ICG Enterprise Trust: Spotlight on secondaries

Hardman & Co

ICG Enterprise Trust plc (LON:ICGT) reported a further strong quarter of NAV growth to October 2021. One highlight from these results was secondary fund investments. This note reviews the strategic allocation that may see these assets become 20%-25% of ICGT’s portfolio over the next few years. The reasons ICGT is increasing the assets’ weighting include i) these assets have known underlying investments, ii) they return cash quickly, and iii) they do not incur material future commitments – all fitting ICGT’s portfolio management well. The raised allocation reflects new, highly experienced and well- connected hires who have a strong track record in secondary fund investments.

  • Secondary attractions: ICGT will be investing largely in Limited Partner (LP) secondaries, which offer diversified exposure to known underlying companies. As these are mature portfolios, they start returning cash quickly, and offer the potential for valuation uplifts that fit well into ICGT’s overall balanced portfolio construction.
  • ICG LP Secondaries funds: ICG Enterprise Trust has already invested in Fund I (known as ICG Ludgate Hill I), investing £32m alongside ICG plc. This is a fund of ca.90 funds. ICGT recently committed a further $20m (£15m) in Fund II, which has ca.50, mainly US, underlying companies. Both funds leverage the investment manager’s skills.
  • Valuation: ICGT’s NAV valuations are conservative (realisation uplifts average 35% long term). The ratings are undemanding, and the carry value against cost is modest. The 31% discount to NAV is anomalous, we believe, with defensive market-beating returns, and is above the levels seen pre-COVID-19. The yield is 2.0%.
  • Risks: Private equity (PE) is an above-average cost model, but post-expense returns are market-beating. Even though actual experience has been of 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 since 2016. 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 on the underlying assets’ liquidity. As noted, it seems anomalous to have a consistent record of outperformance and to trade at a 31% discount to NAV.
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