Better outlook for Intermediate Capital

Intermediate Capital (ICG) is in the process of transforming itself. It used to be solely an investor, putting so-called mezzanine finance (the stuff that bridges equity and debt) into companies in search of funds. However, the poor state of the world's debt markets prompted ICG's bosses to seek other sources of revenue. So becoming a manager, where it looks after other people's money, has become a sensible proposition. Indeed, third-party funds of £10.3bn now account for nearly three-quarters of all the assets that ICG manages – and the plan is to double that amount over the next five years.

Providing mezzanine finance, via the group's investment company, remains the key driver for now though, with net interest income last year from interest bearing loans and investments totalling £210m, while fund management fee income was £76m. Both sides of the business have been performing decently. In the fourth quarter of 2010, around 70 per cent of assets in the investment portfolio were performing at or above their prior year level, compared with 62 per cent at the end of September. True, impairment levels remain high, last year standing at £162m; but these are falling steadily. And just £17m of capital gains were realised in the quarter – not a lot; though ICG's bosses expect a much stronger contribution from capital gains in the final quarter of the financial year.

New investments for the investment company totalled £194m in the nine months to December, and so management's initial estimates of £150-200m of investments for the full year are likely to be exceeded. And the group retains plenty of fire-power for further investment, with undrawn debt facilities of £832m. Furthermore, Fitch, a ratings agency, has confirmed a BBB- rating for the company's debt. This should make it easier – and cheaper – to raise debt in the future, and that should give the investment company the chance to raise the return on the equity capital it employs. The extra fire power may not be needed imminently as ICG still has has an additional £1.26bn that it can tap.

Additional steps have been taken to grow the fund management side of the business, where the £10bn under management at the end of 2010 was 4 per cent higher than in September. In December, plans were announced to acquire a 51 per cent stake in Longbow Real Estate Capital, a property debt specialist. Longbow provides mezzanine finance and debt for UK property companies and has assets under management of £150m. The attraction here is that ICG can provide the finance and employ Longbow's expertise in a market that is almost starved of new debt. Also in December, ICG won a contract to manage a £250m collateralized loan obligation for Resource Europe Management.