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 ‘FY results: proving the market-beating model again’?
A2: ICGT reported another strong year to end-January 2023. The NAV per share was 1,903p, up from 1,690p in January 2022. The NAV total return was 14.5%, driven by the local-currency portfolio return of 10.5%, its 14th consecutive year of double-digit growth. Realisations and new investments were in line with historical averages.
On exit, ICGT saw an average 24% uplift, despite the challenging market conditions. It has a progressive dividend policy (up 11%), is doing share buybacks (£5.2m), and has a new, reduced management fee. ICGT’s investee companies offer good risk-adjusted returns and defensive characteristics, giving investors both growth and resilience.
Q3: So, a bit more on the results themselves?
A3: The portfolio return on a local currency basis over the last 12 months (LTM) was 10.5% (FY’23 sterling return 17.0%). It is the 14th consecutive year of double-digit local currency portfolio growth.
The 2023 NAV total return per share was 14.5%, broadly in line with the five-year NAV per share total return of 16.8% (UK whole market 4.2%). Total proceeds during the period were £252m (FY’22 £343m). There were 54 full exits in the year, at an average uplift to carrying value of 24% (still two thirds of the FY’13-22 average of 35%, despite market conditions), with a 2.7x multiple to cost (somewhat above the 10-year average of 2.3x).
The realisation uplift and returns profile indicate both the inherent conservatism in the portfolio valuations and the company’s ability to identify attractive investments to generate strong returns. Realisations were broadly in line with FY’22, and up 18% on the 2018-21 average.
Q4: I saw there was a reduction in the manager’s fee. What can you say about that?
A4: ICGT has negotiated a tiered cap to management fee, effective from 1 February 2023. If this had been effective over the last year, it would have saved more than £1m. In addition, the manager is now absorbing various costs, saving 25%-30% (we estimate £0.5m p.a.) of ICGT’s other expenses.
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 ICG Enterprise Trust is 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 which 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. ICGT 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.