IGC looks good in mezzanine niche

Intermediate Capital Group provides so-called mezzanine finance for management buyouts - the bit of funding that comes between relatively cheap bank debt and expensive venture capital equity funding.

If things go wrong, ICG ranks before shareholders and trade creditors but after the banks for repayment. It is rewarded for that level of risk with a higher coupon on the debt and often an equity kicker as well in the event of a flotation or takeover. This is a growing niche and ICG is the leading independent offering it.

Half year figures to July came in better than expected, especially the size of the loan book, which increased from pounds 250m to pounds 310m. Pre-tax profits edged up 4 per cent to pounds 11.5m. That doesn't look too exciting but a better measure - core income, which excludes lumpy capital gains and provisions - grew a much more impressive 32 per cent.

That sort of growth looks set fair to continue following yesterday's deal with Bank of Scotland and Northwestern Mutual Life, which will increase ICG's ability to underwrite larger amounts of mezzanine finance than its own balance sheet and existing backers like Hermes and Guardian can handle.

The biggest danger facing ICG is that the banks and venture capitalists decide that, with more cash than they know what to do with, they can fund bigger slices of deals themselves and reduce or even remove the need for the mezzanine financiers. As the business cycle hots up, banks tend to lend greater and greater slices of the total value of a deal.

According to ICG, there is still plenty of business around and the quality of its staff, compared to the relative jobsworths at the banks, means lenders find it quite comforting to have the company give a deal its seal of approval.

With no real quoted rivals, valuing ICG is difficult but because it pays out most of its core income as dividend it has tended to be valued as a yield stock, albeit with substantial growth potential.

The interim dividend of 5.4p represented 12.5 per cent growth over last year's first half 4.8p, putting ICG on track for the consensus forecast dividend of 17p or 18p for the full year. With the shares adding 11p to 367.5p, that implies a prospective gross yield of 6.0 per cent. Good value.