ICG Enterprise Trust Regulatory News (ICGT)

28 September 2015

GRAPHITE ENTERPRISE TRUST PLC

UNAUDITED RESULTS FOR THE

SIX MONTHS ENDED 31 JULY 2015

Graphite Enterprise Trust PLC ('Graphite Enterprise' or 'the Company') presents its unaudited results for the six months ended 31 July 2015.

Graphite Enterprise continued to make good progress in the six months to July 2015, with the net asset value per share, after taking account of the dividend, rising by 3%. The portfolio performed well, rising by 8%, driven by the continued strong profit growth of the underlying companies. The increase in the net asset value would have been higher had the fall in the euro not reduced the value of our euro-denominated investments.

Realisations remained very strong with the portfolio generating £73 million of cash, with the result that cash balances closed £11 million higher at £101 million. We began a programme of share buy-backs to return cash to shareholders and will pay an interim dividend in October.

The strong underlying performance of the portfolio, our investment discipline and our balance sheet strength position Graphite Enterprise well for future growth in an uncertain environment.

Chairman's statement

Summary

Graphite Enterprise continued to make progress in the six months to 31 July 2015 with both the net asset value per share and the share price outperforming the FTSE All-Share Index1.

The portfolio once more performed well, increasing in value by nearly 8% in local currencies. However the weakness of the euro again affected performance, reducing the sterling value of our euro-denominated investments. After taking account of this and of other factors, the net asset value per share, inclusive of the dividend, rose by 3.0% to 700p. This extended its period of continued growth to six years, over which time the net asset value has increased by almost 90%.

The share price, inclusive of the dividend, rose by 5.4% in the period, closing at 590p. This compares with a rise of 2.8% in the FTSE All-Share Index. As the increase in the share price was slightly more than that of the net asset value, the discount narrowed from 17.3% to 15.8%.

Quoted markets have fallen sharply since 31 July, with the result that the FTSE All-Share has now decreased by 6.8% since 31 January2. The Company's share price has proved more resilient and has increased by 0.5% since January. Based on these latest figures both the share price and net asset value have outperformed the Index over one, three, five and ten years.

The portfolio continued its strong performance of recent years increasing at an annualised rate of 16.2% in local currencies. Indeed this rate of growth was slightly higher than the average of 13.1% achieved over the last four years. In sterling terms, the growth in the portfolio was 4.7% in the period under review. The effect of holding cash and of operating costs reduced the overall increase in the net asset value to 3.0%.

At 31 July, the Company had total assets of £515 million. 80% of this, or £412 million, was invested in the portfolio. This was £20 million less than at 31 January, as cash inflows from continued high levels of realisations more than offset new investment and the growth in value of the opening portfolio. In response to this we have started a programme of share buy-backs. The first buy-backs, together with the payment of the dividend of £11 million in June, returned £15 million of cash to shareholders in the period. In addition the Company will for the first time pay an interim dividend, of 5.0p per share or £4 million, in October.

Economic and market environment

The Company's investment programme continues to be focused on the more mature private equity markets in Western Europe. At the half year, the largest exposures were to the UK, which accounted for 48% of the portfolio and to continental Europe which accounted for 37%. Over three-quarters of our continental European exposure was to France, Germany, Benelux and Scandinavia. Most of the exposure outside Europe was to the US.

The UK's economic performance remains relatively strong, with the economy forecast to grow by 2.5% in 2015 and at a similar rate over the next two to three years. The UK is the largest and most developed of the European private equity markets and, although always highly competitive, it has continued to perform well, driven by a highly favourable environment for realisations.

The performance of the major continental European economies remains weaker than that of the UK, although most are expected to grow by 1-2% this year. The stimulus programme announced earlier this year by the European Central Bank does not yet appear to have had a significant effect on growth rates, but has contributed to the fall in the sterling value of our euro-denominated portfolio. The timing of any sustained recovery is still uncertain, with aggregate growth expected to remain subdued for some time.

High quality private equity managers should be able to generate returns throughout the economic cycle. As commitments to funds are typically drawn down over three to five years, managers are able to adjust their rate of investment to the underlying conditions in the markets in which they operate. For this reason it is particularly important that the selection of fund investments is based more on the quality of the manager than on the macro-economic environment in which they operate. The performance of the investment portfolio in recent years, both in the UK and in continental Europe, has demonstrated the ability of the managers we have backed to identify attractive opportunities across all stages of the economic cycle.

Performance

Overview

The investment portfolio continued to perform well in the six months to July, increasing in value by 7.8% in local currencies. As discussed earlier, adverse currency movements limited the increase in the sterling value of the portfolio to 4.7%. As 37% of our opening portfolio was in continental Europe, the 5.9% fall in the value of the Euro against sterling had much the greatest impact during the period. The 3.8% fall in the US dollar also impacted the sterling value of the US portfolio.

As the investment portfolio accounted for just under 85% of net assets at the start of the period, the rise in the portfolio of 4.7% after currency movements increased the net asset value by 4.0%. After deducting running costs and adding the small positive effect of share buy-backs, the net asset value per share increased by 3.0%. Payment of the dividend of 15.5p per share accounted for 2.2% of this.

Portfolio

Increases in the valuation of the unrealised portfolio accounted for two thirds of the growth in the portfolio. It is encouraging that this was driven principally by continued strong earnings growth, with a small increase in valuation multiples.

As the largest 30 underlying companies accounted for 47% of the portfolio at 31 January, their performance will have a substantial impact on that of the Company. These investments performed strongly, with EBITDA3 growing on average by 8% in the 12 months to June 2015, and were valued at an average of nine times EBITDA. By comparison, the aggregate EBITDA of the FTSE All-Share fell 8% in the same period and it was valued at an average of 11 times EBITDA. The Company's portfolio is therefore continuing to perform substantially better, and is valued more conservatively, than quoted companies.

Valuation uplifts achieved on realisations accounted for the remainder of the growth. The great majority of this was generated by full disposals of companies, which were achieved at an average uplift of 23% over their previous valuations. The remainder of the growth from realisations was generated by companies being taken public.

A more detailed analysis of the performance of the investment portfolio is given in the Manager's Review.

Long term performance4

We measure performance against the benchmark of the FTSE All-Share Index and aim to outperform over the medium to long term. Performance against the Index has been strong as set out below:

As discussed earlier, based on the current2 share price and level of the Index the Company's net asset value and share price have both outperformed the FTSE All-Share over each of three, five and ten years.

The Company's performance against the listed private equity sector also continues to be strong. The net asset value and share price total return have both outperformed the average of the peer group5 over 3, 5 and 10 years.

Balance sheet, cash flows and commitments

Cash balances increased by £11 million in the six months, closing at £101 million. This was driven by a substantial net cash inflow from the portfolio which was partly offset by other items, the largest of which was distributions to shareholders. After adding other net current assets of £3 million, the total of £104 million represented 20% of total assets.

The portfolio generated net proceeds of £40 million in the period, which compares with net proceeds of £17 million for the whole of last year. Realisation proceeds of £73 million were received, which represented 17% of the opening value of the portfolio. This was in line with the extremely high level of last year, but materially above the five year average. New investment, which was also at a high level last year, fell back to £33 million in the six months. While this represented just over half of last year's rate, it was not materially out of line with the average of the past five years. This decline reflected a general slowdown in activity, with both Graphite Capital and our third party private equity managers slowing their pace of investment in response to high prices for private companies and for secondary interests in funds. The Manager's Review gives further details of investment activity in the period.

In last year's report we indicated that we would consider buying back shares to return cash to shareholders. The first purchases were made in April and to date we have bought back £4 million of shares. As the buy-backs were completed at a discount to net asset value, they had a small positive impact on the net asset value per share. After adding the dividend of £11 million (15.5p per share) paid in June, cash distributed increased to £15 million.

The level of new commitments made to funds was higher than the total for the whole of last year, as more of our preferred managers were raising new funds. We committed £35 million to four new funds and after deducting drawdowns of £19 million and other net movements, outstanding commitments rose by £15 million to £249 million. We estimate that £50-70 million of these commitments will be drawn down over the next twelve months.

Co-investments and secondary purchases of fund interests can be important tools in managing the balance sheet, as they generate additional investment above that resulting from drawdowns of commitments. As most of the cost of these investments is drawn down immediately, in contrast to fund commitments which are typically drawn down over three to five years, they can generate large short term outflows. In the first six months of the year, the level of such discretionary investments was at around half the rate of recent years. However, the supply of attractive opportunities is by its nature unpredictable and it is possible that the amount invested in the second half will be higher than that in the first.

Outlook

Since January 2013, the portfolio has generated cash proceeds of £335 million, equivalent to over 80% of its value at that date. Despite this very high level of realisations, a combination of new investments and growth in the value of the opening portfolio has been sufficient to ensure that the size of the portfolio has remained virtually unchanged over this period. However, the cash balance has risen to over £100 million, which is higher than we had anticipated.

In response to this, we have made the first of the share buy-backs discussed in last year's statement. The level of purchases made to date has been relatively low, but we would expect to make more between now and the end of the year provided that shares are available at appropriate prices.

Last year the Company paid a total dividend of 15.5p per share. As income in the first six months of the current year has remained high, the level of dividend for the full year is likely to be at least maintained. In order to give shareholders the benefit of an earlier distribution we have decided to pay for the first time an interim dividend, of 5.0p per share, in October.

We have been pleased with the performance of the portfolio in the first six months of the year. Realisations have continued at very strong levels and the profits of underlying companies have continued to grow more rapidly than those of listed companies. It is also important to note that investments made after the financial crisis now represent over 70% of the total portfolio. As the performance of these companies has been stronger than that of the earlier vintages and the uplifts achieved on realisation have been higher, we would expect that they will continue to drive strong performance.

Mark Fane

25 September 2015

1. Throughout the report, all performance figures are stated on a total return basis (i.e. including the effect of re-invested dividends).

2. To the close of business on 24 September 2015.

3. EBITDA is earnings before interest, tax, depreciation and amortisation.

4. On a total return basis, including the effect of reinvested dividends. As the Company changed its year end in 2010, the ten year figures are for the 121 month period to 31 July 2015. 

5. The peer group comprises: Aberdeen Private Equity, F&C Private Equity, HarbourVest Global Private Equity, JPMorgan Private Equity, Pantheon International Participations, Private Equity Holding, Standard Life European Private Equity (funds-of-funds); Better Capital 2009 and 2012, Candover Investments, Dunedin Enterprise, Electra Private Equity, HgCapital Trust, NB Private Equity Partners, Princess Private Equity, SVG Capital (direct funds).

Manager's Review of the Portfolio

Portfolio performance overview

The portfolio made good progress in the first half of the year, rising in value by 7.8% in local currencies. After adjusting for the impact of foreign currency movements on the value of our overseas investments, the sterling value of the portfolio grew by 4.7%.

* In this interim report 96% of the portfolio is valued using 30 June 2015 valuations.

At 31 July the portfolio was valued at £411.5 million. This was £20.4 million lower than at the start of the period primarily because continued high realisations exceeded new investment. Net realisations of £40.7 million therefore more than offset the relatively strong valuation gains.

Unrealised valuation gains accounted for 67% of the underlying valuation increase. These were primarily driven by earnings growth but valuation multiples also increased marginally. Gains from realisations and IPOs accounted for the remaining gains.

Realisations

The portfolio generated proceeds of £73.5 million in the period, equivalent to 17% of the opening portfolio. This represents a very high rate of cash conversion which, on an annualised basis, was broadly in line with the 33% generated in the previous financial year but considerably higher than the average of 25% in the three years prior to that.

Full realisations

Investments in 19 portfolio companies were fully realised in the period and these generated £44.1 million of proceeds.

Full realisations continued to be completed at significant uplifts to the previous holding values, although the 23% achieved in the six months was lower than the historical average. Last year we observed that the uplifts on investments made prior to the financial crisis had started to decline and this trend has continued. Pre-crisis investments realised a valuation uplift of 17% while investments made since the financial crisis generated uplifts of 27%.

The pre-crisis investments were realised for an average return multiple of 1.2 times original cost, reflecting the relative underperformance of the remaining investments from these vintages, whereas post-crisis investments achieved a strong multiple of cost of 2.4. It is, however, worth noting that the pre-crisis investments overall have performed better than many investors expected with, for example, those made in 2007 generating returns of approximately 1.9 times cost.

The largest realised gain in the first half was generated by Graphite Capital Partners VII's disposal of National Fostering Agency ("NFA"), a provider of foster carers to local authorities, from which the Company received proceeds of £11.9 million. NFA was a 2012 investment which grew strongly both organically and by acquisition prior to its sale in April this year. The sale achieved a return of just over two times cost and the uplift added 0.5% to the net asset value in the period. Further details of the ten largest underlying realisations are set out in the Supplementary Information section.

Partial realisations

A further £29.4 million was received from partial realisations of portfolio companies. The most significant element of this was the £13.5 million of proceeds received from sales of listed holdings. Most of these were of companies taken public in previous periods. Only three companies achieved flotations in the first half, compared with 15 in the last financial year. At the end of the period the portfolio included holdings in 29 quoted companies representing 8.4% of total value. Details of the underlying quoted holdings, almost all of which were held through third party funds, are set out in the Supplementary Information section. The remaining partial realisations comprised a high number of small transactions.

New investments

New investment of £32.8 million in the six months was substantially lower than the exceptionally high level of £125.4 million invested in the last full financial year but broadly in line with the average levels achieved in the three years prior to that. This largely reflects the challenges we, and the managers in the portfolio, are experiencing in identifying sufficient sensibly priced opportunities in the current market.

The rate of fund drawdowns was significantly below that of the previous year with £19.2 million being drawn down in the six months compared with £68.0 million in the last financial year. We would have expected drawdowns of approximately £35 million in the six months if outstanding commitments to funds had been drawn down evenly to the end of their investment periods. The lower figure was partly because no new investments were completed by the Graphite buy-out team, although third-party drawdowns were also slower. As many funds, including Graphite Capital Partners VIII, completed a high level of new investments last year, the overall investment pace for most funds is in line with expectations. It remains to be seen whether the slowdown will be sustained in the second half.

Discretionary investment, which includes both secondary fund purchases and direct co-investments, was also significantly lower than last year with £13.6 million invested in the six months compared with £57.4 million in the year to January 2015. We highlighted in the annual report that pricing in the market for secondary fund interests had become more competitive and this continued in the first half. One secondary acquisition, of an interest in BC Partners IX, was completed for £7.1 million. Co-investment opportunities tend to be unpredictable and are linked to underlying investment activity within the fund portfolio. As this was relatively subdued in the first half, fewer co-investment opportunities were available although two were completed for a total of £6.5 million.

A total of 30 new underlying companies were added to the portfolio in the year compared with 74 in the year to January 2015. The largest new investment was in PetSmart, the leading retailer of pet products and services in North America which was acquired by BC Partners in March. The Company invested a total of £4.7 million in PetSmart both through BC European Capital IX and in a co-investment alongside the fund. Further details of the ten largest underlying new investments are set out in the Supplementary Information section of this report.

New investments in the first half were acquired at an average of approximately nine times EBITDA, which is broadly in line with prices paid last year. Therefore, while the level of new investment was lower than expected, it is reassuring that our managers appear to be maintaining pricing discipline in the current environment.

New commitments

New commitments of £34.6 million to four funds in the first half were significantly higher than the £22.0 million committed to three new funds last year. More of our preferred managers are fundraising in the current year and we expect to make further commitments in the second half.

Three of the new funds, ICG Europe VI, Harwood IV and Hollyport V, were raised by managers we have been investing with for many years, while the manager of the fourth, Alcuin IV, is new to the portfolio. Alcuin focuses on small buy-outs in the UK, a part of the market that has generated strong performance for the Company in the past, both directly and through funds.

Further details of new fund commitments are set out in the Supplementary Information section.

Closing portfolio

At 31 July, the portfolio was valued at £411.5 million and was broadly diversified with investments in almost 400 underlying companies across a wide range of sectors and geographies.

We believe the portfolio strikes a good balance between diversification and concentration. While the level of diversification within the portfolio reduces risk, many individual investments are large enough to have an impact on overall performance, as demonstrated in the first half by the sale of National Fostering Agency.

The top ten underlying companies accounted for 26% of the value of the portfolio at the period end, while the top 30 accounted for 48%. The performance of these 30 investments is therefore likely to be a key driver of future growth. In the year to June 2015, the revenues and EBITDA of these companies increased by an average of 6.1% and 7.7% respectively. By contrast, the FTSE All-Share Index reported a fall in revenue of 7.4% and a fall in EBITDA of 8.5% over the same period.

The top 30 companies were valued on an average multiple of 9.1 times EBITDA at June 2015 which reflects the growth being achieved. In comparison, the FTSE All-Share Index was valued at 11 times EBITDA at the period end despite the lack of profit growth noted above.

The leverage of the top 30 companies averaged 3.7 times EBITDA. While this has increased slightly since the start of the year, it remains relatively modest. This should enhance future equity returns without involving undue financial risk, particularly given the relatively flexible terms of many of the underlying loans.

The share of the portfolio represented by investments made prior to the financial crisis has continued to fall. At 31 July, pre-crisis investments represented 28% of underlying investments compared with almost 40% a year earlier. This reflects a combination of high levels of realisations from these earlier vintages, the value of new investments which have been added to the portfolio in the last twelve months, and strong increases in the valuations of post-crisis investments. We expect post-crisis investments to continue to generate the most significant future uplifts and it is therefore encouraging that the portfolio is now concentrated in these vintages.

We directly manage 24% of the portfolio including six of the top ten underlying investments and nine of the top 30. This gives us a high level of influence over the development of a large part of the portfolio. It also provides valuable insights which help us to make more informed strategic and short term decisions on the management of the portfolio as a whole.

While the third-party portfolio represented 76% of value, 14% of this was acquired through secondary purchases and 16% through co-investments. When added to the 24% managed directly, more than half the portfolio is therefore in companies which we evaluated in detail prior to investment. This proportion has been increasing gradually over time, from approximately a third immediately prior to the financial crisis, and gives us greater control over the portfolio than a typical fund of funds investor.

At 31 July the portfolio was valued at an average of 146% of original cost in local currencies, of which 44% of cost had already been returned. At these levels, and with a higher proportion of the portfolio in more recent investments, there is potential for considerable growth as the portfolio further matures.

Events since 31 July

Since the period end, the portfolio has continued to generate a net cash inflow with realisations of £9.6 million exceeding new investment of £4.8 million. One new co-investment and one new fund commitment are at advanced stages of legal documentation and should complete in the near future.

Prospects

With the portfolio continuing to generate strong realisations and the investment pace slowing in the first half, cash is higher than we had anticipated. In the current environment re-investing cash at reasonable valuations is challenging both for us and for the underlying managers in the portfolio. However we are encouraged that our managers appear to be exercising discipline and are not being drawn to pay excessive prices for new investments.

The environment for realisations remains favourable despite the slowdown in flotations and the fall in quoted equity markets since July. This primarily reflects the high levels of equity and debt available to both financial and trade buyers. We therefore expect the portfolio to generate additional cash in the remainder of the financial year. This should drive further growth in net asset value given the valuation uplifts generally achieved on sale.

Our investment strategy gives us the flexibility to adapt the mix of investments, cash and commitments to changing market conditions and to deploy cash where we see the best relative value. At this point in the cycle, the Company has the benefit of a strong balance sheet and a portfolio which continues to perform well.

Graphite Capital

September 2015

SUPPLEMENTARY INFORMATION

The 30 largest fund investments

The 30 largest funds by value at 31 July 2015 are set out below.

* Includes the associated Top Up funds.** All or part of interest acquired through a secondary purchase.

The 30 largest underlying INVESTMENTS

The table below presents the 30 companies in which Graphite Enterprise had the largest investments by value at 31 July 2015. These investments may be held directly or through funds, or in some cases in both ways. The valuations are gross and are shown as a percentage of the total investment portfolio.

+ All or part of this investment is held directly as a co-investment or other direct investment.

* Quoted investment.

** We are not permitted to disclose the details of this co-investment under the terms of a confidentiality agreement.

Portfolio analySIS

The following tables analyse the companies in which Graphite Enterprise had investments at 31 July 2015.

* Excludes Guardian Financial Services where this metric is not meaningful.

** Excludes Cognito where this metric is not meaningful.

*** Excludes Cognito and Guardian Financial Services where this metric is not meaningful.

Portfolio - Investment type

Portfolio - Geographic distribution*

* Location of headquarters of underlying companies in the portfolio. Does not necessarily reflect countries to which companies have economic exposure.

Portfolio - Sector analysis

Quoted equity holdings at 31 July 2015

All quoted holdings, other than Intermediate Capital Group, are held indirectly through third party funds and may have restrictions on their sale. The timing of any disposal of these interests is determined by the managers of those funds.

The following tables analyses the closing portfolio by value.

Graphite and third party investments at 31 July 2015

*Includes Graphite Capital funds, all secondary fund interests and all direct investments

Investment activity

New investments

Largest new underlying investments

* Sold by Graphite Capital in the period. The Company re-invested alongside Alcuin Partners.

Realisations*

* Excluding secondary sales of fund interests.

Largest underlying realisations

* Sold by Graphite Capital in the period. The Company re-invested alongside Alcuin Partners.

Commitments analysis

1 Original commitments are translated at 31 July 2015 exchange rates

New commitments during the six months to 31 July 2015

CURRENCY EXPOSURE

* Currency exposure is calculated using the location of the underlying portfolio companies' headquarters.

UNAUDITED RESULTS FOR THE SIX MONTHS TO 31 JULY 2015

Consolidated Income Statement (unaudited)

The columns headed 'Total' represent the income statement for the relevant financial periods and the columns headed 'Revenue return' and 'Capital return' are supplementary information. There is no Other Comprehensive Income.

Consolidated Balance Sheet (unaudited)

Consolidated Cash Flow Statement (unaudited)

Consolidated Statement of Changes in Equity (unaudited)