ICG Enterprise 08 July 2021
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) trust celebrates its 40th birthday this year, and five years since the move to ICG. In other ways too, 2021 is shaping up to be a banner year. Realisation activity is running at record levels, with £100m of cash received by the trust during Q1. Realisations have come at a 42% uplift to carrying value (35% average for past five years) and puts ICGT on track to deliver its 13th consecutive financial year of double-digit portfolio growth (net of management fees, but not including the effects of cash drag or FX changes).
ICGT sits in a unique place as regards the listed private equity (LPE) peer group in taking a hybrid approach to investing. The team describe their ‘secret sauce’ as blending the third-party funds portfolio (c. 50% of investments) with the ‘high-conviction’ portfolio. This represents investments over which the ICG team make a conscious decision to invest through ICG funds or through co-investments. Investments with third party managers drive co-investment opportunities, and enable diversification within the portfolio, without it becoming too concentrated.
Over time, ICG’s team have added value through selecting top-tier managers in the fund portfolio, or through good company selection in the high-conviction portfolio. The combination has meant that ICGT has delivered consistently strong value creation for shareholders and, as we demonstrate in Performance, ICGT has outperformed UK and Global equities over five years on a NAV and share price basis.
ICGT’s board aims to pay a total dividend (funded from capital) of at least 27p per share for the year ending 31 January 2022. This represents a 12.5% increase over the previous year, equivalent to a prospective yield of 2.5% on the current share price.
As we highlight in Performance, ICGT has produced strong and consistent NAV returns, and the Discount of 24% remains tantalisingly wide. We wonder what will draw more investors into what we view is an underappreciated niche. Large, successful institutions such as the Yale Endowment have long espoused significant allocations to private equity. We wonder when other investors might catch on? Even a slight move from generalist investors towards a ‘Yale model’ allocation could narrow discounts dramatically.
It is worth noting that ICGT’s NAV returns have been achieved net of all management fees and other Charges, which to some look prohibitively high. There are no guarantees that historic outperformance will continue over the next five years. However, those who avoided ICGT five years ago because of the ‘cost’, have found the real cost has been missing out on what has been a strong period of outperformance of global equities.
We continue to believe that private equity-backed companies are in a better position than many of their listed comparators to deal with the aftermath of the pandemic and therefore justify a place in investment portfolios. Now that ICG have been at the helm for five years, their stamp on the portfolio is evident. ICGT offers a differentiated proposition, which over time as we discuss in Discount, could lead to the discount narrowing and justify a premium relative to peers.
|Portfolio benefitting from being in 'sweet spot' un 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