fee income (cont.) – Infrastructure
2 Grow third-party AUM and fee income (cont.) Infrastructure Key contribution to Group’s annual cash income through portfolio income and advisory fees from 3iN European portfolio continues to perform well and generate strong levels of portfolio income – Growth in value of shareholding in 3iN I
Slide 35: Grow third-party AUM and fee income (cont.) – Debt Management
2 Grow third-party AUM and fee income (cont.) Debt Management Significant momentum Strategic objectives Significant momentum since 3-5 year plan to transition from acquisition of MIM platform in senior loan manager to leading 2011 global non-investment grade credit manager Substantial increase
Slide 36: Implement our revised capital allocation policy
3 Implement our revised capital allocation policy Enhanced capital distribution policy Strengthened distribution policy set out in May 2012 in order to give shareholders a direct share in the success of our realisation activities Aggregate shareholder distributions to be 15-20% of gross cash pro
Slide 37: Clear strategic priorities for FY2014
Clear strategic priorities for FY2014 FY2013 FY2014-2015 FY2016+ Deliver further Private Equity realisations to support an enhanced shareholder distribution in FY2014 Realise fully the benefits from the Private Equity asset management improvement initiatives Continue to grow Debt Management and Infr
Slide 38: Financial performance
Financial performance Julia Wilson Group Finance Director 38
Slide 39: Financial highlights
Financial highlights Year to Year to 31 March 2013 31 March 2012 Gross portfolio return £546m £(329)m Fee income £71m £89m Net carried interest £(15)m £(5)m Income Operating costs £(170)m £(180)m statement Net portfolio return £432m £(425)m Total return £373m £(656)m Annual operating cash profit £(8
Slide 40: Business performance underpins strong NAV growth
Business performance underpins strong NAV growth NAV per share (pence) 350 41 311 300 279 (8) cash (3) (2) 4 250 200 31 March 2012 Ordinary Implementation Gross debt Non-cash Business 31 March 2013 Opening NAV dividends costs reduction costs accounting performance Closing NAV items (actuarial, FX, d
Slide 41: Momentum built during the year
Momentum built during the year NAV per share (pence) 350 29 311 300 286 (3) (1) (1) 1 279 273 250 200 31 March 2012 30 September 31 December Ordinary Implementation Gross debt Non-cash Business 31 March 2013 Opening NAV 2012 NAV 2012 NAV dividends costs reduction costs accounting performance Closing
Slide 42: Delivered £51m of run-rate savings by year end
Delivered £51m of run-rate savings by year end 28% ahead of £40m target Operating expenses announced in June 2012 £m 300 Implementation costs of £30.3m recognised 250 200 Headcount reduced by 168 on a net basis to the end of the 150 period, prior to acquisitions 100 Costs for FY2013 similar
Slide 43: Significant reduction in annual operating expenses
Significant reduction in annual operating expenses £m 250 230 1.8% of AUM 1.1% of AUM 210 190 £185m 170 £(51)m 150 £7m £134m £140m 130 110 90 70 Run-rate costs at 31- Run-rate savings Like-for-like run-rate 12 months Total run-rate costs Mar-12 implemented in FY13 costs at 31-Mar-13 annualised run-r
Slide 44: Reconciliation of FY2013 actual operating costs to run-rate costs
Reconciliation of FY2013 actual operating costs to estimated annualised run-rate operating costs at 31 March 2013 £m 250 Temporary reduction in actual costs due to deferral 230 1.8% of of annual bonus into 1.1% of AUM AUM shares. Will normalise over 210 3 years. 190 £185m £178m £39m £(51)m £8m £(30)
Slide 45: Accounting for the new compensation arrangements
Accounting for the new compensation arrangements Year to 31 March 2013 2012 Fixed costs £52m £69m Variable costs £32m £29m £84m £98m Normalised bonus rate - £23m Deferred share awards £8m - £92m £121m 45
Slide 46: Updating our cost reduction targets: £60m savings, £37m costs
Updating our cost reduction targets: £60m savings, £37m costs Base-line Targeted run-rate cost savings Implementation costs operating cost (like-for-like basis) base +28% +33% £7m £180m £185m £40m £51m £45m £60m Up to £30m £30m FY12 Annualised 31 March 2013 31 March 2014 During FY13 FY14 actual run-
Slide 47: Significantly reduced gross debt – ahead of schedule
Significantly reduced gross debt – ahead of schedule Gross debt at £1.1bn at Gross debt progression (£bn) March 2013 through Exceeded original target to reduce combination of maturities 2.5 gross debt to and tactical repayments below £1bn by June 2013 Further repayment in April, 2.0 taking gross
Slide 48: Simplified balance sheet
Simplified balance sheet 1,800 Liquidity 600 Committed Gross debt maturity profile facilities 1,600 £494m 500 1,400 £500m 1,200 400 £1,159m £375m 1,000 £336m £500m 300 800 £280m £746m 600 200 £582m £200m 400 100 200 0 0 (1) Mar-12 Mar-13 Apr-13 2016 2017 -- 2023 -- 2033 Cash / deposits Undrawn facil
Slide 49: A stronger balance sheet
A stronger balance sheet Year to Year to 31 March 2013 31 March 2012 Gross portfolio return £546m £(329)m Fee income £71m £89m Net carried interest £(15)m £(5)m Income Operating costs £(170)m £(180)m statement Net portfolio return £432m £(425)m Total return £373m £(656)m Operating cash profit £(8)m
Slide 50: All three business lines contribute
All three business lines contribute Private Debt Total year Equity Infrastructure Management(1) Total to 31.3.12 Year to 31 March 2013 Gross portfolio return £518m £16m £12m £546m £(329)m Fees £19m £21m £31m £71m £89m Net carry £(7)m £(1)m £(7)m £(15)m £(5)m Operating expenses £(114)m £(24)m £(32)m
Slide 51: Infrastructure – focusing the platform on our strengths
Infrastructure – focusing the platform on our strengths Year to 31 March 2013 2012 Realised profits - - Unrealised profits £(2)m £(7)m Portfolio income £18m £18m Gross portfolio return £16m £11m Fees £21m £25m Net carry £(1)m £(6)m Operating expenses £(24)m £(17)m Net portfolio return £12m £13m % op
Slide 52: Debt Management – performed well again, set for growth
Debt Management – performed well again, set for growth Year to 31 March 2013 2012 Realised profits £5m £1m Unrealised profits £2m £(3)m Portfolio income £5m £3m Gross portfolio return £12m £1m Fees £31m £32m Net carry £(7)m £1m Operating expenses(1) £(32)m £(31)m Net portfolio return £4m £3m % openi
Slide 53: Private Equity – strong portfolio performance
Private Equity – strong portfolio performance Year to 31 March 2013 2012 Realised profits £190m £22m Unrealised profits / (losses) £250m £(488)m Portfolio income £78m £125m Gross portfolio return £518m £(341)m Fees £19m £32m Net carry £(7)m - Operating expenses £(114)m £(132)m Net portfolio return £
Slide 54: Private Equity portfolio by region, sector and vintage
Private Equity portfolio By region By sector By vintage 6% 8% 7% 3% 13% 24% 18% 31% 21% 18% 2% 7% 13% 16% 1% 26% 48% 24% 14% UK Business & Financial Services 2013 2012 Consumer 2011 2010 Northern Europe Healthcare North America 2009 2008 Industrials & Energy TMT 2007 Pre 2006 Brazil Asia Southern Eu
Slide 55: Private Equity portfolio
Private Equity portfolio As at 31 March 2013 Investment Business description Country Value Performance Action Non-food discount retailer Benelux £280m ACR Pan-Asian non-life reinsurance Singapore £121m Element Testing and inspection Benelux £112m F+P Architectural services UK £108m (1) HILITE
Slide 56: Private Equity – valuations
Private Equity – valuations March March Growth in valuation earnings Multiples 2013 2012 of 2% since March 2012 FTSE 250 11.1x 9.6x Growth in value weighted earnings of 10% since March 3i pre-discount 8.8x 8.2x 2012 3i post-discount 7.9x 7.5x Use of forecast earnings for 11 portfolio companies
Slide 57: Significant change in unrealised value movement dynamics
Significant change in unrealised value movement dynamics March March 2013 2012 Performance(1) £141m £3m Multiple movement £37m £(267)m Provisions £4m £(138)m Uplift to imminent sale £24m - Discounted cash flow £(29)m £3m Quoted - £(16)m Other £73m £(73)m Total £250m £(488)m (1) Performance includes
Slide 58: Capital distribution policy
Capital distribution policy Rebased dividend in November 2011 to 8.1p per share per annum Defined basis of aggregate shareholder distributions as 15-20% of gross cash proceeds from realisations, provided that: – gearing <20% – gross debt is on target to be <£1bn by June 2013 Confirming 5.4p fina
Slide 59: Strong progress - setting the foundation for increased distributions
Strong progress - setting the foundation for increased distributions A marked improvement in performance Significant progress in restructuring the business and balance sheet Asset management initiatives driving performance in Private Equity Growth agenda improving core operating profitabilit
Slide 60: Conclusion
Conclusion Simon Borrows Chief Executive 60
Slide 61: Our evolving business model
Our evolving business model 3i Group Proprietary capital investing Fund management activities Investing own-balance sheet Managing third-party and proprietary capital Portfolio income Fee income Realised and unrealised Carried interest and capital gains performance fees Funding costs Operating costs
Slide 62: Tracking our progress and performance
Tracking our progress and performance 3i Group Annual operating cash profit Capital allocation and efficiency Distributions per share Total shareholder return Proprietary capital investing Fund management activities Realisations Third-party AUM and income – Uplift to book value growth –
Slide 63: Attractive business model and value proposition
Attractive business model and value proposition Each of our three businesses has different drivers and return characteristics. Together, they provide an attractive balance of income and capital returns The combination of our asset management skills, together with our strong balance sheet and acc
Slide 64: Continuing to execute successfully our strategic plan
Continuing to execute successfully our strategic plan and deliver further shareholder value Significant and rapid progress made executing first phase of our turnaround plan in FY2013 Restructuring Delivered against all of the immediate priorities and targets for FY2013 Already delivering mater
Slide 65: Clear strategic priorities for FY2014
Clear strategic priorities for FY2014 FY2013 FY2014-2015 FY2016+ Deliver further Private Equity realisations to support an enhanced shareholder distribution in FY2014 Realise fully the benefits from the Private Equity asset management improvement initiatives Continue to grow Debt Management and Infr
Slide 66: Q&A
Q&A Private Equity Infrastructure Debt Management
Slide 67: Appendices
Appendices
Slide 68: Significantly outperformed March 2013 cost target
Significantly outperformed March 2013 cost target Breakdown of cost savings £40m annualised £11m annualised £51m annualised run-rate operating run-rate operating run-rate operating cost savings cost savings over- cost savings target announced achievement achieved by 31 in June 2012 March 2013 £2.6m
Slide 69: Debt Management – diversifying fee income
Debt Management – diversifying fee income Year to Year to 31 March 2013 31 March 2012 Acquired European business £25.2m £31.5m Of which “catch-up” £6.1m £11.1m Europe New European acquisition £3.6m - Total Europe £28.8m £31.5m Acquired US business £1.4m - North New US business £1.1m - America Total
Slide 70: Annual operating cash profit
Annual operating cash profit 31 March financial year-end FY10 FY11 FY12 FY13 Figures in £ millions Third-party capital fees 56 62 91 70 Portfolio fees (2) 1 7 4 Portfolio dividends and interest 75 56 53 58 Cash income 129 119 151 132 Operating expenses(1) 221 181 180 170 Less: Restructuring and redu
Slide 71: Updated hedging policy
Updated hedging policy Current hedging position Illustrative hedging position 1,400 1,400 March 14 1,200 1,200 1,000 1,000 800 800 600 600 49% 400 400 54% 200 200 22% 0 0 € portfolio $ portfolio X%non- Other € portfolio £0m $ portfolio £0m Other non- sterling sterling portfolio portfolio Gross debt
Slide 72: Realisations in the period
Realisations in the period Year to 31 March 2013 Investment Country Calendar 31 March 3i realised Profit/(loss) Uplift on opening year 2012 proceeds in the year (1) value(2) Money Private Equity invested value £m £m £m % multiple(3) IRR Mold-Masters Canada 2007 115 222 107 93% 2.7x 22% NORMA Germany
Slide 73: Long term performance
Long term performance Private Equity: Buyouts New investments made in Cash Return Value IRR to IRR to financial years to 31 March investment flow remaining 31 March 31 March Vintage year £m £m £m 2013 2012 2013 57 – 39 n/a(1) n/a 2012 269 46 420 43% n/a 2011 271 – 322 8% 5% 2010 – – – – – 2009 328 6
Slide 74: AUM movements in the period
AUM movements in the period Assets under management by business line Private Equity Infrastructure Debt Management Total £m £m £m £m AUM at 31 March 2012 5,401 1,734 3,358 10,493 of which proprietary capital 3,578 547 48 4,173 of which third-party capital 1,823 1,187 3,310 6,320 Investment (cost) 39
Slide 75: Private Equity and Infrastructure AUM
Private Equity and Infrastructure AUM Assets under management Remaining 3i commitment % invested Gross money Original Original 3i at March at March multiple(1) at Close date fund size commitment 2013 2013 March 2013 AUM Private Equity 3i Eurofund III July 1999 €1,990m €995m €90m 91% 2.1x €11m 3i Eur
Slide 76: Debt Management AUM
Debt Management AUM Assets under management European CLO funds Closing date Reinvestment Maturity Par value of fund Realised equity AUM Annualised equity cash period end date at launch(1) money multiple(2) yield( 3), (4), (5) Harvest CLO I Apr-04 Mar-09 Mar-17 €514m 0.7x €198m 7.8% Harvest CLO II Ap