On a quiet August afternoon, we found ourselves reviewing the constituents of ICG Enterprise Trust’s top 30 underlying holdings. It triggered a thought: what does the UK’s FTSE All-Share Index look like beneath the surface? Understanding ‘what lies beneath’ is critical to investors because, for example, owning a passive investment product means being exposed to specific risks that active investors might not be.
Private equity should offer investors portfolio diversification opportunities. Interestingly, the net asset value of private equity has grown >7x since 2002 whilst, over a similar time period, the number of public companies in the US and Europe has declined. Private markets have outperformed public equities across multiple cycles and, as a result, allocations are increasing. For retail investors, private equity investment trusts offer the only exposure to this growing asset class.
ICG Enterprise Trust (Ticker: ICGT) invests in profitable, cash generative unquoted companies primarily in Europe and the US. Its 30 largest investments represent 46% of the portfolio at present. By comparison, 46% of the total market capitalisation of the FTSE All-Share is accounted for by just 14 companies; a much more concentrated profile. The sector spread of these companies is also relatively narrow.
In this research note, we compare and contrast the characteristics presented by the FTSE All-Share and the ICGT portfolio of companies across: portfolio composition, investment style, earnings growth and valuations. Our analysis shows that ICGT is less exposed to cyclical industries, such as oil & gas and financials, whilst maintaining higher weightings towards sectors with greater defensive characteristics, such as healthcare and education.
Later in this note, we compare the underlying growth characteristics of the top 46% of each portfolio over the last five years and find that earnings growth has been more consistent at ICGT. This consistency leads to a greater compounding effect: 11.8% compound earnings growth for ICGT vs. 9.5% for the top 46% of the FTSE All-Share. The difference is even more apparent when comparing ICGT to the whole of the FTSE All-Share.
We believe our analysis shows that the FTSE All-Share is actually highly concentrated and under-represented in what one might argue are the more defensive areas of the economy.
At present, listed private equity investment trusts trade on relatively wide discounts when compared to the rest of the investment trust universe. Since Q4’18 ICGT’s discount has narrowed, helped by strong results and more positive market sentiment. At the current discount level of 21%, ICG Enterprise is trading at a wider discount than its peer group average of 16%.
An investment in ICGT should provide meaningful diversification benefits, not least because the underlying portfolio investments are so different. The types of company, the way they are managed and the niches they occupy mean that they are capable of very different growth trajectories, as evidenced by our analysis later in the portfolio section. A discount of 21% looks good value in this context. ICGT is due to publish its H1’20 results on 3 October 2019.
|Outperformance vs. public markets delivered over long term, through different cycles
||Private equity valuations lag markets, so, discounts may be hard to assess accurately at any point in time
|Underlying portfolio looks far more defensive and better diversified than the FTSE All-Share
||Gearing in underlying companies will magnify valuation movements
|Wide discount in absolute, and relative, terms
||Sentiment towards risk assets and in particular LPE may remain subdued, meaning the discount may not narrow in the short term