Complex Higher Return Strategies Will Raise Execution Risks Yet Eventually Support A More Resilient Model

Catalysts

About ICG

ICG manages private markets strategies across credit, secondaries, structured capital and real assets for institutional and wealth clients globally.

What are the underlying business or industry changes driving this perspective?

• Although the tilt towards higher returning strategies in structured capital, secondaries and real assets has lifted the weighted average management fee rate to just under 1%, the move into more complex, higher barrier products increases execution risk. This could limit the pace at which new mandates convert into fee earning AUM and may cap future revenue growth.
• While the partnership with Amundi gives ICG access to a very large pool of over 200 million individual clients and a 10 year commercial agreement around evergreen products, the need to design wealth friendly structures with appropriate liquidity could constrain how much performance fee potential is built into these products. This may temper the impact on earnings and net margins.
• Although fee earning AUM of $84b and a further $19b of AUM not yet earning fees provide visible fee income potential, the slower buyout and private credit deal flow and ICG’s disciplined stance on documentation and risk could delay deployment of committed capital. This may push out the timing of management fee and performance fee recognition that would otherwise support revenue and earnings.
• While ICG’s strong realized performance record and top quartile DPI across multiple strategies are attracting institutional capital, the broader fundraising market remains challenging. The pressure on some peers may reduce overall allocations to private markets, which could limit how far ICG’s operating leverage and fee related earnings can expand from the current base.
• Although the build out of real assets equity and private equity secondaries, including new mid market and evergreen vehicles, aligns with growing investor interest in real assets and secondary solutions, the first time nature of several of these funds and the cautious pace of wealth channel rollout may mean that the contribution to performance fees and operating margin scales more slowly than the underlying opportunity suggests.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on ICG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ICG's revenue will grow by 4.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 54.4% today to 47.9% in 3 years time.
• The bearish analysts expect earnings to reach £605.0 million (and earnings per share of £2.08) by about April 2029, up from £596.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.1x on those 2029 earnings, up from 7.6x today. This future PE is lower than the current PE for the GB Capital Markets industry at 12.8x.
• The bearish analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• ICG is leaning further into complex higher return strategies such as structured capital, secondaries and real assets equity. The company itself describes these as harder to execute and first time in several cases, and any missteps in deployment or underwriting discipline over the long term could affect fee earning AUM growth, management fees and performance fee driven earnings.
• The broader private capital fundraising market has been described as very difficult for several years, with some managers already shrinking or going into runoff. If this pressure persists it could restrain long term institutional allocations to private markets, limiting ICG's ability to scale funds and dampening revenue and fee related earnings.
• The long term partnership with Amundi opens access to over 200 million wealth clients but relies on designing wealth friendly evergreen products with sufficient liquidity and appropriate structures. If regulators, distributors or end investors remain cautious about private assets in wealth channels, the eventual flow of new capital and associated management fees and margins could fall short of expectations.
• ICG's private debt and real estate equity activities are tied to buyout and real asset cycles. Management acknowledges slower buyout deal flow and past pain in real estate that has made many allocators more cautious, so a prolonged period of muted transaction activity or constrained risk appetite could delay deployment of the current $19b of AUM not yet earning fees and soften revenue and net margins.
• The business model is increasingly dependent on performance fees and balance sheet returns alongside management fees. While the company reports strong historic DPI and positive balance sheet outcomes, any multi year period of weaker realizations, lower distributions or adverse valuation changes in underlying funds could weigh on earnings and reduce the cash available for shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for ICG is £18.19, which represents up to two standard deviations below the consensus price target of £24.95. This valuation is based on what can be assumed as the expectations of ICG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £29.0, and the most bearish reporting a price target of just £17.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be £1.3 billion, earnings will come to £605.0 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 8.8%.
• Given the current share price of £15.98, the analyst price target of £18.19 is 12.2% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.