ICG Enterprise Trust plc (LON:ICGT) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report on ICG Enterprise Trust sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, it should only be looked at by professional/qualified investors. Page 2 of the report gives all the details.
Q2: Can you give us a brief summary of your report ‘Investor Day: defensive growth in practice’?
A2: The trusthosted an Investor Day on 13 June 2023.
The key takeaways were i) a clear, defensive-growth investment strategy, targeting superior risk-adjusted returns over the long term, ii) a differentiated portfolio with exposure to profitable, cash-generative businesses with downside resilience, iii) the benefits of having a dedicated investment team focused exclusively on the trust, but leveraging Intermediate Capital (ICG) as the manager, and iv) a disciplined approach to capital allocation with shareholder distributions through dividends and buybacks.
The 1Q trading update noted a small fall in NAV (forex-driven), with the underlying portfolio value growing 10.2% over the past 12 months in constant currency. In terms of ICGT’s investment approach, we believe investors get a good understanding of the differentiated approach from slides 26-40 of the Investor Day presentation. These detailed the benefits of Intermediate Capital as the manager, how ICGT accesses the market, and why it is in mid-large, developed-market buyouts with top-tier managers.
In our note, FY results: proving the market-beating model again, we reviewed ICGT’s latest results, which demonstrated the practical results of the strategy. The NAV total return was 14.5% (local currency portfolio return 10.5%, the 14th consecutive year of 10%+ growth). On exit, it saw an average 24% uplift to carry value.
Q3: So, can you tell us a bit more about what ICGT investors get from the strategy?
A3: The value added by the trust, and its chosen GPs and investments, results in strong NAV per share total returns (20.4% CAGR over three years, 16.9% over five years and 13.8% over 10 years). Critically, the NAV return is driven by the operating performance of the underlying companies, whose portfolio return on a constant currency basis, on average, has been 17% over the past 10 years.
If we compare a theoretical ICGT company (theoretical, as it would be an average- growth company held for a whole period) with a UK benchmark since FY’11, the benchmark average growth rate has been 4.5%, less than a third of the theoretical ICGT company.
With the compounding benefit, the theoretical ICGT company EBITDA would be 5.4x the FY’11 level, while the benchmark EBITDA is up just 32%. We also highlight that ICGT’s consistent performance is an important factor in accelerating this outperformance. It had no down years, with the lowest annual EBITDA growth rate being 8%. For the benchmark, there were falls in EBITDA in four years: FY’13 (-9%), FY’15 (-19%), FY’16 (-14%) and FY’21 (-30%).
Q4: And what differentiates the trust from other listed PE?
A4: The presentation explored what makes them different, highlighting unique access to Intermediate Capital’s platform and secondary/co-investment opportunities, that buyouts offer similar returns for less volatility, compared with VC/Growth, that developed markets offer better returns, how the mid-market space offers greater returns for marginally more volatility, why manager selection is key, and how compounding accelerates outperformance when returns are consistent, rather than volatile. It was a detailed verification of the strategy and why the portfolio is constructed the way it is.
Q5: The company talks of defensive growth as a strategy. In the uncertain world we live in, this appears more important than ever, what does it actually mean in practice?
A5: That is a really good question, and the core of what they are about.
What it means is finding businesses that i) are mature, profitable and cash-generative (unlike early-stage venture capital investments), ii) have dominant market positions, iii) provide mission-critical services, and iv) have the ability to pass on price increases. It also means i) avoiding businesses whose valuations may be based off future revenue projections, not current earnings, ii) having businesses with high margins, scalable platforms and that operate in sectors or sub-sectors where the income streams are non-cyclical, iii) looking for growth levers, such as bolt-on M&A or operational improvements, and iv) identifying strong management, with proven track records. PE is a long-term investment.
ICG Enterprise Trust has, for some time, assumed that exit multiples would be lower than entry ones for its co-investments, thus building in a cushion in its deal assessments. Also, investments have had to justify themselves on earnings growth, not multiple expansion. With recent co-investments, ICGT has been leveraging Intermediate Capital expertise and building downside protection into the structure of its deals, taking a very cautionary approach to such investments. Hopefully, that gives a flavour for what defensive growth means on the ground.
What it delivers, in practice, to investors is market-beating returns, and just three down quarters out of 26 since the manager was appointed.
