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, it sits behind a disclaimer. Can you just remind us why that’s there?
A1: It’s a very 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 is not seen as a simple asset class, it should be looked at by professional and qualified investors. Page two of the report gives all the details, but a very standard disclaimer and nothing to worry about.
Q2: Now, if we turn to your report, Investor Questions Answered and First Half of FY27 Results, could you give us a brief summary of that report?
A2: ICG Enterprise Trust recently hosted two webinars to answer questions that Hardman & Co readers had previously submitted.
In the first, the manager discussed the trust approach to private equity investing, its positioning in uncertain times through its very unique defensive growth strategy. He also reviewed recent market challenges, the outlook for transactions and exit uplifts, AI opportunities and risks, including the impact on the software investments.
The second webinar covered ICGT’s gearing and interest rate sensitivity, its dividend policy, share buybacks and sector-wide discounts to NAV. It also looked at the sustainability of shareholder returns and where the demand for shares would come.
So, it covered a lot of topics on those two webinars.
The key takeaways from ICGT’s interim results and associated presentation were firstly, strong and accelerating operating company EBITDA and revenue growth. So, 11% and 16% in terms of the revenue, 11% for revenue, 16% for EBITDA and we see this growth as the core to the long-term value creation.
The second key message was through-cycle interest from buyers with 24 exits at an average of three times cost multiple and nearly 10% uplift on exit.
Finally, given the topicality of it, a very modest software exposure and indeed many companies that will benefit from AI.
Q3: Why do ICGT investee companies deliver such strong revenue and earnings growth?
A3: That is the million-dollar question and as I say, is the key driver to the long-term value creation. There are a number of factors involved, and these were covered partly in the webinar and also in our note.
Firstly, there is how investments are selected. ICGT invests in mature, profitable, cash flow-positive companies which have secular growth. An investment space that is increasingly difficult to access in the public markets.
Defensive growth businesses, ICGT’s core focus, have resilience to GDP fluctuations and reasons to grow which are non-cyclical. Typically, there is an underlying macro trend to support growth and many actually reflect the very factors that present challenges such as AI or digitalisation.
ICGT investments have multiple different themes for growth and there is diversity in its portfolio as a consequence. The core driver though is that non-cyclical growth should deliver consistent growth.
The second key driver is picking the right manager who can operationally improve the engineering or high exit multiples to create value. Both of those are outside the manager’s control.
Picking partners who are highly experienced in managing change is a key part of the ICGT approach.
Q4: Now you indicate that it is well positioned for future realisations and that ICGT’s defensive growth investing companies attract through-cycle interest. What is the outlook then for exits?
A4: In the medium term realisations look likely to be very strong.
Industry-wide, the dry powder is high, following large fundraisers a few years ago and relatively modest deployment since. Over the next few years, this dry powder has to be deployed or returned to investors.
Importantly, it is constant in the larger funds, actual buyers of ICGT investments. GPs are seeking liquidity because their investors want it.
In our view, AI efficiency means that deals which previously did not meet hurdle returns now have options to actually meet hurdle returns.
Private equity has had a great record in implementing digitalisation and the effective implementation of technology is a core benefit that PE managers bring to investee companies.
Specifically for ICGT, its defensive growth characteristics mean that its investments are more likely to generate through-cycle cash and that makes them more attractive to large PE buyers.
Q5: Are there any other issues in the results that you can tell us about?
A5: Apart from the highlights which I gave a little earlier, the results showed a strong balance sheet with flexibility to invest and to return capital.
64% of the portfolio is pre-2022 vintages, which therefore have high exit potential. The EV to EBITDA multiple is 15.8 times, which is stable, and the debt to EBITDA is 4.8 times, also stable. It received proceeds of £84 million and made investments of £65 million in the first half. The five-year portfolio returns in a constant currency basis are just over 10%.
We would also highlight the chart on page three of our report, which showed the risk-adjusted returns for ICGT and its listed peers since January of 2020.
The key message from that is that ICGT is earning sector-level types of returns, but at below sector-level types of risk.
Q6: Finally Mark, are there any risks that we should be aware of?
A6: There are always risks with investments.
Most of the private equity sector is trading at a discount, as investors have been worried about the realism of NAVs, the prospects for PE in a higher interest rate or a recessionary environment.
We’ve addressed these concerns directly in previous reports and believe the NAV to be realistic and resilient, and explaining how the model adds value through all economic conditions.
Private equity is an above-average cost model, but post-expense returns have consistently beaten public markets.
We also consider that ICG Enterprise Trust’s permanent capital structure is right for its unquoted and illiquid assets.
