ICG Enterprise Trust: seeking "defensive growth" in private equity

Investors still have little idea how well private equity trust portfolios held up as the coronavirus crisis deepened. But there is an argument that some will prove resilient because of a focus on business models that have benefited from recent events.

ICG Enterprise Trust (ICGT) could well fall into this category. The trust's shares traded at an eye-watering 25.5 per cent discount to NAV on 24 August. With the trust’s latest update covering events to the end of April at the time of writing, investors are yet to see how recent months have treated the portfolio. But exposure to resilient sectors could see it through this year's uncertainty.

Unlike many of its peers, which tend to mainly invest either via funds or directly in companies, ICGT does a mixture of the two. To limit risks, the trust and the funds it backs will focus on company buyouts, rather than areas such as venture capital. Oliver Gardey, head of private equity investments for the trust, argues that the loss ratio for venture capital investments can be as high as 60 or 70 per cent, compared with 15 per cent in the buyout space.

The trust focuses on large and mid-market buyouts because the companies involved tend to be more resilient than their smaller peers and the funds investing in them often have specialists who can assist such businesses in difficult conditions. The team avoids emerging markets, where private equity liquidity is especially limited. Importantly, an onus on “defensive growth” could protect investors in difficult times.

“We look for opportunities in assets and companies where there’s asymmetry in risk and good downside protection, such as a market leader in a resilient sector,” says Mr Gardey. “We don’t like cyclical sectors and businesses. We like demonstrable growth.”

This has involved backing companies and funds with a focus on software and tech-enabled business services. But “defensive growth” can take many forms. For example, one investment theme within the portfolio is the rising burden of regulatory compliance across various sectors, and the need for companies to pay specialists who can help them stay on top of this.

Companies in the portfolio that fit into this theme include RegEd, which provides an online platform enabling businesses to track their regulatory requirements. Another holding, Minimax, provides businesses with fire protection systems.

“It’s probably considered [as exposure to] industrials but it’s really a business services provider,” Mr Gardey notes. “Airports and other companies must fulfil certain fire safety regulations. Minimax does fire protection systems and the services for it. You buy the protection systems, but also need to service them. The company therefore has ongoing recurring revenues."

The trust also has a good level of exposure to healthcare and education, where holdings include pharmaceuticals company Doc Generic and Supporting Education Group. Mr Gardey views both industries as sources of defensive growth, even if the latter has faced disruption.

"Education has been hit by Covid, but it is generally a nice defensive growth sector," he says. "Some [companies] have been hit by Covid, but they have come around very quickly, especially if it’s tech-enabled. Many have done a good job to quickly adjust to a digital learning world."

The Covid outbreak triggered a period of intense activity for funds held by the trust. From the end of February to May, private equity specialists were initially focused on protecting their investee companies. "Managers brought in operational teams and supply chain logistics experts to help teams on underlying companies to manage severe disruption," Mr Gardey says.

He believes private equity is now in a "reboot space", with signs of businesses being bought again following a drop in activity. But so far he has seen more activity in the private equity fund space, rather than on the direct investment side. The trust has continued to invest in private equity funds, with holdings including Charlesbank, which focuses on US tech services names. More generally fewer deals appear to be available for now, but prices have at least come down.

"This year there’s less dealflow but it’s building up now and in six to nine months it should be back to normal. But value is back," Mr Gardey says. "Because there’s less activity out there, there’s an overall adjustment in terms of value and expectations and what you can achieve for your company. We’re mostly exposed to resilient sectors but even in healthcare and business services we’re seeing better value than we saw in the past two years."