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: Putting the discount into perspective?
A2: ICG Enterprise Trust’s discount, like most of the listed PE sector, is well above historical averages. To put this into perspective, in this note we considered i) the improved risk/reward opportunity this presents to new investors compared with the past, ii) potential misperceptions, noting that in our view, the NAV is realistic and resilient going forward, and iii) how PE managers aim to achieve unchanged target returns in a higher rate environment.
We also consider how the triggers to a potential re-rating have evolved in the recent past and are likely to evolve in the near future. While many of these factors apply across the PE industry, we explain how the trust’s position, portfolio and strategy mean it is uniquely well positioned in this environment.
Q3: So, can you tell us a bit more about the improved risk/reward opportunity this presents to new investors compared with the past?
A3: The medium-term average discount is ca.20% but this is distorted by the pandemic/wars etc. If we go back to immediately pre-COVID-19, it was just 10%. Looking at current comparatives, in our note we explore why the discount to NAV is considerably above the level its assets are likely to trade in the market.
At current return levels, the NAV doubles over five years and with no change in discount levels, investors could expect that return on their investment; so on that assumption, they get 2x their money back. If the discount closes to the medium-term average, investors get 2.5x their money back, and if it returns to pre-COVID-19 levels 2.8x.
It is important to recognise that the compounding effect of the NAV growth is likely to be much more important to long-term investor returns. On a ten-year horizon, the NAV growth return for investors would represent 4x the benefit from seeing the discount close from 35% to 20%.
Q4: In previous interviews you have commented on why you believe the NAV to be realistic and resilient. Can you just give us the key reasons?
A4: After buyers have conducted extensive due diligence, the fact they are still willing to pay substantial premiums to carrying value is evidence of the conservative accounting. Continued delivery of this should mitigate concerns about the credibility of the current NAV.
In terms of resilience, the trust’s strategy is defensive growth. Our note explores what defensive growth means in practice. The keys are a focus on growing, profitable businesses, in secular growth sectors, with multiple options to generate growth, and well-established managers. It has delivered 2.5x market EBITDA growth over the long term but crucially, has done so consistently.
Q5: Your note highlights their targets are unchanged despite higher interest rates, so how will they achieve that?
A5: ICG Enterprise Trust and PE managers have not changed long-term targeted returns because of short-term noise of a higher rate environment, but the way the returns will be achieved has changed. Specifically, we believe incremental organic EBITDA growth and bolt-on deals are planned to offset a lower financial gearing return.
In our note we give some of the specific ways this can be achieved.
Q6: What could change in terms of the perceptions driving the discount?
A6: We see two elements at work here. There is a sector-wide discount and then trust-specific issues.
In essence, what may change the former is macro drivers, such as expectations of an interest rate fall, the current green shoots of increased PE activity converting into higher sustained deal activity, and improved communication by all the participants. The trust’s own discount is likely to be driven by continued delivery of returns and uplifts on exits. More of the same convincing investors that their concerns are misplaced.
