ICG Enterprise Trust plc (LON:ICGT) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report on ICG Enterprise Trust sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, it should only be looked at by professional/qualified investors. Page 2 of the report gives all the details.
Q2: Can you give us a brief summary of your report ‘3Q’23: continued growth and resilience?’
A2: ICGT reported another strong quarter, with an NAV per share total return of 3.6% in its third quarter and a portfolio return of 13.8% (local currency) for the last 12 months. Total proceeds and new investments for the quarter were strong, at £63m and £60m, respectively.
Disciplined net investment continues, capitalising on attractive opportunities. ICGT saw an average 33% exit uplift, despite the challenging market conditions.
It has a progressive dividend policy, is doing share buybacks and has a new, reduced management fee. ICGT’s investee companies offer good risk-adjusted returns and defensive characteristics, giving investors both growth and resilience.
Q3: So, a bit more on the results themselves?
A3: As I just mentioned, the portfolio return on a local currency basis over the last 12 months (LTM) was 13.8% bringing the five-year average to 20.2%. In the last three months, just 0.2% was generated, reflecting the short-term challenging markets. There were 11 full exits in the quarter, at an average uplift to carrying value of 33% (close to the 10-year average of 36%, despite market conditions), with a 1.8x sale multiple to cost.
Turning to new investments, £33.9m (57%) went into primary funds and £25.9m into direct investments. Year-to-date new investments total £204m, in line with the last financial year, and broadly double the average of FY’19-21. There was just one new commitment of £17.2m to a new manager (Leonard Green & Partners) in the quarter. ICGT had £174.2m of available liquidity with its over-commitment ratio at the end of July 2022 of 27% of NAV.
Q4: I saw there was a reduction in the manager’s fee. What can you say about that?
A4: The manager’s fee has seen a tiered cap as a proportion of NAV introduced, which would have reduced the management fee by ca.6% (£1.1m) over the year to 3Q’23. The manager is also absorbing costs equivalent to 25%-30% of ICGT’s general expenses. In 2022, these were £2.1m – so the savings could be £0.5m+.
Q5: The company talks of defensive growth as a strategy. In the uncertain world we live in, this appears more important than ever. What does it actually mean in practice?
A5: That is a really good question and the core of what IICG Enterprise Trust is about.
What it means is finding businesses which are i) mature profitable and cash-generative (unlike early-stage venture capital investments), ii) have dominant market positions, iii) ones that provide mission-critical services, iv) have the ability to pass on price increases, v) avoiding ones whose valuations may be based off future revenue projections not current earnings, vi) having business with high margins, scalable platforms and which operate in sectors or sub-sectors where the income streams are non-cyclical, vii) looking for growth levers, such as bolt-on M&A or operational improvements, and viii) identifying strong management, with proven track records.
PE is a long-term investment. ICGT has, for some time, assumed that exit multiples would be lower than entry ones for its co-investments, thus building in a cushion in its deal assessments.
Also, investments have had to justify themselves on earnings growth, not multiple expansion. With recent co-investments, ICGT has been leveraging Intermediate Capital expertise and building downside protection into the structure of its deals, taking a very cautionary approach to such investments. Hopefully, that gives a flavour for what defensive growth means on the ground.
What it delivers in practice to investors is market-beating returns and just two down quarters out of 26 since the manager was appointed.
