ICG Enterprise 19 October 2023
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by ICG Enterprise. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
ICG Enterprise (ICGT) offers exposure to a diversified portfolio of buyouts, private equity backed businesses. ICGT currently has over 500 underlying companies, sourced through primary commitments, secondary fund investments and through co-investing. The highly flexible mandate seeks to benefit from the best deals and managers available in the buyout universe, increasingly on a global basis.
For a while now, ICG has focused on generating consistent and resilient total returns across economic cycles by targeting buyouts with defensive growth characteristics, both in terms of the managers and businesses they select to invest in. The portfolio offers exposure to businesses in a range of very different niches than one might find in quoted markets, but with low specific risk. In view of the strong earnings growth for the portfolio that ICG continues to report (see Performance section), ICGT’s underlying spread of investments offers clear diversification to traditional equity portfolios.
Within the listed private equity peer group, ICGT is also increasingly differentiated. ICGT’s management team are making good strides towards achieving the board’s strategic objectives for the portfolio (see Portfolio section), which are anticipated to further improve returns over the long term. Alongside this, the board contributes further positives, such as a progressive dividend, a management fee reduction which is already contributing savings this year, and a long-term share buyback programme.
As we discuss in the Discount section, at 39% ICGT’s discount to NAV is around 1 standard deviation wider than the five-year average. The more active use of buybacks may help to limit the downside in terms of rating, but as an activity, it is also highly accretive to the NAV.
Alongside the strategic portfolio initiatives set for the manager, ICGT’s board has a track record of making changes to ICGT’s proposition, making it incrementally more attractive for investors. As we discuss in the Dividend section, in 2016, the board first instigated a progressive dividend policy and ICGT’s shares now offer a meaningful prospective yield, which, at the current price, is 2.8%.
Seen another way, the dividend represents a regular return of capital to shareholders at NAV. Complementing this, the board continues to implement their long-term buyback programme (see Discount), which over the last 12 months has absorbed around one-third of cash returns from the portfolio. Further activity will be highly accretive to the NAV, but ICGT’s near term financing requirements need to be balanced against more buybacks, meaning the board is unlikely to be a direct catalyst for the discount to narrow, in our view.
ICGT’s historic returns have been impressive. Underpinning this track record has been the consistent earnings growth delivered by the portfolio year in, year out. With investors everywhere generally cautious on valuations, a result of the significant rise in bond yields, we believe that earnings growth will be the main driver of NAV growth going forward. The ICG team’s preference for defensive growth companies puts it in a good position to continue to deliver in what is a highly uncertain economic environment.
Bull
- Underlying earnings’ resilience continues to support valuations of ICGT’s portfolio, despite difficult macroeconomic background
- Strong progress being made on board’s and managers’ strategic objectives, which should result in improved portfolio returns over long term
- As ICGT increasingly differentiates itself, the higher the potential for a sustained discount narrowing relative to peers
Bear
- Private equity valuations lag markets, so it can be hard to determine current underlying value
- ICGT’s overcommitment strategy and current level of gearing may exacerbate downward valuation moves, or limit the potential of the discount to narrow
- Discount may potentially widen yet further
Fund History
