ICG Enterprise Trust PLC (ICGT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to ICG Enterprise Trust results for the 6 months ending 31st of July 2023. I am delighted to be joined by the 2 portfolio managers, Oliver Gardey and Colm Walsh, who will give a brief overview of the results. The presentation can be found on our website. We will be taking Q&A via the online platform and questions can be submitted throughout the presentation, and we will address all questions at the end. Oliver, over to you.

Thank you, Chris. Let's begin with the key takeaways for the first half of the financial year. Firstly, portfolio performance was robust. We are up 4.6% on a local currency basis, which has been supported by double-digit revenue and earnings growth from our underlying portfolio. Secondly, both realizations and new investment activity have continued despite a slower transaction environment, and we do see realizations to continue to be at significant uplifts to holding values, demonstrating, we believe, the embedded value in the portfolio. Thirdly, the diversified base of the ICG portfolio supported our primary program over the last 12 to 18 months, and it allows us to access co-investments, secondary investment opportunities with a wide range of our -- with wide range of leading managers, supporting an ongoing new investment for our future growth. And finally, we reached an important milestone for almost a year -- almost a year ago, we started our share buyback program. And this has operated in parallel with our progressive dividend policy and our investment program, and we maintain our commitment to continuing this approach through fiscal year '24 and beyond. Moving on to the next slide, let's touch on our portfolio composition. As you know, our mission is to provide our shareholders access to top-tier high-performing private equity assets. And we have a dedicated investment team, which proactively construct a portfolio and is dedicated to execute our investment strategy, and that's where we think we are quite differentiated. And as you know, we invest exclusively in buyouts, focused on North America and Europe. Why? Because these are the 2 most developed private equity markets worldwide, providing depth of quality resource for managers, a large market for quality assets and more liquidity. That really helps to provide superior risk-adjusted returns. We access the market through primary, direct and secondary investments identifying managers and investments that align to our strategic focus on defensive growth. Therefore, our long-term goal is to be about 50% exposed to primary and 25% equally weighted between secondaries and direct investments. Turning over, we see here a summary of this approach, how that this approach has delivered solid returns on the portfolio and on an NAV basis. Our portfolio returned 4.6% during the first half of the financial year and supports an LTM return of 7.3%, driving NAV per share of 4.1% on an LTM basis. Our investment approach is long term, reflecting an investment hold period of approximately 5 years. Therefore, we believe it is very important to also focus on the 3- to 5-year returns. And as you can see, our portfolio and NAV returns have outperformed the FTSE all-share on both a 3-year and a 5-year basis. And actually, in absolute returns, our NAV per share has grown 160% over 5 years. A quick summary on our half year activity. Our portfolio value at 31st of July stands at GBP 1.4 billion. And as I touched on earlier, NAV growth was 4.1% on an LTM basis, which represents a combination of portfolio growth and capital returns. And capital returns through -- really through dividends and buybacks. During that period, we have maintained an ongoing investment program to support our growth, including making new investments of GBP 64 million and new commitments of GBP 110 million. Simultaneously, we generated realization proceeds of GBP 94 million, including 17 full exits at weighted average uplift of around 18%, and Colm will discuss that in more detail. But we're particularly proud of a weighted average multiple on invested cost of 4.0x. These are strong exit results, and we believe that it demonstrates the high quality of our portfolio.

Thanks, Oliver. I'd now like to take a little bit of time. Moving on to the next slide, looking at the performance of our underlying investments. And you can see here on the chart, the attribution of our performance. You can see that the performance was broad-based with growth occurring across our primary, direct and secondary investments. There's a small -- there's a slight reversal from FX. One thing to note is, given recent sterling weakness that we expect some of this FX loss to reverse in subsequent reporting periods. Moving on to the next slide. I'd like to look now at the performance of the -- of those underlying investments with a snapshot, which you can see here of our broader portfolio disclosure. We -- for a long time, we've disclosed the metrics for our Top 30 companies, but recently at the last full year results, we expanded this analysis to cover a larger proportion of the total portfolio, what we term our Enlarged Perimeter. And as you can see from the data here, both the Top 30 and this Enlarged Perimeter, which represents roughly 2/3 of portfolio value, have continued to deliver strong double-digit revenue and EBITDA growth. And you can see also the portfolio is valued that larger -- the large perimeter is valued at 14.4x, Top 30 and 14.7x. And we think these valuation metrics compared very favorably to public markets, particularly when you look at companies with similar quality of earnings and earnings growth. So moving on to the next slide. You can see here the consistency of the -- of our EBITDA growth relative to public markets. As a reminder, for those who're not familiar, this chart shows the LTM EBITDA growth of the Top 30 portfolio and compare it to that of the FTSE all-share. And even in periods such as this, where you can see the FTSE earnings have been skewed, and that's largely due to the index composition, we still find this chart very compelling. The reason for this is that the chart illustrates not only the consistency of our earnings growth, but also the persistence of the trend over the last 15 -- almost 15 years. And identifying companies that can deliver this kind of resilient earnings growth across economic cycles is central to our defensive growth thesis and to supporting resilient shareholder returns over the long term. So moving on to the next slide, looking at exit activity. And it's been well documented by peers, by the media, PE managers that the transaction environment has been in 2023, has been slower than we've seen in previous years. But despite this, our managers have continued to identify attractive realization opportunities during the period with transactions completed across all of our investment categories and representing a range of sectors and geographies. So not skewed by any significant event. In the first half of FY '24, ICG Enterprise portfolio generated GBP 94 million worth of realization proceeds, which was in excess of the new investments we made, and that resulted in a net portfolio cash inflow of around GBP 30 million during the period. Our realization activity, as Oliver has noted, included 17 full exits during the period just to repeat at a weighted average and uplift to carrying value of 18%. And turning over, I'd like to take a look at what that has meant on a deal-by-deal basis. So you can see on this chart, we've anonymized the deals, but you can see the exit out-turns and the uplift generated across all 17 exits in the period. You can see that one was completed below cost, but forgive us if we're not overly embarrassed by this, even at a markdown to its previous carrying value, the asset was realized at a multiple of invested capital of 6.6x costs. So we're not -- we're very, very pleased by the overall out-turn, even if it was at a slight discounts. And we believe that our managers' ability to generate these uplifts on exit, which you can see on this chart, is a really important validation of the quality and the integrity of the valuation of the underlying portfolio. And after all, an asset is only worth what someone is willing to pay for it. And you can see from this chart that acquirers continue to value our portfolio assets above their carrying value. And that represents a long-term trend, which has been exhibited over the last 10 years. Moving on to the next slide. As we mentioned earlier, transaction activity has been slower during the first half of the year. And logically, this is also reflected in new investment activity. And during the period, we made new investments of GBP 64 million, which I touched upon earlier. And as you can see from the chart on the right, the majority of this new investment activity was channeled through our primary portfolio. The activity is reflective of our commitment program over the last 18 to 24 months, and it's enabling us to continue to invest through the cycle, alongside a combination of new and existing top-tier managers. We've maintained selectivity in our direct investments, has been a lower transaction volume environment, and that's naturally been reflected in the opportunity set we see for direct co-investments. In the current economic environment, you would be surprised to learn that our caution and discipline and our selectivity remains very high, but we did manage to find what we think are 2 very attractive direct investments in the period, Archer and Atlas. And just moving on to the next slide, I'm going to spend a little bit of time talking about one of them, which is Archer. So Archer is a direct investment we made in the period alongside Cinven. Cinven is one of our longest-standing third-party manager relationships. What Archer does is quite difficult to explain around the kitchen table, but it's a provider of governance, risk and compliance software. It's headquartered in the U.S., but it serves a global client base. It's a carve-out from a larger group, and we believe that Cinven has been able to acquire the business on attractive terms. Very importantly, Archer's core business characteristics, they're very closely aligned to our defensive growth approach. It's a mission-critical product for its customers. It allows them to large organizations to monitor risk, to track risk workflows and to analyze risk data. It has very, very high customer retention. And importantly, it's got significant scope to grow market share, although it already counts around half of the Fortune 500 as its clients. And in Cinven, we're backing a manager that we've known for a very long time. As I said earlier, one of the longest-standing managers in our portfolio. We've known them for over 15 years. They're one of -- I would say, one of Europe's leading private equity managers. They've got very strong domain expertise and very strong operational capabilities. So we remain very optimistic for the future for this business. And on the next slide, we're just going to spend a little bit of time talking about our new -- our primary investment activity. As we discussed previously, the current fundraising environment is creating very attractive opportunities for investors with access to permanent capital. It's a market where there is more fundraising supply, if you like, than likely demand, and that really plays to our strengths. So during the first half, we made 8 new fund commitments, total commitments of around GBP 110 million, and that included 2 commitments to new managers. And you can see on the slide here, Audax and Genstar. Both of these new managers are great exemplars of what we look for managers, the approach of targeting top-tier managers. They've both got track records of delivering consistent and market-leading returns. And they both have broader relationships with the ICG platform that allows us to build a deeper relationship with them as we invest into the life of the fund. But it's also very helpful to us in guiding our manager selection. So they are very well known to ICG as a broader group. And as a broader group, we've worked with both over a long period of time. And within the selection you can see here, GBP 90 million of the GBP 110 million was to pure primary funds. Worth noting, we also committed GBP 20 million to an ICT managed dedicated secondaries fund, which focuses on GP-led secondary opportunities. These fund commitments sow the seeds of our future primary investment program, and they provide access to a diversified base of direct investment opportunities as we go through the next investment cycle. So moving on now to very importantly, to shareholder returns. On dividends, we announced today a Q2 dividend of 8p per share. That brings total dividend for the half year to 16p. That represents a year-on-year increase of 15%. The Board have also affirmed their commitment to our progressive dividend policy, and that includes an intended full year dividend of 32p per share. And as Oliver -- almost a year ago today, we announced the introduction of a new long-term active share buyback program. And in line with the intended objectives of this program, we've maintained a consistent level of activity in the market, and we believe that's helped to reduce the volatility of our share price during the period. So as we stand here at the first anniversary of the buyback program, it seems appropriate to touch on the capital returns over that period. And over the last 12 months, we've distributed capital of around GBP 30 million to our shareholders. As you can see from the chart on the right, share buybacks represent approximately 1/3 of those capital -- of the capital returns during that period. We bought back around 950,000 shares as an average discount to NAV 40.6%. We're looking at that another way, our buyback program has in its first year, delivered incremental cash returns of over GBP 10 million, an increase of approximately 50% year-on-year. So with that, I'm going to pass it back to Oliver to complete.

Thanks, Colm. Yes, let's end our presentation by giving you a brief outlook. We strongly believe that the ICG Enterprise Trust offers a very differentiated approach to shareholders. Just to summarize on those, we have a clear investment strategy centered around defensive growth and buyouts in the U.S. and Europe. We have a dedicated investment team centered on selecting proactively attractive portfolios -- an attractive portfolio invested exclusively in those areas we've discussed. And we have implemented an active buyback program and support -- that supports the capital returns in addition to our aggressive dividend policy. And as Colm mentioned, we remain committed to continue with this buyback program. Our primary commitment provides our base of top-tier managers with capital to deploy into what we think is going to be a highly attractive market in the next couple of years. And a difficult fundraising environment is actually our friend, as we become much more important to our fund managers and then providing us with more interesting investment opportunities. And finally, the secondary market remains very attractive. Maybe a couple of words to addressing the secondary market. I'd like to quote Steve Schwarzman from last week where he said at the conference that private equity has performed too well for most private equity investors. What he meant by that is that private equity has performed very well and has now increased the allocation and the exposure to private equity, while liquid assets and funds have come down significantly in value, which -- and this has created an over allocation for most investors and therefore, a lot of them are trying to reduce or restructure their current portfolios in order to continue to invest in private equity and continue to. And this is creating a fantastic secondary market, not just in pipeline but also in terms of high-quality assets. And so ICG and the Enterprise Trust has been investing in the 2 ICG portfolio, secondary funds into the GP-led strategy and the LP secondary strategy. They both have performed very well, as you've seen in the previous slide and have been showing very strong performance in the last half year. So we remain attract very bullish on the secondary market for the coming years. And with that, I would like to conclude our presentation and open it up to Q&A.

And as a reminder, you can submit questions on -- via the online platform. We have a couple in already. First of all, you mentioned buybacks given where the discount is trading and some actions of other peers, should you be doing more buybacks?

It's a great question. I think we are very proud of that we have been one of the early movers on buybacks, and we have been very consistently in the market buying back over the last year. We'll continue with that commitment, and we will continue to do that. And -- but we want to also make sure that we are doing this in balance also to kind of provide liquidity to our investors and provide a liquid market for our shares. And therefore, that balance is important to us, so making sure that we're very much aligned with the market.

A number of peers have indicated that underlying private equity managers have not changed their long-term target returns despite the higher rate environment. They're suggesting higher rates may be offset by more bolt-ons and the ability to pass through price increases. I think to put simply, target returns for private equity haven't come down despite the rising cost of debt. Is it still your expectation that private equity will generate going and looking forward, similar returns to what is experienced in the last [indiscernible]?

Absolutely. We are still seeing great opportunities. And we do believe that if you look at our portfolio, it's growing a significant -- it's demonstrating significant growth in the mid-teens. And if you would put our portfolio on the market, and you would look at the S&P 500 -- having that traded on the S&P 500, we will be trading at much bigger EBITDA and enterprise value as it is being currently held up. So we do think that our existing portfolio is going to -- is in good shape and we'll continue to show strong returns going forward with more clarity around interest rates and more clarity around we will see more activity, and we do believe that, that will obviously allow us and the private equity companies -- sorry, the private equity fund managers is still to find some very attractive opportunities. As you've seen, for example, the co-investment we've done with Archer. So we have not changed our underwriting, and we have not changed our outlook in regards to performance.

And more broadly, maybe I spend too much time in the U.S., but we'd like to give you lemons, make lemonade. And I think many of our managers, if you look at our realizations in this half year, the largest one was Endeavor. Now a substantial proportion of that growth -- the growth in that investment occurred during the COVID pandemic, which was arguably one of the worst times in education business. They saw opportunity. I think you see that more broadly, even in the rising interest rate environment. Our managers are very adept at taking advantage of changes in the marketplace, identifying opportunities and maybe the cost to finance increases and there's other -- to your point, Chris, other competitive factors they can take advantage of.

And we're not new to this, right? I mean, interest rate environment was much higher in the '90s and the late '80s than it is today and private equity produce dollar returns.

I guess, as a portfolio company, the ability to access capital through cycle, see from when public markets may be kind of constrained is quite a powerful long-term driver. Colm, a question referencing the portfolio in Large Perimeter generally, you referenced the leverage at just under 5x. Do you have any sense on fixed or floating rate risk can be financing risk within the portfolio that you could comment on?

Sure. This is something we spend a lot of time monitoring. It's very, very nuanced and it's very difficult to provide a kind of crisp number that answers all of these questions because in practice, the capital structures are complicated. They often contain within the same capital structure elements of fixed and those in exposure. But in very high-level terms, we think over half of our larger exposures are either hedged or have substantially fixed interest rate exposure. And in terms of our refinancing risk, the bunch of refinancings, we expect to occur after 2026. So in both kind of metrics would take some comfort. We also take some comfort actually from just the overall performance of the portfolio because this is a portfolio which is highly cash generative, where the companies are naturally delevering over time. And obviously, when you're growing at 15%, 16% EBITDA, that's a very powerful tool to derisk those capital structures.

And then zooming out quite dramatically, in the economy generally, what are you seeing within the portfolio companies? Are you seeing any differences by sector or by geography that I want to comment on. And this looks like it's our last question. So maybe, Oliver, I'll let pass that to you.

Yes. We see that the U.S. is incredibly robust and performing very well. Europe is a little bit weaker. We do see in terms of sectors. It's the classic sectors, which are robust and resilient, which we also like to focus on, which is tech-enabled business services, consumer staples and areas where there is this consumer discretionary financial war, cyclical things like financial services. Those are all areas which continue to see a little bit more softness versus the other areas to show resilience. And I think overall, with interest rates and what we are assuming in our underwriting overall is that we assume that we are not underwriting or assuming a soft landing. We do consider still that we are going to look for a more recessionary environment. But the good news is, I think interest rates are close to peak. The bad news is what we are underwriting is that we are going to see a longer period of interest rates at those levels. And not what we've seen banks communicating 3, 4 months ago that interest rates will drop significantly again in 12 to 24 months. So we don't believe in that. But I think it's going to be very much of a kind of dispersion between quality assets in non-cyclical sectors versus more cycle place.

Thank you very much. And there are no more questions online. So with that, Colm, Oliver, thank you for your time. And most importantly, thank you, everyone, for joining us. We look forward to speaking soon. Thank you.