ICG Enterprise Trust giving investors market-beating returns (LON:ICGT)

Hardman & Co

ICG Enterprise Trust (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 report1H’23 and beyond: safe harbour in the storm’?

A2: ICGT reported another strong half-year, with an NAV per share total return of 10.9% and sterling portfolio returns of 12.4% (local currency was still a very respectable 7.4%). Total proceeds and new investments were strong, at £107m and £144m, respectively. At this stage of the cycle, disciplined net investment is expected, capitalising on attractive opportunities, especially in secondaries. ICGT saw an average 25.2% exit uplift, despite the challenging market conditions and the key point from that is it once again proves the accounting and NAV are conservative.

Investment remains focused on businesses with good risk-adjusted returns and defensive growth characteristics. The board is optimising shareholder returns with a progressive dividend policy and share buybacks. ICGT’s strategic approach has given investors market-beating returns and just two down quarters out of 26 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 EBITDA growth. 

Q3: And can you say how the underlying companies are doing and give us some of the metrics?

A3: In summary, very well. The top 30 companies showed strong year on year revenue and EBITDA growth of 27.5% and 26.3%, respectively. The average EV/EBITDA ratio was stable at 14.5x, it was 14.6x on 31 January. The Price Earnings to Growth or PEG ratio was just 0.55x. Net debt/EBITDA was 4.3x again stable in January. There was much enhanced disclosure which helpfully showed dispersion around these metrics.

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Q4: So, a bit more on the results themselves?

A4: The portfolio return on a local currency basis over the last 12 months was 21.9%, a bit up on the five-year average: 20.6%, with 7.4% generated in the last six months. High Conviction investments (52% of the portfolio) generated local currency returns of 9.2% in the six months, while third-party funds generated local currency returns of 5.7% over the period. The five-year NAV total return is now 16.9%.

Q5: The company talks of defensive growth as a strategy. In the uncertain world we live in this appears more important than ever. What does it actually mean in practice?

A5: That is a really good question and the core of what ICG Enterprise Trust is.

What it means is finding business which are i) mature profitable and cash-generative (unlike early-stage venture capital investments), ii) that have dominant market positions, iii) ones that provide of mission-critical services, iv) have the ability to pass on price increases, v) avoiding ones whose valuations may be based off future revenue projections not current earnings, vi) having business with high margins, scalable platforms and which operate in sectors or sub-sectors where the income streams are non-cyclical, vii) looking for growth levers, such as bolt-on M&A or operational improvements, viii) identifying strong management, with proven track records. PE is a long-term investment.

ICGT has, for some time, assumed that exit multiples would be lower than entry ones for its co-investments, thus building in a cushion in its deal assessments. Also, investments have had to justify themselves on earnings growth, not multiple expansion. With recent co-investments, ICGT has been leveraging Intermediate Capital expertise and building downside protection into the structure of its deals, taking a very cautionary approach to such investments. Hopefully, that gives a flavour for what defensive growth means on the ground.

What it delivers in practice to investors is market-beating returns and just two down quarters out of 26 since the manager was appointed.

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