ICG Enterprise Trust: ICGT’s steps to value-adding portfolio construction

Hardman & Co

In this note, we examine how ICG Enterprise Trust plc (LON:ICGT) approach to active portfolio construction and management adds value to its investors. ICGT has a focused, multi-stage approach, with a stringent filtering process, which starts with the whole private equity (PE) market but then narrows down investments to buyouts – in developed markets, mainly in the mid-market/larger deals, and through leading PE managers. Individual opportunities must then meet ICGT’s defensive growth strategy. Third-party manager relationships are leveraged to generate high-conviction (HC) ideas. This has all led to an 11% NAV total return over nine months and 203% over 10 years.

  • Managing returns: ICGT optimises returns by i) managing new investments/ realisations in the HC and third-party funds, ii) General Partner (GP) manager selection, iii) optimising synergies between the businesses, and iv) supporting businesses through a cycle. Managed returns support the sustained dividend.
  • Managing risk: ICGT’s stated policy is “defensive growth”. This means focusing on well-established businesses with strong competitive positions in a structural growth market, recurring revenues, high margins, strong cashflows, low customer concentration, and managing other concentration and liquidity risks.
  • Valuation: Valuations are conservative (3Q’FY’21uplifts on realisations averaging 40% to latest book value (33% over medium term). The ratings are undemanding, and the carry value against cost modest. The 18% discount to NAV is anomalous, we believe, with defensive market-beating returns. The yield is 2.2%.
  • 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 ICG. 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, and the underlying assets’ liquidity. As noted, it seems anomalous to have a consistent record of outperformance and trade at an 18% discount to NAV.

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