3i Group plc Report and accounts 2008 Contents Directors’ report Introduction 01 Business review continued Group financial highlights 02 Infrastructure 20 Chairman’s statement 03 Quoted Private Equity 22 3i at a glance 04 Venture Capital 24 Chief Executive’s statement 06 Financial review 28 Business review Risk management 38 Group business 08 Corporate responsibility report 44 Our strategy 10 Board of Directors and Buyouts 12 Management Committee 54 Growth Capital 16 Directors’ report – statutory and corporate governance information 56 Directors’ remuneration report Directors’ remuneration report 68 Auditors’ report Independent auditors’ report to the members of 3i Group plc 79 Financial statements Consolidated income statement 80 Balance sheet 82 Statement of recognised income Cash flow statement 83 and expense 81 Significant accounting policies 84 Reconciliation of movements in equity 81 Notes to the financial statements 88 Portfolio and additional financial Portfolio valuation – an explanation 106 Realisations 115 information Ten largest investments 108 Private equity and Forty other large investments 109 venture capital – a lexicon 116 Assets under management 110 Returns and IRRs – an explanation 118 3i portfolio 111 Carried interest – an explanation 120 Investment 113 3i and Transparency 122 Information for shareholders Information for shareholders 124 Investor relations and general enquiries 124 Investor relations website – 3igroup.com 125 This Annual report and accounts may contain certain Further information Annual and half-yearly reports online statements about the future outlook for 3i Group plc You will see these symbols used throughout this report. To receive shareholder communications electronically and its subsidiaries (“3i”). Although we believe our They point you towards further information either within in future, including your annual and half-yearly reports expectations are based on reasonable assumptions, any the report or online. We hope you find them useful. and notices of meetings, please go to statements about the future outlook may be influenced www.3igroup.com/e-comms to register your details. by factors that could cause actual outcomes and results to be materially different. d Information online Information in this report Portfolio and additional Directors’ report Directors’ remuneration report Auditors’ report Financial statements financial information Information for shareholders Introduction 3i is a world leader in private equity. We focus on buyouts, growth capital, infrastructure and quoted private equity, investing across Europe, Asia and the US. Our purpose: to provide quoted access to private equity returns. Our vision: to be the private equity firm of choice: – operating on a world-wide scale; – producing consistent market-beating returns; – acknowledged for our partnership style; and – winning through our unparalleled resources. Our strategy: – to invest in high-return assets; – to grow our assets and those we manage on behalf of third parties; – to extend our international reach, directly and through investing in funds; – to use our balance sheet and resources to develop existing and new business lines; and – to continue to build our strong culture of operating as one company across business lines, geographies and sectors. Report and accounts 2008 3i Group plc 01 Group financial highlights Year to/as at 31 March 2008 2007 Business activity Investment £2,160m £1,576m Realisation proceeds £1,742m £2,438m Returns Gross portfolio return £1,041m £1,406m Total return £792m £1,075m Total return on opening shareholders’ funds 18.6% 26.8% Dividend per ordinary share 17.0p 16.1p Assets under management Own balance sheet £6,016m £4,362m Third-party funds £3,776m £2,772m Total assets under management £9,792m £7,134m Balance sheet Gearing 40% 0% Diluted net asset value per ordinary share £10.77 £9.32 Portfolio value by business line (£m) as at 31 March 2008 2007 Buyouts 2,025 1,281 Growth Capital 2,366 1,460 Infrastructure 501 469 Quoted Private Equity Limited (“QPE”) 142 20 Smaller Minority Investments (“SMI”) 244 391 Venture Capital 738 741 Total 6,016 4,362 02 3i Group plc Report and accounts 2008 Portfolio and additional Directors’ report Directors’ remuneration report Auditors’ report Financial statements financial information Information for shareholders Chairman’s statement “A good performance in challenging markets.” Against a background of financial turmoil and Over the past three years, we have taken This led the British Private Equity and Venture weakening stock markets, 3i achieved advantage of strong demand to realise over Capital Association to invite Sir David Walker to substantial growth in net asset value, and £6 billion from our portfolio, at an average set up a working group on transparency and successfully continued its strategy of raising uplift over the opening value of these assets at accountability, of which I was delighted to be a external funds to accelerate growth in assets the beginning of each year of 43%. Over this member. This annual report is fully in compliance under management. same three-year period we have returned just with Sir David’s guidelines, as explained on page over £2 billion to shareholders, improving our 122. Moreover, we have taken again the The total return of £792 million for the year to capital efficiency, and raised funds totalling over opportunity to increase disclosure beyond that, 31 March 2008 represented an 18.6% return £5 billion including a commitment of £2.5 billion by providing more detailed information on our on opening shareholders’ funds, close to the from 3i. We closed the latest of these funds, valuation methodology (see page 106). five-year average of 20.4%. The Board is an unquoted vehicle for investing in Indian recommending a final ordinary dividend of In the following pages, Philip Yea and his infrastructure, above target in March 2008 at 10.9p, making a total ordinary dividend for the management team provide updates on the $1.2 billion. year of 17.0p per share, up 5.6% on last year. business lines, geographies and sectors in which With so much uncertainty still clouding economic 3i operates, with Asia showing the most The contribution from our mid-market Buyouts prospects in the major economies, we take a significant growth. At Board level, there will be business was exceptionally strong. The Growth cautious view of the coming year. Management only one change at our AGM: as I intimated last Capital business performed well and will in future has for some time made it clear that realisations year, Fred Steingraber, who has been a non- include the results of later-stage technology were expected to slow, as time would be executive Director since the beginning of 2002, investing which shares the same characteristics needed to fulfil the growth plans of newly- will be retiring. Fred’s international experience as growth investing in other sectors. Venture acquired assets and realise full value from has been especially helpful to the Board over the Capital will continue to be reported as a separate these investments, and we will be taking a highly last six years and I would like to thank him for his business line until all assets are disposed of, selective approach to investment. important contribution. although no new early-stage venture investments will be made. Our new Quoted Our existing €550 million convertible bond We start the year at a moment of great Private Equity business has been a cautious matures in August. It has provided a great deal uncertainty as to the impact of the credit investor due to unsettled markets while of flexibility in our capital planning, at attractive crunch, energy prices and raw material costs on Infrastructure has continued to focus on rates of return. We have therefore decided economic activity, and as to whether these opportunities with long-term contractual cash to replace it with a new circa £425 million pressures can be managed by the world’s flows that make this asset class attractive to similar bond. monetary authorities without precipitating investors in an uncertain environment. recession or a sharp rise in inflation. We believe At times like these, 3i’s standards of that our mid-market focus, a portfolio well- transparency and accountability, reinforced by diversified by sector, geography and type of 14 years’ experience as a quoted company, investment, and the quality of our Board and serve the Company well. In our annual reports, management team, provide a combination that which have been widely praised by observers of positions us well to meet these challenges and both private equity and quoted companies, we build further value for shareholders. strive to provide our shareholders with a detailed picture of our approach to investment, valuation Baroness Hogg Chairman and risk management. This also stood us in good 14 May 2008 stead at a time of unprecedented interest in the industry and some challenge to its reputation. Report and accounts 2008 3i Group plc 03 3i at a glance 3i is a mid-market private equity business making and managing investments in Europe, Asia and the US. 3i Group plc is a FTSE 100 company, providing shareholders with quoted access to private equity returns. Investments are made with capital from the Group’s own balance sheet and from funds which the Group manages or advises for others. Buyouts Growth Capital Infrastructure Focusing on leading mid-market transactions Making minority investments of typically up Investing in a broad range of international primarily in Europe but also in Asia, with an to €250 million in established and profitable infrastructure assets, principally in enterprise value of typically up to €1 billion. businesses across Europe, Asia and the US. transportation, utilities and social infrastructure. Investments are generally made through Limited Investments are generally made using 3i’s own Investments are made by 3i Infrastructure Partnership private equity funds. balance sheet resources. From 1 April 2008, Limited, a quoted company which is advised by all late-stage technology and healthcare minority 3i, the 3i India Infrastructure Fund, or from 3i’s investment will also be conducted through this own balance sheet resources.