With a looming Brexit crisis and a bull market already long in the tooth, my need for a solid margin of safety has increased before I consider any new stock purchase, more so when contemplating an investment in the highly cyclical game of private equity.
While investment giant 3i Group captures most of the attention of investors looking for exposure to private equity (PE), I believe a much smaller competitor offers greater value right now and provides far better downside protection against a market sell-off.
Over the last three years, ICG Enterprise Trust (LSE: ICGT) has seen its share price increase by 60%. Impressive but not as good as 3i’s doubled price over the same period. The problem is, I believe there is a lot of froth in 3i’s current market value… the stock trades at a whopping 40% premium to net asset value, and that gap has been growing in recent months — something I find concerning at this late stage in the cycle. By contrast, ICG Enterprise Trust’s shares trade at an 18% discount today. Given how similar the two companies’ investment criteria are, I find this wide disparity in share price hard to fathom.
Both vehicles provide investors with access to mature, middle-market private companies, primarily in Europe. The key difference is that just over half of ICGT’s investments are in funds managed by external PE managers, something I believe provides a welcome spread across a wide portfolio of underlying companies. Furthermore, the lion’s share of these third-party-managed investments is in high-quality funds managed by the likes of CVC, Graphite, BC Partners and other leading PE houses. Most individual investors would find it impossible to gain entry into these highly respected funds on their own.
One more thing. Emma Osborne, ICGT’s lead portfolio manager, has been in that role for 13 years and so has a detailed grasp of the business and deep relationships with those third-party fund managers. While some of 3i’s top executives have been in situ for a similar length of time, I don’t get the same level of comfort when examining the bios of the company’s investment managers closest to the coal face. In private equity, where investee companies can take five to eight years to reach an exit, longevity of service among the hands-on investment personnel really matters.
With over £700m of net assets, ICGT is no minnow. Plus, it offers substantially the same benefits as an investment in 3i — exposure to later-stage private companies without the risks associated with start-ups and venture capital — but, in my view, with significantly less risk of a collapsing share price. Its sizeable discount to net asset value is precisely the type of financial cushion I’m looking for in the market right now.
