ICG Enterprise Trust (LON:ICGT) is the topic of conversation when Hardman & Co’s Financial Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your 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 seen as not being a simple asset class, it should really be looked at by professional and qualified investors. Page two of the report gives all the details, but as I say, very standard disclaimer, nothing to worry about.
Q2: Can you give us a brief summary of your report ‘Mid-Teens EBITDA Growth and Long-Term Returns’?
A2: The key message from ICG Enterprise Trust’s first half results, which ended in July, is the continued strength of the operating companies, which delivered, on average, 15% EBITDA growth over the past 12 months. Margins have widened by about 5%, with average revenue growth of 10%. Now, that should help allay some concerns regarding the impact of the challenging environment on the private equity market and obviously ICGT.
New investment is forecast to accelerate, and realisation proceeds already exceed the whole of last year, with an average 14% uplift to carrying values on exit.
Now, a degree of short-term volatility is to be expected, and the first half returns were below long-run averages, but the outlook is encouraging with good visibility on exit and, as I mentioned, an attractive investment pipeline. The second quarter was also well ahead of the first quarter.
Overall, in terms of capital allocation, their capital return policy is balanced: investment, buybacks, and dividends.
Q3: Could you briefly give us a few of the key numbers?
A3: The constant currency portfolio return was 2.1% in the first half, and the NAV per share total return minus 0.7%. A narrowing discount saw a share price return of 12.6%. Investee company, as I mentioned, the last 12-month EBITDA growth was 15.2%. New investments totalled $113 million, and realisation proceeds were $222 million, which, as I mentioned, is already above the whole of last year.
Q4: You highlighted the long-term performance, could you give us a few numbers on that?
A4: Over five years, their constant currency CAGR portfolio return is 17.4% compared to the 2.1% delivered in the first half, and the NAV per share total return has been 14.5% annualised.
The return consistency generates compounding benefits as well. The shareholder return has been 16.5% over five years, a slightly narrower discount and ICGT is one of around only 10% of investment trusts that are the ISAs millionaire investments.
Q5: Now, you mentioned earlier the H1 FY26 being below long-term run rate, what were the drivers behind that?
A5: The key factors firstly were exit activity has generated below long-run uplift benefits. It’s about 3% annualised versus the long-run average of 6% to 7% and it’s also extended catch-up periods with some implications for returns from that.
Secondly, bottom line earnings trends will vary from EBITDA growth when interest rates change. Now, in a rising rate environment, earnings growth will be slower and in a falling rate one, earnings will be higher than EBITDA, with PE-backed businesses typically having more gearing than non-PE-backed ones. The effect has also been smoothed through treasury management, which meant the full impact of rising interest rates was not felt immediately, and so the drag on earnings came later than the rise in rates. So, it’s only now really been fully felt.
Thirdly, there were the usual distortions from mixed changes to any given period, with an increased impact with accelerating realisations and investments, and not all valuations obviously are linked to EBITDA.
So, you’ve got exit activity below average, you’ve got bottom line earnings growth relative to EBITDA growth, and finally you’ve got mixed changes. Over the long term, strong EBITDA growth drives strong NAV growth, but there are periods of positive and negative noise.
Q6: What might change the key drivers so that future EBITDA growth will drive short-term NAV growth?
A6: A more normal market environment for realisations and IPOs could see greater uplifts, increases than we saw in the first half and there are some encouraging signs for that already coming through.
Secondly, the interest rate environment is likely to be more supportive, with falling interest rates helping earnings growth relative to EBITDA growth.
Thirdly, the investments in secondaries, so a portfolio mixed change, means that ICG Enterprise Trust is investing once the PE value creation journey has already begun. That means that the uplifts should be closer and realisations should be closer, and this should accelerate NAV growth compared with say a primary focused portfolio.
So, three good reasons for things to change.
Q7: Finally, can you tell me about the risks?
A7: Most of the PE sector is trading at a discount, as investors have worried about the realism of the NAV and the prospect for PE in either a higher rate environment or a recessionary environment.
We’ve addressed those concerns directly in previous notes, believing the NAV to be realistic and supported by the valuation uplift on exit, and explaining how the model adds value through all economic conditions.
PE is an above cost model, but post expense returns have consistently beaten public markets over the long term and ICGT’s permanent capital structure, is the right one for unquoted/illiquid assets.
