Given the events of last year, there was bound to be some pent-up demand in the private equity space but it’s unlikely many would have predicted the level of deal flow we’ve seen this year. According to research from Bain Consulting, 2021 is likely to see deal value approach or cross $1 trillion by year-end. If that bears out, the industry will have essentially tripled in size over the 10 years starting in 2011.
One of the beneficiaries of this is ICG Enterprise Trust, part of a number of private equity vehicles to utilise the closed-ended fund model to appeal to investors. Speaking to Colm Walsh (pictured), managing director of Intermediate Capital Group (ICG), not only are the market conditions as good for private equity players as ever, it’s suited for this trust’s particular portfolio.
Mr Walsh characterises the trust as ‘defensive growth’, a reflection of the companies it has invested in. Despite many equity managers pondering whether we’re in a value cycle or not, this portfolio does not contain any cyclical companies.
This trust is structured as a private equity fund of funds and while Mr Walsh says he might have conversations with around 200 players a year, the deal making is restricted to a tried and trusted 50 firms. Given the model, it's imperative that tne fund picks the correct partner to invest alongside with on deals.
Looking through some of the fund’s top holdings, Covid would certainly have been a catalyst to their success. Rather than the obvious tech companies which allow for easier remote working and so on (which are well represented in the portfolio) there are also companies which have been curious beneficiaries of the pandemic.
US-based Petsmart(Chewy) has thrived due in part to the growing demand for pets during lockdown. This investment was made alongside BC Partners, a private equity house with around $40 billion in assets under management.
However, while ICG’s focus is on the managers, when a company stands out the fund will follow it even when ownership changes. Take Visma, a Norwegian accounting software provider, it has been in the ICG Enterprise For Trust since 2013 through three different managers.
One of the hallmarks of private equity is that some companies which supply household names are virtually unknown. He cites Froneri, a UK-based ice cream maker which has teamed up with large confectionary companies such as Cadbury and Mars an example of how the trust tracks companies on their private equity journey. This company started out as a regional player, then merged with an Italian firm which caught the eye of some big private equity firms and is now one of the largest ice-cream makers in the world.
Why the apathy?
Despite solid performances by ICG Enterprise Trust and others in the space such as Harbourvest Global Private Equity and Apax Global Alpha, these trusts continue to trade on quite steep discounts.
Trading at around at over a 20 percent discount to NAV, this trust seems to offer an incredibly generous entry point for investors into what is a well-diversified and strong portfolio. While many bemoan the high carry fees that private equity managers can earn on successful investments, plus painful memories of how the trusts crashed in the 2008 financial crisis which may explain the lack of shareholder enthusiasm, this seems exaggerated by the level of discount.
As Mr Walsh says: “During COVID it was a period of market panic. We're insulated from that and we can take long term decisions. We can ride out those kinds of crises, without being forced to change our investment strategy or sell things the worst possible time.”
Last week’s results showed the trust’s net asset value grew 11.1 percent for the six months to July which means a 12-month return of 37 percent and putting five-year annualised returns from the portfolio at 16 percent.
The number of take privates happening in the UK alone suggests that being in private equity hands is now fairly sought after by companies’ boards. Being removed from the scrutiny over quarterly results which can lead to short termism is surely one reason for this pattern. Furthermore, while Mr Walsh says the trust has enjoyed a record number of realisations over the last six months, they are not reliant on IPOs as companies are happy to go with another private equity owner who may be in a better situation to help them with the next stage of their journey.
