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

Good morning. Welcome to ICG Enterprise Trust's Q1 Trading Update for the 3 Months to 30th of April 2024. I'm joined today by Oliver Gardey and Colm Walsh, who will discuss our investment performance and activity in more detail over the course of the presentation. The slides of the presentation, along with the accompanying results announcement, are available on our website. We will have time for Q&A at the end of the presentation. So if you would like to submit a question, please do so through the online portal at any point in the Q&A box on your screens. We will then aim to answer these questions at the end of the session. With that, Oliver, over to you.

Thanks, Martin. I thought we'll give you a little bit more of a perspective on the market as well as on ICGT before Colm dives into the numbers. It has been another quarter where our clear investment strategy, focusing on defensive growth has performed well. Our portfolio grew 1.3% on a sterling basis over the 3 months to April 30, 2024. The exit activity continues to be executed at an uplift to carrying value and Colm will share some numbers there, which continues to be -- continues our long-standing trend. We also communicated to you in our full year results in May that we expect a measured increase in transaction volumes in the coming quarter. And we continue with that view, nothing changes. We continue to expect a measured increase in the coming quarters. All the conditions are in place for the exit environment to pick back up, as we said in our shareholder seminar as well. Our managers are focused, and the reason for that is that managers are very much focused on liquidity since they have fallen behind over the last 2 years. And -- but probably most importantly, debt markets are better positioned than they were 12 to 24 months ago. Spreads are down and cost of capital has tightened up in the sense of that cost of capital has reduced. And that usually causes a lot more exit activity and more aggressive buying. With that backdrop, I'll hand over to Colm.

Thanks, Oliver, and good morning, everyone. So a quick overview of the quarter in numbers. So in Q1, and that's for us the 3 months to the 30th of April 2024, our portfolio grew on a local currency basis by around 0.5% and on a sterling basis, as Oliver mentioned, by 1.3%. And that translates into NAV per share total return growth over the period of 1.2%. Our share price total return over the period was marginally down, so it fell by 0.8%. That's based on the closing share price of GBP 1,208 on 30th of April. And as of yesterday, our share price was trading at close to GBP 1,234. We're continuing our focus on all forms of shareholder distributions, and we do this through both dividends and buybacks. We are announcing a Q1 FY '25 dividend we announced yesterday of 8.5p per share. And in the quarter, worth noting that we returned around 7.5 -- sorry, GBP 7 million to shareholders through share buybacks. Looking at activity, it was a relatively quiet quarter as we demonstrated a disciplined approach to investment activity with GBP 28 million worth of new commitments, and they were 2 of our long-standing manager relationships in Leads Equity at Oak Hill, 2 U.S.-based managers with whom we've enjoyed considerable success since pivoting our strategy towards the U.S. back in 2016. We invested GBP 32 million in the quarter. Of that, 10% was to funds managed by ICG. And exit activity was broadly in line with new investment activity, total realization proceeds of GBP 29 million. And within that, there were 2 full exits and they were completed during the quarter. As Oliver noted, they were completed at a premium to previous carrying value, continuing that long-standing trend. So moving on to the next slide. And this slide builds on the numbers I've just taken you through, splits out by investment type by primary, direct and secondary. And yes, you can see our portfolio growth was driven by primary and direct performance. FX also moved in our favor. So that gave us an extra 0.8% on top of the portfolio return. Our closing portfolio value stands just shy of GBP 1.4 billion and about 31% of that is in ICG managed investments. So moving on to the next slide. Just, I suppose, to bring what we do and bring the numbers to some degree to life, I wanted to spend a few minutes on a recent investment. It's a business called Multiversity. It's -- as you can see on the slide, it's the #1 online higher education group in Italy, over 170,000 students participating in online education. It's what's known in the trade as a GP-led secondary, and this is where a manager, in this case, CVC, one of the world's leading private equity managers, gives investors the choice to -- they want to keep participating in the success of this company, but they want to hold it for longer. So they give investors the choice to continue to participate in the investment or to step back and take the liquidity. Now we've decided -- we've elected to continue to invest. It's a really good exemplar of the defensive growth company. It's a market leader, significant barriers to entry. And critically for our approach, it's a company where we have a distinctive ICG angle as our colleagues and our strategic equity strategy are the lead underwriter of this transaction, and that gives us really strong insights both into the company, but also into the sector. As I said, it's a really good example of the types of things we look for in a company. And it's also a great example of the power of the ICG platform, which we think is very differentiated. In terms of portfolio composition today, just to remind you that back in 2023, we announced the medium-term targets around type of investment. That's the split between primaries, directs and secondaries, by geography, in particular, aiming to pivot to having a 50-50 allocation between U.S. and Europe, and also our net cash/net debt position. Just touching on a few of those. As you can see from the slide, our portfolio by investment type stands at 55% primary, 29% direct and 16% secondary. These ebb and flow over time with new investments and realizations. So it's always very much a kind of a direction of travel. It's worth noting in terms of our secondary allocation that one of the reasons it's a little bit below our target is by virtue of its success. It's realized -- its realization profile is actually ahead of our investment case. And that's meant that, obviously, the exposure has come down. Looking at geography, as you can see, we're pretty much in line with our 50-50 allocation. We have a small exposure, 6% in the rest of the world, but that's definitely the target, which we're very -- we're in the right ballpark for. And our debt exposure at quarter end, 3% gearing. We manage our balance sheet very prudently. And we use our revolving credit facility to sort of to bridge some of the timing differences that we have between calls and distribution. So very much in line with how we intend to manage the balance sheet going forward. So with that, I'm going to hand back to Oliver, who's going to conclude and talk a little bit more about shareholder experience.

Thanks, Colm. As many of you know, our Board has been very focused on shareholder distributions and has been very active and introducing buyback programs. But firstly, let's talk about the progressive dividend policy. As Colm mentioned, we are -- the Board has agreed to pay 8.5p for the quarter of 2025 and is communicating a dividend for 35p for the fiscal year 2025, which represents about a 6% increase. And then secondly, we have the long-term share buyback program, which is meant to be particularly being very active in the market, constantly supporting liquidity and reducing volatility in the share price. You can see here on the slide that we have been in the market 103 days in the market and have returned to capital -- returned GBP 25 million back to our shareholders. This is really the long-term share buyback plan we introduced in the fall of 2022 and has worked very well in our opinion in terms of reducing volatility and being always a buyer out there for if there isn't enough seller -- enough buyers in the market to take care of the sellers. Then we introduced last month in our annual results, we introduced an opportunistic share buyback program. This is meant and designed to be taking advantage of big overhangs or buying big blocks, particularly at the current discounts where we feel they can be highly accretive to our NAV per share -- or to our share price and our NAV per share. And we have been already active in buying roughly GBP 7.5 million of shares back. The Board has approved up to GBP 25 million for the fiscal year of 2025. And as you can see here, we have been already very active, which brings us to the concluding slide. In summary, our goal is to produce for our investors, low to mid-teens returns in portfolio returns as well as in NAV per share. You see here that on a 3-year basis, on a 5-year basis, we delivered that. And the way how we deliver that is foremost is the investment strategy. We are focused on buyouts, U.S., Europe, in defensive growth sectors and defensive growth companies, and that has really proven well to grow in the company and the portfolio is growing well in good times and bad times. And the other 3 value drivers for us and for our shareholders is really the progressive dividend policy, the long-term share buyback and the opportunistic share buyback, all designed to deliver long-term outperformance for our shareholders. And with that, I'd like to conclude and open up for Q&A.

Great. Thanks, Oliver. We now have a few minutes for Q&A. So as a reminder, please feel free to submit questions via the Q&A box on the webinar platform. A few have come in already. So taking them in turn. One focus is on our capital allocation policy. So through our dividend and our buyback, our shareholder distribution is on track for about 5% to 6% of NAV compared to many of our peers around 2% to 3% of NAV. But on buybacks, in particular, many have come up with a formulaic approach as a percent of realizations or a percent of future cash flow. How does our Board think about buybacks? Why haven't we gone down this route of linking it to a relative percentage? And maybe why is an absolute number up to GBP 25 million on the opportunistic perhaps a bit more impactful?

What the Board and what the team is trying to manage is finding the right balance between creating -- being there and creating liquidity for the shares in the market and reducing volatility. That is usually not done by big bazookas. To the contrary, you actually take liquidity out and that creates actually more volatility in the share price. And that's why we designed -- we did a very carefully designed, what we call it, the long-term share buyback. So it's always there to support the market and liquidity and reduce volatility. The -- we did think that, however, we also wanted to show strong confidence in the value and the NAVs of our portfolio. And that's why we also introduced then the opportunistic share buyback, particularly where current discounts are held at. So although this is not a discount management policy, this is really about taking advantage from an investment perspective to create accretion to the NAV per share. And as we see big blocks and as we see opportunities where we can execute on that, we will do that as we have already shown, having invested GBP 7.4 million. We do not believe necessarily that a strict percentage of returns of certain -- doesn't necessarily reflect what's going on in the market at any given time. And therefore, we have been -- or the Board has been very focused on designing something which is flexible and it's really market-driven and takes advantage of the right opportunities as they present themselves.

And I've got a particular view, too. I think those targets based on a percentage of realizations, one of the reasons it's not the route we've gone down is actually when activity levels come back, it's not maybe as good a time as it is now to execute those buybacks. So there's a degree of -- there's a cyclicality in the activity levels. And actually, at the moment, we think it's an optimal time to be executing our buyback program. We don't want to be waiting for market levels of activity to recover.

There's just been a follow-up question on that, actually, which is how will the share buybacks be funded, whether through exits or the revolving credit facility. The answer is it will be funded through our total available liquidity. But Colm, if there's anything further to add on that?

Yes, it will be funded by both, depending again on the investment opportunities we see. So for example, right now, we have seen some really interesting investment opportunities, particularly on the co-investment side. Colm introduced some of those. And therefore, some of the GBP 7.4 million we did in the most recent opportunistic buyback, we did it through the facility in order to act fast and in order to be there quickly. So this is a constant balance between management, your cash and your realizations versus your overall deal flow. What we are not saying is that share buybacks are more accretive than making investments, and we're not saying the opposite either. We think both are interesting opportunities for now, and that's how we're going to manage our liquidity and our cash.

Perfect. Thanks, Oliver. A question has come in on defensive growth. So people, I think, understand very well the theory of our investment strategy focused on defensive growth, as you say, companies that can grow in the good times and the bad times, strong pricing power, market-leading position, et cetera. But maybe just to expand on the theory into practice. We've mentioned Multiversity, but can we in practice illustrate for our listeners, maybe any other examples of a company illustrating good defensive growth properties in this current climate?

Sure. So maybe our biggest exposure, Minimax, a company I'm sure very few of you have heard of. I certainly hadn't before we start investing in it. It's a market leader in the fire protection space. So what Minimax does is it manufactures and installs and then services complex fire protection component. So they're used in large infrastructure, so shopping centers, airports, and so on. And why is it defensive growth? Well, first of all, you need a fire protection system. I mean, obviously, it's a good practice to have one, but it's also mandated by regulation. And the regulation is -- regulations across the planet are becoming increasingly more comprehensive, more complex. Those regulations require certain components to be used. They also require those components to be certified and to be regularly serviced. So you have a business work, which is not linked to the underlying economic activity levels of its customers. So during COVID, Frankfurt Airport, I think Minimax customer, operating at 95% down to pre-COVID levels in terms of flight volumes, but you still have to keep that fire protection system going. So that's -- it's not related to underlying activity. It's mission-critical. It's a market leader. And it has elements of both growth from new developments and new construction, but it also has embedded recurring revenue for all the servicing and certification. So I think it's a really good example of what defensive growth means. It's worth noting that we see -- defensive growth attributes can be seen across lots of different sectors. So when you look at our top 30, you will see quite a variety of different sector exposures, ranging from holiday parks, [ or camping ], pet products and accessories, cybersecurity, software -- cloud-based software. So a whole plethora of -- a whole range of different sectors, we can find good investments that have defensive growth qualities.

Thanks, Colm. A third question has just come in, and this person does acknowledge that they were late to join. You said you expect a measured increase in transaction volumes in the coming quarters. What gives you the confidence?

What gives us confidence is just the activity we see within our overall portfolio from a selling as well as from a buying perspective. So -- and that's -- and the amount of companies being actually in some kind of a process as well as what the managers are communicating to us and what they're promising in regards to what they think they can liquidate within or exit within the next 12 months. So a lot of managers are under a lot of pressure to create some liquidity in their portfolio as they have been fairly inactive over the last 2 years for understandable reasons. And that has definitely [indiscernible]. And that mood and the music here is definitely has changed. Now I do want to be -- we're cautiously optimistic about it for a couple of reasons. One is we're not expecting it back to historical norms where you are at 22% to 25% of NAV being exited every year. But we are very confident that there will be an improvement over last year where we were around 12% to 13%, and the industry and the peer average was around 9%. So we definitely see an improvement and we are cautiously optimistic about that. And then furthermore, the interest rate outlook, particularly in the U.S., seems to be contracting and the Fed seems to be finishing with their hawkish stance and inflation seems to be under control. And all those are good signs and data points which lead to lower cost of capital eventually. That might take a little longer than it was probably expected in January. However, we do think that we have seen kind of -- we have seen the peak. So that's all -- those are all kind of main drivers why we feel confident that we will see an improvement.

Thanks, Oliver. A question's just come in on the dividend. So we -- we've spoken about the share buyback. This question is on the dividend. Is the dividend yield attainable at current yield and why?

Is it attainable?

Yes. So at the minute, our dividend yield is about 3%. And we've just announced another 8.5p per share dividend for Q1 and the 35p indication for FY '25. Question is, is the dividend yield attainable?

Yes. It is attainable and that's why we're very careful. We're very cautious when we do forward-looking -- managing our balance sheet. So we are committed to the progressive dividend policy, and we are very comfortable with the liquidity as well as with the return of the portfolio -- overall return of the portfolio that we can continue with a progressive dividend policy. And that's why we're communicating a 35% -- 35p for fiscal year '25. As you know and you've seen in many years, we have done actually better than what we've communicated. I don't want to promise that that's the case again, but we have been -- the 8.5p for this quarter, I think tells you that we are very confident of getting to that 35p in fiscal year '25.

Great. I see no further questions online. If there are any follow-up questions after this webinar, please feel free to contact the email address you see on your screens. As a reminder, recording of this event will be available on our website in the coming days. And for those of you as well who missed the shareholder seminar last week where we dived deeper into the current PE landscape, financing and state environment and the role of secondaries in diversifying portfolios, please visit our website for a replay. With that, Oliver, Colm, thank you very much, and thank you all for joining today.

Thank you.

Thank you.