New-look 3i sets return target after mixed year

UK-listed 3i, which doubled its investment pace in the past year, set a new 15% benchmark for future returns but CEO Michael Queen reported results for the last financial year which fell short of that despite a successful reorganisation.

Michael Queen, chief executive of 3i Group, said during a results call this morning that the group's total return had fallen to £324 million for the financial year just ended, down from £407 million the prior year. The total return in percentage terms was 10.6 percent, down from 16.2 percent in the previous financial year. Its net asset value rose however to £3.51 from £3.21 last year.

Queen said 3i had decided to more clearly set out its future return goals to shareholders, setting a benchmark of a 15 percent net return averaged out over any five-year period.

The performance of 3i's portfolio was hindered by a small number of its UK-based investments, Queen said. The group wrote down the value of Enterprise, an outsourcing business, over the course of the year by £198 million to zero, he revealed.

Realisation proceeds were down from £1.39 billion to £609 million, but represented a higher uplift to the value at which assets were held (from 11 percent to 26 percent).

The fall in returns came despite the firm increasing investment activity and assets under management, and increasing portfolio value from £3.52 billion to £3.99 billion.

Significant progress has been made over the last two years.

Michael Queen

Successful exits included the sale of Hyva, which delivered a 7x multiple, while earnings growth across 3i's portfolio stood at 15 percent.

Speaking more generally about the group's progress, Queen said: “Significant progress has been made over the last two years and I am confident that we now have three strong platforms for growth. We have made a good start to the financial year and are well placed to make further progress,” he added.

The group almost doubled investment activity for the financial year to March 31, investing £719 million, compared to £386 million in 2010.

Since his appointment has chief executive in 2009, Queen and his team have reshaped 3i Group, turning the business into a diversified asset manager. Last year, it merged its growth capital and buyout units to form a unified private equity business. It also established a debt management arm by acquiring Mizuho Investment Management in February. Its debt arm now manages about £3.3 billion in assets, Queen said. He also revealed 3i plans to grow the debt business by raising new funds and by making acquisitions like MIM.

3i's third arm, focusing on infrastructure investments, is also planning to grow further. Queen said the group will return to market later this year to raise a second India-focused infrastructure fund, targeting up to $1.5 billion. Its current $1.2 billion India infrastructure vehicle is 70 percent invested, he said, with one more investment to make before the group needs to raise another fund, Queen said.

Queen said 3i was in the process of negotiating with the Chinese authorities to raise a RMB-denominated investment fund for China. The group continues to expand internationally, having opened an office in Brazil earlier this year to give it access to a region Queen said was increasingly figuring as a trading partner for current portfolio businesses and as a source of new deals.

Attempting to quell speculation that 3i might itself be subject to a bid, which had arisen due to its share price representing a significant discount to NAV, Queen said that since becoming a board member at 3i in 1999, he was unaware of any formal or informal takeover approaches for the business.

Iain Scouller, an analyst at Oriel Securities, viewed the results positively. In a note released following the results, he wrote: “Realisations and imminent sale gains are continuing to pick-up and were much stronger than we were expecting. This reflects the trend which we are seeing across the private equity sector.

“We believe a key driver of the greater emphasis on debt management and infrastructure is management’s intention of reducing the volatility in 3i’s returns from year to year. In turn, we would hope that this may reduce some of the volatility in the 3i share price and this has also been an issue across the listed private equity sector.”