Final Results

11th May 2006 07:02

3i Group PLC11 May 2006 11 May 2006 3i Group plc announces strong results and £700 million return to shareholders Preliminary results for year to 31 March 2006 2006 2005*Total return on opening shareholders' funds 22.5% 15.2%Net asset value per share (diluted) 739p 614pFinal dividend 9.7p 9.3pRealised profits on disposal of investments £576m £250mNew investment £1,110m £755mRealisation proceeds £2,207m £1,302m *As restated to reflect the adoption of International Financial ReportingStandards (IFRS) Highlights• A total return of £831 million representing a return of 22.5% on opening shareholders' funds.• Realisation proceeds on the sale of assets of £2,207 million generating realised profits of £576 million. Realisations were made at an uplift of 35% over opening values.• Investment of £1,110 million (£1,322 million including co-investment funds).• Final dividend of 9.7p, making a total ordinary dividend for the year of 15.2p, up 4.1%.• Announcement of intention to return £700 million to shareholders through a bonus issue of listed B shares. Baroness Hogg, Chairman of 3i Group plc, said: "A strong position in a buoyantmarket enabled the Group to deliver a return of £831 million for the year. Inaddition good progress has been made towards achieving our vision. Another yearof strong cash flow enables us to make further substantial returns of capital toshareholders." 3i's Chief Executive, Philip Yea, said: "With another very good set of resultsbehind us, a detailed strategy for the future, and confidence high within theorganisation, we remain determined to accelerate the development of 3i todeliver further shareholder value." Commenting on the outlook, he added: "Markets remain favourable, and although weexpect our levels of realisations in the new financial year to be below lastyear's exceptional levels, we expect to increase our level of investment againif the present economic conditions continue." Return of capital to shareholdersThe Board of 3i Group plc also announces the proposed return of £700 million toshareholders. The proposed cash return is currently expected to be made by wayof a bonus issue of listed B shares accompanied by a share consolidation designed to maintain comparability of share price and earnings per share.This is currentlyexpected to take place in July. Resolutions relating to the return of capital proposals will be put to shareholders at an Extraordinary General Meeting. A circular convening the EGM and giving more information and detail on the proposals is expected to be sent to shareholders in June. - ends - For further information, please contact: Philip Yea, Chief Executive Tel: 020 7975 33863i Group plc Simon Ball, Finance Director Tel: 020 7975 33563i Group plc Patrick Dunne, Communications Director Tel: 020 7975 32833i Group plc Issued by:Philip Gawith Tel: 020 7379 5151The Maitland Consultancy For further information regarding the announcement of 3i's annual results to 31March 2006, including video interviews with Philip Yea and Simon Ball (available7.15am) and a live webcast of the results presentation (at 10.00am, available ondemand from 2.00pm), please see www.3igroup.com. Notes to editors3i is a world leader in private equity and venture capital. We focus on buyouts,growth capital and venture capital and invest across Europe, in the UnitedStates and in Asia. Our competitive advantage comes from our international network and the strengthand breadth of our relationships in business. These underpin the value that wedeliver to our portfolio and to our shareholders. Chairman's statement3i entered the financial year with strong momentum and buoyant marketconditions, which continued throughout the period. Our market position enabledthe Group to take advantage of these factors and to deliver a return of £831million for the year to 31 March 2006. This was substantially up from £501million last year and represented a return of 22.5% on opening shareholders'funds. Having invested in and developed companies of strategic value to others, 3i waswell placed to sell into receptive markets. Realisations totalled £2.2 billionand were made at a profit of 35% over opening value. The Board is recommending a final ordinary dividend of 9.7p, making a totalordinary dividend for the year of 15.2p, up 4.1% on last year. Meanwhile, the£500 million return of capital approved by shareholders at our EGM last year hasessentially been completed. The Board intends to return a further £700 millionto shareholders by way of a bonus issue of listed B shares, which is currentlyexpected to take place in July. Resolutions relating to the return of capitalproposals will be put to shareholders at an Extraordinary General Meeting. High quality new investment is a key driver of future value. Despite remaininghighly selective, we were able to increase investment by 47% to £1.1 billion,drawing on our in-depth sector knowledge and local relationships in a range ofdifferent markets. The international proportion of our investment rose in theyear to 63% and our widening international reach is illustrated by the fact thatover half of our assets are now outside the UK. In Asia we established teams in Shanghai and Mumbai during the year, and madeground-breaking investments in both China and India. 3i's Growth Capitalbusiness has also recently entered the US Market and, in addition, ourInfrastructure team is now in place and has made a number of investments. We have been planning for some time to establish an Advisory Board for our business in Germany. I am delighted to report that Dr Peter Mihatsch, who has been on the Group Board since 2004, has agreed to become Chairman of this new Advisory Board. However, as he would then no longer be categorised as an independent non-executive Director, this means he will be stepping off the 3i Group Board at the end of July. I would like to thank him for the contribution he has made as well as the still greater one he will be making to 3i in the future. I would also like to thank Danny Rosenkranz, who is Chairman of the RemunerationCommittee and has been on the Board for six years. Danny has agreed to stand forre-election for a further year to support Sir Robert Smith, who will be takingon the chairmanship of the Remuneration Committee in August. Underpinning this year's performance is a high level of staff engagement. Asurvey of our staff during the year, conducted by Ipsos MORI, showed highcommitment, and that 3i's level of staff engagement exceeded that of many otherleading companies. This commitment also characterises our approach to corporate responsibility. Fora company like 3i, our direct impact on the community and the environment willbe much less significant than that of the companies in which we invest. Wenevertheless are refining measurement of our own impact, while continuing toreview our standards for these issues in portfolio selection and management. I would like to thank all our staff for their skill, effort and teamwork inachieving these good results and also pay tribute to the management teams andthe advisers of our portfolio companies. So, in summary, this has been a good year for 3i shareholders, with theGroup taking advantage of favourable market conditions, delivering a high levelof return on shareholders' funds, growing investment levels and improving thestrategic position of the business. In developing our strategy we will continue to combine ambition with rigour in pursuit of value for our investors. Baroness HoggChairman10 May 2006 Chief Executive's statementI am pleased to report a very good set of full year financial results andfurther progress in implementing the plans we set for the business over the past18 months. In particular, these results provide tangible evidence of thecontinued success of our Buyout business and the benefits of the recentstrategic changes made to the models for our Growth Capital and Venture Capitalbusiness lines. Financing markets continue to be favourable, with the private equity marketsgiving high valuations to good assets. These conditions have provided theopportunity for us to achieve a record level of realisations and also realisedprofits. All of our business lines have been active sellers into these markets.Yet, at the same time, each of our three core business lines has increased itslevel of new investment. The most notable increase was within the Growth Capitalbusiness, reflecting its focus on larger deal sizes when compared to a year agoand the growing importance of Asia within our strategy. The rate of growth in private equity markets over the last decade has, for manypeople, raised genuine questions as to the sustainability of returns and therelative advantages of this ownership model as the asset class becomes moremainstream. We continue to believe that there is more than ample opportunity andthat the key issue for the Group is to leverage its competitive advantage inthose particular markets which provide greatest returns over the mid term. Our teams in Asia have been strengthened, our teams in the US are beingreinforced and, more indirectly, we have made a number of investments inselected funds which can bring exposure to specific geographies or asset classesthat we cannot achieve on our own. We have recently completed a comprehensive strategic review of both our currentand future business areas within the private equity field and, whereappropriate, will continue to use our balance sheet to develop new businesslines, and our knowledge-sharing culture and market access to attract new peopleto join us. As part of this review, we have also looked in detail at the opportunities andstructure of each of our current business lines. We have concluded that weshould increase the mix of late-stage investment within our Venture Capitalbusiness, an area which particularly plays to our international differentiation.As a result of this change we have amended our cash to cash IRR target for thisbusiness line to 25%, with vintage year volatility of plus or minus 15%. We havealso confirmed the opportunity for both this business and our Growth Capitalbusiness within the US, and are building our local teams accordingly. I am very pleased with the further steps we have taken on our people agenda. In a rapidly growing industry where experience is critical and personalcompensation at the most senior levels is performance related and uncapped, itis critical to ensure that both the financial and non-financial elements of ourpeople proposition are as competitive as they can be. To supplement the carryschemes which we have implemented across our business lines, we have alsointroduced market aligned co-investment schemes whereby members of our investingteam make personal investments alongside 3i and third party investors' capital. We have also made further changes to our internal organisation to ensure that wegive our investing teams maximum flexibility to operate as self-standingpartnerships with the same operational flexibility as their competitors, yetenable them to be both the beneficiaries of and contributors to the network ofknowledge sharing that differentiates 3i from most firms within our field. OurBusiness review which follows, contains a number of examples showing thisculture of cross-geography cross-business line co-operation at its very best. To reflect the ambitious nature of our agenda, we have also created a GroupPartnership, which brings together those senior business leaders who can makethe broadest contribution to the further development and expansion of the firm. The recent move of our London office to more modern premises has had asignificant impact in terms of communications and produced an enhancedexperience for visitors to 3i, as well as an improved working environment. We have also reviewed our capital requirements over the coming period and,notwithstanding the significant level of opportunity we have identified, webelieve it is appropriate to make a further return of cash to shareholders.Although accounting for the equity option within the Convertible Bond issued in2003 has, under IFRS, reduced reported profits (and will continue to do so if weare successful in delivering shareholder value through an increase in the shareprice), the flexibility to satisfy the bond redemption in 2008 in either cash orshares provides a significant equity cushion should realisation markets slow forany reason. Markets remain favourable and, although we expect our levels of realisations inthe new financial year to be below last year's exceptional levels, we expect toincrease our level of investment again if the present economic conditionscontinue. With another very good set of results behind us, a detailed strategy for thefuture, and confidence high within the organisation, we remain determined toaccelerate the development of 3i to deliver further shareholder value. Philip YeaChief Executive10 May 2006 Business review Group strategyOur strategy is to grow our assets and those the Group manages on behalf ofthird parties by using our relationships and knowledge to identify and invest inopportunities that can deliver high returns. Change provides opportunity, and as3i operates across Europe, Asia and the US, the rapid rate of change in theglobal economy provides a significant number of investment opportunities whereour knowledge and relationships, when combined with active management, candeliver real financial value. We are constantly reviewing developments in the private equity markets, thecompetitiveness of our existing business lines and the potential to expand ouraccess to good opportunities. Where appropriate, we use our capital to fundadditional resources, to seed new proprietary business lines and to buildrelations with other investment managers who can give us exposure to anattractive market. Our people are organised in self-standing teams whose structure ismarket-adapted, whose compensation is results-oriented, and which have as theirprincipal objective the selection of the very best opportunities within ourchosen asset classes. We seek to maximise our performance by the delivery of ourcollective knowledge and relationships to each investment opportunity. Our teamsare both the contributors to, and the beneficiaries of, this culture ofknowledge sharing. Key to our strategy is attracting and developing people who can combine therequisite investment and professional experience with our cultural fit. Part ofthis culture is an active approach to managing development. Our financial and risk management processes are focused on delivering targetedreturns on asset specific pools of capital, whilst optimising the mix betweenreturns on proprietary invested capital, income received from fees onthird-party funds and setting appropriate leverage ratios. Our business GroupThe Group's investment focus is on buyouts, growth capital and venture capital.At 31 March 2006: Buyouts represented 35% of our portfolio; Growth Capital 31%;and Venture Capital 20%. Additionally, we have a portfolio of Smaller Minority Investments, whichaccounts for 14% of the portfolio. It is our objective to realise this portfolioprogressively in the near term. We are a knowledge-based company providing market access, insight for investmentdecision making and the ability to add significant value to the companies inwhich we invest. We use our international network to identify and assess a wide range ofinvestment opportunities, selecting only those that meet our return and qualitycriteria. Having made an investment, we then work in active partnership with theboards of our portfolio companies to create value through to the ultimaterealisation of our investment. We operate through a network of teams located in Europe, Asia and the US. Europeis our principal region with some 90% of the investment portfolio by value basedin this market. We continue to increase our presence in new markets. During theyear, teams were formed in Shanghai and Mumbai and, most recently, in New Yorkto extend our Growth Capital business. Consistent with our strategy of investing in third-party private equity funds togain market access and additional opportunities to add value to our portfolio,we made investments in Israel and Russia during the year. These accompanyexisting investments in funds in China, eastern Europe and Japan. The benefits of having access to permanent capital from our own balance sheetalso enable us to take a more flexible and longer-term approach to thestructuring of individual investments. BuyoutsThis business line invests in European mid-market buyout transactions with avalue of up to €1billion and targets around 15 investments per year. Theseinvestments typically involve 3i investing with co-investment funds managed by3i. Investments are in businesses with development potential where we can workwith an incentivised management team to grow value through operationalimprovements and by exploiting market opportunities. These businesses aregenerally sold by large corporates disposing of non-core activities, privategroups with succession issues or, in the case of a secondary buyout, otherprivate equity investors. A key to our success is our international network, which enables us to accessmarkets as a "local" participant and to apply to each opportunity the knowledge,skills and sector experience of our much larger pan-European resource. Anintimate understanding of the economic model that drives the companies that weinvest in is critical, as is the value creation plan that supports eachinvestment decision. Competition in the European buyout market is intense and the high level ofhistoric returns achieved has continued to attract new entrants, including somenon-traditional competitors, such as hedge funds. Despite the strong competition, we are confident that through a combination ofour scale, local knowledge and sector insight, we can build on our position asthe leading European mid-market buyout house. We will also actively review the opportunities to expand our Buyout businessbeyond Europe, particularly as we build Group-wide experience in Asia. Growth CapitalOur Growth Capital business targets investments of between €10 million and €150million, across a broad range of sectors, business sizes and funding needs. Weaim to invest in between 20 and 30 such transactions per year and it is ourstrategy to continue to grow the average size of investment. Growth capital investments typically involve 3i acquiring substantial minoritystakes in privately-owned businesses at key points of change. Growth capital canbe invested to accelerate organic growth, to fund acquisitions or to acquireshares from existing shareholders to resolve a succession or other ownershipissue. With such minority positions, we seek to ensure a high level of influenceto create value for shareholders. Success in growth capital is increasingly driven by deep sector knowledge andthe ability to add value to companies expanding internationally, through givingthem access to 3i's network. These factors, combined with 3i's traditionalstrength in managing relationships with regional businesses and intermediaries,give 3i significant competitive advantage. To date, our Growth Capital business has focused on the European and Asianmarkets where we have strong networks and relationships and see goodopportunities to invest. During the year, we extended our reach by entering theUS market. The competitive environment in the growth capital market is more attractive thanin the buyout market. Additionally, not all private equity funds' mandatesprovide the freedom to make minority investments. Our permanent capitaldifferentiates us from other private equity investors, enabling us to make notonly minority investments, but provide more flexible longer-term funding. A dedicated infrastructure team has also been created within this business linewith the goal of building a high-quality portfolio in this asset class. Ourinvestment strategy here is threefold: direct investment in infrastructureprojects; investment in infrastructure funds; and creating portfolios ofinfrastructure assets to bring to the market. Venture CapitalOur Venture Capital business is focused on early and late-stage technologyinvesting and targets investments in the range of €2 million to €50 million. Thefour main sub-sectors are: healthcare, communications, software and ESAT(Electronics, Semiconductors and Advanced Technologies). The main geographic focus continues to be Europe and the US, though we have madeventure investments in Asia. As venture businesses typically compete globally,each investment opportunity is reviewed by reference to the relevant globalsub-sector's competitive landscape. We work closely with each company we invest in to create a route map to becominga scalable, successful business. We are a selective, active investor and we siton the boards of the majority of companies in which we invest. We work inpartnership with our investee management teams to add value by utilising 3i'sglobal network of relationships. Through these relationships, we will oftenintroduce new partners, customers and suppliers, and because our network isinternational, we can help young businesses to bridge the gap to new markets. Our Venture Capital business has a prominent position in Europe with a strongtrack record of investment and divestment. Competition is strong in markets suchas the UK, where many US firms are active. However, we continue to be wellplaced here and in other European venture markets. The US market is highlycompetitive but our global network, sector focus and international offeringposition 3i well alongside local firms. Our markets EuropeEurope is our principal geographic market, with the majority of our assets andinvestment activity being conducted in this region. Our business strategy isfocused on harnessing our strong regional presence and deep sector experience. 2005 was a record year for the market, with the level of fundraising being twicethat of the previous year and total investment increasing by 39%. A number ofsubstantial buyout deals in the UK and across continental Europe were a majorcontributor to this record level of activity. European buyout investment increased by 44%, driven by increased M&A andsecondary market activity, the return of trade buyers and improved IPO markets. Activity levels in the growth capital market in 2005 were similar to 2004,although this market presents an excellent opportunity as the economy continuesto restructure, sectors consolidate and companies seek to expandinternationally. The venture market is showing increased levels of investment and capital marketactivity. The year also saw divestments in Europe at record highs as favourable exitconditions were prevalent. The return of trade buyers, improved IPO markets,secondary sales and increased M&A activity were all strong sources of exits. AsiaThis region comprises a number of stand-alone markets and each market has verydifferent characteristics. Asian markets are in the growth phase and forecastmacroeconomic growth rates make this a particularly attractive region forprivate equity investment. At the present time, Asia is predominantly a growth capital market for 3i.However, we expect to develop Buyout and Venture Capital teams in the longerterm. Currently, India and China represent the highest potential private equitymarkets, although we will seek opportunities to develop our business in Japan,South Korea, and South East Asia. In 2005 the Asian private equity industry has seen a very significant increase in incoming funds compared to 2004, with India leading the way. Investmentincreased 29%, with growth capital returning to prominence. Japan accounted forthe largest proportion of capital returned to investors, followed by India andChina. IPOs were the most preferred exit route, making up 50% of divestments,although trade sales remained the dominant exit route in Japan. The USVenture capital has been our focus in the US, where we have invested in bothearly and late-stage technology companies. During the year, we recruited aGrowth Capital team to take advantage of the opportunities in this market andcomplement our investment teams in Europe and Asia. The US continues to be the largest and most attractive venture capital market inthe world. The market is characterised by a high level of competitiveness,access to technology and clusters of innovation, combined with significantnumbers of serial entrepreneurs. Our leading competitors are typically nichepartnerships operating domestically. US venture capital investing in 2005 rose to its highest level since 2001.Market activity was based on the strong fundraising environment of 2004 and2005, which contributed to increased investment levels. Improved exit markets,particularly for venture-backed companies, was another important contributor. Group financial review Total return3i achieved a total return for the year to 31 March 2006 of £831 million, whichequates to a 22.5% return on restated opening shareholders' funds (2005: 15.2%).A key feature of this return is the very strong level of realised profits ondisposal of investments where, throughout the year, we have benefited from goodmarket conditions for sales. Total return-------------------------------------------------------------------------------- 2006 2005 (as restated)* £m £m--------------------------------------------------------------------------------Realised profits on disposal of investments 576 250Unrealised profits on revaluation of investments 245 245Portfolio income 232 232--------------------------------------------------------------------------------Gross portfolio return 1,053 727Net carried interest 15 (64)Fund management fees 24 30Operating expenses (211) (177)--------------------------------------------------------------------------------Net portfolio return 881 516Net interest payable (17) (42)Exchange movements 47 13Movements in the fair value of derivatives (78) 13Other 19 (2)--------------------------------------------------------------------------------Profit after tax 852 498--------------------------------------------------------------------------------Reserve movements (pension, property and currencytranslation) (21) 3--------------------------------------------------------------------------------Total recognised income and expense ("Total return") 831 501--------------------------------------------------------------------------------*As restated for the adoption of IFRS. As indicated in the table below, we have generated a very good level of grossportfolio return of £1,053 million (2005: £727 million), representing 24.4% onopening portfolio value (2005: 16.7%). Each of our core business lines hasgenerated higher returns, with Venture Capital showing the most improved resultover last year. Buyouts and Growth Capital are operating at the top end of theirlong-term target ranges, with returns of 29% and 26% respectively. Return by business line (£m)--------------------------------------------------------------------------------------- Growth Venture Buyouts Capital Capital SMI Total 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 (as restated)*---------------------------------------------------------------------------------------Gross portfolioreturn 447 301 341 285 128 76 137 65 1,053 727---------------------------------------------------------------------------------------Return as % ofopeningportfolio 29% 20% 26% 23% 17% 11% 18% 7% 24% 17%--------------------------------------------------------------------------------------Net portfolio return 881 516Return as % ofopening portfolio 20% 12%---------------------------------------------------------------------------------------Total return 831 501---------------------------------------------------------------------------------------Total return as %on openingshareholders'funds 22% 15%---------------------------------------------------------------------------------------*As restated for the adoption of IFRS. The Group's gross portfolio return of 24% compares with 17% in 2005. After costsand carried interest, the net portfolio return is 20% (2005: 12%). The reductionof 4% from the gross level is below our anticipated range of 5% to 6%, as netcarried interest benefited from significant carry receivable in the year. Through gearing the balance sheet to an appropriate level, we would expect toenhance total return on opening shareholders' funds by some 4% from the netlevel. However, given the low level of gearing in our opening balance sheet, thebenefit from leverage was below our long-term expectation. Investment3i invested a total of £1,110 million in the year, significantly up on the £755million invested in 2005. Having entered the year with a very strong pipeline ofnew opportunities, some significant individual investments were made in thefirst half, including NCP (£96 million) and Giochi Preziosi (£61 million). Thesplit of investment across our regions reflected our increasingly internationalfocus, with 63% invested outside the UK. Investment, including co-investmentfunds, totalled £1,322 million. Consistent with our strategy, the most notableincrease by business line was within Growth Capital. Across the Group we invested in 58 new assets in the year (2005: 67). We alsoincreased our investment in established funds to gain exposure to new oremerging markets. We invested a total of £111 million (2005: £26 million), 10%of our total outlay, into these externally managed funds. This included five newfunds into which we committed £242 million (of which £97 million was investedduring the year), the largest of these being the I2 infrastructure fund (£79million invested). The average investment size in the other 53 new assets was £15 million (2005: £8million), in line with our strategy of increasing deal size within the "mid-capmarket" segment. Realisations and realised profitsRealisation proceeds for the year were £2,207 million, an increase of 70% over2005. The favourable market conditions experienced in the first six monthscontinued throughout the second half, enabling strong realisations across allbusiness lines. We also made further progress in selling down the SMI portfolio,realising £268 million from 278 investments. In total, 38% of our openingportfolio value was realised during the year. In continental Europe realisations totalled £891 million (2005: £365 million),reflecting the maturity of the portfolio which we have built up in this region. Realisations were made at a profit over opening carrying value of £576 million (2005: £250 million), representing an uplift on sale of 35%, and are stated net of write-offs of £66 million (2005: £37 million). During the year, 15 of our portfolio companies achieved IPOs across ninedifferent markets and £229 million of realisation proceeds were raised throughsales at the time of flotation or subsequently. Sales from other quotedportfolio companies generated proceeds of £143 million. Cash proceeds have also been generated through refinancing portfolio businesseswhere we have realised £168 million and through secondary buyouts, where we havesold 10 assets for £404 million. Unrealised value movementThe unrealised profit on revaluation of investments was £245 million (2005: £245million). An analysis of the components of this return is given in the followingtable. Unrealised profits/(losses) on revaluation of investments-------------------------------------------------------------------------------- 2006 2005 (as restated)* £m £m--------------------------------------------------------------------------------Earnings multiples (1) 41 40Earnings 95 20First-time uplifts (2) 70 149Provisions (3) (62) (66)Up rounds 3 36Uplift to imminent sale 97 101Other movements on unquoted investments (29) (45)Quoted portfolio 30 10--------------------------------------------------------------------------------Total 245 245-------------------------------------------------------------------------------- *As restated for the adoption of IFRS. (1) The weighted average earnings multiple applied to investments valued on an earnings basis increased from 12.0 to 12.2 over the year.(2) The net valuation impact arising on investments being valued on a basis other than cost for the first time.(3) Provisions against the carrying value of investments in businesses which may fail. The aggregate attributable earnings of investments valued on an earnings basisat both the start and end of the year increased by 5%, giving rise to a valueincrease of £95 million (2005: £20 million). Assets which were revalued on an imminent sale basis generated value uplifts of£97 million, reflecting the good realisations pipeline at the year end. Portfolio incomePortfolio income of £232 million (2005: £232 million) includes reduceddepreciatory dividends (arising on the sale of more mature assets), offset byincreased interest income from a number of new higher-yielding investments.Negotiation fees for new investments have risen with increased investmentlevels. Net carried interestCarried interest payable for the year was £64 million, which is offset by carryreceivable of £79 million. Carried interest payable is broadly in line with last year's level, despite theincrease in proceeds, as a number of realisations were from early vintages withno associated carry schemes, or from carry schemes which have yet to reach thehurdle at which carry payable is accrued. Carry receivable of £79 million relates primarily to Eurofund III, 3i's 1999pan-European fund, whose cumulative performance in the first half passed throughthe point at which carried interest receivable within 3i's financial statementsis triggered. The accrual at 31 March 2006 has been calculated on a fair valuebasis and includes carry receivable relating to realised and unrealised valueincreases arising on assets in more recent vintages, including Eurofund IV. CostsOperating expenses totalled £211 million (2005: £177 million). The increase overlast year reflects higher variable remuneration costs arising on the improvementin total returns and costs associated with implementing new strategicinitiatives. Operating expenses include a charge in respect of share-based payments, to reflect the fair value of options and other share-related rewards granted to employees, of £8 million (2005: £6 million). Net interest payable for the year was £17 million, reflecting the considerablefall in net borrowings resulting from our net realisation proceeds and anincrease in the proportion of borrowing in non-sterling currencies for whichinterest rates were more favourable during the year. Other movementsUnrealised value movements in the fair value of derivatives of £(78) millionwere recognised in the income statement for the first time, having adopted IFRS.£(75) million of this movement relates to the valuation of the equity derivativeembedded in the €550 million 2008 Convertible Bond. The movement is the productof a number of factors, the most significant of which was the increase in theCompany's share price of 40% in the year. Exchange movements of £47 million arose in respect of the US dollar denominatedinvestment portfolio. As the dollar strengthened relative to sterling, thecurrency risk relating to this portfolio is now substantially hedged. Cash flowsNet cash inflow for the year was £550 million, reducing net borrowings,including the Convertible Bond, to £56 million at 31 March 2006 (2005: £545million). During the year, capital was returned to shareholders through the payment of£245 million by way of a special dividend of 40.7p per share and a further £222million of on-market share buy-backs, as approved by shareholders at an Extraordinary General Meeting following the 2005 Annual General Meeting. Capital structure3i's capital structure comprises a combination of shareholders' funds, long-termborrowing, short-term borrowing and liquid treasury assets and cash. In managingour capital structure, we seek to balance the current needs of the business withour ability to support new business growth. Total shareholders' funds at 31March 2006 were £4,006 million (2005: £3,699 million), the main components beingcapital reserves of £3,110 million, revenue reserves of £263 million and sharecapital and share premium of £668 million. Total Group borrowings at 31 March 2006 were £1,474 million, which is repayableas follows: £231 million, less than one year; £643 million, between one and fiveyears; and £600 million, greater than five years. At the year end, 3i hadcommitted and undrawn borrowing facilities of £488 million, and cash and liquidassets totalling £1,955 million. Additionally, as noted above, in 2003, 3iissued a €550 million Convertible Bond due in 2008. Gearing3i's listed status and permanent capital structure enables the Group to enhancereturns to shareholders through leveraging our equity. The Board's view is thata gearing ratio of debt to shareholders' funds set between 30% and 40% isappropriate across the cycle, given the current investment profile. Despite growing our investment by 47% and returning £467 million of capital toshareholders, during the year the exceptionally high level of realisationscaused gearing at 31 March 2006 to fall to 1% (2005: 15%). Taking account of future cashflow projections and the development plans of thebusiness, the Board has proposed a further return of £700 million by means of aa bonus issue of listed B shares accompanied by a share consolidationdesigned to maintain comparability of share price and earnings per share.This iscurrently expected to take place in July 2006. Growth in diluted net asset valueDiluted net asset value ("NAV") per share was 739p at 31 March 2006, whichcompares with 614p at 31 March 2005, an increase of 125p, reflecting the strongresults for the year. PortfolioThe value of the portfolio at 31 March 2006 was £4,139 million (2005: £4,317million). The reduction in portfolio value resulted from the high level ofrealisations in the year. Other movements include transfers of assets into theportfolio previously held through joint ventures and the currency movement inthe year. At 31 March 2006, 6% of the portfolio value was held in investments in quotedcompanies (2005: 5%). The number of investments in the portfolio continues to fall, reflecting thehigh number of realisations in the year, our policy to seek investmentopportunities in fewer larger deals and our strategy to reduce portfolio numberswithin SMI. At 31 March 2006, the number of investments stood at 1,087(excluding SMI: 561), down from 1,502 (excluding SMI: 695) at the beginning ofthe year. Accounting policiesAs a result of the Group's adoption of IFRS, certain accounting policies havebeen amended. Prior year figures have been restated so as to provide meaningfulcomparison with the results for the year to 31 March 2006. The major changes are as follows: - derivative financial instruments are now held at fair value and any movements in value taken to the income statement; - a charge is made in the income statement in respect of share-based payments based on the intrinsic value of awards at grant date; - foreign currency items in the Group's income statement are converted at the actual exchange rate and not the year end rate; - dividends declared after the balance sheet date are not recognised as a liability at the balance sheet date. There have been no significant changes to 3i's valuation policy in the year.However, to comply with IFRS, discounts are no longer applied to market pricesand quoted investments are valued at bid price rather than mid price. Buyouts Gross portfolio returnThe Buyout business generated a gross portfolio return of 29% for the year to 31March 2006 (2005: 20%), which is at the top end of our target return rangeacross the economic cycle. The business has now achieved or exceeded its targetin each of the last three financial years through a combination of investmentdiscipline and a favourable market environment. Investment and realisationsInvestment (excluding third party co-investment funds) for the 12 months to 31March 2006 was £451 million (2005: £338 million). Investment levels were good,particularly in the first six months of the year, when the pipeline for newinvestment was exceptional. The lower level of investment in the second halfreflects the continued competitive conditions in the European buyout market.Despite these competitive conditions, the business generated significant dealflow through its pan-European origination capability. Realisations (excluding third party co-investment funds) for the same periodwere very strong with £877 million of realisation proceeds being generated(2005: £505 million). This reflected the underlying quality of the assets in theportfolio and the continued buoyant financial markets. Portfolio healthThe underlying health of our Buyout portfolio has been good since the newbusiness model was introduced in 2001. The strong performance of the portfoliois underpinned by the low loss rate that we have seen on our investments inEurofunds III and IV, which at the year end stood at 3% of investment cost. Fund managementThe third party co-investment funds that 3i raises are co-invested alongside ourown capital when financing buyouts. In the year to 31 March 2006, 3i earned feeincome of £24 million (2005: £27 million) from the management of private equityfunds. In addition, 3i receives carried interest in respect of the performanceof these funds. During the year, 3i recognised £79 million of carry receivablewhich relates primarily to Eurofund III, 3i's 1999 pan-European Buyout fund. Our Buyout business is currently investing Eurofund IV, the €3.0 billion fundthat was raised in 2003. The fund was 75% committed at 31 March 2006 and,consistent with industry fund raising practices, 3i intends to raise itsEurofund V mid-market buyout fund during the financial year ending 31 March2007. Growth Capital Gross portfolio returnThe Growth Capital business generated a gross portfolio return of 26% to 31March 2006 (2005: 23%). This is the third consecutive year that the GrowthCapital business has generated returns at the higher end of its returnobjectives. Investment and realisationsInvestment for the 12 months to 31 March 2006 was £497 million (2005: £263million). The increase in investment was driven by several factors, including afocus on larger investments and a good contribution from our new infrastructureteam. During the year, 22 new investments were made at an average of £20 million(2005: £6 million). Included in the investment total were investments of £108 million made in otherfunds including I2, the UK infrastructure fund, and CDH China Growth CapitalFund II. Realisation proceeds of £855 million were very strong and significantly higherthan last year (2005: £443 million). This strong performance reflects theunderlying quality of the assets in the Growth Capital portfolio and thecontinued buoyant financial markets. Regionally, the UK accounted for 53% of Growth Capital realisations, continentalEurope accounting for 34% at £293 million was up from £103 million in 2005. Asiadelivered £66 million of Growth Capital realisations (2005: £6 million). Portfolio healthThe underlying health of our Growth Capital portfolio is good. At 31 March 2006,84% of our investments were classified as healthy, against a three year rollingaverage of 74%. This reflects improved investment disciplines combined withinvesting in larger and more established businesses in our recent vintages. Venture Capital Gross portfolio returnThe Venture Capital business generated a gross portfolio return of 17% to 31March 2006 (2005: 11%). This improvement in performance was driven by a numberof factors, most importantly organisational changes made to integrate the teaminto a truly international partnership across Europe and the US and enhancedportfolio management disciplines. As returns have improved in our Venture business, so has the amount ofinvestment in late-stage technology increased. When compared with early-stagetechnology, late-stage has lower return characteristics, but considerably lessvolatility. In the year to 31 March 2006, 44% of our Venture Capital investmentwas in late-stage and we anticipate that this percentage could rise to as muchas 70% in the near term. We have therefore reviewed the return objectives for our Venture Capitalbusiness in the light of this changing mix, and adjusted both the volatility andthe overall return objectives as a consequence. The new gross portfolio returnobjective for the business remains higher than that for Buyouts and GrowthCapital at 25%, and vintage year and cyclical volatilities have been set at 15%and 7% respectively. Investment and realisationsInvestment for the 12 months to 31 March 2006 was £156 million (2005: £143million). It is the team's objective to invest between £175 million and £225million per annum. Realisation proceeds of £207 million were 33% higher than last year (2005: £156million). The increase in realisations reflects an increased appetite ofcorporate buyers and, to a degree, the public markets for venture capitalcompanies. Six Venture Capital portfolio companies achieved a flotation duringthe year, with the healthcare, drug discovery and software sectors beingparticularly active. Portfolio healthAt 31 March 2006, 67% of our Venture investments were classified as healthy,against a three year rolling average of 65%. These levels are consistent withthe higher risk return profile of venture capital investing. Risk management3i has a comprehensive risk management framework which provides a structured andconsistent process for identifying, assessing and responding to risks inrelation to the Group's strategy and business objectives. As part of this process, risks are considered across the following broadcategories: External Risks arising from political, legal, regulatory, economic policy and competitor changes Strategic Risks arising from the analysis, design and implementation of the Group's business model, and key decisions on investment levels and capital allocations Investment Risks in respect of specific asset investment decisions, the subsequent performance of an investment or exposure concentrations across business line portfolios Treasury Risks arising from (i) uncertainty in market prices and rates, (ii)and funding an inability to raise adequate funds to meet investment needs or meet obligations as they fall due, or (iii) inappropriate capital structure Operational Risks arising from inadequate or failed processes, people and systems or from external factors affecting these Risk management operates at all levels throughout the Group, across businesslines, geographies and professional functions. It is monitored by a combinationof the Board, the Audit and Compliance Committee, Management Committee and RiskCommittee, supported by the Group Risk Assurance and Audit, and Group Compliancefunctions. The Risk Committee meets four times a year to oversee movements in risk exposures across the Group and recommends appropriate responses. Its membership includes senior representatives from investment and professional services functions. Given their fundamental significance to the Group, investment and treasury andfunding risks are managed by specific processes which are described below. Investment risk3i's investment appraisal is undertaken in a rigorous manner. This includesapproval by the relevant business line partnerships, and where appropriate, peerreview by executives from other business lines, and our international network ofindustry and sector specialists. Investments over £5 million are presented to anInvestment Committee chaired by one of our Group Partners and comprising some ofour senior investment executives. Having made our investment decision, a rigorous process is put in place formanaging the relationship with the investee company for the period through torealisation. This can include board representation by a 3i investment executive andregular internal asset review processes. 3i invests across a range of economic sectors. The portfolio is subject toperiodic reviews at both the business line and Group levels to ensure that thereis no undue exposure to any one sector. The valuation of 3i's unquoted portfolioand opportunities for realisation depend to some extent on stock marketconditions and the buoyancy of the wider mergers and acquisitions market. Treasury and funding risk3i's funding objective is that each category of investment asset is broadlymatched with liabilities and shareholders' funds according to the risk andmaturity characteristics of the assets, and that funding needs are met ahead ofplanned investment. Credit risk 3i's financial assets are predominantly unsecured investments inunquoted companies, in which the Board considers the maximum credit risk to bethe carrying value of the asset. The portfolio is well diversified and, for thisreason, credit risk exposure is managed on an asset-specific basis by individualinvestment managers. Liquidity risk During the financial year, 3i generated a cash surplus of £1,089million (2005: £562 million) from its investing activities and cash resources atthe end of the period amounted to £1,955 million (2005: £1,199 million). Inaddition, the Group had available to it undrawn committed facilities of £488million at 31 March 2006 (2005: £764 million). Price risk The valuation of unquoted investments depends upon a combination ofmarket factors and the performance of the underlying asset. 3i does not hedgethe market risk inherent in the portfolio but manages asset performance risk onan asset specific basis. Foreign exchange risk 3i reports in sterling and pays dividends from itssterling profits. The Board seeks to reduce structural currency exposures bymatching assets denominated in foreign currency with borrowings in the samecurrency. The Group makes some use of derivative financial instruments to effectforeign exchange management. Interest rate risk3i has a mixture of fixed and floating rate assets. The assets are funded with amixture of shareholders' funds and borrowings according to the riskcharacteristics of the assets. The Board seeks to minimise interest rateexposure by matching the type and maturity of the borrowings to those of thecorresponding assets. Some derivative financial instruments are used to achievethis objective. Consolidated income statementfor the year to 31 March 2006-------------------------------------------------------------------------------- 2006 2005 (as restated)* £m £m--------------------------------------------------------------------------------Realised profits over value on the disposal of investments 576 250Unrealised profits on the revaluation of investments 245 245-------------------------------------------------------------------------------- 821 495Portfolio income Dividends 75 104 Income from loans and receivables 133 101 Fees receivable 24 27--------------------------------------------------------------------------------Gross portfolio return 1,053 727Carried interest Carried interest receivable from managed funds 79 2 Carried interest payable to executives (64) (66)Fund management fees 24 30Operating expenses (211) (177)--------------------------------------------------------------------------------Net portfolio return 881 516Treasury interest receivable 55 46Interest payable (72) (88)Movements in the fair value of derivatives (78) 13Exchange movements 47 13Other income 22 1--------------------------------------------------------------------------------Profit before tax 855 501Income taxes (3) (3)--------------------------------------------------------------------------------Profit after tax and profit for the year 852 498-------------------------------------------------------------------------------- Earnings per share Basic (pence) 152.0 82.6 Diluted (pence) 147.3 81.0--------------------------------------------------------------------------------*As restated for the adoption of IFRS. Statement of recognised income and expensefor the year to 31 March 2006-------------------------------------------------------------------------------- Group Group Company Company 2006 2005 2006 2005 (as restated)* (as restated)* £m £m £m £m--------------------------------------------------------------------------------Profit for the year 852 498 643 407Revaluation of property - (1) - (1)Exchange differences on translation of foreign operations (5) 5 - -Actuarial losses (16) (1) - ---------------------------------------------------------------------------------Total recognised income andexpense for the year 831 501 643 406---------------------------------------------------------------------------------Analysed in reserves as: Revenue 117 129 87 93 Capital 719 367 556 313 Translation reserve (5) 5 - --------------------------------------------------------------------------------- 831 501 643 406--------------------------------------------------------------------------------*As restated for the adoption of IFRS. Reconciliation of movements in equityfor the year to 31 March 2006-------------------------------------------------------------------------------- Group Group Company Company 2006 2005 2006 2005 (as restated)* (as restated)* £m £m £m £m--------------------------------------------------------------------------------Opening total equity 3,699 3,294 3,626 3,300Total recognised income andexpense for the year 831 501 643 406Share-based payments 8 6 - -Ordinary dividends (86) (85) (86) (85)Special dividends (245) - (245) -Issues of shares 13 5 13 5Share buy-backs (222) - (222) -Own shares 8 (22) - ---------------------------------------------------------------------------------Closing total equity 4,006 3,699 3,729 3,626--------------------------------------------------------------------------------*As restated for the adoption of IFRS. Balance sheetas at 31 March 2006-------------------------------------------------------------------------------- Group Group Company Company 2006 2005 2006 2005 (as restated)* (as restated)*Assets £m £m £m £m--------------------------------------------------------------------------------Non-current assetsInvestments Quoted equity investments 259 235 173 203 Unquoted equity investments 2,514 2,682 1,349 1,899 Loans and receivables 1,366 1,400 735 987--------------------------------------------------------------------------------Investment portfolio 4,139 4,317 2,257 3,089Carried interest receivable 77 9 77 9Interests in joint ventures - 46 - 14Interests in Group entities - - 1,483 981Property, plant and equipment 31 33 9 25Investment property - 6 - ---------------------------------------------------------------------------------Total non-current assets 4,247 4,411 3,826 4,118--------------------------------------------------------------------------------Current assetsOther current assets 149 116 193 165Derivative financial instruments 19 35 19 35Deposits 1,108 885 1,052 791Cash and cash equivalents 847 314 776 279--------------------------------------------------------------------------------Total current assets 2,123 1,350 2,040 1,270--------------------------------------------------------------------------------Total assets 6,370 5,761 5,866 5,388-------------------------------------------------------------------------------- --------------------------------------------------------------------------------LiabilitiesNon-current liabilitiesCarried interest payable (83) (71) (83) (71)Loans and borrowings (1,243) (1,196) (968) (879)Convertible Bonds (365) (352) (365) (352)Subordinated liabilities (24) (50) - -Retirement benefit obligation (17) (23) - -Deferred income tax (1) (1) - -Provisions (5) (5) - -------------------------------------------------------------------------------Total non-current liabilities (1,738) (1,698) (1,416) (1,302)-------------------------------------------------------------------------------Current liabilitiesTrade and other payables (160) (135) (271) (254)Carried interest payable (60) (38) (60) (38)Loans and borrowings (231) (102) (230) (102)Derivative financial instruments(168) (80) (160) (66)Current income tax (2) (2) - -Provisions (5) (7) - ------------------------------------------------------------------------------Total current liabilities (626) (364) (721) (460)-----------------------------------------------------------------------------Total liabilities (2,364) (2,062) (2,137) (1,762)-----------------------------------------------------------------------------Net assets 4,006 3,699 3,729 3,626----------------------------------------------------------------------------- EquityIssued capital 292 307 292 307Share premium 376 364 376 364Capital redemption reserve 17 1 17 1Share-based payment reserve 17 9 - -Translation reserve - 5 - -Capital reserve 3,110 2,613 2,767 2,433Revenue reserve 263 477 277 521Own shares (69) (77) - -------------------------------------------------------------------------------Total equity 4,006 3,699 3,729 3,626------------------------------------------------------------------------------*As restated for the adoption of IFRS. Cash flow statementfor the year to 31 March 2006-------------------------------------------------------------------------------- Group Group Company Company 2006 2005 2006 2005 (as restated)* (as restated)* £m £m £m £m--------------------------------------------------------------------------------Cash flow from operating activitiesPurchase of investments (1,068) (719) (873) (717)Proceeds from investments 2,213 1,287 1,949 1,184Interest received 67 64 42 45Dividends received 76 103 70 99Fees received from investment and fund management activities 46 56 13 1Carried interest received 9 - 9 -Carried interest paid (30) (4) - -Operating expenses (216) (224) (182) (90)Income tax paid (8) (1) (5) ---------------------------------------------------------------------------------Net cash inflow from operations 1,089 562 1,023 522------------------------------------------------------------------------------- Cash flow from financing activitiesProceeds from issues of share capital 13 5 13 5Purchase of own shares (222) (25) (222) (25)Dividend paid (331) (85) (331) (85)Interest received 50 46 46 45Interest paid (60) (81) (38) (55)Payment of finance leaseliabilities - (1) - -Proceeds from long-term borrowings 69 44 92 -Repayment of long-term borrowings (54) (32) - (1)Net cash flow from short-termborrowings 188 (67) 156 (58)Net cash flow from deposits (223) (269) (261) (285)--------------------------------------------------------------------------------Net cash flow from financingactivities (570) (465) (545) (459)-------------------------------------------------------------------------------- Cash flow from investing activitiesPurchase of property, plant and equipment (15) (4) - -Sales of property, plant and equipment 24 1 17 -Divestment from joint venture 2 14 2 3--------------------------------------------------------------------------------Net cash flow from investingactivities 11 11 19 3-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Change in cash and cashequivalents 530 108 497 66-------------------------------------------------------------------------------Opening cash and cash equivalents 314 203 279 213Effect of exchange rate fluctuations 3 3 - --------------------------------------------------------------------------------Closing cash and cash equivalents 847 314 776 279-------------------------------------------------------------------------------*As restated for the adoption of IFRS. Significant accounting policies3i Group plc (the "Company") is a company incorporated in Great Britain andregistered in England and Wales. The consolidated financial statements of theCompany for the year to 31 March 2006 comprise the Company and its subsidiaries(together referred to as the "Group") and the Group's interest in associates andjointly controlled entities. Separate financial statements of the Company arealso presented. The accounting policies of the Company are the same as the Groupexcept where separately disclosed. The financial statements were authorised for issue by the Directors on 10 May2006. A Statement of compliance These consolidated and separate financial statementshave been prepared in accordance with International Financial ReportingStandards, International Accounting Standards and their interpretations issuedor adopted by the International Accounting Standards Board as adopted for use inthe European Union ("IFRS"). These are the Group's first consolidated andseparate financial statements prepared under IFRS and IFRS 1 First-time Adoptionof International Financial Reporting Standards ("IFRS 1") has been applied. These consolidated and separate financial statements have been prepared inaccordance with and in compliance with the Companies Act 1985 and the ListingRules of the Financial Services Authority. IFRS 1 permits those companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS in the transition period. 3i hastaken the following key decisions: - The effect of changes in foreign exchange rates: Under IFRS 1, cumulative translation differences on the consolidation of subsidiaries are being accumulated from the date of transition to IFRS and not from the original acquisition date.- Share-based payment: IFRS 2 Share-based Payment ("IFRS 2") has been adopted from the transition date and is only being applied to relevant equity instruments granted after 7 November 2002 and not vested as at 1 January 2005. 3i has elected not to take up the option of full retrospective application of the standard.- Financial Instruments: Under IAS 39 Financial Instruments: Recognition and Measurement ("IAS 39"), all equity investments have been designated at the date of transition to be assets at fair value through profit or loss except for subsidiaries held by the Company. The Group's consolidated financial statements for the year to 31 March 2006 willcontain a reconciliation of total return under UK GAAP to profit under IFRS forthe year to 31 March 2005 and a reconciliation of equity under UK GAAP to equityunder IFRS as at 31 March 2005 and 1 April 2004 (note 38). New standards and interpretations not applied During the year, the IASB andIFRIC have issued the following standards and interpretations to be applied tofinancial statements with periods commencing on or after the following dates: International Accounting Standards (IAS/IFRSs) Effective date--------------------------------------------------------------------------------IFRS 1 Amendment relating to IFRS 6 1 January 2006IFRS 4 Insurance Contracts (Amendment to IAS 39 and IFRS 4 - 1 January 2006 Financial Guarantee Contracts)IFRS 6 Exploration for and Evaluation of Mineral Assets 1 January 2006IFRS 6 Amendment relating to IFRS 6 1 January 2006IFRS 7 Financial Instruments: Disclosures 1 January 2007IAS 1 Amendment - Presentation of Financial Statements: 1 January 2007 Capital DisclosuresIAS 19 Amendment - Actuarial Gains and Losses, Group Plans and 1 January 2006 DisclosuresIAS 39 Fair Value Option 1 January 2006IAS 39 Amendments to IAS 39 - Transition and Initial 1 January 2006 Recognition of Financial Assets and Financial Liabilities (Day 1 profits)IAS 39 Cash Flow Hedge Accounting 1 January 2006IAS 39 Amendment to IAS 39 and IFRS 4 - Financial Guarantee 1 January 2006 Contracts IAS 21 Amendments to IAS 21 - The Effects of Changes in Foreign 1 January 2006 Exchange Rates - Net Investment in a Foreign Operation-------------------------------------------------------------------------------- International Financial Reporting Interpretations Committee (IFRIC) ---------------------------------------------------------------------------------IFRIC 4 Determining whether an arrangement contains a lease 1 January 2006IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 1 January 2006IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment 1 December 2005IFRIC 7 Applying the Restatement Approach under IAS 29 - 1 March 2006 Financial Reporting in Hyper Inflationary EconomiesIFRIC 8 Scope of IFRS 2 1 May 2006IFRIC 9 Reassessment of Embedded Derivatives 1 June 2006--------------------------------------------------------------------------------- The Directors do not anticipate that the adoption of these standards andinterpretations will have a material impact on the financial statements in theperiod of initial application. Upon adoption of IFRS 7, the Group will have todisclose additional information about its financial instruments, theirsignificance and the nature and extent of risks that they give rise to. Therewill be no effect on reported income or net assets. B Basis of preparation The financial statements are presented in sterling, thefunctional currency of the Company, rounded to the nearest million pounds. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgments, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and other factors that are believed to be reasonable under thecircumstances, the results of which form the basis of making the judgments aboutcarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. The most significant techniques for estimation are described inthe accounting policies below and in our "valuation methodology" forinvestments. The accounting policies set out below have been applied consistently to allperiods presented in these consolidated financial statements and in preparing anopening IFRS balance sheet as at 1 April 2004 for the purpose of the transitionto IFRS. The income statement of the Company has been omitted from thesefinancial statements in accordance with Section 230 of the Companies Act 1985. The accounting policies have been consistently applied across all Group entitiesfor the purpose of producing these consolidated financial statements. C Basis of consolidation(i) Subsidiaries Subsidiaries are entities controlled by the Group. Controlexists when the Company has the power, directly or indirectly, to govern thefinancial and operating policies of an entity so as to obtain benefits from itsactivities. The financial statements of subsidiaries are included in theconsolidated financial statements from the date that control commences until thedate that control ceases. (ii) Associates Associates are those entities in which the Group has significantinfluence, but not control, over the financial and operating policies.Investments that are held as part of the Group's investment portfolio arecarried in the balance sheet at fair value even though the Group may havesignificant influence over those companies. This treatment is permitted by IAS28 Investment in Associates ("IAS 28"), which requires investments held byventure capital organisations to be excluded from its scope where thoseinvestments are designated, upon initial recognition, as at fair value throughprofit or loss and accounted for in accordance with IAS 39, with changes in fairvalue recognised in profit or loss in the period of the change. The Group has nointerests in associates through which it carries on its business. (iii) Joint ventures Joint ventures are those entities over whose activities theGroup has joint control, established by contractual agreement. Interests injoint ventures through which the Group carries on its business are classified asjointly controlled entities and accounted for using the equity method. Interests in joint ventures that are held as part of the Group's investmentportfolio are carried in the balance sheet at fair value. This treatment ispermitted by IAS 31 Interests in Joint Ventures ("IAS 31"), which requiresventurer's interests held by venture capital organisations to be excluded fromits scope where those investments are designated, upon initial recognition, asat fair value through profit or loss and accounted for in accordance with IAS39, with changes in fair value recognised in profit or loss in the period of thechange. The Group has no interests in joint ventures through which it carries onits business. (iv) Transactions eliminated on consolidation Intragroup balances and anyunrealised gains and losses or income and expenses arising from intragrouptransactions, are eliminated in preparing the consolidated financial statements.Unrealised gains arising from transactions with jointly controlled entities areeliminated to the extent of the Group's interest in the entity. Unrealisedlosses are eliminated in the same way as unrealised gains, but only to theextent that there is no evidence of impairment. D Exchange differences(i) Foreign currency transactions Transactions in currencies different from thefunctional currency of the Group entity entering into the transaction aretranslated at the exchange rate ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies at the balance sheetdate are translated to sterling at the exchange rate ruling at that date.Foreign exchange differences arising on translation are recognised in the incomestatement. Non-monetary assets and liabilities that are measured in terms ofhistorical cost in a foreign currency are translated using the exchange rate atthe date of transaction. Non-monetary assets and liabilities denominated inforeign currencies that are stated at fair value are translated to sterlingusing exchange rates ruling at the dates the fair value was determined. (ii) Financial statements of non-sterling operations The assets and liabilitiesof operations whose functional currency is not sterling, including fair valueadjustments arising on consolidation, are translated to sterling at exchangerates ruling at the balance sheet date. The revenues and expenses of theseoperations are translated to sterling at rates approximating to the exchangerates ruling at the dates of the transactions. Exchange differences arising onretranslation are recognised directly in a separate component of equity, thetranslation reserve, and are released upon disposal of the non-sterlingoperation. In respect of non-sterling operations, cumulative translation differences on theconsolidation of non-sterling operations are being accumulated from the date oftransition to IFRS, 1 April 2004, and not from the original acquisition date. E Investment portfolio The Group's return is generated primarily from itsinvestment portfolio, which forms the main element of its total assets.(i) Recognition and measurement Investments are recognised and derecognised on adate where the purchase or sale of an investment is under a contract whose termsrequire the delivery or settlement of the investments. The Group manages itsinvestments with a view to profiting from the receipt of interest and dividendsand changes in fair value of equity investments. Therefore, all quotedinvestments and unquoted equity investments are designated as at fair valuethrough profit or loss and subsequently carried in the balance sheet at fairvalue. Other investments including loan investments and fixed income shares areclassified as loans and receivables and subsequently carried in the balancesheet at amortised cost less impairment. All investments are initiallyrecognised at the fair value of the consideration given and held at this valueuntil it is appropriate to measure fair value on a different basis, applying3i's valuation policies. Acquisition costs are attributed to equity investmentsand recognised immediately in profit or loss. Subsidiaries in the separatefinancial statements of the Company are accounted for at cost less provision forimpairment. (ii) Income Gross portfolio return is a key performance indicator and isequivalent to "revenue" for the purposes of IAS 1. It represents the overallincrease in net assets from the investment portfolio net of deal-related costsbut excluding exchange movements. Investment income is analysed into thefollowing components: a. Realised profits over value on the disposal of investments is the differencebetween the fair value of the consideration received less any directlyattributable costs, on the sale of equity and the repayment of loans andreceivables, and its carrying value at the start of the accounting period,converted into sterling using the exchange rates in force at the date ofdisposal. b. Unrealised profits on the revaluation of investments is the movement incarrying value of investments between the start and end of the accounting periodconverted into sterling using the exchange rates in force at the date of themovement. c. Portfolio income is that portion of income that is directly related to thereturn from individual investments. It is recognised to the extent that it isprobable that there will be economic benefit and the income can be reliablymeasured. The following specific recognition criteria must be met before theincome is recognised: - Income from loans and receivables is recognised as it accrues by reference to the principal outstanding and the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash flows through the expected life of the financial asset to that asset's carrying value.- Dividends from equity investments are recognised in profit or loss when the shareholders' rights to receive payment have been established except to the extent that dividends, paid out of pre-acquisition reserves, adjust the fair value of the equity investment.- Fee income is earned directly from investee companies when an investment is first made and through the life of the investment. Fees that are earned on a financing arrangement are considered to relate to a financial asset measured at fair value through profit or loss and are recognised when that investment is made. Fees that are earned on the basis of providing an ongoing service to the investee company are recognised as that service is provided. F Fund management The Group manages private equity funds, which primarilyco-invest alongside the Group.(i) Fund management fees Fees earned from the ongoing management of funds isrecognised to the extent that it is probable that there will be economic benefitand the income can be reliably measured. (ii) Carried interest receivable The Group earns a share of profits ("carriedinterest receivable") from funds which it manages on behalf of third parties.These profits are earned once the funds meet certain performance conditions. Carried interest receivable is only accrued on those managed funds in which thefund's performance conditions, measured at the balance sheet date, would beachieved if the remaining assets in the fund were realised at fair value. Fairvalue is determined using the Group's valuation methodology and is measured atthe balance sheet date. An accrual is made equal to the Group's share of profitsin excess of the performance conditions, taking into account the cash alreadyreturned to fund investors and the fair value of assets remaining in the fund. G Carried interest payable The Group offers investment executives theopportunity to participate in the returns from successful investments. "Carriedinterest payable" is the term used for amounts payable to executives oninvestment-related transactions. A variety of asset pooling arrangements are in place so that executives may havean interest in one or more carried interest scheme. Carried interest payable isonly accrued on those schemes in which the scheme's performance conditions,measured at the balance sheet date, would be achieved if the remaining assets inthe scheme were realised at fair value. An accrual is made equal to theexecutive's share of profits in excess of the performance conditions in place inthe carried interest scheme. H Property, plant and equipment(i) Land and buildings Land and buildings are carried in the balance sheet atfair value less depreciation and impairment. Fair value is determined at eachbalance sheet date from valuations undertaken by professional valuers usingmarket-based evidence. Any revaluation surplus is credited directly to theCapital reserve in equity except to the extent that it reverses a previousvaluation deficit on the same asset charged in the income statement in whichcase the surplus is recognised in the income statement to the extent of theprevious deficit. Any revaluation deficit that offsets a previously recognisedsurplus in the same asset is directly offset against the surplus in the Capitalreserve. Any excess valuation deficit over and above the previously recognisedsurplus is charged in profit or loss. Depreciation on revalued buildings is charged in the income statement over itsestimated useful life, generally over 50 years. On subsequent sale or retirementof a revalued property, the attributable surplus in the Capital reserve istransferred directly to accumulated profits. (ii) Vehicles and office equipment Fixed assets are depreciated by equal annualinstalments over their estimated useful lives as follows: office equipment fiveyears; computer equipment three years; computer software three years; motorvehicles four years. (iii) Assets held under finance leases Assets held under finance leases aredepreciated over their expected useful life on the same basis as owned assetsor, where shorter, the lease term. Assets are reviewed for impairment whenevents or changes in circumstances indicate that the carrying amount may not berecoverable. The interest element of the rental obligations is charged in theincome statement over the period of the agreement and represents a constantproportion of the balance of capital repayments outstanding. I Investment property Investment properties are properties that are held eitherto earn rental income or for capital appreciation or for both.(i) Recognition and measurement Investment properties are recorded at their fairvalue at the date of acquisition or upon classification as an InvestmentProperty following a change of use. They are subsequently held in the balancesheet at fair value. Fair value is determined at each balance sheet date fromvaluations undertaken by professional valuers using market-based evidence. Gainsor losses arising from the changes in fair value are recognised in profit orloss for the period in which they arise. (ii) Income and expenditure Rental income from investment property is recognisedin the income statement on a straight-line basis over the term of the lease.Lease incentives granted are recognised immediately in the income statement.Expenditure on investment properties is expensed as it accrues. J Treasury assets and liabilities Short-term treasury assets and short andlong-term treasury liabilities are used in order to manage cash flows andoverall costs of borrowing. Financial assets and liabilities are recognised inthe balance sheet when the relevant Group entity becomes a party to thecontractual provisions of the instrument.(i) Cash and cash equivalents Cash and cash equivalents in the balance sheetcomprise cash at bank and in hand and short-term deposits with an originalmaturity of three months or less. For the purposes of the cash flow statement,cash and cash equivalents comprise cash and short-term deposits as defined aboveand other short-term highly liquid investments that are readily convertible intocash and are subject to an insignificant risk of changes in value, net of bankoverdrafts. (ii) Deposits Deposits in the balance sheet comprise longer term deposits withan original maturity of greater than three months. (iii) Bank loans, loan notes and borrowings All loans and borrowings areinitially recognised at the fair value of the consideration received net ofissue costs associated with the borrowings. After initial recognition, these aresubsequently measured at amortised cost using the effective interest method,which is the rate that exactly discounts the estimated future cash flows throughthe expected life of the liabilities. Amortised cost is calculated by takinginto account any issue costs and any discount or premium on settlement. (iv) Convertible bonds Where a convertible bond has an issuer cash settlementoption, the convertible bonds are regarded as compound instruments consisting ofa liability and a derivative instrument (see policy below for derivatives). Onissue of the convertible bonds, the fair value of the derivative component isdetermined using a market rate for an equivalent derivative. Subsequent toinitial recognition the conversion option is measured as a derivative financialinstrument. The remainder of the proceeds is allocated to the liabilitycomponent and this amount is carried as a long-term liability on the amortisedcost basis until extinguished on conversion or redemption. Issue costs are apportioned between the liability and derivative component ofthe convertible bonds based on their relative carrying amounts at the date ofissue. The portion relating to the derivative instrument is recognised initiallyas part of the financial derivative instrument. The interest expense on the liability component is calculated by applying theprevailing market interest rate for similar non-convertible debt to theliability component of the instrument. The difference between this amount andthe interest paid is added to the carrying value of the convertible bonds. (v) Derivative financial instruments Derivative financial instruments are usedto manage the risks associated with foreign currency fluctuations of theinvestment portfolio and changes in interest rates on its borrowings. This isachieved by the use of foreign currency contracts, currency swaps and interestrate swaps. All derivative financial instruments are held at fair value. Derivative financial instruments are recognised initially at fair value on thecontract date and subsequently remeasured to fair value at each reporting date.The fair value of forward exchange contracts is calculated by reference tocurrent forward exchange contracts for contracts with similar maturity profiles.The fair value of currency swaps and interest rate swaps is determined withreference to future cash flows and current interest and exchange rates. Allchanges in the fair value of derivative financial instruments are taken throughprofit or loss. (vi) Subordinated liabilities The Group has some limited recourse funding, whichindividually finances investment assets, at various fixed rates of interest andwhose maturity is dependent upon the disposal of the associated assets. Thisfunding is subordinated to other creditors of the individual Group entity towhich the funds have been advanced and becomes non-repayable as the assets fail.These liabilities are held in the balance sheet at the amount expected to berepayable based on the underlying assets. Changes in the amounts repayable as aresult of changes in the underlying assets are treated as other income in theincome statement. Interest payable on subordinated liabilities is charged as itaccrues by reference to the principal outstanding and the effective interestrate applicable. K Employee benefits(i) Retirement benefit costs Payments to defined contribution retirement benefitplans are charged as they fall due. For defined benefit retirement plans, the cost of providing benefits isdetermined using the projected unit credit method with actuarial valuationsbeing carried out at each balance sheet date. Current service costs arerecognised in profit or loss. Past service costs are recognised to the extentthat they are vested immediately in profit or loss. Actuarial gains or lossesare recognised in full as they arise as part of the statement of recognisedincome and expense. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligations as reduced by the fair value ofplan assets. (ii) Share-based payments In accordance with the transitional provisions of IFRS1, the requirements of IFRS 2 have been applied to all grants of equityinstruments after 7 November 2002, that were unvested at 1 January 2005. The Group enters into arrangements that are equity-settled share-based paymentswith certain employees (including Directors). These are measured at fair valueat the date of grant, which is then recognised in profit or loss on astraight-line basis over the vesting period, based on the Group's estimate ofshares that will eventually vest. Fair value is measured by use of anappropriate model. In valuing equity-settled transactions, no account is takenof any vesting conditions, other than market conditions linked to the price ofthe shares of the Company. The charge is adjusted at each balance sheet date toreflect the actual number of forfeitures, cancellations and leavers during theperiod. The movement in cumulative change since the previous balance sheet isrecognised in the income statement, with a corresponding entry in equity. L Other assets Assets, other than those specifically accounted for under aseparate policy, are stated at their cost less impairment losses. They arereviewed at each balance sheet date to determine whether there is any indicationof impairment. If any such indication exists, the asset's recoverable amount isestimated based on expected discounted future cash flows. Any change in thelevel of impairment is recognised directly in profit or loss. An impairment lossis reversed at subsequent balance sheet dates to the extent that the asset'scarrying amount does not exceed its carrying value had no impairment loss beenrecognised. M Other liabilities Liabilities, other than those specifically accounted forunder a separate policy, are stated based on the amounts which are considered tobe payable in respect of goods or services received up to the balance sheetdate. N Equity instruments Equity instruments issued by the Group are recognised atthe proceeds or fair value received with the excess of the amount received overnominal value being credited to the share premium account. Direct issue costsnet of tax are deducted from equity. When share capital is repurchased, theamount of consideration paid, including directly attributable costs, isrecognised as a change in equity. The nominal value of shares repurchased istransferred to the Capital redemption reserve in equity. O Provisions Provisions are recognised when the Group has a present obligationof uncertain timing or amount as a result of past events, and it is probablethat the Group will be required to settle that obligation and a reliableestimate of that obligation can be made. The provisions are measured at theDirectors' best estimate of the amount to settle the obligation at the balancesheet date, and are discounted to present value if the effect is material.Changes in provisions are recognised in the profit or loss for the period. P Income taxes Income taxes represent the sum of the tax currently payable,withholding taxes suffered and deferred tax. Tax is charged or credited in theincome statement, except when it relates to items charged or credited directlyto equity, in which case the tax is also dealt with in equity. The tax currently payable is based on the taxable profit for the year. This maydiffer from the profit included in the consolidated income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates and laws thathave been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit ("temporary differences"), and is accounted for using the balance sheetliability method. Deferred tax liabilities are generally recognised for all taxable temporarydifferences. Where there are taxable temporary differences arising oninvestments in subsidiaries and associates, and interests in joint ventures,deferred tax liabilities are recognised except where the Group is able tocontrol the reversal of the temporary difference and it is probable that thetemporary difference will not reverse in the foreseeable future. Deferred tax assets are generally recognised to the extent that it is probablethat taxable profits will be available against which deductible temporarydifferences can be utilised. However, where there are deductible temporarydifferences arising from investments in subsidiaries, branches and associates,and interests in joint ventures, deferred tax assets are recognised only to theextent that it is probable that both the temporary differences will reverse inthe foreseeable future and taxable profits will be available against which thetemporary differences can be utilised, and that the temporary differences willreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax assets and liabilities are not recognised if the temporarydifference arises from the initial recognition of goodwill and other assets andliabilities in a transaction that affects neither the tax profit nor theaccounting profit. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised using tax ratesand laws that have been enacted or substantively enacted by the balance sheetdate. Notes to the financial statements -----------------------------------------------------------------------------Segmental analysis----------------------------------------------------------------------------- Smaller Growth Venture Minority Buyouts Capital Capital Investments Total 2006 2006 2006 2006 2006Year to 31 March 2006 £m £m £m £m £m-----------------------------------------------------------------------------Gross portfolio returnRealised profits overvalue on the disposal ofinvestments 208 232 72 64 576Unrealised profits on therevaluation of investments 124 60 51 10 245Portfolio income 115 49 5 63 232----------------------------------------------------------------------------- 447 341 128 137 1,053-----------------------------------------------------------------------------Net (investment)/divestmentRealisation proceeds 877 855 207 268 2,207New investment (451) (497) (156) (6) (1,110)----------------------------------------------------------------------------- 426 358 51 262 1,097-----------------------------------------------------------------------------Balance sheet-----------------------------------------------------------------------------Value of investmentportfolio 1,465 1,284 826 564 4,139----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Smaller Growth Venture Minority Buyouts Capital Capital Investments Total 2005 2005 2005 2005 2005 as restated)* (as restated)* (as restated)* (as restated)* (as restated)*Year to 31 March 2005 £m £m £m £m £m----------------------------------------------------------------------------------------------------Gross portfolio returnRealised profits over value on the disposal of investments 103 110 35 2 250Unrealised profits on therevaluation of investments 122 109 37 (23) 245Portfolio income 76 66 4 86 232---------------------------------------------------------------------------------------------------- 301 285 76 65 727----------------------------------------------------------------------------------------------------Net (investment)/divestmentRealisationproceeds 505 443 156 198 1,302New investment (338) (263) (143) (11) (755)------------------------------------------------------------------------------------------------------ 167 180 13 187 547------------------------------------------------------------------------------------------------------Balance sheet------------------------------------------------------------------------------------------------------Value of investment portfolio 1,521 1,292 748 756 4,317------------------------------------------------------------------------------------------------------*As restated for the adoption of IFRS. -------------------------------------------------------------------------------- Continental UK Europe US Asia Total 2006 2006 2006 2006 2006Year to 31 March 2006 £m £m £m £m £m--------------------------------------------------------------------------------Gross portfolio return 392 586 27 48 1,053--------------------------------------------------------------------------------Net (investment)/divestmentRealisation proceeds 1,173 891 76 67 2,207New investment (409) (540) (70) (91) (1,110)-------------------------------------------------------------------------------- 764 351 6 (24) 1,097--------------------------------------------------------------------------------Balance sheet--------------------------------------------------------------------------------Value of investment portfolio 1,740 1,925 307 167 4,139-------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- Continental UK Europe US Asia Total 2005 2005 2005 2005 2005 (as restated)* (as restated)* (as restated)* (as restated)* (as restated)*Year to 31 March 2005 £m £m £m £m £m-----------------------------------------------------------------------------------------------------------Gross portfolio return 502 230 3 (8) 727-----------------------------------------------------------------------------------------------------------Net (investment)/divestmentRealisation proceeds 897 365 34 6 1,302New investment (334) (341) (51) (29) (755)----------------------------------------------------------------------------------------------------------- 563 24 (17) (23) 547-----------------------------------------------------------------------------------------------------------Balance sheet-----------------------------------------------------------------------------------------------------------Value of investment portfolio 2,258 1,693 277 89 4,317-----------------------------------------------------------------------------------------------------------*As restated for the adoption of IFRS. Per share information The earnings and net assets per share attributable to the equity shareholders ofthe Company are based on the following data: -------------------------------------------------------------------------------- 2006 2005 (as restated)*--------------------------------------------------------------------------------Earnings per share (pence)Basic 152.0 82.6Diluted 147.3 81.0--------------------------------------------------------------------------------Earnings (£m)Profit for the year attributable to equity holders ofthe Company 852 498Effect of dilutive potential ordinary shares 14 11-------------------------------------------------------------------------------- 866 509--------------------------------------------------------------------------------*As restated for the adoption of IFRS. ------------------------------------------------------------------------------- 2006 2005 Number Number-------------------------------------------------------------------------------Number of sharesWeighted average number of shares in issue 560,684,598 603,240,340Effect of dilutive potential ordinary shares Share options 2,744,369 119,980 Convertible bonds 24,750,000 24,750,000-------------------------------------------------------------------------------Diluted shares 588,178,967 628,110,320------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2006 2005 (as restated)*--------------------------------------------------------------------------------Net assets per share (pence)Basic 743 615Diluted 739 614--------------------------------------------------------------------------------Net assets (£m)--------------------------------------------------------------------------------Net assets attributable to equity holders of the Company 4,006 3,699--------------------------------------------------------------------------------*As restated for the adoption of IFRS. -------------------------------------------------------------------------------- 2006 2005 Number Number--------------------------------------------------------------------------------Number of shares in issue 539,475,744 601,912,869Effect of dilutive potential ordinary shares Share options 2,916,552 1,007,723-------------------------------------------------------------------------------- 542,392,296 602,920,592--------------------------------------------------------------------------------*As restated for the adoption of IFRS. Notes to the preliminary announcement Note 1The preliminary announcement is prepared under International Financial ReportingStandards ("IFRS") and IFRS 1 First-time Adoption of International FinancialReporting Standards ("IFRS 1") has been applied. The statutory accounts for the year to 31 March 2006 have not yet been deliveredto the Registrar of Companies. The statutory accounts for the year to 31 March2005 have been delivered to the Registrar of Companies. The auditors' reports onthe statutory accounts for these years are unqualified and do not contain anystatements under section 237(2) or (3) of the Companies Act 1985. Thisannouncement does not constitute statutory accounts. Note 2The final dividend will be payable on 21 July 2006 to holders of shares on theregister on 23 June 2006. Note 3Copies of the Report and accounts 2006 will be distributed to shareholders on orsoon after 26 May 2006. Ten largest investments(1)-------------------------------------------------------------------------------------------------------- Investment Proportion Income(Business line) (Geography) Residual of equity Directors' in the NetBusiness description cost (2) shares valuation (2) year (3) Assets (4) Earnings (4)(First invested in) £m held £m £m £m £m--------------------------------------------------------------------------------------------------------SR Technics Holding (Buyouts) (Switzerland)Technical solutions provider for commercial aircraft fleets (2002)Equity shares 7 32.2% 70 -Loans 30 30 3-------------------------------------------------------------------------------------------------------- 37 100 3 14 (1)--------------------------------------------------------------------------------------------------------Oval (2040) Ltd (NCP) (Buyouts) (UK)Transport management and parking services (2005)Equity shares 1 39.9% 1 -Loans 95 95 12-------------------------------------------------------------------------------------------------------- 96 96 12 (23) (9)--------------------------------------------------------------------------------------------------------Giochi Preziosi Spa (Buyouts) (Italy)Retailer and wholesaler of toys (2005)Equity shares 63 37.8% 64 ---------------------------------------------------------------------------------------------------------- 63 64 - 77 13---------------------------------------------------------------------------------------------------------Boxer TV-Access AB (Growth) (Sweden)Digital TV distributor (2005)Equity shares 58 30.0% 60 ---------------------------------------------------------------------------------------------------------- 58 60 - 14 8---------------------------------------------------------------------------------------------------------Infrastructure Investors (5) (Growth) (UK)Secondary PFI and Infrastructure investment fund (2005)Equity shares - 31.2% - -Loans 59 59 ---------------------------------------------------------------------------------------------------------- 59 59 - 208 23---------------------------------------------------------------------------------------------------------Vetco International Ltd (6) (Buyouts) (UK)Oilfield equipment manufacturer (2004)Equity shares - 17.7% 53 ---------------------------------------------------------------------------------------------------------- - 53 - (67) (49)---------------------------------------------------------------------------------------------------------Tato Holdings Ltd (SMI) (UK)Manufacturer and sale of specialist chemicals (1989)Equity shares 2 25.2% 53 ---------------------------------------------------------------------------------------------------------- 2 53 - 89 13---------------------------------------------------------------------------------------------------------Coor Service Management AB (Buyouts) (Sweden)Facilities management (2004)Equity shares 1 37.5% 26 -Loans 26 26 2--------------------------------------------------------------------------------------------------------- 27 52 2 2 2---------------------------------------------------------------------------------------------------------Senoble Holding SAS (Growth) (France)Manufacturer of dairy products and chilled desserts (2004)Equity shares 9 10.0% 27 -Loans 18 19 1--------------------------------------------------------------------------------------------------------- 27 46 1 88 18--------------------------------------------------------------------------------------------------------- Notes1 The valuation of Vonage Holdings Corp., a US Venture Capital investment made in 2004, has been excluded as the company has commenced an IPO process in the US. If it had been disclosed, the investment would have been among the largest five investments shown above.2 The investment information is in respect of the Group's holding and excludes any co-investment by 3i managed funds.3 Income in the year represents dividends received (inclusive of any overseas withholding tax) and gross interest receivable in the year to 31 March 2006.4 Net assets and earnings figures are taken from the most recent audited accounts of the investee business. The figures shown are the total earnings on ordinary activities after tax and the net assets of each business. Because of the varying rights attaching to the classes of shares held by the Group, 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.5 The investment by 3i is into three Infrastructure Investors' entities, a limited partner in the fund, a general partner in the fund and a management company as well as the loan shown, has a cost of £3,177 for partnership capital. The net assets and earnings figures for this investment are for the LP and are unaudited.6 The cost of the equity held in Vetco International Ltd is £423,367. This information is provided by RNS The company news service from the London Stock Exchange

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