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 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 report ‘Portfolio: 14% EBITDA growth + widening margins’?
A2: The key message from the 1HFY’25 results to July is the continued strength of the operating companies, which delivered an average 14% LTM EBITDA growth.
Margins have widened by ca.5%, average revenue growth 9.4%, which should help allay some concerns over the impact of the higher-rate environment. New investment is accelerating, and realisation activity continued with an average 26% uplift to carrying values on exit.
A degree of short-term volatility is to be expected, and the 5-year and 10-year total annualised NAV per share return, 12.5% and 13.2%, respectively are a good reflection of what investors are getting from the their defensive growth strategy. They also have a balanced capital return policy.
Q3: So, to start, can you give us a few of the key numbers from the results?
A3: The trust’s constant currency portfolio return was 3.8% (£: 2.6%) and the NAV per share total return 2.8%. A narrowing discount saw a share price return of 10.3%. New investments were £104 million, the third consecutive six-month period increase, new fund commitments £72 million, and proceeds received £86 million.
Q4: You highlight the strong operating performance of investee companies. what can you tell us about that?
A4: The core to the trust is the long-term value created from operating performance and defensive growth strategy. The appendix of our note goes into some detail as to what this means in practice, but, in summary, it is a focus on growing, profitable businesses, ones with resilient income streams and often market-leading positions and working with well-established managers.
Our note details how this not only sees strong EBITDA growth, 14% in the first half, widening margins, EBITDA growth 5% ahead of revenue growth, but, critically, this is consistently delivered, which compounds benefits.
A theoretical investee company, held since 2010, would have circa 10x its starting EBITDA, against a whole UK market average, which has slightly more than doubled over the period.
Q5: Deal activity is accelerating, what can you tell us about that?
A5: From a low level, admittedly, in the first half, we saw a further increase in new investment, the third sequential six-month increase. The exit pipeline has now been re-built and management expects an acceleration of that in the second half.
Overall, we characterise the improvements as a steady reversion to normal levels of activity rather than a boom which may see a bust.
Q6:And capital allocation?
A6: Shareholders saw 1H dividends of 17p, the prior year 1H 16p, and a reiterated intention to pay 35p, +6% in the whole year. Buybacks of £21m, average discount 37.8%, were executed for both the long-term, £11m, and the opportunistic, £10m programmes. These added 19p to the NAV p/sh.
Since inception in October 2022 to 1 October 2024, the long-term programme has been active in the market on 155 days while the opportunistic programme, £25m authorised for FY’25, has been active on five days.
Q7: Your note goes into some detail as to why, in this period, the EBITDA growth and portfolio/NAV growths varied. What can you tell us about that?
A7: Over the long term, operational outperformance leads to strong, correlated valuation gains. However, in the short term, there are portfolio mix factors, including which companies are captured by sampling, the proportion of new companies which are held at cost, funds in catch-up phase. We also note the importance of exit uplifts, which are a core feature of the model and inter alia reflect how much companies have been improved under PE management, as well as through conservative accounting.
We note ICG Enterprise Trust is investing in funds and their valuations can have some variances to underlying company growth as well as the impact, positive and negative, of leverage.
Finally, we note that not all companies are valued using EBITDA metrics. The key point is that looking through short-term noise, long-term operational outperformance delivers valuation gains.
Q8: And the risks?
A8: Most of the PE sector is trading at a discount, as investors have been worried about the realism of the NAV and the prospects for PE in a higher-rate/recessionary environment. We have addressed these concerns directly in previous notes, believing the NAV to be realistic and resilient and explaining how the model adds value through all economic conditions. PE is an above-average cost model, but post-expense returns have consistently beaten public markets. ICGT’s permanent capital structure is right for unquoted/illiquid assets.
