ICG Enterprise (ICGT) recently announced its NAV as at 31 October. As we discuss in more detail in the Performance section, the portfolio showed good progress. With the managers indicating that strong momentum has continued into the final quarter of their financial year (ending 31 January), we look forward to more details in April when the trust publishes its annual results.
ICGT invests in profitable, cash-generative private companies, primarily in Europe and the US. Overall, the portfolio appears to have been operationally resilient, proving that the underlying companies are exposed to very different risks and growth drivers to listed stock markets. As such, we think ICGT offers a potentially useful complement to portfolios.
Five of the top ten holdings have been made through ICG, and eight are ‘high conviction’ (representing those invested through ICG funds, co-investments, and secondary investments). In 2016 when ICGT’s management team moved to ICG, the board set out a strategic goal to increase ‘high conviction’ investments to 50% of the portfolio, and also to increase exposure to US private equity deals. High conviction investments now represent 46% of the portfolio, and US companies represent 39%, representing strong progress toward these goals.
Last year’s dividend of 23p per share represents a historic yield of 2.3% at the current share price (as at 11/02/2021). So far this year, the board have paid three 5p interims. The balancing amount determining the total dividend will be announced with the annual results in late April. Given that it is paid from capital, the dividend is not subject to the same short-term headwinds that other dividend sources have faced this year.
We believe that there are plenty of attractions to ICGT. Private equity is a relatively misunderstood asset class, and one only needs to look at back to a year ago to see the risks of the discount widening in a market sell-off. However, we believe that the performance of ICGT’s portfolio over 2020 serves to highlight the trust’s essential attractions.
ICGT is a high-quality trust, but there is potential for its differentiating features to be better recognised by the market in the form of a narrower discount than peers. ICGT sits right in the middle of the LPE spectrum when viewed in terms of approach. It is neither a higher risk, concentrated trust, nor a very highly diverse one with many thousands of underlying investments. ICGT is a hybrid direct and fund-of-fund investor, putting it in the sweet-spot in terms of concentration vs. diversification. As we discuss in the Portfolio section, there is clear potential for ICGT to differentiate itself from the peer group yet further as the proportion of ‘high conviction’ investments increase.
In our view, as ICGT continues to carve out its own niche, this will serve as a support for the share price rating. High conviction investments have delivered higher returns historically, but investors should start to value more highly the access that ICG as a manager brings. The third-party portfolio adds diversification, but also wider access to dealflow through other managers. With the discount still wider than it was at the start of 2020, now could be an interesting time to consider ICGT.
|Portfolio benefitting from being in ‘sweet spot’ in terms of concentration vs diversification, having delivered strong historic returns
||Private-equity valuations lag markets, so precise level of discount is hard to determine
|Benefits of ICG starting to be felt in underlying portfolio (now 25% of total), with trust in good position re: deal flow and access to investments
||Gearing in underlying companies will magnify valuation movements
|ICGT carving out its own niche in the LPE sector offers the potential for a sustained discount narrowing relative to peers
||If sentiment towards risk assets changes, the discount may widen, potentially dramatically