Tag: ICGT

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: Mark, your report on ICG Enterprise Trust sits behind a disclaimer. Can you tell us why that’s there?

A1: Yes, it’s a standard disclaimer that many investment companies have. 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 2 of the report provides all the details, but it’s a very standard disclaimer.

Q2: Can you give us a brief summary of your report ‘Unique Approach to Capital Allocation’?

A2: In this note, we examine how shareholders benefit from ICGT’s unique approach to capital allocation. We first discussed this on page 11 of our 16 May 2024 note, “FY’24: portfolio companies performing strongly.” We’ve previously highlighted how the group’s defensive growth strategy differentiates itself from peers. In this note, we focus on the capital allocation policy and why that is also a differentiator.

ICGT’s approach rewards investors in four ways:

1. Immediate income through a progressive dividend policy.
2. Long-term compounding capital growth through new private equity investments.
3. Ongoing NAV accretion through a long-term buyback program.
4. Further NAV accretion via an opportunistic buyback program when the discount is particularly high.

The mix of these returns of capital is unique. We also reviewed the recent results covering the third quarter ending in October 2024.

Q3: Can you provide some figures on those returns?

A3: For the financial year 2025, the intention is to pay a minimum of 35p dividend, recently reiterated, giving a current yield of 2.7% and a five-year annual growth of over 9%. In the third quarter, new investment was £35 million, with a further £23 million to the end of December. Over the five years ending October 2024, the portfolio has generated average annual returns of 16%, indicative of the potential returns that new investments have to make long-term returns to shareholders.

Buybacks of £50 million at an average discount of 37.6% have been executed between October 2022 and the recent results, adding 47p to the NAV per share. Of the £50 million, £32 million was in the long-term program and £18 million in the opportunistic one. Excluding one-off tender offers, ICGT has seen the largest share count reduction of any of its peers since it started the long-term program in October 2022. A new £25 million opportunistic program for the next financial year was also announced.

The bottom line is that in the five years to October 2024, they have delivered a CAGR NAV per share total return of 13.8%.

Q4: Can you tell us more about the buyback programme?

A4: The company has two programmes: a long-term one, which is regularly in the market for relatively small quantities of shares, and an opportunistic one, activated only when the discount to NAV is large, allowing a material number of shares to be purchased in a single trade. Consequently, the opportunistic one trades rarely but in much larger size than the ongoing one, with an average daily volume of 15.3 thousand shares in the ongoing program and 135.6 thousand shares in the opportunistic one.

Being more active when the discount is large is not new; for example, ICGT’s buybacks post-Brexit were significant, while there were none in the period FY2011-15. What differentiates ICGT from its peers is this dual approach to its buyback programme.

Q5: Can you give us some headline numbers from the results?

A5: The NAV per share was £19.97 against £19.46 on 31 July. There was a NAV per share total return of 3% in the third quarter, bringing the five-year annual return to 13.8%. There were 12 full exits at an average uplift to carrying value of 18%, demonstrating the conservatism of the accounting. The third-quarter dividend was 8.5p.

Q6: Finally, can you tell me about the risks with ICG Enterprise Trust?

A6: All investments have risks. Like most of the private equity sector, ICGT is trading at a discount. Investors may be concerned about the realism of the NAV and the prospects for private equity in a higher-rate, recessionary environment. We’ve addressed those concerns directly in previous notes, believing 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. In our view, ICGT’s permanent capital structure is appropriate for unquoted and illiquid assets.

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.

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 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 ‘FY’24: portfolio companies performing strongly’?

A2: The key message from ICG Enterprise Trust’s FY’24 results, to January, is the continued strength of the operating companies, which continue to deliver mid-teen EBITDA growth.

Despite challenging markets, margins have widened, which should help allay some concerns over the impact of the higher-rate environment. Target returns are “broadly unchanged”. FY’24 saw about half the usual investment and realisation activity (and fewer realisations saw less NAV uplift on exit). A degree of volatility is to be expected, and the five- and 10-year total annualised NAV per share return (14.6% and 13.2%, respectively) are a better reflection of what investors are getting from the defensive growth strategy.

The trust has a balanced capital return policy.  

Q3: So, your key themes were value creation from their defensive growth strategy and particularly how this works in a higher-rate environment. What can you tell us about that?

A3: Their focus is on growing, profitable businesses and well-established managers. This has seen investee companies deliver mid-teens’ EBITDA growth over the long term.

Crucially, there has been great consistency of performance, which materially enhances compounding, and we estimate its EBITDA growth since 2010 has been over 4x the UK market. FY’24 results prove both resilient and well-diversified investments.

In terms of the higher-rate environment, the bottom line is that its partner GPs’ target returns are unchanged. We detail in the note how both organic and inorganic EBITDA growth opportunities combine to offset the pressure of higher rates. It is worth remembering that over the long-term investment horizon of PE, financing costs are just one of many variables the managers face.

Q4: In previous interviews, you have commented on why you believe the NAV to be realistic and resilient, can you just give us the key reasons?

A4: After having conducted extensive due diligence, the fact that buyers are still willing to pay substantial premiums to carrying value is evidence of the conservative accounting. In FY’24, this was close to a 30% premium, continuing a long-term trend.  Further, continued delivery of this should mitigate concerns about the credibility of the current NAV.

In terms of resilience, ICGT’s strategy is defensive growth. Our note explores what defensive growth means in practice. The key factors are a focus on growing, profitable businesses, in secular growth sectors, with multiple options to generate growth, and well-established managers.

Q5 The company announced an opportunistic buyback programme in addition to the long-term progressive dividend and share buyback programme.  What can you tell us about that?

A5: ICG Enterprise Trust has a balanced approach to capital allocation, including making new investments to generate long-term growth, a progressive dividend policy (it was up 10% in FY’24), a long-term buyback programme (£23m bought back to date) and, with these results, it announced a tactical buyback programme of up to £25m to take advantage of the unusually high level of discount. This will run alongside the long-term programme, with the opportunistic programme, typically, involving larger single transactions but active less frequently.

We believe this reflects the board’s willingness to take market opportunities as they are presented but, with a strong balance, continue to make investments and new commitments.

Q5: What could change in terms of the perceptions driving the discount?

A5: We see two elements at work here. There is a sector-wide discount and then trust-specific issues. In essence, what may change the former is macro drivers, such as expectations of an interest rate fall, the current green shoots of increased PE activity converting into higher sustained deal activity, and improved communication by all the participants. The trust’s own discount is likely to be driven by continued delivery of returns and uplifts on exits. More of the same convincing investors that their concerns are misplaced.

ICG Enterprise Trust is a leading listed private equity investor focused on creating long-term growth by delivering consistently strong returns through selectively investing in profitable private companies, primarily in Europe and the US.

ICG Enterprise Trust plc (LON:ICGT) is the topic of conversation when Hardman and 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: Putting the discount into perspective?

A2: ICG Enterprise Trust’s discount, like most of the listed PE sector, is well above historical averages. To put this into perspective, in this note we considered i) the improved risk/reward opportunity this presents to new investors compared with the past, ii) potential misperceptions, noting that in our view, the NAV is realistic and resilient going forward, and iii) how  PE managers aim to achieve unchanged target returns in a higher rate environment.

We also consider how the triggers to a potential re-rating have evolved in the recent past and are likely to evolve in the near future. While many of these factors apply across the PE industry, we explain how the trust’s position, portfolio and strategy mean it is uniquely well positioned in this environment.  

Q3: So, can you tell us a bit more about the improved risk/reward opportunity this presents to new investors compared with the past?

A3: The medium-term average discount is ca.20% but this is distorted by the pandemic/wars etc. If we go back to immediately pre-COVID-19, it was just 10%. Looking at current comparatives, in our note we explore why the discount to NAV is considerably above the level its assets are likely to trade in the market.

At current return levels, the NAV doubles over five years and with no change in discount levels, investors could expect that return on their investment; so on that assumption, they get 2x their money back. If the discount closes to the medium-term average, investors get 2.5x their money back, and if it returns to pre-COVID-19 levels 2.8x.

It is important to recognise that the compounding effect of the NAV growth is likely to be much more important to long-term investor returns. On a ten-year horizon, the NAV growth return for investors would represent 4x the benefit from seeing the discount close from 35% to 20%.

Q4: In previous interviews you have commented on why you believe the NAV to be realistic and resilient. Can you just give us the key reasons?

A4: After buyers have conducted extensive due diligence, the fact they are still willing to pay substantial premiums to carrying value is evidence of the conservative accounting. Continued delivery of this should mitigate concerns about the credibility of the current NAV.

In terms of resilience, the trust’s strategy is defensive growth. Our note explores what defensive growth means in practice. The keys are a focus on growing, profitable businesses, in secular growth sectors, with multiple options to generate growth, and well-established managers. It has delivered 2.5x market EBITDA growth over the long term but crucially, has done so consistently.

Q5: Your note highlights their targets are unchanged despite higher interest rates, so how will they achieve that?

A5: ICG Enterprise Trust and PE managers have not changed long-term targeted returns because of short-term noise of a higher rate environment, but the way the returns will be achieved has changed. Specifically, we believe incremental organic EBITDA growth and bolt-on deals are planned to offset a lower financial gearing return.

In our note we give some of the specific ways this can be achieved.

Q6: What could change in terms of the perceptions driving the discount?

A6: We see two elements at work here. There is a sector-wide discount and then trust-specific issues.

In essence, what may change the former is macro drivers, such as expectations of an interest rate fall, the current green shoots of increased PE activity converting into higher sustained deal activity, and improved communication by all the participants. The trust’s own discount is likely to be driven by continued delivery of returns and uplifts on exits. More of the same convincing investors that their concerns are misplaced.