ICG Enterprise Trust

Putting the discount into perspective

08 Jan 2024 / Corporate research

ICGT’s discount, like most of the listed PE sector, is well above historical averages. To put this into perspective, in this note we consider i) the improved risk/reward opportunity this presents to new investors compared with the past, ii) potential misperceptions, noting that in our view, the NAV is realistic and resilient going forward, and iii) how PE managers aim to achieve unchanged target returns in a higher rate environment. We also consider how the triggers to a potential re-rating have evolved in the recent past and are likely to evolve in the near future. While many of these factors apply across the PE industry, we explain how ICGT’s position, portfolio and strategy mean it is uniquely well positioned in this environment.

  • ICGT’s investment approach: While the discount is important, we believe long-term investors will generate the vast majority of their returns from ICGT’s defensive growth strategy delivering continued, consistent, compounding, long-term EBITDA outperformance. This has led to five-year NAV TSR 15.2% annualised to July 2023.
  • Discount risk reward: Assuming continued NAV growth at this level, a return to the medium-term average 20% discount increases the five-year return from 103% to 150%. A return to the levels immediately pre-COVID increases the return from 103% to 181%.
  • Valuation: ICGT’s NAV valuations are conservative, demonstrated by continued realisations above reported book values. The ratings are undemanding. The 36% discount to NAV is anomalous, we believe, with defensive, market-beating returns, and twice the levels seen pre-COVID-19. The 2024E yield is 2.7%.
  • Risks: PE is an above-average cost model, but post-expense returns have consistently beaten public markets. Actual experience has been of continued NAV outperformance in economic downturns, but sentiment may be adverse. ICGT’s permanent capital structure is right for unquoted/illiquid assets.
  • Investment summary: ICGT has consistently generated superior returns, by adding value in an attractive market, having a strategic focus on defensive growth and leveraging synergies from being part of ICG since 2016. Valuations appear conservative, and governance is strong. ICGT focuses on delivering resilient, risk-adjusted returns, and balancing risk and reward. The risks are primarily sentiment-driven on costs, cyclicality and the underlying assets’ liquidity. A 39% discount to NAV appears anomalous with ICGT’s performance.

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