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 FY’22: you couldn’t ask for more?
A2: The companyreported another strong year, with an NAV per share total return of 24.4%, its 13th consecutive year of double-digit NAV growth. It materially outperformed the UK public market index, with a five-year CAGR of 16.4% (post all fees), three times the FTSE All-Share index total return. The portfolio generated a 29.4% return on a local currency basis to January 2022. Total proceeds and new investments were a record £342.9m and £303.7m, respectively, generating net proceeds of £39.2m. Their 36% uplift on exits is in line with historical averages. Investment is focused on businesses with good risk-adjusted returns and defensive growth characteristics.
Q3: Before turning to the results, could you just give a few comments on the strategy?
A3: ICGT’s strategic approach has given investors market-beating returns and just two down quarters out of 24 since the manager was appointed. In both good and bad years, the model has consistently proved that it can deliver resilient returns, driven by underlying company growth. It is worth putting that strategy and the results into the context of the six years since ICG was appointed as manager.
While there was a smooth transition of the individuals, structurally, ICG gave access to deal flow, especially in the US and other geographies, leveraging ICG’s expertise and co-investment opportunities. Since appointment, they have also moved to be more fully invested, and this has reduced the impact of cash drag on the portfolio. Additionally, there is a different culture in a business that, historically, was more debt-focused, and, in the 24 quarters since the appointment, there have been only two quarters when the NAV has fallen. That, and the five-year CAGR of 16.4% (post all fees), is what defensive growth has delivered.
Q4: So, a bit more on the results themselves?
A4: The portfolio return, on a local currency basis, was 29.4% (five-year average 20.4%). HC investments (49% of the portfolio) generated local currency returns of 23.1%, while ongoing third-party funds generated a local currency return of 36.0%.
The top 30 companies represent 39% of the portfolio value reported aggregated past 12-month revenue growth was 27%, demonstrating the strength of these companies. This revenue growth fed EBITDA growth of 30%, a key driver to the valuation growth.
We believe the market sometimes overlooks the fact that PE is actually about improving the underlying businesses and adding value in ways that cannot be achieved as standalone businesses, and this type of revenue and EBITDA growth proves it.
Total proceeds during the year were £343m, which included 54 full exits that were executed at an average of 36% uplift to carrying value (in line with the 10-year average of 36%), and a 2.6x multiple to cost (10-year average 2.3x). The uplift to carrying value is important in proving again conservative accounting towards the NAV ‒ a trend reporting since the period-end in a number of market-wide PE exits.
Q5: And regarding outlook?
A5: In the results call, management commented that it has reduced risk by focusing on i) mid to large buyouts, ii) Europe and the US, which have the largest and deepest pool of PE assets, iii) high-quality managers (in a market with material differences between top and quartile performances), and iv) most critically, companies with defensive growth characteristics. We explore the underlying characteristics behind this in more detail in our note, but, critically, it is this feature that has consistently delivered the returns evident in ICG Enterprise Trust’s performance over the long term.
When the FTSE All-Share saw falling EBITDA (e.g. in FY’16 and FY’21), ICGT’s top 30 companies still delivered double-digit EBITDA growth. It is in uncertain times that strategies, which proven in the past to have delivered defensive growth, are most likely to be valued by investors again.
