Okay. Good morning, everyone. To 3i's results for the year to the 31st of March 2018. In November, Julia and I said that the group was performing well, with good momentum moving into the second half. As you've now seen, we finished the year with a strong set of well-balanced results. We closed the year with a 24% return on equity, a NAV of GBP 7.24, and an increased dividend of GBP 0.30 for the year. Both divisions performed well, with some major realizations of significant premiums to book value and our . It was another year of GBP 1 billion of group, and we with net cash of GBP 475 million. Fee income from the infrastructure team increased to GBP 81 million for the year. FY 2018 was not just a good all-round year, as you can see, it was another important step in our post-restructuring track record.
It's the fourth year in a row we've delivered 20% plus returns on equity. The high level of cash investment is a strong future indicator for the group. As you know, our objective is to generate mid-to-high teens returns across the cycle by investing our proprietary capital in mid-market private equity. We aim to grow the earnings and cash flow of our portfolio companies and to double their value or better at exit. We use fee income from infrastructure and some portfolio income to pay for the running costs of the group. To achieve that, we operate a lean cost base with a high proportion of variable pay. In turn, that means we generate strong shareholder returns before our compensation bill grows.
A central plank of our approach is a clear and straightforward strategy which allows our investment teams to focus on our chosen sectors and geographies, as well as on the winning themes or mega trends we have identified as most likely to satisfy our overall financial objectives. One of the key advantages of private equity is the flexibility we have to adapt our approach, to avoid challenge sectors and focus on those areas which are most likely to meet our growth aspirations. It's very important in today's world that we stand back from time to time and reaffirm those themes or mega trends or move on to new ones. Some of the trends we focus on within our sectors you can see here and how our recent investments map across those trends. Lately, we've increased our exposure to health and wellness.
We've decided this year we will break health out as a fourth sector for our PE team to focus on. FY 2018 was another important year for new investment in private equity. We added four new companies and our platform assets, including Ponroy, Q Holding, Cirtec, and WP, were busy with strategic acquisitions. With the acceleration in value we've seen this year in the investments we made in FY 2014, our 2013-16 vintage is already valued at 2.1 times cost. That vintage is looking like it could deliver closer to three times when you consider the growth still to come from larger companies like Q, Audley, and WP. While it's been a more balanced year in terms of the spread of performance across the PE portfolio, Action has still been the standout for value growth.
As many of you heard about at the Capital Markets Day in March, Action had its fair share of growth issues in 2017. I'm thinking particularly about a couple of buying categories as well as distribution, especially in France. It was still able to open 243 net new stores, two new distribution centers, and start construction on two more. At the same time, they were generating 28% revenue growth, over 5% like-for-like, and 25% EBITDA growth. That's what I call a busy agenda. 2018 will be another stretching year for Action on all fronts. That's because they plan to open even more stores than in 2017. As well as building out their infrastructure to meet their medium-term objective of GBP 10 billion of sales.
This investment program, together with the early country expansion in Poland and Austria, will hold back profit growth this year, just like it did in 2017. Even with this level of investment in group development, Action is still very likely to remain a sector leader in terms of sales and profit growth. In December 2017, we acquired Vascotube in Germany, Cirtec's first significant acquisition. Vascotube is a leading manufacturer of nitinol tubing, which is used in minimally invasive surgical procedures, such as heart valve surgery. Vascotube was the top M&A target for the Sertec CEO when we acquired his business in early 2017. We were able to work with our German team to secure the asset and, in the process, transform the earnings potential of the Sertec Group, as well as diversifying its client base.
In time, we expect Sertec, Q and Ponware to become significant platform assets for 3i in the health sector. FY team was another strong earnings performance across the PE portfolio. 91% by value grew their earnings with particularly strong performance from Basic-Fit, Q, Audley and Sertec. Trading at Christ, our German jeweler, struggled again with declining footfall in German city centers during its key Christmas period. We have also reduced its multiple. EURO-DIESEL encountered some manufacturing issues last year. Notwithstanding this, the company has a strong customer base and a full pipeline of orders for this year. We saw a good flow of realizations this year, delivering good returns over our cost. Our second half was particularly busy, with significant realizations in PE and infrastructure, as well as a significant cash return from Action's latest refi.
The sale of ATESTEO achieved a 4.8x money multiple over the four years of our ownership. That's a great example of how effective our German team is in transforming a family-owned Mittelstand engineering company into a leading international independent testing business. Our PE portfolio continues to develop well. Some 88% by value are in our top two buckets. That's 93% if you include our quoted asset, Basic-Fit. We continue to see most companies transitioning into bucket one from bucket two, rather than moving down to three or four. We took a hit to group cash income last year when we sold our debt management division. With our lean cost base and recent new fundraising from our infrastructure team, as well as ongoing regular dividends from our reinvestment in Scandlines, we expect to continue to generate small operating cash profits going forward.
Scandlines has been a very strong investment for us since we bought the other 50% from Allianz in 2013. It has a well-invested fleet and is highly cash generative. We fully expect it to deliver many years of strong profit and cash performance, as do our fellow shareholders, First State and Hermes. Which is why we decided to reinvest 35% into a 35% equity position for our longer-term hold portfolio. Our Infrastructure team also had a really good year with a 29% total return from 3iN off the back of the very successful sales of Elenia and AWG in particular. You didn't mishear me. That's a 29% total return from an infrastructure investment company. It's testimony to the capabilities and energy of the 3i Infrastructure team.
As a result of strong portfolio performance and greatly reduced platform costs, we've moved our capital efficiency and allocation on again even further. With over 84% of cash generated going to the good stuff of reinvestment in shareholder dividends, as opposed to just 32% in the bad old days. On outlook for the current year, I would say the year has started well with decent investment activity across both divisions and some strong early realizations in private equity. Despite the broader volatility in politics and markets, we expect to see another decent year of earnings and value growth in our portfolio, particularly given the momentum in our larger investments. We are planning divestments of around GBP 700 million-GBP 800 million in private equity. I'm sure it'll be another good year from infrastructure, if not quite as exciting on the realization front.
Before I close, I would like to just remind you of the simple arithmetic behind our business model. We aim to buy four to seven companies a year for a total of GBP 750 million, with a view to generating a two times return over four to five years. That means mid to high teens annual returns, net of carry and platform costs through the cycle. As you can see from the last six years' results, we manage our annual costs very tightly. This should be a repeatable model. GBP 1.5 billion of cash generated pays for another year of investment, as well as providing for distributions to shareholders. Our focus on investing proprietary capital in mid-market private equity is quite distinctive amongst the larger listed alternative asset managers.
As you can see from our recent FY 2014 realizations, successful investment outcomes can really drive group performance and achieve returns significantly above the mid to high teens. We've put a great deal of thought into the construction of our proprietary portfolio. When you look at our longer term holds such as Action and other recent large 3i investments such as our platform assets, you can see why we are quietly confident about continuing to generate very strong returns and dividends for shareholders for years to come. Thank you. I'll now hand over to Julia.
Thanks, Simon. Our financial results for FY 2018 show a strong all-round performance. NAV per share increased by 20% to GBP 7.24. Good portfolio performance accounts for GBP 0.90 of that increase. Another GBP 0.21 comes from some excellent realizations, and that's in addition to the GBP 0.30 that we get from the upcoming Scandlines transaction. Despite some very significant intra-year movements, there was none of the currency benefit that we've seen in previous years. The GBP 7.24 NAV is after the GBP 0.265 dividend, which is last year's GBP 0.185 final dividend and this year's GBP 0.08 interim. With 88% of our proprietary capital invested in private equity, that is the biggest driver of our returns. Our private equity business had another excellent year, with a gross investment return of GBP 30%.
Last year's return of 43% included an additional GBP 220 million of FX translation benefit. In absolute terms, our performance is actually marginally better. Simon talked about the realizations in the year that generated GBP 199 million of realized profits. The 48% uplift over opening value on the investments we sold was high. 100% in the case of ATESTEO. That reflects the quality of the assets that we're selling in a highly competitive market and our ability to attract strategic buyers. It doesn't reflect the excellent uplift that we achieved on the Scandlines transaction that we'll complete in the summer. At the 31st of March, the private equity portfolio value was GBP 5.8 billion and you can see here how it progressed from the GBP 4.8 billion at the start of the year.
The GBP 1 billion of value growth is supported by good earnings growth from our larger investments and the Scandlines uplift. With no end in sight to these highly competitive markets we've been specifically targeting more primary buyouts or family company investments In the last couple of years. These investments can require more attention in the early days as we professionalize them and support their growth. Clearly, that can hold back earnings early on, and that's some of what's behind the small number of companies in the portfolio with negative earnings growth this time round. Good earnings growth overall underpins the GBP 541 million of performance in our value growth, as you can see here. I'll talk about Action and Scandlines separately in a minute. Basic-Fit was also a strong contributor, generating the GBP 81 million of value growth that we got from our quoted assets.
The increase in weighted average multiple to 11x reflects the sale of some lower-rated investments, and it also reflects our more recent investments, such as Sertec and Lampenwelt, in higher-rated sectors. We continue to take a long-term view of multiples, and we will adjust the multiples downward from what the comp set implies if we think we need to. We did exactly that for 14 out of the 21 companies that we valued on an earnings basis. We also did a review of the set of comparable companies that we refer to when looking at Action's valuation. Action has had another strong year, which has included the investment in the logistics platform. Its performance compares very favorably against any of its peers. In that context, Given our conviction about Action's longer term growth potential, we have increased the post-discount multiple from 16x to 16.5x.
We apply that multiple to Action's run rate earnings. We announced the sale of Scandlines in March, as well as our 35% reinvestment alongside funds managed by First State and Hermes. That's an excellent outcome, and the GBP 302 million uplift this year reflects both the successful refinancing in July last year, as well as a very competitive sales process. At the 31st of March 2018, we're holding Scandlines at its transaction value, less a 2.5% discount. After completion, we will show our reinvestment in Scandlines as a long-term hold proprietary capital asset, and we will report on it separately from the private equity business. Scandlines will also provide an important contribution to our cash income, and it also has the potential for value upside from delivering operational excellence and from further delays in the competing fixed link. We first invested in Scandlines in 2007.
That makes it one of the earliest investments in Eurofund V. The Scandlines value increase, together with Action's increase, is reflected in the carry receivable of GBP 138 million that we have recognized in this year. The majority of the GBP 196 million of carry payable relates to our 2010 to 2012 vintage, which includes Action, but not Scandlines. The net carry payable of GBP 58 million for private equity is only 4% of private equity's gross investment return, which is quite a bit lower than the 10%-15% guidance that I've given you in the past. While we're looking at carry, I should mention IFRS 15. That's the revenue recognition standard that we will apply from the 1st of April 2018. The only potential impact it has is on our carry receivable. We have a pretty unique set of circumstances.
That's because almost all of our carry receivable is due from Eurofund V, our last buyout third-party fund. I'll spare you the finer technical analysis, but because of the small number of companies that remain in that fund, we have concluded that IFRS 15 will not have a material impact on our carry receivable recognition. There's a slide in the back of the pack to give you a bit more information, but you should assume that for private equity in the future, we will accrue net carry payable in the range of 10%-12% of gross investment return. I said right at the beginning that we had a strong all-round performance. Infrastructure also had a great year, with 3iN's results announced last week being outstanding. Following 3iN's disposals of AWG and Elenia, we received a performance fee of GBP 90 million.
75% of that GBP 90 million goes to the infrastructure team's incentive plan. Payments under their plan are awarded over a number of years and partly in shares. We have only been able to accrue for GBP 9 million of the 75% potential payable so far. We're also making good progress with our complementary infrastructure funds activity. In fact, we closed our European Operational Projects Fund ahead of our internal target, and we're building a small team of investors in the U.S. We used our balance sheet to make our first U.S. infrastructure investment in Smarte Carte. That's off to a good start, with the team already completing a significant refinancing and a small bolt-on acquisition. Our conservative balance sheet approach is fundamental to our strategy.
Having a conservative balance sheet means that we can be confident about our ability to fund new investments and initiatives, and to support our portfolio, even when conditions for realizations are not as favorable as they are today. We closed the year with net cash of GBP 475 million and liquidity of GBP 1.4 billion. We are obviously well-funded for both investment and dividends. Today, we've recommended a dividend of GBP 0.22 to be paid in July, making a total dividend of GBP 0.30 for the year. That GBP 0.22 is made up of the second half of the GBP 0.16 base dividend and an additional dividend of GBP 0.14. As Simon said earlier, we have a business model which, if we execute properly, is quite capable of generating mid-to-high teens returns over the cycle, and strong cash returns to fund both investment and shareholder distributions.
We introduced our policy of paying a base and additional dividend in 2012, and it has served shareholders well as we reshaped our business. After six years of strategic delivery and an increase in the annual dividend from GBP 0.081 in 2013 to the GBP 0.30 that we have announced today, we have decided it is time to simplify the policy. We will continue to set the dividend with careful consideration of our outlook for investments and realizations, our balance sheet strength, and market conditions. We will also be careful to make sure that we avoid any structural gearing at the group level. Taking all that into consideration, we will aim to maintain or grow the dividend year-on-year from this year's GBP 0.30. Finally, to make things even simpler, we will set the interim dividend to be 50% of the prior year annual dividend.
We would expect next year's interim dividend to be GBP 0.15. This has been a strong year all round. Our private equity and infrastructure businesses are performing well, and we enter 2019 with a good level of activity and portfolio momentum. Thank you, and we'll now take questions.
Chris.
Yes.
There's a mic coming, Chris.
Chris Brown from J.P. Morgan. Simon, you mentioned, I think GBP 700 million-GBP 800 million of divestments planned?
Yeah.
Just to be clear on that, does that include what you're already expecting from Scandlines?
It includes the net amount. That if you like, we're selling a few hundred million GBP worth of our stake. That is in the number, the big number of GBP 800 million is not in the number.
Yeah. Okay. Thank you. Also on investment levels, I think I recall reading somewhere you're expecting around GBP 700 or so?
Well, as you know, our cap is GBP 750 million.
Yeah.
It's up to. We try and get up there, being mean about prices never quite gets us up there. You've seen the track record in the earlier table.
Yeah.
If we can get there, we'd love to. It depends on pricing.
Yeah. Okay. Thank you.
We've done two already, so you've seen those. Charles, there's one ahead.
You have made a number of additions to the private equity team this year. I wonder if you could summarize those, but also give us an idea if you're planning to add further.
There is an ongoing recruitment plan in both businesses. The numbers are not significantly material in terms of our cost base. What has happened over the last few years, we've taken costs out of the back office and out of some redundant offices, and we've reinvested in the front line of the private equity and infrastructure teams, particularly around our origination capabilities behind the big sectors. We've been beefing up the teams in our busy geographies in private equity, in particularly Germany, Holland, and the U.S. We're also adding people in the U.K., and we've been doing the same in infrastructure. The net numbers are actually not moving because of closing Madrid and taking other people out of the back office.
Thank you.
Sorry, we had a question.
Can you talk a little bit about why you're not going to classify Scandlines as a private equity investment?
Yeah. We've decided we'd like to continue to hold about 35% of Scandlines because we think it's a terrific company, and it's got significant potential to grow in value and also, particularly in this case, has very considerable cash flow coming off it each year. It throws off as much cash flow as our entire debt management business did, but it does it a lot more predictably without lots of regulatory risk around it. It fits a particular piece in our jigsaw puzzle, and we're designating it a corporate asset, and it's going to be managed corporately in conjunction with the private equity team as opposed to it being a private equity asset. Philip.
Thank you. Just a couple of questions on the existing private equity portfolio. I understand the maths of you buy higher rated companies, the multiple goes up. You were talking about 11 companies, you're actually taking the multiple down. If you could give us a little bit more detail about what your thinking is. Secondly, you implied the reason that some of the companies you're seeing were not delivering earnings growth was because they're new companies where you are executing a turnaround. Could you tell us about what visibility you have about the success of that turnaround and why you think that's kind of a good place to be?
Do you want to do the first?
Yeah. If we do multiples, first of all, as I said, in 21 companies valued on an earnings basis, 14 of those, we adjust the multiple downward relative to the comp set. In doing that, we may still, if the business has performed well, if we've gone through a significant milestone in terms of our investment case, we may still be moving the multiple up marginally. When we talk about moving multiples up, we're not doing multiple turns. It's sort of half a turn here or there. There are a small number of companies where we've moved the multiple up slightly, but it may well still be adjusted down from the comp set. There's still, if you like, the buffer that I think about in terms of where we see equity markets today.
We've got that effect going on, which is I would call the sort of the normal profile of managing the multiples through ownership. As you say, we've also got a feature this time, which is a mix effect that comes from having sold some older assets that were held at lower multiples and having acquired a couple of assets this year that are in higher-rated sectors.
I'd just add as well, there's an issue in here in terms of when we realize things. What we can't do is continue to hold assets at levels where we're making 100% premium on exit within a matter of months of putting it in our accounts at another figure. We do, where we see really strong momentum in a business, have to think very carefully about whether the multiple is too conservative, particularly if we're approaching an exit point on something like that. It goes to the credibility of the numbers in the book. On the second part of your question, if I use an example of something like a BoConcept. This was a business that we took private in Denmark, which had been run by a family. It had been around quite a long time, many decades.
The son had taken it over from the founder, it had floundered, frankly, it's a global franchise-based model. What we perceived in the business was a very strong brand and a very cash-generative business. It completely lacked any depth in terms of professional management. Its IT was antiquated. A lot of the franchisees, which really drive the business, seemed to be people the guy had met in a bar in a hotel at some stage and been given the franchise for the thing. They weren't what we would call professional franchise managers. We went in with a plan that involved significant investment across the infrastructure of that business and a significant replacement of franchisees, which takes time and costs money because you're bringing contracts to premature ends. That was all in the investment case, that is nothing new.
It does mean that the first couple of years of our ownership, the numbers almost certainly go backwards, then after that, they begin to accelerate. We have a number of companies of that type which have hair on them, we think there's more upside as a result of that, they were less competed over in terms of process than a plain vanilla company that's doing incredibly well from the get-go. We have three or four of those companies in our portfolio where we have no less ambitious targets for realizations than for making 2X or better, it's a bit more of a dip then a strong drag out. That's a good example of that. The end of the row here.
Adetiosan Adediran from Morgan Stanley. Two questions from me. Looking at your PE portfolio, if I look at your long-term assets, the ones you've categorized that you plan to hold for the long term, thinking how do we look at this versus your target returns? In terms of when you assess these assets, what would make you keep them in this bucket going forward? Will you be looking at your target returns on an annual basis? What would make you remove assets from that category? Also in terms of when we look at these assets versus your target holding period, your PE portfolio, how should we be looking at that now going forward, given that these assets, you're likely to hold them much longer than four to five years?
Let me deal with that. Our average holding period in our PE portfolios is, in reality, in a range of four to seven years, that's what we would expect for the majority of our PE portfolio. There are two assets which we regard as longer term assets. One is Action and one is Scandlines. We would expect both of them to do better than our cost of capital as a starting point. We're actually holding them for different reasons. Action we're holding because we think it's capable of very material growth over a prolonged period of time, which is very material given its size in the context of the 3i Group. That is the particular reason around Action.
We may face something of a transaction, which is quite similar to Scandlines in due course because Eurofund V comes to an end at the end of 2019. We will see ourselves as almost certainly holding most of our position in that well beyond that date. The second one is Scandlines, which has an interesting characteristic in that it's so cash generative and has been such a consistently strong performer. Because we have this desire to really plug any cash leakage that comes from the cost of the platform, which is not dealt with by third-party fees in private equity as we develop a model focused purely around proprietary capital.
That is dealing with that specific issue, as well as having plenty of upside in value terms as we see progression in profitability from the two routes that it maintains and the retail business it has, the increase with GDP, the further likely delays in the opening of the competing tunnel in due course. They're held for different reasons, they're the only two what I call we have long-term assets at the moment.
Will you expect them to continue to deliver above your target returns of
Absolutely
low to mid-single digits
Yeah
returns? Okay, fine. The second one is just relating to the comments on multiples. Just in terms of the multiple adjustments for the, I think you said 11 companies, how should we look at this? Is it more or less when you compare it to peers, the adjustment, is it in relation to the market performance of the peers? Just in terms of your expectations on the performance of these assets versus peers in terms of earnings performance?
Yeah. It's not a fixed adjustment. There's always an element of judgment in the sorts of valuations that we're doing. In a number of cases, it may well be that there's something just happening in the market and the sector, and we'll be looking at long-term sector averages. We're always looking at the relative size of our companies to the quoted companies that we're comparing with. Sometimes, there's a very significant delta between the size of the businesses. It'll be a whole feature of those types of things that we'll be thinking each time. We'll have looked at what's particularly happened in the comp set if we have particular drivers that have taken us up against the market.
Over time, as Simon said, as we get closer to exit, we will then have to think about how we're moving with more of a view to what we expect to get at exit. In these markets, we can sometimes see that that actually almost leapfrogs where we might have been relative to the comp set, because something will happen in the process that just turns that up. There's a bit of a craft as we get closer to that side cycle of it. The way I look at it overall is when I look at the chart that I have, what sort of cushion do I have in markets that are really quite volatile? They've been relatively stable recently, but you've got a volatility in there that we don't want to see playing through the NAV.
Just one final one. In terms of the market factor in determining the multiple, how much of a downturn will lead to a significant adjustment or maybe 0.5 times adjustment in the multiples-
What-
for the assets in your portfolio?
As I said, the point of doing what we're doing is to insulate ourselves to what I would call the type of volatility that we've been seeing over the last three, five years, actually, we've been doing this for now. We're never going to be protected from a wholesale turn downturn, a catastrophic fall in the market. You've seen over the four to five years that we've been doing this, that we haven't, even when the market has got nervous, there's been a risk-off environment. Actually, we've had market commentary that suggests people get nervous about our valuations. Actually, they haven't been impacted by that. That's the point of doing what we're doing.
I struggle to get too nervous about this when I see some of the listed entities. I think Hg is over 16 times on average. I think Apax is at 15 times or something. We're considerably below some of our peers in terms of where we mark our book and where the indices is marked for the relevant companies we're investing in. When we look at some of these changes, when you buy something like Sertec, which is a very attractive business, and then you're able to transform it within 12 months by the acquisition of something like Vascotube, which actually grows at an even higher rate than the original Sertec business. We do have to re-look at this and work out whether we're just too off-pitch in terms of the way we're valuing the business.
Just a quick question with the Scandlines equity stake and your operating cash profit expectations going forwards. We've been used to seeing this be quite a small number. Are you now saying to us that we should expect this to be a much bigger profit number? Clearly that could have an impact on how we think about your company. Thank you.
Yeah. I wouldn't sort of bake that in as a profit stream. As we've said, the important thing in terms of our strategy is to make sure that shareholders aren't suffering a dilution of our cost base in the absence of big third-party funds to generate a lot of fee income in private equity, for example. I think you should think about it as our objective is to maintain a profit, and the steps that we've taken to fill the hole that debt management left, I think are really positive. The GBP 11 million this year is a very good story. I think you should think about it as a modest profit.
Any more questions? Okay. Thanks very much for coming, everyone.