3i Group PLC

Primary Credit Analyst:

Sadat Preteni, London (44) 20-7176-7560; sadat.preteni@standardandpoors.com

Secondary Contact:
Dhruv Roy, London (44) 20-7176-6709; dhruv.roy@standardandpoors.com

Table Of Contents

Rationale

Outlook

Company Description

Business Risk: Fair

Financial Risk: Modest

Accounting: Changes To Consolidated Accounts As A Result Of IFRS 10

Liquidity: Strong

Ratings Score Snapshot

Related Criteria And Research

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Rationale
Counterparty Credit Rating
BBB/Stable/A-2

Business Risk: Fair Financial Risk: Modest

Long track record in the European mid-market Permanent capital base.

private equity market.
Exposure to investment market volatility, albeit with
more stable investment performance recently.
Measured investment activity, with limited
prospects for near-term private equity fundraising.
Conservative approach to leverage, demonstrated
by a consistent improvement in leverage metrics.
Weak underlying cash flow, excluding realization
proceeds and noncash revenue items.

Outlook

The stable outlook on U.K.-based private equity firm 3i Group PLC (3i) reflects Standard & Poor's Ratings Services'
expectation that the group's "strong" liquidity and conservative leverage policy will continue to support its financial
profile over the two-year outlook horizon.

Downside scenario
We could lower the ratings over the two-year outlook horizon if:

We observe re-leveraging of the balance sheet, measured by net debt to adjusted total equity moving closer to
0.8x (from 0.05x at year-end March 31, 2015);
We consider that 3i demonstrates a reduced commitment to a conservative leverage and liquidity policy; and
We perceive that 3i's restructuring initiatives have materially eroded the franchise.

Upside scenario
While unlikely in the near term, we could raise the rating if:

3i is able to maintain its current leverage ratios; and

We see a clear prospect of sustained growth in third-party assets under management (AUM) and fee income
such that net cash flow coverage of gross interest moves more in line with that of similarly rated peers.

Company Description
Founded in 1945, 3i is a mid-market-focused private equity firm and alternative asset manager. It is organized around
three business lines: private equity, debt management, and infrastructure. 3i has a long track record in European
mid-market private equity, investing in companies with enterprise values of 100 million-500 million. In debt

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management, the group invests primarily in senior secured loans, specializing in the management of collateralized loan
obligations (CLOs). 3i's infrastructure business invests across core infrastructure with a focus on the U.K. and Europe,
primarily public-private-partnership (PPP) and low-risk energy projects in developed markets.

On March 31, 2015, 3i had total AUM of 13.5 billion, of which the on-balance-sheet investment portfolio represented
about 24% and fee-generating third-party AUM about 76%. Total AUM comprised:

Private equity (AUM of 3.8 billion);

Debt management (AUM of 7.2 billion); and
Infrastructure (AUM of 2.5 billion).

Following a period of investment underperformance during the global financial crisis, 3i embarked on a strategic
restructuring of the business in June 2012. This included (a) streamlining the private equity business by refocusing on
its core markets and improving its investment and asset management controls and processes; (b) increasing operating
cash profitability by reducing operating expenses; and (c) growing fee income through increased third-party AUM.

3i continues to focus on mid-market companies in its core region of Northern Europe--with a country/region bias
toward Germany, France, Benelux, the Nordics, and the U.K.--and North America, and a reducing focus on
Asia-Pacific, Brazil, and Southern Europe (see chart 1). As of March 31, 2015, 89% of the private equity portfolio by
value was headquartered in 3i's focus areas, primarily due to realizations combined with value increases in core areas.

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Chart 1

3i is the group holding company and is listed on the London Stock Exchange, with its shares widely held. 3i is not
regulated, but some of its subsidiaries, including 3i Investments PLC (an investment manager, not rated) are regulated
by the Financial Conduct Authority. 3i is, however, subject to regulatory requirements under the European Alternative
Investment Fund Managers Directive as of July 2013. As a U.K. investment trust, 3i's capital gains are exempt from
tax.

Business Risk: Fair

3i is relatively small in comparison to traditional asset managers and larger U.S. alternative asset managers. However,
we consider that the group benefits from its three different business lines and that the investment portfolio is
reasonably diverse by business classification and geography. We also consider that the group has sound franchises in
each of its three operating units.

We note that 3i has largely completed the key phases of its strategic plan. Accordingly, the group has reduced its
private equity portfolio and made significant cost savings, in part led by reductions in headcount, and in the number of
global offices to eight from 19 previously. Finally, monthly dashboards now facilitate the monitoring and tracking of

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performance to enable the timely escalation of issues, in addition to more comprehensive bi-annual portfolio company
reviews. 3i's strategic imperatives for 2016 are to (a) invest in the private equity franchise by way of new investment
and continue the strong run of realizations; (b) grow the debt management and infrastructure businesses; and (c)
maintain strong cost discipline and low leverage.

We consider the debt management and infrastructure businesses as key to 3i's objective of growing third-party fee
income in the absence of near-term private equity fundraising. We note that increased AUM in debt management and
infrastructure offset the net divestment in private equity and roll-off of legacy debt management funds during the
financial year ended March 31, 2015 (financial 2015). 3i successfully raised 2.4 billion in gross new money. The net
effect was growth in net AUM of 4% to 13.5 billion on March 31, 2015. The debt management business closed six
new CLOs, three in Europe and three in the U.S., raising 2.2 billion in AUM. We also understand that the business had
the first close of a European third-party mid-market loan fund at 250 million, with a view to diversifying its product
offering.

3i has a long track record of managing its portfolio companies and we consider that its long-term track record of
cash-on-cash returns is generally satisfactory. Moreover, we consider the quality of the group's investment portfolio to
be adequate and the overall portfolio as defensively positioned from a sector perspective (see chart 2). However, these
strengths are offset by the facts that the majority of investments comprise companies that might typically be rated in
the 'B' category and that 3i generally holds either the riskier equity portion or shareholder loans in the capital structure.

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Chart 2

There were 457 million of new investments during financial 2015, 369 million of which were proprietary capital.
However, 3i is currently a net divestor, and investment activity in private equity remains measured. In keeping with its
strategy to make the private equity portfolio more manageable, 3i reduced the portfolio to 65 investments by the end
of March 2015, from 81 in 2014. We understand that the group may reduce the number of investments in the portfolio
further over the coming two years. Thus, the portfolio has become more concentrated by number of investments and
investment size than historically. On March 31, 2015, the 10 largest investments (excluding the group's investment in
3i Infrastructure PLC) represented about 48% of the direct portfolio, compared to typically below 20% historically.

We note 3i's commitment to achieving operating efficiency, demonstrated by a run-rate operating cost reduction of
70 million since 2012, surpassing its target of 60 million. Increased fee income, driven by the closing of new CLO
deals, combined with higher cash income from dividends and interest has supported the group's cash profitability,
allowing it to cover its operating expenses with stable cash and portfolio income for the first time in over a decade at
year-end March 2015.

Nonetheless, we consider 3i's profitability to be "below average," reflecting an adjusted EBITDA margin of below 20%,
excluding volatile revenue items, such as realized and unrealized gains/losses and performance fees, because data net
of compensation expense is not available. We also view 3i's earnings (total return) volatility as a ratings weakness,

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driven by realized and unrealized returns that are inextricably linked to market conditions.

S&P base-case operating scenario

We consider that 3i's earnings prospects over the next 12 months will remain solid, in view of macroeconomic
improvements in its core markets and a continued emphasis on cost control.
Although on an improving trend, we expect 3i's profitability to remain "below average" as measured by its adjusted
EBITDA margin of below 20%.
We believe that 3i's main strategic challenge will be to boost fee income while reducing the volatility of its overall
returns. Although we see some progress, we think that it will take some time to grow its fairly modest fee income
relative to peers.
We consider the debt management and infrastructure businesses as important alternative avenues for fundraising
and generating third-party fee income. However, we expect that growth in debt management and infrastructure
third-party AUM will be broadly offset by declines in private equity fee income, in light of the limited near-term
prospect of fundraising in this segment.

Positive adjustment for comparison against peers

We raise 3i's anchor by one notch to reflect our view that the group's business risk profile of "fair" is likely to be
sustained at the upper end of the assessment range. Key to this assessment is 3i's focus on increasing fee income by
growing third-party AUM and reducing investment performance volatility, supported by the implementation of tighter
controls and processes in investment and asset management.

Financial Risk: Modest

We focus on net debt to adjusted total equity (ATE), as calculated by Standard & Poor's, as our core leverage ratio for
3i, unlike debt to adjusted EBITDA for most other asset managers. This is because of the group's large portfolio of
on-balance-sheet investments (3.8 billion of total balance-sheet assets of 4.9 billion on March 31, 2015) and because
of the greater role for interest and investment income from on-balance-sheet investments in portfolio companies
within total revenues. Our calculation of gross debt and debt to ATE is shown in table 1.

Table 1
3i Calculation Of Net Debt To Adjusted Total Equity, March 31, 2015
March 31, 2015 March 31, 2014
+ Loans and borrowings 815 849
+ Residual B shares liabilitiy 0 6
= Non-current liabilities 815 855
+ Derivative financial instruments 0 4
= Current liabilities 0 4
Gross debt 815 859
- Surplus cash after 25% haircut 648 523
Net debt 167 336
Reported equity 3806 3308
- intangibles 19 26
- proposed dividend 190 126
- equity in structured vehicles 169 52

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Table 1
3i Calculation Of Net Debt To Adjusted Total Equity, March 31,
2015 (cont.)
Adjusted total equity 3428 3104
Net debt to ATE (x) 0.05 0.11

Historically, 3i's permanent capital base, which we view as a rating strength, has been offset by relatively high gross
leverage. However, as a result of management initiatives over the past three years, the group has tempered its leverage
appetite relative to historical levels. We note that the company was successful in achieving its target of gross debt of
less than 1 billion by June 2013. On March 31, 2015, gross debt stood at 815 million, down 50% from 1.6 billion at
end-March 2012. Consequently, interest expenses have fallen to 49 million at end-March 2015, 18% below the target
of 60 million. As a result, our calculation of debt to ATE has improved substantially.

3i's consistent policy to hold adequate liquidity--which has increased on the back of recent divestments and operating
cash income--and its well-spread debt maturity profile extending to 2032, lead us to apply a haircut of 25% to 3i's cash
balances to arrive at net debt, rather than the 50% that is typical for alternative asset managers. Net debt to ATE, by
our measures, has trended from 0.3x at year-end March 31, 2012, to 0.05x at year-end March 31, 2015. We consider
both these ratios to be comfortably in the "minimal" leverage category.

Chart 3

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We consider 3i's cash flow coverage of gross interest costs to be weak compared to peers with similar leverage
profiles. When calculating EBITDA, we exclude non-cash and more volatile revenue items such as realized and
unrealized gains, and place a greater focus on stable cash flows, such as portfolio income and fee income after
operating expenses to gross interest payable. We note that portfolio income mainly comprises income from loans and
receivables, a large proportion of which is in the form of payment in kind, a non-cash item that we exclude from the
calculation. Considering the modest role of recurring fee and portfolio income in 3i's earnings, EBITDA coverage of
interest expense has historically been negative and is currently marginally positive. This metric turned positive at
year-end March 31, 2014, and improved to 1.4x at end-March 2015, supported by the group's increased focus on
annual operating cash profit. However, we assess 3i's leverage as "modest" to reflect our expectation that despite
ongoing improvements in coverage, the ratio will remain weak relative to what we expect and typically observe for
rated peers with "minimal" leverage assessments.

S&P Base-Case Cash Flow And Capital Structure Scenario

We expect that the net (and gross) debt-to-ATE ratio will remain stable and well below 0.4x in financial 2016 and
2017.
Although we do not expect any further material decrease in gross debt, we expect 3i to maintain its conservative
leverage policy, with debt remaining below 1 billion.
Albeit improving, we expect net cash flow coverage of gross interest to remain weak over our two-year rating
outlook horizon, in line with our expectation that fee income growth will remain modest and broadly stable over this
period.
Finally, although 3i has a strong track record of portfolio realizations, we believe that realizations may become
lumpier in the future, reflecting the ongoing reduction in the number of investments in its on-balance-sheet
portfolio.

Accounting: Changes To Consolidated Accounts As A Result Of IFRS 10

3i adopted a new accounting standard, IFRS 10 "Consolidated Financial Statements," in its annual results for the year
ended March 31, 2014. Under this new standard, 3i's directly held investments are presented on a fair value basis.
However, the application of the standard has meant that the group's investment subsidiaries are also accounted for on
a fair value basis. This means that the financial effect of the investments held through investment entity subsidiaries
and their fee income, operating expenses, and carried interest are aggregated into a single line item in the financial
statements. In 3i's view, this approach effectively reduces the transparency of its proprietary capital investments and
associated transactions occurring in the investment subsidiaries. We agree with this view and, therefore use the results
reported on the "investment basis" for our analysis of 3i's portfolio performance and to enable like-for-like comparisons
with previous periods. We note that there is no change to total return or NAV as a result of the application of IFRS 10.

Liquidity: Strong
We assess 3i's liquidity as "strong" under our criteria. We view the group's policy and track record of maintaining
adequate cash balances as positive for the ratings. We consider this policy to be appropriate given the illiquid nature of
3i's investments and the fact that the portfolio may at times have limited investments suitable for harvesting. The

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group also maintains cash to give it the flexibility to invest opportunistically, but carefully monitors its pipeline of
expected investments and divestments to ensure that adequate cash is always maintained. Cash is conservatively
invested with well-rated banks rated 'A' or higher and with 'AAA' rated money market funds.

Principal Liquidity Sources

Principal sources of liquidity at year-end March 2015 were little changed from March 2014. Cash and deposits
increased to 864 million from 697 million as a result of net divestments, while the size of the 350 million undrawn
committed credit facility, maturing in September 2019, remained unchanged. Total liquidity totaled 1.21 billion on
March 31, 2015, up from 1.20 billion in 2014.

Principal Liquidity Uses

We expect that sources of liquidity will exceed uses by more than 1.5x (not considering investment and realization
activity) over the next two years, as the first maturity of a 240 million note is not until 2017. 3i's internal liquidity
planning accounts for: (a) planned investments over the next 12 months; (b) debt repayments; (c) 18 months of
operating costs; and (d) interest payments.

Covenant analysis
The 350 million committed facility has no financial covenants.

Ratings Score Snapshot

Corporate Credit Rating: BBB/Stable/A-2

Business risk: Fair

Country risk: Low
Industry risk: Intermediate
Corporate industry and country risk assessment: Intermediate
Competitive position: Fair

Financial risk: Modest, due to weak cash flow coverage of gross interest expense
Cash flow/Leverage: Minimal

Anchor: bbb-

Modifiers
Diversification/Portfolio effect: Neutral (no impact)
Capital structure: Neutral (no impact)
Liquidity: Strong (no impact)
Financial policy: Neutral (no impact)
Management and governance: Satisfactory (no impact)
Comparable rating analysis: Positive (+1)

Stand-alone credit profile: 'bbb'

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Related Criteria And Research

Related Criteria
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
Key Credit Factors For Asset Managers, Dec. 9, 2014
Corporate Methodology, Nov. 19, 2013
Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
Group Rating Methodology, Nov. 19, 2013
Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings Detail (As Of October 23, 2015)

3i Group PLC
Counterparty Credit Rating BBB/Stable/A-2
Senior Unsecured BBB
Senior Unsecured BBB/A-2
Counterparty Credit Ratings History
27-Mar-2012 Foreign Currency BBB/Stable/A-2
24-Feb-2010 BBB+/Stable/A-2
23-Feb-2009 BBB+/Negative/A-2
27-Mar-2012 Local Currency BBB/Stable/A-2
24-Feb-2010 BBB+/Stable/A-2
23-Feb-2009 BBB+/Negative/A-2
Sovereign Rating
United Kingdom AAA/Negative/A-1+
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact:
Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com

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