ICG Enterprise dipping into its debt facility – this article has been updated following a conversation with the managers
ICG Enterprise delivered an 11.2% return on NAV for the year ended 31 January 2020 (a bit ahead of the return on the All Share) a narrowing discount gave shareholders a return of 20.5%. The dividend was upped to 23p from 22p. The statement points out that the end January figures were struck before markets dived as a result of COVID-19.
The management team continues to grow and now stands at 14 people. Oliver Gardey (ex Pomona capital) succeeded Emma Osbourne as the lead manager. Emma remains on the investment committee.
Extract from the chairman’s statement
“We made further progress towards our strategic goals of becoming more fully invested, increasing our weighting towards high conviction investments and extending our geographical diversification. Over the last three years, we have reduced the impact of cash drag on performance by becoming more fully invested without compromising the quality of the portfolio…. Our flexible mandate has meant that we have been able to increase the capital deployed into our high conviction portfolio, which remains a significant driver of growth. These are investments the team has proactively decided to increase exposure to, either by individual co-investments alongside third party managers, proprietary investments managed by ICG or secondary fund holdings.”
Investments in the US exceeded those in the UK for the first time and the trend towards greater investment in the US is likely to continue.
£149m of realisations from the portfolio were matched by £159m of new investments and £156m was committed to 12 different funds. At the end of January, ICG Enterprise had £162m of liquidity (£14m of cash and a €176m undrawn bank facility) against £459m of uncalled commitments. Since then, it has drawn down £40m of its debt facility. It is normal to run with more commitments than available cash as money is drawn down over time and realisations usually come in to fund called commitments. The idea is to avoid having large unused cash balances which would be a drag on returns. Right now, in a period where realisations are harder to achieve, the trust may find itself using more of its debt facilities than normal. Much will depend on how long this period is. The trust will have problems if it cannot fund its commitments.
We got to talk to the managers this morning and they have reassured us that the danger of ICG Enterprise running out of liquidity is minimal. One reason is that they expect the pace of investment within the underlying funds will slow down until the managers can get a clearer picture about the prospects of a proposed investment. They think drawdowns will be well below normal levels at least until Q4 this year. In addition, these funds invest over a number of years. The liquidity that ICG Enterprise has available is sufficient to meet about two years’ drawdowns at the normal rate. They also point out that £80m-£90m of outstanding commitments relates to funds that are beyond their investment period – these commitments are probably not going to be called upon.
Investors may be wary given what happened to some listed private equity funds in the financial crisis. The managers say conditions then and now are very different. In 2008 there were some funds that were geared with borrowings even before the crisis, rather than having these facilities available as a buffer. Some were locked into commitments that they were unable to sell on in the secondary market (we are a long way away from this but in a worse case scenario, ICG Enterprise could sell part of its portfolio to shore up its balance sheet).
As things stand, the money that ICG Enterprise borrowed under its facility is still sitting in cash two months later. The managers are comfortable with the balance of liquidity and commitments and would reassure investors that the fund is well placed in the current environment.
Extract from the manager’s report
“Within our high conviction portfolio, notable contributors include three US co-investments: PetSmart (a leading US pet retailer), which successfully listed its online business, Chewy; Abode Healthcare (a provider of at-home hospice care), which was sold during the year at 2.0x cost and a gross IRR of 69%; and Ceridian (a human capital management software provider), which was listed in 2018 and whose share price increased by almost 80% in the year taking the return to 4.6x cost. In addition, three of our recent co-investments alongside ICG’s flagship European strategy (Domus, Minimax and Visma) all outperformed the wider portfolio following strong underlying growth.
Outside of our high conviction portfolio, Gridiron III, a US mid-market fund which is currently our second largest fund holding by value, reported significant gains in the year, with one of its portfolio companies, Leaf Home Solutions, driving a significant proportion of the gain. This follows exceptionally strong trading performance. The business, which provides gutter protection solutions that reduce the requirement for homeowners to clear gutters, is considered one of the fastest growing home maintenance companies in the US.
In the 71% of the top 30 companies portfolio which are high conviction investments, there is a strong bias towards investments in sectors which have defensive characteristics. This includes a number of recent co-investments in sub-sectors such as software and packaging which continue to perform well even in the current climate. We also believe that our investments alongside ICG will, in addition to having defensive business models, benefit from being structured to provide downside protection. This makes these investments less sensitive to short term earnings or valuation pressure compared to a conventional buyout deal structure. ”
ICGT : ICG Enterprise dipping into its debt facility