ICG Enterprise Trust Defensive growth: explaining downside resilience

Hardman & Co

We called our 6 July initiation Outperformance through every stage of cycle. In this note, we explore ICG Enterprise Trust plc (LON:ICGT) resilience to a downturn in more detail. We first explain why private equity (PE) is so resilient, and then we deep dive into what ICGT has done to further reduce risk. Its performance through the initial stages of COVID-19, earlier NAV returns through downturns and academic research all confirm our view of PE’s and ICGT’s market-beating resilience. For ESG investors, this aspect of ICGT shows good “S” (jobs are preserved) and “G” (better governance, especially managing for the long term, is key to this performance).

  • Why PE outperforms in downturns: The critical factors are i) access to committed capital, ii) strategic optionality, iii) operational, financial and market expertise and iv) for managers to earn performance fees, or launch new funds, they must manage through the cycle. Recent sector changes enhance resilience.
  • ICGT incremental risk reduction measures: ICGT’s stated policy is “defensive growth”. In practice, this means focusing on well-established businesses with strong competitive positions in a structural growth market, recurring revenues, high margins, strong cashflows and low customer concentration.
  • Valuation: Valuations are conservative (uplifts on realisations averaging 33% to latest book value over medium term). The ratings are undemanding and the carry value against cost modest. The discount to NAV is 25% (ca.2.5x recent levels), and is anomalous with defensive long-term market-beating returns.
  • Risks: PE is an above-average cost model, but post-expense returns are market- beating. Even though actual experience has been continued NAV outperformance in economic downturns, sentiment is likely to be adverse. ICGT’s permanent capital structure is right for unquoted and illiquid assets.
  • Investment summary: ICG Enterprise Trust has consistently generated superior returns, by adding value in an attractive market, having a defensive growth investment policy and exploiting synergies from being part of the ICG family. The valuations and governance appear conservative. It has an appropriate balance between risks and opportunities. The risks are primarily sentiment-driven on costs and cyclicality, as well as the underlying assets’ liquidity. It seems anomalous to have a consistent record of outperformance and trade at a 25% discount to NAV.

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