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In our 8 September note, Defensive growth: explaining downside resilience, we explored ICGT’s resilience to a downturn in more detail. We first explained why PE is so resilient, and then we deep-dived into what ICGT has done to further reduce risk. Its performance through the initial stages of COVID-19, earlier NAV returns through downturns and academic research all confirm our view of PE’s and ICGT’s market-beating resilience. For ESG investors, this aspect of ICGT shows good “S” (jobs are preserved) and “G” (better governance, which, especially managing for the long term, is key to this performance).

  • Why PE outperforms in downturns: The critical factors are i) access to committed capital, ii) strategic optionality, iii) operational, financial and market expertise, and iv) for managers to earn performance fees, or launch new funds, they must manage through the cycle. Recent sector changes enhance resilience.
  • ICGT’s incremental risk reduction measures: ICGT’s stated policy is “defensive growth”. In practice, this means focusing on well-established businesses, with strong competitive positions in a structural growth market, recurring revenues, high margins, strong cashflows and low customer concentration.
  • Valuation: Valuations are conservative (uplifts on realisations averaging 33% to the latest book value in the medium term). Ratings are undemanding, and the carry value against cost is modest. All this gives confidence that the NAV on the accounting date is realistic. The 29% discount to NAV is at nearly 3x recent levels.
  • Risks: PE is an above-average cost model, but post-expense returns are market-beating. Even though actual experience has been continued NAV outperformance in economic downturns, sentiment is likely to be adverse. ICGT’s permanent capital structure is right for unquoted and illiquid assets.
  • Investment summary: ICGT has consistently generated superior returns, by adding value in an attractive market, with a defensive growth investment policy, and exploiting synergies from being part of the ICG family. The valuations and governance appear conservative. It has an appropriate balance between risks and opportunities. Risks are primarily sentiment-driven on costs and cyclicality, as well as the underlying assets’ liquidity. It seems anomalous that a business with a consistent record of outperformance is trading at a 29% discount to NAV.
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