ICG Enterprise Trust plc (LON:ICGT) is the topic of conversation when Hardman & 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, private equity (PE) is not a simple asset class, and it should only be looked at by professional/qualified investors. Page 2 of the report gives all the details.
Q2: You called your results piece “blew the roof off, not just the doors”. Sounds explosive. What can you tell us about that?
A2: We think the market expected that, to quote Michael Caine, ICGT would “only blow the bleeding doors off” in FY’21 with a known good uplift to NAV in 4Q from listed holdings. In the event, it blew the roof off with a 4Q 11.8% NAV total return (22.5% in the year, against 15.9% five-year average). Portfolio returns (local currency) were 24.9%, with the “High Conviction” (HC) portfolio generating 48.0% and third-party funds 22.4%. Underlying investee company revenue growth was 15%, reflecting ICGT’s defensive growth strategy. Realisations have continued (at a 31% average uplift to carrying value), and FY’22 has started well (£97m proceeds).
Q3: Before turning to the results themselves, can you give us a bit of a longer-term context?
A3: Sure. It is now five years since Intermediate Capital Group was appointed manager. There was a smooth transition of the individuals, but, structurally, ICG gave access to a whole new range of opportunities for the trust.
It has been a key differentiator in getting access to deal flow, especially in the US and other geographies, where the previous manager was weak. Additionally, as we highlighted in our initiation, there is a different culture in a business that, historically, was more debt-focused, and so, consequently, had a different approach to managing downside risk.
In the 20 quarters since the appointment, there have been just two quarters when the NAV has fallen. One of these was 1Q’FY’21, when, at the quarter ending April 2020 (i.e. close to the deepest point of the COVID-19 crisis), the NAV total return in the quarter was down just 4.1%.
Q4: And a bit more detail on how they delivered those strong results?
A4: There were a number of factors at play here.
Firstly, there is the sustainable benefit from investing in what the company calls defensive growth companies. The top 30 companies, which represented just over half of the portfolio value, reported aggregated revenue growth of 15% year-on-year. That is because they were in defensive sectors and ICG picked companies with strong balance sheets and resilient income streams. So you might think of that as being strategic and sustainable.
The second factor was that two of its largest listed holdings, PetSmart and Telos, performed really well. Telos was sold after the period-end, saving ICGT from its dramatic share price decline since. Having your best and largest holdings perform well is obviously the objective of the company, but it can see volatility in any given reporting period, and last year was especially strong.
Q5: In the annual results, we got some more details on the portfolio. Can you give us some of those headlines?
A5: Total proceeds during the year were £209m. They consisted of first realisation proceeds of £137m, against a five-year average of £147m. The 32 full exits were executed at an average of 31% uplift to carrying value, pretty much in line with the 10-year average of 36%, despite market conditions. In addition, fund disposals generated £72m proceeds and released £42m of undrawn commitments. There were £139m of total new investment made, pretty much in line with the prior year’s £159m.
ICG Enterprise Trust had £201m of available liquidity (£45m of cash and a £156m undrawn revolving credit facility at 31 January 2021), against undrawn commitments of £418m (£77m of which are in funds outside their investment period). The gearing, average investee company EV/EBITDA and average EBITDA growth metrices were all similar to previous years.
In terms of outlook, the growth side of “defensive growth” is now likely to be evident. ICGT is investing heavily in historically above-average-return HC investments and £201m of resources to take strong pipeline opportunities. In the first two months, FY’22 realisations are two thirds of the five-year annual average.