Citywire’s Investment Trust Insider: ‘ICG Enterprise’s bumper quarter as cheap private equity trusts surprise’

Citywire's Investment Trust Insider - Jeremy Gordon

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ICG Enterprise (ICGT) has become the latest listed private equity trust to report surprisingly buoyant performance in the second half of 2020, with analysts reporting the wider sector has weathered the Covid-19 storm, creating an opportunity in funds’ lagging shares.

The £649m investment company run by Intermediate Capital Group, which combines a fund-of-funds approach with co-investments and group-sourced plays in the managers’ highest conviction holdings, reported its underlying portfolio had recovered strongly from August to the end of October. 

Net asset value (NAV) shot up to £12.43 per share, up from £12.13p three months prior, with a 10.7% total return over the quarter. That put the portfolio in positive territory for 2020, returning 9.6% over the previous nine months, with private equity funds more broadly holding up better during the pandemic than they did in the financial crisis. 

ICGT’s shares were trading up 1%, or 10p, at 986p this morning and are up 2.8% over the week. The trust is currently trading on a 21% discount to NAV.

Oliver Gardey, lead manager along with Colm Walsh, said it was ‘particularly encouraging’ how strong returns in the quarter had borne out their strategy. The managers focus on top private equity funds in Europe and the US and have tried to proactively build a resilient portfolio with ‘defensive growth’ characteristics.

Gardey said they were always confident they could weather a downturn but now had nine months of data to back that up, as the portfolio’s  defensive characteristics had ‘really shined through’. He also highlighted that gains had been powered by the ‘high conviction’ segment, where the team effectively cherry-pick their favourite ideas from the funds they invest in.

This portion – which makes up just under half the portfolio – delivered local currency returns of 17.6% in the quarter.

As well as profitable realisations, that has been driven by strong performance at Telos, Leaf Home Solutions and PetSmart, all US companies in the top 10 holdings. Cybersecurity company Telos’s shares have doubled since it listed in November, while PetSmart has benefited the strong performance of listed subsidiary Chewy.

In Europe, Walsh picked out Germany’s Minimax, a leading global supplier of fire protection systems and services, as ‘a really good example of defensive growth’. Even though its customer base includes airports, it has not experienced the same downturn because the components and services it provides continue to be essential and often underpinned by regulation.  

‘I think the last big point is we’re seeing this momentum continuing into [the fourth quarter]. So, this is not just an outlier of a quarter,’ added Gardey.

Given the NAV is for the end of October, some of the ‘vaccine bounce’ seen in public markets since will also be reflected when the end of January valuation is published with the annual results. 

Gardey said that could be subtle, given a cautious approach to valuations. But he pointed out the pattern of asset sales at prices well above carrying value on the balance sheet, even during a tumultuous period.

In the first nine months of 2020, there were 22 realisations at an average uplift of 40%. The previously-reported sale of Dutch holiday park operator Roompot, which boosted NAV by 1.3%, also completed during the quarter.

Stifel: sector may surprise

In a report on London-listed private equity funds this week, Stockbroker Stifel argued the wider sector is about to deliver a positive surprise.

Its investment company analysts, led by managing director Iain Scouller, wrote:

‘With the [end of December] reporting season imminent we think the private equity sector NAVs may well surprise on the upside. When combined with the relatively large discount many of the funds are trading on, this makes the sector look attractive…

‘The rally in listed markets in Q4 has boosted comparable valuations and many funds have significant exposure to the technology and healthcare sectors which have performed strongly.’

Analysts pointed to meaningful realisations during 2020, including significant activity at NB Private Equity (NBPE) and ICG Enterprise’s accretive Roompot sale, suggesting there was plenty of latent value in portfolios.

Trusts with high healthcare and tech-related exposure could particularly benefit if valuations move upwards in line with public markets. That would boost HarbourVest Global Private Equity (HVPE) and Pantheon International (PIN), two funds of funds with more than half their portfolios across those areas. 

Although IGCT would be a smaller beneficiary of that trend, about a third of the portfolio is held across those two sectors, according to Stifel.

‘Crazy’ discount

Since autumn, ICGT has made some progress on its discount, which has fallen from around 25% to now trade in the low double-digits.

Gardey, who said he had been buying shares himself, said the pair is still ‘not satisfied’ and lambasted the discount as ‘crazy’, given the latest showing of strong performance. He believes that discounts remain too wide across the sector as a whole, given final quarter guidance suggesting performance will continue to be strong across the sector.

The managers made £30m of new investments in the quarter, taking the total to £82m for the nine months.

Since the end of October, there have also been realisations of City & County Healthcare Group and System One, while £48m was deployed in the final two months of the year.

New high conviction investments have been made into Curium, a leader in the specialised field of nuclear medicine, and AML RightSource, which provides anti-money laundering services to banks. Around £35m has also been committed to funds, including a new relationship with FSN Capital in Northern Europe.

In the past five year, shareholders have enjoyed a 96% total return with dividends reinvested, lagging the 148% average in the Association of Investment Companies’ Private Equity sector.

After the update, Stifel’s Scouller reiterated his ‘buy’ recommendation on ICGT and increased the ‘fair value’ price to 1080p, representing a 15% discount to estimated NAV.

In this week’s note, other trusts rated as a ‘buy’ by the broker included NB Private Equity, Pantheon, Standard Life Private Equity (SLPE), HarbourVest and Princess Private Equity (PEY). The latter two were both upgraded from ‘hold’ after publishing strong NAVs.