Every time I see a richly priced IPO, I get a touch envious. If only I could have got in well before the company went public. Well, buying shares in FTSE 250-listed ICG Enterprise Trust (LSE:ICGT) offers me the chance to do that. ICG is a private equity investor. Owning shares in ICG gives me access to a portfolio of European and US investments in private, unquoted companies.
Why do I want exposure to private equity?
Buying and selling shares on the stock exchange is simple. Ownership stakes in private companies are difficult to buy and sell. Private equity investors expect to be rewarded for taking on the challenge. According to a JP Morgan report, private equity buyout, in particular, has delivered 1%-5% excess returns over pubic equity markets since 2009. I want to add private equity exposure to my public stock portfolio because of its potential to boost returns.
How I am getting private equity exposure in my portfolio
Buying directly into a private equity fund typically costs millions. Once invested, the money is locked up for perhaps a decade. Investing in a listed private equity investment trust costs as little as the cost of one share, and I could sell it the next day. ICG shares cost 1,176p each at present, 144% more than their cost at the end of January 2018, and pay a dividend of just over 2%.
The ICG share price is driven by changes in its net asset value per share (NAV). NAV is calculated by summing the value of investments, subtracting liabilities, and dividing this by the number of shares issued. ICG’s NAV has increased from 959p at the end of January 2018 to an estimated 1,422p on 30 April 2021. Right now, ICG shares trade at a 17% discount to the NAV. The discount has been as small as 10% over the last five years, suggesting potential share price gains from the discount narrowing.
However, what will really drive the ICG share price higher regardless of the discount is growing the NAV. ICG has built an impressive track record of unrealised NAV growth by investing directly and indirectly in buyouts of mid to large-sized companies in developed markets. These companies typically generate cash when bought and are not very sensitive to the business cycle, i.e., defensive picks. Exiting investments, in for example, an IPO, results in realised. NAV growth
FTSE 250-listed ICG Enterprise Trust
ICG does not use leverage in the traditional sense, but the underlying investments do have significant debt. This can lead to pronounced downsides in the NAV during economic downturns. Since NAV valuations are infrequent and private equity is considered risky, wide discounts in the share price to NAV (43% in March 2020) may occur and persist.
ICG charges management fees of 1.4% on the fair value of assets (excluding cash and closely held funds) plus 0.5% on outstanding commitments. There are also conditional incentive fees. The fees are high but appropriate in my view. I note that ICG’s 148% increase in NAV since January 2018 outperformed the FTSE 250 index and is a net of fees return. But, fees could become an issue if the portfolio does not perform as expected.
I am confident that ICG will continue to outperform, and I plan to regularly invest in ICG shares in my Stocks and Shares ISA to add private equity exposure.