ICG Enterprise Trust average constant-currency portfolio return of 21% since FY17 (LON:ICGT)

Hardman & Co

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 Intermediate Capital Group/ICGT: friends with benefits?

A2: This note analyses the unique advantages that Intermediate Capital Group (ICG plc) has brought to ICGT since becoming the manager in 2016 and contributing to the average constant-currency portfolio return of 21% since FY17.

We note i) access to ICG plc funds/co-investments where ICGT is the only way for retail/small institutional investors to obtain this exposure, ii) access to a wider range of third-party funds/co-investment opportunities by virtue of its global network and reputation, iii) insights from investment teams at ICG, which cover the whole capital structure, and iv) wider benefits from leveraging ICG plc’s central platform. 

Q3: So tell us a bit more about the improved access to deals that Intermediate Capital gives ICGT.

A3: The first access point is geography. ICG plc is a global business with nine offices in Europe, five in Asia Pacific, and one in each of New York (c.75 staff) and Dubai. In our note, we show a chart that illustrates the fundamental geographical shift in the portfolio since ICG plc became manager in 2016, with the UK reduced from c.40% of the portfolio to under 20%, while North America has risen by a commensurate amount.

For investors, this means ICG Enterprise Trust has more choice on investments, access to the deepest and higher-growth markets, and geographical diversity. The second point of access is more direct. ICG plc’s enormous franchise in flexible financing solutions across the capital structure (1HFY’22 was a record) sees many opportunities for equity in the deals. This generates a good pipeline of global opportunities for ICGT, which is attractive as a partner for ICG because it offers certainty of finance, speed of decision-making, knowledge of working practices and incremental information flows.

In our note, we show a second chart that illustrates that ICG plc’s managed investments make up a much higher proportion of the total, and there has been a marked increase in co-investments as a proportion of the ICGT element of the portfolio.

Q4: You also talk about access to the insights that Intermediate Capital can give ICGT. Can you tell us some more about that?

A4: ICG plc’s expertise in providing flexible financing solutions across the capital structure gives it market intelligence on the operating performance of companies, sectors, economies and management teams. This can prove invaluable in assessing the attractiveness of new propositions and gives ICGT investment managers an insight that may not be available to many PE houses. Culturally, investing across the whole capital stack means that ICG plc’s focus on downside protection, alongside value creation, marries very well with ICGT’s stated defensive growth policy.

Q5: Your note highlighted some other advantages. What are they?

A5: First, ICGT can access ICG plc’s central resources in areas such as treasury, investor relations, legal, finance and information technology. By way of example, it can leverage the ESG-specific resources/tools in ICG plc, rather than having to author a unique approach itself. With the administrative burden absorbed by ICG plc’s platform, the investment team can focus on investing.

Second, the investment management fee payable is calculated as 1.4% of the investment portfolio and 0.5% of outstanding commitments to funds in their investment periods, excluding the funds managed directly by ICG plc. The saving on the management fee is currently c.£2m, 20bps p.a.

Third, familiarity with ICG plc may assist in potential third parties getting comfortable with ICGT.

Finally, ICGT’s investment team has access to ICG plc’s platform, but it is not required to invest in ICG plc managed assets. As such, it gets the benefits from the ICG plc market presence, but it can invest in any assets of its choice, independent of what the ICG team/position may be.

Q6: And the risks?

PE is an above-average cost model, but post-expense returns are market-beating. Even though actual experience has been of continued NAV outperformance in economic downturns, sentiment is likely to be adverse. ICG Enterprise Trust’s permanent capital structure is right for unquoted and illiquid assets.

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