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What is Intermediate Capital Group?

The debt investor and latest addition to the FTSE 100 had a bruising Financial Crisis. Will this time be any different?
May 27, 2020

On 2 July 2009, Intermediate Capital Group (ICP) announced a seven-for-two rights issue at 112p per share in a bid to raise £351m. The deeply discounted placing landed amid the wreckage of the financial system, and 18 months after the alternative investment firm tapped shareholders for £175m – at a pre-crisis price of £11.50 per share – to finance what it called “unparalleled changes in debt markets and our access to the opportunities that result”.

IC TIP: Hold at 1,171p

Cynical observers might be tempted to draw parallels with the present moment. Since taking a reputational beating in the global financial crisis, ICG has emerged as a major beneficiary of the seemingly unlimited corporate appetite for non-bank financing, and the even larger wave of capital looking to invest in this debt. Its shares have responded in kind, rising to an all-time high of £18.96 on 21 February, the Friday before it dawned on markets that Covid-19 was indeed the next truly global crisis.

Despite the ensuing crash, the stock was added to the FTSE 100 in its latest reshuffle. With this enhanced platform comes greater scrutiny of the group when it opens its books for the year to March next week, as investors get a first glimpse at the alternative asset manager’s exposure to corporate distress. In turn, that should give the market a clearer idea of whether ICG’s stint in the blue-chip index could prove short-lived.

One big reason to believe the group should prove more resilient this time sround is its model, which has shifted from that of a leveraged debt investor to a co-investing asset management structure. This switch is important. Having previously financed leveraged buyout deals with its own balance sheet, since 2010 ICG has focused on sourcing and managing debt investments on behalf of return-hungry third parties such as pension funds, endowments and sovereign wealth funds.

To aid this, ICG often first takes small stakes in the debt instruments and investments, a marketing strategy that helped it raise €16.2bn in new money in the 21 months to December 2019. In that brief window, total assets under management (AUM) rose by half to €42.6bn, most of which attract chunky management fees, which average 0.86 per cent across all strategies.

Handily for ICG, many of the funds it manages are closed-ended and therefore backed by long-term capital. Other funds more familiar to retail investors – including closed-ended UK property debt fund ICG-Longbow (LBOW) and the FTSE 250-listed ICG Enterprise Trust (ICGT) – make a relatively small proportion of the group’s income and exposure.

However, it would be wrong to suggest that the balance sheet is without risks. In the six months to September, group revenue of £304m comprised £128m in fee and other operating income, and £165m from net gains on ICG’s own investments. A full-year consensus sales forecast of £521m points to a big second-half drop in the latter.

While the group’s loan exposure is spread across more than 1,000 investments, overall credit risk will inevitably have risen. For example, a glance at ICGT’s top 10 investments – most of which are group co-investments (see table) – reveals an array of private businesses yet to experience a downturn under ICG’s ownership, and whose cash flows and asset bases will inevitably have been damaged by the ongoing economic crisis. How this is accounted for, and whether the use of long-term closed-ended funds will help smooth any potential losses, is an important detail for investors to follow.

 

CompanyCountryDescriptionPortfolio valueManagerInvestedType
DomusViFranceThird largest care home operator in Europe3.6%ICG2017High conviction*
City & County HealthcareUKUK-based home care provider2.9%Graphite Capital2013Third-party fund
MinimaxGermany Provider of fire protection systems and service2.9%ICG2018High conviction
RoompotNetherlands Holiday park operator and developer2.5%PAI Partners2016High conviction
PetSmartUSA Pet products and services retailer2.4%BC Partners2015High conviction
Leaf Home SolutionsUSAHome improvement group2.1%Gridiron2016Third-party fund
VismaNorway Business software provider to enterprises1.8%ICG2017High conviction
YudoSouth Korea Plastic injection moulding manufacturer1.8%ICG2018High conviction
DOC GenericiItaly Generic pharma group1.8%ICG2019High conviction
System OneUSA Specialist staffing provider1.7%Thomas H Lee Partners2016High conviction
Source: ICG Enterprise, as of 31 Jan 2020. *ICG defines high conviction as a co-investment or other direct investment

 

Other areas of the portfolio present concerns, too. About a third of ICG’s AUM is in capital market investments, which are typically publicly-issued senior-secured loans in Europe and the US. Yet within this portfolio are so-called collateralised loan-obligations (CLOs), debt instruments themselves invested in often highly leveraged companies with weak credit ratings to begin with. Given the complex nature of these securities, they are hard to value, although the near-total shutdown of issuance since March suggests the market is no longer orderly.

Some commentators believe global CLO default rates could range between 10 and 15 per cent this year, which could severely impair investor recovery rates. For ICG, this is especially concerning given the £333m CLO loan portfolio on its balance sheet, although analysts at Numis argue that a £201m write-down would have a negligible effect on group-wide net tangible asset value. This rather sanguine view, it should be noted, would still lead to the company making a pre-tax loss of £103m in the year to March 2021.