Total return
Realised profit
Unrealised value movement
Portfolio income
Gross portfolio return
Fees receivable from external funds
Net carried interest
Costs
Other movements

Returns

Total return

3i achieved a total return for the year ended 31 March 2007 of £1,075 million (2006: £831 million), which equates to a 26.8% return on opening shareholders' funds (2006: 22.5%). This was a very strong result for the year, the most significant component of which was realised profits of £830 million (2006: £576 million).

Gross portfolio return at £1,406 million (2006: £1,053 million) for the year represented 34.0% on opening portfolio value (2006: 24.4%), of which more than 80% was crystallized in the form of realised profits, interest and dividends, and unrealised profits on uplifts to sale in respect of assets sold shortly after the end of the financial year.

After adding carried interest receivable and external fees and deducting carried interest payable and operating expenses, the net portfolio return for the year was £1,127 million (2006: £881 million) representing 27% of opening portfolio value (2006: 20%).

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Realised profits

The high level of realisations was also accompanied by a significant increase in the level of uplift achieved on sale of 52% (2006: 35%), resulting in realised profits of £830 million (2006: £576 million). This exceptional rate of uplift is in part attributable to a small number of high-value realisations being sold, some still valued at original investment cost. The most significant of which was the partial disposal of NCP, described in more detail in the Case studies section.

Realised profits are stated net of write-offs of £27 million (2006: £66 million).

Unrealised value movement

The unrealised profit on revaluation of investments was £323 million (2006: £245 million). £139 million of this movement arises from revaluations due to imminent sales (2006: £97 million), including Smart & Cook and Clínica Baviera.

A further £142 million (2006: £70 million) is attributable to first time uplifts from cost, particularly in relation to the Buyouts portfolio. Assets valued on an earnings basis at the beginning and end of the financial year also showed an increase of £147 million (2006: £136 million). Offset against these positive movements was a net decrease in the value of the quoted portfolio of £(37) million, principally due to share price movements in the Venture Capital investments Vonage and CSR plc.

Portfolio income

Portfolio income of £253 million (2006: £232 million) includes £158 million (2006: £133 million) of interest and £81 million (2006: £75 million) of dividends, as well as £14 million (2006: £24 million) of net deal-related fees.

The increase in interest income results from a number of high-yielding Buyout investments made in the year together with some early redemption premiums related to the strong realisations in the year. Dividends benefited from some significant distributions from our investments in unquoted funds. Lower levels of negotiation fee income together with increasing deal-related fee costs, underlie the reduction in net fee income.

Gross portfolio return

In aggregate, realised profits, unrealised value growth and portfolio income gave rise to a total gross portfolio return for 2007 of £1,406 million (2006: £1,053 million). From a business line perspective, Buyouts and Growth Capital were the main contributors, delivering gross portfolio returns of 54% (2006: 29%) and 48% (2006: 26%) respectively. For both business lines, these returns were above our across-the-cycle expectations, and reflect favourable market conditions for realisations, good portfolio health and earnings growth. In contrast, despite a stronger second half of the year, the Venture Capital business line generated a negative gross portfolio return of (6)% (2006: 17% positive). This was largely a consequence of adverse movements in the value of its quoted portfolio, but also due to a less advantageous realisations market.

The new Infrastructure business line contributed £15 million to gross portfolio return as a result of income yield on the portfolio, profit on the transfer of assets to 3i Infrastructure Limited and a subsequent rise in the share price of 3i Infrastructure Limited (and its associated warrants) since flotation.

The SMI portfolio generated a positive gross portfolio return of £74 million (2006: £137 million) representing 13% (2006: 18%) of opening portfolio value.

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Fees receivable from external funds

Following the successful launch of Eurofund V, fees receivable from our managed funds have increased substantially in the year to £37 million (2006: £24 million).

Net carried interest

Carried interest aligns the incentivisation of 3i's investment staff and the management teams in 3i's portfolio with the interests of 3i's shareholders and fund investors. 3i receives carried interest from the co-investment funds managed by 3i Investments plc, and pays carried interest to investment staff based on the performance of its assets under management. An explanation of Carried interest is provided in the Carried interest - an explanation section, together with a description of our accounting methodology.

Carried interest receivable of £81 million (2006: £79 million) relates primarily to two managed funds, Eurofund III and Eurofund IV, which account for 80% of the accrued income. Investments in these funds have performed particularly strongly in the period and the Group has accrued its entitlement to carried interest based on the realised profits generated in the funds and the fair value of unrealised assets at 31 March 2007.

In the prior year, most of the carry receivable related to Eurofund III, which achieved its performance hurdle in that year.

There has been a substantial increase in carried interest payable to investment staff in the year. The Group has accrued £142 million of carried interest payable across all its business lines, based on the realised profits generated by assets in carry schemes and the closing value of assets that remain unrealised (2006: £64 million). The increase is due to the strong gross portfolio return in Buyouts and Growth Capital in the financial year, and the high proportion of realisations being made from the most recent vintages, all of which are in market-aligned carried interest schemes with typically higher carry rates than earlier vintages. Of the £142 million charge in the year, 63% relates to Buyouts and 35% to Growth Capital.

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Costs

Operating expenses totalled £255 million (2006: £211 million). Approximately one third of the £44 million increase in costs relates to expenses associated with implementing new strategic initiatives such as the establishment of the two new business lines (Infrastructure and QPE), continued development in Asia and the US, as well as the move of our office in London. In addition, the exceptional level of total return has generated correspondingly higher levels of performance payment to employees.

We have continued to reshape our regional network with new offices added in Beijing and New York, the closure of four smaller regional offices in Europe and the decision to focus our US venture activity in Silicon Valley and to close our office in Waltham, Massachusetts. Restructuring costs in the year for these changes totalled £8 million.

Net operating expenses for the year (after offsetting fee income from external funds) are 5.3% of opening portfolio value. With effect from 1 April 2007 we are adopting a further key performance measure to monitor cost efficiency. We expect this measure to reduce to around 4.5% in the next two to three years, with a long-term target of 3%.

Net interest payable for the year was £9 million (2006: £17 million), reflecting the low level of net borrowings maintained throughout the year.

Other movements

The two largest "other" movements in the year relate to Exchange movements and the movements in the fair value of derivatives.

The movements in the fair value of derivatives relate largely to the valuation of the equity derivative embedded in the €550 million 2008 Convertible Bond. This unrealised value movement accounted for a gross charge of £(62) million in this category. It is the product of a number of factors, the most significant of which was the Company's share price which rose 21% during the year to 1136p (2006: 941p). Offsetting this movement were net movements on interest-rate swaps used to hedge the portfolio. A number of these swaps were closed out profitably during the period to reflect changes in the proportion of the sterling portfolio.

Exchange movements of £(31) million (2006: £47 million) arose as a result of the weakening of both the US dollar and the Euro during the year.