ICG Enterprise Trust plc (LON:ICGT) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your report on ICG Enterprise Trust sits behind a disclaimer. Can you tell us why that’s there?
A1: Yes, it’s a standard disclaimer that many investment companies have. For regulatory reasons, there are some countries, like the US, where the report should not be read. In the UK, because private equity is not seen as a simple asset class, it should be looked at by professional and qualified investors. Page 2 of the report provides all the details, but it’s a very standard disclaimer.
Q2: Can you give us a brief summary of your report ‘Unique Approach to Capital Allocation’?
A2: In this note, we examine how shareholders benefit from ICGT’s unique approach to capital allocation. We first discussed this on page 11 of our 16 May 2024 note, “FY’24: portfolio companies performing strongly.” We’ve previously highlighted how the group’s defensive growth strategy differentiates itself from peers. In this note, we focus on the capital allocation policy and why that is also a differentiator.
ICGT’s approach rewards investors in four ways:
- Immediate income through a progressive dividend policy.
- Long-term compounding capital growth through new private equity investments.
- Ongoing NAV accretion through a long-term buyback program.
- Further NAV accretion via an opportunistic buyback program when the discount is particularly high.
The mix of these returns of capital is unique. We also reviewed the recent results covering the third quarter ending in October 2024.
Q3: Can you provide some figures on those returns?
A3: For the financial year 2025, the intention is to pay a minimum of 35p dividend, recently reiterated, giving a current yield of 2.7% and a five-year annual growth of over 9%. In the third quarter, new investment was £35 million, with a further £23 million to the end of December. Over the five years ending October 2024, the portfolio has generated average annual returns of 16%, indicative of the potential returns that new investments have to make long-term returns to shareholders.
Buybacks of £50 million at an average discount of 37.6% have been executed between October 2022 and the recent results, adding 47p to the NAV per share. Of the £50 million, £32 million was in the long-term program and £18 million in the opportunistic one. Excluding one-off tender offers, ICGT has seen the largest share count reduction of any of its peers since it started the long-term program in October 2022. A new £25 million opportunistic program for the next financial year was also announced.
The bottom line is that in the five years to October 2024, they have delivered a CAGR NAV per share total return of 13.8%.
Q4: Can you tell us more about the buyback programme?
A4: The company has two programmes: a long-term one, which is regularly in the market for relatively small quantities of shares, and an opportunistic one, activated only when the discount to NAV is large, allowing a material number of shares to be purchased in a single trade. Consequently, the opportunistic one trades rarely but in much larger size than the ongoing one, with an average daily volume of 15.3 thousand shares in the ongoing program and 135.6 thousand shares in the opportunistic one.
Being more active when the discount is large is not new; for example, ICGT’s buybacks post-Brexit were significant, while there were none in the period FY2011-15. What differentiates ICGT from its peers is this dual approach to its buyback programme.
Q5: Can you give us some headline numbers from the results?
A5: The NAV per share was £19.97 against £19.46 on 31 July. There was a NAV per share total return of 3% in the third quarter, bringing the five-year annual return to 13.8%. There were 12 full exits at an average uplift to carrying value of 18%, demonstrating the conservatism of the accounting. The third-quarter dividend was 8.5p.
Q6: Finally, can you tell me about the risks with ICG Enterprise Trust?
A6: All investments have risks. Like most of the private equity sector, ICGT is trading at a discount. Investors may be concerned about the realism of the NAV and the prospects for private equity in a higher-rate, recessionary environment. We’ve addressed those concerns directly in previous notes, believing the NAV to be realistic and resilient, and explaining how the model adds value through all economic conditions.
Private equity is an above-average cost model, but post-expense returns have consistently beaten public markets. In our view, ICGT’s permanent capital structure is appropriate for unquoted and illiquid assets.
