ICG Enterprise 16 November 2022

ICG Enterprise (ICGT) is a leading listed private equity investor, focussed on generating consistent and resilient returns across economic cycles. ICGT is well-positioned to generate long-term value, benefitting from the experience and expertise to source attractive opportunities in primary, secondary and direct investments.

The Portfolio composition reflects the team’s focus on three strategic objectives designed to further enhance risk-adjusted returns. These objectives are: being more fully invested over time, thereby reducing cash drag; to allocate a higher proportion to discretionary investments, which, historically, have delivered higher returns than fund investments; and to have a greater proportion of the trust’s assets invested in the US, the largest, most mature and best performing PE market globally.

As discussed in the Performance section, ICGT’s NAV growth has been steady and consistent over time. NAV total returns over the past five years have been impressive, outpacing the FTSE All-Share Index by 12.9% per year (to 31/07/2022, Source: ICG). In our view, a key contributor to this is ICGT’s focus on ‘defensive growth’ companies, as evidenced in the resilient earnings’ growth of underlying companies.

The current discount to NAV of 45% is 1.8 standard deviations from the long-term average of 26%. Of course, some investors perhaps expect the NAV to fall over the short term: a NAV decrease of 30% would put the shares back on their long-term average discount. Whilst we do not believe ICGT’s portfolio will be immune from declines in public market multiples, the discount gap, which is c.20 percentage points wider than ICGT’s long-run average, implies an EV/EBITDA multiple reduction from 14.5x to c.10x, assuming no EBITDA growth.

ICGT’s managers have demonstrated their ability to capitalise on opportunities in the evolving private equity market. One example of this is ICGT’s increased exposure to the secondary market, with a target allocation of 15-25% of the portfolio in secondary investments announced in FY22. Increased secondary investments should accelerate the portfolio’s cash flow profile, since secondary investments generally reflect more mature assets, the distributions being typically received faster than from primary investments. Moreover, structural supply/demand dynamics are generating secondary investment opportunities priced at attractive discounts. In our view, all of these developments are to be welcomed, and NAV returns should be enhanced as a result.

As illustrated in the Discount section, ICGT’s shares have suffered a significant de-rating over 2022. Indeed, the listed PE sector has significantly underperformed UK equity markets over the short term by quite a considerable margin. However, as illustrated in the Portfolio section, we show that the earnings’ growth of ICGT’s underlying companies has been strong and consistent, as well as being considerably less volatile than that of UK equities. This should put the trust in good stead in the currently uncertain environment but, in our view, the ability of ICGT to outperform over the long term has improved as a result of the board’s and managers’ strategic initiatives.

As such, the short-term move in the share price seems unjustified. Relative to the peer group, we believe ICGT is differentiated enough to justify a premium rating relative to peers. ICGT’s current discount level could, therefore, be viewed as an attractive entry point for investors on an absolute and relative basis.