Good morning, everyone, and thank you very much for joining us for this trading update for ICG Enterprise Trust for the period ending 31st of October, 2023. The announcement and accompanying results presentation are available on our website. I'm delighted to be joined by the two portfolio managers, Oliver Gardey and Colm Walsh, who will give a short presentation on the results in the period, and we will then take Q&A. You can ask questions at any time during the presentation via the online portal. And of course, if there are any follow-up questions, feel free to reach out to us directly, and we'd be more than happy to speak. With that, I will pass over to Oliver.
Thank you, Chris. What we would like to do today is to start our presentation actually with one of my favorite slides from our capital markets day. You see here on slide one that the slide captures well, in my opinion, our investment strategy and defines the guiding principles of our investment strategy. And as you know, our goal is to provide and deliver our investors with superior risk-adjusted returns and with steadily compounding returns, or in plain English, our goal is to reduce risk without sacrificing superior returns of what we can deliver on private equity assets. Now, so how do we do this? And if you look at this slide, you see those pillars here. The first two pillars is all about reducing risk. So we only invest in buyouts. Why?
Because buyouts have much lower volatility and loss ratios than venture and growth. Buyout ratios, loss ratios, somewhere around the 10% versus a venture, you'll be speaking and looking at 65%-75% loss ratios. We only focus on developed markets, only North America and US, sorry, and Europe. We do avoid Asia and emerging markets, because there is much higher volatility and fewer exit opportunities than you will find in North America and Europe. Focusing on the other three pillars is where we actually generate alpha. So we focus on mid-market and larger portfolio deals, as well as fund managers. Why? Because private equity returns are very much driven by transforming good companies to market-leading companies and better companies.
That is very resource-intensive, and therefore, you need a lot of people on the ground, and mid to large capital, mid to large funds have the resources and the infrastructure to hire the talent to manage those portfolios actively. Top-tier managers is also how you generate alpha. There's a big dispersion between top quartile and bottom quartile, so selectivity and having access to top-tier managers is very important. And lastly, it's defensive growth. Everything we do, we look at it with the lens of defensive growth. What do we mean by that? We're looking for companies and pick managers who are able to find and invest in assets which are very defensive in difficult times, but continue to grow in good and bad times. And so that's what we are looking for.
Now, we overlay all this in our execution, by being very active in our portfolio construction. That's why you see on the very much on the right side, you see those, three circles. That allows us. We are, by being 50% in primaries and 50% in direct and then secondaries to combined, that allows us to be very active in our portfolio construction and pick specifically, the best ideas of our managers, in particular with a defensive growth lens. I hope that gives you a good idea about our guiding principles, and I would like to therefore go to the next slide and give you an update on our quarter. The portfolio is up, 3.4% on a sterling basis. We're quite happy with that.
However, a lot of that benefit came from a sterling movement. Our cash flow positive, our portfolio remains cash flow positive, and that has been very much driven by our increase in secondaries, which has helped us on positive cash flows. Realization, I would like to highlight our realization activity continues to be strong with 12 full exits, but we're particularly proud of the uplift we achieved with those 12 exits at about a 33% uplift to carrying value. Consistent with our active management of our portfolio, we executed a secondary sale of tail-end assets average that were close to a 10-year, close to the end of their 10-year life, generating proceeds of GBP 68 million, and therefore we were able to crystallize a very attractive return of 1.8x.
I would lastly like to highlight that, 2023 was lower than average in terms of activity and what we're picking up in the market, market commentary, as well as what we see in our portfolio. We're starting to see a pickup in, in the levels of private equity transaction activities. With that, I'd like to pass it on to Colm.
Thanks, Oliver. Well, we were pleased with progress in Q3, against a backdrop of a relatively quiet quarter for the market as a whole. We continued our disciplined capital allocation policy, with a quarterly dividend of 8 pence and GBP 3.8 million worth of share buybacks. We also, very importantly, continued to back some of our existing investment partners, making two commitments in the quarter to long-standing managers. We committed GBP 12.5 million to Bowmark Partners, adjusted upwards to GBP 15 million in Q4, and $20 million to New Mountain Capital, a leading U.S. manager.
And that's our fifth commitment to a Bowmark fund over our 20-year partnership, and it's our third commitment to a New Mountain fund. And as we're going to discuss later with a case study, developing long-term partnerships with top-tier managers is a cornerstone of our investment strategy, and that's obviously something which Oliver has just discussed as well. As Oliver has noted, during the quarter, we deployed around GBP 29 million into new investments, and that was mostly through our primary program, and we received GBP 39 million worth of realization proceeds, and that included 12 full exits. And we're very proud of that long track record of exits being a meaningful uplift to the previous carrying value. So in this quarter, it was 33.7%. Moving on now to portfolio activity.
It was, as I said, a relatively quiet quarter in the market, with very little underlying aggregate valuation change. There was a 3.4% uplift in sterling terms, and that reflects sterling's depreciation against the euro and dollar over the period. So we closed the period with a total portfolio value of just one point—of around GBP 1.4 billion. Now, it's worth highlighting that next week represents our eighth anniversary of joining ICG, and in that time, the portfolio value has grown more than threefold, and that's also been alongside significant growth in our co-investment and secondary capabilities. Moving on to the next slide, which shows our portfolio composition today and our medium-term targets.
We've made good progress towards a 50/50 split between primaries and discretionary investments, that's co-investments and secondaries, and our U.S. program is maturing well, with 43% of the portfolio being allocated to investments in North America. We've built up a strong stable of primary fund managers. So I noted earlier our commitment, recent commitment to New Mountain Fund, and Bowmark Funds. But I wanted to spend some time now talking about another one of our managers, to which we made a recent commitment. And hopefully, this will help to underpin the way we think about portfolio construction. So TJC, formerly known as The Jordan Company, hence the initials, is one of the longest-established managers in U.S. private equity. It was founded in 1982, when private equity was a very nascent industry.
TJC invests the Resolute series of funds, so all of the funds are called Resolute One, Two, Three, and so forth. The focus is on the U.S. mid-market, and there's a particular focus on industrial businesses. It's a strategy where one of the core value generators is a high degree of operational involvement. Indeed, TJC was an early pioneer of this approach, with one of the industry's first operating partner models, which they started in 1989. We've committed to three of their funds, and due to our primary relationship, we were able to access a successful GP-led secondary. Now, this was a situation where TJC identified a need for a longer time horizon for certain investments to maximize value. This gave existing investors, who've been invested in these assets for a long time, the opportunity to get liquidity, but it also provided opportunity for new investors.
In December 2023, the largest investment in that portfolio was realized. So you won't see it in these numbers, but next quarter, GBP 12.5 million of proceeds will be reflected. WCT was actually a 2007 investment from Jordan, so it really demonstrates the ability of private equity to adopt a long-term perspective to value creation. Really, it's in relationships with firms like TJC, like Bomark, like New Mountain Capital, and you can see the importance of our primary program in sourcing hard-to-access discretionary transactions. With that, I'm going to pass it back to Oliver, who's going to discuss our recent shareholder initiatives and our recent track record.
Thanks, Colm. Flipping on to page 7, shareholder returns. We are paying 30p per share for the Q3 of fiscal year 2024, and we are on target for our progressive dividend policy to reach 32p for the fiscal year of 2024. Moving on to cash returns to shareholders, GBP 12.1 million was distributed back via buybacks, GBP 21 million in dividends. I'd like to spend a little bit more time on our buyback program. As you see here, we've returned over the last 12 months GBP 12.1 million, but since the program started, which was in October 2022, we have purchased over about 1.3 million shares and returned GBP 14.6 million back to our shareholders.
We feel that this share buyback program has been very effective and is meeting its goal and our target to provide liquidity to our shareholders, but as well as bringing efficiently cash back to our shareholders. You see here that we have bought the shares at an average discount of close to 40%, and we have been very active in the market. We've been 92 days in the market, actively buying back shares. With that, I'd like to go to the next slide and talk about our track record. As you see here, our last 12-month returns are at 4.8%. This is below our target. Our, as you know, our target, and what we are trying to deliver is double-digit returns on an annual basis to our shareholders.
However, if you look at the three-year and the five-year returns, that does show you that we have a track record of strong returns. We analyzed 21% on the three-year track record and 17.5% over five years. We do expect that in the next 12 months, we will reverse back to our five-year average. And what gives me confidence is what we see in terms of activity in the market, which is very much driven on the basis of due to the stabilization of interest rates, falling inflation and falling yields, which, as you all know, stimulates very much the activity in the private equity market. And with that, I would like to conclude and open it up for Q&A.
Absolutely. We have a number of questions. As a reminder, please submit your questions online through the portal. One just in, Oliver, you referenced this concept of us seeing in the next 12 months or beyond, a slight reversion towards longer-term historical average portfolio returns. Could you give some more color around what you're seeing in the broader market? A couple of people have observed there does seem to be a slightly more positive sentiment from a number of private equity managers, generally. Is that something you're seeing in the portfolio? Could you give some more color, more generally, on why people feel a little bit more optimistic coming into 2024 than maybe they finished in 2023?
Yeah, absolutely. So, and again, it's, it's green shoots, and that's very much driven by, what we've seen in, particularly in the U.S., and to some degree in Europe, where, inflation has come substantially down, which allowed the Fed and the interest rate environment to peak, and we're starting to see also yields falling. And as you all know, you know, cost of capital or a reduction of cost of capital, or a more efficient cost of capital is a very important, tool and stimulator for private equity. As you-- in a rising interest rate environment, it adds a lot more risk for private equity and put leverage on buyouts, and therefore, what happens is the market kind of freezes. There is no panic, there's no...
Usually no panic, there's no fire sales, but it just freezes the market, which you can see also on our exit activity has been down for 2024 than over our average. That's very much as a showing that the activity has not been as strong in the last 12 months on average, and we do see a significant pickup when we talk to our managers in terms of assets in for sale or in process, or funds deploying capital or starting to draw capital. So that, all those are kind of first indicators and green shoots for a more active fiscal year of 2025.
Thank you. Changing gears slightly, Colm, you referenced in previous case studies the ability to invest in structured transactions.
Yeah.
Alongside ICG. We have a question here around broadly, how much of the portfolio do we think of as being in structured transactions, and have we continued to see deal flow in those type of transactions during this period of volatility over the last sort of 12 months or so?
Yeah. Okay. Well, I would say overall, there has been a market-wide decline in transaction volumes, and I think those transactions have been impacted in much the same way as more conventional buyout structures. In terms of our portfolio composition, obviously all private equity deals have some degree of structuring, but I would say the kind of ICG Europe and North America strategies, which are the main sources of these transactions for us, I haven't got the precise number to hand, but it's in the region of 10%-12% of the portfolio. There haven't been any significant landmark deals for sort of co-investments in the last year in that bit of our portfolio.
But we would expect, to Oliver's point, you know, if these green shoots do turn into to reflect the possibility of a more active market, I would expect that deal flow to recover as well, alongside conventional buyouts.
Thank you. Is there any commentary around valuation multiples that we're seeing? Obviously, at this for Q3's, we don't give, we don't give portfolio data or average valuations, but is there any commentary that you would, that you would give on how you see valuations develop over the last quarter?
I think what is clear to see is the volatility you see in PE multiples in the public markets, and the multiples there. It does not reflect and translate 1-to-1 into private equity. There is clearly correlation, so we do expect the current rise in the overall valuation and the more positive mood on the stock markets will reflect in our portfolio, but we do not think it will translate 1-to-1. As you've seen in our portfolio, we've held it roughly—it's holding somewhere around the 14x EBITDA in the past, and then in the cycle of our H1 results. We do not think that that will materially change in the next six months.
But at the same time, the stock market over the S&P 500, over the last 12-18 months, has swung around from the low teens to now close to 20. So, we feel obviously remain very confident about the valuations of our portfolio, as well as I'd like to highlight, the uplift we've seen on our exits have been, this quarter, higher at 33% than they were in previous two quarters, which were more around the low 20s.
And one thing just to add to that, I would say that our approach to our strategy means that we're investing in in top-tier, very high-quality managers, and therefore, very high-quality assets. I think one of the things we have seen is that there's a real flight to quality and, you know, assets like WCT, which we cited, and also another, another one in the public domain, ICG recently transacted up with Iris, which is a reasonably large exposure for Enterprise Trust. These are very high quality businesses, and they're still achieving very attractive valuation multiples, you know, reflecting the quality of earnings those businesses create.
Yeah, and linked to that realization, there was a question on of that disposal proceeds, how much were full realizations? Twenty-six million pounds of the realization proceeds received in the quarter related to full realizations, which is the weighted average uplift that we referred to earlier. Currency, Oliver, you mentioned that we had a positive currency tailwind during the quarter. Just to confirm, the currency risk is unhedged, so we report in sterling, so there's no currency confusion going on there. The overall currency split, ColM, do you have any thoughts on the overall currency split of the portfolio? How we should think about it?
It, I mean, broadly reflects the geographical location of the companies which we disclose in 40, I think 42% or 3% US, if we dollarize, and most of the rest is euro or sterling. Obviously, one thing I would say, though, is we're investing in many companies that actually are internationally diversified. So if you think of some of our larger exposures, say, Froneri, that's actually a multinational business. So in practice, even though it's headquartered in the UK.
Yeah.
Its currency exposure is much more complicated.
Yeah.
I think we feel hedging is something we have discussed, but I think we feel since we have a diversified portfolio, I think we feel very confident with the current approach.
Thank you. And then we have a number of questions on the secondaries. So I'll sort of group these together thematically a little bit. First of all, Oliver, just generally, could you give a little bit more color on why we chose to do the secondary transaction and why we decided to do it at this point in the cycle, as it were?
Yeah. So, great question. We are, as you know, we're active in our portfolio construction. We constantly monitor our portfolio, and we're constantly in the market doing secondary sales. So, as you know, this is not new to us. We have announced several secondary sales over the last 4-5 years. And this is really very much of a result of actively managing your, our portfolio. When assets become or funds come to the end of their life, you have to kind of really look at, are the returns the same as the rest of the portfolio returns? As you know, we have high ambitions to generate double-digit returns, and when assets, we identify who we feel like are scratching and are not gonna necessarily meet that goal, it's time to kind of crystallize gains.
And that was very much kind of a result of this, and we have a secondaries team, as you know, a dedicated secondaries team, and we're constantly in the market monitoring and looking at prices. So opportunistically, where we see also good environment and good pricing for certain assets, we will then take advantage of that. And these were tail-end assets, vintages 2014, 2015, so close to the end of year, 10-year life. Where we also identified good pricing for some of those assets, for tail-end assets, and that's why we went ahead and executed this portfolio.
Should we expect to see further secondary realizations in the coming quarters? Is this becoming a programmatic approach to portfolio management, or is this quite opportunistic and more of a, more of a one-off?
It's a bit of both, right? So it's systematic that we're monitoring the portfolio, so we're constantly looking at, and particularly, we always look at tail-end assets with a very focal lens. Now, but that has to also make sure that for those specific assets and for those, we're getting the right price, or the price we think is the correct price, and therefore, it's not a programmatic process in the sense that every quarter we will do something, or every half year we'll do something, or every year we'll do something. We will do it opportunistically wherever we feel the best price, but we are systematically analyzing the portfolio and actively constructing and managing the portfolio.
Thank you. We've made comments over recent years about the secondary market becoming more liquid. And actually being helpful from a portfolio management perspective. Does that change your view around the overcommitment ratio as a percentage of net assets? Does it give you more comfort looking forward, that actually you could have more overcommitments because you've, you've got this backstop of liquidity from secondary disposals, or does that not really factor into your balance sheet management thinking?
At this point, it doesn't really impact our balance sheet. We don't want to rely on that because, as I said, we wanna continue to be opportunistic in the market and find the right pricing. Because usually when you get bad pricing, when you want as much liquidity as possible, is usually when you don't get the best price. So therefore, usually those are very highly correlated, and we don't want to get caught in that. But your point is absolutely right, that more liquidity in the secondary market certainly helps liquidity, and are managing it. Well, let's put it differently. It helps us to be even managing it, even on our conservative nature, to kind of really help on that. But we don't want to get caught up.
Thank you. Moving away from the secondary, we had a question out of AI, and as we look at our defensive businesses, you know, dependable as it's quoted here in the quote in the question, you know, when we look through our portfolio, what are our thoughts on AI, the disruption risk, but also the investment opportunity AI presents?
Well, it's a very hot topic, and it's definitely something we're hearing about from our managers all the time. I would say as we look at our portfolio, it's actually quite a big opportunity for many of our portfolio companies. So if you think about Circana, that's the business formerly known as IRI, that's a data provider, and obviously for especially closed-ended AI systems, that data is really important. So there's tremendous opportunities for that business to grow away from its sort of core and generate new offerings based on new AI technology. So I think we see that across the board, that you know for a lot of our businesses, it's a potential source of value creation, margin improvement, and I don't think we have significant exposures.
You know, when you look at our larger exposures, things like Minimax, Fire Protection or the Home Solutions, Froneri, they are not businesses that are going to be impacted in terms of, you know... Their business models are not going to change fundamentally because of AI, but they may find that they can make significant margin improvements as a result of adopting new technology.
But also in our investment analysis, and our lens of our Defensive Growth lens, we certainly are much more alert now than we were maybe, you know, certainly than 10 years ago or 20 years ago, what business models or sectors might be obsolete.
Yeah
Due to AI. So that definitely has integrated much more into our defensive growth lens.
And, that pivots nicely into another question here, which is, today, what are we seeing any emerging themes from new investments that we're seeing, that we're seeing today?
Good question. Well, AI is obviously a good one in the sense of, what are the opportunities? Colm mentioned already, a clear opportunity here. So there's lots of areas where with AI or supporting the AI industry effectively creates great opportunities. You see a lot, as you see in our portfolio, that where we have pivoted over the last 5-6 years, I think that's a good indication of what we think are interesting in themes. So for example, business services, tech-enabled business services, more software-driven types of activities and businesses are certainly an area where we pivoted more towards, and we do believe that that will continue to grow. Digitization of the economy is still continuing and still has a big impact on growth on businesses.
So healthcare is also an area where we like to invest in. There are obviously some fundamental changes coming from, for example, new diabetes drugs. But that also offers new opportunities and interesting opportunities to kind of look how, how that has changed the landscape and where can we invest.
Thank you. Question on debt, debt refinancing risk. Do we see any sort of risk to earnings emerging as we're looking at refinancings required in our portfolio over the next 12-24 months?
I think it's something we track. There aren't any significant imminent refinancings, but one thing I would say is that we are beginning to see in our realizations a number of partial realizations. So in the last 18 months, we've had a dearth of refinancings, dividend recaps, and so on, and they're beginning to come back. So actually, I think that a lot of... We don't have a significant kind of refinancing cliff, but also to the extent that companies will need to be refinanced over the next 2-3 years, actually, those markets are coming back to life and normalcy.
Perfect. Well, with that, we're at the half-hour mark. There are a couple of other questions that are quite detailed, and we'll follow up separately over email with the folks who have asked that. It's probably the best forum for those. But with that, thank you very much for joining us, and Oliver, Colm, thank you very much. We look forward to speaking soon. Thanks, everyone.