UK Value: Intermediate Capital Group Is On My watchlist

Intermediate Capital Group plc (

LSE:ICP, Financial) is a global alternative asset manager with over 30 years’ worth of history managing assets in private debt, credit and equity, principally in closed-end funds.

It is backed by guru Alexander Darwall and makes up about 7.5% of his European Opportunities Trust (

LSE:JEO, Financial). It has a high Piotroski F-Score of 8 out of 9, implying a very healthy finanical situation. These two facts put it on my watchlist.

What makes Intermediate Capital Group interesting is it seems to be strategically well positioned to benefit from the demand for private capital products. It has been growing its Assets Under Management (AUM) and recording robust revenue margins and growing operating margins. This means it’s well placed to achieve market-leading asset management profit growth.

The business

For management purposes, the Group is organized into two operating segments, the Fund Management Company and the Investment Company, which are also the reportable segments.

The Investment Company invests the Group’s capital in support of third-party fundraising and funds the development of new strategies. The Fund Management Company is the Group’s fund management business, which sources and manages investments on behalf of the Investment Company and third-party funds.

The Fund Management Company, as of June 30, is split into four asset classes:

• Structured and Private Equity ($18 billion third-party AUM): providing structured and equity financing solutions to private companies;
• Private Debt ($19 billion third-party AUM): providing debt financing to high-quality corporate borrowers;
• Real Assets ($6 billion third-party AUM): providing financing solutions in the real estate and infrastructure sectors; and
• Credit ($18 billion third-party AUM): investing in primary and secondary credit markets, including managing collateralized loan obligation .

In a recent presentation, management stated their high expectations in all asset classes and provided estimates for compound annual growth rates between 2020 and 2025. Assets under management are predicted to achieve a 16% CAGR in private equity, an 11% CAGR in private debt and a 4% CAGR in real assets.

Darwall, meanwhile, has stated recently that “Private equity and debt remain favoured asset classes with good visibility and longevity of earnings streams.”

Q1 trading statement

Intermediate Capital’s trading statement for the first quarter of fiscal 2022, reported at the end of July, showed a strong start to the year across fundraising and investment activity. Third-party assets under management grew to $61.5 billion at the end of June, which was an increase of 10% compared to the prior quarter and 27% compared to the year-ago quarter.

CEO Benoît Durteste stated he expects fiscal 2022 to be a peak year in the company’s four-year fundraising cycle.

Valuation

Intermediate Capital Group trades with a price-earnings ratio of just 13. Meanwhile, its closest peer, Partners Group Holding (

XSWX:PGHN, Financial), has a price-earnings ratio of 35.

I value Intermediate Capital on a sum-of-the-parts basis, splitting the balance sheet valuation from its asset management franchise valuation. I get a rough price target of just under 23 British pounds ($30.97) a share, compared to the current stock price of about £20.

A price-earnings ratio of 22 for Intermediate Capital’s fund management business is slightly higher than the sector average, but this is justified by the company’s higher growth in AUM, revenue stream longevity, lower revenue volatility, fund rollover potential and increasing fee rates.

Partners Group, in comparison, has a 10-year average price-earnings ratio of 24, so I feel 22 is reasonable. If we used a 24 multiple for Intermediate Capital’s fund management business, the price target comes to just over £24 a share.

There is no reason to value the investment company and rest of the balance sheet at anything other than book value, hence a book multiple of 1 is applied.

With a clear growth profile in its fund management company and an unstretched price-earnings ratio in comparison to its group of peers, Intermediate Capital looks like an attractive investment case. However, the company is still relatively unfamiliar to me, so I need to do more work before I pull the trigger, and hence it only remains on my watchlist.