Chief Executive's statement
"much-improved portfolio health, good uplifts in value and
strong realisation profits"
Results
I am pleased to report good results for the year with a total
return of £531 million.
This significant improvement follows a three year period of
substantial change for 3i, during which we refocused the investment
business, restructured and slimmed down the organisation, and
strengthened our investment processes. These changes, together with
our continued international growth, are now delivering
much-improved portfolio health, good uplifts in the value of the
portfolio and strong realisation profits.
3i continues to lead the European market in our three chosen
segments of mid-market buy-outs, growth capital and early stage
technology (“venture capital”).
As the year progressed, we increased the momentum of investment
activity, which resulted in almost £1 billion being invested during
the year, including co-investment funds.
For the year, our buy-out and growth capital businesses
generated returns of 22.4% and 26.8% respectively. Our venture
business delivered a substantial improvement, with a return of
(6.0)%, though its return was broadly break-even before the impact
of currency translation losses.
Our overall return of 18.1% can compare with performance data,
produced by Thomson Venture Economics, which shows an overall
return for European private equity and venture capital funds of
(1.4)% for calendar year 2003. Although the data is not strictly
comparable, it does suggest that 3i is performing well within the
top quartile of the industry.
3i’s return compares with returns of 25.7% and 31.0% on the FTSE
100 and FTSE All-Share total return indices respectively. It is
normal that our returns lag an upturn in quoted markets. This is
because the valuations of 3i’s unquoted investments are generally
based on historical earnings and our venture capital assets are not
marked up in line with a rise in quoted markets.
Market conditions
Market conditions and business confidence have improved steadily
since the beginning of the financial year. The improvement in
capital markets and mergers and acquisition activity encouraged a
rise in investment activity as companies began to return to growth
agendas. The new issues market remains quiet across Europe, with
only a small number of significantly-sized IPOs being achieved.
Strategy and competitive advantage
3i’s development in recent years has been built on the four key
elements of our strategy: developing the business internationally,
building a balanced investment business, using the network as a key
competitive advantage and investing in growth companies.
Today, 3i is active in Europe, Asia Pacific and the US, with 42%
of our assets now outside the UK. Of our investment in the year,
51% was in continental Europe and a further 10% in the US and Asia
Pacific.
Buy-outs account for 53% of assets, growth capital 35% and
venture capital 12%.
3i’s network of relationships around the world continues to
deliver significant competitive advantage and is integral to all
that we do. Market access, the ability to convert opportunities
into good investments, add value to our portfolio companies and
realise value, all depend upon it.
Our strategy of investing in companies with significant
potential to grow is increasingly appropriate in a low inflation
and more internationally competitive environment.
Strategy implementation
We have continued to drive improvement throughout the business,
particularly investment focus, in ensuring the best from the
network and in further efficiency programmes.
The combination of increased productivity and a smaller number
of companies in the portfolio enabled a reduction in headcount of
13% from 858 to 750 during the year.
A further change during the year was that our teams in Bristol,
Glasgow and Leeds are now focused on portfolio management. We are
also in the process of moving our teams in Padua and Nantes back to
Milan and Paris respectively.
Across our three activities, 3i’s scale has allowed us to
develop a multi-specialist approach which can deliver the best
resource to new business opportunities and from the management of
key relationships with major companies and professional
advisers.
A good illustration of this is our ability, within industry
sectors, to bring together the chief executives of our portfolio
companies and directors of the leading international businesses.
This provides origination opportunities and creates value for our
portfolio companies.
The establishment of specialist teams is especially clear in our
venture business. This is now focused on nine of our offices,
located in the main technology hubs within Europe, the US and Asia
Pacific and coordinated by sector leadership teams in healthcare,
software, communications and ESAT (electronics, semiconductors and
advanced technologies).
Outlook
3i has withstood some of the most volatile market conditions that I
have seen in my 30 years in the industry and has come through
strongly. It is a leader in its industry and one of the few
genuinely international businesses with competitive scale. The
general macroeconomic drivers look more favourable, the business
model is delivering in each of our three key areas of activity:
buy-outs, growth capital and venture capital and the business has
the people, the network and the capital strength to grow
significant value for our shareholders.
I would like to thank the Board, the staff and our shareholders
for the tremendous support I have enjoyed in leading 3i. I would
also pay tribute to the entrepreneurs who build the businesses that
our industry supports and acknowledge it is largely their visions
that provide our opportunity.
"3i is in great shape and well positioned to grow value for our
shareholders"
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