ICG Enterprise

With its focus on defensive growth, ICGT’s current discount feels unwarranted...

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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

The market sell-off has not been kind to the listed private equity (LPE) sector. The share price of ICG Enterprise Trust (ICGT) has fallen more than most, and so we ask: do the fundamentals justify this treatment?

ICGT invests in profitable, cash-generative unquoted companies, primarily in Europe and the US. Increasingly it does so by the team deciding on individual investments themselves (rather than committing to third-party managers). The ‘high conviction’ portfolio now represents 41% of the total portfolio. Overall the trust retains a bias towards large- and mid-market buyouts, accounting for 88% of the total portfolio.

As we discuss in the Portfolio section, the overriding theme for quite some time – which is reflected in the sector exposure – has been for the managers to favour investments which exhibit ‘defensive growth’.

At an operational level, we observe that private-equity-backed companies are used to dealing with change, being well set up to evaluate new circumstances and adapt, enabling continued growth. Managers should be able to take a long-term view without the pressure of short-term performance which is found in public markets.

As such, we believe that there are good reasons to think that on a NAV basis over Q1 2020, ICGT will at the very least not perform any worse than the average of the peer group, and likely better than wider equity indices.

In the Performance section, we evaluate the various listed and private-equity comparators available and conclude that ICGT’s NAV is likely to see a mark-to-market fall of between 12% and 18% for its 31/03/2020 valuation. This would indicate a discount range of 27% to 32% at the current price.

Kepler View

An investment in ICGT provides meaningful diversification benefits over the long run, not least because the underlying investments are so different to those found in listed-equity indices. The dividend represents a 3.3% yield, and being funded from capital means it’s not subject to the same short-term headwinds other dividend sources currently face.

Due to defensive biases within the portfolio, we believe it’s fair to assume the operational performance of the portfolio will outperform that of those trusts which dominate listed-equity markets. Conversely, the share price has fallen by c. 30% since the start of 2020. As discussed in the Discount section, we estimate a potential discount range of between 27% and 32% to the 31/03/2020 valuation (expected to be announced in mid-June).

This represents a very wide discount for what we view as a high-quality trust. More recently, a board member has personally been buying shares, and the trust had previously bought shares back in a highly accretive fashion. This suggests board members are confident about ICGT’s future prospects. With cash and borrowing facilities making up 43% of likely commitments, this represents over two years’ worth of funding in the absence of any realisations. As discussed in the Gearing section, this is broadly in line with peers.

Aside from the valuation opportunity presented by the discount, we believe the portfolio is well positioned to benefit from a resumption of global economic activity. As such, now could be an interesting time to consider the trust.

bull bear
Strong NAV outperformance of listed-equity markets over the long term, with expectation that NAV outperformance will be maintained in the downturn Private-equity valuations lag markets, so precise level of discount is hard to determine
Underlying portfolio looks far more defensive and better diversified than the FTSE All-Share Gearing in underlying companies will magnify valuation movements
Wide discount in absolute terms Sentiment towards risk assets, and in particular LPE, may remain subdued, meaning the discount may not narrow in the short term
William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

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