ICG Enterprise 21 February 2023

ICG Enterprise (LON:ICGT) is one of the longest-standing constituents of the listed private equity sector and is focussed on generating consistent and resilient total returns across economic cycles. ICGT has a highly credible strategy, which differentiates it from its peer group, with a flexible mandate enabling it to source attractive opportunities in primary, secondary and direct investments.

As we discuss in the Discount section, the entire listed private equity sector is trading at historically-wide discounts, which seems at odds with historically-strong returns. ICGT is on track to deliver its fourteenth consecutive year of double-digit underlying portfolio growth, assuming the last quarter of the current financial year does not disappoint.

One reason for the trust’s strong and consistent NAV performance has been the managers’ continued focus on defensive growth companies, anticipated to demonstrate resilience in tough economic conditions. Now that the challenging environment is here, this defensiveness is showing through. During 2022, portfolio growth has been driven by resilient earnings, offsetting declining valuation multiples. This further builds on the picture we identified in our last note, which showed that ICGT’s underlying earnings have been consistently positive since 2010, in stark contrast to the FTSE All-Share Index, which has seen considerably more volatility.

Taking a step back, 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 recently-announced management fee reduction and a long-term share buyback programme.

ICGT’s historical outperformance of the UK equity market is stark, as we highlight in the Performance section, and, so far, 2022 is also proving to be another year of outperformance. Some market commentators have queried whether private equity valuations are defying gravity somehow, and have been predicting falls. We believe it is worth remembering that ICGT’s portfolio is very different to the UK equity index, not just in terms of composition, but also underlying exposure: ICGT invests in profitable, defensive and resilient businesses, which are growing within their niche (see Portfolio section).

Whilst valuation multiples will always be a topic for debate, the unavoidable evidence is that private equity valuations have, historically, proved conservative. Evidence comes in the form of the reported uplifts to valuations on a sale. Despite the environment, realisations are still occurring, with ICGT seeing 11 full exits from its portfolio of companies over the quarter to 31/10/2022. In our view, this shows that within private equity, life continues and valuations are potentially not unrealistic.

Over the longer term, as we discuss in the Discount section, we think it irrational that a differentiated and strongly-performing strategy, such as ICGT’s, remains at such a wide discount. Management fees are coming down (see Charges) and ongoing buybacks continue to signal the board’s confidence. Over the short term, in a challenging economic environment such as the one we are experiencing, we think the portfolio’s continued resilience, if achieved, may give cause for the historically-wide discount to NAV to narrow.