Direct approach sees ICG Enterprise come roaring back to life
A pivot towards direct investments is paying off for ICG Enterprise (ICGT ) as the portfolio bounced back with growth that was five-times higher than the previous year’s return.
The £1.2bn portfolio invests in both unquoted companies and private equity funds run by its own manager Intermediate Capital Group and third parties, but over the past year it has continued to tilt towards direct and secondary investments and away from funds.
The switch helped the fund deliver a net asset value (NAV) total return of 10.5% in the year to end of January, significantly outpacing the 2.1% NAV total return it logged in the previous year, according to results released last week.
Chair of the fund Jane Tuffnell said: ‘During the year, we evolved our target portfolio mix towards having more direct and secondary investments, which will help to optimise portfolio concentration and liquidity.’
She added that the board and lead manager Oliver Gardey have been ‘careful’ in allocating money, deploying £181m into new investments and making further commitments of £83m.
‘As we enter another period of uncertainty, I am confident our long-term approach can generate value for shareholders,’ she said.
Gardey added that he had made a ‘secondary sale post period-end at a 5.5% discount’ that generated cash proceeds of £62m.
‘The investment trust structure enables shareholders to invest efficiently in privately-owned companies,’ he said.
‘With our track record and network, ICG Enterprise is an attractive proposition for those seeking exposure to mature, profitable, cash-generative business.’
Gavin Trodd – an analyst at Deutsche Numis, which it should be noted is the trust’s corporate broker – attributed the success to ‘strong portfolio operating performance’ from investments into ‘defensive growth companies’, a focus taken up by the trust when Intermediate Capital Group took over management in 2016.
Trodd said the investments benefitted from ‘strong cash flow generation and exhibit structurally high margins and consistent earnings growth’.
He added that ‘valuation multiples remain relatively modest compared to peers’, which should stand the listed fund in good steady against a volatile market backdrop.
Despite the underlying strength of ICGT’s portfolio, the trust trades at a gaping 42% discount. Although, that is in line with its private equity peers as 12 out of the 16 names in the sector currently at discounts over 30%.
The private equity sector was hard hit by rising interest rates that increased the cost of borrowing and hampered deals, while investors have also shown concerns about the valuations of the underlying assets.
In recent months, volatile markets have spooked investors, who are once again concerned about long delays between valuation updates.
Letting go and buying back
As already announced, ICGT let go of two sizeable assets post-period end. These were its largest holding, fire protection systems and services company Minimax, which made up 3.1% of its portfolio, and eight other, mature primary fund investments.
Altogether, the trust generated £107m from the sales, significantly strengthening its balance sheet and leaving it with a total available liquidity of £232m – equivalent to 17% of NAV. The extra cash is good news for shareholders, as it will likely be used to fund buybacks.
During the period, the trust announced an ‘opportunistic’ buyback programme of up to £25m, taking advantage of the current discount. This is on top of the £59m it returned to shareholders in the past financial year, equal to 5% of the opening NAV.
According to Trodd, ‘the increased level of capital return is reflected by 39% of realisation proceeds being returned, though buybacks and dividends in full-year 25, compared to a five-year average of 17%.’
