Buyouts

"The Buyout business has delivered another successful year, with a gross portfolio return of 29% and record levels of realisations. We face a highly competitive market but the strength of our deal flow and execution capabilities enable us to find exciting investment opportunities across Europe."

Gross portfolio return

The Buyout business generated a gross portfolio return of 29% for the year to 31 March 2006 (2005: 20%), which is at the top end of our target return range across the economic cycle. The business has now achieved or exceeded its target in each of the last three financial years through a combination of investment discipline and a favourable market environment.

Investment and realisations

Investment (excluding third party co-investment funds) for the 12 months to 31 March 2006 was £451 million (2005: £338 million). Investment levels were good, particularly in the first six months of the year, when the pipeline for new investment was exceptional. The lower level of investment in the second half reflects the continued competitive conditions in the European buyout market. Despite these competitive conditions, the business generated significant deal flow through its pan-European origination capability.

Realisations (excluding third party co-investment funds) for the same period were very strong with £877 million of realisation proceeds being generated (2005: £505 million). This reflected the underlying quality of the assets in the portfolio and the continued buoyant financial markets.

Portfolio health

The underlying health of our Buyout portfolio has been good since the new business model was introduced in 2001. The strong performance of the portfolio is underpinned by the low loss rate that we have seen on our investments in Eurofunds III and IV, which at the year end stood at 3% of investment cost.

Fund management

The third party co-investment funds that 3i raises are co-invested alongside our own capital when financing buyouts. In the year to 31 March 2006, 3i earned fee income of £24 million (2005: £27 million) from the management of private equity funds. In addition, 3i receives carried interest in respect of the performance of these funds. During the year, 3i recognised £79 million of carry receivable which relates primarily to Eurofund III, 3i's 1999 pan-European Buyout fund.

Our Buyout business is currently investing Eurofund IV, the €3.0 billion fund that was raised in 2003. The fund was 75% committed at 31 March 2006 and, consistent with industry fund raising practices, 3i intends to raise its Eurofund V mid-market buyout fund during the financial year ending 31 March 2007.

Long-term IRRs

The strong IRRs achieved on investments in the last five Buyout vintages reflect our commitment to high-quality investment. Favourable exit conditions and the health of our ongoing portfolio have seen recent vintages performing well ahead of our longterm targets for the business. The most notable successes from the last five vintages were the sales of Yellow Brick Road, Go-Fly, Westminster Healthcare and Betapharm.